Let’s learn the right lessons from the Winterbourne View scandal

On Monday the government published its serious case review into the Winterbourne View abuse scandal.  Winterbourne View was a specialist private sector hospital for learning disabled and autistic people – people who were sectioned and could not fend for themselves – “vulnerable” in the jargon.  The BBC Panorama programme filmed some spectacular cases of staff abusing patients.  A closer look didn’t make things look any better – abuse had being going on for years, and the hospital was not remotely doing the job it was being paid to do.  This is laid bare in the report.  All sorts of people fell down on the job – the hospital’s owners, police and other services, and the Care Quality Commission.  This should not distract us from the central lesson which the report makes clear – the commissioning of these services was seriously deficient.

The report was published on a day when the news was dominated by the Olympics and by the Coalition spat over Lords reform.  Perhaps it is a pity that this meant it did not get the public attention it deserved.  But it may be just as well.  In the hands of the usual top news journalists and editors, the wrong lessons would have been drawn.  Instead the coverage has been a bit more balanced and considered – I have even been able to pick up mature and balanced coverage from BBC’s Radio 4.  Even so, I’m not sure if the right messages are getting through to the people that matter.    There are some big red herrings.

The first red herring is the use of private sector providers to deliver care.  The report and headlines made much of the hospital owner’s pursuit of profit as being the reason they failed to provide a proper service, in spite of being paid quite well.  But this is nothing new – and there are plenty of shining examaples of good practice in the private sector.  The problem was that they were not being held to account.  Terrible things happen in public sector organisations too, if nobody is asking what they are getting for their money.

Which leads to a second red herring.  An early “lesson” was that the Care Quality Commisssion’s inspection regime was too light touch, and that inspections by this national body should be more frequent and more thorough.  But we mustn’t rely on these big inspectorates, who often fail to understand local nuances and issues, and can end up being excessively confrontational.  At best they can guarantee a certain level of mediocrity.

And thirdly there is the role of family.  The patients at Winterbourne were often from a long way away, which meant that it was much more difficult for the family to stay in touch.  This was condemned as being part of the problem.  This is right up to a point.  Public service commissioners are far too casual about sending people a long way from where they have their roots.  I am uncomfortable with the NHS reformers’ constant refrain of creating fewer but bigger specialist facilties for everything – though they always point to statistical evidence.  But while family can and (usually) should be an important part of somebody’s care, the system should not depend on them.

No, the real issue is with the commissioners of public services, within the NHS and local authorities.  They should take more responsibility for the services they commission and devote more time to holding them to account.  At this point it is very easy to be swept away by a debate over structures, procedures and responsibilities, seeing this as simply an exercise in public procurement, as one might outsource street cleaning, for example.  But again, that is not the important point.

At the heart of the commissioning of social and health services should be the client or patient.  Their individual requirements should be assessed, treatment individually tailored and their progress followed with human interest.  The patients of Winterbourne were sent there by commissioners who thought their job was done by just placing them there.  What was supposed to assessment, treatment and rehabilitation, a process implying progress towards a goal, turned into warehousing.  That should be almost as outrageous to us as the abuse itself.  If the commissioners had been following their patients, they would have picked up their lack of progress, and either worked with the hospital to improve it, or simply taken their patients elsewhere.

This isn’t rocket science.  My wife is a care manager at a local authority, dealing with drug rehabs.  Her authority takes an interest in their clients as individuals, and this invovles meeting clients at the rehab facility from time to time to check on progress…and cutting out facilities that aren’t up to standard.  The problem is that some public sector managers take a more industrial view of things, trying to drive efficiencies by doing things in bulk and treating problems and performance indicators rather than people.  This can give rise to some short term cost savings, but it quickly becomes self-defeating, as processes that fail to take account of people as individuals fail to solve their problems, and you end up with warehousing on a minimum cost basis.  But it is not value for money you keep adding to the workload.

Unfortunately in this aspect of public services, not much much can be learnt from the private sector.  Private sector techniques (lean management, business process engineering) can lead to a more people-centred approach if applied properly – but ultimately the private sector answer to difficult clients is either to pass them on to somebody else, or turn them into dependents and warehouse them for a fee.  Warehousing problems rather than solving them can be a lucrative business, as the owners of Winterbourne, Castlebeck Ltd, clearly saw.

I hope that the government’s ideas for GP-led health commissioning, and integration between local authority and NHS care, will lead the commissioning process to the right place, as they should in theory.  But the bureaucratic obstacles are huge.  It would help to have a clearer vision from on high.

 

Lords reform: the real loser is David Cameron’s project

Today Nick Clegg, Deputy Prime Minister and leader of the Liberal Democrats, announced that Britain’s Coalition government would end its attempt to make the country’s upper house, The House of Lords, mostly elected.  It is a bitter blow for Lib Dems, but not unexpected.  What does this say about the state of British politics?

The problem was that the plans did not command sufficient support on the Conservative benches.  There were 90 or so rebels at an earlier vote, and this is enough to kill the bill if Labour oppose it.  Labour had supported the reforms in principle, but said that, as a constitutional measure, it needed more time for debate in the Commons, so opposed the critical timetable motion.  This argument is entirely specious.  Debate on the floor of the Commons is an exercise in farce; it has to be time-limited or else it degenerates into filibuster.  The cynicism of Labour’s position is made plain by the fact that they would not be drawn on the amount of time they thought the bill actually needed.  But there was in any case a more substantive argument from the Labour side: in their manifesto they had said that reform should be made subject to a referendum, which the government side did not want to do.  We can argue about the logic of Labour’s position on the referendum, but a manifesto is a manifesto.

So Mr Clegg was quite right to abandon his attempt at reform.  There was very little credit in the wider world to be had for a fight to the death on this issue.  While the public is broadly sympathetic to the idea, they don’t care very much about it.  Mos readily agree to the trump card argument of British constitutional conservatives: that there are more important things to be doing.

Just about the only way of getting the reform through would have been to accept a referendum.  Although the current polls are favourable, it would be  a difficult referendum to win – a bit like Australia becoming a republic.  Australians favour a republic in principle, but the never the particular structure of republic that is on offer.  It was easy to pick holes in the specifics of the proposals – but that would be true of any proposal born of attempts to create consensus.  The risk/reward ratio just didn’t stack.

Lib Dems are very bitter, since they see this as a breach of faith, as Andrew Rawnsley has explained in the Observer.  They have knuckled down to vote for a number of proposals that they really hated, such as tuition fees for universities (though to be fair some high-up Lib Dems secretly liked the idea), and elected police commissioners, as well as immigration limits.  Of course Tories have voted for Lib Dem policies too, but these are mostly quite popular in the country at large, such as raising tax thresholds.  Although the Tories let them have a referendum on AV, their campaign to oppose this modest and sensible reform was so vitriolic and irrational as to come over as a breach of faith, especially when they attacked Mr Clegg personally on the basis that you couldn’t trust him because he entered into coalition with them!

But the public indifference left Mr Clegg with a problem.  Why bring the government down over this, and not tuition fees, or many other things which are currently unpopular with the public at large?  So the breach is not enough to end the Coalition.  Instead Mr Clegg has decided to withdraw the party’s support to boundary changes to Westminster constituencies.  This reform would equalise their size, to the benefit, so the conventional wisdom goes, of the Tories.

Here it is Mr Clegg’s turn to be politically calculating.  I have heard his supporters make the argument that since there will be no elected upper chamber, we need to retain a bigger Commons – an argument that I struggle to understand.  To be fair Mr Clegg does not use this argument in his email to members – where it comes over as a more straightforward tit-for-tat.  The Tory sophists argue that the Coalition agreement did not actually say that they would vote for the Lords reforms – just to bring forward proposals.  But the same can be said of the boundary changes.

And as things have turned out, the boundary changes are a real problem for the Lib Dems.  In ordinary times they would have been much more relaxed, as they have shown an ability to move out of their strongholds in held seats to win over adjacent areas.  The London MP Sarah Teather won her seat in 2010 in spite of major changes to the boundaries.  But the Lib Dem activist base has suffered with the coalition, and the campaigning environment is much tougher.  They have shown an ability to hold on where the party and its candidates are locally well know, but not elsewhere.  There are no reserves with which to flood new areas.  The boundary changes are a major headache.  Neither are the changes partilcualry popular amongst the general public, whatever the intellectual case.  To get equally sized seats they have run roughshod over traditional local sensibilities.  In Wales the impact  is particularly severe.  Even may Tory MPs will be relieved if the reforms died a death.

But it will create an awkward moment in 2013 when the vote is due to take place, unless the proposal is abandoned.  To defeat the changes Lib Dem government ministers would have to vote against or abstain – this would be new territory for the government and could easily bring it down.

So who gains from this sorry saga?  The first winners are Labour, where their cynical manoeuvring have bought rich rewards.  First they have made the Coalition look weak and incompetent.  But best of all they should now be able to defeat the boundary changes, which they hate.  Ed Milliband’s leadership can chalk up another success after his inauspicious start.

The second winners are the grumpy Tory backbenchers.  They genuinely hated the Lords reform, and will be glad to kill it.  They are also pretty relaxed about idea of the coalition failing.  And as individuals the defeat of the boundary changes makes their lives easier.

For the Lib Dems the outcome is mixed.  It’s a policy failure but it is very clear who is to blame: the Tory backbenchers and the scheming Labour politicians – unlike the AV referendum.  This fiasco is out of the way a long time before the next election is due – and defeating the boundary changes will give their campaigners the best possible chance of hanging on to the 40-50 seats needed for the party to survive as a political force.

The big loser is the Tory leader and Prime Minister David Cameron, and his project of turning his party into a credible one of government.  For all the soft soap he puts into the Party’s manifesto, it is clear that he can’t carry his party with him.  He took on his backbenchers and came out second.  His party can unite around a right-wing Eurosceptic platform, but winning a General Election, especially on the old boundaries, looks impossible.  A centrist Tory manifesto will not be credible.  His plan to use the coalition with the Lib Dems to de-toxifiy the Tory brand has come completely unstuck.

And the country remains stuck with an antiquated system of government that increasingly loses the respect of both the public and the world at large.  The public is paying a big price for its indifference.

My day at the Olympics

Yesterday I joined London’s Olympic party, when we went to see the gymnastics at the North Greenwich Arena, better known as the O2 (but the company isn’t an Olympic sponsor…) or in its prior guise as the Millennium Dome.  It was the women’s artistic individual overall final.  All too brief – but I’m glad we made it, for once in a lifetime!

The event was due to start at 4.30pm, but we decided to make a day of it.  We set off at 11.30 in the morning, and took the river bus to Greenwich.  We opted to lunch there, about 2km from the arena, since we’d heard so many scare stories about the dominance of the Olympics sponsors (McDonalds for restaurants, Heineken for beer, etc).  Greenwich town is near another Olympic venue – Greenwich Park for equestrian events – so had plenty of Olympic atmosphere.  After a long but rather mediocre lunch at a Tex-Mex restaurant, we set off by bus for the arena, as directed by one of the many Olympic volunteer helpers.  London Transport nearly undid the glow of goodwill by taking out of service the bus that was due to take us, with a long wait for the next one shown on the indicator.  But another bus turned up, untracked by the indicator, a few minutes later, with space enough for everyone.

At the venue we were cheerfully herded through the security checks.  All very quick, but it was quite early (about 3pm).  It didn’t help to try and figure out what was going on in the complex system of queues and barriers, just follow the crowds and go where people were pointing.  In the Dome we found a profusion of restaurants (but no McDonalds, or Burger King, come to that), with no conspicuous restrictions.  The scare stories were overdone.  But a sign at one of the bars in the arena itself said “proud only to accept Visa cards for payment” or some such.  I think most people, me included, find that the Visa monopoly on payment cards quite offensive, so they should have put “ashamed” instead of “proud”.  We paid cash, which was fortunately allowed for a bottle of water (though not for tickets or merchandise…).

So we took our seats perched up high in the arena with over an hour to go.  But they kept us entertained and warmed us up, with videos and explanations and previews, and finally a dance by the English Ballet from Swan Lake (from their current show which coincidentally we are due to see next week).

And then it all started.  There were 24 gymnasts (limited to two from each country – a bit hard on the Americans and Russians) divided into four groups, each taking on one piece of “apparatus” – the beam, the vault, the uneven bars and the floor (which is not an “apparatus” in my pedantic book) – the last set to music.  It was quite a lot to take in.  The top contenders were all in one group, so the pros could concentrate on just them.  But the two British contenders (Hannah Whelan and the 15 year old Rebecca Tunney) were in another group – and the predominantly British crowd were keen to give them full support.  And again, the floor exercise tended to draw attention, with its sheer size and, of course, the music.  There was a screen and a scoreboard, and a bit of commentary – but it is easier to follow on the television at home.  There were one or two performances that I wanted to see but missed – like the American Gabrielle “flying squirrel” Douglas on the uneven bars.

The organisers could have helped us a bit more.  They were selling a daily magazine for £5 on the day’s events, but this gave just two pages to the gymnastics, gassing on about the two British girls, with two thirds of a page on the the girl they considered the favourite (the US Aly Raisman), who did not end up with a medal, plus a brief profile for the main Russian contender (Victoria Komova) and an even shorter mention of her team-mate (Aliya Mustafina) – these ended up with Silver and Bronze respectively.  So they almost failed to mention the winner, Ms Douglas, at all!  Still, better than the forecast at the beginning of the magazine which predicted an American who failed to qualify for the final at all (Jordin Wieber).  This whole things misses the point about people who turn up for the events – who are unlikely to be attending more than one event in a day – so don’t want masses of superficial waffle on everything – but some substance on the event they are watching.  A list of the 24 finalists, and their scores in  earlier rounds, and perhaps a little profile would have added to the event.  All the magazine could do was while away 15 minutes on the train home.

No matter! It was lovely to be there, and to make your own choices as to what to follow, rather then the choice of some television producer.  The performances were astonishing.  I am no gymnast, and don’t know much about the sport.  But I am irrestiably drawn to it each Olympics, and have been watching the drama of the team finals and the men’s event on the television.  There was a thrilling finish on the floor exercises as the Americans and Russians slugged it out.  But Ms Douglas was already in a significant lead, the others having wobbled a little in earlier rounds and she clinched the deal with confidence – quite wonderful to watch.  Interestingly the leading women contestants did not seem to be so pally with each other as were the men – they seemed a bit more absorbed in their own worlds.  Tears from the Russians in the end as they failed in their bid for Gold, in spite of the American favourite having come a cropper in qualification.

Alas for Ms Whelan.  She was already struggling after a poor beam and indifferent floor, when she came a cropper on the vault and score zero points (the only gymnast to do so on any apparatus) – she ended up 24th by some distance, though she would not have done much better in the placings if she had got a middling score there.  Ms Tunney did better, ending up 13th after an uncertain start on the beam -she should still have her best years ahead of her.  After her vault (she led and so was the first score to be posted in the third rotation), she even topped the leader board for a minute or so – as my picture shows.

What a wonderful experience!  My head had was never really convinced by the economic case for London hosting the Olympics, and still isn’t.  But the gain is deeper than economics.  It makes us Brits feel world class again.  The organisation is generally excellent, the spirit wonderful.  The tone set by the opening ceremony was shear genius – celebrating Britain inclusively for what it is, and not trying to wallow in past glory.  We can be cynical about lots of it (the scare stories about transport chaos, the sponsors’ monopolies), critical about details (the daily magazine) – but it feels good.

Copenhagen: home from home

Sand scupture in Copenhagen harbour

A question sometimes arises among Britain’s beleaguered Europhiles.  Should the sceptics get their way, and the UK drop out of the EU (and no doubt losing Scotland with it), where do we emigrate to escape this sclerotic mean-minded land?  There are some popular choices: Paris, perhaps, or the French Midi; Spain’s Costa del Sol or Portugal’s Algarve; and Italy’s Tuscany for the chattering set.  After a visit there last weekend I now know where I want to go: Copenhagen.

A first attraction is anonymity (mine, that is).  It’s a place where people of my complexion and (lack of) dress sense don’t stand out, and the range of body shapes will make all feel at ease.  Unlike France or Italy, and without seeking British ghettos in Spain.  Typically the locals would open a conversation with us in Danish, asssuming that we are one of them.  This is unsurprising, perhaps, since so many of us English are descended from Anglo-Saxon and Danish-Viking stock, both genetically indistinguishable from current Danes (and each other).  Everybody speaks English, many perfectly, and don’t seem to mind (unlike the French, for example) .  Of course, if I emigrated I would need to pick up Danish – but this does not look such a hard language to learn (though my wife is not so sure!).  At first it sounds alien (oddly more so than French or Italian) but you soon find tht we share  many words – and it is much less daunting than German.

There is an inevitable comparison with Stockholm, which we visited a couple of years ago.

Copenhagen’s old architecture: the Borse

There too we were often mistaken for natives, English is widely spoken, and the language is part of the same family (as is Norwegian).  Copenhagen lacks Stockholm’s dramatic highlights: the island of Gamla Stam with its old buildings and palace: the cliffs; the nearby archipeligo; or the Wasa museum.  But outside these highlights Stockholm soon fades into something a bit ordinary.  There is much more to Copenhagen.  Wonderful old buildings (mainly 19th century, since the city has repreatedly been burnt down – but in good taste) in a distinctive Danish style – it is more difficult to define an equivalent Swedish style.  There is a lot of newer building too, though, again as in Stockholm, this often fits less happily.  The canals and islands and the harbour give the place character, if not quite as dramatically as in Stockholm.

There are all manner shops, displaying goods of often equisite taste (favourite this trip the jewellers Georg Jensen).  And plenty of wonderful food, from the famous pastries and rye bread (we took home a loaf to prolong the experience) to many good restaurants.  All three of our restaurant meals were of excellent standard, though the menus can be a bit limited.  We knew about the pork and the seafood – but the excellence of the beef was a surprise.

There is plenty to do.  The number of museums and art galleries is quite overwhelming,

The Mermaid is a distraction for tourists

and we hardly touched the surface.  Mind you we weren’t that taken with the National Museum – which seemed badly designed by our standards.  Lots of exhibits without clear narrative structure – less would have been more.  The Mermaid is a bit of a silly tourist distraction – but it serves to get the tourists out of the town centre.

And though these should not been taken for granted here, as anywhere, liberal values were on display.  Cycling is very well provided for, with clearly demarcated cycle lanes.  If there isn’t space for both cars and bikes, it seems, the cars are pushed out and the street pedestrianised.  And the Danish attitude to cycling is different to ours.  We dress up to cycle, with helmets, high vis jackets, and lycra for show offs.  They just hop on a bike as they are, with a small number of helmets on show.  Many don’t even bother to lock their bikes up – and when they do they usually use simple locks on the wheels, rather than massive things chaining everything to everything.  Crime seems less of problem – though homelessness was not.  Public transport – we mainly used the buses – was excellent.

There are cultural differences, left by the 1,000 years in which our cultures have been apart and any residual Celtic traces in ours.  There is much less jaywalking (though the traffic lights are better organised, with less waiting around as each stream is given its exclusive turn) – though as here the cyclists push the boundaries harder.  It was a bit of shock to see middle aged couples sitting down to drink beer at cafes at 10 in the morning.  Their sense of humour is a bit strange.  In the National Museum there was a series of spoof commentaries in the prehistory section, which were mainly tiring and unfunny – though the exhibit of an ancient mermaid skeleton dug up from a bog was well done.

And Copenhagen’s transport connections are good with the wider world, closer to the rest of Europe than other Scandinavian capitals.  No doubt the place gets a bit cold, damp and dark in the winter (as our expectations have been managed by The Killing), but a temporary escape does not look too hard.   This is a place where I could live happily.

There was one slightly jarring note as we left.  Sitting down for lunch at the Seafood Bar in the departure lounge at the airport and looking round, we couldn’t see anything Danish at all.  All the signage and advertising was in English; all the brands were familiar international ones, including the only Starbucks we saw on our trip; the bar staff spoke English to each other and struggled with Danish speaking customers.  Apart from the fact that it was modern, clean and gleeming, we could have been in a British airport.  I couldn’t even find a Danish eatery to have a Danish sandwich, though we found one later, out of the way.  This was too much of a home from home.

The UK GDP figures change nothing

Today the Office for National Statistics delivered its first estimate for the UK’s GDP in the second quarter.  With a fall of 0.7% they were a bit shocking – we have had a number of quarters with it being cose to no change, and this looks like a proper lurch downwards.  This has provoked some predictable “told-you-sos” by the government’s critics, who say that it shows that the Coalition government’s policies are failing, and call for less austerity.  But what do the figures actually mean?

Making sense of it all is not easy.  The first point is that GDP is not of huge importance in its own right – only as a proxy for the population’s overall wellbeing.  But in a dveleoped economy this latter is more closely tied to employment – and here that statistics  seem to be slowly moving in the opposite direction.  This has created a headache for economists, since this behaviour isn’t in the script.  Some even say that the GDP figures may be in error.  But they have been saying this for some time now, and revised estimates have not made the figures any better.  We need more evidence from the real world to see if anything very harmful is going on.  If, for example, the decline in GDP is a result of a shrinkage of investment banking, where they is lots of money and few jobs, we needn’t lose any sleep.  Or if it results form people taking time off, e.g. for the Jubilee holiday, then again it is no real cause for concern – provided people enjoy their time off.  The truth is that we don’t have a clear understanding of what is happening, and whether it is in fact particulalry bad.

Well, not quite.  We rely on money income, measured by GDP, to generate taxes to fund the services and benefits supplied by the state.  And to pay off the debts left by past governments.  Given that taxes still fall well short of what they are supposed to pay for, this is a worry.  For now things are OK.  The financial markets aren’t taking fright (even as they are in Spain, whose finances are not in such bad shape).  If they do then we can expect all sorts of nasty consequences as interest rates rise, and possibly inflation too.

But what of the argument that austerity is slowly strangling the economy, and we need to ease off?  This is a topic that I have blogged about many times before.  The austerity sceptics are those who basicly think that a sustainable economy is within our grasp, and it just needs a bit of confidence and an upward demand cycle to reach it.  I remain sceptical.  Slowing austerity may simply be postponing a necessary adjustment – and runs greater risks with those financial markets.  These figures do not provide additional evidence either way on this debate.

The problem for the government is that GDP – and tax income – is falling behind their projections, which makes it look like a failure.  But this is more a criticism of the art of economic forecasting than it is of government policy.  But economic forecasting has long been known to be inaccurate, and it always will be.  Many people, on both sides of the austerity argument, are not surprised that the recovery is so slow.  And the forecasts weren’t even politically motivated – since the government transferred responsibility to an independent body – the Office for Budget Responsiiblity.

Still, the case for using the government’s weight to progress worthwhile investments in house building, transport infrastructure and education remains strong, and no doubt their advocates will use this data to pressure the Treasury to loosen up.  But these investments must be for items that will be of genuine benefit – the right sort of homes in the right places, for example – and not just expenditure for its own sake.  And that makes the process slow.

So, in short, these GDP figures are nothing to get excited about.

The meaninglessness of “money supply”

Where are modern economists most at sea?  Some may think it is their over-reliance on GDP to represent the welfare of an economy.  But economists are quite comfortable with the theory of all that, even if they often fail to put it into practice.  No, the real problem is money supply.  It used to be a central concept, but now it is useless.

Economistsused to be very confident about it all, even while I was taking my Economics degree in the mid 2000s.  Their ideas had been developed most famously by Milton Friedman, the 100th anniversary of whose birth is being celebrated this year.  He was the first to say that managing the money supply was a critical part of managing an economy as a whole.  He was an iconoclast at first but gradually the idea became conventional wisdom.

The imagery that economists used to explain money’s role was endearingly folksy but also revealing.  Money was explained in terms of dollar bills or pound notes.  To increase the supply of money, a central bank simply printed more of it.  The role in macroeconomic policy of increasing money supply was often talked of in terms of a helicopter drop of bundles of banknotes.  If an economy was suffering from unemployment, then people would rush out of their homes, grab the cash dropped by the helicopter, spend it, and soon the unemployed would be back in work with no harm done!  (Of course if there was no unemployment, people would spend the new money, but the result would be inflation).  Friedman thought that the Great Depression of the 1930s could be simply explained by a lack of money (banks kept on going bust), and not a lack of government expenditure.

But it’s obvious to everybody that cash plays a very small role in a modern economy.  The money we spend is in bank accounts, and often spent via credit cards; pound notes just don’t come into it.  But economic theory hasn’t caught up.  It is simply assumed that modern money could be managed by a central bank in an analogous way to printing banknotes.  A couple of theories were used to justify this.  First was an idea of a “monetary base” of deposits held by commercial banks at the central bank, which limited the amount of money these banks could supply to their customers, but this clearly did not reflect reality.  A more enduring theory was based on the central bank controlling money supply through the interest rates it set on the deposit, and influenced through “open market operations”.  Raise interest rates  and money supply would fall as people moved money into interest bearing securities.  This seemed to work – though it was hard to reconcile it to the complexities of what was actually going on – the line between non-interest bearing “money” and interest-bearing securities being hardly a firm one.  There was no no better idea, though, and an elaborate macroeconomic theory was constructed on the back of of it.

Two ideas were central to this theory.  First that people responded to an increase money supply by spending more (or a decrease by spending less), and second that the money supply could be controlled centrally.  If an economy was suffering from a lack of demand, you could correct this by loosening the money supply, as an alternative to fiscal policy – increasing government spending or reducing taxes.  This was irrestiable to the polical right, who hated the idea of using taxes and public spending to manage the business cycle – since this raised the size of the state sector.

But the idea is now in tatters, though some economists don’t seem to realise it, especially those of an amateur sort, which unfortunately seems to include the UK Chancellor of the Exchequer, George Osborne.  Both assumptions are problematic.  First, do people respond to an increased money supply by spending more?  What if, in the banknotes in the helicopter example, people are so frightened about the future that they simply grab the banknotes and stuff them into their mattresses?  There is no extra spending, and no effect on unemployment.  This is an old challenge.  Maynard Keynes talked of increasing money supply in a recession as “pushing against a string”.  With money now a much more complex thing held in bank accounts, this problem is worse.  It can be quite rational to leave money in a bank account without wanting to spend it – especially when interest rates are low.

That could be used to explain why very loose money policy by central banks in the developed economies currently has had so little effect, which is indeed what people like the US economist Paul Krugman are saying.  But in fact money supply itself does not seem to be responding to the central banks’ wishes.  It has been shrinking even as interest rates fall.  This causes certain commentators angst – pleading for central banks to loosen policy yet further.

But how is money actually created?  Apart from notes and coins it is mainly created by commercial banks.  They do so by advancing their customers money.  If you borrow £1,000 from your bank, the bank simply adds the money to your current account, increasing the overall money supply, and the bank puts a loan on the asset side of its balance sheet.  No central bank or other authority plays any role in this.  And if banks decide to cut back their lending, money supply shrinks.  What counts is not money supply but credit.

Governments and central banks can use the creation or withdrawal of money to wreck an economy, as Zimbabwe has done, but not to fine tune it.  The sensation of doing so in the 1990s and early 2000s was in fact an illusion.  What actually counts is mood and the supply of credit.  Movements in the money supply follow what is going on in the economy at large rather than lead it.

There is in fact no alternative for policy makers but to get their hands dirty in the detailed workings of the banking system as a whole, rather than simply adjust central bank interest rates.  As the world’s banking crisis continues to rumble on, nobody argues with this – but there is a distinct air of crisis management and an absence of strategy.

What people in practice mean by “monetary policy” is series of policy interventions, such central bank interest rates, bank regulation, managing government debt, credit policy, exchange rate interventions, and so on.  Each of these interventions has its impact – but it is disinctly unhelpful to view this impact in terms of any concept called “money supply”.

But we are left with a theoretical vacuum in economics.  We know credit and banking are important parts of an economy, and critical to an understanding of the business cycle.  But how on earth to manage them?  Giving commercial banks free reign subject to a few central bank interventions does not look a good idea any more.

The G4S fiasco poisons attitudes to the private sector

The British contractor G4S has specacularly failed to find anything like enough staff to support its contract to provide security staff for the London Olympics…which start in less than two weeks.  The details aren’t clear yet, but this one has all the makings of a fiasco that will be examined in deph in MBA courses for a long time.  A bigger question is the effect it will have on public attitudes to the private sector here in Britain.

For now the politicians and journalists are having some fun.  “Is this a humiliating shambles for G4S?  Yes or No?” (or similar words) one MP asked Nick Buckles, the hapless G4S Managing Director, this morning, showing the sort of skills of forensic questioning that make people wonder how useful parliamentary select committees really are. Mr Buckles had to agree.  It wasn’t just the size of the recrutiment gap, it is that nobody at the top seemed to have any idea that there was trouble until a couple of weeks ago.

Another revealing encounter was on Radio 4’s Today programme this morning.  John Humphreys was interviewing the senior police officer coordinating Olympics security.  The latter referred to G4S as a “partner”.  They’re not a partner, retoted Mr Humphreys, they just a private company only interested in profit.  And that seems to summarise a widespread attitude here.  Private companies are greedy and heedless of ethical standards.  Meanwhile the good old public services, like the police, the armed services or the NHS are selfless public servants working for the good of us all.

What a difference 30 years makes!  Back in the 1980s public services were supposed to be crassly managed, unable to control their unions and unable to deliver anything on time or efficiently.  The private sector on the other hand, the odd (state supported) car manufacturer apart, was all enterprise, innovation and efficiency.  It says a lot for the process of public sector reform that has happened since that public services command such respect now.  The private sector, on the other hand, has not come out of the banking crisis well, as the parallel case of Barclays seems to demonstrate.

This matters because further public sector reform, especially in the NHS, implies greater use of private businesses.  This was already a hard sell politically.  It’s not getting any easier.  Should it?

Well, management screwups are by no means the unique preserve of the private sector.  Last week a coroner reported on a case of a patient dying at our local hospital, St George’s.  This looks like a case too many people being involved, not aware of the complete picture, and nobody taking the initiative to sort problems out.  The hospital said that it had changed its procedures to prevent future incidents like it.  You can almost guarantee that this means an extra check or process spatulaed on top the ones already there – theoretically dealing with the problem, but actually making the process more complex and difficult to manage.  Reengineering of operations to deal with risks like this seems to infinitely more difficult in public sector organisations than in private sector ones, perhaps because it means trampling over well established demarkation lines.  Cases of bad management abound.  The quality of police management was shown in very bad light by last year’s riots, especially in London, where they were caught flat footed by youngsters with Blackberrys.  And as for the armed forces, whose public stock is currently very high, the amount of money they have wasted in equipment procurement programmes is absolutely eyewatering.

And as for the G4S scandal, the wider story is not necessarily against the private sector.  The company is clearly accountable, and is picking up the extra costs instead of the taxpayer.  And surely the procurement process is a much to blame as the contractor?  G4S may have been suffering from “winner’s curse” – required to cut costs to win the contract, and then finding that it had been unrealistic, or taking too many risks.  Realistic or cautious bidders simply get eliminated.  But this is a well known procurement problem – and surely the commissioners should have seen fit to take precautions?  Some rather obvious questions are being asked about how such a large and important contract was being supervised.

And it’s interesting to reflect a little further on the currently popular subject of “culture” in organisations, that, for example, was supposed to be so bad in Barclays.  Well senior managers not knowing about problems building up within their organisation is often a sign of bad culture.  Mr Buckles said he was a “no excuses” manager; so were staff afraid to pass up bad news?  The twist on this is that this sort, tough, no excuses style of management is beloved of politicians and the public (provided they aren’t actually working in the organisations concerned).  I’m not sure that most politicians would recognise healthy corporate culture if they saw it.  And that is bad news for the public sector.

So it would be a pity if this episode slowed down the process of involving private companies in public service reform.  But it would be as well to learn the lessons for public sector procurement and contract management.

The financial crisis: five years and counting

It is five years since the financial crisis broke.  In July and August of 2007 the interbank markets froze over, and it became evident that the boom years were over.  Five years on and the world economy still looks in deep trouble.  Each of the major developed economies is in a mess, especially if you treat the Eurozone as a single economy.  This is a remarkable fact in itself – we are used to economic crises taking a much shorter time to resolve.  It is worth trying to take a long view on it.

Looking back at what I was writing in 2007 (when I was in the third year of my economics degree at UCL), I am struck by how much denial there was in the air then.  There was clearly a crisis in finance. but this was all about a few loans to poor people in the US – and would not affect the “real” economy by much, so many thought.  Share prices held up, and superficially things seemed to be holding together.  In the autumn of 2007 the small British bank Northern Rock fell apart.  All hell did not let loose until the autumn of 2008, when Lehman collapsed, threatening to take much of the world’s financial system with it.  Even so, the press regularly articles from people saying, backed by statistics from previous crises, that things would be back to “normal” soon.  Alas, those who were comparing the crisis to Japan’s “lost decade” of the 1990s were closer to the mark.  What happened?

At first sight the crises affecting the US, the Eurozone, Japan and the UK all look quite different – and it is very easy to focus on just one of these (as I usually do about the UK) as if the crisis in the rest of the world was something else.  But the fact that they are all going wrong at the same time suggests a global pattern underlying all the local variations.

In the developed world, across the board, there has been a collapse in domestic demand – private consumption and business investment.  This collapse has been compensated by an increase in net government expenditure (spending less taxes), to varying degrees in each economy.  This has stopped, or mitigated, a sort of doom loop in which diminishing demand feeds on itself to reduce demand further.  But private sector demand has been slow to revive.  This is what is perplexing people.

Here the world is divided – and depending which side you are on, your views on how to tackle the crisis will differ.  The optimists suggest that the problem is a temporary loss of confidence which is suppressing business investment and consumer demand.  Revive this (some say by government stimulus, others by business friendly polices like cutting taxes) and we can get to something like where we were before, with more employment and rising living standards.  The there will be a multiplier effect whereby growth feeds on itself.

I am not an optimist in this sense.  I think that behind the crisis lie some big developments in the world economy:

  1. The developed world’s demographics are changing.  People are living longer;  the post war baby boom is moving into retirement.  The proportion of the working age population is shrinking.  Many older people want to stop work to retire.  It is important to see this in perspective.  Many talk of a demographic crisis and of the threat to the wider economy.  But it is quite rational to want to experience the benefits of a modern, highly productive economy through increased leisure, rather than through an endless treadmill of work and consumption.  And quite rational to take this leisure as retirement rather than a shorter working week, say.
  2. Technological advance is changing the shape of the economy in the developed world.  Manufacturing is now so efficient that it requires few people employed in it to satisfy all of our needs.  As a result a growing proportion of jobs are in services.  It is not so obvious how increased productivity, as conventionally viewed, applies in many services.  Too often this comes at the expense of the personal contact we value so much.  Another problem is that so often the jobs created by the new economy aren’t matched to the skills that a large proportion of the population has.
  3. The developing world is catching up with the developed world.  This can be counted as the biggest success of the global economy, but it is putting pressure on some scarce global resources – such as oil – and forcing their relative prices up in all economies.
  4. And as if that wasn’t bad enough, the amount of carbon the world is pumping into the atmosphere is causing global warming, with the prospect of increasingly disruptive effect across the world – and an imperative to change our ways to reverse it.

The sum of these trends it to suggest two things: that the developed world economy before the crisis was unsustainable so that we can’t return to it; that the prospects for economic growth, as conventionally measured, in the developing world are weak.

That means that the world after the crisis will be a very different place to the one before it.  It is one where people in the developing world escape the tyranny of poverty, and where in the developed world people consume less but enjoy life more.  But to get there means resolving some awkward tensions:

  • It’s all very well to say that we should be less focused on economic growth and consumption, and more on wellbeing.  Except that so much of what we expect from a modern society depends on the state, and on taxes to fund it.  Taxes are driven by the conventional economy.  We have to reduce our expectations of what the state can provide.
  • As growth in the economy as a whole slows, tackling poverty and deprivation through growth alone won’t work.  Distribution of wealth grows in importance.  That leads to a dense thicket of economic problems and challenges to social values.
  • At a global level we are hardly beginning to understand how to reconcile tackling poverty in the developing world with the need to reverse carbon emissions.  While this battle continues, the developed world has to lead from the front and reduce its own net emissions to less than zero.

And here we are. 1,000 words on the economic crisis and I have mentioned debt and globalisation, or even the problems of currency unions – factors which have dominated discussion of the crisis since it began.  But debt, trade and currency are the tactics, not the strategy.  We won’t solve these mammoth problems without a clear understanding of strategy.  as the crisis drags on though, people will perhaps realise that the problems are a bit deeper that a bit of stimulus here and there will fix.

Betty Boothroyd makes the case for Lords reform

This morning’s Radio 4  coverage of the oncoming debate on Lords reform made little attempt at balance.  They gave prominent coverage to opponent Betty Boothroyd.  A supporter may have been given airtime while I wasn’t listening – but if so they did not get a mention on the website.  But at least Baroness Boothroyd’s bluster gives supporters of reform plenty of ammunition.

Baroness Boothroyd, a former Labour MP and the House of Commons’s first (and only) female Speaker is treated as a bit of a national treasure – understandable given her remarkable life story, and the determination with which she climbed the greasy pole to celebrity.  She is deeply conservative, and loves all that fake tradition and flummery that the British Parliament wallows in.  But beyond this emotional attachment, she seems unable to give good reasons in their defence.

Her main point was that electing members of the upper house (whatever it would be called) would give it more power, and elevate its status to beyond that of a mere revising chamber that is not meant to get in the way of the Government and its whipped majority in the House of Commons.  She suggested that the reform would lead to the upper house challenging financial legislation, something which it is currently unable to do.  She also accused the reform’s proponents of not having thought things through, and insisted that it should be debated at length in parliament.

But this is mostly complete nonsense.  The reform bill does not propose to change the current powers of the upper house – which means that it would not have the ability to challenge financial legislation.  The primacy of the Commons is categorically included in the draft bill.  Debate on the floor of parliament is not grand dialectical process by which laws get improved through earnest challenge and debate – it’s a theatre for the pompous to spout off pre-conceived opinions without listening to anybody else’s.  The challenge and debate comes in the consultation process that surrounds the debate.  This has been extensive, both in this parliament and in various predecessors.  The arguments have been rehearsed many times, and solutions to the many problems devised.  Having hammered out a workable compromise it is now time to decide, subject to a bit more wheeling and dealing, perhaps.

But what Baroness Boothroyd showed was that she herself could not be bothered to find out about what the proposals actually were.  So what value does she contribute to the revising chamber that she defends, beyond a few deeply held prejudices?  The trouble with the House of Lords is that it is full of people like her – and not the valuable experts that its supporters claim.  What on earth is the point of it?  Why not just abolish it all together?

The is much to criticise in the Government’s reform proposals.  But they do deal with the two main weaknesses of the current house.  First it shrinks it to a sensible size, including the use of limited terms of office (rather staying until you drop dead, as now) .  Second it replaces patronage systems of appointment with an electoral process.  These two steps will help to professionalise it, and then make it rather more effective in its job of challenging and improving lower house legislation.  It may not succeed.  15 year non-renewable terms may mean that those elected just soak up the status and grandstand rather than doing any real work.  And Baroness Boothroyd’s fear that it may just get in the way of government without adding value is not itself complete nonsense, unlike the bluster with which supported it.  Being elected might give its members licence to be simply obstructive.

But it’s worth a try.  If it doesn’t work we can change it.  Or abolish it altogether.

Behind the theatrics on Barclays, what needs to be done?

Predictably enough the Barclays Libor scandal is generating rampant theatrics amongst both journalists and politicians.  It is not easy to keep grip on what actually matters.  And yet this is vital when it comes to deciding what the next steps should be.

One piece of theatre is a sort of whodunnit, amongst Barclays senior managers, and government and regulatory officials.  How much did they know?  What did they authorise? One line of attack concentrates on Bob Diamond, the former Barclays Chief Executive, whose evasions at a parliamentary select committee yesterday created predictable anger.  The real point behind this is the question of how far up the chain of command should responsibility for unethical behaviour go?  Should bank chief executives be like Royal Navy captains, as John Kay suggested yesterday in the FT, and take full responsibility for everything that happens on their ship?

A further twist comes from the thought that there may have been an element of government connivance in the second phase of manipulation, as the financial crisis was in full swing.  The hope amongst government politicians is that something can be pinned on Labour figures such as Shadow Chancellor Ed Balls.  That looks a long shot.  Experienced political operators like Mr Balls don’t leave fingerprints, and there were legitimate reasons at the time for an interest in the behaviour of Libor.  But the Labour’s case wasn’t helped by a radio interview with Baroness Vadera, Gordon Brown’s economic adviser, yesterday lunchtime.  She was evasive, confusing the two very different phases of the scandal (i.e. the first phase of manipulation for to make trading profits, and the second of official manipulation for wider politcal purposes).  It gave the impression there was something to hide.  Other key Labour figures, such as Mr Balls and Lord Myners, the former City minister, are giving much more confident performances, though.

Centre stage for the theatrics today is the argument as to whether any enquiry should be a full judicial one, like the Leveson Inquiry into the press, which Labour are asking for, or the government’s preferred option of a quicker parliamentary one.  Both options have merit.  A judicial enquiry gives the whole thing an air of importance, and legal interrogators are much more effective than grandstanding politicians; it would keep the City types on the ropes for longer.  But lawyers are unlikely to contribute much of value to designing a solution.  A parliamentary enquiry would be a quicker way to actually change the law, as well as creating less complications for any parallel criminal investigations.  What is actually needed is an expert commission – but we’ve already had one of those, the Vickers Commission – which indeed pointed towards some of the solutions.

But what actually needs to be done?  In principle this isn’t difficult.  Investment banking activities do play a useful role in the modern economic system, and aggressive trading culture can help the process of what economists call “price discovery” – spotting and correcting where the prices of financial instruments don’t reflect the world’s realities.  Short-selling the shares of badly performing companies looks ugly, for example, but it does improve accountability.  But the usefulness of investment banking is distorted by two problems:

  1. Using other people’s money.  Where traders use borrowed money to trade with, which is the bulk of what they do, then they are not taking full responsibility for the rsiks they are taking, and the whole balance of incentives gets skewed.  Trading soon escalates to levels beyond the socially useful. The volume of borrowed money used has risen massively over the last couple of decades, and many traders probably don’t even understand the idea of using their own capital to bet with.
  2. Trading culture struggles to recognise ethical boundaries.  A disagreement over price is one thing, but manipulating systems designed help people is another.  Fiddling Libor (especially in the first phase of this scandal) was one such transgression, as are various scams to exploit the way mutual funds are priced.  The UK regulatory authorities can be too soft on this.

So in essence what needs to happen is this:

  • Isolate banks’ trading and derivative activities from ordinary economic deposit-taking and commercial lending, and attach separate regulatory regimes to each.
  • Clamp down hard on unethical behaviour – with chief executives and directors taking full responsibility for what happens in their organisations.  Ignorance should not be a defence – and if that means some organisations become impossible to manage, then they should be broken up.  Sanctions should hurt, and include the criminal law (though remember that its higher burden of proof can get in the way).
  • The money supply to investment banking operations needs to be choked off, so that only those that fully understand the risks are supplying it.  Isolation will help here, but may not be enough.

The principles are easy, but the details are all important.  The problems are global but it will be very hard for us in Britain.  The City is so important for our overall economy that we are easily scared away from being too tough.  But if the attraction of the City is that it is easier to do unethical business, then this is not a recipe for long-term success.  We can still have a thriving financial services industry with niche operations based on genuine knowledge and expertise of the real world, and the provision of solid, well designed infrastructure and systems.

Next steps?  I think an enquiry is a bit of a distraction, so the government’s option is probably better.  the government perhaps using this enquiry as cover, must go back to the Vickers proposals and implement them in full.  Going beyond Vickers to enforce the full separation of investment and commercial banking should be considered.  And as for culture change, that needs to happen at the regulators, including the Bank of England, as much as the banks themselves.  A change of senior personnel would help here.