Douglas Carswell, direct democracy and the coalition

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Douglas Carswell MP (on the right of the picture) – blogger, co-author of The Plan, and founder of Direct Democracy – was our guest at a Power Lunch in Westminster yesterday. He believes that the coalition's commitment to decentralisation– with the devolution of power to municipalities and the public, and the diversity in public service delivery that it implies – is genuine.

To some extent the LibDem leadership are even stronger advocates of this agenda than some Conservatives. Of course, if there is to be a real shift in power, it means there must be a shift in funding too, since local authorities control only about a quarter of their budgets. But again, the presence of the LibDems in the coalition has pushed the Conservatives to think about it.

On the other hand, the government does seem to have messed up its earliest exercises in 'crowdsourcing' popular democracy. Its online consultation on the 'freedom bill' – supposedly a great bonfire of redundant laws – should have been more of a wiki rather than the usual official page designed and run by Whitehall, condescendingly inviting comments. And the fact that the only definite clause in the bill so far is a plan to prevent car clamping on private land just convinces sceptics like me that the bill will become a catch-all for various minor intrusions into our lives and property, rather than a genuine bit of rolling back the state.

Still, it seems the direct democracy agenda is alive and well. Carswell wants to see open primaries that would end the central control of candidate selection by party bosses, and US-style recall petitions that would keep MPs in 'safe' seats (ie most of them) on their toes. We need fewer ministers too drawn from the House of Commons – its role should be to question the executive rather than be part of it. And stronger parliamentary committees that could question departmental actions and spending.

That is an agenda that could give the coalition purpose, even if the LibDem's cherished referendum on election reform were lost. And it would indeed improve our democracy.

A new Parliament dawns

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As an anticipant sun climbs over Westminster Palace, Members of Parliament flock to the capital and take up their seats for the new session of Parliament opening today. The mini-session before the summer recess saw the Government move quickly, issuing the Emergency Budget as a start on deficit reduction and passing the (mainly) excellent Academies Act. We at the Adam Smith Institute are hopeful that this session will be greeted with a similar flurry of reforming activity. In particular, we wish to see Parliament approve the following this session:

• Welfare Reform: Ian Duncan Smith seems to have the right idea; ensuring that work always pays by tapering away benefits at a constant rate. Whilst we recommend a more localist approach, a simplified system infinitely improves upon the status quo.
• The Great Repeal Bill: The scrappage: of ID cards, Contact Point database and restrictive business regulation, amongst other things, is to be welcomed by all of a socially liberal stripe. Yet, let’s just hope that the final text more represents the unofficial wiki-site than the botched ‘Your Freedom’ consultation.
• A Budget that reconsiders the role, and appropriate size, of the state: 2011-2012 will be a crucial year for setting Britain’s public finances on a sustainable trajectory. As we’ve argued before, our huge budget deficit requires us to comprehensively review all public expenditure with the aim of shrinking the state from its current, unsustainable 52.5% of GDP. This much seems likely, but ideally Parliament should pressure the Coalition to abandon its ring-fencing of Health and Foreign Development. Savings are possible in both of these departments.
• Further devolution: Although the Calman Commissions’ proposals were, as my colleague delicately put it at the time, “a bit of a dog’s breakfast”, giving Scotland greater fiscal autonomy is a step in the right direction and at least does away with the Barnett formula. Giving Wales greater powers in the devolved areas is also a good proposal. However, as I have blogged recently, these proposals do nothing to address the West Lothian question; we need an English Parliament.
• Election of local police chiefs: Currently, constables are upwardly accountable to Whitehall, spending far too much of their time jumping through mandarin hoops and chasing central targets. We’d like to see a return to community led policing, where officers are responsive to those they serve. It seems the surest way to avoid ‘Ciggybusters’ MK II.
• The Public Bodies (Reform) Bill: Finally, a bonfire of the quangos! This Bill promises to scrap many quangos and make the remaining more accountable to ministers. Although we prefer parliamentary accountability, any clamp down on these blights to productive activity is welcome. The bonfire could also be improved by using consumer protection agencies as fuel.

Although we’ll push further for reforms in this vein, any parliamentary session that approves all of them would be great by recent standards. Let’s hope that it is this one.

Yes, we do need government: just not as much of it as many seem to think

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No, I've not read Tony's maunderings and no, I'm not going to. However, there is one interesting little story that's emerged:

The former Prime Minister describes how he supported pension reforms proposed by Adair Turner but these were opposed by the Chancellor of the Exchequer at that time. Lord Turner recommended raising the State pension age and restoring some linkage with earnings – both changes now planned by the Coalition Government – but Mr Brown was thought to be against these reforms. Now we know just how much so.

Mr Blair’s book ‘A Journey’ says: “We had been having a huge set-to about Adair Turner’s pension proposals. John Hutton (the pensions secretary) and I both thought them right but Gordon disagreed.

“He was in a venomous mood and I can truthfully say it was the ugliest meeting we had ever had…the temperature which was already below freezing point went Arctic.”

Mr Blair goes on to relate how Mr Brown threatened to call for an inquiry into allegations that wealthy friends of the Prime Minister had gained seats in the House of Lords after making donations to the Labour Party. Mr Blair claims Mr Brown said he would expose what became known as the ‘cash for honours’ scandal unless Lord Turner’s proposals were dropped.

Government is needed because there really are some collective action problems that cannot be solved without the existence of government (sorry anarchists!). But that does not mean that all of the problems of the world are amenable to government action and that we thus require a government so large as to try and solve all such problems.

For, as we can see, those who actually make up government do not in fact attempt to solve those problems. They're far too much like the rest of us fallible human beings, willing to snit and scrabble for short term advantage for themselves while ignoring the large scale and long term problems.

No, I don't say this was unique to Brown: James Buchanan received the Nobel for pointing out that all politicians, all bureaucrats, are susceptible to exactly the same urges. They are, after all, just people and people everywhere react to incentives.

All of which leads us to he conclusion that while we do require government to solve those problems that only government can solve we really don't want them doing anything at all other than what only government can do.

For the rest of it we'll make our own mistakes thanks very much.

The West Lothian Answer

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Given the very different appetites of the Coalition Government’s two parties for it, resolving the West Lothian question may not be high on its policy grocery list. Yet with the wording of next year’s referendum question to grant further powers to the Welsh Assembly finally looking agreed, it seems appropriate to once again highlight our constitution’s lopsidedness and propose a sensible correction.

If Wales votes positively in the referendum, the Welsh Assembly will be able to fully legislate in devolved areas (such as health and education) without Parliament’s consent. Like the Scottish Parliament it would be a thoroughly independent legislature in these areas. It is a development that I, and other localists, would welcome.

That said, it would exacerbate the wonkiness with which British law is made. English Members of Parliament would lose their ability to influence the Welsh Assembly’s legislative process (currently the Welsh Assembly needs to ask for Parliament’s permission to legislate on a particular matter within a devolved area; English MPs can always decline), whilst Welsh MPs would still be able to legislate on English matters.

Surely a better set up for the United Kingdom is one where each country of the Union has its own assembly to legislate in the devolved areas?

Few would deny this, yet some may object to an English Parliament on other grounds. Perhaps, they may say, “it’s an unnecessary expense” or “it risks duplicating the functions of the UK Parliament”. Yet neither of these need be true. If based in the House of Commons and comprising the 533 English MPs elected to the UK Parliament, there would be no building costs, minimal additional staff costs and no overlapping of constituency work. Cohabitation isn’t a problem either; the SNP majority in Scotland has not prevented the current Conservative-Lib Dem Coalition from governing the UK.

The sensible answer to the West Lothian question is an English Parliament. With the Welsh Assembly set to be strengthened soon, here’s a new question: “is it too much to ask?”

Business and politics

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The news that businesspeople can enjoy dinner with a minister at the Conservatives' annual conference – for £1,000 a pop – has created the usual outrage. Cash for access? Same old sleaze?

The former sleaze watchdog, Sir Alastair Graham, may well be right that ruling parties need to be above suspicion. But does anyone really think that someone can change, or even influence, public policy by sitting across the table from some minister at a party fundraiser? Maybe some businesspeople do, but anyone in politics just rolls their eyes at the thought.

I see so many businesspeople who boast that they have just had a meeting with a minister, who nodded sagely when they were told we should do X, Y or Z. I know that the next day, someone else would be in telling them to do the exact opposite, and that the minister would have nodded equally sagely. In business, you are used to making sound plans which your staff then execute. In politics, you can give people sound plans but all it does is to start a discussion. What actually happens – if anything – depends less on common sense than the innumerable political pressures that squeeze the policy into different contorted results.

In any event, if you haven't been at the table during the years of opposition, no politician is going to regard you as a true friend whose opinions should count. To influence policy, you have to play the long game. And you need to understand what pressures politicians to act this way or that, rather than presuming they just make decisions that are then faithfully executed, as you do in business. As Bismarck put it, if you like laws or sausages, you should never watch either being made: but that's how it is.

I dream of a world in which businesspeople get on with making money for their shareholders, rather than spent their time (and their shareholders' cash) pandering to politicians. But politicians today have enormous power – both regulatory power that can spare you from annoying new competition, and purchasing power that can bring you lucrative contracts. Adam Smith complained of such sordid relationships back in 1776 – and government was a good deal smaller back then.

The long-term future of business would be far more secure if politicians stuck to civics and businesspeople stuck to making money by serving their customers. Then at least there would be no doubt that £1,000 can't buy you more than a nice dinner and a handshake.

Optimistic about free markets

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Though my colleagues at the Adam Smith Institute regard me as the 'down' man, always seeing the difficulties presented by any new idea, underneath I'm really an optimist. I really believe that the free market will triumph, despite everything that our system of government conspires to do to shackle it. The free market is an entirely natural system, like evolution itself, which grows and adapts whatever adversity it faces. You can concrete over a path but still, before long, the grass pokes through. So do markets.

And I'm optimistic that Britain will sort out its tax and benefits system, and adopt a flat tax on incomes and a negative income tax to relieve poverty. Looking at the first tentative proposals of the coalition government in general and of the welfare and pensions secretary Iain Duncan Smith in particular, I think we can see the first green blades of common sense breaking through here too.

Our tax system is fiendishly complicated. Civil servants like it that way, because it creates work for them. Whenever you try to tax people, they will find ways round it. And when your own money is at stake, it is worth buying in good accounting brains to protect it. So tax becomes a cat and mouse game with the Treasury: a new tax is introduced, people find ways to avoid it (quite legally), so the Treasury has to close off the loopholes with new rules. A few years of that, and the rule book gets pretty complicated. The standard tax guide for accountants now runs to about 11,000 pages across four volumes.

We should cut right through all this nonsense and have a flat tax – as we have said many times in our publications on the flat tax. Cut out all the deductions, the loopholes and the clawbacks, and have a low, standard rate of tax that applies to everyone. Then everyone knows what they and their fellow workers are expected to pay. No escape and (sadly for accountants and Revenue civil servants), no need for a lot of complicated measures to avoid tax or to make sure people pay it.

I am optimistic that similar simplicity might come to social benefits too. We have roughly 51 different social benefits. They are designed – well, that's too strong: they have grown up under pressure from various interest groups – to make sure that everybody's unique circumstances are catered for, and that nobody falls through any cracks in the system. A laudable aim, but a madly complicated result. We should scrap it all and have perhaps just two benefits – a long- term benefit for those who simply cannot earn for themselves, and a short-term benefit for those struck by temporary unemployment. Instead of a complicated raft of benefits, we should have a negative income tax. If you have a good income, more than enough to live on at a decent level, you should pay tax. If you don't have enough to live on, you should get cash – the negative bit of the tax.

After all, when you get a job, your employer pays a rate for the job. Employers don't ask you about your exact family and personal circumstances before setting your wage. It should be the same with the benefit system. That makes it simple to administer, and it encourages people to curb their costs instead of thinking about how to maximise what they can get from the authorities. True, some people in special circumstances will face hardship. But alleviating that is something that seems the proper role for the charitable sector. True, we need then to liberate the charitable sector, with things like US-style tax deductibility to encourage more philanthropic giving, so that charities can step in where the state falls short and real help is needed. But I am optimistic that we can do that, too.

A hundred days of coalition

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The coalition government outperformed most expectations in its first 100 days. The document that set its agenda contained measures causing unease in both parties. It did not just highlight areas of overlap; there were few of those. Instead it represented horse-trading, with Liberal Democrats agreeing to some policies they opposed in return for Conservatives doing likewise.

It has been a surprisingly firm government. George Osborne has impressed the City and most analysts with his resolute approach to spending cuts. He reassured the financial community that Britain is serious about bringing the budget to balance and eliminating the huge deficit run up by Labour.

Education reform is radical. With the state allowance per child going to finance free places at new schools founded by parents, teachers and business groups, parents can escape from under-performing schools. It will restore much of the social mobility lost with the grammar school closures.

Some talk of lowering university admission standards for applicants from poorer schools, but the planned reform outflanks the issue. The new schools should raise standards sufficiently for their students to win university places on merit.

The welfare details have yet to be filled in, but Iain Duncan Smith stressed that welfare dependency as a career option will be closed off. This is as it should be, with welfare to help people without trapping them. Duncan Smith's principle, that work should always be worthwhile, is a good one. Coupled with the raising tax thresholds, the work/welfare balance looks set to shift dramatically.

Critics say that the reviews and commissions established simply kick difficult issues into touch, but what the government has been doing is laying down markers in key areas while it still enjoys some honeymoon popularity. There will be tax simplification. There will be much unwinding of Labour's surveillance state. There will be a power transfer to local levels. There will be reform of financial regulation. There will be a thorough shake-up to make our armed services better able to do their job.

People want from the government a clear sense of purpose and a determination to put right much of what is wrong with Britain. Business still awaits news on how over-regulation is to be curtailed. And we still wait to hear how our police forces are to be made more user-friendly and efficient.

But the early news and the omens are good so far, and better than many people expected. If the coalition carries on as it has started, and survives the faults and fissures of in-party manoeuvring, it could well go the full term.

Explaining Goodhart's Law

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Goodhart's Law was used as an explanation of why those monetary targets used by Maggie et al in the 80s would never work: my, how the clever people mocked. Of course, those oh so clever people then went on to do exactly the same in spades: we ended up with targets for waiting times in emergency rooms, targets for child poverty and I'm sure it was only the intervention of an election which stopped us having targets for sheets of toilet paper successfully soiled.

For, while originally formulated to deal with certain problems in economics, Goodhart's Law really says that whenever you use a proxy as a target for what you really want to happen either the proxy will stop connecting to the target or people will game it. Thus we had patients waiting in ambulances so they wouldn't be in A&E, policies to bring those families just under the poverty level over it while ignoring the truly poor and, yes, those monetary targets going haywire two and three decades ago.

To see this on the hoof, taking all of the politics out of it, have a look at this:

By counting the cars in Wal-Mart’s parking lots month in and month out, Remote Sensing Metrics analysts were able to get a fix on the company’s customer flow. From there, they worked up a mathematical regression to come up with a prediction of the company’s quarterly revenue each month.

How excellent, we've a method of predicting the financial results from seeing how many people are going to the store. But of course as soon as this is known there will be gaming of the system. Sticking more cars into the parking lots will raise expectations of the financial performance. But no, you wouldn't want to do that, buy the shares and then stick cars in the lots. No, you stick the cars in the lots, wait for the shares to rise on the excellent results to come, then sell them short. As the satellite photos turn out to have been counting the cardboard models you've been putting up the shares will fall of course and you can buy back and retire on your ill got fortune.

Yes, it probably would be illegal, yes, it probably would be market manipulation but that's not the point here. Only that it's an example of what happens when we all decide to start using some glorious new metric to measure performance: as soon as we do someone starts gaming it and our new metric is now useless.

Sorry folks, but setting targets just doesn't work.

Time to cut council workers?

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A study has pinned the blame on bad management for lazy council workers. The average town hall employee spends just 32% of the day working, compared to 44% of those in private companies – which is still exceeded in better performing countries.

Executed by management consultancy group Knox D’Arcy, the study suggested that increasing working rates of council workers would eliminate the need for savage governmental cuts to frontline council services. Instead, up to 27% of workers could be cut.

It’s right to say that raising productivity levels would mean thousands of workers per council could be got rid of. However, if workers want to sit idle all day and there are people prepared to pay them for it, that’s fine! But local authorities don’t have any money; only other people’s. And those other people, the general public, don’t currently have a choice on whether or not they pay council employees. People will work if there’s an incentive to work and won’t work if there’s an incentive not to – and that goes for managers as well.

Bad management may be the proximate cause of lazy council workers, but the ultimate cause is lack of market competition.

The fact is it does not need to be the council who empty the bins, run the local leisure centre or manage tourism. The UK's 410 local authorities spend over £113 billion on day-to-day services, employing more than 2.1 million people and delivering 700 different services. These are all services (the genuine ones; not pseudo-services like equality and diversity) that could be run and managed by private companies, far more diligently and effectively, in a competitive market.

Who's in charge?

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When you stand before a civil servant, is there any real doubt who is the servant and who the master?

Milton Friedman