Do not believe them

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We can all see the campaigns starting up. The Guardian is already carrying the pieces. If the Arts budget is cut then the creative ambitions of generations will be thwarted. If GPs hold the budgets then how can anything be planned? Abolish a quango about the countryside and the countryside will disappear. Do not, whatever you do, believe these stories for, as James Buchanan pointed out, politicians and bureaucracies do what is good for politicians and bureaucracies, not what is good for the rest of us. As this appalling story confirms.

Washington DC has a schools voucher programme, a small one, a test one. It was also a terribly successful one. Parents loved it, children's school grades went up and, in the topsy turvey world of US public education, it is cheaper to send a child to a private school than a public one. So, of course it was cancelled.

For when given a choice, and the financial freedom to exercise that choice, children overwhelmingly went to schools that were not tied into the teachers' unions and as the teachers' unions are the most powerful force in Democratic Party politics then....well, yes, of course, Democrats pulled the plug on the scheme.

This is obviously most relevant to Gove's plans for free schools: it's quite obvious that most of them won't have much time for the local education authority and thus most of the screaming will come from those very LEAs. Which is exactly why we shouldn't bother listening to such screaming, corral the kiddies into failing institutions in order to save my job is not a call that should be listened to.

There is also, of course, that wider application too: remember, the various interest groups will say damn near anything to make sure that our money continues to be spent on them. Whether the service, the country, the society, will be better off with or without money being spent upon them is, for the purposes of their arguments, entirely immaterial.

Making big cuts to public spending

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Civil service unions find themselves firefighting on all fronts. Microphones are being thrust to record their outrage on the possibilities of 25% departmental cuts, then 40% cuts, then cuts in their pensions and redundancy payments. They've had to search the phone book to find plausible numbers of cuts in front-line policing and nursing. They've been expected to tell broadcasters that our children's future is at risk by stopping the school building programme dead in its tracks. Meanwhile, one minister says that rich over-60s should pay their own bus fares. The RAC says people should pay directly for the roads they use. Even the expense claims of Tony Blair's security staff are under public scrutiny. Where is it all going to end?

The point is that it shouldn't end. The magnifying glass has to be put over every part of the public sector. Do we really need new school buildings? Well, in many places we do, but in others that I know, the local people weren't even consulted, and thought that rebuilding was a complete waste of money. Should taxpayers really stump up for free bus passes, or winter fuel and Christmas bonuses, to wealthy pensioners? Or buy sweeties for Tony Blair's protection squad?

This isn't the usual overspent-government penny-pinching exercise. Sure, many a mickle mak's a muckle, and many a muckle adds up to quite a chunk of taxpayers' cash. But there are limits to what you can achieve by freezing pay or budgets, searching out efficiency cuts or salami-slicing a few percent from every budget: tell managers to make cuts and all that happens is that they tell their under-managers to make cuts, who tell their under-managers, and so on, until the only folk who get cut are the ones actually doing the work. You really do need to look at every job, and programme, and department, and ask whether you really need them at all.

Private-sector companies do this every day; and interestingly, since the election, time-and-motion firms say growing numbers of public bodies are asking their help too. What they will be told by the experts is to forget trying to pinch a penny here, another there. They need to take some time and conduct a fundamental review of what they exist for. Then they need to work out how those aims are best delivered – which might be by someone else – and cut out all the stuff which isn't part of their core purpose. They will emerge from that process less distracted by marginal activities, more focused on their fundamental role, and better structured to deliver what they exist to deliver. As part of that, it is perfectly right that they should think about how they would cope with budget cuts of 25%, 40%, even more, and what of value would be lost. If anything.

Hannan and a functioning democracy

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Typically erudite and robust performance by the controversially sound MEP Dan Hannan at a Civitas seminar this week in Westminster. The coalition, he thought, was a real chance to re-align British politics, with libertarian Conservatives and Orange Book liberals coming together. But, he felt, the problem is not so much winning the arguments – we won those years ago – but implementing the principles of a free society and a functioning democracy.

It is this last problem that troubles him. Take the case for open primaries to select general election candidates. At present, it is the local party bosses who select candidates, leaving candidates and MPs more beholden to their party than their electors. Few seats ever change hands at elections, so once you are in, your only fear is losing the party's endorsement that guarantees you victory. So again, the whips have more power over you than do your voters. Open primaries, says Hannan, would change all that at a stroke – MPs would have to be fully conscious of the mood of their constituents, and prepared to argue their case against all comers. Yes, there is a proposal to introduce open primaries – but only in a small number of seats, hand-picked by the House of Commons authorities. What sort of a democratic revolution is that?

The power to recall MPs is, says Hannan, another bastion of democracy. Again, MPs would have to fear their constituents more than their whips. But again, while this idea is being mooted, the official plan is to leave recall up to the powers in Parliament rather than up to voters themselves. Another Establishment stitch-up.

Hannan is also concerned about the proposed referendum for the Alternative Vote system. He's a great proponent of referenda – speaking enthusiastically about the Swiss canton system, where they have referenda for just about everything. But AV, he says, was not in either party manifesto. There may be a case for a referendum on full-scale electoral reform; but this will be a referendum not on a point of principle, not on a subject that people are demanding to be heard on (like our relationship with the EU), but on some deal thrashed out in secret between party heavyweights.

It takes brave politicians to give away their own power to the people. At least it's now being talked about. But we need a lot more bravery still.

Prison sentencing reform and the cost of drug prohibition

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Faced with the dire need to restore discipline to British public finances and a rising rate of reoffending among prisoners, Justice Secretary Kenneth Clarke announced yesterday broad changes to the way in which the government administers criminal justice. The prison population of England and Wales recently surpassed 85,000 inmates this year, a historically unparalleled number that is expected to continue to grow even further in coming years. As a proportion of their populations, England and Wales lock up nearly 150 of every 100,000 residents, a number that represents one of the highest rates of incarceration in Western Europe.

This sizeable prison population does not come without a significant cost to taxpayers, who must shell out more than £100 per day to keep a single prisoner behind bars. While acknowledging that the government must apprehend and punish violent or otherwise dangerous criminals, Mr. Clarke called for an end to the “numbers game,” in which increases in spending and the rate of incarceration define success in matters having to do with crime. The coalition government will undertake a review of sentencing policy in an attempt to determine what changes should be made.

Mr. Clarke’s comments should raise serious consideration of the unnecessary and severe costs of drug criminalization. A sizeable percentage of those incarcerated in England and Wales are drug offenders; a 2009 report by the International Centre for Prison Studies at King’s College London revealed that 15.5% of those incarcerated are convicted on such charges. At more than £35,000 per inmate year, the cost of simply holding these offenders in prison costs taxpayers nearly £500 million per year. This cost, along with those associated with enforcement of drug laws, should be examined seriously as the government proceeds with its review.

The Adam Smith Institute has advocated a more sensible policy, involving the medicalisation of addictive and damaging drugs, and the legalisation of recreational drugs. Such a policy would eliminate the financial burden of incarcerating drug offenders, as well as the need to expend precious resources to police drug-related crimes. The decriminalization of drugs, as has been successfully completed in Portugal with positive results, has the potential to save the British taxpayer money, and simultaneously improve the security and health of the general public. The coalition government should use this opportunity to inject sensibility into the criminal justice system and eliminate costly penalties for drugs.

Immigrating towards isolation

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The Home Secretary announced a strict migration cap on non-EU citizens. It is supposedly to help slim the deficit. Three points come to mind:

First, immigration into a country is good for the economy. Economies are not static but grow and diminish by sector disproportionately. One migrant’s job gained is not necessarily a local’s job lost. Also, immigration is a transaction between a foreigner and the economy. The individual will incur the cost of not finding work, not the country. If the worker is successful, wealth is disseminated throughout the economy and indirectly creates jobs. The economy also flourishes because of the added diversity.

Second, immigration is mostly costly because of welfare. Instead of limiting the number migrants, the government should restrict access to public programs. Then the government will run profits from the worker’s tax revenue.

Third, Chicago economist Gary Becker recently argued a price system for migration would be more efficient than a cap. True, although that considers only nominal price. The risk, opportunity cost, and social costs associated with migrating should not be assumed away. A high priced visa could be too high if these factors are not considered.

Although these prices and the economic benefits of immigration are tempting, it’s politically impractical to assume complete open borders would be accepted. A marginally more welcoming border is almost as good. As long as competitor economies don’t receive workers that would have come to the UK.

My only concession: it takes time. Benefits will not show instantly and will not be clearly contained.

Coach Schäuble

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England faces its old nemesis Germany on today in the World Cup and, no doubt, there’ll be the usual hackneyed references to past confrontations between these two great nations, whether on the football pitch or on the battlefield.

But, as we’ve said here before, Chancellor George Osborne would be well advised to cosy up to his German counterpart, Finance Minister Wolfgang Schäuble. Right on cue, he writes in Thursday’s Financial Times a stirring defence of restoring discipline to government spending.

The wailing in the UK is in full cry and Mr Osborne will need nerves of steel to stay the course. If ever a man needed a wise uncle for solace and support, it’s Mr Osborne. And that uncle could easily be Mr Schäuble.

Here’s just some of Mr Schäuble’s no-nonsense pearls of wisdom to justify his government’s budget tightening:

“To the question of what caused the recent turmoil in the eurozone, there is one simple answer: excessive budget deficits in many European countries.”

“Governments should not become addicted to borrowing as a quick fix to stimulate demand. Deficit spending cannot become a permanent state of affairs.”

“Seeking to engineer more domestic demand by raising government borrowing even further would…be counter-productive. On the contrary, restoring confidence in our ability to cut the deficit is a prerequisite for balanced and sustainable growth.”

“These steps are… economically sensible because they will increase incentives for the jobless to find work, reduce subsidies and trim the civil service.”

Both Mr Osborne and Mr Schäuble are in Toronto on today for the G20 summit. Kick-off time for the England-Germany match is 10 am local time. Imagine the two of them dawdling over a nice Canadian breakfast, served in front of a wide screen TV. Maybe they could ask France’s Finance Minister Christine Lagarde along to reveal some details from Thierry Henry’s briefing on Thursday to President Sarkozy.

Barack Obama: Last European

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George Soros yesterday used very strong words in an interview with the German highbrow weekly, DIE ZEIT (The Times), words no government official would dare to use for it would be a break with the international rules of non-interference in other countries internal affairs. However what he said in his harsh language is exactly what Barack Obama will be preaching on this weekends G20 summit in Toronto: Germany should cut taxes and do everything to induce Germans to spend more and buy other countries products rather than continue its mean habit of sitting on a huge trade balance surplus.

However German chancellor Angela Merkel has taken a decisive stand against Barack Obama, finding herself alongside many other European heads who recognized the once in a generation opportunity to abandon Keynesian deficit spending that did them no good lately. It will be this battle between realists and denialists in relation to unsustainable spending that will occupy centre stage for the foreseeable future in the West. For example, France has not had a balanced budget in one single year of the last four decades. If it were not for the extraction of huge European funds, paid for by Germany among others, France would have long gone broke.

With the brave austerity budget in Britain and the dramatic tumbling of Kevin Rudd over a prohibitive mining tax the balance in the Anglo-sphere, which had erred for too long on the side of unlimited deficit spending, is switching back to economic realism - focussed on wealth creation after everybody seems to be “running out of other peoples money” (Thatcher). US president Obama, who was so keen to emulate the now broke European model, suddenly stands as the last European spendthrift. And he used George Soros, the same who made his billions by betting on the decline of the pound, to bully Germany back into the Keynesian fold. I wonder where Soros has put his bet in times of a much anticipated decline of the Euro. Overall Soros is a poor choice of Obama - he is probably the last person to get any sympathetic audience in Germany.

An arranged marriage

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There are those who mock Britain's coalition government, possibly out of a desire to see it fail. I am not amongst them. I want the coalition to work, and to set about with serious intent the solutions to Britain's long term problems.

In some ways it resembles an arranged marriage. People who marry in a love match often do so starry-eyed with limitless expectations. People in arranged matches go in knowing they are going to have to work at it, and the lucky ones fall in love with each other afterwards. Statistically, arranged matches last longer than love matches.

The partners in this coalition are really working at it, doing their best to make it succeed. They are determined to replace our top-down state school system with one that responds to parents' wishes. They want to take low paid people out of income tax altogether. They want to end the cycle of permanent dependency fostered by the current state welfare system.

And so it goes on through many of the major problems which have been allowed to fester for so many years under a government which thought it could pass directives to micro-manage every aspect of society. Now we have a real chance to move systematically through a reform agenda and try new solutions that put people ahead of government.

It is not the government people voted for, not the one that most people hoped for or expected. But people are making what they can of an unusual situation, and our hope should be that they can make it work. One thing is already clear: it is light years ahead of its predecessor

The Excel Trap

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Microsoft’s Excel spreadsheet is a wonderful tool, beloved by analysts, economists and policy wonks of all stripes. Load in a bunch of data, run any number of calculations and a conclusion is virtually instantaneous. Change a variable and anybody can make just about any prediction they want. But Excel is no substitute for proper out-of-the-box thinking; it can’t capture all the world’s complexities.

The Financial Times fell into this trap on Friday with a story headlined “Migrants cap will raise taxes and cut growth.” (Not “may” but “will”.) Using the new Office for Budget Responsibility’s (OBR) forecasting model (presumably an Excel spreadsheet), the FT adjusted some variables to reflect the prime minister’s election pledge to bring net immigration down to 1990s levels. Result? Reduced output of 1% and £9 billion of foregone tax revenues.

Quite obviously, the FT concludes, “Chancellor George Osborne will have to fill this fiscal hole in the emergency budget if he is to live up to his promise to accept the OBR’s forecasts when framing government spending.”

How elegant if life were that simple - but it isn’t. A couple of days earlier, the latest UK employment statistics revealed some 8.2 million Britons are out of work and not seeking employment, including some 2 million on long-term sick leave.

Surely it’s not beyond the imagination of the new government to replace the couple of hundred thousand “lost” immigrants with home-grown talent from this pool of 8.2 million non-workers. Indeed, this would have a double positive effect on the budget – creating new taxpayers while reducing the number of claimants to the state’s largesse.

As the government’s budget cutting gets underway, expect a lot more of this kind of one dimensional analysis as all the country’s special interests unleash the power of Excel.

A starving country with a surplus of food

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More evidence that Chávez’ 21st century socialism seems to be failing spectacularly: as this Economist article describes, thousands of government-imported food containers were discovered rotting away in Puerto Cabello. Officials admit to 30,000 tons, while the opposition claims the number to be somewhat higher – around 75,000. This is quite uncomfortable news for the regime amid growing food shortages and rising prices ravaging the country.

Throughout his 11-year presidency (now extended for an indefinite period thanks to last year’s referendum), Chávez has nationalized many corporations, while private firms face constant threat from the state. In the meantime, the government-run industries such as telecommunication, agriculture and supermarkets are deteriorating day-by-day. Authoritarian regime aside, it is not really in the president’s best interests to let the country starve. Rather, the fault lies with the inherent inability of a regime to succeed under a planned economy.

Despite all outrage caused by this scandal, there is nothing really new here. How many times have we witnessed a similar scenario, replayed over and over again? The Soviet Union (both before and after the perestroika) and Cuba are just a few examples. Aside all ethical and theoretical discussions, the system has proven to be unsuccessful and impracticable many times over. We knew this during Adam Smith’s day and we know it now: free markets are the most efficient means of allocating resources. Government meddling, no matter how benevolent its intentions are, will always lead to miscalculations – simply due to the staggering amount of planning involved. Decomposing containers of food in the port of a starving country is testament to this very fact.

By the way, another feature of such ineffective regimes is that people eventually get tired of them. It’s only a matter of time before Chávez’ indefinite presidency term comes to an end.