Don’t knock the system: politics caused this crisis of capitalism
With turmoil in the world’s markets, politicians and commentators have been demanding for more regulation and control of the financial sector. Their reaction is entirely predictable — but entirely wrong.
This crisis was not caused by capitalism being fatally flawed. It was caused by politicians forcing banks to give out bad loans, monetary authorities flooding the West with cheap credit and regulators being asleep at the wheel.
Indeed, one can date its origin precisely, to October 12, 1977, when U.S. President Jimmy Carter signed the “anti-redlining” law. Before then, lenders generally denied loans to people in poor neighborhoods, believing that the local mix of low incomes and a weak housing market would lead to many people defaulting.
But the politicians — with good intent — wanted to make home ownership available to all Americans. So lenders were forced into giving out risky mortgages: what we now call “subprime” loans.
By 1985, this torrent of bad business had nearly bankrupted America’s Saving & Loan institutions. So the government took on their bad debt and encouraged them to consolidate — unwittingly making them too big to be allowed to fail.
Meanwhile, several other problems worried the monetary authorities. In 1987, the U.S. stock market plummeted, fearing that other lenders could collapse. Asia’s markets sank.
Mexico, Argentina and even Russia defaulted on their loans. Overvalued dotcom stocks crashed. And then there was 9/11. Each time, Western authorities responded by flooding the markets with cash.
After 9/11, the Federal Reserve took U.S. interest rates down from 6.25 percent to just 1 percent, fearing this blow to investor confidence could sink the markets. But again, their action boosted the wrong market by sustaining the credit bubble. With loans now six times cheaper, mortgage applications soared.
Lenders, awash with the Fed’s cash, happily issued more subprime loans. With more people buying homes, house prices soared. Buying a house seemed a certain money-maker, so more people got more loans and bought more houses, continuing the spiral.
In London, that other great financial center, a decade of government overspending saw public debt soaring. Private debt and house prices soared even faster.
So for 10 years, economies boomed, the champagne flowed and everyone had a great party. But it was financed by fake money — printed by the authorities solely to keep the party going. When the dawn of realization broke, the long party turned into the inevitable hangover we suffer today.
The regulators, meanwhile, were unconscious on the floor. The U.S. mortgage institutions, Fannie Mae and Freddie Mac, had 200 regulators on their case but still went bust for $5 trillion.
These semi-governmental companies allowed investors to believe the bad mortgages were guaranteed by the government, causing credit rating agencies to give their dodgy bonds high scores.
Mortgage lenders re-packaged these bad debts round the world but nobody cried foul. Institutions were lending 30 times their asset base.
Though the Bank of England knew that the huge mortgage lender Northern Rock was failing, the 2,500 staff of Britain’s financial regulator seemed to do nothing until it actually collapsed six months later. Even then, they had no coherent plan.
When the government is persuading the casino to hand out free chips and the regulators are standing drinks at the bar, you shouldn’t be surprised if the customers place a few risky bets.
It’s the management and not the system that deserves our scorn for breaking the basic rules of economics: There is no such thing as a free lunch.
Any sustainable solution has to get finance back to those basics. But the U.S. bailout package includes so many treats for special interests that it could save the culprits without helping the victims.
But it’s a big world out there. China, now the world’s fourth biggest economy, continues to grow at nearly 10 percent. India and other emerging economies are expanding too. Even with the West in recession, world growth next year will probably be near 4 percent. That’s pretty good.
Western capitalism has been dealt a severe blow by inept politicians and officials. But global capitalism continues to pull hundreds of millions of people out of poverty. It’s a great system. Let’s not break it.
Regulators in paralysis
The Financial Times reports that BERR – the Dept for Business, Enterprise & Regulation – had received no plans yet from the 27 national regulators allowed additional powers under this new legislation. Originally intended to streamline business regulation across the board, the Act actually provides powers for regulators to impose hefty fines on those who do not conform to a raft of regulations.
Ben Summers, a partner with Peters & Peters, a law firm specialising in regulation, told the FT that research by his firm revealed little sign of regulators making moves to implement the Act. “Given the new regime which the act heralds and the expectation which the government clearly has of it, there is a surprising lack of proposals from any of the national regulators”, observes Summers.
Ominously, BERR says that it is having ‘constructive discussions’ with the 27 regulators that fall within the Act’s remit. If the new statute goes some way towards consolidating regulatory overlap it is to be welcomed, but in the meantime the jury remains out.
REG will monitor developments closely. If readers have any personal experience of the new Act as implemented, please get in touch with us at info@old.adamsmith.org.
Keith Boyfield is the chairman of REG, the ASI’s regulatory evaluation group.
Sentamu and the City
The archbishop’s criticism of the markets is misplaced; it’s governments and regulators that are responsible.
I was beginning to like Dr John Sentamu, the Archbishop of York, who seems to have solid views on issues like Robert Mugabe and political correctness. So it’s disappointing that he’s fallen for the politically correct line on the markets crisis, calling share traders who cashed in on falling prices “bank robbers and asset strippers”.
Then, in a pincer-movement of stupidity, I see the Archbishop of Canterbury, Dr Rowan Williams, giving Spectator readers his views about banking regulation. Well I’ve got a few theories of my own about how Christ fed the 5000, but I don’t publish them in the media because I figure lots of people know more about it than me. And the men in mitres should know better than to proclaim such superficial – and wrong – views on finance.
Sentamu told bankers that the financial market “seems to have taken its rules of trade from Alice in Wonderland”, and of course he’s right. But it’s the monetary and regulatory authorities who set these rules, not the players. You’ve had the Fed dishing out money and credit for the past dozen years, slashing interest rates from over 6% to just 1% as it tried to stave off the alarm of 9/11, the dotcom crash, bird flu, the Russian default, and much else. You’ve had a British government that’s been spending wildly beyond its means. And a regulatory regime so inept that it allows banks to turn one pound of deposits into 10 pounds worth of loans, and then lets other funds ratchet that up even more. It’s been a Mad Hatter’s tea party right enough, but it’s been the authorities who’ve been inhaling the mercury.
“To a bystander like me”, said Sentamu, “those who made £190m deliberately underselling the shares of HBOS … and drove it into the arms of Lloyds TSB, are clearly bank robbers and asset strippers”. And in the same vein, Williams backed the curb on short-selling.
That’s maybe just how it seems to the uninformed. But short-selling is a risky business. If a £1 stock falls to zero, you make £1. If it rises to £100, you lose a fortune. You need to be thoroughly clued up about the company you are shorting. Short-selling is actually a valuable signal that something is wrong with a company – and that managers or regulators should take action.
When Pakistan banned short-selling back in July, it halted the market’s downward drift for a couple of days but had no long-term impact. Nor will ours. It’s so easy for pious folk to see a problem and say that more regulation is the answer. Maybe smarter regulation is the answer. But the real bank robbers, who’ve dipped into our pensions and savings and given the world a decade-long party from which we’re now suffering the hangover, are those who were supposed to be controlling this market, not those inside it.
Published in The Guardian here
Prime Minister for a day
6.30am
I’ve never been a morning person, but if by some stroke of luck I became prime minister for a day, I would want to make an early start. Most PMs struggle to achieve much in five or even ten years, but I’d have big plans for my day in Number 10, and I’d need all the time I could get.
7.15am
Over breakfast – something substantial, to keep my hunger locked up till lunch – I’d kick things off with some simple reforms to make everyone’s journey to work a little bit easier. For starters, I’d let people turn left on red lights, which would reduce congestion and make traffic flow more smoothly. Then I’d let motorcycles and cars with passengers drive in under-utilized bus lanes, making far more efficient use of our scarce road space.
9.30am
Getting into my workday now, my thoughts would turn to all those people toiling away in Britain’s public services. I’d think of all the doctors, teachers and policemen whose working lives are made a misery by stifling government bureaucracy and I’d want to do something to help. So I’d get rid of all the Whitehall targets and memorandums, those orders from on high, and let the professionals get on with their jobs.
Instead of having to march to the beat of the government’s drum, I would make them accountable to the people who really matter, the people they treat, teach and protect. Brits would elect their police chiefs, pick their doctors and hospitals, and choose their children’s schools. And all these services would have the independence they needed to innovate, specialize and tailor their services to individual and community needs. Before long people would be asking, why didn’t we always do it like this?
1pm
I’d watch myself on the news, reflecting on how much better the BBC had become since I privatized it over my elevenses. Then I’d have beer and sandwiches – Number 10 have been good at that ever since Harold Wilson’s cosy chats with the unions. They’re pretty good at peas too, thanks to John Major. I’d head into the garden for a bit of fresh air, and feed any scraps to Humphrey, the Downing Street cat.
1.45pm
Back to work. Did you know the government will spend more than £600bn of the taxpayers’ money this year? That’s more than £10,000 per head for every man, woman and child in the UK, and twice as much as in 1997. It doesn’t represent anything even approaching value for money.
As PM, I’d have to ask myself, do we really need 1165 QUANGOs, spending more than £63bn a year? Do we need a business department that does nothing for business and spends £5bn a year? Or a culture department that spends £3bn? Does the communities and local government department do anything useful? And why do we still have a Scotland Office and a Wales Office, now that Edinburgh has a parliament and Cardiff has an assembly?
Every government promises to cut waste. Most of them fail. They spend years re-arranging the furniture of government and trying to make things more efficient, but it never amounts to anything. Government just grows and grows. The only way to stop it is by abolishing whole departments, agencies and functions. And if I were PM for a day, that’s exactly what I’d do. I doubt anyone would miss them.
3.30pm
Thinking of all the money I’d just saved, I’d get down to cutting everyone’s taxes. I’d start by raising the personal allowance to at least £12,000, taking low-earners out of the income tax system altogether. Then I’d create a single, flat-rate tax on all income over that threshold – regardless of its source. Capital gains would have to be indexed to inflation, but apart from that there would be no added complications. While our current ‘progressive’ tax system hammers low-earners with disproportionate tax bills, my ‘flat tax’ would put everyone from cleaner to fat cat on a level playing field. All those New Labour zillionaires would be pretty peeved at losing their loopholes, so I’d take the phone off the hook and dodge their angry complaints.
6.30pm
By now my day as PM would be drawing to a close. Running the UK government has got to be a pretty stressful job, so I’d want to head to The Red Lion across the road in Whitehall to unwind. Before knocking-off, however, I’d make one more reform: repealing the licensing laws so that pubs could stay open as long as they wanted. My work done, I’d promote myself to the House of Lords. It would be such a welcome relief from serious politics.
Even the bean counters reckon regulation has spiralled out of control
In the longer run, however, over regulation shackles GDP and, in turn, accountants’ fee income from audit and consultancy services. It is therefore highly significant that PWC’s chairman is saying enough is enough. Referring to the threats posed to the UK economy Powell observes, “The quantity and scope of regulation combined with the level of uncertainty and complexity in this country’s tax system are particular causes for concern”.
Meanwhile, yet another hedge fund – Krom River – announced it was relocating from London. In this case, the winner was Zug in Switzerland (pictured right). Mounting tax bills and Switzerland’s more conducive regulatory regime, which was recently overhauled, were given as the principal reasons for the move.
Already this year a growing roster of major companies, including Shire pharmaceuticals, United Business Media and Henderson, the financial services group, have announced they are leaving British shores for more attractive regulatory and fiscal jurisdictions. This list will inevitably lengthen unless policy makers reverse the trend towards ever more cumbersome and expensive regulatory intervention. What is more, the recent turmoil in the financial markets makes the temptation to adopt ill thought-through regulatory initiatives that much greater.
Coupled with regulatory reform is an urgent need to establish a tax regime that promotes wealth creation and attracts businesses from overseas. London topped the Global Financial Centres Index this year but its achievement is increasingly under threat, not least – as the compilers of the Index point out – because of a widespread perception that there has been a less than effective regulatory response to the Northern Rock debacle. Compared with the speedy US regulatory response to the credit crisis, once again demonstrated by Treasury Secretary Hank Paulson over the last weekend, London’s regulatory dithering risks losing valuable business to thriving financial centres such as Zurich, Dublin, and Bermuda. All of them have two things in common: an effective light touch regulatory regime along with highly attractive tax rates.
As far as the financial markets are concerned, we need to implement effective regulation, but regulation that does not impose onerous compliance costs. If the authorities impose a welter of new regulatory controls, firms will vote with their feet and relocate to one of a raft of rapidly growing financial centres overseas.
Keith Boyfield is a Senior Fellow at the ASI and chairman of REG – our regulatory evaluation group.
The BAA Leviathan
Accusations of ‘flawed’ analysis and other jibes favoured by lobbyists are thrown at the Competition Commission’s 290 page report, but in truth, the Commission’s robust assessment highlights the company’s lacklustre vision with regard to planning capacity, its poor standards of service and its high-handed snubbing of its main customer base: the airlines.
Combined with a score of other criticisms this explains BAA’s abysmally poor position in the Airport Council International league table of airport operator performance. Indeed, perceptions of BAA have sunk so low that the company must win the duffer’s prize for the least favoured business currently operating in the UK.
BAA plc was created as a dominant monopoly by government. And it ranks as probably the foremost monopoly in Britain. No less than 91% of all passengers flying in and out of airports in the South East fly through one of the company’s three airports that encircle the capital, not to mention its 84% share of airport passengers in Scotland.
BAA’s monopoly grip on the airport sector is identified by the report as the principal reason why service levels for both airlines and passengers are so abysmal. Complaints about poor service, lost baggage and smelly loos have escalated in recent years, culminating in the debacle of the Terminal 5 opening at Heathrow. Following the classic behaviour of a dominant monopolist, BAA has been slow to develop new runway capacity in the South East. As the main player in the market, it has benefited from restricting capacity – as the Commission’s deputy chairman, Christopher Clarke, reminded reporters when the report was launched.
The Competition Commission is to be commended for its radical package of remedies. It proposes that both Gatwick and Stansted are sold off as separate businesses in competition with Heathrow. This will probably require an independent trustee to ensure that BAA does not shun rivals that could attract airlines away from Heathrow.
In implementing a set of remedies the Commission could learn from the suggestion made in the IEA study, A Market in Airport Slots, which urged that over a period of ten years 10% of slots (landing and take-off rights) at Heathrow, Gatwick and Stansted should be randomly auctioned to the highest bidder. This would inject some much needed competition into the circumscribed world of slots at congested airports and identify the true value of these scarce resources.
What is more, if a third runway at Heathrow is given the go-ahead by government, all slots should be auctioned off to the highest bidder. A proportion of the proceeds could be reinvested in improved facilities and a substantial slug could be earmarked to address the external costs, such as noise and pollution, linked to such a step-change in capacity. Accordingly, local residents would benefit from better double-glazing, landscape initiatives aimed at minimising noise and improved mass transportation links.
A similar strategy has been advocated by the Federal Aviation Authority (FAA) for La Guardia, the grossly congested airport serving the domestic market in New York. Such an approach would introduce a welcome market-based rationality into the Byzantine world of civil aviation. And nowhere is it more Byzantine than Heathrow.
Keith Boyfield is a Senior Fellow at the ASI and chairman of REG – our regulatory evaluation group.
A Flat-Rate Income Tax System – Just wishful thinking?
The idea of a flat rate income tax system is attractive, and the arguments in favour are well rehearsed. It is simple, transparent to the taxpayer and easy to manage, with low administrative costs; it enhances the incentive to work; if it is extended to investment income it encourages the saving and investment necessary to stimulate economic growth in a competitive global market; it attracts entrepreneurs from abroad to a business friendly environment; it provides the conditions for increased employment; counter-intuitively, and given a sufficiently generous non-taxable personal allowance, it favours the lower paid over the affluent; and it quickly leads to higher tax receipts that enable government spending elsewhere.
Flat rate income tax has existed for many years, but has only recently attracted widespread attention after its adoption, to good effect, by several East European countries. On the evidence, which is becoming extensive, there is little to object to and, yet, it is likely to be difficult to introduce such a system to the UK, principally for reasons of short-term affordability and popular perception. It is an unfortunate fact that, whilst the benefits of a flat tax have been widely discussed by a growing number of advocates, the considerable obstacles that could decisively frustrate its realisation in the UK have largely been ignored. These difficulties need properly to be exposed and addressed if flat tax is not to remain wishful thinking.
However desirable a flat rate may be, it is doubtful that such a radical change to our tax regime could or should be made without a prior ‘in principle’ general election commitment. Consequently, any proposal must have wide appeal and strong credibility, leave few losers (especially amongst low-income earners) and be demonstrably affordable with low risk.
This is not easy. A single rate that, on its own, leaves income tax receipts broadly unchanged (around 18.5%) will disadvantage all but the upper quartile, and the personal allowance necessary to alleviate that penalty will inevitably push the rate higher still if receipts are not to be prohibitively eroded. Richard Teather’s model in A Flat Tax For the UK; A Practical Reality assumes a 22% flat rate of tax and a £12,000 personal allowance to balance the equation. It leaves no losers, ensures that those on just-below average incomes benefit most, and sees that the poorest third of all earners gain proportionately more than the richest third. It is bold and inescapably eye-catching.
But it is also £50 billion short of cost neutrality, and relies upon unduly optimistic (and wildly different) assumptions to close the gap – notably, savings from public sector waste. Such efficiencies are notoriously difficult to realise and, in any case, £20 billion’s worth identified by the Gershon Spending Review is already committed. Nor is it clear that the uncompromising discontinuation of allowances Teather proposes (with savings of up to £12 billion) is practical in the short term – the UK is not, like some others, starting with a near clean slate. Thirdly, whilst some benefit can be expected to accrue from the reduced bureaucratic cost of administering a simplified system, and from the reduced incentive to avoid tax, it is too unpredictable to rely on. And finally, it is unlikely that receipts will rise sufficiently over 3 years to cover the deficit, as Teather suggests. On the contrary, historical data indicate that it could take up to 6 years to achieve the 30% necessary increase in revenue. In sum, it would be imprudent to assume an initial funding gap of much less than £40 billion on Teather’s model, and no measure can survive scrutiny that leaves a budgetary black hole equivalent to 9.5% of total public sector receipts and 138% of public sector in-year borrowing.
But nor will it be easy to reduce the deficit to more reasonable levels. A new flat rate cannot realistically exceed the current 22% basic rate without raising potentially insurmountable presentational difficulties (ie, the impression of a tax rise for most people), and a personal allowance of any more than the present £4745 will fail to achieve broad cost neutrality. Yet a significantly increased threshold will be necessary to spread the benefits equitably and widely, to maintain the projects allure, and to avoid (comparatively) insupportable disadvantages for low earners.
Another option is demanded, and a range of solutions, or contributory measures is possible to bridge the gap. Inevitably, they involve diluting Teather’s – very attractive proposal or raising revenue by alternative methods at least in the short term – and there is a risk that they could undermine the credibility and appeal of the broader concept. Because of this, any enabling measure must form part of a transparent, structured and predetermined process that protects the public’s confidence.
One partial solution may be to delay the full benefit of a reduced flat rate for the best paid, by temporarily retaining the 40% rate for earnings over £100,000 (£11.5 billion). Another may be to limit the personal allowance threshold to £8,000 (£25 billion) or £10,000 (£12.5 billion). Public sector expenditure could also be frozen in money terms (£13 billion), or more could be borrowed – an increase to 4% of GDP could generate £13 billion. More controversially, National Insurance Contributions could be increased, perhaps as a precursor to other reforms, such as funding for state pensions (a 1% increase in NICs could raise up to £6.5 billion); or Value Added Tax could be raised, temporarily, to the EU average of 19% (£6 billion) this would least affect those whose proportion of expenditure on non-VAT rated necessities was highest. This list does not pretend to be exhaustive but, given the vast sums involved, it is inescapable that income tax, VAT, NICs or public sector expenditure as a whole must form part of the solution.
Except, perhaps, for stopping the inexorable growth of the public sector (and, even here, the time may not yet be right), none of these options is attractive; each, for as long as it is necessary to implement, will detract from the beneficial effect of a low and flat rate income tax system; each brings with it a significant presentational challenge, perhaps none more so than increases in NICs or VAT which would need to be tied to a clear undertaking on subsequent intentions; each will limit the scope for other government measures and reforms, at least initially; each presses home the reality that having ones cake and eating it is not a choice.
Some may consider the short and medium-term cost ascribed here to introducing a flat rate tax to be unduly inflated, but the margin for error in any calculation of this sort is highly significant and, with huge numbers upon which to make an error, the potential downside is no less important, if only for the debilitating effect that it could have upon the credibility of the project and the government that sought to bring it in. Hence, a degree of caution is essential; it is far wiser to invest up front by selling the concept with its warts and all, subsequently to benefit (politically and economically) from any windfall that befell, than to be caught downstream without the proverbial barge-pole. What is clear is that an affordable solution is possible, albeit boldness is essential to making it happen.
Much relies on marketing – perhaps the greatest challenge of all, and the area that has, so far, been neglected. Many will be wary of change on this scale, because they are uncomfortable with change, because of the likely severity of even a marginal miscalculation, or because of the potential for unforeseen consequences; hence, there is a particular need for transparency and prudence. Many more will be un-persuaded, even by arithmetic evidence and historical precedence, that a flat tax will not benefit the wealthy at the expense of the least well paid. A popular consensus or strong presumption still exists, encouraged by a not-yet discredited or antiquated ideology, that only progressive taxes are fair; it will take a great deal (of time and careful effort) to dispel that notion, including amongst the affluent, who are content to pay a premium for their social conscience.
Nor, presently, can any political party be expected to champion the cause. The idea of a flat rate tax sits ill with the Labour and Liberal Democratic parties current philosophies, and the Conservative party lacks the confidence, both in itself and of the electorate, to pursue anything so boldly ‘Tory’ – indeed, for the moment, it would be counterproductive for them to enter the charge. Instead, the debate already taking place amongst politically interested think-tanks and academics needs to be broadened and transferred to the popular domain, so that the seeds of an idea can take root in people’s consciousness.
Seminars and papers have their part to play, but real success lies in mobilising the very considerable power of the media, and this will rely on ‘free’-thinking journalists and commentators entering the fray. It will still take time – perhaps years – but in the context of an increasing tax burden and far from assured economic stability, the marketing prospects are good. Without the popular debate, however, the concept will remain confined to the margins.
In summary, a flat rate income tax is attractive in principle and proven in practice. Introducing such a system to the UK will not be straightforward. For it to appeal which is prerequisite it must benefit most people and disadvantage very few, especially amongst the poorest. In the short term, bold measures will be necessary. Consequently, and despite the supporting evidence for a flat rate tax, transparency and demonstrable prudence will be critical to building the projects credibility and the public’s confidence. The perception that a progressive tax is fair and that a flat tax can only be a sop to the wealthy needs to be dispelled. Political parties will either be disinclined or, for the moment, ill-placed to champion a flat rate tax, but the debate must be transferred to the popular domain if it is to gain traction. The political classes will be important in this, but the key lies, initially, with free-market thinkers in the media. Success is there to be claimed, but only if the realities – good and bad – are fully and honestly exposed. Nor is there any time to waste: the next general election is only 4 to 5 years away.
The consequences of economic ignorance
Seventeen years on from the political assassination of Margaret Thatcher, her legacy seems to be an enduring transformation of our national economic fortunes. Her political courage was the sledgehammer that was needed to knock Britain out of its pathetic performance as a manufacturing nation. Seventeen years of media establishment vendetta however have sought to deny her any of the credit. This travesty of the truth has been made possible because there is in Britain a widespread ignorance of our economic history.
Self-delusion and decline
The hard fact is that our relative decline in manufacturing began right back in the second half of the 19th Century, as soon in other words, as better adapted societies like Germany and the USA began to compete with us. It had continued relentlessly ever since. No economic policies of either political party had ever made a jot of long-term fundamental difference.
Mrs Thatcher set out to make a real difference, and in a way she did, although probably not quite the one that she and many of us had hoped for. It may be difficult for us to learn to love it, but in spite of its frothy insubstantiality, our new financial, leisure and entertainment economy has the merit at least of being relatively successful. This ironically lends it a kind of dignity compared to the industrial sick joke that was Britain in 1979. Decades of sentimentality about our manufacturing base was a major reason why it had failed to match or even copy the wellspring of design and manufacturing innovations of our competitors. The real cost of flattering badly educated home-grown middle managers and propping them up with taxpayers’ money was that they were still in post next year doing just as badly. The real cost of ‘saving jobs’ was a long slow economic decline.
The 1980s freed the British to focus on what has always been their greatest strength, which is trading. London is now more comfortable than ever in its role as the great global bazaar. But if Mrs Thatcher had dreamed of revitalising our technological prowess she will have been disappointed. Dispiritingly, in 2007 as in 1977 you kind of know that if a consumer appliance is well designed and thoughtfully innovative, then it almost certainly was not designed in Britain.
The cost of prosperity
It was no small achievement to steer us onto our current economic path given the drag effect of our sentimental mythology about ourselves. But perhaps the real cost of having a prosperity like ours is Celebrity Big Brother and a sad underclass culture in which people pay ludicrous prices for football merchandising tat even though they cannot themselves play football and even though their hero is far less marketable for his skill with a ball than for his brandability. Does this matter? Is there more inherent quality of life in a German-style industrial design and manufacturing culture than a British entertainment, leisure and financial services ‘products’ culture?
Quite possibly, for the whole of Europe, the heyday of manufacturing is in the past and we are just ahead of the game. On the other hand, as Robert Pirsig demonstrated in Zen and the Art of Motorcycle Maintenance the mental discipline of engineering can nurture spiritual qualities as well. In this case the Germans may in the long run, fare better than us in the new Western, post-industrial zeitgeist.
Still no economic understanding
One reason for Britain’s long manufacturing decline has been the low status of engineering compared to other professions. Allied to this is the poor quality of technological and – I would argue – economics education. Our education system has always been relatively biased against technology and decades of politically correct educational theorising have resulted in the virtual abandonment of the intellectual and the conceptual as a goal of education – except for an elite. Apart from its one great lesson in economic realism, Thatcherism failed to rescue our education system. The Blair era has done no better. And so it is that our more streetwise economy has not been accompanied by any greater understanding of fundamental economic concepts. We may be better at shopping than we used to be but the British are an economically ignorant people.
Does this matter? Yes. Britain’s initial manufacturing advantage has been let down ever since by our educational culture. Absence of economics education has had a part in this because the cost / benefit principle is so fundamental to good design. But the consequences of that educational failure go much further even than this.
We have in this country a huge media current affairs output. And yet in our political discourse, even amongst the educated middle class (and most notably amongst journalists) fundamental economic concepts are rarely applied or even comprehended. It has long been fashionable to sneer at economics and many chattering class people wear their ignorance as a badge of honour. Presumably they imagine that this makes them seem less calculating and more warm-hearted. On the contrary, an understanding of the fundamentals of economics underpins an understanding of almost everything else in life because it deals so directly with human desires. The oft repeated: All they care about is money is a profoundly ignorant observation. There can scarcely have been a single human being in the whole of history that only cared about money. But how many British people would apprehend economics as being (as in Robbins’s classic definition) a study of human behaviour – the interaction of scarcity and desire?
Does this matter? Only in so far as how much more effective would our public spending be if every time the clamorous phrase more resources were uttered the economic phrase real or opportunity cost were to pop up in the consciousness. And how much less would have been squandered on completely ineffectual ‘health and safety’ measures if a cost/ benefit habit of thought had been instilled during schooling. We might even have been spared Live 8 if only it had occurred to our Make Poverty History warriors to apply a cost / benefit analysis to the history of Third World Aid. If only our huge BBC current affairs army had shown an interest in the story of South East Asia and just how irrelevant foreign aid has been to the economic vitality of that region. And how much more coherent might the philosophical system of your average weekend anti-capitalist be if they understood how ‘foreign sweat shops taking our jobs’ might actually be a good thing all round.
If your education spokesperson understood the interaction of scarcity and desire, how much less likely that they would make the fatuous claim that GCEs have not been devalued by the fact of everyone now getting lots of them. And how much less media abuse there would be of the word genius.
Feelings supplant facts
Take another example: ‘Europe’. All through the 1990s a seemingly interminable debate raged on and on in the media about ‘Europe’. The BBC current affairs coverage must have run to many thousands of hours of talk-talk asking the question Is membership of the European Union good for the British economy? That discussion could have been so much better informed if the endless coverage had featured just some of the relevant macroeconomic statistics (easily available from the OECD etc). If such a thing ever happened in those ten years and more, well I never saw any of it and I certainly was looking. How much are we exporting to the French for example and how much are we importing from them? Or a nice graphically presented matrix table showing, in detail, payments to and receipts from Brussels.
I have no doubt that this would have held the viewer’s attention just as well as following some man-on-the-Clapham-omnibus around on his rather unremarkable daily routine. Instead we got what BBC journalists and producers love, which is pointing a microphone at someone and asking What do YOU think? Do you think Britain is doing better in Europe? The theory is that this anecdotal approach brings the economics to life. The truth is that the journalist making the programme is not remotely interested in the economics in the first place – only in the drama.
Or another example: ‘Global Warming’. How much better focussed might be the debate about reducing ‘greenhouse gas’ emissions if the BBC gave wide coverage to quantitative data instead of just fretful emoting. A simple table showing how our targeted reductions over the next few years will be utterly dwarfed by China and India’s projected increases in the same period – that would be interesting.
So for the British, an understanding of economic concepts is not normally a part of their education; and thanks to the media, they are also left blissfully ignorant of macroeconomic data on how our economy and quality of life compares with other nations.
Does any of this matter? Certainly it is right to question, for example, to what extent GDP per capita is really a measure of quality of life. But to critique the standard tools of measurement of economic development you first need to understand them and what they do and do not signify. In media driven, post-Enlightenment Britain this is apparently unnecessary. All you need to know is how you feel.
SelfCare – Essentials of 21st Century health care reform
Proposals to healthcare reform should be judged not on the goodness of their intentions but rather on the basis of there results – in other words: nobody washes a hired car
The focus on consumer choice within both major parties seems to respond to the core weakness of the British health system, as reported by patients (A Coulter, Picker Institute BMJ: 331, 19/11/05, pp 1199). The deplorable heritage of the NHS – its cold war bureaucracy and a paternalistic doctor-patient relationship – is the very opposite of choice. And there are many doubts whether the recently introduced patient choice between hospitals for elective surgery is the most urgent kind of choice that people are coveting. Over 500 consultants of Doctors for Reform have declared: “The NHS was conceived more than half a century ago, at a time of rationing and considerable poverty. We once believed it was the finest healthcare system in the world. Today few healthcare professionals would make that claim.” Indeed Britain seems to be coping worse than other Western countries with soaring health costs and is dramatically falling behind other Western countries in such crucial things as cancer survival rates.
The intangible revolution
Quite a different issue is to predict the future of the NHS in a competitive global health market. As everybody knows, here are economies of scale, particularly in purely knowledge-based goods. This is what some experts like Roger Boothe call the intangible revolution. They maintain that the economic potential and wealth creation of the knowledge-based technology of the future is enormous. This is especially true for the health sector which in the future will produce lots of intangible products and services. But today, as a closed market, the NHS simply cannot compete with the lower prices of the much larger international markets. That’s the bad news. The good news is that the globalization of healthcare services and products is the best way to contain exploding costs everywhere. Surprisingly loss of control over health expenditures happens in very many countries, regardless of ideology and the way health care is organized – from central Europe to the United States of America.
Control over health expenditure is the main challenge
Some countries have already responded to exploding costs with incentives to save money at the origin of all health expenditures: the patient or consumer. These ideas try to encourage more responsibility by healthcare users. For example the Dutch introduced a no-claim bonus for health insurance. Switzerland introduced something similar with different choices and levels of healthcare coverage. The USA introduced medical savings accounts. Denmark is charging an extra fee for seeing a consultant and Germany introduced a general fee for seeing a GP. We certainly can learn from other countries how to achieve more.
Public confidence in health reform is dwindling
Unfortunately nothing like this is happening in Britain, except in some private insurance companies. Not surprisingly, 54% of electors don’t believe that the billions of pounds that Labor has been pouring into the NHS since 2000 will result in real improvements, and only 39% agree that it will do so. In the most recent ICM poll by the Sunday Express 35% of voters said that they think the NHS has got worse since Labor was elected as against 24% who think it has improved. 35 % think things have stayed the same. In a recent MORI poll 44% of people said they expect the NHS is getting worse, only 22% held the opposite opinion. Other surveys have suggested that the American managed care organization Kaiser Permanente was much more cost effective than the NHS run programs (BMJ 24 August 2004). The crucial difference between both was that Kaiser employed many more consultants per patient than the NHS.
The politics of choice and the Web
Although countries differ considerably, choice seems not to be as overwhelmingly important to patients as politicians often suggest. According to surveys of patient preferences, the heaviest users of primary care the elderly and the chronically ill value continuity of care higher than choice of providers. However younger patients value fast access higher than continuity. But both groups want greater personal involvement in their treatment. Ever more people are turning to the internet to get information on their condition, because it is not provided sufficiently by their doctors, surgeries and hospitals. Even among people aged 45 and over about 30% have searched the web for information about their condition. Finally choices between competing providers or hospitals seem less important to patients than fast access to specialists.
Social and medical Progress
The NHS was founded in times when political and social collectivism prevailed – as were the dominant concepts of epidemic and contagious diseases. And this is reflected not only in the health bureaucracies created by Aneurin Bevan but even today in the top-down centralism of the NHS. But social and medical progress renders those collectivist concepts obsolete. Biotechnology has deconstructed the fiction of “one size fits all” medicine. The new consumerism has created a huge increase in demand for quality and choice in health services and the pharmacotherapy of the future will be much more individualized – no longer the same tablets and average dose for everybody. People are becoming even more different as we approach the genetic level of understanding diseases. And this means that, increasingly, any kind of socialized health insurance will be deeply flawed. Risks in the future will be centered in the individual and family rather than in the group or collective.
Dramatic change of disease burden
Past social progress and ongoing medical innovation have led to a fundamental transformation in the disease burden, due to changes in two major areas.
Firstly the affluent Western societies created a lifestyle which is outright unhealthy. It is to blame for the leading causes of death these days: coronary heart diseases, stroke, many different cancers, sexually transmitted diseases, asthma, diabetes and fatalities of poly-pharmacy. This lifestyle encompasses smoking, overeating, promiscuity with unprotected sex, abuse of illicit drugs like cocaine and alcohol and lack of exercise. In response, we consume vast amounts of medicines in the attempt to postpone or avoid any deterioration of health. Prudent disease prevention and health improvement through healthy lifestyles are the exception.
Secondly, globalization with mass tourism and mass immigration has introduced or brought back a host of infectious and tropical diseases to the Western societies. These include the reemergence of tuberculosis as a corollary of the HIV epidemic, diphtheria and other infectious diseases. International sex tourism also has given a booster to sexually transmitted diseases. All these factors and the masses of new immigrants with no or poor English language skills have put our Western health systems, not at least the free-for-all English NHS, under considerable pressure. Not surprisingly, according to a survey by the think tank Reform, the productivity of the NHS has constantly declined over the last decades despite a huge increase of the NHS budget.
Since unhealthy lifestyles are to blame for much of the Western disease burden, this is where we need to look first in terms of keeping healthcare costs under control. Simple exhortation is not enough, as we have seen on the obesity epidemic for example.
So how can we achieve sustainable ways of behavior or lifestyle changes?
Setting the right incentives for consumer choice
The most promising solution would be to give patients/consumers back responsibility for their own health, and control over their own health care expenditures. Only thus we can contain the progress of chronic diseases driven by lifestyles in which peoples damage their own health. The clue is self-reliance and incentives for people to look after their own health, supported by full access to health information via the web and a viable health insurance system. Previous attempts to get people to live healthier have failed because they lacked any economic underpinning or incentives to do the right thing. But at least they may have raised awareness of the problem.
Patients value self-care high
According to surveys (Picker Institute, Oxford) most patients value preventive advice and support for self-care high. But our healthcare system does not offer any reward or incentive for combined efforts of doctors and patients to achieve this. There needs to be benefits for patients who really care about health improvement and disease prevention. Only rewards for patients who protect their health plus rewards for doctors, who are committed to health promotion with their patients, will accomplish anything. This should be the meaning of a patient-centered health care.
Health care funding needs to be linked to personal risks and lifestyle
Abandoning third-party payment systems is the truly global solution to the health care crisis. It is the way to make health care systems sustainable over the generations. It clearly implies a turn to individualized methods of raising health care funds: only this allows different patterns of individual health risks to be taken into account. It implies a competitive insurance system of staggered premiums according to different risks. Only then we might accomplish a fully patient/consumer-driven health care.
Provision of health care by private companies is not enough
The tax-funded system of health care in this country has become counterproductive. It does not give any incentive to prevent or avoid diseases. As a result not only should the provision of health care be decentralized, but also opened up to market forces, as initiated by the Tories and continued by New Labor.
However, if only the delivery of health care is privatized there remains the problem of collective or state purchasing of health services. Any kind of third party commissioning as a proxy for patients is prone to bureaucratic failures and complexity. Probably the most advanced concept, although not implemented yet, has been developed by Newt Gingrich at the Washington based Center for Health Transformation (CHT). He is attempting to abolish third-party payments in all US public healthcare provision under Medicaid and Medicare.
This means that the patient acquires full consumer power since he is put in control of all health expenditures on his behalf. The crucial point of a consumer-driven healthcare system will be the direct link between personal lifestyle and individual control of health expenditure with fully informed consumers.
The information point is important and the internet as well as new virtual or real health coaches hopefully can reduce the knowledge gap between health professionals and the consumers. The bridging of this gap is crucial in order to provide us with a true consumer driven health care system. My impression is that this problem of bridging the information gap is underestimated in the CHT approach which is focuses on IT implementation in the US health care system.
Markets can best address inequalities in health
Contrary to the prevailing prejudice, healthcare is not much different than other sectors where the market prevails. True, the bulk of our healthcare resources are taken up only in the last couple of years before we die. But the way to deal with this is that every consumer/patient should contribute to the necessary pool of resources to cover for these expenditures with a monthly basic contribution let us say of about Pounds 150. Upon entry into the workforce this payment should be mandatory by law.
People with healthy lifestyles will not need to spend more than this – they may spend even less. But people with risky lifestyles, like skiing or horse riding etc, will have to pay extra fees. The same of course applies to couch potatoes and people who keep smoking, boozing or overeating. However, for people with inherited diseases, permanent disabilities or for the ten percent of people who cannot afford the contribution, the government would have to step in.
Such ideas do not have to be developed from scratch, because others have already tried market-style solutions for health care. Good examples are Denmark, Switzerland, the Netherlands and the United States, although mostly in the private sector. What they have in common is the implementation of meaningful consumer choice – with impact before any disease hits. People in some countries are encouraged to take responsibility for their future health earlier in life – all of which can be monitored by them selves or their doctors – and are rewarded with lower monthly health insurance contributions.
Evidence that the new concept will work
Evidence that a combination of activity, attitude, and good nutrition, can actually achieve a significant improvement in health and can prevent or at least postpone chronic diseases was provided by scientists at Nestlé – most of all in the area of obesity and diabetes. They have also proven that the improvement of physical health will make a huge difference in figures of mental health – showing that there is a strong connection between both. It is not at all surprising that lifestyle changes like increased physical activity and weight loss will also decrease depression and anxiety. Without treatment depression and anxiety can result in unemployment, unnecessary disability, substance abuse, inappropriate incarceration, suicide and homelessness.
The challenges for self care
The self monitoring of health parameters and introduction of personal risk management will be big challenges, but well worth it. Special bespoke software programs for consumer health control solutions need to be developed in the near future. If instead of just one third of the British population being able to maintain a normal body weight, two-thirds could do so, then the disease burden or work load for the health service could be nearly halved.
Contrary to the common belief free access to the health service without payment does not serve the patient because it is an invitation to neglect your health and leads to a general waste of resources. One example for this is that, according to a recent survey (Picker-Institute, Oxford) British patients, used to the NHS, are less inclined to get involved in health improvement than patients almost all other European countries. Another example is the millions of missed appointments with consultants, GPs and nurses in the NHS.
Public health is to be reconsidered
Fifty years of Public Health in the NHS have witnessed a complete failure to improve the health of the population at large. Apart from vaccinations in childhood and cancer screening, which are more or less established in all Western countries and not a merit of NHS-style public health, most other public health interventions to target things like cholesterol, weight and blood pressure have failed. There is poor evidence that this kind of public health interventions achieve any long-term health improvements. Admittedly, in other Western countries the results are not any better. It is therefore as true for state health interventions as for other things: market forces tend to be the stronger.
To be fair, in spite of the huge controversy over cancer screening two years ago, some benefits of the centrally planned NHS are still outstanding. Those are programs for the prevention of breast and cervical cancer in women, which should probably be maintained and developed further to other areas of prevention. But the bulk of the NHS workload is curative care for acute and chronic conditions. And for this business the future consumer and patient must have a completely different and more central role, which will impy more choices and more responsibility as well.
Doctors for Reform
Recently Doctors for Reform rejected the current tax-based healthcare system in Britain. As Dr Christopher Lees, one of the founders admitted the group was disappointed by the Wanless Report’s conclusion that taxation was the best way to fund healthcare. Doctors for Reform are looking increasingly to health care systems in continental Europe, one of the favorite candidates being Switzerland which has implemented the most advanced market based health-reform – it combines mandatory social insurance with individual discounts for people who stick to a healthy lifestyle and take up less health care resources. In the Swiss system employers no longer contribute to health insurance for their employees.
According to Doctors for Reform taxation-funded healthcare can never meet demand and compulsory insurance in Europe works much better. “The NHS as we know it has had its day”, said the founder of the group, the oncologist Professor Karol Sikora. He added, tax finance is simply no longer fair because people with a healthy lifestyle have to subsidize people, who knowingly damage their health in a variety of ways. Indeed the NHS provides incentives not to bother about one’s health and even to remain ill in order to get the most out of the NHS. It is another example of the welfare state that actually encourages people to the opposite of what it seeks to achieve. James Bartholomew has looked into this in his book “The Welfare State we are in”.
Getting away from centrally planned and politically driven NHS, Doctors for Reform maintain, would provide more flexibility, freedom of choice and more competition for excellent health care. Putting power into patient’s hands would mean more choices. And the patients in the UK seem to agree. In the already quoted ICM poll 52 % of respondents agreed that Britain should move towards a European style system “where everyone takes out health insurance and the Government tops up payments for people who can’t afford the premiums”.
Implementation How can we implement this new concept of consumer driven health care?
Inevitably, any reform of NHS financing must be gradual. But once it is under way, it could serve as a template for other countries and give Britain an advantage for the export of ideas and services to bigger markets in Europe and abroad with the possibility to employing millions of people. This means the huge present workforce of the NHS 1.3 million do not have to expect redundancy.
Many pundits expect the healthcare sector in the developed countries to grow faster than others and an increasing part of this expansion of the health market will come from private, out of the pocket payments. Even in the UK, with hero behemoth NHS, a growing part of the electorate is willing to spend more for their health out of their pocket. In the ICM poll 41 % were open to charging patients for some NHS services. These people will purchase Top-Up fees for primary care and medication.
And that’s what the market should offer them in the areas of self management of disease prevention and chronic conditions. The introduction of electronic health records, given interoperability, will foster the use of personal software modules for disease prevention and for the control of chronic ailments. There are many other new developments such as the digital directories, online services for directing consumers to the right health provider and so on.
Ten guiding principles for a patient driven health care: 1) Devolution of decisions 2) Create full price transparency for consumers 3) Develop individual health risk management tools 4) Create a genuine health insurance market 5) Create comprehensive IT support 6) Give every patient his own electronic health care record 7) Abandon third-party payments 8) Enable early access to orphan drugs 9) Manage heath care market as national asset 10) Pay for outcome instead of performance
Self care and individual risk management tools
In order to prepare for this change we need to establish a think-tank exclusively dedicated to market based health reform with a focus on individual health risk management. The main purpose would be to develop concepts for self care and risk management for every major preventable disease and also for the management of chronic conditions. These modern software modules will include modern technologies for the monitoring of body functions taking patients beyond mere good intentions. If the patient can see on his or her laptop what difference they can make in terms of health and disease, this is much more rewarding and motivating. However the most sustainable incentive will be financial. Healthy people will be able to save in their health care accounts for their future (already many millions of Americans save into Medical Savings Accounts).
How to build the SelfCare think tank
Sponsors for a self care think tank could come from in the existing health care industry, e.g. pharmaceutical, NHS and insurance companies, HMOs or PFI consortia. The main remit would be to develop and design multiple software modules for coaching and personal health management including health promotion, disease prevention and disease management. Most of those software modules would be protected by intellectual property rights and form the basis for software products destined to be marketed for private purchase and consumption. This means the sponsors of SelfCare could benefit in the form of ownership of certain disease-specific modules or software products which would grant them a return on their investment.
How to survive in the age of the free-lunch economy
The libertarian science-fiction writer Robert Heinlein famously observed that “there ain’t no such thing as a free lunch,” but today’s producers and retailers are increasingly faced by a public which expects one. Our economy has a habit of turning what was once an item of value into a throwaway freebie, and the economics of this are making people rethink their ideas.
When George Orwell was Down and Out in Paris and London, he observed that homeless people, then called “tramps,” would pick cigarettes from the gutter and sometimes roll their own from the residual tobacco (there were few filter tips in his day). The problem was matches; these were a valuable commodity among the destitute community, for few would spend the few coppers a box cost, even if they had the money. Now, of course, free matches are widely available, and not as many people buy them. They use free boxes which carry advertising, or they use cheap disposable lighters at a tiny fraction of what a lighter used to cost.
The obvious question is “What happened to the match companies?” Given that not nearly as many matches are sold, how do they make their money? Some of them went out of business, some diversified, and some survived by making the boxes and books of matches which are given away, making money from the companies which offer them, rather than from the public direct.
The public expects its matches free, providing an early example of a trend which has encompassed more and more products. Record companies made money by selling at several pounds each pieces of plastic which cost pennies to produce. The value lay in the intellectual property. The physical object that changed hands in the form of a vinyl disc, a tape, or a CD, was the way value was exchanged. The rise of the personal tape recorder caused some concern, because teenagers didn’t regard it as stealing to copy a friend’s music. Record companies began insisting that DJs talk over the opening of the records they played so that listeners could not record a “clean” copy.
The rise of the internet and of file sharing caused a major change in the dynamics of that market. Purchasers, many of them young people anxious to stretch their pounds, found they could share files with each other, and that advancing technology gave them top-quality copies. Music sales went into decline, and there were fears for the industry itself. The solution has been paid-for downloads such as those bought through Apple’s iTunes. Purchasers have been found to be ready to pay a small sum to download legally, with increased numbers of them making up the lower price they pay. The music industry is breathing more easily, but no one doubts that it was the free product which forced the change.
A similar problem has been faced by the movie industry, given the high quality of internet downloads. The spread of broadband has led to the availability of illegal, but free, downloaded movies. It remains to be seen whether the iTunes formula can be replicated, with extremely low prices being paid in return for convenience, choice, and legality. One thing is certainly true: the people who made Hollywood movies a few years back never expected that their work would be given away free with copies of daily or Sunday newspapers, or that this would constitute rational and sensible economics. The point is that the promotion is worth it to the newspapers and their advertisers.
Newspapers and magazines themselves have had to adjust to the fact that people expect their on-line product to be free. Some charge subscription for access to their content but the publications which granted free access have usually roared ahead in on-line readership and potential value to advertisers. And they are the ones more likely to be cited and quoted, along with their writers, than the subscription ones.
People expect their on-line papers and magazines to be free, and the problem for proprietors is that some undoubtedly choose to read the free on-line copy instead of buying a printed one. The economics of the business include having to react rapidly, just like those of the movie, music and match industries. If people expect it for free, you have to work out other ways of making your profit.
Shed a tear for the phone companies that invested billions in converting landlines to fibre optic, only to see an explosion in mobile telephones which by-pass them. Then shed a tear for the mobile companies that invested billions in G3 licences only to watch the rise of voice over internet protocol (VOIP) services. When Skype offers phone calls free of charge, as they do for millions, for how much longer can the others charge money? People are beginning to expect free calls, just as they expected free matches. They are free in the sense that they cost nothing on top of what people are already paying for.
Other products and services are bound to follow. Food is not usually free, at least not yet, but it costs a fraction of what it did. The student standby of baked beans bought at 7p or 9p a can still costs money, but only just, and probably costs less to produce than some other goods already supplied free. It is quite conceivable that baked beans and other foods could be supplied free to customers, with the profits being generated elsewhere in the economic chain.
This is the point. The old model in which producers and middlemen took their profits from cash paid over by customers is looking dated. For many goods and services the money is made from advertisers, from people who will pay for customer lists, or from people who want to add value to their existing package of services. In an increasing number of cases their contribution to the economic chain is enough to allow the product to be offered free at the end of that chain. And if people obtain it free from one source, they are unlikely to continue to pay for it from another.
In the Star Trek series nobody pays for their food or appliances because these are generated by replicators, and come free, barring a small energy cost. We are by no means at that stage, but in the plethora of free goods and services, and in the increasing demand for free products by the public, we can begin to determine the shape of a very different type of economy.
This article originally appeared in The Business.