Making corporate control work

Amongst the events that predictably lead to demands for government action are business failures and corporate scandals. Demands for government action to improve corporate governance are, however, based on a dual mistake. They wrongly presuppose that the problems have been caused by a lack of sufficient regulation, and they erroneously assume that government regulation can make things better.

Experience has shown, however, that all such pronouncements need to be considered sceptically. Best practice rather than regulation may indeed be the government’s publicly preferred starting point. But judging from their past performance, it is unlikely to be the preferred – or the actual – outcome.

Today there are suggestions that ‘best practice’ guidelines should be enforced by the Financial Services Authority, a government agency with sweeping powers (though less accountability). The danger of ‘regulatory creep’, in which guidelines are transformed over time into mandatory requirements, is all too real.

The likelihood of regulation is exacerbated because many of the respondents who participate in corporate-governance reviews regularly advocate regulatory strictures. Some seek government regulation to make directors serve a social or political agenda other than the direct interests of shareholders. Others, including many who ostensibly represent business interests, would enlist government support to prescribe some favoured model of best practice, regardless of shareholders’ own preferences.

Both such approaches are mistaken: by its very nature, corporate governance should be the responsibility of the shareholders themselves. There is much that could and should be done to increase the effectiveness of non-executive directors, but it should be up to the shareholders of each corporation to determine the rights and responsibilities of their directors, both executive and non-executive.

A Genuine Market for Corporate Control

Most of the changes that are needed to improve corporate governance do not involve any government action. They can and should be provided by the marketplace itself. In the US, many firms have already voluntarily chosen to show the cost of granting options as an expense in their profit and loss accounts, and investors are voting down far more option plans than they did five years ago. The best way to bring about beneficial changes would be to encourage maximum experimentation in the marketplace, and to allow different forms of corporate governance to compete for the support of investors.

Contrary to popular belief, the free-rider problem is not an insuperable barrier to such non-regulatory solutions. An investor acting independently would unilaterally incur the costs of action from which all shareholders would benefit. But if the costs of the corporate governance action were for the account of the corporation, they would be automatically shared by all shareholders, in proportion to their shareholdings.

The kinds and amounts of shareholder support paid for by the corporation could be one of the ways in which companies competed in a genuine ‘market for corporate control’. The ‘market for corporate control’ conventionally refers to the use of takeovers to transfer corporate ownership. But it can be used more broadly, to refer to the market in which companies compete for shareholders, and investment managers compete for funds, in part on the degree and kinds of accountability they afford to owners and investors.

Subjects of such competition might include, for example, the nature of the constitutional corporate objectives, the extent to which strategic and operational matters required shareholder approval, company election proced-ures, the independence and quality of directors, the extent and quality of performancerelated remuneration, and the types of disclosure and audits.

Companies could compete for shareholders on the different ways in which their directors were selected and elected. Or experiment with the levels of disclosure they required from directors (including their reasons for resignation), with the personal or professional or other qualifications they required directorial candidates to have, and with the number of times that directors could be re-elected. Or they might try varying the responsibilities of the lead non-executive director, and having differing percentages of non-executive directors.

Corporations might even vary in the extent to which they allowed their directors to be executives of other companies. Shareholders might seek to employ the services of ‘professional directors’ – directors who would not be the executives of any firm, but who would be chosen specifically for their ability to safeguard shareholder interests. Even if such directors acted in a non-executive capacity for more than one firm, they might be less prone to the damaging conflicts of interest which now typically arise between executive directors and owners.

Companies could also compete for shareholders on the basis of the different sorts of financial and structural support offered to directors. Companies might reimburse some or all of the expenses that directors incurred in investigating company matters, and in taking specialist advice. Companies could also vary the extent to which directors’ (and advisors’) liabilities were indemnified, contractually limited, or covered by errors and omissions insurance at company expense.

But these are just a few of the very many different ways in which companies might compete in respect of corporate governance. One of the many advantages of free markets, is that they elicit innovative solutions to problems as they arise in all their real-life variety and complexity. Markets also effectively test those solutions and efficiently disseminate best practice.

The best way to ensure good corporate governance is to allow shareholders the greatest possible freedom to control their own corporations. The value of doing so is clear. According to a recent analysis of 1,500 stocks by the (US) National Bureau of Economic Research, companies with the most restricted shareholder rights had annual earnings and valuations between 1990 and 1999 that were almost 9% lower than companies with the fewest restrictions. Shareholder freedom is associated with both good corporate governance and superior corporate performance.

Ambitious yoof

In the 1970s, public administration was at one stage the most popular career choice. Not any more. Only 1% of under-21s list it as a career goal. Meanwhile 48% express a desire to own their own business, with as many girls as boys saying so.

‘Class does not matter, according to the youngsters,’ says a MORI report for the Adam Smith Institute. Only 9% include a privileged background in the factors which aid success. Only 19% think that good connections matter. However, 72% say determination is what counts, and 70% include education. ‘The upshot is that the classless, meritocratic society has already arrived for the Millennial Generation.’ ‘Birth, breeding and background do not matter. It is who you are which counts, not where you came from or who you know.’

The picture of an upward-reaching group is reinforced by the fact that 43% list ‘becoming a millionaire by the age of 35’ as a career goal. ‘Clearly the age group includes a high proportion of would-be entrepreneurs,’ suggests the report. It also points out that ‘the Millennial Generation appear to have moved closer to the kind of aspirations thought to typify their American counterparts, rather than towards an attitude more representative of the European approach.’

Their social, non-career aspirations are thoroughly down to earth. 59% list ‘owning their own home’ as something they aspire to. An equally traditional goal of ‘having children’ is included by 46%. When asked to list a single goal, the largest single group put down ‘to be happily married with a family.’ This is followed by ‘successful career’ and ‘long and healthy life.’

As the report points out, ‘A vision of their own future for the Millennial Generation might include less government, more economic risk-taking, greater self-reliance and ambition, but it also includes the very traditional personal wants for home, marriage, family, health and long life.’

There is hardly anything the Millennial generation would ban, except Ecstasy (60%) and fox-hunting with hounds (57%). Nothing else comes close to a majority in favour of banning. Not beef on the bone (8%), not tobacco advertising (14%), smoking in a public place (16%), explicit sex on TV or films (11%) or explicit violence (6%). Only 25% want cannabis outlawed, and only 35% go along with banning the ownership of a handgun in a gun club. As the report puts it, ‘The Millennial Generation is a markedly tolerant one.’

The report concludes that ‘the picture painted is of a generation which differs in many respects from its predecessors. They do not expect much from the political process, and accord little or no respect to its practitioners.’ ‘The Millennial Generation seem to be self-confident and self-dependent. They aim high and do not think themselves limited by background.’ ‘These qualities suggest that the future will feel the impact of the Millennial Generation quite soon, and that the new millennium might well be in safe hands.’

Alternatives to outdated court systems

Angered by the red tape of the public courts, people entering into contractual agreements in the United States began searching for ways to by-pass the courts and resolve any disputes between them more quickly and more cheaply. Before long, specialist dispute-resolution services arose to service this need. About 60,000 cases a year in the US are now handled through alternative dispute resolution – ADR – including industrial, commercial, environmental, and even international disagreements.

Most private ADR services follow a fairly simple procedure. First, the parties contact each other and agree to work through ADR rather than the courts to resolve their disagreement. Together with the ADR service they choose the kind of process they want, an objective neutral intermediary, and a timetable. They sign a confidentiality agreement to ensure that the maximum amount of information is divulged to the mediator, and agree to share costs and accept the outcome.

The existence of quicker and lower-cost ADR options has caused the public courts in the US to adopt some of the same approaches. Thus courts may mandate the use of out-of-court arbitration before agreeing to schedule a trial date; or they may set up a mock jury to hear the arguments informally, in a non-binding and private forum, in the hope of reaching a decision without the need for a trial.

Using ADR does not preclude the losing parties from going to the public courts if they still feel that they have not reached a just settlement, though it may colour the opinion of the courts. In some jurisdictions, ADR is treated as the first, lower court, so that any continuing dispute about the decision can be taken straight to the appeal courts – reducing duplication and cost all round.

Also in the UK, the recent Woolf report on the legal profession proposed that British lawyers should point out to clients where ADR might serve them better than the courts, and judges now have power to stay court proceedings where ADR is in progress. Meanwhile, government departments are testing or encouraging ADR for procurement, planning, employment, and other disputes. The UK’s Housing Ombudsman, for example, uses the Centre for Dispute Resolution as an independent mediation service.

The benefits of ADR to people in a dispute are clear. Because they can decide their own rules of evidence, and because they can scrap the need for juries and for serried ranks of lawyers, the whole thing is very much cheaper – and less stressful.

Time for competition in police services?

The police might think it important to arrest those who use force to defend their property, or to enforce motoring laws such as speed limits, or to offer counselling to crime victims, but these are rated the least important priorities by the general public, according to the Adam Smith Institute’s MORI poll, published as The Wrong Package.

What the public want the police to do is:

* Target criminal gangs and organized crime * Tackle muggings and street crime * Deter crime by being visible on the streets * Prevent burglary & recover stolen property

Lowest priority, rated so by 41 percent, is arresting those who defend their property with force. Second lowest (32 percent) is enforcing laws against motorists. Only 12 percent think this is important. Even building good relations with ethnic minority communities has a low priority. By 22 percent to 12 percent, people rate it among the least, rather than the most, important activities. People want the police to concentrate on ‘hard’ crime first, ‘to have a crime agenda rather than a social agenda.’

So why are the police so non-responsive to their customers? Because there is no competitive pressure for them to be otherwise. Policing is a monopoly: and worse, a state-run monopoly. So there has been no systematic incentive to keep costs under control and performance maximized. And not just in front-line performance, but throughout the sector. The Audit Commission showed how services such as transport, communications and training varied markedly in cost and quality between different parts of the country. But in the absence of real consumer sovereignty, this bad resource management was never extinguished.

The possibility of introducing competitive pressures exists, but is fiercely resisted by much of the police service. There has been a steady increase in private security firms, often by owners of homes and businesses who believe they can no longer get an adequate service from the police. There are neighbourhood patrol schemes in villages and estates. Local authorities themselves, the notional employers of police forces, use their own private-sector security guards in housing estates, libraries, shopping centres and offices.

Across the globe, there are many public-private security partnerships. In Switzerland, private-sector security guards provide back-up to police services. In the United States, alarm calls may be handled by private companies who check the reports and call in police only if necessary. On-street parking is commonly managed by private firms. US police forces contract-out routine functions such as patrolling property, while private-sector ‘police assistants’ take pressure off expensive full-time officers. Prisoner custody is contracted out in parts of the UK and in many places elsewhere. In some places, local authorities even put their entire policing function out to tender.

The police now work with Neighbourhood Watch groups, but only after initial resistance. Monopolies cannot admit that they are failing and need help from others. The same resistance is now seen against other self-help groups, such as New-York-style ‘guardian angels’ on buses and underground trains. Other methods to keep out the competition included denying access to criminal records to private security firms wishing to check the probity of potential employees.

The first reform in the UK must be genuine decentralization, instead of police budgets and targets being controlled by the Home Office. Because Chief Constables are closer to the needs of their local community, they are probably in a better position to judge how to spend money and deploy personnel than officials in Whitehall. They should have budgetary and staffing control – including the ability to hire in private services.

Civilianization can be extended too. The idea is to preserve expensive, highly-trained police officers only for the tasks that really need them, and use civilians for other functions. Instead of police officers laboriously writing out crime reports, for example, much of this work can be delegated to specialist assistants, using newer technology.

Another key principle is the user-pays principle. At present, all kinds of local services, including policing, are bound up in county budgets. But in various placed in the world, responsibility for road-maintenance, street lighting, refuse collection, and security, has been devolved to much smaller units run by local resident associations. When users are paying more directly, providers need to be more aware of their needs and willing to serve them.

Roads and Congestion

Road space is an asset like any other. Users should be charged for using it, at the point of consumption. That means a system of road congestion pricing, rather than the mixture of vehicle and fuel taxes that we have at present.

Our report ‘The Road from Inequity’ shows that country dwellers pay far too much for road space, while urban road users pay far too little. Car users add to the congestion in towns, making public transport even less reliable and attractive, because there is no economic reason for them not to. The CBI has calculated that the consequent delays, pollution and accidents costs the country billions.

This is not to say that Ken Livingstone’s scheme for London congestion pricing is a good one. It is a paper-based system, which means it has to rely on hard boundaries between the charged and the uncharged areas, causing many problems of parking and congestion for local residents just outside the boundary.

In our short report Charging Ahead, we favour a more flexible electronic system, which also allows vital traffic-flow data to be gleaned. Most of the benefits of road pricing can be gained by charging only the morning and afternoon peaks, allowing people to travel freely at less-congested times; but Livingstone’s charges are all day, leaving people no reason to come into town a bit later.

The issues and options around urban road congestion charging are detailed in our series of road pricing factsheets, and there’s a review of international experience in our report and website Around the World in 80 Ideas.

Art of the state

In many countries the arts have been effectively nationalized. In the United Kingdom, for example, not one of the national opera, ballet or theatre companies turns a profit: they survive on taxpayer subsidies. Regional companies are even more dependent on handouts. On the continent of Europe, opera and ballet is even more reliant on state subsidy.

The arts have suffered from being welfare-dependent. Between 1950 and 1994 public expenditure on the arts in Britain increased twentyfold in real terms. In contrast, public expenditure as a whole merely (!) trebled. By 1996, each seat in the Royal Opera House, Covent Garden was being subsidized to the tune of £28. As Dominic Hobson points out in the National Wealth: ‘All too often the quality of subsidized art is low, the cost of producing it is high, and the prices charged to consumers are excessive.’

State support tends to lead to the bureaucratization of the arts and an obsession with form-filling and performance indicators that stifles artistic vision. State subsidies allow producers to raise their costs which, perversely, means that ticket prices are driven up too.

But the arts do not have to be heavily reliant on taxpayer support, justifying themselves as a ‘public good’. Instead, policy makers should encourage sponsorship of the arts by businesses, individuals and charities through tax incentives.

In the United States there is virtually no government funding of the arts. Helped by tax allowances, private sponsorship fulfils this role. Even television is supported in this way: PBS (the ‘Public Broadcasting Service’) works as a private, non-profit media enterprise, owned and operated by the nation’s 349 public television stations. It provides children’s, cultural, news, nature, education, history, science, and public-affairs programming to 100m people each week. Its billion-dollar budget comes largely from the subscriptions of private members and from business and foundation support.

In the United Kingdom since 1984, under the Business Sponsorship Incentive Scheme, the taxpayer matches donations made by corporate sponsors. The sums raised now amount to over £80 million a year. It also helps that, in the UK, gifts to artistic foundations are tax-exempt.

The UK’s Glyndebourne Opera has shown that it possible to attract audiences without the need for state subsidy. Taking advantage of the economic recession of the early 1990s, it entirely rebuilt the opera house for £33.5 million. Production costs are half those of the state funded Royal Opera House.

Good art attracts visitors. London has long benefitted from its unrivalled theatre, while Edinburgh now acts host to the largest International Arts Festival in the world.

Scottish arts chief Magnus Linklater commented in the Scotsman newspaper: ‘I would like to see a range of small and medium-scale arts organizations being market-orientated and unstuffy about it. They should have no hang-ups about re-labelling themselves in association with a commercial company in what can be a very rewarding partnership for both sides.’

Private support for the arts reintroduces some much needed customer sovereignty into what is exhibited or put on the stage. It also provides valuable employment opportunities for young, creative talent, some of which will not appeal to politically correct state arts bodies.

The million-year wait

What do waiting lists measure?

The newspaper headlines which tell us there are now a million people on NHS waiting lists are rightly shocking. The figure means that one in sixty of us are now waiting for medical treatment. And by no means all of us are even ill. Of those who actually need the NHS to do something for them, it is more like one in six who are condemned to wait.

Waiting lists are the inevitable consequence of a politically-driven, tax-funded, centrally-run health service. Users have no customer power over the system. Since the amount which people pay (through taxation) is unrelated to the volume of services they use, they have every incentive to demand as much service they can get, however marginal or even unnecessary. And because – unlike almost all other goods and services – there is no price mechanism to inhibit the over-demand, the central authorities have to resort to the only other strategy open to them, that of rationing.

Waiting lists are merely the symptom of this. They represent unmet demand. They are rationing by queuing.

Undoubtedly, this strategy has some success. Some people do not bother to see the doctor because they cannot face a long wait, while others fail to turn up to consultants’ appointments because they have simply got fed up waiting. A growing number choose to dip into their own savings and pay directly for their treatment in the private sector. A quarter of cardiac patients actually die before it is their turn to be called in, which reduces the burden of demand even more.

But the headline figure for waiting lists conceals a great deal too. There are wide variations in waiting times in different areas, between different doctors and hospitals, or for different kinds of illness. So what is the real story behind the headline figures?

How long are the waiting lists?

What patients are concerned with is not so much the number of other people who are on the waiting list, but the length of time which they themselves will have to wait. Obviously, in principle it is possible for the waiting list to be small, but for each person to have a long wait; or for the waiting lists to be large, but for each person to be seen very quickly.

The National Plan for the NHS published in 2000 states that by 2005 “no one will wait more than 13 weeks for an appointment and 6 months for admission”.

That was two years ago, but in fact the position has worsened slightly since then. The slide in performance suggests that, however determined the policy objectives might be, today’s centralized control structure cannot in fact deliver even these modest goals.

In-patient waiting lists. Most urgent cases, however, are actually seen quite quickly. Consider in-patient waiting times – the period between a consultation with a senior doctor and admission for treatment. There are roughly ten million admissions for in-patient treatment each year. Just under half (4.3 million, in England) are emergencies and as such are treated quickly. Just over half (5.7 million) are for other sorts of treatment

Taking only the figures for England, the one million people on this waiting list at any moment, it is estimated that: 155,000 are seen within 4 weeks.

However, non-urgent cases can have very long waits indeed. Of the remaining 845,000 who are seen after 4 weeks:

* 345,000 are seen before 13 weeks, but * 500,000 are not seen until after 13 weeks, and of those: * 250,000 are not seen until after 26 weeks.

Out-patient attendance. There are around 44 million outpatient attendances each year. These are people waiting to see a consultant. The biggest delays are in getting to see the consultant in the first place: once you have had a first consultation, subsequent attendances tend to follow more quickly.

But of the (roughly) 11 million first attendances with a consultant:

* 8.4 milllion (78%) are seen within 13 weeks, of whom: * 3.8 million (35%) are seen within 4 weeks; but * 2.4 million (22%) are not seen until after 13 weeks.

How much time do we waste in waiting?

Of course, we can probably never entirely get rid of waiting time in any service – either in health care or even at the supermarket check-out. But for the population as a whole, today’s NHS waiting lists add up to a very long wait indeed. As Professor Richard Feachem showed in the British Medical Journal of 19 January 2002, they compare very unfavourably with waiting times in Kaiser Permanente, a California health plan whose spending per patient is remarkably close to that of the NHS. In Kaiser, though, 90% of in-patients are treated within 13 weeks, and 80% of out-patients are seen within two weeks.

But let us set a more modest target for the NHS and say merely that a wait of over 4 weeks is unsatisfactory – and given the pain and anxiety that people may suffer, it clearly must be. So how much time do NHS patients spend in this ‘clearly unsatisfactory’ state of waiting more than 4 weeks?

Let us also assume that people reach the top of the waiting lists at a fairly regular rate as indicated by our raw statistics, so that all out-patients are seen within 20 weeks and all in-patients are treated within 36 weeks. (Though as a number of hip-replacement patients will testify, this is perhaps an over-generous assumption.) We can then calculate that, in rough terms:

* the in-patients on the NHS waiting list will spend 235,000 years waiting in excess of 4 weeks for their treatments; and * NHS out-patients will wait 830,000 years waiting beyond 4 weeks to be seen.

That is, a total of 1,065,000 years of unsatisfactorily long waiting.

What are the knock-on costs?

Of course, this is not the whole story. Waiting lists cost people a lot more than just time. Dudley Lusted, chief economist at PPP Healthcare, undertook a major exercise on the economic cost of waiting lists. His starting point was to estimate the cost to employers of working days lost – counting the period after the first 4 weeks’ absence – where the individual remained too incapacitated to return to work and was awaiting medical treatment.

Averaged across the workforce, Lusted estimated two days being lost per employee per year. With a workforce of about 22 million that suggests 44 million work days lost due to delays in medical treatment. With a weighted average pay of £15,000 the cost is therefore £660,000,000. As a rule of thumb, the consequential cost of lost work time or covering for absence will be the same again, to give a total cost close to £1.5 billion for employers. This does not include the productivity losses of below-par workers or the management costs of dealing with absence.

The cost of anxiety and limitations on activity for the patients themselves has been estimated by Professor Carole Propper of Bristol University. Taking this at £5 a day (the mid-point of her estimated range) then the unseen cost of the 1,065,000 years that people spend waiting beyond 4 weeks is approximately £19.4 billion.

There are, of course, other costs too. A MEDIX survey identified the extra burdens on GPs and their patients. Among the key results were:

* Worsening conditions – 66% of GPs had patients waiting as outpatients admitted as emergency because their condition worsened * Increased burden – 90% of GPs had patient consultations arising out of waiting list delays and 70% of GPs dealt with problems arising from that – an estimated 1.5 million extra consultations.

What should be done?

Although all these costs are necessarily estimates, it is clear that the cost of NHS waiting lists – in terms of anxiety, incapacity, time off work, the cost of absence to employers, the extra costs to the NHS whose condition worsens and the cost to GPs of seeing patients who are waiting for treatment – is well over £20 billion.

But rough as they are, these calculations do tell us something about the real human scale of the waiting lists and the costs to individuals and economy. Unfortunately, fewer people are being put on the waiting list, fewer of those are being treated in good time, and the total queue is not getting any shorter. Clearly, productivity is falling, despite a real increase in funding of about £5,000 million in the past two years. The inescapable conclusion is that the current structure simply cannot make the improvements that we all want, and that radical reform is inevitable.

Pumping more money into a failing structure will not deliver the benefits. Importing clinicians or exporting patients is a marginal stop-gap. We need to change the system.

Most healthcare can be delivered locally, and there is a strong case for managing that delivery locally too. More local management, greater diversity of provision, and methods to make the financial rewards come upward from the patient, rather than downwards from Whitehall and through the health bureaucracy, could all produce a more patient-centred system where there was a real downward pressure on waiting times both from patients and providers.

Two Thousand Days of Nothing Very Much – Labour’s performance in office

In her first 2,000 days Margaret Thatcher changed the world. She privatized state industries, lowered taxes, deregulated the economy, and tamed the unions. The miners were conquered at home, the Falklands liberated abroad. By late 1984, after decades of decline, Britain was back and booming.

Has Tony Blair done as much? It would be hard to suggest that New Labour, which passed its 2,000th day in office on October 23rd, has as much to be proud of. Indeed, for a government which came in promising so much, the delivery has been small.

Both Blair and Thatcher promised a fundamental change in direction for Britain, but Lady Thatcher had one great advantage. She had a clear vision of an alternative. In place of controls, central planning and subsidies, she could set the market alternatives. By contrast Tony Blair had something hyped as the “Third Way,” but difficult to pin down to much more than a set of attitudes. It seemed to involve a market economy with more care for the vulnerable, and with better public services.

Certainly Labour’s first move was pure free market. The Bank of England gained the freedom to set interest rates and pursue inflation targets. It was bold. Even the Tories had refused to do it, despite pressure from the Adam Smith Institute. It has been so successful that the very Tories who criticized it at the time have subsequently endorsed it.

Labour’s second big achievement has been constitutional. Part one of House of Lords reform has been done, with the hereditary element reduced to a temporary rump. Even so, this is only half a reform. Where is the elected element? Unless most of them are elected, the chamber is reduced to a giant quango of political placemen. Yet the government is reluctant to weaken its grip on the Commons by giving the upper house any authority.

Devolved assemblies for Scotland and Wales are a reality, but have not achieved much. Scotland’s can claim to be more generous with student fees and home care charges, but it is generosity done with other people’s money, and leaves unresolved the allocation of powers and the now-dated Barnett formula subsidy. The Scottish Assembly has separated the two nations, however. Scottish political stories rarely feature in national dailies, while the Scottish papers seem more parochial than ever.

The economic changes are even more contentious. Gordon Brown created a very good first impression by the pledge to keep Tory spending targets, and by Labour’s promise not to raise income tax. He was rumbled fairly quickly, however, as someone who was raising a great many other taxes, most of them surreptitiously.

The various taxes on pensions, insurance, travel, and fuel, all left their mark. Indeed, since New Labour took office, Britain has increased taxes more than any other EU country. Thirteen of them have lowered taxes, but the UK, along with Portugal, has raised them.

The least pleasant of the tax changes has been their complexity. They were becoming simple. Nigel Lawson lowered taxes, abolished taxes and simplified taxes. Gordon Brown has done the opposite. Clearly he relishes a situation in which no ordinary people, sometimes not even accountants, actually understand the tax code.

Mr Brown inherited a golden economy, performing better than our EU partners, and flexible enough to adapt to changing circumstances. The Tories cannot take all of the credit for this, since some it followed the forcible overthrow of their ERM policy. However, Mr Brown has spent 2000 days slowly eroding that advantageous position. The British economy is now more highly taxed, more regulated, has less flexible labour markets and higher business costs than it did 2000 days ago. Lady Thatcher’s first 2000 days achieved all of the opposites.

It was all done, he says, in the name of better public services; but are they better? Figures are promoted assiduously, but the reality is of targets unmet. Less than a quarter of the extra doctors are there. School class sizes are down for younger children and up for older ones. This hardly amounts to the promised revolution.

The problem which Tony Blair sees, if not Gordon Brown, is that the problem was not lack of resources. They have already had extra money without getting better. The problem is organization, lack of customer input, and lack of different sources of supply. For all the hype and spin, very little has actually happened in those 2000 days to change the experience which people have of those services.

Crime remains a problem to which the government clearly has no solution. Police pursue priorities other than those the public would have them tackle. Most people feel less safe than they did in 1997, and celebrities, once attracted by the general buzz of the place, have begun to flee from its violence.

Outside of hard politics, there have been gains and losses in the cultural field. The Blair government set a lead in making Britain a more tolerant and relaxed place, despite firm opposition from the ‘nasty’ tendency. But cool Britannia and rebranding Britain now invoke only cringes of embarrassment. The Dome, which could have been a confident symbol of a confident Britain, collapsed in a welter of politically correct and utterly dull exhibits.

Meanwhile, the government muddled pretty incompetently through the legacy of BSE, the fuel protest, the foot and mouth crisis, the Railtrack fiasco and the A-levels problem. Sleaze reached new levels of efficiency because, unlike under the Tories, Labour’s backers got something in return. Passports for the Hindujas, exemption for Formula One advertising, all gave evidence of a new joined-up sleaze. Ministers resigned in disgrace, and in one case for crass incompetence.

What was it all about? Compared with Lady Thatcher’s 2000 days, not very much. There is not a lot to show for two massive mandates. Media control and spin are at unprecedented levels. Most stories appear because government sources put them there. Hype abounds out of all proportion to substance. But this is talk. Lady Thatcher, with far less going for her and far less control, achieved far more with her first 2000 days. She turned Britain around and pointed it toward the future; Labour did not.

Liberating libraries

Throughout the world, users of public libraries are suffering a vicious circle of decline in services. Free or near-free libraries are commonly provided by city or district governments. But local government budgets are always under pressure – because their services are labour-intensive, their costs rise faster than inflation and local taxpayers become less and less willing to pay for them.

What, then, can be done to stem the decline of public libraries today? One modest example from the United States might show the way.

Since July 1997, twenty-five public libraries in Riverside County, California have been run by Library Systems and Services Inc – a private-sector service supplier – working in partnership with the County. Under the $5 million contract, LSSI promised 25% increases in library hours and in the book purchasing budget. The results have been praised as showing that the library service can be managed very effectively by private concerns without compromising its ethos and integrity.

Before LSSI were brought in, Riverside had exactly the same problems that cause local authorities everywhere to cut back on service. Cash had been taken out of the libraries budget to meet the more electorally sensitive needs of local schools. Book purchases and opening hours were being cut in order to save money.

Now, complaints from users have virtually ceased. Circulation – the number of books and other items lent out – increased 10%. LSSI has expanded library hours by 34%, doubled book purchases, increased staff by nearly 50%, and maintained salary levels. And all within the same budget. Having seen the results, other US cities have been keen to sign contracts with LSSI.

It may be hard for local librarians to accept that, just possibly, someone else could run the service more cost-effectively than they. Or they worry that if libraries are no longer run by public servants, their social-service dimension will be lost or they will be easy prey to publishers who want to push their own wares.

Clearly, libraries must remain community-oriented, serving local needs, including the social-service dimension. But they do not have to be managed and run by public servants in order to do that. With care, the whole of that public-service function can be captured in an operating contract. Indeed, the fact that it has to be specified with precision may make us more aware of the wider community role of libraries.

It may not be easy to specify or measure such wider values; but if we can, it makes the case for the preservation of library services stronger. And if we can cut costs and raise service quality by contracting-out, then the future for local libraries becomes even brighter.

The NHS: a dysfunctional insurer

The NHS is the dominant provider of healthcare services, but it is the dominant funder of services too. Nominally, the financing function of the NHS is a national health-insurance system: but it is a highly dysfunctional one.

For example, through their tax and National Insurance Charges, UK citizens have to pay for NHS services whether they use them or not. They are not paying simply to guarantee fair access for anyone who needs healthcare, regardless of their ability to pay; they are paying for their own NHS treatment, even if they decide not to rely on it. Instead of rewarding people for removing their demand from an over-stretched public service, in effect we make them pay twice.

Not surprisingly, many people believe that since they have paid for the NHS through taxation, they are going to extract the most out of it. While others believe that NHS services are somehow ‘free’, either because they do not pay tax, or because they are not charged at the point of use.

In either case, there is no limit to over-demand as there would be in ordinary commercial markets. With nearly all other goods and services, people face paying a price for what they buy – even if they are buying out of the benefit income given to them by the state. So they look at the value which different goods and services might provide for them, against the cost of acquiring them. But in health, where other taxpayers are bankrolling the system, there is no incentive for people to make the same value-for-money calculation. Instead, their every incentive is to get as much service as possible, no matter how marginal the benefit, since there is no price barrier against demanding more and more.

Likewise, there is no incentive for people to look after their health. In a private insurance systems, people who smoke or drink heavily, or who overeat, or who take no exercise, or are drug abusers, for example, might pay higher premiums than those who take more care of their health. But in the NHS, everyone pays on the same (tax) scale, so there is no incentive for personal responsibility.

Certainly, the NHS protects people who have higher than average risks through no fault of their own – for example, if they are women, or elderly. And it guarantees access to healthcare services even for the poorest families. However, it is easily possible to guarantee fair access to everyone without having to pay for the provision of an entire service. The government does not have to run supermarkets, for example, to ensure that the nation is fed. It simply gives cash benefits to poor families so that they can buy their own food – and shoes, clothing, and other essentials. And, empowered as valued customers of the providers, they then have access to the same competitive, value-conscious markets as the rest of the general population. Why does healthcare need to be different? A variety of solutions

So how can we promote value for money while ensuring access for all? There are many potential solutions to these funding problems.

One is the idea of Continental-style social-insurance funds. Here, everyone pays into a fund on a sliding scale, usually linked to income, so those with low incomes or no incomes pay nothing but are still members of the insurance system, and so are guaranteed good access to medical services. But the difference is that people can choose which insurer to belong to, so there is competition between the social-insurance providers. Naturally, customers try to seek out the providers that deliver greatest value for their compulsory premiums, and providers seek to outperform their competitors and deliver it. So there is a dynamic process that promotes improving value for money.

It is not necessarily easy to introduce a social-insurance system in the UK, because it requires us to establish a number of competing insurers and somehow to split tax contributions to them rather than all going to the Department of Health. But for a discussion of the general principle, which has much political support across the spectrum, see the ASI paper NHS Reform: Towards Consensus by left-wing journalist Anthony Browne.

Another solution is to rebate a large amount of the taxes paid by individuals, if they agree to limit or abandon their demand on NHS services and use only private or voluntary alternatives. This would mean that people were no longer trapped in an NHS that they did not like, but would have the financial empowerment to seek out their own choice of provider.

It would also put considerable pressure on the NHS to work more efficiently and to provide a better, more customer-focused service, so as not to lose this source of custom and finance. The rebate would not be 100%, because some of the tax paid would still be needed to provide services for those who were on low incomes but who still chose to stick with NHS providers. But it would be high enough that many families would at last have some means of escape, even if they had to top up the rebate by small amounts in order to exercise it.

Granting people the power to exit is arguably the only way to stimulate real operational reform in a state monopoly provider. For an analysis of how it might be made to work in the UK, see the ASI report by Professor Philip Booth, Getting Back Your Health.

A third suggestion is to create a more robust partnership between the state, private insurers, and patients themselves. Faced with escalating insurance costs, many US employers are now restricting the traditional comprehensive ‘first-dollar’ insurance schemes (very much like the NHS’s ‘everything is covered’ promise) that they provide for their workers.

Instead, they offer workers the choice to have only (much cheaper) forms of ‘catastrophic’ insurance, which covers major healthcare expenses only; and to remit to them all or part of the savings as deposits into ‘medical savings accounts’. The individual worker can use their MSA funds for any medical expenses that are not covered under the catastrophic insurance scheme, and often were not covered under the so-called ‘comprehensive’ scheme either – services such as stress counselling, weight management, or helping to kick drug or alcohol habits, for example.

The logic of this is that insurance still covers the big-ticket items – which people are unlikely demand just for the sake of it. But for middle-range items where there is an element of choice whether to demand a service or not, people face real value-for-money calculations, since these services have to be paid for out of the money they have in their Medical Savings Account. And for really small items – cough medicines or sticking plasters, for example – people pay out of their own pockets – much more efficient than getting them off the insurance, where the cost of processing a claim can be much greater than the value of the item itself.

Could such a system work in the UK? With the NHS being only the insurer for big-ticket items, and with the rest of people’s tax contributions going into new Medical Savings Accounts, perhaps on the ISA model? The ASI’s Dr Eamonn Butler thinks they could, as he outlines in his report Medical Savings Accounts.

Paying for mediicines is another real problem for the NHS. At first, they were free, but the demand suddenly rose so sharply that the postwar architects of the NHS were obliged to introduce prescription charges. Over the years, however, different groups have secured exemptions from prescription charges, so that now only a minority actually pay them.

Prescription charges bear no relation to the real cost of medicines. So (apart from chemists advising them that they might be cheaper to buy over-the-counter alternatives to their prescription item) there is no incentive – and not even any price information – to induce people to seek out the best value-for-money options. Furthermore, many people who could easily pay for medicines in fact pay nothing, simply because they are members of some exempt group (such as the over-60s, or nursing mothers). Meanwhile, less-than-wealthy people who have chronic conditions that can require a lot of medicine can be faced with high prescription bills.

Former NERA health expert Ian Senior argues, in his ASI paper Paying for Medicines, that charges should be based on the real cost of medicines and on the individual’s ability to pay; while to protect those who need a large volume of medicines, the total annual bill should be capped. Thus, people would face the real cost of medicines – inducing them and their doctors to seek out better-value alternatives where possible – but only up to a certain annual amount, which would be higher for wealthier people. This system, similar to that operating in Sweden, would create a more efficient use of pharmaceuticals while spreading the cost of medicines much more fairly than it is today.