Quangocracy - euthanasia or liberation?

Not for the first time, I have been scattering observations on an issue, in comments dotted around the place, rather than pulling the strands together for a piece on here. This time, the topic is the rising cost of the quangocracy. As a subject particularly close to my heart, I thought I'd pull the comments together before I forget where they are.

Dan Lewis, of the Economic Research Council (and some time of the Centre for Policy Studies), has produced an analysis of the increasing size and cost of our quangocracy. (It will be available on the ERC's site from Thursday 23rd August.) The Sunday Telegraph produced a piece on this analysis, in which the overall cost of the quangos ("nearly £170bn a year") was highlighted and compared with the budget of the Ministry of Defence (£32bn). Tim Worstall picked up on this article, and posted a brief comment arguing for the complete abolition of the quangos and the use of the savings to abolish income and corporation tax. Nothing wrong with the principle, but there is a bit of a problem with the calculations, as I commented on Tim's site (though rather too late to be helpful, as it turned out):

No one could be more opposed to quangos and determined to see most of them shut down than me. But a couple of things to bear in mind on the cost:

1. Around two-thirds of that total cost is attributable to quangos associated with one department of government - the Department of Health. Effectively, the NHS is a giant set of quangos, amongst which are the Primary Care Trusts and the NHS Trusts (which as a pair make up over £100bn of that sum).

2. Of the executive NDPBs (the busy-body, rather than funding quangos, which is what we usually have in mind when we rage against them), over half of the total cost of around £36.8bn lay within another department - the Department for Education and Skills. But the lion's share of this cost is also attributable to two quangos - The Learning and Skills Council (responsible for post-16 education and training) and the Higher Education Funding Council for England. It turns out, then, that although they calls these NDPBs "executive", most of their cost lies (like the NHS quangos) in the allocation of public funds.

This shouldn't diminish the attacks on the wastefulness of our quangocracy, but we should bear in mind that it is the sclerosis induced by bureaucracy that is their really harmful aspect. They cost and waste money, but only a fraction of that headline figure. We can probably save several billion pounds by scrapping most of them, and that's money worth saving, but we can't save anywhere near £167bn.

Mickey Mouse degrees

How do you fancy an outdoor adventure with Philosophy?  How about some fashion buying?  Some Aromatherapy and Therapeutic Bodywork?  A bit of lifestyle management?  Not got a clue what I'm on about?  Believe it or not you can do all these things and get a degree at the end of it. The Tax Payers' Alliance and Burning Our Money have identified the most ridiculous "Mickey Mouse" degrees that you can do - all funded by the tax payer.  At £40m a year. 

Yet another NHS Workforce planning shambles

New NHS figures reveal that there are 5,000 newly qualified nurses who are unable to get a job.  It is also reported that more than 20,000 jobs have been cut in recent years as managers struggle to bring NHS finances back into balance.  Yet only a few years ago there was such a critical shortage of nurses, the NHS were flying them in from all over the world.  So what an earth has happened?  Well, a health department spokesman said yesterday: "Low vacancy rates confirm the NHS is no longer burdened by the staff shortages of the past."  But that hardly ans

Bloody hell!!!

Global coal production, 1971-2006

Can we finally stop pretending that cap-and-trade and our other half-baked "carbon-pricing" mechanisms aren't simply offshoring our carbon?

Global coal production has increased by one-third in 3 years (and by over 50% since the turn of the millennium). Three-quarters of that increase is attributable to China.

Back in 1973, nearly three-quarters of the world's coal was produced in the OECD or the USSR. China accounted for less than 20%. We're producing nearly two-and-a-half times as much now globally, of which just over a third (35.3%) comes from the OECD and the former USSR. Nearly half (46.2%) of this much bigger total is produced in China.

And they're using pretty much all of it themselves. They export only 2.5% of their production. Their exports have actually declined in the past three years (from 93Mt to 63Mt), even as their production has rocketed (from 1,502Mt to 2,481Mt). And their imports have increased over the same period. At 37Mt/year, they are now the seventh-largest importer of coal in the world.

At this rate, all the coal in China will be gone in 46 years.* And that's if they stop adding to their consumption right now. As that graph indicates, they are showing little sign of slowing down. We know they are building a coal-fired power station (or two) a week. And they haven't stopped building factories either. If they carry on like this, they'll have used up their coal within 30 years. They'll have a massive infrastructure dependent on coal-burning whose costs have only partially been recovered, and will be dependent for fuel on imports at a scale that suppliers cannot begin to supply. Great plan!

But of course, this isn't purely for their own benefit. Whilst a decent share is going to internal development and consumption, a large share also goes to the production of (usually cheap and nasty) goods for exporting, much of it to the OECD. And despite dumping most of our energy-intensive production on the Chinese and importing many of the nick-nacks we either used to produce here or never realised we needed, we manage to carry on increasing the amount of energy we consume within our own border, and yet persuade ourselves that we are somehow virtuous because our direct energy-consumption and emissions are increasing less quickly than they otherwise might have done, and than they are doing in other parts of the world.

So don't blame the Chinese - they are just responding rationally to the incentives. Why the hell we want to create incentives to do this, though, I can't imagine. Scrap Kyoto and EU-ETS now, before they do any more harm.

Graph and figures from the IEA's recently-published booklet, Key World Energy Statistics 2007 (and the earlier, 2004, version).

* Chinese reserves based on figures from the 2007 BP Statistical Review of World Energy. According to BP, despite the rampant extraction, Chinese reserves have not changed an iota between 2003 and 2006. Now, I can understand that additional discoveries or reclassification of previously uneconomic reserves may replace worked reserves, but so precisely that the figures are identical every year?! I think not. It appears that BP cannot get recent data on Chinese reserves, and are therefore sticking with the figures they've got. In which case, there is every likelihood that real reserves are lower than given in their latest publication, and they will run out sooner.

HIPs - implementation judders on

The government has announced that HIPs will now apply to all three bedroom houses earlier than expected - September 10th.  This has meant that anyone who thought they had bit of time before any October deadline has, once again, been shafted by the government and actually only have 15 days to beat the pointless "tax" kicks in.  So it now seems the majority house sellers will be caught up in read tape and unnecessary financial pay out - it also seems the scheme will be extended to all home by October.  The saving grace for the government on this one is that the markets have been pre

Planes, trains and automobiles

Tim Worstall has challenged, in a recent post, the logic of the DfT's suggestion that Air Passenger Duty (APD) needs to be increased further to take full account of the contribution of aviation to carbon-emissions. By Tim's calculations, taking Stern's figure of $85 as the social cost of a tonne of carbon-dioxide emissions, the cost of carbon emitted by air travel is "around and about the amount currently charged" under the APD.

One could raise a number of reservations about this estimation, but let's say (for the sake of argument) that he is right. It raises interesting questions, either about Stern's calculations, or about this approach to welfare economics.

Tim cites approvingly the DfT's explanation of the principles underlying Pigovian taxation. The DfT does indeed reduce the idea to its most basic essentials, but it seems to me that the essence has been corrupted or lost to some extent in the act of reduction. Let me see if I can set out the idea clearly, so we can judge mechanisms like the APD for how well they embody the economic theory that underlies them.

Economics, if it treats only of monetary values, is subject to the Wildean criticism that it knows the cost of everything and the value of nothing. Economists have therefore felt it important to consider the impact of actions on utility (or, simplistically, happiness). Welfare is the notional sum of utility or happiness amongst a group (ignoring for the moment that it is ridiculous to aggregate something incommensurable like happiness). Welfare economics is the study of economics from the perspective of maximizing welfare.

In theory, if all participants in a transaction agree voluntarily to its terms, then they must all feel themselves at least to be no worse off from the transaction, and some of them presumably feel themselves to be better off, or why would they have agreed to it voluntarily? This satisfies the condition needed to demonstrate that an action has increased general welfare. By definition therefore, free markets increase welfare. This (and the inability to make the same case for coerced actions, such as those obliged by the state) is the basis of the libertarian philosophy.

In practice, however, it is often the case that people not party to a transaction may be affected by it. The classic example is a factory whose effluent is discharged into a river. No matter whether all parties engaged in commercial transactions with the factory-owner do so voluntarily, the contribution of the factory to the general welfare may be negative, if the benefit to the direct participants is outweighed by the impact on those who use the river downstream from the factory. The pollution of the river is, in the language of economists, an externality - a value (negative in this case, but they can be positive too) that is attributable to someone's activities, which they are not able to capture (if positive) or obliged to incur (if negative).

Externalities skew decisions, such that the options that provide the greatest benefit to society (maximize welfare) may not be the ones that offer the greatest benefits to the participants in transactions. The way to ensure that markets provide the optimal outcome for society is to internalize the externalities. In effect, this means ensuring that the party responsible for the externality is attributed the cost or value of that externality.

A Pigovian tax (named after Arthur Pigou, the Cambridge economist who first set out a detailed exposition of welfare economics) is a mechanism whereby the cost of a negative externality can be internalized to the producer of that externality. If the impact of the effluent from the factory results in losses to those downstream at a rate of £100/litre, a government may impose a Pigovian tax of £100/litre on the factory, so that the factory-owners' decisions take into account the full costs of any choice, and not just those incurred directly. The Pigovian tax provides an incentive for the factory-owner to minimize the discharge of effluent or even to locate elsewhere where the external costs of disposing of the effluent are lower.

However, the application of the Pigovian tax is not sufficient in its own right to ensure that welfare is maximized. It may be that the factory-owner has few feasible alternatives, and decides to continue to discharge and pay the tax. In that case, the damage (or disutility) to those downstream is no less than before, and the utility of the factory-owner has also been reduced by application of the tax. The utility of the government (or taxpayers generally) may have been increased by the revenue from the Pigovian tax, but it is not the government or taxpayers generally who were being harmed by the externality. The Pigovian tax can only be said to have achieved its objective if it represents an accurate valuation of the harm and if it is distributed as compensation to those on whom the harm is inflicted, proportionately to their share of the harm. In other words, a tax (or charge) cannot be said to be an effective mechanism to internalize externalities unless it either deters the externality or fully compensates those who experience the effect of the externality (or a bit of both).

Greenhouse-gas (GHG, or, in the vernacular, carbon) emissions are an externality. They are a particularly difficult example, because the impact of the harm is uncertain and because most of those who may experience the harm are remote, both geographically (e.g. inhabitants of vulnerable countries) and temporally (i.e. future generations). It is important that mechanisms to internalize the carbon externality reflect the remoteness and uncertainty.

If we applied that tax of £100/litre to the factory-owner in the above example, but recycled the revenues to him by some subsidy or tax-break, there would have been no point applying the Pigovian tax in the first place. Similar could be said if we recycled the tax-revenues to his customers - the amount that he had to increase his prices would be balanced by the extra amount that his customers were able to pay for them. The tax would be neither an effective deterrent, nor an effective means of compensating those who experience the harm. It would simply be an inefficiency in the market, perhaps effective at salving consciences, but of no real value. Indeed, if it is effective at salving consciences, it may exacerbate the harm, because customers may consume more of the good, freed (superficially) from the responsibility of considering the impact of their choices on those affected by the externality.

In the case of carbon emissions, most of us, metaphorically, own shares in the factory, and most of us live downstream. But some own more shares in the factory and suffer less of the impact of the pollution than others (e.g. rich world vs poor world, this generation vs future generations). If we impose a Pigovian tax on the factory, but recycle the revenues to those who own most of the shares, we have not effectively internalized the externality. We may have exacerbated the harm by letting the factory's customers think that they now need not worry about the impact of the factory's externalities. This is exactly what most of the rich-world mechanisms to internalize carbon externalities, including the APD, are doing.

Osborne finds 14 billion new ways to waste our money

George Osborne has welcomed the report of John Redwood's Economic Competitiveness Policy Group, which identifies £14 billion that could be saved by cutting red tape and bureaucracy and recommends tax cuts of £10 billion, as "the most impressive and comprehensive analysis of the state of the British economy produced by any political party in recent times".

Pickles' rubbish economics

Fly-tipped asbestos in Thornton (from The Times, 17/08/06)Here is Cameroonian Conservatism in action. If people are inclined to avoid paying for goods, get taxpayers to pay for them, so they appear to be "free" at the point of consumption, in order to reduce the temptation to commit unlawful acts.

The specific example is that Eric Pickles, the Conservatives' Shadow Local Government Secretary, thinks it is wrong to charge people proportionately for the waste-disposal services that they require:

"We all want to increase the level of recycling but bin taxes will harm the local environment by leading to a surge in illegal dumping and backyard burning. Whether they can't pay or won't pay, many irresponsible people will dump instead."

Having discovered this radical, socio-centric approach to law & order and public welfare, there is no limit to the ways in which this logic can be applied in other fields. The Tories will doubtless wish to propose:

  • The extension of this model to all other waste producers. The image (right) associated with this article in The Times illustrates that fly-tipping of commercial and industrial waste is a more common problem. Shouldn't we also relieve businesses of the temptations of illegality, in the interests of society?
  • As many burglaries and thefts are committed in order to fund drug habits, we should legalize drugs, and if that doesn't make them sufficiently cheap, provide them free to ensure that junkies are not tempted to steal to fund their habit.
  • Provide free snacks and drinks outside convenience stores, so shoplifters are not tempted to steal. The same, of course, will go for a selection of the latest fashions outside clothes stores, and phones and ipods outside electrical-goods stores.
  • Make cars and motorbikes freely available to young people, so they don't have to hotwire someone else's vehicle.
  • Free taxi-rides from pubs and parties, so no one is tempted to drink and drive.

The opportunities are endless, now that we can forget about economics and focus on the good of society.

What the..?!

From today's Times:

"Police are being sent skateboarding in an attempt to cultivate a “cooler” image to improve their relations with young people. Hampshire police are sending officers to workshops, attended by up to 30 youngsters aged from 12 to 16, to receive expert tuition."

I have nothing more to add to this that you aren't already thinking. 

The Government cop-out

We have, to a certain degree, an anti-social drinking problem in this country.  The solution?  Ban it.  But what are the real causes of this problem?  It doesn't matter - ban it.  We are told today that nearly 200 MPs now want the Government to stop supermarkets selling cut-price drink after a senior policeman appealed for action to tackle drunken youths.  There also reports that a "top cop" wants to ban drinking outdoors (that'll confuse the alcoholic smokers!).  Yes, there have been various drinking related problems recently - particularly with the young.  But I'm su

One in four is an A, but at what cost?

It's that time of year where we mock the students who have worked hard for the past 12 months for being handed A grades on plate.  Gradually over the years, there is more and more truth in the accusations that standards have slipped with the convenient spin for government that education standards are rising.  The problem is, no one believes the spin anymore.  It is being reported today that one in four grades at A level is now an A.  One in four?!  Not only that, but pass rates are now at 96.9%.  A-levels are now no longer a qualification in themselves, but rather another stepping stone