Standing up for democracy

That we face immense difficulties economically and otherwise is obvious on the day of Osborne’s autumn statement.  But how many noticed that on its eve a heavyweight commentator on Newsnight suggested, albeit somewhat tentatively, that we might have to consider alternatives to democracy to deal with the problems?

The commentator concerned was Gillian Tett of the Financial Times whose writing I generally like so I wonder how much this was just a loose comment made in the heat of the moment and how much she was reflecting a strand of opinion among the Great and the Good.  The relevent bit of the conversation was as follows (starts at 17: 40, lightly edited)

Tett: “The chief economist of the BIS, the central bank of central banks, gave a devastating speech recently where he pointed out that the real problem is that economic cycles tend to happen in multi-decade periods and governments only last for a few years and you have this fundamental clash right now that you need governments to be able to take a 5 – 10 year view and unfortunately they are looking at 1-2 years at the most – and that’s a real problem”.

Paxman: “Well, there’s no way round that  … not if you believe in democracy”.

Tett: “Not unless you start looking at more technocratic solutions like Mario Monti in Italy or something like that….  Maybe the next decade or two is going to be about people questioning this balance of how democracy works and looking at more technocratic solutions because the economic choices confronting the West right now are so painful that the pressure is not going to evaporate quickly”.

There is certainly a long wave component to economic cycles – that is hardly a new thought.  And the mismatch between political horizons and the longer ones supposedly required for effective long-term management of the economy is nothing new either.  They are certainly issues, but they are hardly the “real problem” - even when combined – so the proposed technocratic solution is predicated on a faulty analysis.

The real problem is (to put it at its simplest) that there is too much debt (not just the government debt that the Coalition obsesses about but also private debt) and that inequality is too high (these are, of course, linked).  Debt and inequality combine to work like a sea anchor on the economy, preventing it from making proper headway so the only answer is to write off some of the debt and reduce inequality.  That would indeed be painful to the 1% who own most of the debt.  But how does that compare with having no job, no home, no hope – and hungry children?

Any democracy, however imperfect, is likely to come down on the side of the 99% eventually even if the entire political establishment has lost the plot as completely as ours has.   And strangely enough, policies crafted for the benefit of the 99% are exactly what is required economically as well as for natural justice.

 

 

Energy market fail – the case for ordoliberalism

For once David Cameron has done the roughly right thing in restricting the energy companies to only four tariffs although I would have liked to see even fewer.

For years the received wisdom has been that competition – not just in energy, but generally – is a Good Thing; any evidence of that a market isn’t working properly is routinely greeted with calls for more competition.  It’s become so ingrained that almost no-one stops to question why it don’t always work as it’s supposed to.

Unfortunately for market fundamentalists, a growing pile of evidence suggests that their economic theory is wrong because it’s simply not an accurate description of how the real world works and ’free market’ competition isn’t delivering the goods.  How this has been working (or rather, not working) was discussed on last week’s edition of ‘This Week’  with  guest Martin Lewis of Money Saving Expert (starts at 5:15).  His site has done a survey of its 14 million users and found that 80% don’t want the present system so this is political dynamite.

Martin Lewis pointed out that the energy market works as a regressive tax; affluent, middle class internet users pay the least while those in fuel poverty, disproportionately the poorest and oldest pay more, often substantially more.  He said that, whether or not Cameron really meant to say what he said on the subject recently, what he actually said is exactly what the public want, namely regulated prices.  For consumers competition has failed.

Michael Portillo reflected the uncertainty of many politicians.

“I think politicians reaching the point where they are beginning to lose faith in the ability of competition to produce the best deal for consumers but I think that is a big psychological and, kind of, philosophical moment if that’s what you actually conclude because, you know, for the last 20 years it’s been based on the idea that competition was going to give people a deal and in most things in life that’s exactly what happens. If you go to shops, telephones, if you fly on airlines, competition has brought down prices”

Note the positively baroque construction of his opening,“reaching the point where they are beginning to lose faith …“.  You can almost hear the gears shifting.  Whether he realises it or not he is calling the end of the era of neoliberal belief in the infallibility of free markets which Thatcher ushered in with her general election victory of 1979.   The old paradigm still rules by default in the absence of a better replacement but it’s mortally wounded and can’t stagger on much longer.

Portillo still clings to faith that competition reliably delivers in sectors other than energy.   However, here too evidence is piling up that not all is well with the received wisdom although, inevitably, the picture is complicated so no simple statement suffices.  I see at least three main problems (there are others but that would involve a book, not a blog post).

The first is the problem of ‘market failures’ including that markets don’t factor in externalities and that they reflect short-term supply and demand which makes them terrible where the long-term is important like planning for transport infrastructure or energy.  Market fundamentalists typically claim that market failure is rare and exceptional.  Indeed the whole basis of their faith is that ‘free’ markets (i.e. free of any government regulation) deliver optimal outcomes.

In reality, market failure is the norm.  To result in anything like a good outcome that is stable over time requires a long list of tightly specified preconditions which never, or almost never, occur in the real world.  For instance, any business sector with economies of scale (i.e. almost all) will tend towards concentration and oligopoly until the point is reached where competition is no longer effective.  The board game of Monopoly is a familiar example of how an early advantage drives growing concentration of power and inequality until it’s game over.

The second problem is that ‘free’ markets rarely exist – and then only briefly.  It doesn’t take long for oligopolistic businesses to work out how to influence the levers of power.  It helps the influencers that too many politicians are horribly star-struck and easily succumb to the glamour of money.  It can be revolving doors between companies and government, informal understandings with senior regulators and politicians, participation in standards-setting or even writing legislation.  The ways commercial power wins are limited only by human imagination – which is to say almost unlimited.  The result is the emergence of an interconnected elite.

Moreover, power abhors a vacuum so when government is weak the private sector quickly seizes an opportunity to fill the void.  If government decides not to regulate as a matter of either policy or weakness someone else will step in and the ‘law’ becomes whatever the new Mr Big says it is.   The law ran thin on the frontier of 19th century America so the theme of many westerns is the story of a big rancher employing a gang of thugs to enforce his own self-serving version of the law.  Much the same is true of Wall Street today thanks to the gutting of effective regulation as a policy choice.

The third problem is that real full-blooded competition is simply TOO effective for firms to survive it.  They must find ways of reducing the pressure on them.  The easiest way to do this is to merge with or take over rivals until the market is an oligopoly.  Hence the small numbers of serious players (typically 4 – 6) in a whole range of sectors from banking to supermarkets to energy.

It’s not that I’m against competition, far from it, but left to their own devices markets aren’t stable and won’t deliver the public policy goods.  Like advanced fighter planes the trade-off for high performance is that they are unstable.  The solution for planes is fly-by-wire systems that react faster than any human pilot ever could.

The solution for markets is the equivalent.  It’s a constant battle to keep them ‘open’ (subject to challenge) and keep them working for the public good.  This is a very different from what neoliberals advocate.

Equally, because full-blooded competition is ruinous it means that government should arrange things so that it is muted, so that there is a gentle pressure to improve and to innovate but not the imperative to eat the seed-corn to survive until next week.  That in turn means limiting pricing ‘freedom’ (aka anarchy) in sectors like energy.  And that is why I think Cameron, for once, is on the right track except I would like it to be even simpler – allow only one fixed and one variable tariff for each company with premiums and discounts for dual fuel or direct debit etc. expressed as a percentage.

This is ordoliberalsim and is the approach of most German liberals.  It’s worked rather well for them.

Greek forecast fail

Here’s one simple graph that reveals an awful lot about the mess in Greece.  It shows how Greek GDP has changed over the last few years and how well the experts of the European Commission, the European Central Bank and the International Monetary Fund (collectively the ‘Troika’) have forecast it since the start of the crisis.

It’s not too easy to read but the black line is the actual change in Greek GDP (expressed as the percentage change on the previous year) and goes from a little over 3.5% in 2007 to around -7% in 2011.  The dotted red lines are successive annual forecasts from 2008 to 2012  (H/T Zero Hedge/Follow the Money).

Obviously, the Troika is totally and consistently incompetent at forecasting.  To be so reliably bad it must be sticking to a wholly wrong theory of how an economy works.  It’ as bad a series of misses as you would expect if NASA was trying to send a probe to Mars while remaining unshakably convinced of the Ptolemaic theory that the Sun and other planets go round the Earth.

The only other reason I can think of is that these were never intended to be serious forecasts at all; that they were just a way of dressing up a real strategy that dare not speak its name – for instance that it was a way for those calling the shots (i.e. largely France and Germany) to save their banks from bankruptcy by buying time for them to get their money out of Greece and dump the losses onto unsuspecting Eurozone taxpayers.

The two explanations are not mutually exclusive so could both be true.  That would be my bet but either way how much longer can it go on?  The new Chinese leadership is apparently reading de Toqueville on the causes of the French Revolution.  EU leaders should join them.

Nuclear power: renaissance or nightmare?

The thing with nuclear power is that while the risk of a serious accident may be small the consequences are monumental. Is this something we just have to live with or are there things we can do to minimise the risk of accidents and/or their severity if they happen? I think there are.

The physics involved is well understood and is NOT a problem, not even the disposal of high level waste (although antis like to pretend it is). What IS a problem is the regulation – by which I mean regulation in the widest sense covering design and operation plus the entire supervisory system from formal government agencies to the management company.

My introduction to this came in the late 1980s when I attended a series of conferences for my then employer (we sold into the civil nuclear business). At the first of these conferences a paper was delivered by someone developing an advanced reactor design. Among the advantages claimed for the new design was that it was failsafe.

What! That’s an advantage? You mean existing designs AREN’T failsafe?

That, unfortunately, turned out to be precisely what he meant. And that in turn precisely explains my thesis. It is and always was possible to design better, safer reactors but somehow no one involved in design or regulatory approval thought to insist on that. Nuclear safety is not about difficult physics; it’s about about managing people and organizations and priorities to eliminate, or at any rate minimise, risk.

On another occasion, conference delegates went on a visit to a reactor – Heysham near Morecombe in Lancashire. A senior manager from a continental utility asked about planning for the evacuation of people in the area in the event of an accident as mandated by international guidelines. He was puzzled how it could be done given the large population in the area. After some embarrassed foot-shuffling the locals admitted that there was no plan because it wouldn’t be possible to evacuate so many people.

Heysham is one of the sites where a new reactor is planned.

On yet another occasion, a few of us stayed behind to chat informally after one of the formal sessions. One of those present, the highly respected technical director of a major European nuclear utility, opined that some western countries shouldn’t host reactors. Someone asked who and why. He replied, “Oh! Britain. There isn’t a culture of engineering integrity and in any case Britain’s regulatory apparatus just isn’t up to the job”.

He was spot on about regulation as subsequent event have proven in many sectors – from the abysmal performance of the FSA prior to and after the financial crisis, to hospitals, to the examination boards and many more. He was also right about engineering integrity; it is the ultimate backstop for regulatory failures. Where it exists, a mid level engineer who spots a problem can expect to be taken seriously and not brushed off. In Britain the corporate and/or political context dominates and he will be told not to rock the boat. Everyone has someone higher up the chain on their backs wanting solutions, not problems. Messages pass down the line but not nearly so well up it so the engineering voice is not reliably heard in the boardroom.

Good luck and happy job hunting to anyone brave enough to suggest that, just perhaps, Heysham isn’t a suitable location for a new reactor. And by the way, tsunamis do happen in Britain but just not as often and not from the same causes as at places near subduction zones.

Our culture of confining engineers (and other technical disciplines) to the engine room below decks is part of the reason that engineers and the like don’t punch their weight in Britain. In all the years I worked in large companies I never came across a senior engineer (or whatever) right up to board level who told the accountants what management reports he wanted. Invariably, it was the accountants who decided – even when the accountants concerned were emphatically in the wet-behind-the-ears category.

Another part of the problem is the hostile framing and bad-mouthing of ALL regulation in some political circles. Propagandists for this view may never have intended it to be applied to reactor safety but the chances are that it will be sooner or later. Not every regulator at the coal (or reactor) face is as adept at getting the context right as the agenda-driven politicians who spout this nonsense so it’s a racing certainty that some will imagine that what they are supposed to do is deliver regulation-lite. After all that’s happened in banking, there are many regulators who still don’t understand (or don’t want to understand) that they should be enforcing the law (itself a type of regulation).

Then there is the question of the operating company’s ultimate objective. Is it ‘to keep the lights on’ or is it ‘to make a profit and keep the lights on’? Introducing a single additional objective can completely transform the outcome as anyone who saw last week’s Dispatches about Branson’s Virgin Care will know. Despite all the safeguards and regulations many patients of Virgin Care now find it very difficult to see a doctor despite a blizzard of justification from the company. I’m sure it’s not what Branson (or Andrew Lansley who drew up the enabling legislation) intended to happen but, like the fable of the scorpion and the frog, it’s in the nature of things that it does. Lansley and his fellow travellers put the health of the nation at risk by ignoring that simple fact. We must not make the same mistakes with nuclear.

In conclusion then, we can have safe nuclear power but only if we get the regulation right. That will require swimming against the current of established UK practice which is going to be immensely difficult for government to deliver. But we must try.

From Beveridge to Dickens

High on the wish list of the US GOP’s right-wing is the abolition of welfare.  Today some of that argument spilled over to this side of the Atlantic when the Radio 4′s World at One staged a brief debate between Tom Palmer, who is over here to promote his new book ‘After the Welfare State’, and Graeme Cooke of the IPPR.

The right’s argument is based on a steaming pile of falsehoods but well honed in the US for maximum impact.  It should be squashed before it gets established over here.

The central argument is that welfare is a monstrously unsustainable pay-as-you-go (unfunded) system that has accumulated staggering financial liabilities, not just in Britain or the US but generally in the developed economies.  Palmer asserts that in the UK the unfunded liability over a 50 year horizon is an astonishing 500% of GDP, that it’s a fundamentally bankrupt ‘pyramid scheme’ and that if this was done by a company its finance director would be indicted for fraud.

Wow!  Scary stuff.  As of course it’s meant to be.  Part of the plan is to so stun listeners that they react emotionally, not on the basis of rational analysis.

Start with that 500% of GDP deficit; this is the (small) difference between two very large numbers – the income and expenditure of the welfare system – extended over 50 years.  If either very large number is only very slightly out that makes a big difference, a huge difference over 50 years.  So does Palmer really think he knows the future, is he saying that he can forecast these two big numbers very accurately for two generations ahead?  I don’t think he can!  And the corollary is that a small tweak to either income or expenditure or both makes a dramatic change to the claimed deficit.   That is why the government keeps retirement age, contribution rates and inflation adjustments under review and sometimes changes them, for instance in response to increasing life expectancy.  What may look like small changes actually make a big difference.

Then there is the faux alarm about the deficit being ‘unfunded’.  Think about this for a minute.  One way or another the current working-age population has to look after those who are too old or too young or too ill to work so whether this support is funded or not changes the accounting entries but not the underlying reality.

If funded, people save during the years they are working putting their savings into the stock market or a house that they can downsize on retirement.  The next generation’s support is transmitted to them either when they sell their house to a young couple or by the dividends arising from the younger generation’s work.   If unfunded, money simply flows directly from the working cohort to the retired via a government administered bureaucracy.   In practice we use a combined approach in Britain; the state uses an unfunded system to provide a basic but (hopefully) decent safety net, the more prudent add to this through their own efforts – or sometimes by being lucky with their employer!

As for the argument that it would be fraudulent for a company director to run a pension scheme like this, that too is complete nonsense – companies and governments are completely different beasts.  Trying to pretend that apples are oranges is disingenuous in the extreme.

There is a problem with welfare but Palmer didn’t comment on it, possibly because his preferred approach doesn’t help.   The next generation will have to pay so much of their income for housing as a result of the increase in its real price in recent years that there will be little spare income to devote to welfare.  Wealth that should have gone one way or another to support the old, the young and the sick has instead been diverted to enrich the current generation of financiers.   All those bonuses had to come from somewhere.

The real motive behind this right-wing fantasy is, of course, to see welfare privatised which would be a huge windfall for the financial sector.  In place of a public service we would have competition.  Anyone who believes this would be great for pensioners probably also believes in the unicorns and the tooth fairy.

Palmer apparently believes that private welfare worked perfectly well before there was a state system.  As it happens there is a word for that – ‘Dickensian’.

Hague channels Mugabe

The Foreign Office’s threat to lift the Ecuadorian Embassy’s diplomatic status over the Assange affair is a disgrace.  As Carl Gardner points out the Diplomatic and Consular Premises Act 1987 permits the Secretary of State to withdraw diplomatic recognition from premises for various reasons but ONLY “if he is satisfied that to do so is permissible under international law” – and, in this case, that means the Vienna Convention which requires the UK government to facilitate the acquisition of suitable premises.

It’s impossible to believe that the Government would indulge in such heavy-handed tactics if the affair was really about an incident originally described by the Swedish police as “not a serious enough crime for an arrest warrant.”    What it’s really about is perverting the rule of law for the convenience of an American administration which has been embarrassed by Assange’s activities, wants revenge and is leaning on everyone to get its hands on him.  It’s about a President who is determined to do away with due process and suspend Habeas Corpus all in the name of the War on Terror but really to suppress dissent.

One way and another the UK is heading down a legal and ethical rabbit hole if it persists with this course.

All in all, the UK government has set out on a foolish and ill-considered path.  If it continues it will put Britain in the same class as Mugabe’s Zimbabwe which flouted international norms by opening a British diplomatic bag a few years ago.  Does William Hague really wanted to be classed, along with Mugabe, as someone with no regard for the laws and norms of civilisation?

Democracy – when more is less

Well before it has launched one of Cameron’s most cherished policies – the planned move to elect police commissioners for all 41 police authorities in England and Wales – is looking like a very bad idea indeed and one that ultimately raises important questions about the practical limits of democracy.

On Radio 4′s ‘Today’ Nick Herbert, Minister for policing and criminal justice repeatedly refused to answer Evan Davis’s perfectly reasonable question about what would constitute a reasonable turnout at the elections in November and whether he would be happy with 15%, saying only that he wanted it to be as large as possible.  Well, yes of course.   Ministers are usually very happy to set targets for others but strangely reticent when it comes to setting any for themselves.  It is bad news indeed if the minister is not privately confident of hitting a measly 15% turnout.

Then there is the question of costs.  Nick Herbert was emphatic that the estimated cost of a state-funded mailshot at £25 – £35 million is too much for the government to afford at this time so candidates will NOT get one.  Earth to Whitehall; policies that are unaffordable are, err, umm, unaffordable.   Yet it’s not that spending on campaigning including mailshots isn’t allowed; earlier on the same programme Ann Barnes who is standing as an independent  in Kent explained that the population she has to reach is 1.7 million, equivalent to over 17 parliamentary constituencies and the allowable expenses in the last six weeks alone are £228,ooo.  This is on top of a £5,0000 deposit.

Cameron’s notion (also from ‘Today”) was apparently that, “Community leaders and pioneers of all sorts… [should stand]“.   In practice, it means only those with the backing of a political machine and the army of free deliverers that brings with it.  The only independents with much chance are those with serious financial backing.

Multi-millionaires are not normally ’community leaders’ in the usual sense so who might get such backing and in return for what?  The precedent from the USA where many positions are elected that we would regard as administrative appointments – everything from county clerks to judges – is not good.  The track record is that vested interests, even criminal ones, can buy privileged access to the system.  Media magnates have a particular advantage.  Incumbents with plum jobs have to keep those who will finance their re-election happy however unsavory they might be and even if it means bending the law – or driving a coach and horses through it.  Although some voters will know what is going on there is no practical and affordable way of telling the majority, at least not in the face of organised disinformation.  And when turnouts are very low, as Nick Herbert obviously expects but won’t admit, the opportunities for buying elections are that much the greater.   If I were Murdoch I would regard this as the perfect opportunity to buy insurance against any further or future exposures.

The conclusion I draw is that democracy is not about voting as often as possible or for as many posts as possible.  Elections should be arranged and financed in such a way that there is a level playing field that gives independents (and/or minor party candidates) a reasonable chance of ejecting incumbents.  Inter alia, that means that cost must NOT be a significant factor.  And there must be an effective exchange of information and opinion independent of the candidates where their relative merits and demerits can be freely discussed.  The national media (increasingly supplemented by new media) provides this for Westminster elections but only weakly for local elections which is partly why there is so much ‘cross talk’ from national trends.  But for police commissioners?  I don’t see any suitable forum.  As for who might regard £250k or so as a good investment wealthy but public-spirited citizens would be well down my list of likely candidates; top would be power-crazed media magnates and organised crime.

 

Retail rip-off – what the milk market should teach us about regulating the marketplace

Dairy farmers are back in the news; the processors who buy their production to sell on to supermarkets and food manufacturers want to push through a substantial price reduction that will see most farmers getting paid well below their cost of production.   Clearly this is not sustainable; if the processors succeed many farmers will be forced out of business, inter alia increasing our trade deficit in dairy products despite our having one of the world’s best climates for it.

To the extent that imports are involved I would bet a substantial amount that they are driven by lower welfare standards overseas and/or devious transfer pricing schemes whereby most of the profit ‘just happens’ (/sarc) to arise in subsidiary companies based in tax havens that provide a ’service’ but never actually handle the milk at all.   Clearly, this is enormously beneficial to those involved but, equally clearly, it’s not in the public interest.

The problem is not that milk is ‘too cheap’.  Rather it is because well over 100% of the profit in the industry that should be equitably spread through the supply chain has been appropriated by the buyers.  (It’s over 100% since the farmers’ loss adds to the buyers’ profits).   They are able to do this because the supermarkets at the top of the food chain have the power to dictate terms so forming an effective oligopsony as described in an earlier post.   This has enabled them to pump up gross margins year by year; they rip off consumers while pretending to be their friend.

On the figures provided by the BBC adjusted to a single litre (and which are consistent with the time series included in my earlier post – see above link) supermarket make a gross profit of around 15 pence/litre which is nearly 30% of the selling price.   The BBC lamely ducks the issue of how much of this makes it to the bottom line as net profit but we can make a reasonable guess.  Logistics, store overheads etc. will all be minimal as it’s handled in bulk and sales are predictable.  Also we know (earlier post) that in the mid 1990s supermarkets got by on gross margins of only 1 or 2 pence.  So we can be very sure that the vast majority of the gross profit translates into net profit meaning that the supermarkets are achieving a ‘economic rent’ (roughly the excess profit above what they would get in a genuinely free market) of at least 12 pence per litre or around 25% of the selling price.

That is HUGE; if the margins on other goods are broadly similar (and I think many are) then this is a big part of the cost of living – especially for those on limited incomes.

So what is to be done?  If you are a plutocrat then nothing; for everyone else reducing prices raised by oligopoly is an even bigger prize than increasing personal allowances for the low paid.   Getting retail right also has a very direct bearing on other issues including Clone Towns and Mary Portas’ Review of the future of high streets.  But what can be done?

Any solution must start from the fact that the core issue is an imbalance of power.  So, for instance, suggestions that producers should differentiate their product miss the point – some limited differentiation around the edges may be possible but milk is fundamentally a commodity product.  Ditto an ombudsman or Food Market Regulator: having someone looking over the supermarkets shoulder, so to speak, may lead to limited interventions but it leaves the bad dynamics in place.

The first thing to say is that size is a problem in itself.  Retailing is a complex and demanding business but not exactly rocket science.  Nor does it require global companies with the resources required to design a new jetliner or get a new drug to market.   But it does benefit from economies of scale – largely (though not entirely) because the bigger you are the easier it is to bully producers – which means that the big get bigger and the small go extinct unless they can hang on in some niche.   Therefore left to its own devices a retail sector will evolve into an oligopoly where a small handful of large firms, all with similar cost structures, dominates the market.  In effect, regulation of the marketplace becomes privatised for the benefit of the biggest participants and freedom to evolve without limit in response to the market’s internal dynamics eventually ends in a market that is neither free nor fair.

So, the first conclusion is that the size of retailers should be limited.  This could be done in several ways, for instance by legislating that retailers must divest operations above a market share of, say, 20% in any one local authority area or 5% nationally.

The other way that retailing has traditionally been regulated is by mandating an equal price at either the wholesale level (US practice) or the retail level (UK practice).

The US Robinson-Patman Act  (and see also here) prohibited price discrimination by, in simple terms, requiring that the same price and other terms be given to all purchasers of goods for resale except insofar as the cost of supply is genuinely different.  The effect is to put all retailers on a level playing field with respect to their purchases.   The most obvious consequence is that large and small retailers can coexist which means that they are all kept honest by competitive pressure; many corner stores would think themselves in heaven to get ADSA’s margins and would gladly undercut them to increase sales – provided they could buy competitively!  A less obvious consequence is that producers who depend in large part on selling to retailers are not under the bully pressure that has characterised the UK in recent years; there is no particular advantage for a strong retailer to beat them into the ground as the retailer gets no advantage from so doing – any lower cost they negotiate has to be given equally to other retailers.  Another result is that it helps maintain a reservoir of small firms – and small firms are almost always the most innovative.

One of Reagan’s first actions on becoming President was to eviscerate enforcement of antitrust (i.e. anti monopoly) legislation to allow brute force to rule in the marketplace.   The fallout from this has been one of the biggest drivers in the subsequent growth of inequality.

In the UK regulation was accomplished by Retail Price Maintenance (RPM) until the 1964 Resale Prices Act which made most such agreements illegal.  (Libertarians ought to – but mostly don’t as far as I know – object to the RPA’s  flouting of privity of contract.)   RPM put the onus on producers to set competitive prices vis-a-vis their rivals while helping preserve a diverse retail scene but large retailers can still get better terms.  Absent RPM producers have no control over price which compromises their marketing and puts most on the back foot.   Interestingly, RPM survived for books until 1995 since when its demise has helped drive a huge concentration in retailing matched by a corresponding defensive concentration in publishing despite which most publishers are over a barrel, held to ransom by the few surviving retailers.

So, we face a stark choice; if we want a competitive market in goods we have to legislate to create and maintain a competitive marketplace.  If we don’t restore effective competition in the marketplace we can’t have a properly functioning market in goods.

 

Clegg’s bicycle shed

An apocryphal story (attributed to C. Northcote Parkinson) tells of a board of directors who had only two items on the agenda of their monthly meeting.  The first was a proposed £100 million investment in a new plant that would be a make or break investment for the company; the second what colour to paint the bicycle shed at head office.  The first was disposed of in two minutes, but agreeing the best colour for the bicycle shed took the rest of the afternoon.

However daft this may sound it’s pretty much the ranking of priorities Nick Clegg has chosen.   For many liberals reforming the House of Lords is a spot that must be scratched.  Fair enough – but how important is it in the scheme of things?   I have seen no compelling evidence that its existing form is a serious impediment to good government nor that the proposed changes would improve decision-making in Westminster.   Such evidence may exist but, if so, advocates of the bill have failed to make the case.  If anything the evidence is to the contrary;  there have been several occasions in recent years when I have been delighted that the Lords has, in effect, asked the Commons to reconsider some point and  I remain to be convinced that a reformed HoL would have done as well.  If composed largely of Westminster Village insiders (who else would stand?) it would be at great risk of succumbing to the waves of groupthink that periodically sweep the Commons.   Hence it is no surprise that the comments on this LDV post suggest widespread reservations about the bill’s specific proposals even among liberals.   In short, HoL reform remains firmly in the bicycle shed category.

In contrast the evolving financial mess and associated banking criminality are an existential crisis for Britain and moreover one that exposes the complete bankruptcy of Conservative thinking – not to mention how compromised some of their leading characters are.   And where is Clegg?   AWOL as far as I can tell.

Can we please focus on the things that really matter; things where we should be offering leadership.

 

 

 

 

 

Zombie theory stalks the railways

Justine Greening, Secretary of State for Transport, has announced that the government plans to accept many of the recommendations of Sir Roy McNulty’s report on the railways and that she wants to see efficiency savings of £3.5 billion per annum.   Much of the media coverage has been dominated by the proposed introduction of smart card ticketing and job cuts.  Unions fear that 12,000 jobs may go.

There is clearly a problem.  As McNulty puts it in the forward to the report,

“However, there is widespread recognition that the industry has problems in terms of efficiency and costs.  Unit costs per passenger kilometer have not improved since the mid 1990s.”

Hmmm.  The ‘mid 1990s’ was when the railways were privatised (progressively between 1994 and 1997 in fact).   Yet a business with a high but fixed cost base should see efficiency soar when passenger numbers increase.  And passenger numbers have gone through the roof as long-suffering travellers know - up by about two-thirds over the same period according to the report.  Clearly something has gone badly wrong.

McNulty goes on to list some of the causes,

“The causes of GB rail’s excessively high costs are many and complex.  The Study was asked to examine “barriers to efficiency” and we have identified that among the principal barriers are fragmentation of structures and interfaces, the ways in which the role of Government and industry have evolved , ineffective and misaligned incentives, a franchising system that does not encourage cost reductions sufficiently, management approaches that fall short of best-practice in a number of areas that are key cost drivers, and a railway culture which is not conductive to the partnership and continuous improvement approaches required for effective cost reduction”.

In other words its structure too fragmented and byzantine to work properly.  Someone forgot the KISS rule.

On R4′s Today Sir Roy said that British passengers are paying about 30% more than their counterparts in other countries.  John Humphrys suggested that the ‘big opportunity’ is to reunite the fragmented parts and rail expert Christian Wolmar agreed adding that since privatisation public subsidies have increased from about £1.5 billion to £4 billion in real terms – i.e. over and above inflation.  Elsewhere, Bob Crow of RMT contributed the fascinating factoid that Network rail has 300 solicitors who spend their time suing the Train Operating Companies (TOCs) and the TOCs have another 300 who spend their time responding.  It’s a hell of a way to run a railway.

So, the government’s solution is to ignore the elephant in the room – that the structure of the railways is all wrong – and go for a combination of fare increases (disguised as smart ticketing) and substantial job cuts (even allowing that the unions may be a scaremongering a little).  Why would Ms Greening do that?  She could just blame it all on Labour as usual.

The answer is that too many in government still believe the neoliberal nonsense that markets have god-like powers and magically always deliver optimal solutions despite massive evidence to the contrary and a theoretical base that can’t stand up to scrutiny.  They are locked into a failed paradigm by bad theory and cemented in for good measure by the vested interests that are doing very nicely from the arrangement.  That 30% excess of costs is someone’s income and is quite big enough for some to be spared for a generous contribution to party funds.

As for hopes that a re-structuring of incentives and the like within the existing structure will solve the railway’s problems – forget it.  These are features of the system, not mere bugs.  Like all centrally mandated targets they will always be gamed by the industry players for their own advantage; if the incentives are changed the game will simply continue under the new rules.