The Department of Health: an overview of its quangos
Health and adult care services are surely complex matters but the challenges facing the 2,000 Department of Health HQ staff should be relatively simple: persuading HM Treasury to provide more resource and splitting that between NHS England (treatment and cure), adult care services and the technical quangos which address central issues such as the efficacy of medicines. The more that goes to the Department itself, and its quangos, the less goes to front-line services.
Remarkably, none of the 27 quangos focus specifically on adult care services or mental health – the two big problems of our time. NICE provides guidance on medicines, medical technology and, since 2013, social care. The Care Quality Commission (CQC) and the National Data Guardian monitor both NHS and adult care provision. The Health and Social Care Information Centre is now called NHS Digital as, according to its 2016/7 annual report, it now aligns itself with the NHS rather than social care. None of the other 23 gives address social care at all. The DH should, perhaps, have an over-arching public body, equivalent to NHS England, to oversee adult public services, especially since the front line services are largely devolved to local authorities.
As discussed in an earlier ASI Blog[1], NHS England, now an “Executive Non-departmental Public Body”, should become a publicly owned corporation, if only to stop politicians and civil servants messing it up. Remarkably, the DH has eight quangos interfering, or helping depending on one’s point of view, in NHS England’s business: Independent Reconfiguration Panel, National Information Board, NHS Business Services Authority, NHS Digital, NHS Improvement, NHS Litigation Authority and the two review boards for NHS staff pay and doctors/dentists. Clearly decisions for staff differ from GPs who are independent contractors for the context is the same and the board needs to be fair across both sectors.
Five of those can be seen as services that NHS England would itself need, one way or another. The Independent Reconfiguration Panel, National Information Board and NHS Improvement, however, exist purely to tell the CEO of NHS England how to do his job in addition to the stream of instructions from the DH itself. The three should be disbanded.
Six other quangos clearly need to be independent from the NHS: Administration of Radioactive Substances Advisory Committee, CQC, Human Fertilisation and Embryology Authority, Human Tissue Authority, National Data Guardian and the NHS Blood and Transplant. The CQC and Data Guardian monitor performance and patient confidentiality respectively. The other four are technical/scientific.
Of the remaining 12 quangos, five should be disbanded and seven have overlapping functions and could be merged into three quangos. Merger does not of itself guarantee better value for money but at least it gives the opportunity for squeezing costs to prioritise what matters most. The seven could therefore be merged into two agencies: Public Health, and Medicines and Technology (NICE). The public health agencies are Public Health England, Health Education England and the Health Research Authority. The other four are National Institute for Health and Care Excellence (NICE), British Pharmacopoeia Commission, Commission on Human Medicines, Medicines and Healthcare Products Regulatory Agency.
The existing NICE is far the largest of this last group, with 600+ staff and a budget of £65M p.a. Its guidance on medicines can be controversial but is unquestionably independent and well informed. The 2013 tacking on of adult social care seems culturally alien and receives relatively little attention. Much of its social care guidance can be parodied as “all the involved people should be involved”. This responsibility should be transferred to the new adult social services public body proposed above.
The final proposed disposals are the Accelerated Access Review, Advisory Committee on Clinical Excellence Awards, Committee on Mutagenicity of Chemicals in Food, Consumer Products and the Environment, Morecambe Bay Investigation and Porton Biopharma Limited. The first and fourth of those completed their work some years back and should no longer be listed. Deciding, once a year, which consultants should receive awards does not need a full time DH quango, just an ad hoc committee of the NHS. The Mutagenicity Committee is actually three separate ones which belong in their separate Whitehall departments – the Food Standards Agency for food, BIS for consumer products and DEFRA for the environment.
Porton Biopharma Limited is either the profitable commercial enterprise, as the DH website claims, in which case it should be privatized, or that is a cover for high security research, in which case it should become part of the Ministry of Defence.
Although the idea of “taxpayer value” has now been espoused in Whitehall, comparing the taxpayer value of, say, a destroyer with an acute hospital is somewhat with an acute hospital is somewhat conjectural. This overview of the DH quangos has indicated that, excluding the NHS and Adult Care bodies, only about nine of them are necessary. Divvying the annual budget 12 (NHS and Adult Care England, nine quangos and the DH itself) ways, once a year, and writing a few policy and briefing papers, is not a lot of work: all bar 200 of the HQ staff could safely be stood down and thereby fund another 1,800 doctors and nurses.
The “bonfire of the quangos” promised (again) in 2010 was more of a puff of smoke. Some were merged but most were unaffected. The streamlining of quangos outlined in this overview is not so much to save money as to give the NHS a better chance of improving its performance. No NHS England chief executive needs this many quangos looking over his shoulder and telling him how to do his job.
Well done Polly, except this is rather the point of trade
Polly Toynbee tells us that the very point of trade is one of the terrors of trade which must be avoided. Which is a rather interesting case of entirely mangling reality, isn't it?
The American farming industry insists any free trade deal must include agriculture – and Britain must allow in US chlorine-washed chicken, hormone-fed beef and genetically modified crops, all banned here and in the EU. The Telegraph reports Fox sources, backed by Boris Johnson, saying “the Americans have been eating it perfectly safely for years” and it’s 21% cheaper than our chicken. Trade is supposed to mean cheaper imports. But, with echoes of the old Corn Law wars, Gove and Leadsom jump to defend British farmers, expressing “serious concerns”. Not only will UK farmers lose market share, but lowering standards bars us from exporting our food to the EU. Fox dismissed food obsession as media trivia. Maybe the food is safe – but his eagerness to lower standards shows how a supplicant UK will take whatever terms a super-power desires.
It’s infuriating to watch Brexiteers only now finding out basic truths that “experts” told them years ago. Trade with New Zealand? That will wipe out our sheep farming.
If foreigners do the chicken thing better than we do (there is more on our work on this here) then we positively desire to be buying what they do better than we. If foreigners can farm better than we can, perhaps they have a greater or better original endowment of land for example, then we want them to take market share.
If our land isn't very good for sheep growing, as it also isn't for cocoa or banana growing (or even, as Adam Smith pointed out, grapes for Bourdeaux) then we absolutely do want them to be doing that and we to be doing something else.
Something else that we're less bad at, as David Ricardo pointed out 200 years and a couple of months back. Which is surely long enough for even Polly to get to grips with the basic concept?
That free trade with the world would mean we do less of certain things here in Britain is not a problem with free trade, is not a usurpation by free trade nor a perversity of free trade, it's the entire damn point of free trade itself.
Neoliberalism at Niskanen
We're big fans of the Niskanen Center here at the ASI. So we were glad to see Niskanen's Karl Smith follow our lead and embrace neoliberalism.
In his post, Karl sets out why he identifies as a neoliberal and sums the ideology up rather well.
He writes:
There is something fundamentally hybrid about neoliberals. I embrace the term, yet my intellectual background and native sympathies lie on the right, not the left. Neoliberalism most readily brings to mind a certain type of libertarian who never quite bought the discarded philosophical case for liberty. It’s someone who was more enamored by Milton Friedman than Murray Rothbard; liked Nozick but preferred Rawls; and saw the failures of Eurosclerosis as just as relevant to the case for free markets, as Cold War-era anti-communism. It’s the cast of mind described in a Medium post by Sam Bowman, the executive director of the Adam Smith Institute.
Crucially, it also connotes the type of libertarian who saw free-market liberals as heroic bedfellows. Their heroism lies in the courage to overcome the anti-market bias of the left. Ours was in embracing them and so transcending the anti-left bias endemic to the right. Together we are a muddy middle of liberal philosophy and libertarian policy solutions.
In practice, this implies that we’re suspicious of regulation, but embrace redistribution. I often tell my more conservative friends that I’ve made my peace with the welfare state. That, however, isn’t entirely honest. The truth is that I wholeheartedly embrace the welfare state as a tool for empowering people to live happy, fulfilling, self-directed lives. My primary concern regarding the welfare state is making it less intrusive in the choices of individuals, families, and communities.
When your funding sources do & don't matter
The most common response we got to our Monday ASI paper on chlorine chicken is that our view was driven by a monetary interest. It wasn't: we don't accept any funding for specific projects—everything comes out of general funds—and as far as I know none of our general donors stand to benefit from such a move either. The actual inspiration for the paper came in a facebook chat in January between ASI staff, screenshotted below. But the interesting question is: would it matter if we did get our funding that way?
There is a popular view, perhaps derived from a Marxist-materialist worldview, or more mundanely from a economicsy self interest perspective, that opinions are just outgrowths of economics. Everyone cynically supports the perspectives that stand to contribute to their narrow, mostly financial, self interest. The rich like property and the poor like redistribution. Sometimes, in a more vulgar version of the theory, the holder will argue that self interest is for thee, but not for me, and all views except theirs are a sort of false consciousness.
It's certainly one model of the world. But as Sam says very well here: political error is driven by complexity, not greed. In fact, most of the evidence on public choice suggests that people are pretty altruistic and "sociotropic" in their political behaviour. People are ignorant, and that causes great problems. But by and large they are not corrupt or atavistic. I think that jumping to motivational games suggests people are unwilling, or unable, to try and understand the question at hand, and thus need some sort of crutch to explain beliefs, rather than being open to the possibility of honest disagreement.
Look: even if I were in favour of this trade deal step due to Big Chicken or Big Chlorine payouts, how could that affect my work? Scientists working in lab studies declare conflicts of interest because their work is partly dependent on their probity. The recent massive scandals around p-hacking, publication bias, and even straight scientific fraud underline why this is important.
But when I write something I'm not asking anyone to trust me as an authority, and I use publicly available data and evidence created by people completely unrelated to me. This is by definition transparent, doesn't pose problems in the way Monsanto-funded pesticide research might. Does getting payment from corporate lobbies or interested parties make me more convincing? Does it find me better data or cleaner logic? It's hard to see how it could possibly affect the situation in any way.
Interest groups fund people who support their interests. If they didn't fund them, they'd still support those interests, but with less money. If John Stuart Mill were alive today then tobacco firms, brewers, distilleries, and Coca Cola would probably give him cash. But he would be defending the Harm Principle either way. True Believers have a comparative advantage over shills in advocacy.
The only possible reason someone could ask for my motivations is that they can't be bothered to tackle the argument. Perhaps they are even looking for reasons to dismiss evidence that conflicts with their existing worldview (we are all prone to this, because it hurts to admit you are wrong). But neither do their motivations tell me that their conclusions are wrong, just as the fact the IFS gets their funds mostly from governments doesn't tell me they're wrong, and the fact that CLASS is funded by unions doesn't tell me that they're wrong.
It's simple minded to jump to money as an explanation for all evils. Sometimes people are just wrong, because social, political, and economic questions are often hard to answer.
Fine, clobber the rich, but not with a 100% inheritance tax
Abi Wilkinson has a piece at The Guardian making the case for bolstering the UK's welfare state by raising inheritance tax to 100%. She argues that it would be good to do more redistribution, to fund more and better public services, and that unlike other taxes, it does not face objections of moral desert. Perhaps you deserve the sweat off your back, she argues, but it's hard to see how you've earned a pile of cash that simply fell into your lap through luck. And she argues that we cannot infinitely respect the wishes of the dead.
There are some small points that Wilkinson is simply wrong on: she argues that elderly folk retiring earlier and earning less would make space for younguns to fill those spots. This is the Lump of Labour Fallacy: it's wrong for the same reason that immigrants don't steal jobs off natives, and the entry of millions of women in the labour market in the 1970s didn't cause mass male unemployment. When more people work we just produce extra stuff, consume extra stuff, and invest in extra stuff. But this claim isn't crucial to her case, and there's a more important point here.
Libertarians have always been divided on inheritance. If you think that freedom is important because it lets humans express their free wills, then why respect the non-existent wills of dead people. Jim Buchanan, the public choice theorist who suffered at the hands of Nancy Maclean and supposedly ties the whole libertarian right together, advocated an 100% inheritance tax. Robert Nozick switched towards one later in his life. Thomas Jefferson thought similarly. "Even" Adam Smith was against unlimited rights of bequest.
But unlike both Wilkinson and libertarians, I think we should approach this question pragmatically, not based on moral rules. We want to raise money to fund redistribution and public goods. How can we do this at the lowest possible economic cost? Inheritance tax is an inefficient way of raising money, even if we ignore problems of enforcement and loopholes.
When economists analyse taxes they typically use the visors of incidence and behavioural responses. Behavioural responses are what they say on the tin: how households and families adjust their economic behaviour in response to a tax change.
Incidence is who is made worse off by a tax. Money is there for consumption. If you save it or invest it, it is only to spend it in the future, to insure against an unexpected consumption need you might have, or to give it to others to consume later. A tax's statutory burden falls on whoever hands it over, but a tax's incidence is on who eventually has lower consumption in order to fund it. An example is VAT: shops hand it over to the government, but consumers end up paying most of it through higher prices. Similarly, buyers hand over Stamp Duty Land Tax, but sellers are also made worse off by it: about half of it is paid in the form of lower house prices.
Wilkinson's piece implicitly assumes a higher inheritance tax falls entirely on the deceased and their benefactors. But it only falls on the deceased if their behaviour doesn't change in response, and they generate estates of an equal size in their lifetime even given the tax. This is questionable under a 40% tax, but dubious in the extreme under an 100% tax.
The higher the inheritance tax, the higher the implicit income tax, and the more unbalanced the tradeoff between your consumption and your kids'. At 100%, it is infinite: no matter what you do, you cannot make your kids' lives better off after you die. Your incentive, again heroically assuming we are able to deal with all the practical difficulties, is both to generate less wealth, and to consume any you do generate before you die. Why not live out your days at the Ritz like Thatcher?
Less income created means less for public goods and redistribution, not to mention less for their kids, and less for them. And while more holidays and nicer houses for older people is all well and good, more consumption means we have to switch land, labour, and capital towards producing those things, and away from the things the savings of the old were buying. Nearly all of these savings aren't hidden under beds, but are being put to work: lent out by banks, and invested in equities through pension funds. This investment is what funds productivity growth—and productivity growth is what underlies higher wages.
So an 100% inheritance tax would barely make rich old people worse off, but it would clobber workers with no chance of inheriting. This is why I disagree with Wilkinson and a bunch of smart libertarian scholars, including the namesake of my very own think tank. There are very good reasons to tax the rich to improve the well being of the badly-off. But we should do that through consumption taxes that are guaranteed to reduce their Maserati and private jet purchases, not taxes that destroy their incentive to invest in society.
How onerous are Basel III's constraints on bank leverage?
It is generally acknowledged that high bank leverage was a key factor contributing to the severity of the Global Financial Crisis. For the UK, Bank of England data suggest that UK banks’ average simple leverage – the ratio of banks’ total assets to their shareholder equity – was 24.4 over 2006.[1]
Basel III then sought to counter high leverage by imposing a minimum required leverage ratio on regulated banks.[2] The ‘leverage ratio’ is the inverse of the leverage.
So how onerous are Basel III’s constraints on bank leverage? More precisely, what is the maximum permitted leverage under Basel III?
A clear expression of the Basel rules on this point is the following from the 2015 Prudential Regulatory Authority (PRA) Rulebook in the UK:
3 MINIMUM LEVERAGE RATIO
3.1 A firm must hold sufficient tier 1 capital to maintain, at all times, a minimum leverage ratio of 3%.[3]
3.2 For the purposes of complying with 3.1, at least 75% of the firm’s tier 1 capital must consist of common equity tier 1 capital [CET1].[4]
This minimum required leverage ratio is expressed in terms of the ratio of Tier 1 capital to the leverage exposure. Section 3.1 of the PRA Rulebook would suggest that the maximum permitted leverage is then 1/3 percent = 33.33.
Section 3.2 of the PRA Rulebook then states that at least 75 percent of the firm’s Tier 1 capital should consist of CET1 capital.
Now 25 percent of the 3 percent minimum Tier 1 leverage ratio is 0.75 percent, so the minimum required leverage ratio expressed in terms of CET1 capital = 3 percent minus 0.75 percent = 2.25 percent.
This implies that the maximum permitted CET1 leverage = 1/0.0225 = 44.44.
However, Basel III also allows banks to include a ‘sin bucket’ of non-CET1 capital items as part of their reported CET1.
So let’s distinguish between ‘reported’ CET1 (or CET1 including the sin bucket) and ‘clean’ CET1 (or CET1 purged of the sin bucket).
Under Basel III rules, the clean CET1 can be as low as 85 percent of reported CET1.[5]
Let’s also assume that bankers make maximum use of the sin bucket so the clean CET1 = 85 percent reported CET1.
This means that the Leverage Ratio using clean CET1 can be as low as 85 percent 2.25 percent = 1.9125 percent and still comply with the Basel III minimum required leverage ratio. Inverting this number gives the maximum permitted leverage using clean CET1, i.e., 1/1.9125 percent = 52.29.[6]
A loss of 2 percent of the leverage exposure would then be more than enough to wipe out a bank’s CET1 capital.
In plain English, the Basel III capital rules allow banks to maintain remarkably high leverage and still be Basel III-compliant. Indeed, the Basel capital rules would appear to allow banks to maintain considerably higher leverage than they had on the eve of the financial crisis!
I should also note some qualifications, which will serve to further loosen the impact of the Basel III maximum leverage constraint:
- The first is that these calculations ignore sources of hidden leverage such as accounting standards that cause capital to be over-reported or the additional leverage in off-balance sheet positions.
- The second is that the above calculations relate to book values, not to market values, and market-value leverage these days will typically be higher than book-value leverage.
In fact, since Basel III does not impose any restriction on market-value leverage, the maximum permitted market-value leverage under Basel III is theoretically unbounded.
End Notes
* I thank Anat Admati, Tim Bush, Gordon Kerr and Sir John Vickers for helpful discussions on the subject covered in this blog posting.
[1] Obtained from the Bank of England’s Financial Stability Report for November 2016, p. 58, where the 2006 average simple leverage ratio is reported as 4.1 percent. The simple leverage is then 1 ÷ 4.1 percent = 24.4.
[2] Critics however have argued that such requirements are onerous. These include many leading bankers (e.g., Jamie Dimon and former Deutsche Bank chairman Josef Ackermann) and even central bankers (e.g., Alan Greenspan), the American Bankers Association, and the British Bankers Association (see, e.g., the citations in A. Admati and M. Hellwig, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About it, Princeton University Press, 2013).
[3] As an aside, it is disappointing to see that the PRA’s own rulebook explicitly endorses the ‘capital is a rainy day fund’ fallacy by stating that banks “hold” capital. Banks do not “hold” capital. To suggest that they do is to suggest that capital is an asset to a bank and it is not. Read Admati and Hellwig.
[4] Prudential Regulation Authority (2015) PRA Rulebook: CRR Firms: Leverage Ratio Instrument 2015. London: PRA, p. 5.
[5] For more on the ‘sin bucket’ see T. F. Huertas (2014) Safe to Fail: How Resolution will Revolutionise Banking, Basingstoke: Palgrave Macmillan, p. 23, or Basel Committee on Banking Supervision (June 2011) “Basel III: A global regulatory framework for more resilient banks and banking systems,” pp. 21-6 and 65.
[6] If one took account of systemic or countercyclical buffers, however, the maximum permitted leverage would be somewhat lower, but not much.
What terrors The Guardian reveals to us, eh?
We do think it must be terribly stressful being a member of the aggrieved left these days. So may of the world's basic problems are on the way to being solved, capitalism and free markets doing that solving. As this excellent chart from Max Roser shows. Given this there must be the most terrible angst suffered as something else to complain about is searched for.
As an example of this we offer the latest from The G:
Revealed: the insidious creep of pseudo-public space in London
Pseudo-public space – squares and parks that seem public but are actually owned by corporations – has quietly spread across cities worldwide.
If there were some epidemic of private economic actors taking over the publicly owned green spaces of our cities then we too might start to get a little uppity. This is not what they are complaining about.
The current publicly owned spaces are remaining as just that, publicly owned spaces. However, developers of varied private sector projects are realising that we humans like a bit of space around, a colonnade to house the cafe tables perhaps, a fountain or two, stretch of green grass to sooth the eye, this sort of stuff, possibly even just some cobbley bit to wander around in. Shrug, OK, this is the private sector, it ends up through trial and error in offering what people actually want.
These bits of open space, meeting places and all that, are additional to the publicly provided and extant ones.
At which point The Guardian is complaining. No, really, this is an outrage! The rich bastards who own so much of the world's most expensive real estate are allowing just anyone, you, me, the hoi polloi, to use that vast wealth pretty much as we wish. For free!
How! Very! Dare! They!
Clearly the law must be changed immediately to prevent anything so outrageously liberal from happening. Really, where would we all be if people were able to just decide to allow others to walk upon their hallowed flagstones?
Alternatively we might suggest a more adult reaction. A cooling glass of something frothing and a reflection, as Dr. Roser is pointing out, that we've sweated most of the difficult stuff and that the good old days are in fact now. At which point it's not actually necessary to find something to be aggrieved about.
Don't cry fowl play
“Global Britain. A nimble independent Britain, freed from the regulatory shackles of the EU, was supposed to be able to rapidly sign trade deals where European efforts have stalled endlessly. And we can, but trade deals require concessions. If we want a quick and profitable deal with the USA, we need to put chlorine-washed chicken on the table.
The EU’s attempt at a better trade deal with the US has gone through 15 rounds. But post-Brexit Britain will have more latitude to make, and gain, concessions. One such concession is dropping our prohibition on chlorine-washing broiler chickens, which has frequently proved a stumbling block in EU-US deals since its 1997 introduction.”
I have a piece in the Telegraph, albeit behind a paywall, explaining the findings of our new paper, written by Pete Spence, on chlorinated chicken washing and trade deals with the US. Read the whole thing, and check out the author's own case in City A.M.
Look how well we're dealing with the problem
Evidence that a problem is being solved is not evidence that we need to find a solution to that problem:
The number of homeless children living in temporary accommodation has soared by almost 40 per cent in the past three years, new figures reveal, compounding fears Britain is facing a “catastrophic” housing crisis.
Councils are housing 120,540 children with their families in temporary shelter, an increase of 32,650 extra children since 2014.
Labour’s shadow housing minister John Healey said ministers should "hang their heads in shame" over the "shocking" figures.
1210,540 children are at risk of sleeping rough. Precisely zero children are sleeping rough. That's rather good evidence that we've got a pretty good solution to the risk of children sleeping rough.
Do note that we don't therefore think that everything's just hunky dory with British housing. We've been insisting for some years now that we can make the system massively better by blowing up the Town and Country Planning Act 1947 and successors.
Evidence that millions of children are learning to read and write is not evidence of some literacy crisis. As with temporary accommodation, it's evidence that we're solving that problem.
The difference between taste discrimination and rational discrimination is an important one
That difference being that taste discrimination is doing something because of some prejudice or belief which is not rational, rational being doing that same thing for sensible reasons. The NBA is overwhelmingly black but not because those who hire the players desire higher melanin contents, but because that's just how it works when you select for the ability and desire to play basketball at the highest levels.
Baseball provides us with another example, as that most definitely was subject to taste discrimination years back. One major reason it ended being that it wasn't rational - teams realised they were potentially losing games, series, because they were not tapping into that talent in the Negro League.
As Gary Becker famously pointed out taste discrimination is costly to those who do it and a free market is one of the best ways of getting rid of it. One of his examples being the Jim Crow laws, they existed because of this very market process. They had to be encoded into the law otherwise the market would indeed compete the discrimination away.
At which point the story about the security tags on ackee:
An angry shopper has accused Sainsbury's of racism after he found £3.80 tins of Jamaican fruit security tagged in a south London store.
Toby Taylor, 31, said he bet the chain 'wouldn't tag hummus' and slammed it as 'corporate racism'.
He was shopping in his local supermarket in Penge, Bromley this afternoon when he noticed a whole shelf of the delicacy had been placed in security boxes - despite being reduced and only worth £3.80.
Supermarkets have excellent information on what walks out the door, that's what all the barcodes, scanning and computer equipment is all about. They also know, as a result, what walks out the door having been paid for and what leaves rather more lightly. Those security boxes are put onto things which tend to leave without paying tribute. They are costly, therefore it is only done to those products where it is worthwhile.
That ackee is more likely to be stolen than lychees could be a horrible example of all things in our society. But it's not racism on the part of the supermarket.