The Euro does not need a federal superstate to prosper

The Euro crisis is in one of its quiet phases. But few are foolish enough to think that its future is now secure. It is often said that the currency is destined to fail because of a fundamental economic law which means that you cannot operate a successful currency without the full authority and resources of a state behind it. The Euro needs to the apparatus of a federal superstate to survive, it is said. One Tory MP even suggested that the Euro’s promoters were committing fraud to suggest otherwise. But, for all that many in Brussels want it, establishing such a superstate is not politically feasible. And yet it is possible to see emerging the institutional architecture that will allow the Euro to survive and prosper without it. It’s a hard road, but there are enough benefits for the currency’s members to persist with it.

There are four key elements to the architecture. The first is an obvious one: a powerful European Central Bank (ECB), able to do what it takes to ride out the various crises that financial markets will throw at the system. The current ECB has proved up to the task, albeit by pushing at the boundaries of its formal powers, for example by buying the debt of member governments on the secondary market. Confidence that it can handle future crises is growing, adding to the overall stability of the system. And yet this power has its limits; it cannot transfer taxpayer funds from one country to another (referred to as “fiscal transfers” by economists), in the way a federal government could. The Euro has to find a way of existing without the sort of massive fiscal transfers that you see in the United States, for example.

In its place is the second element: provisions for states to default on their debts. This has been resisted tooth and nail by Euro federalists, but at long last it has been implemented for Greece. Alongside this, a crisis infrastructure is emerging, including crisis funds to support governments that are in the process of restructuring their obligations. This whole process needs to go further: publicly held government debt, e.g. that bought by the ECB, needs to be included, for example. Greece will surely need another restructure. But we are seeing the different nations’ bond prices reflecting the risk of default, and this imposes a discipline on government finances. And no government will want to follow the humiliating path of Greece into default, if they can help it.

There remains the problem of managing the banking system, which is very much run along national lines. While Greece got into trouble because of a profligate government, Ireland, Spain and Cyprus were brought down by banking crises. At first the response to a banking crisis was for governments to underwrite all banks’ creditors in order to restore confidence. Many applauded the Irish government when they did this early in the crisis; but it is a terrible idea, transferring liabilities from various people who should have known better to taxpayers who could ill afford it. Therefore the third element of the new architecture is to force bank creditors to pay, or at least contribute to, bailing out bust banks, referred to as “bailing in”. This solution was put in place for Cyprus, and hopefully will be the pattern in future. Of course it remains possible for financially strong governments, like Germany’s, to stand behind their own banks – but this should be discouraged. It is essential for discipline to be brought back into banking, and the system whereby bankers keep the profits and pass losses on to taxpayers has to be terminated.

But this approach is undeniably destabilising; it adds to the risk of bank runs. The obvious solution to this is to establish a Europe wide deposit insurance scheme, just as America has its federal scheme. Initially European governments seemed to favour this, but as they grew to understand its full implications, possible taxpayer transfers between states and increased central regulation, they have backed off. This has left us with the fourth and final element of the new architecture: emergency capital controls. This has been implemented for Cyprus, where depositors at Cyprus banks are suffering severe limits to their ability to move money out. It is an ugly process, and represents a big step bank from the integrated ideal of the Euro. The third and fourth elements in particular mean that a Euro held in a German bank is worth more than one held in a Portuguese one, say. But this is better than the alternatives, which attempt to wish financial risks away into an anonymous federal centre.

I believe that these four elements can evolve into a system that will give the Euro long lasting stability, and a better distribution of risk than a federal system would. We must remember that systems of human relations are only in a small part dependent of formal laws and powers, and much more based on expectations of how people should and will behave. This is how the management of the Euro is evolving. In the early days those expectations were wholly unrealistic, and ultimately required some kind of federal system to underwrite them. Now that we know this cannot be, new expectations are evolving. This is a bit like the way the British constitution and Common Law develops.

But is it worth it? Is it a loveless marriage between southern economies locked into permanent austerity, and more dynamic northern ones which are constantly being dragged down by their neighbours? (And France which manages to be on both sides of this equation at once!) If so the enterprise will lose political support and die anyway.

This question deserves a post all to itself, but I believe that all this pain has benefits to both sides. For the southern economies, joining the Euro was all about converging with their rich northern neighbours and their higher standard of living. Unfortunately they at first thought this would be easy. Lower interest rates and hot money from the north created a short term boom, but could not do the trick. Endless tax transfers (like between north and south Italy), are not on offer, and probably wouldn’t work either. In order to raise living standards the southern economies will have to undertake a painful series of reforms, rather in the way Britain did in the 1980s, Sweden in the 1990s, and, to a lesser extent, Germany in the 2000s. The process is starting, and the new disciplines of the Euro zone help this.

And for the northern economies of Germany, the Netherlands and Finland? Being in the Euro gives them a more stable economic environment, at a time when the global economy has been destabilised by the rising of China and other emerging markets. With a lower exchange rate than otherwise they have been able to preserves their exporting industries and maintain a degree of social stability. You only have to look at Britain to see what might have happened otherwise. There a short-term boom and appreciating exchange rate led to a flooding in of cheap imports and a hollowing out of export industries. Living standards grew for a while, but it could not last. The country is still struggling to escape the bust of 2008/09, with exports remaining weak.

The first decade and a half of the Euro has not been a happy experience, taken as a whole. But these are difficult times for developed world economies. In these circumstances the Euro remains a good idea, and indeed eastern European countries are still queuing to join. In the rough, interconnected world that is the modern economy, living with a freely floating currency is much harder than many would have you believe.


The GDP obsession

Today initial estimates of Britain’s quarterly GDP figures have been published. It has become a very silly circus. The BBC Today programme was giving it a lot air time this morning, in spite of not knowing what the crucial number was. Instead they made do with economists’ guesses. This is what they usually do, in spite of the fact that the guesses are often very wrong – though this time they were spot on. A much more informative discussion will be possible once the figures are released, and experts have had a chance to root around the detail. But by then it won’t be news, and the BBC won’t cover it. Meanwhile some even more meaningless political posturing is taking place. I just wish economists, journalists and politicians would show a bit of humility on the topic. As a measure GDP is not all it is cracked up to be.

The first problem is that, although it is quite a simple concept in theory, it is very complex in practice, making the implications of movements difficult to understand. In the UK economists have been puzzling over the fact that the current economic downturn (often trumpeted as being one of the worst in history) has not affected jobs nearly as much as previous downturns. This is often articulated as a “productivity gap”, since if income, and hence production,  is falling faster than the number of jobs, productivity (production divided by jobs) must be falling. The Institute of Chartered Accountants’ Economia magazine ran a vey interesting article on this (Measure for Measure), which simply asked a whole series of prominent economists what they thought was going on. It was very revealing. Quite a few took a very superficial view, without probing behind the numbers much, speculating a bit, and then launching into some hobby horse or other, such as the need to stimulate aggregate demand, or let companies go bust more readily. But a number had clearly taken some trouble to get behind the numbers to understand what was going on. And when they did this, they picked up a very complicated picture, and they started to worry that the numbers were at all meaningful or accurate. Several speculated that the official figures were understating the level of GDP because they were not measuring some aspect of the economy properly, usually associated with services and new technology. They further speculated that, though GDP was artificially low now, this would be corrected in due course, when artificially high growth numbers would come through.

Another point that came through was that a large part of the “gap” arose from the fact that North Sea oil and financial services had shrunk. These sectors gave rise to a lot of product (albeit largely fictitious in the case of financial services) but not many jobs. Which leads me to a second problem with GDP: it doesn’t measure economic wellbeing very well. If these two sectors shrank, and it mainly affected a small number of very wealthy people, surely we can take its loss with a bit of a shrug? A big problem with the growth before the downturn in 2007 was that it benefited so few people (especially a problem in the US). Median real incomes and unemployment levels tell you a lot more. (There is an interesting article in todays FT by Richard Lambert on this). And, of course, there is the whole issue of wider wellbeing, which depends on the quality of personal relationships, the environment, and so on.

So, where does that leave any assessment of the current state of the British economy? The first point is that, although GDP numbers may not be as bad as we thought, economic wellbeing is not good for large parts of the population. Pay is not keeping up with prices. It is particularly hard for those with public sector jobs or dependent on benefits. A little bit of confidence is returning, and this will be good if, and only if, it leads businesses to invest more. If ordinary people simply decide to save less, and spend more, we will get a short-term lift to economic wellbeing, but it will not be sustainable.

Well, that is my personal view. Optimists, like the Observer commentator William Keegan, who also writes an article in Economia, think that there is a lot of spare capacity in the economy (people who are underemployed, for example, and working part time) so that any lift in demand will be self-sustaining, and that it doesn’t matter where it comes from – his preferred choice being from government, by cutting VAT and slowing down government cuts. Once this capacity is being used, we will be in a better position to reduce the size of government, if that is what is needed to make the economy sustainable in the long term. You hear a lot of this sort of view from professional economists, even very distinguished ones. To such an extent, indeed, that austerity policies are described as “discredited” by many, on the grounds that they have not delivered the steady GDP growth that these economists say is feasible.

Supporters of austerity are gloomier about the longer term economic outlook. The spare capacity highlighted by Mr Keegan and his friends is illusory: it is mainly in the wrong places. The economy before the crisis was unsustainable: too dependent on borrowing and a trade deficit. Furthermore, there are huge headwinds, in particular from an aging population and a workforce that will shrink (though Britain is not as badly off in this respect as many other economies, thanks in large part to a more liberal view of immigration, which politicians now regret). The economy has to be rebalanced and made more efficient: that means destroying a lot of the less efficient jobs, and creating new ones elsewhere. The wrong sort of economic growth will slow this down and simply create a bigger crisis later. There is no alternative to a slow and painful path of adjustment.

It is an old argument, with resonances of that between Keynes and the Treasury in the 1930s. Keynes is usually held to have been right then: the main problem was lack of demand, and it just needed to be kicked into place by government action. Many economists use this as evidence that we should repeat that prescription this time. But the world was a very different place then; there is no equivalent of the incipient manufacturing revolution to sustain growth now.

And this seems to be the biggest cost to an obsession with GDP. It gives economists the illusion that the issues are much the same, regardless of what is happening in the real economy. It is only when you try to get behind the numbers and ask searching questions, that you can start to understand the real policy options. Today’s figures will tell us very little.


Is there a case for complementary medicine on the NHS?

Last weekend there was outrage from The Daily Mail that Prince Charles had being lobbying government ministers to give more space for complementary medicine on the NHS. This provoked a piece on the BBC Today programme (at 0833) on Saturday morning. In this UCL’s Professor David Colquhoun made short work of Tory MP David Tredinnick, who was attempting to defend homeopathy, the target of choice of those wanting to drive complementary medicine to the lunatic fringe. Indeed, very few advocates of complementary techniques do a decent job of defending them in public forums, quickly resorting to dodgy mumbo-jumbo and dubious scientific studies. And yet there is a case to be made.

I find it a bit awkward to make this case myself. I have not used such therapies, and nor am I likely to. I am simply in too deep with conventional scientific scepticism to give any credence to their supporting patter – “energy fields”, “life forces”, or homeopathy’s “like cures like”. And without that, I suspect the techniques lose a lot of their impact. However, people I like and respect do use selected complementary techniques, and they have value.

The best way to start a defence of complementary medicine is attack. Conventional, evidence-based medicine has its own weaknesses. The technique depends on breaking health issues down into bite-sized problems, and then testing therapies to treat them using statistical tests against a placebo. Once a therapy passes this test, it then gets rolled out to anybody suffering from the condition concerned. This approach benefits from scientific rigour, and has steadily improved the effectiveness of conventional medicine over the generations. More recently the focus of the technique has been more on finding what works than necessarily why. This makes it less vulnerable to dismissing therapies that do not work in theory (as happened in some spectacular early medical failures in the 19th century over the importance of hygiene and clean water). But it has certain blind spots designed into it.

The first problem concerns placebos. The reason why this is the null hypothesis against which therapies are tested is that placebos have a measurable beneficial effect in many cases. The main scientific sceptical explanation for any benefits of complementary therapies is that it is a placebo effect. A supporter might go further: complementary therapists understand how placebos work better than conventional therapists: it isn’t just a placebo, it’s a top class placebo. But you can’t test a placebo against a placebo. Back in the 1980s a practicing GP told me how one of his favoured techniques was to prescribe harmless sugar pills to his patients, and he claimed great benefits from doing so. Surely if that sort of thing is allowed on the NHS, why can’t other placebo therapies? And the answer isn’t to ban all placebos – though doubtless that is the approach taken by conventional medicine advocates; something tells me that my GP wouldn’t be allowed to prescribe his sugar pills nowadays.

The second problem is the fragmentary approach of conventional medicine. Fragmentation has been elevated to a positive religion in the NHS. You can’t experience the service without being handed to several different professionals of different shapes and sizes, each with their carefully rationalised boundaries. Each handoff creates risks, and stories of catastrophic breakdowns in hospital treatments abound – patients left for hours on trolleys, starving to death, or forced to drink water from plant pots – and even more cases where post hospital after care breaks down. One of the few common themes across complementary disciplines is that they are holistic. Indeed the very idea of holistic treatments (now very much part of modern management jargon) was originally derived from complementary medicine, or that is where I heard it first, anyway. You see a single therapist, who gathers as much information about you and your condition as she can, integrates it, and then moves on to treatment. The diagnosis is likely to be a large part of the cure in its own right. And yet scientific testing of complementary therapies is liable to start only after the diagnosis has ended. All this proves is that if you go out to a shop and buy homeopathic remedy, you are on to a hiding to nothing. That does not prove that the complete homeopathic therapeutic process is useless.

There is a third problem. Evidence has to be gathered by using large numbers of people. In this process there is very limited opportunity to distinguish between the different needs of individuals. As a result the evidence tends to show not that the therapy works for everybody, or even most people, but that on average it is better than the placebo. The result is that lots of people are prescribed treatments that are, for them as individuals, useless. How many people do you know who complain of medication that gives unpleasant side-effects but does not seem to be doing them any good? The scientific evidence says they could be right, but is rather helpless after that. Complementary therapies are much less likely to have side effects, though they don’t have the proven benefits either. I do wonder whether for some conditions the overall cost-benefit balance of complementary therapies against conventional ones is constructed fairly.

And finally we need to address the question that few advocates of scientific method will admit to. That scientific rigour has its costs. There are areas of potential knowledge into which it is incapable of reaching. The higher your standard of rigour, the less that is capable of being revealed. The method is too blunt an instrument to deal with many types of issue. It can’t handle too many variables at a time, especially if they are interdependent; and any ideas that mess with constancy of the laws of nature are ruled out a priori. It struggles to find ways of testing mind over matter propositions, which often play a part in complementary medicine’s thinking. How many people do you know who feel unwell, go to doctor, who commissions tests that just don’t find anything? You don’t have to take on mystical ideas to see that the bluntness of conventional diagnosis leaves huge areas of illness as a mystery. And when this happens conventional medicine is worse than useless. It creates stress and frustration, and doctors start to disbelieve the patient, making the problem worse, not better. Complementary techniques are much better at handling patients suffering from these sorts of problems.

So what are my conclusions? A little more humility on the part of the advocates of conventional medicine is warranted. They don’t know everything; they are not very good of handling conditions that are difficult to diagnose; they are too sanguine about the collateral damage arising from evidence based treatments on those they do not help; and they fail to see how the fragmentary way they handle problems is bad for patient health. With this humility they might understand that once they have eliminated the nice, well-defined illnesses in their comfort zone – cancer, heart disease, strokes, bacterial infections et al – being open to patients who want complementary treatments is often the best way forward. And I haven’t even mentioned the corrupting influence of big pharma.



Where Keynes and Beveridge turned out to be wrong

The Spring 2013 edition of the Journal of Liberal Democrat History has a fascinating article on the role of Maynard Keynes and William Beveridge in developing Liberal Party policy, culminating in the party’s manifesto for the seminal election of 1945. These men took the party’s thinking decisively into what is now called “social liberalism”. Their vision was inspiring and coherent; much of it is now simply accepted wisdom. But I detect a tendency to treat these men’s ideas as holy writ. But nobody can be right on everything, and the world was changing fast. It is interesting to pick out the places where they got it wrong. This will perhaps help us to reflect on the challenges we face today.

Beveridge (in his report to the wartime coalition government) memorably set out the challenges to society presented by the “five giants” of Want, Disease, Ignorance, Idleness and Squalor. The answer was to extend what we now call the Welfare State, establish the National Health Service, nationalise a series of critical industries (railways, coal and power in particular) and to adopt a system of macroeconomic demand management, which we know as “Keynesianism”. These policies were largely adopted by the subsequent Labour government, albeit with more enthusiasm for their collectivist aspects, and retained by the Conservatives that followed them. The success of their ideas on the wider political stage contrasts with the Liberals’ disastrous performance in the 1945, when Beveridge lost his seat, and the Liberal Party faced extinction – in a crisis that makes its successor party’s current woes look like a picnic. Which only goes to show that winning the battle of ideas and having coherent policies is on a small part of how a political party succeeds.

But what has gone wrong? The Welfare State grew to be a monster of a size that Beveridge would have been horrified at, though it made much headway in combating Want and Squalor. The contributory principle, central to Beveridge’s vision, has largely broken down, with entitlement being based on need rather than past contribution. It has never broken free from the dependency problem, where people don’t have enough incentive to sort out their own problems – an issue that Beveridge foresaw. It strikes me how Beveridge’s system was overwhelmed by the breakdown of the traditional family, and of traditional working class communities. These were inevitable consequences of economic progress, as well as the march of liberal social values. But needs that used to be met within the community were now thrown at the state’s door, and, perhaps, the breakdown of discipline in some communities (about starting families in particular) added to the problem. Beveridge’s carefully worked out system of benefits and entitlements was not equal to the task.

Nationalisation has proved another disappointment. Keynes was convinced that these critical industries would not be managed for society’s overall benefit if they continued in private ownership. He also wanted to incorporate them into his system of macroeconomic management. But the state proved inept at setting strategy, and was often a prisoner of the short term interests of managers and workers. Strategic decisions tended to be made badly, and investment declined. They were all subsequently privatised and, except arguably the railways, have performed much better since. Regulation has proved a much more effective answer than state management.

Keynesian economic management has proved highly controversial, after two major economic crises, in the 1970s and now. But it is clear that widespread adoption of Keynesianism has moderated the economic cycle, and this has been of huge benefit. We have to accept though that it cannot deliver full employment sustainably unless the overall economy is in the right shape. In the 1970s it was too dependent on cheap oil. Now it is too dependent on finance and government jobs and funding.

But it is interesting to read that in 1945 Keynes thought that the main means of managing the business cycle was investment. He understood that private sector investment tended to follow the cycle (i.e. increase in the good times, and fall back in the bad – just what we are currently experiencing), and so make it worse. Government investment should counterbalance this – and he wanted to nationalise key industries so that the scope of government investment increased. This just hasn’t happened. Instead the expansion of the welfare state has created a counter-cyclical dynamic (called “automatic stabilisers” by economists) that has proved perfectly sufficient until now, with a few tweaks here and there.

But since the size of the welfare state and government generally is now part of the problem, using it to manage the cycle has hit its limit without the job done. A lot of economists (like Martin Wolf of the FT) now urge that we go back to Keynes’s original idea and increase the level of government investment. But I suspect that the reason why governments did not follow Keynes’s original system, apart from the growth of automatic stabilisers, is that this is much more difficult in practice than in theory. Examples of where it has been tried, such as Japan in the 1990s, and China in the present crisis, are not particularly encouraging. Vested interested and construction businesses close to the government have reaped benefit, leading to wasted investment and a corrupted political system. As a developing country China’s investment needs are huge, so they may still end up ahead, but the case for developed economies is much weaker.

What does this say to us now? The five giants are still with us, although they may not loom as large as they did. But I think the era of grand political projects established by clever men from on high has run its course. What is needed is a reshaping of government to make it more local, participative and people centred. But that is a very long journey.


The NHS crisis: while politicians look the other way, what should we do?

The NHS is deep in a long term crisis. Last Thursday NHS England published a “call to action” outlining the emerging crisis. This attracted a day or so of news coverage, focusing mainly on a £30 billion funding gap. But there was no political debate, and the story quickly died. It was replaced yesterday by a story on the NHS’s abuse of the “Liverpool Care Pathway” for end of life care, and today by an investigation on struggling hospitals. Both stories are backwash form the continuing struggle of NHS management and staff with financial pressures. But where are the politicians? Labour are waiting to pounce on stories of struggling accident & emergency services to promote a general air of government incompetence on the NHS; the government try to play things down, blaming any problems on long standing issues not tackled by the previous government. A debate about the long-term options for the service it is not. So what should they be talking about?

The dimensions of the crisis are quite clear. Britain’s NHS is almost entirely funded from tax. But after the economic crisis of 2007-09 the tax base has shrunk. Furthermore a number of trends, not least the increasing proportion of older people, point to a slowing down of the overall rate of growth in the economy and hence taxes. And yet some of those same trends will create growing demand on the NHS. The government has promised to protect the NHS budget in real terms, much to the chagrin of right wing critics, but this will not solve the problem of rising demand. The NHS England report settled on a headline gap figure of £30 billion by 2021  – after toying with £60 billion by 2025, the number used by Health Service Journal (HSJ) in its preview.

The strategy is to buy time through efficiency savings. As a large, monolithic organisation, with weak accountability, inefficiency is rife. NHS top management has been ratcheting up pressure on the component services by progressively squeezing the available funding, , in a process known as “the Nicholson challenge” after NHS England’s chief executive, Sir David Nicholson. The NHS England report claims that this is on track to deliver its target of £20 billion efficiency savings by 2015, but there is plenty of reason to doubt its efficacy, as the number of crises with a financial root seems to grow.

But the strategic point is that efficiency is not a long term answer to the pressures. The NHS paper calls for fresh thinking, but seems to rule out most radical ideas, like charging for, or heavily restricting services, although in doing so it is only holding to the current political near-consensus (the far right does not go along with this, but everybody else does). Let’s take a step back and look at this.

The first point to make is that increased demand for health services in the economy will be met by increased supply. Occasionally you hear people suggesting that the economy can’t bear an increase. But there is no fundamental economic reason why the proportion of the economy taken up by health care cannot increase substantially. It does not depend overly on imports, and there are plenty of things the public can give up to make way (own fewer or cheaper cars or clothes, go out less, and so on and on). Healthcare offers the prospect of a longer life and less pain; it is a consumer proposition, as I have pointed out in an earlier blog, to die for. If there is demand, there will be supply. The only question is how that supply will be met.

There are broadly four ways the NHS will meet this crisis:

  1. Taxes will be progressively increased so that taxpayer funded services maintain their current profile overall. This is clearly what is favoured by most NHS insiders, and left wing policy types who like the paternalist structure of the current NHS.
  2. It will stratify into a class-based service, where only poorer people will use it, while richer people go private. This will happen because the NHS service will be considered dangerous, shoddy, and accessible only after an intolerable wait. This is largely what has happened to NHS dentistry, and it is what will happen if the NHS is allowed to muddle on with its current level of funding (or if funding is cut).
  3. The NHS will concentrate on excellence in a smaller core of services, while letting people go private for others. However healthcare has few neat boundaries, and it is difficult to see how this would work in practice.
  4. The NHS will start charging for more services, and accepting co-payments for cosmetic and other add-ons. This may be done with increased collaboration with the private sector, rather like NHS optometric services. This is the direction of travel favoured by the right, apart from those who secretly favour option 2.

These solutions are not mutually exclusive, and indeed option 3 is probably only viable in conjunction with 4.

The first strategic question is how far new taxpayer funding will be forthcoming. Many seem to assume that it will be. John Appleby, economist at the health think tank the King’s Fund,  assumes this will be so: the economy will be growing again by 2025, and public demand for increases to real spending will return. I’m not so sure: the headwinds on the economy are severe, and I don’t see any return to the growth rates we have previously seen for more than a two or three years in a row. Meanwhile demand from other areas of public expenditure has been suppressed and could bounce back. And I think public attitudes to higher taxes have changed, after the general squeeze that has been put on living standards. Some left-wingers assume there is large pot of money available from taxing rich individuals and businesses. This is open to doubt, however, and it has proved a volatile source of tax revenue both Britain in the past, and to other economies, like California’s, whose public funding depends heavily on taxes on the rich.

Besides, I do not think that taxpayer funding is particularly efficient. It means that resources tend to be allocated top down according to political objectives, and not where it is really needed. And difficult problems tend to be left unsolved rather than confronted. My guess is that we will end up with option 4, after having given options 2 and 3 a try. It will continue to be a very bruising time for the NHS.

For those that want to avoid this, I think the most promising way forward is to bring health services into a complete rethink of public services to make them more integrated with each other, and centred on people rather than symptoms. And in case you think that sounds like motherhood and apple pie, its practical consequence means dismantling current power structures, and pushing towards democratically accountable local control. That will not be popular amongst NHS professionals, and we know how much noise they can make. Some on the left are starting to think this way, and while I don’t trust the left, with their penchant for paternalism, this may be the basis for a useful political coalition. One interesting aspect of this is that the other services (personal care, housing) with which the NHS would be integrated are not “free at the point of use”, considered so sacred in the NHS, which may allow the whole question of charging and co-payments to be fudged in a constructive way. Here’s hoping that something can be achieved along these lines.


The pensions blind spot

“All in it together? MPs WILL get a payrise worth up to 12%” thunders this morning’s Independent newspaper. While I’m not a big fan of our MPs, this headline has persuaded me that they deserve the payrise that apparently will be proposed by the independent body given the task of setting their pay. If even a supposedly more mature and considered newspaper like the Independent indulges in this kind of vindictive, misleading headlining, then something is clearly wrong.

This headline is revealing about how information is communicated in our society. First of all, no formal announcement has actually been made. The headline is based on a leak, which only reveals a partial picture. And yet by the time the full news is released, it will be old news. Speed trumps accuracy in the world of news media. The 12% figure is also misleading. It compares the proposed salary to be implemented in two years’ time to the current one. 9% is a more accurate number, and indeed this is what other organisations are reporting. Such considerations do not weigh heavily with headline writers.

But there is a further distortion. Apparently the proposal will be to reduce MPs’ pension entitlements at the same time – though the details don’t seem to have been leaked. So the total package will not be as generous as the headline writers make it sound. But here the journalists seem to be at one with the general public: treating pension entitlements as being of little real value, and failing to realise the implications of changes to it. Over the past couple of decades companies have been squeezing their employees’ pension plans hard, so that overall pension provision is now pretty meagre, when it used to be generous. This has barely reached the popular consciousness. Only public sector trade unionists have grasped that this is an fact a steady reduction in what people are paid.

There are in fact sound economic reasons for changes to pension arrangements. The proportion of pensioners to the working population is rising, and this makes pensions less affordable. Unfortunately high rates of pension saving don’t help change this dynamic much: this is one of those things that may work for individuals, but not for society as a whole. Pensions have to become less generous overall, and the collapse of private sector occupational pension plans is just part of that process.

But there is a big problem at the heart of it. Employers are in headlong retreat from pension provision, but individuals are not stepping forward into the breach to save more into personal pension plans. Even where they do, and they are being “nudged” into doing so by opt-out pension schemes, the amount being saved will go nowhere near providing for the scale of pensions the previous generation had been entitled to. This is sometimes offered as an example of irrational economic behaviour. But it isn’t. The transaction costs of saving weigh heavily on all but the very rich, and investment returns are dismal – even without the current regime of very low interest rates. Personal saving is a very inefficient way of delivering a pension for the majority.

It is better if the state steps in. A state-managed pay as you go scheme has comparatively low transaction costs, as well as reducing the risk to individual savers. Reforming the state pension is one of the more impressive achievements of the current Coalition government. It has been led by Lib Dem pensions minister Steve Webb, but it has not been politically contentious – the Conservatives deserve credit for letting him get on with the job – and Labour have not got in the way. Previous governments have changed their pensions ministers every year or so before any reform effort could get going. The focus has been on establishing a good basic pension to which everybody is entitled, which people can then top up through personal savings. Previous state schemes have tried to concentrate entitlement on the most needy, destroying the incentive to save, or to create complex entitlements based on income and contributions, which few understand because of the need not avoid double counting with subsidised private savings.

But the cost of this pension commitment will grow, and this is causing many sage heads to worry. Personally, I think we have to grin and bear it. If it looks as if it will run ahead of the ability to raise taxes, then we have to push the age entitlement back. But this is one of the critical strategic issues that our political leaders must grasp as our demography changes. Paying for the NHS is another.

These are weighty and important matters, which deserve much more attention than they get. They are much more important in the scheme of things than how much our MPs are paid. The country needs more MPs like Steve Webb, with both the intellectual and political skills to push forward difficult reforms like the one on pensions. We have a long way to go on that score.