Not another bloody one: IfG calling for subsidy quango

The Institute for Government has released a new report calling for a new quango to replicate the European Commission’s state aid responsibilities. This would mean a British regulator having the power to determine what subsidies are – and are not – acceptable. 

From the perspective of domestic sovereignty, this would be preferable to leaving the responsibilities in the hands of the European Commission – the untenable demand of the EU in trade talks until recently. Just like any free country, Britain should have the ability to subsidise companies (albeit limited by WTO rules and trade agreements, and good sense). 

 The IfG are also correct to argue for strong domestic subsidy control to prevent devolved administrations, regions and cities from crony subsidy races – a commitment the UK Government has already made. 

We should also not sacrifice a trade deal with the European Union to subsidise domestic industry. As I wrote on CapX last week: this would mean Britain “punching herself in the face in order to have the freedom to shoot herself in the foot.”

The real challenge, once Britain regains this freedom, is to ensure we choose to not subsidise domestic industry. Just because you can, does not mean you should. 

Worryingly, the IfG envisages the test of whether a subsidy falls foul of competition to be much higher – enabling the Government to subsidise unproductive businesses, for “net zero, ‘levelling up’ and the tech industry”. They want exemptions for smaller subsidies to go unquestioned (because what’s a few million of taxpayer pounds here or there?) and to raise the threshold for what is harmful. This would, they claim, create a “more effective” system. More effective simply meaning more subsidies, according to the IfG.  This is because IfG believes there exists “good” subsidies and that there are faceless bureaucrats capable of deciding which fall into that category.

We should also wonder whether we need another bloody quango deciding these matters. It would more likely than not turn into a similar merry-go-round as the European Commission’s state aid proceedings – that ultimately lets countries undertake plenty of subsidies, effectively normalising mass handouts.

It would be preferable to have strong norms against state handouts than a toothless quango. This could be achieved by the Government adopting clear policies, enshrined in legislation, that prevent ministers from ‘picking winners’: giving hundreds of millions of taxpayer pounds to whoever hires the best lobbyists.

Unfortunately, it appears that this Government has the opposite intentions. The Prime Minister’s senior advisor, Dominic Cummings, has a mistaken belief that subsidising companies is the path to creating a billion dollar technology company in the United Kingdom.

Cummings’ plot has echoes of the International Computers Limited (ICL) fiasco. For decades, the UK Government pumped millions of pounds of subsidies into ICL to compete with the big bad American leader in mainframe computers, IBM. Former civil servant Martin Stanley, who led the Business Department’s industry/education team, has explained how:

“I inherited the sponsorship team and initially continued to pour as much money as possible into ICL and to arm twist the public sector to continue to buy its mainframes. But I eventually realised that the company was uncompetitive to the extent that well over 90% of its sales were to the public sector. In other words, any business that had a choice bought IBM. I understand that colleagues subsequently did their best to continue to support the company but it was essentially doomed and was eventually bought by Fujitsu.”

Stanley concludes that he has “absolutely no faith in ministers’ ability to withstand pressure to spend unwisely for political and constituency reasons… Equally, I have little faith in minister’s ability to focus support narrowly enough.” [sic] 

The moral of the story is pretty clear: the state should get out of the business of picking winners, and perhaps spend more time cutting taxes and red tape, if it wants the private sector to succeed.

What is the public benefit, the public good, of rural high speed broadband?

Something about this puzzles us:

Rural areas with slow internet speeds are in line for ultrafast broadband due to a £22.2m government funding boost.

The government's Gigabit Broadband Voucher Scheme subsidises the cost of building gigabit-capable broadband networks in remote areas.

We understand the benefit to the users of said high speed broadband. But that is, by definition, a private benefit. For the rest of us out here, us taxpayers, to be paying for it there has to be a benefit to us. Some public benefit, some public good perhaps, derived from people in the boonies being able to download cat videos.

It is rather difficult to see what that is. It is as with electricity supply, or water, sewage. It is possible to be so far out in those boonies that you, the individual living that rural lifestyle, must pay the extra costs of connection to the network. We all agree that electricity, water, they’re great things for an isolated cottage to have. But the benefit flows to those who have the electricity, the water, therefore they are the people who should pay for it. So too with broadband.

One response is that the costs are so high that people won’t pay to be connected. At which point if the people who benefit don’t think the thing itself is worth the cost of its provision then why should other people pay? We’ve just gained that proof perfect that it’s not worth doing. If it costs - say - £10,000 to connect you to the internet, you do not think being connected to the internet is worth £10,000 then we’ve just proven that we shouldn’t pay - whoever pays - £10,000 to connect you to the internet.

Other than buying a few - and it is clearly few because the very point is that the boonies are lightly populated - votes what actually is the justification here, the benefit that means we all get landed with the bill?

Why?

An odd insistence here:

England needs more houses, more social infrastructure and more genuinely affordable places to live – especially council housing.

We grasp the idea that England needs more houses. For it most certainly does and that’s what the recent reforms to planning permission are all about achieving. We agree that more affordable places to live would also be a good idea. Which building more houses achieves because if we increase the supply of something we decrease the market clearing price as everyone who has attended even the first lecture of that economics course understands.

So we rather go with the idea that the first thing, more houses, achieves the second, the more affordable bit.

It’s the next leap that makes us ask why? What do council houses have to do with this? Why is it that more 3 bed mansion flats to be occupied by the likes of Frank Dobson - who used to be the leader of the council that owned his flat - is a good idea? Why is it that councils, not social landlords, should run subsidised rental housing?

And, if all housing is to become more affordable due to the greater supply, does anyone think we need more subsidised housing anyway?

Perhaps someone could help us out here about the Good Friday Agreement

It’s a standard claim currently in British politics that the Good Friday Agreement commits to free trade on the island of Ireland. See Simon Jenkins :

Such a border would not just be near impossible to erect and unpopular across Ireland, it would be a gross breach of the 1998 Good Friday agreement, which pledged open trade.

We entirely agree that open trade is a very good thing, so much so that we spend a considerable portion of our time recommending the idea to all and sundry. It’s just that we’re wondering where that Good Friday Agreement insists upon anything quite so wondrous. The more formal name is the Belfast Agreement. The text of which is here.

Agreed, this result might be due to our age related inability to use anything complicated like the “search in this document function” but we find the one single use of the world “trade” in said document. It’s in Clause 34 and is part of the phrase “trade union” which we don’t think is really related to a gloriously free trade island of Ireland.

Could someone help us out here? Exactly where is this commitment to be found therefore?

Of course, if it is there is some form we cannot find then the solution is simple. We really do believe in open trade to the point that we continually recommend unilateral free trade. So, if it has been committed to then that’s what we do - declare unilateral free trade. This would mean that we would need to do so to all and sundry but then so should we do that anyway.

That is, we can’t see where the problem lies and if it is indeed there then the solution is win/win anyway.

Our assumption is that the difficulty being mentioned is something to do with politics rather than reality but then that is so often true, isn’t it?

Well, yes, obviously, what did anyone expect?

Despite the macroeconomic claims of that Modern Monetary Theory there is in fact no magic money tree. Something which BT is just proving again:

Faced with a share price collapse and a gaping pension deficit, BT will pass the cost of better broadband onto customers

Obviously, what did anyone expect?

The former state telecoms monopoly is to hike the price of its products by consumer prices index (CPI) inflation plus 3.9pc from March 31, raising hundreds of millions of pounds to help cover coronavirus costs and pay for broadband upgrades across the country.

...

BT shares nonetheless remain close to their lowest ebb in more than a decade amid fears over the costs of ultra-fast “full fibre” broadband upgrades and an ongoing review of its multibillion-pound pensions black hole.

Upgrading the broadband network is going to cost money, lots of it. Who is going to, who should, pay that bill? The people who use broadband, obviously. For there isn’t anyone else out there to do so. Even if we we start to insist that everyone should have broadband because it’s essential, therefore the taxpayer should pay. That’s still all - the users of broadband now being all of us by definition - paying for it, isn’t it?

We insist that consumers who upgrade from skirt steak to sirloin pay for it. We insist that those moving up from a £500 beater to a new car pay for it themselves. Moving from ASDL to fibre, get your wallet out. How could it be any other way?

Assar Lindbeck

Assar Lindbeck, who died aged 90 at the end of August, was a distinguished Swedish economist who at one time chaired the committee that awards the Nobel Memorial Prize in Economic Sciences. He is thought to have influenced the award of the prize in 1968 to James Buchanan, the Public Choice economist. 

Lindbeck’s research included work on self-destructive welfare state dynamics, dealing with the moral hazard of state welfare that undermines work and responsibility and leads to dependence of the state.

His was famous for his work on Swedish rent control, which he opposed for decades. The ASI has many times quoted his opinion that “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” We have pointed out that it is in fact more effective than bombing because bombing takes out demand as well as supply. 

Rent control achieves this because it makes it unprofitable to let out property, leading investors to withdraw property from the rental market and invest in assets that bring better returns. It also leads to poor maintenance and more rapid degradation of property because not enough money is generated from rents to pay for the property’s upkeep. 

It achieves these effects everywhere it is tried, and it exposes a weakness of the political system, in that politicians bid for and secure the votes of current tenants, and are gone by the time rent controls wreak their inevitable damage. Lindbeck’s research convinced him that it should be markets, not politicians bidding for votes, that determine rent levels. He was correct.

The government's sugar strategy is having problems

The National Audit Office has had a look at that plan by Public Health England that we should all be eating less sugar. Given PHE’s ability to concentrate upon the day job, pandemics and infectious diseases, this was unlikely to be laudatory:

Despite pledges to cut sugar consumption by 20 per cent between 2015 and 2020, a review by Public Health England found that in fact it had dropped by just 2.9 per cent..

Well, yes.

A starting observation would be that humans seem to have a taste for sugar. Few reports about hunter gatherer lifestyles are free of the wonder at how many stings will be accepted just to gain a few pounds of that sweet, sweet honey. Many languages use both sweetness and honey as synonyms for everything from a pleasant person to a complaisant lover. The history of our own society shows that we enslaved some three, three and a half million, went to war several times to conquer the islands upon which to do so, just to grow sugar for the palates of our forbears. Human beings really, really, like their sugar and we’re unconvinced that a few prodnoses, from their comfy offices, yelling at us to stop doing so is going to have much effect.

But there is more here from the report. Their major observations:

In 2018/19, nearly one tenth of 4 to 5 year olds and more than one fifth of 10 to 11 year olds were obese.

This is not true, not in the slightest. As Chris Snowdon has been pointing out for years it isn’t even vaguely true. Further:

The government estimates that treatment of obesity-related conditions in England costs the NHS £6.1 billion each year.

This is also not true in any useful sense. As we have been pointing out for years obesity saves the NHS money. Yes, there are costs to treating obesity related diseases but in a lifetime health care service it also matters how many years of life health care needs to be offered over. And since the - truly, and morbidly - obese die younger there’s a saving there. The net position being that obesity, as with smoking and booze, saves, not costs, the NHS money. This before any issues over taxation and the like.

We regard the aim itself as being one of those near impossible things to do and both reject and refute the evidence on offer as justifications for even trying. Fortunately, this does mean that we agree with the first recommendation from this NAO report:

Recommendations

a The Department should establish a robust evidence base

Yes, that probably would be a good idea, wouldn’t it?

A morally suspect view of corporate taxation

We’re told that organisations - the statement is companies but organisations is meant - that add value to lives in Britain should be taxed for doing so. This strikes us as a morally suspect justification of taxation:

“Any business that takes money from British customers should contribute to the schools, hospitals, roads and services those customers need, by paying their share of taxes. Far too many are not,” he said.

A business makes a profit by adding value - that’s what profit is, the value added. It is also true that what we all consume is value added - that’s the definition of consumption in the GDP calculation, the total value added in the economy. It is also true that people only purchase something if they believe that the value on offer is greater than the price they must pay - the consumer surplus.

So, a profit making business is, by definition, adding value. Any consumer is also gaining further value they don’t have to pay for. For this temerity all such companies must pay more tax? This makes neither moral nor logical sense.

That those who then draw incomes be taxed, why not? The broader shoulders pay more than in proportion perhaps. Vast dividend or interest streams, CEO salaries, pay a higher rate of tax, this could be fair even as we might argue that current rates are more than what might be fair.

But why would we insist upon taxing the organisations that make us rich for being the organisations that make us rich?

‘A Level’ Lessons for the Cabinet

The Cabinet did not deserve a long summer holiday, after flunking ‘A levels’, it should have been back in the classroom. “The Need for Independence” was the main failure followed by “How not to Lose to Judges” but we can consider the second another time. Part 1 of the former paper dealt with civil servants, part 2 with what the Cabinet Office is pleased to call “arm’s length bodies”. 

We all know that civil servants are part of government but should be independent of political party. Policy intentions of ministers should be challenged, the classic introduction being “yes minister, but…”. Of course, once the ministerial decision is made and recorded, the civil servant’s role changes from devil’s advocate to implementation but the nature, course and timetable for that implementation should have been recorded as part of the decision. If the policy turns out to be wrong, either the civil servant or the minister or both should take the blame according to whether the civil servant’s “yes but” advice was correct.  If the civil servant failed to predict the adverse outcome, he or she was incompetent.  If the minister failed to heed the warning, the buck should stop there.  Nobody should be sacked for being right however irritating that may be. 

The head boy of this Cabinet may be giving too much credence to the head boy of the junior school, “Dom Major”. According to The Times, the junior school, meeting in “mission control” i.e. Room 38, 70 Whitehall, will determine all policies and prepare the announcements, leaving departments to catch up as best they can.  “Also in the room is the prime minister’s implementation unit and the No 10 legislation team.” If this report is correct, the junior school would make all decisions without independent challenge or advice from those expected to implement the policies.  This would be folie de grandeur. 

Moving to part 2, arm’s length bodies can be divided into three categories: executive agencies, which are part of government, public corporations and regulators which are supposedly independent of government and non departmental public bodies (quangos) which are both independent of government, and not independent, at the same time. Executive agencies, such as the Rural Payments Agency, were invented by Sir Robin Ibbs, in 1988, to handle the implementation of departmental policies. [1] Public corporations, such as the BBC, are owned by the state, financed by government authority but operationally independent, as should be the case with regulators, such as Ofcom, which is answerable to parliament, not government. 

The ambiguous status of quangos has long been criticised, notably by the House of Commons Public Administration Select Committee “There is insufficient understanding across Government about how arms-length Government should work” and the National Audit Office: “the arm’s-length bodies sector remains confused and incoherent.” Cabinet needs to determine, for each one, whether its main role is to implement policy, and should be an executive agency, or its independence is more important, in which case it should not be part of government. 

The ‘A level’ fiasco this summer illustrates the confusion. Ofqual, according to its website, is “independent of government and report[s] directly to Parliament”. As the regulator, it should not have been offering advice to the minister; that is the role of his civil servants.  Ofqual should either have made the decision, as the independent body it is supposed to be, or concluded that the matter was not within its competence and stepped away. We now know that Ofqual’s preference was for 2020 ‘A level’ exams to go ahead.  To prevent cheating, exam desks are well distanced, masks would have been easy and there was plenty of empty local spaces, churches in particular. That was the right decision and administrative confusion blocked it. 

One question remains open. In all, there are about 85 public corporations, i.e. arm’s length bodies, which are not governing us, and not regulators, ombudsmen or part of the judiciary. They are owned by, and part of, the state but operationally independent of government which is itself only one branch of the state. Most of these bodies are museums, libraries, property and parks which pretty much take care of themselves apart from finance and the appointment of top directors. If they are not part of government, to whom should they be answerable? 

We need to remember that we, the people, are the state and the fulcrum of our democracy is parliament, not the government. The Queen only appoints the prime minister if he or she can form a government supported by the House of Commons. Some public bodies, such as the National Audit Office and the regulators, are answerable to parliament, not government, and are no less democratic for that – probably more. Regulators and ombudsmen should be answerable to the relevant select committees, if they are not already, but they might not welcome having the 85+ public corporations dumped in their laps as well. 

That is the conundrum: government needs to be streamlined in order to focus on governing, especially this government.  So who will supervise the public corporations that are supposed to be independent and not part of government?  One possibility is to create a supervisory group within parliament itself, replacing the supervision now provided by the executive.  It would simply be the shareholders, i.e. very little supervision, beyond inspecting their annual reports, would be required. And most of these bodies’ annual reports already go to parliament. However the legislature is no more suited to safeguarding these public assets than the executive. The alternative is to have another branch of state, accountable to parliament as is government, with each focused on its own role. 

The performance of all human activity benefits from clear boundaries. Be it neuroscience, banking or tennis, professionalism requires the participants to know whether the ball, so to speak, is in or out.  So it is with governing: the Cabinet should be crystal clear about what should fall within its remit and what should be independent. 

[1] Sir Robin Ibbs, (1988) Improving Management in Government.  The Next Steps. February, HMSO. 

In which we find out that the TUC doesn't do economics

There are times when the Trades Union Congress spiffs up a lovely report to claim that higher wages will make the world a richer place. There are also times when the TUC just demands higher wages. Even when it is quite obvious that such a demand will not make the world a richer place. At which point we should really stop worrying about whatever economics the TUC uses to spiff up their reports and simply peg them for what they are, a special interest group not interested in what is good for us all in general:

The head of the Trades Union Congress (TUC) has denounced a possible freezing of the national living wage as “totally wrong”, as the Treasury reportedly considers backtracking on a planned pay rise for the lowest paid.

We’ve just had a serious recession. Wages have fallen, unemployment is rising. This might not be the time for a pay rise:

Frances O’Grady, the general secretary of the TUC, said: “Many key workers who have got us through this crisis – including care workers and supermarket staff – are on the minimum wage. It would be totally wrong to freeze their pay.

“The government must not renege upon its commitment to raise the minimum wage. Millions of low-paid workers are struggling to make ends meet. That’s not right during a pandemic – or at any time.”

One of the grand mistakes that Roosevelt made during the Depression was his insistence upon raising wages in the teeth of it. It’s one of the reasons that the disaster over there lasted a decade while the one here was over within 18 months.

The general thinking is that it is the low end of the service sector which is getting it in the neck in this post-covid employment market. Increasing the cost of employing people in such jobs just as we’re worrying about the disappearance of a million or two of those jobs just ain’t the way to do it. Well, not unless we want to wait for a war, as FDR had to, to overcome that mistake.