Why public provision makes economic sense

The blog has made several references to the Nordic social model. At a time when neo-liberal attacks on the "welfare state" are as strong as they have ever been, it is important that a properly strong response is given to these attacks. The argument is that public goods make strong economic sense. And this is well stated in a recent Social Europe article 

there are many misunderstandings of the Nordic states, even by sympathetic commentators. The most common one is that the state is portrayed as a very costly undertaking that by its high level of taxation becomes a hindrance to economic growth. This reveals a misconception regarding what the welfare state is about. The largest part of this type of welfare state is not benefits to poor people but universal social insurances and social services (like health care, pensions, support to families with children and public education) that benefit the whole, or very large, segments of the population. These goods are in high demand by almost all citizens and research shows that having these demands covered by universal systems in many cases becomes more cost effective.

The economic theory about problems of asymmetric information in markets is well suited for understanding this. Although this theory is quite technical, the logic is very simple. For example, in private health insurance systems, the costs that such information problems lead to (overtreatment, overbilling, the administrative costs for insurance companies screening out bad risks, the costs for handling legal problems about coverage) can become astronomical as seems to be the case in the United States[2]. Universal systems are much more cost effective in handling these problems since risks are spread over the whole population and the incentives for providers to overbill or use costly but unnecessary treatments are minimal.

The second misunderstanding is that such welfare states by necessity come with heavy handed bureaucratic intrusion and paternalism (“the nanny state”) and that it cannot be combined with freedom of choice for various services. This is for the most part wrong. An example is the publicly financed school system in Denmark and Sweden that are full-fledged charter systems. Public schools compete with private charter schools that are run on public money and have to accept to work under the same national regulations and education plans. For example, they have to accept students without any discrimination concerning their learning abilities. This can be compared with the intrusive inquiries and testing used by many private schools in the US in their admission processes. The same choice systems have been developed when it comes to health care, elderly care and pre-schools in the Nordic countries. Simply put, public funding of social services can very well be combined with consumer choice and respect for personal integrity.

A third common misunderstanding about the universal welfare state system is the neo-liberal argument that high public expenditures is detrimental to market-based economic growth. As shown by the economic historian Peter Lindert, this is simply not the case. In a global perspective, rich states have a level of taxation that is almost twice as high compared to poor states. And when the rich western states are compared over time, the evidence that high public spending is negative for economic growth is simply not there. This is also shown when the leading international business organization, the World Economic Forum, ranks countries’ economic competitiveness. The Nordic countries come out at the very top, far ahead of most low tax/low spending countries. In addition these states have their public finances in good order, simply because people are willing to pay taxes for the services that are proven. And lastly, when it comes to measures of human well-being, the Nordic countries outperform all other known social models. Thus, the future of the state looks bright, provided it is modelled on the Nordic model.

Cold Transylvanian idyll

I was premature in removing the snowbound Transylvanian valley from the blog masthead! I arrived a few hours ago in my mountain house for my first visit since mid-January to find the village wearing a newly-endowed cloak of light snow. Apparently, in my absence, the snow has been at least two metres and covered cars and some houses – but my roof and verandah have survived the pressure. Although there is still no running water….and the gas-stove hose seems to have given up the ghost. So the kitchen fire was duly kindled – and supplied the heat for everything.

And lots of books and paintings were duly transferred – with less difficulty now that the cowpath at the bottom of the garden has been upgraded to a track which can sustain the car. Not quite the dual carriageway I had feared in the autumn - although various assets such as the gate and a pile of construction material have been stripped without consultation by the municipality). And the lack of water may be due to the road construction!
Tomorrow the car has its bi-ennial technical test – which will hopefully allow me to make the last trip to Sofia (and its swimming and fitness facilities) in a few days before vacating the flat there at the end of the month. Sad to leave the aesthetic thrills I get there – but its good to be back in this country house with its views, library and music….

In praise of Direct Action

There couldn’t have been a more appropriate location for a lone protest against the ongoing insidious repression of our democratic freedoms than that of the Oxford-Cambridge Boat Race yesterday. Not just that these are the universities which predominantly cater for the elites but that the homes of the super-privileged overlook the river.

And the impact should be all the greater since the guy who disrupted this traditional annual race on the River Thames is himself one of the elite – expressing (in what I confess I find a powerful but strangely-written manifesto) his deep concern about the direction public policies in countries such as the UK seem to be taking us -  

Everyone will remember some of their history lessons ... where people have been taken advantage of by people that believe themselves somehow better, more entitled than others. Most recently this has included the enclosure and eviction from the commons, transatlantic slavery, imperialism and colonialism, fascism, holocausts, genocides and dictatorships and migrant labour camps. It is difficult to grasp, as many of us have strong memories of the previous ‘boom’ decade, but .... we have just about reached the precipice of another era of mass enslavement and the large scale enclosure of ‘Our Public’. What is happening in the UK, for example, is not ‘privatisation’ but a contemporary demonstration of full scale enclosure of Our Public. "Couldn’t happen again ..." why not? Why wouldn’t something different but similar happen again? What policies, what institutions, exist to prevent something similar from happening again? What evidence is there that this isn’t happening? When did Our Public last experience an injection of its own readily available dose of agency and liberty?

To enclose and to enslave requires the audacity, cunning and daring to take advantage of our natural kindness, our belief in others, our respect for authority, our desire to please, and our apprehension about ‘causing waves’, our hope for all to have a better life, somehow. It also depends on our disbelief, despite having experienced it, that other people would purposefully set out to harm us for their own advantage. More recently we have also been encouraged, though the evidence displays the opposite much of the time, that a whole raft of institutions exists that work to prevent human catastrophes like our right to protest being denied, detention without trial or charge, the monopolisation of industries, and essentials like food and water. These institutions were established to prevent slavery, genocide, indentured labour and groupings of indices of deprivation and poverty from occurring. It is likely many in the western Baby Boomers generation (large percentage of the UK population), who have benefited so much from these institutions, are finding it very difficult to consider that these institutions might now be turning against them, their children and their grandchildren? Could what is happening in the UK (and around the world); the state of exception with Olympics, the wholesale removal of countless civil rights, the project to create fear and suspicion of others, the transfer of our money into the vaults of a handful of corporations, the ongoing wars, the pomp and ceremony for unelected official anniversaries, the amazingly high unemployment, the devastation to public services such as health and education, the isolation of education due to high fees, the entangled corrupt relationship between the media, police and politicians, the racism, the increasing misogyny, the forced labour in supermarkets, the spying on our emails, skype calls, the control of food production and distribution and the reductions of tax burdens for the richest ... could these all be best understood as the process of enclosure? Do we resist now setting out to avoid something akin to slavery and imperialism? Or do we hesitate and find ourselves and our children without agency once again and in a long battle to gain it again? How long might it take and how many lives might this demand?

His manifesto encourages others to take similar direct actions. There are so many people of my age who have nothing to lose and who should certainly be inspired by his example. The discussion thread which The Guardian eventually added to the story was, curiously (since Guardian readers are notoriousoy liberal), pretty hostile to the action. So much so that I was moved to add my own comment to the discussion -

Most of these comments are at the level of "He stole my football, mummy!!" Ironically, they confirm the point the guy hints at in his statement/manifesto - that too many of us seem to be living in a protected bubble, unaware of what is going on around us - our sense of history lost. Direct Action has an honourable tradition - and has to be a serious option when corporate power has castrated our political choices and system. That Guardian readers can react in such a selfish way will, however, have to be taken into consideration during discussions about future actions.
And, for those who can't see a bigger picture, who are stuck at the level of the individual rower who has trained hard for months, can you not imagine the courage it takes for a guy to prepare for such an act?

Back in Romania

Bucharest is in full spring growth – so male testerones are obvious in the drivers (a stand-off within minutes of arriving - with a driver unwilling to back the metre needed to let me access my street). The stupid arrogance of a young (female) Vodaphone staff member who can’t answer a simple question (about the term-date for an internet payment) ensures gender balance. I advise her on the answer she should have given and add a comment that she lacks listening skills and seems able only to use formulae they’ve been trained to use. When I leave, she utters a “Good Day” and fails to appreciate the irony.

Romania’s honour is saved (as always) by its older generation – in the shape of a wood sculptor from Targovishte (80 year-old Marin Manea) who has a stall at the Easter Fare at the Peasant Museum here in Bucharest.
I could not resist this traditional "dresser" which he had beautifully carved (and embossed) from Tei (Linden or Lime) wood. For 60 euros. Perhaps "dresser" is not quite the right term since what he had carved was the upper part which holds the plates and cups (almost a metre in depth - with 3 levels).
I expressed my admiration and envy of his skills – and he offered to teach me. An idea worth thinking about – and appropriate on the day I read this section of a late Updike short story ("Personal Archeology")

an utterance…gouged with effort from the compacted accumulation of daily pretence and accomodation

Updike did not win the Nobel Literature Prixe - and this reflects badly on that Award.

More tax evasion

I wrote a few days back about the impact of Nicholas Shaxson’s book Treasure Islands - and the revelations it contains about unregulated financial institutions and tax havens being much more extensive than we realised. Today there is a story about how Amazon UK changed its ownership a few years back (now owned by a Luxemburg company) and has paid no Corporation tax on its 7.5 billion euros annual sales

Ironic (to put it mildly!) that I bought Shaxson’s book from Amazon UK; that Shaxson is apparently domiciled in Switzerland; and that his book was published by Bodley Head – once a proud and independent company but now part of the multinational Random House which itself engages in the tax gymnastics the book attacks.
Actually it's not ironic! It is a powerful demonstration of how extensive the coils of the octopus of the new gene of capitalism has become!
For new readers, these are not the rantings of a leftist -  but of someone who in the 1980s strongly fought the hard left (and would still justify my role) but from whose eyes the scales have now fallen about the parasitical greed of the commercial elite.

Privatisation of public facilities stinks!

I’ ve already confessed on the blog that I was too open-minded in my attitude during the opening stages of Thatcher’s privatisation agenda. Who knows, I mused in the 1980s, perhaps private management skills and more competition can shake up these systems and make them more customer-friendly. Where there was indeed the possibility of competition (telecommunications and energy) the results have been defensible.
Elsewhere (railways, water, health, education etc) the results have been utterly disastrous and we all need to shout this from the treetops. Private ownership or management of public assets stinks!!
Cities worldwide are experiencing the failures of water privatisation. Unequal access, inflated prices, environmental hazards and scandalous profit margins are prompting municipalities to take back control of this essential service. A new book Remunicipalisation – putting water back into public hands from Corporate Europe Observatory, Transnational Institute and the Municipal Services Project examines this growing trend for water ‘remunicipalisation’. Case studies analyse the transition from private to public water provision in Paris, Dar es Salaam, Buenos Aires and Hamilton, and look at a national-level experiment in Malaysia.
The journey toward better public water illustrates the benefits and challenges of municipal ownership, but the book also highlights the stranglehold of international financial institutions and the legacies of corporate control, putting water in the context of the larger debate about ‘alternatives to privatisation’ and drawing lessons from these experiences for future action in favour of public services.

Most of us thought that the global crisis would loosen the grip of corporate power, neo-liberalism and deregulation and make voters more sympathetic to the traditional social democratic agenda. The opposite seems to have happened. We need a better understanding of the reasons for this. In my view there are at least three –
• the crassness of the new breed of social democrats (New Labour and others who chose to make Faustian deals)
• the power of the corporate media
• the sheer scale of the neo-liberal lobbying tentacles

Radical reform is blocked because the crisis has strengthened elite power over governing structures and highlighted the importance of what an important recent paper called "democratic disconnects" .

First, the crisis has discredited banking and finance but it has not disempowered financial elites because crisis has strengthened the power of conservative financial, bureaucratic and political elites within our governing structures. Second, a series of democratic disconnects have disempowered the critics of finance in the technocracy and civil society who have been unable to turn popular hostility into effective reform of finance. The disconnects are such that, after the decline of the mass parties, it is now structurally difficult to convert the radical technocratic agenda or civil society activism into effective policy reform. Our story is of a stifled revolution and the reassertion of power by traditional elites.

For this reason, it is all the more important that successes in driving back corporate power are properly reported. These examples of remunicipalisation are inspiring.

Responsibility, accountability and all that

What would you make of a zoo which kept its more harmless animals under strong guard but which allowed its man-eaters to roam free? I am beginning to feel this is a good way to look at Western systems of social control and regulation.

Some 15 years or so ago, transparency and accountability became a big issue in my professional field (of governance). I have only recently begun to question the motives which have been at work.
Reassuring, at one level, in the story it told of how various public organisations were held to account by citizens, it demonstrated one of many apparently superior elements of the capitalist model of governance over the communist one which had been the default system of the countries in which many of us were working post 1989. For example, in 2001 I myself wrote this briefing note on the issue for my beneficiaries in a Central Asian State.
But, at another level, the emphasis (in the UK at any rate) on the need for more and more scrutiny of government business has perhaps had a hidden agenda – part of the wider drive there has been for several decades to convince people that government activities were inherently inefficient and malevolent. After all, while we were devoting more and more energy to scrutiny, for example, of local government activities, regulations and controls were being lifted from banks and financial agencies.

Bank profits these days – as most people have noticed – are pocketed by members of the 1% but their losses are nationalised. And only in Iceland, it appears, are attempts being made to prosecute a few (including a Prime Minister) who are deemed culpable for the banking crisis.
It was only Shaxon’s book Treasure Islands which made me realise that bank bosses and owners had managed only a decade or so ago to wriggle out of their legal responsibilities – by having their legal status altered to that of "limited liability”. Until then, bank bosses stood to lose everything if their banks went down. No more!
And I noticed yesterday that no less a figure than Nassim Taleb (of Black Swan fame) has suggested that we return to this simple model of accountability for financial insititutions -

Instead of relying on thousands of meandering pages of regulation, we should enforce a basic principle when it comes to financial oversight:
The captain goes down with the ship;
Every captain and every ship.

In other words, nobody should be in a position to have the upside without sharing the downside, particularly when others may be harmed. While this principle seems simple, we have moved away from it in the finance world, particularly when it comes to financial organizations that have been deemed “too big to fail.”

The best risk-management rule was formulated nearly 4,000 years ago. Hammurabi’s code specifies: If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.

Clearly, the Babylonians understood that the builder will always know more about the risks than the client, and can hide fragilities and improve his profitability by cutting corners—in, say, the foundation. The builder can also fool the inspector (or the regulator). The person hiding risk has a large informational advantage over the one looking for it.

Of course, despite the public condemnation of bankers (a word which appropriately rhymes with wankers) there is by no means an intellectual consensus on the precise role which various groups have played in this global crisis.

Robert Skidelsky looks briefly in his book Return of The Master at 6 possible groups to blame (bankers, hedge funds, credit-rating agencies, central bankers, regulators and governments) before turning his fire on economists.

And, in a very-well written 2009 book The Financial Crisis – who is to blame, the ex-Chair of the British Financial Services Agency (Howard Davies) explores 39 different explanations of its possible cause. You can see some overheads and videos from his various presentations here, here and here
A wikipedia entry also gives a useful summary of the various explanations. Those looking for more complex treatment should have a look at this paper which

reviews current explanations of crisis whose differences are classified according to whether the causes are located in structure or agency or in neither as part of a kind of third way explanation.

In this section we argue that these explanations of the crisis (as accident, conspiracy or calculative failure) share common assumptions about how crisis is generated within socio-technical systems amenable to technical, mainly technocratic, fixes.

The second section shifts the problem into a much more political frame, initially by introducing the politics literatures on policy fiascos which are more commonly associated with foreign policy humiliations than with economic crisis. Within this frame, the section focuses on the massive failure of regulation before the crisis and argues that the crisis was then permitted by the inaction of political and technocratic elites whose hubristic detachment was such that they made no serious attempt to control the finance sector.

The third section explains how the process of financial innovation produced a fragile latticework of connections that was inherently ungovernable. A brief conclusion draws out some implications.

 My basic point, however, remains - that we should be responsible for our actions. That is the sysem in which 99% of us work - the systems created in the past few decades have lifted that basic rule from the 1% and encouraged total irresponsibility.

A Deafening Silence

Groupthink has always fascinated me. Even more, its corollary – the failure to ask how it can be avoided in future. The result is that governments and organisations bounce around from one fashionable idea to another. The 2008 global crisis and its aftermath is not only a case-study ("how did our various elites buy such snakeoil?") – but a stark demonstration of the need for social ideas to be subjected to more critical appraisal. Indeed of the need for more contrarians and sceptics – and for a culture which values such a critical approach.
The institutions and professions which are supposed to develop and sustain the critical analysis central to liberal democracy – universities, journalism, opposition political parties – have been found so severely deficient in this respect as to have lost almost all credibility. And with it, our model of democracy!

There may be a debate within (and about) the economics profession prompted by Paul Krugman, Steve Keen and the Real World Economics network - but where is the debate about the conditions in universities, journalism and politics which allowed such a profession (and that of management) to exert so much unchallenged influence and to screw us all so right royally?

A recent book Confronting Managerialism: How the Business Elite and Their Schools Threw Our Lives Out of Balance by Robert R. Locke and J. C. Spender offers some useful comparative, social insights. It contrasts the role of engineer-economists (and their schools) in post-war France with that of managers in America

US engineers principally in schools of industrial administration (MIT, Carnegie Institute of Technology, Georgia Institute of Technology, etc.) propagated the scientific toolkit of operations research. But their interaction with corporate management differed considerably from what took place in France. In 1900 when Frederick Winslow Taylor began the scientific management movement, engineers on the shop floor were deeply involved. But by the second quarter of the 20th century a revolution in corporate governance was well underway. Its historian, Alfred D. Chandler, Jr., most famously in The Visible Hand (1977), describes this rise of new managerial hierarchies in giant corporations whose managerial needs were quite different from those Taylorism induced. Because top corporate management concentrated on money more than product management, it required staff that could deal with financial reporting and marketing, that could oversee money flows through the various corporate divisions -- information that was much more vital to decision making in a multifaceted strategic setting than product knowledge. It required accountants and controllers to design and run the management system; they replaced the engineers previously at the top. At General Motors Alfred P. Sloan installed systems of financial reporting to headquarters “based heavily on analysis of managerial accounting data,” (Rother, 63). Sloan noted that GM was in the business of making money not automobiles. Other multiple division corporations followed suit. In 1929 The Controllers’ institute was founded in the United States because of their increasing managerial importance.

French engineers at the head of industry, preoccupied with saving their country from backwardness, succeeded in their task during what the French call “The Thirty Glorious Years” of postwar modernization (1945-75). American managers succeeded, too, in making lots of money. But there was little in the educational background of most top managers in US industrial corporations that permitted them to work closely with operational research scientists and economists like in the system of French engineering education and industrial leadership. US corporate moneymen lacked the scientific and mathematical knowledge needed to grasp quickly what operations research people and neo-classical economists were talking about..............

Post-war American business school professors and students had abysmal mathematical knowledge Business school professors, students and finance investors did not comprehend mathematics enough to see its limitation as a tool in the modeling of financial markets. When the financial crisis came, surprised finance analysts, Paul Wilmott and Emanuel Derman issued The Financial Modelers Manifesto, which opened with words reminiscent of Karl Marx: “A specter is haunting markets – the specter of illiquidity, frozen credit, and the failure of financial models.” Then followed the admission: “Physics, because of its astonishing success at predicting the future behavior of material objects from their present state, has inspired most financial modeling. Physicists study the world by repeating the same experiments over and over again to discover forces and their almost magical mathematical laws. … It’s a different story with finance and economics, which are concerned with the mental world of monetary value. Financial theory has tried hard to emulate the style and elegance of physics in order to discover its own laws. … The truth is that there are no fundamental laws in finance.”