Friday, February 22, 2008

Leaving the country

ChairsWhen economists want to know what people think they try to avoid relying upon asking them. Surveys, opinion polls, personal anecdote and other ways in which people express their opinion can often be misleading or distorted. When and how a question is asked and how it is phrased can seriously affect the outcome of a poll. More importantly, people may express a certain preference in a poll but make quite different choices when asked to make real decisions with real consequences.

It is often better to look at revealed preferences; how people actually behave when faced with actual decisions in real life rather than hypotheticals in a survey.

Some dramatic new evidence of this kind emerged yesterday. High staff turnover often suggests that an organisation is not a pleasant place to work. High numbers of asylum seekers from Venezuela suggest that Hugo Chavez's rule is not very pleasant. The Army's recruitment and retention difficulties suggest that the poor management of the Armed Forces is making them an increasingly unpleasant place to work. In that light, the evidence yesterday that Britain is facing the biggest brain drain in 50 years, that those most able to leave are doing so, is an alarming suggestion that things are going very wrong in Britain today:

"There are now 3.247 million British-born people living abroad, of whom more than 1.1 million are highly-skilled university graduates, say the researchers.

More than three quarters of these professionals have settled abroad for more than 10 years, according to the study by the Organisation of Economic Co-operation and Development (OECD).

No other nation is losing so many qualified people, it points out. Britain has now lost more than one in 10 of its most skilled citizens, while overall only Mexico has had more people emigrate."

Why are people leaving? One suggestion:

"Prof David Coleman, of St John's, Oxford, said the brain drain was "to do with quality of life, laws and bureaucracy, tax and all the rest of it"."

Ever higher levels of tax; little to show by way of public service results for that huge drain on private incomes; an overly meddlesome state that leaves people bereft of control over their own lives. Yesterday's emigration numbers should be a wake-up call for a nation whose government is attempting to do too much and doing a very poor job of it. If things don't change Britain will continue to lose far too many of its best and brightest.

Cross-posted from the TaxPayers' Alliance blog.

Wednesday, February 20, 2008

The Government's Northern Rock agenda

Vince Cable, in yesterday's debate on the bill to nationalise Northern Rock, framed the essential question that the Government are not openly addressing but that is of paramount importance to the question of where Northern Rock goes from here over the next few years:

"May I return to the central question of what kind of bank will now operate? Will it be built up or run down? The hon. Member for Newcastle upon Tyne, Central (Jim Cousins), with whom I have had several exchanges in the past few weeks, put it rather well yesterday when he asked whether this is the end of the beginning or the beginning of the end of this bank. That question is crucial. It is at the heart of the argument about the business model, on which Ron Sandler will presumably be asked to decide. It is not clear to me which of the two approaches is the better. A wide range of options exists, so one can envisage a kind of continuum, at one extreme of which the bank would be run off and would have no new business. The other extreme might involve a highly expansionary strategy—a kind of publicly owned Virgin or “the people’s bank”, as somebody called it yesterday. Alternatively, something between the two might happen." - Hansard, 19 Feb 2008 : Column 193

The agenda that the Government are trying to slip under the radar is something closer to the latter that the former; a highly expansionary strategy. Jim Cousins provided an illustration of the political pressure that the Government are under to deliver such a solution to the problems of Northern Rock:

"Let us be fair about this. Northern Rock was trying to be a big bank based in the north-east that could take on the big boys of the banking sector. That prospect, from the north-east’s point of view, must be retained. It may not ultimately work out that way, but it must be retained." - Hansard, 19 Feb 2008 : Column 198

Cousins is supporting nationalisation because he believes that it is a vehicle for taxpayers' support to be used in an attempt to revive the busted Northern Rock. Why does he believe this?

Such a strategy wasn't mentioned in Alistair Darling's speech and is hardly the impression given by his rather humble talk of "temporary public ownership". John Redwood asked whether the Government had told Cousins that they were going to attempt to run into reality his vision of nationalisation reviving Northern Rock as a big bank:

"Mr. Redwood: As a local Member for the business, has the hon. Gentleman been given any assurances by the Chancellor that he is going for the growth model and not the wind-down model?

Jim Cousins: No, I have had no such assurance; nor, at this stage, would I necessarily look for one. We have had from Mr. Sandler clear comments that he sees the business as a going concern and is preserving the option of growing it on." - Hansard, 19 Feb 2008 : Columns 197-198

If Cousins is representative then Labour MPs share our conclusion that Ron Sandler's unguarded statement on Monday (quoted in the Financial Times) offers the best clue we have yet to the objectives that will inform the business plan for a nationalised Northern Rock.

"The aim is to reinvent Northern rock as a 'profitable, vibrant and sustainable business'"

This is the agenda that the Government won't yet discuss openly but that seems to be underlying their policy on Northern Rock. Taxpayer support is to be enlisted in an attempt to revive the bank. There are a number of issues with this:

1. It ups the ante by committing taxpayers money to the risky venture of trying to revive Northern Rock instead of taking the more cautious approach of trying to get value from the assets as they stand. As Stephen Dorrell put it: "The state would be used as a sort of turn-around venture capitalist" (Hansard, 19 Feb 2008 : Column 200). The ill-fated Phoenix Consortium attempt to turn around Rover as a mass-market car manufacturer shows the risks of a hubristic failure to accept that a company has had its day and might need to be wound down.

2. Regardless of Ron Sandler's abilities he will be operating a nationalised industry and subject to the political pressures that make the lives of many brilliant private-sector executives' lives hell when they switch to the public sector. Jack Lemley, the project manager brought in to run construction of the London Olympics venues, told the Idaho Statesman:

"Well, I’ve never walked away from a project ever until I retired from the London 2012 programme, and it was so political that I think there is going to be a huge difficulty in the completion both in terms of time and money and it’s much more difficult because there’s so much time being lost now. [...] I don’t want my reputation ruined being able to deliver projects on time and on budget."

3. This will be a massive market distortion. There will be one player in the mortgage market with a guarantee from the taxpayer behind them. This will allow the bank to offer more generous interest rates than its competitors. Potential competitors with a revived Northern Rock are rightly furious.

The Government are deliberately keeping the plans for what happens next with Northern Rock obscure. However, their plan to make taxpayers play venture capitalist trying to revive a busted bank with a wrecked brand is becoming clear anyway. It is a political agenda that puts taxpayers' money at huge risk and could create damaging distortions in the British economy.

Cross-posted from the TaxPayers' Alliance blog.

Tuesday, February 19, 2008

What the opposition should say in the Northern Rock nationalisation debate

The Government offered every inducement to private sector bidders for Northern Rock. It offered a heads you win, tails we lose deal whereby the taxpayer would foot the bill if things went wrong at the bank but a new owner could walk away with big profits if things turned around for the better. They still couldn't find a private sector bidder able to offer good value to taxpayers.

That the Government could not find a bidder despite lowering the bar so drastically suggests that the private sector didn't expect to be able to get much value out of Northern Rock. We are now expected to believe that the Government can do a better job - can deliver taxpayer value where the private sector couldn't. Taxpayers are understandably cynical.

There are several unanswered questions. Just how strong is Northern Rock's loan book? How well prepared is it to weather weaknesses in the housing market and still pay off massive loans to the taxpayer?

What will we have to pay shareholders? Is there any chance that the outrageous demands for £4 per share being made by hedge funds, who have bought into Northern Rock since the crisis, will be sated?

Bigger questions are raised by the form that this nationalisation is beginning to take. While this is, in theory, a debate on whether or not to nationalise Northern Rock that is less a decision than a resignation that there is little other alternative. By contrast, the form of nationalisation is a decision firmly within the Government's grasp and one that could have vast financial consequences.

We can understand how that decision has been made by listening to Ron Sandler, the new boss at Northern Rock, who was quoted in the Financial Times as saying "the aim is to reinvent Northern Rock as a 'profitable, vibrant and sustainable business'". The Government have chosen not to take the option of running down the mortgage book and steadily putting the bank out of its misery. Instead, taxpayers are being asked to support an attempt to resurrect the bank. There are many parallels to the Phoenix Consortium's promise to make Rover a world-beater again.

Such an endeavour is necessarily more risky and involves a greater exposure of taxpayers' money than running the bank down. The Government is upping the ante on taxpayers' behalf. While there has been an attempt to spin this 'temporary' settlement as a very short-term arrangement Ron Sandler has acknowledged that it is likely to be years before a resurrected Northern Rock is likely to be ready to return to the private sector.

Throughout that period each British taxpayer will, effectively, have £3,500 staked on the future of a mortgage bank with a busted brand. Beyond that, they will have to hope that this bank is really run on commercial, and not political, terms. While Ron Sandler may be impeccably qualified he will be employed by, and answerable to, politicians. If they see some short-term political advantage in delaying, for example, important decisions on downsizing Northern Rock will the chances of taxpayer value being delivered be further imperilled?

There are other costs to a nationalisation that aims to reinvent Northern Rock. It will mean facing other mortgage lenders with a rival able to call on a guarantee from Her Majesty's Government. That is quite a luxury and, in a time when banks are struggling to raise finance, will make it hard for other banks to compete. For that reason European authorities are likely to take a dim view of overly ambitious proposals to revive Northern Rock.

It is a betrayal of basic economic principle and the interests of every taxpayer for the Government to use Northern Rock as, perhaps, the most expensive job creation scheme in history.

Cross-posted from the TaxPayers' Alliance blog.

Monday, February 18, 2008

Obama and the Precautionary Principle

Tim links to some rather... enthusiastic statements from Obama supporters:

"He empowers us with words... People are rushing into the tent to drink that Magic Water."

"He is not the Word made flesh, but the triumph of word over flesh."

"I felt this thrill going up my leg"

All from the excellent Is Barack Obama the Messiah? blog. So on the one hand we have the possibility that Obama is some kind of saviour who will reward a vote for him with all kinds of miracles.

Unfortunately, there is another possibility. Kevin Henry suggests that electing Obama could lead to the destruction of the human race thanks to a giant meteorite.

So, should we take the possibility that God is a racist and will punish Americans with extinction for electing a black man seriously? Or, should we vote Obama so that he can end terrorism, global warming and man's inhumanity to man?

We should probably ignore both but, then, we should probably ignore a few degrees of climate change here or there after 2800 (PDF, Box 1.3). Imagine if someone proposed going to war with Iran in case they nuked us in even two hundred years time. Stern and those who believe his "authoritative" report are allowed to get away with that kind of breach of common sense.

Cross-posted from

Sunday, February 17, 2008

Defence spending

As I noted following the CSR in October defence spending as a share of GDP is set to continue to fall. It is even set to fall absolutely in real terms over the next few years. Massive commitments in Iraq, Afghanistan and now in Kosovo just can't be combined with steady cuts in the military's resources. Particularly given the ongoing scandal of MoD inefficiency.

The Government's standard defence - that military spending fell under the last government is very weak. The last government both started from a high, Cold War, base and never faced the military with the massive commitments that the present Government has.

The Armed Forces are being massively let down. Good personnel are leaving thanks to the conditions created by such an overstretch. The consequences will last for decades. Soldiers are dying thanks to the Government's failure to properly resource the Army.