The 2020 Public Services Trust Blog

“If you want to turn London into a Marxist society, then great…”

At the risk of wading in to an area I know too little about… interesting to read reaction to Adair Turner’s comments this week on the idea of a global tax on financial transactions – known as a Tobin Tax.

This is essentially a tax on currency speculation, and a proposal that some development economists have floated as a means of generating revenue to support economic development in the global south.  In fact, the original purpose seems to have been more focused on dampening market volatility – as Tobin himself put it, throwing “sand in the wheels” of the market.

Obviously the finance industry have opposed this, along with those who argue that such a thing just isn’t feasible (tax avoidance reasons, for one).  But at Avinash Persaud notes in the FT today, times have changed:

“The real question today is not … feasibility; but … desirability. It is hard to argue that anything is not feasible today after governments have engaged in whole-scale bank nationalisation and credit guarantees, pushed budget deficits into double figures, become the buyer of last resort of assets they would not normally touch with a barge pole and threatened to legislate against private sector pay. Where there is a will there is a way.”

So I guess one reason why the idea might fly today is that global regulators are looking much more critically at a ‘swollen’ financial market, and a need to address excessive profit-making in the financial sector.  This is quite a conceptual shift and, as one might imagine, one that is not shared by many bankers (one of whom was responsible for the quote above).

There’s a serious trade off underpinning all of this – between the need to make sure we don’t return to the culture of excess and irresponsibility that brought us through boom, bust and recession; and the need for London to maintain its comparative advantage in an important revenue-generating industry.  Strong vested interests muddy the waters, so Lord Turner will need to navigate a difficult path between morality, social justice, regulatory prescience and macroeconomic stability.  Good luck to him.

Some interesting debates going on over the Compass campaign for a high pay commission.  I’m going to try and set out some of it here:

Arguments For:

• Some people earn an absolute fortune – true
• Some people have repeatedly been rewarded for what most of us would see as failing – true
• The government acted pretty successfully over low pay, establishing consensus over the minimum wage – true
• A better and happier society would be a more equal one (or certainly less unequal) – progressives would probably say true

But say the commission is established, and sets a salary cap.  This might not be a good thing because:

• A high salary cap would be indiscriminately lump together the bankers, with the entrepreneurs, with the footballers, with the pop stars etc etc on the basis of salary – true
• It would therefore penalise some people who work very hard, and deserve their rewards (salary or bonus) – maybe true
• It would ignore nuance in the value or spin-off benefits from these high salaried jobs – true
• It would set an obstacle to high pay, but not an insurmountable one (people would use bonuses, incentives etc to get round that) – definitely true
• It’s effectively a ceiling on aspiration, and thus damaging economically and morally – maybe true, but how many of us will live to find out?
• High pay in the highest performing organisations is a function of a well-working market, so the government shouldn’t tinker with it – hmmmmm- not sure what the economic crisis says about this…

An alternative suggestion – put forward this week by David Aaronovitch Hamish McCrae (and there are other ideas) – is to make earnings transparent, along with establishing a more open and ‘straightforward’ tax system.  This sounds good, though certain footballers have demonstrated that public knowledge of salary details does not necessarily translate into more self awareness…

Anyway, I’m undecided about this one, and eager to hear more arguments for both sides. Anyone want to help?

Benson the carp died on Monday at the age of 25, after having been caught over 60 times in her lifetime. She weighed 29kg, and was quite frankly massive. The owner of her lake declared that “she was an iconic carp”.

The cause of death is currently in dispute, but one theory is that she was killed by “the introduction of foods that are harmful to fish” – i.e., some nuts had been thrown into the lake, and Benson had munched her way to death.

All week I have been struggling to find a way to segue from this tragic tale to a searing critique of UK public policy – the dangers of obesity? The problem of over-fishing? A lack of regulation on the riverbank? Poor policy enforcement mechanisms? Or even the inherent problems caused by a single major player in a limited market?

Never Mind.

On the subject of markets however, Richard Thaler appears in the Financial Times this morning with a nice article on the ‘myth of the rational market’. Economists such as Robert Shiller have been banging this drum for some time now, but Thaler has a nice way with words, and equates the assumption of individual economic rationality as “similar to doing physics without bothering with the messy bits caused by friction.”

The big question is how we can use these insights into market imperfection to shape the way we think about financial regulation in the future. The government seems horrifically tied up with the mess it was forced to take on during the banking crisis, and to date no-one seems quite sure whether it is acceptable that a ‘bonus culture’ is re-emerging, or how the bailed-out institutions should reimburse the taxpayer (if at all).

The Conservatives (in a recent review by David Arculus) have proposed less, but better, regulation – and Osborne a strengthening of the regulatory role of the Bank, alongside a reformed, more consumer-oriented FSA.

I am hardly the expert in this area. But I do think that leaving the efficient market hypothesis behind should be the trigger not just for a re-think of our regulatory structures, but also for a fundamental re-evaluation of how we view public policy (and indeed public services) in general. For example, the assumption of rational decision-making lies behind much of the choice agenda advanced across our parties, yet we are not there yet in terms of making sure that choice (which can be exercised so variably across different people and places) really equals empowerment. There are no bigger fish to fry – and that includes Benson.

Obama’s healthcare plans are enduring a slow and painful birth. The President himself has claimed that parties are in ‘broad agreement’ over his proposal to inject a public player into the US healthcare insurance market, but congressional committees are apparently still debating how to structure and fund the scheme.

We have written on this blog before about the potential value of a public sector player in a mixed market – and in this case the government option proposed by Obama has potential to pull down costs for the consumer (see this excellent New Yorker article for info), and set a bar in terms of quality and access. As Paul Krugman spells out today, a wholly private market has the potential to skew incentives away from user interests:

“The key thing you need to know about health care is that it depends crucially on insurance. You don’t know when or whether you’ll need treatment — but if you do, treatment can be extremely expensive, well beyond what most people can pay out of pocket. Triple coronary bypasses, not routine doctor’s visits, are where the real money is, so insurance is essential.

…Yet private markets for health insurance, left to their own devices, work very badly: insurers deny as many claims as possible, and they also try to avoid covering people who are likely to need care.”

It is easy to see why those with a vested interest have spoken out against the scheme, but some on the American right are also arguing from an ideological perspective – that a free (or rather unregulated) market is preferable, and it is actually Medicare and Medicaid that have contributed most to escalating costs.

This is fair enough, but arguing for less regulation in the aftermath of the banking crisis seems a bit foolish. What Obama has developed is a plan that is fundamentally market-friendly, and there is little evidence that a truly free market for healthcare would work anyway. As Krugman argues:

“To the extent we have a working health care system at all right now it’s only because the government covers the elderly, while a combination of regulation and tax subsidies makes it possible for many, but not all, nonelderly Americans to get decent private coverage.”

Policymakers in this country will be eyeing the debate carefully, and especially because real limits on public spending may ultimately be the catalyst for more diverse means of providing public services. Despite being played out on fundamentally different terrain, the US healthcare debate shows that getting the right mix of providers and incentives – and thus being careful about market design and regulation – will be key skills for any future government.

“We live in a world awash with knowledge. ‘The challenge we have now is to shape how we navigate that information in meaningful ways,’ …The people who truly figure that out…are going to be the ones to run the world.” Perhaps they already are.”

Sounds like a film trailer… but is in fact a new article from Seed Magazine on ‘the new interface of government’ – and an opportune follow-up to my comment from last week on the need to think more carefully about choice architecture in public health.

The article, by Nancy Scola, describes an osmosis of behavioural economics from the pages of bestselling books, to the policymaking arena in the US. This is exemplified by Nudge author Cass Sunstein’s appointment to head the Office of Information and Regulatory Affairs (OIRA) – with a clear mandate to ‘clarify the role of behavioural science in formulating regulatory policies’.

Most interesting is how Scola expects a backlash against behavioural approaches can be prevented – through greater government transparency. In this sense, access to more and better information acts a counterbalance to choice architecture – but the whole behavioural premise remains that we may well use this information in sub-optimal ways.  This is essentially the same conundrum that I mused on last week.