A View From The Ice Road

The A322

Last evening Tyler drove the treacherous Ice Road across the frozen wastes where Berkshire used to meet Surrey*. And as he gingerly crawled along, he listened to some buffoon on the radio explaining why two arctic winters in a row do not mean the global warming hippies have got it all wrong.

True, the £200m pa tax-funded Department of Climate Propaganda Met Office has once again made a complete horlicks of its winter weather prediction (predicting only a one-in-seven chance of a cold winter). And true, they use this same much hyped "expertise" to predict global apocalypse by 2100. But somehow - in some way Tyler couldn't quite fathom - it's much easier to make predictions covering 100 years than those covering 100 days.

Later on Newsnight, official warmist spokesperson Susan Watts explained that the public are pretty dim. And that makes it very difficult to convey the Met Office's outstanding reliability on millennial climate change in the face of their screaming unreliability on forecasting the weather. If only we could all be as bright as her, we 'd understand that climate change is not the same as the weather.

Sadly, because we're so dim, we're instead left wondering why we've got an expensive Met Office that can't do the stuff we need it to do, but can produce reams of global warming guff none of us ever asked for.

But of course, it isn't just the Met Office where the weather/climate priorities are expensively arse about face. Despite the fact that our councils can't even afford to stock up on road grit, Miliband Jnr today announced the Commissars' latest money inferno - a £75bn programme to build another 6,400 offshore wind turbines to save the planet.

Except, post the Copenhagen fiasco, they seem to have dropped the bit about saving the planet - these days it's all about saving the election  economy:

"Our policies in support of offshore wind energy have already put us ahead of every other country in the world... The offshore wind industry is at the heart of the UK economy’s shift to low carbon and could be worth £75 billion and support up to 70,000 jobs by 2020... We did it before with oil and gas in the North Sea and we’ll do it again for offshore wind."

Now if you think you've heard this kind of thing before, you have - back in the glorious 1970s, when it was known as... er, "picking winners". And it cost us many tens of billions with virtually no payback (see this blog).

So against those £75bn windmills, how much have we spent on grit for our death trap skating rink roads? (which IIRC never got this bad in the 70s, even though at that point the climate hippies were telling us the world was freezing to death).

The local councils' version of the story is summarised here. Councils are responsible for gritting the vast majority of our 250,000 miles of roads (only motorways and a few A roads are covered by the Highways Agency). And they say they have treated "the equivalent of 1.7 million miles of road" (although words like "equivalent" always make Tyler suspicious). They reckon it's cost them £12.2m - about £7 per mile.

Unfortunately they are now virtually out of salt supplies, which with more snow promised sounds like a Grade 1 disaster.

Some very obvious points:

• Against the wholesale danger and disruption now being caused by our ice roads, £12.2m is a vanishingly small sum. It stacks up against the £600m per day the chaos is estimated to be costing UK businesses.
• £12.2m is less than 0.007% of total local authority spending this year. It compares to the £450m pa the TPA discovered councils spend on publicity (see this blog).
• Refocusing the Met Office on weather forecasting and cutting its budget by £100m pa would fund an eightfold increase in council supplies of salt and grit

So next time you're stuck in a snowdrift listening to some arrogant buffoon telling you that it wouldn't make financial sense for warming Britain to spend more on gritting, feel free to put your fist through the radio.

*Footnote: The ancient and proud county of Berkshire now exists in name only - after 12 centuries it was abolished by the Commissars in 1998.

PS I know we've made this point many times, but it is important we remember it. Every single Labour government we have ever had has ended in disaster. Usually, it's a straightforward financial and economic meltdown of the kind you expect from socialism. But it can't be coincidence that the abiding image of Labour's last go at government is of wintry streets lined with rotting rubbish - and ours now hasn't been collected since well before Xmas.

PPS I know what you're thinking - Tyler must have made some mistake - surely local councils have spent more than £12.2m on gritting. But I promise you that's the official number from the Local Government Association. Here's the full quote:

"An LGA analysis of council gritting activity over the last three weeks, since the cold snap started, estimated that:

• The equivalent of 1.7 million miles of road have been gritted by council gritting teams
• 200,000 tonnes of salt have been spread on the road
• £12.2m has been spent treating the roads
• 4,000 council staff have been involved in gritting operations around the clock"

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For Real

Circle of unreality

According to the Major, the crisis has moved way beyond the handling capacity of our dysfunctional democracy.

"Here we are, the country bankrupt, ruled by a Scottish communist, stuck in a war we can't win, overrun by mad mullahs nobody does anything about, and our only alternative is a lightweight PR man. Gah! We need a leader - someone who can get a grip." He fixed me with those bloodshot eyes of his, and tapped the side of his nose meaningfully. "It won't be long now - you just wait."

Well, obviously the Major is a tad right of centre, but he sure ain't the only one casting round for Another Way. And watching PM's Questions today, you can see why.

What exactly is the point of PMQs?

"Will the Prime Minister admit he's crap?"

"I'll tell him who's crap! The party opposite is crap, crap, crap!"

"Once again, the Prime Minister has ducked the question. The IMF says he's crap, the OECD says he's crap, and even his own personal Hoon says he's crap! Why won't he admit he's crap?"

"The only crap round here is the party opposite. It's crap! And if it was left to them, we'd be in the crap!"

Errrrugghh...

I've just read the Treasury Select Committee Report on the preposterous Pre-Budget Report. Here's what it says:

• The GDP assumptions underpinning the PBR's fiscal projections are ludicrously optimistic
• The unemployment assumptions are ludicrously optimistic
• The housing market assumptions are ludicrously optimistic
• The bank lending assumptions are ludicrously optimistic
• The projection of the structural fiscal deficit is ludicrously optimistic

The Committee - Labour dominated, remember - also highlights the shameful lack of information on the government's future public expenditure plans:

"There is a sense that the Treasury are using uncertainty to suit themselves. Despite substantial uncertainties they still produce some forecasts out to 2014-15 and illustrative projections out to 2017-18. We can see no good reason for the Treasury failing to produce illustrative figures for future expenditure... We recognise that there will be uncertainty in these figures, but they are produced as part of the Spending Review process so there appears to be no argument of principle against their publication."

To summarise, the Committee is saying the government is not levelling with us over the true magnitude of our fiscal crisis, and the full horror of the medicine we'll have to take.

Why is that?

Well, because they figure if we knew the truth, we'd never re-elect them.

Fine. But couldn't Her Majesty's Loyal Opposition tell us the truth?

Well, no, because if they did, we might associate the nasty medicine with them, and not elect them either.

So we're stuck.

And you know the really worrying bit?

Once Cam is in No 10 - once he's Seen The Books - he'll have to decide whether he can risk telling us the truth without us turning on him. And judging by the evidence to date, you'd have say that's a longshot.

Instead, we'll get an update of the preposterous PBR, slightly tweaked in the direction of reality, and with slightly more information on spending. But it won't be the unvarnished truth. We won't get that until we run into the inevitable sterling/gilt market crisis and the IMF pitches up on the redeye from Washington.

It will be Obamba Part Deux all over again - yes, it's a fresh new start with me, I'll close Gitmo, and everything will be cool... OMG, you mean these are the secret files... OMG... what should we do? ...we haven't closed Gitmo yet, have we?

Is it black-hearted deception, or simple naivety? You know - if we just whistle to ourselves and carry on as if everything is OK, then maybe something will turn up.

Yeah. That must be it.

Remind me, what's the point of our politicos again?

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Back To Basics: Robert Campbell.

From the sublime to the ridiculous. Next up in the back to basics series, I'm delighted to present the birkenstock-clad Robert Campbell - a man who makes up in original thinking and humanity for what he may lack in urbane dress-sense.

Robert is co-creator of the cynic advertising empire, a provocative irritant to the rest of that industry and runs a new venture called Sunshine in Hong Kong. He swears a lot, has won many awards and, as with Seth, he's someone whom I initially met and shared ideas with online, but came to know in real life too. His terrific answers approach the questions not only from the perspective of someone who runs his own business but also as someone who solves marketing problems for others. Here they are.

How do you get new business?

In my experience, the ad industry tends to lose about 30% of its revenue annually so they need to continually fight for new business just to stand still.

When we started cynic, we thought this was a mad situation to be in so rather than simply chase money, we decided on a strict criteria regarding new business, they must be either [1] run by an entrepreneur [as we are more likely to be attractive to them] [2] be 3rd or 4th in their respective category with ambitions for disproportionate growth and/or [3] trying to understand culture outside of their core category [either for NPD/business development/research purposes]

We also try to deal with people who sit beyond just a marketing role – or at the very least – hold a senior board position. We do this because we believe we can only show our value if we address fundamental business issues rather than simply discuss marketing and advertising – which is why we incorporate a royalty scheme within our remuneration proposals as this helps demonstrate we’re happy to put our money where our mouth is.

Of course there are exceptions to this – but all in all, we have stuck to these rules and it has enabled us to build a fairly solid foundation of business that has allowed us to grow and expand into a variety of areas – often in conjunction with our clients.

How would you advise others to do so?

Don’t fall for the trap of only evaluating a new business prospect by the money, the creative opportunity or the chance to get a bigger slice of their marketing spend down the line. Those elements play a part, but it shouldn’t be the only part.

How has this changed in recent years and why?

Adland loves to go on about how they’ve lost their seat at the ‘big table’ … but that’s because more often than not, they talk about things that the ‘big table’ doesn’t give a flying **** about, ie: ads. {I told you he swears.}

The sad truth is that in a lot of cases, companies don’t value their marketing director nearly as much as they once did – which is why the emphasis is on driving business, not driving advertising – which is why those who can think creatively without the need to link it to an advertising channel [established or new] have great potential for future growth.

How would your advice differ for someone who is just starting up?

Deal with the top and deal with what they are focused on achieving.

Be knowledgeable about their company, their category and society as a whole. [Including how political, economical and social change is affecting the attitudes and approaches of society in relation to their business]

Create interesting, energised and executable ideas that can quantifiably fulfil their commercial [and emotional ambitions]

Remember turnover is vanity, profit is sanity.

How do you balance this with keeping existing customers satisfied and coming back?

We treat all clients like they’re new clients – it’s the lifeblood of our survival.

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A Postcard From Newport Beach

As you may have heard, we've just received a rather distressing postcard from plush Newport Beach in Southern California. It's from Mr Pimco, the world's biggest bond investor, who lives nextdoor to Newport's famous Fashion Island. Here's what he says:

"...we are currently cutting back in the U.K. because... supply and demand dynamics are likely to be negatively affected as borrowing rises and central bank buying declines."

Translating, what Mr P is worried about is that UK government bonds (gilts) are about to lose their biggest buyer - to wit, the UK government. He's understandably concerned that gilt prices will then crash, and is quite sensibly heading for the exit before the stampede.

We've blogged this many times (eg see here). For the last year, HMG has funded its humongous borrowing requirement by having its wholly owned subsidiary, the Bank of England, buy up a corresponding quantity of gilts in the open market. The subsidiary has funded these purchases by the simple expedient of printing money. The process has ensured that HMG's borrowing has not undermined the market price of gilts. Which in turn means that HMG has been able to borrow at historically low interest rates.

Unfortunately, this terrific scam is now coming to an end. Having printed £200bn of new money, even the Bank's most rabid inflation monkeys seem to have decided they'd better let the presses cool down for a while. Savvy investors like Mr P are sensibly taking the chance to leave before the inevitable kerrrunchh.

So where does this leave us?

The key indicator of market confidence is the interest rate the government must pay on its bonds - ie the gilt yield. And here's how that looks over the last 2 years (10 year benchmark gilt):

There are a couple of points to highlight. First, the average yield we've seen since the onset of the financial crisis has been extraordinarily low. Second, over the last month or so, it has spiked up through the top of its post-crisis range. And that's almost certainly because of the actions of people like Mr P.

What if all international investors dumped their gilts?

Overseas investors currently hold around £200bn of gilts, around one-third of the total outstanding (see here):

So a mass dumping would be a serious problem.

It would be especially serious over the next few years, given the massive amount of new gilts HMG intends to issue - well over £200bn both this year and next:

Just take a moment to clock that chart (from the Debt Management Office). Even on Darling's wildly optimistic fiscal projections, HMG's net issuance of gilts over the next 4 years will exceed its entire cumulative issuance since the dawn of time up until now.

That will make enormous demands on gilt investors, especially those who are already heading for the exit. There is absolutely no way it will be possible on anything like current terms.

Gilt yields back above 5% are a certainty, and they could easily go a lot higher. Last time through in the 70s, they peaked at an eye-watering 17%.

And with a National Debt of £1.5 trillion (Darling's forecast for 2014), every additional 1% on gilt yields ultimately means an extra £15bn pa on debt service costs. Which is another 4 pence on the standard rate of income tax. And that's without correcting for Darling's forecast optimism.

Gulp.

And do you know the cherry on this particular cake?

Pimco's head honcho in London is one Andrew Balls. Andrew Balls, brother to Balls Balls - Sorcerer's Apprentice to the Great Gordo himself.

Uhhhhh.

I'm afraid I may need to break my New Year's alcohol resolution.

PS There's another reason we should listen to what Pimco says about dodgy government debt. Newport Beach is in Orange County, and Orange County famously went bust in the early 90s. Why did it go bust? Because its Treasurer decided he was a financial genius, took a whole series of reckless financial decisions, and when they started to go wrong, filed false and misleading financial statements in an attempt to cover up (see here). At least nothing like that could possibly happen here.

Update (6-1-09) - Pimco's Head of Global Portfolio Management has since stated that the UK has a greater than 80% chance of being downrated from the top AAA credit rating. He says: "It's just a question of when on the current trajectory, not if. Based on what we know today about the debt trajectory and about the inability to adjust that, I think it's greater than a 50% likelihood for sure. Call it more like 80%." HMG's debt reduction plan "is lacking in conviction and it is lacking in details." Presumably Brother Balls agrees 100%.

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Credibility Gap

Can we stand four months of this? Here we are with a government whose fiscal policies are shot to buggery and back, and whose financial projections aren't worth a bucket of warm spit. Yet they have the brass neck to criticise others for lack of credibility.

According to Darling today:

“The Tories have made over £45 billion of promises, but can barely explain how they can pay for a quarter of this. This leaves them with a credibility gap of £34 billion."

How dare they! Especially since half Darling's so-called Tory promises aren't promises at all (like the supposed promise to rescind the new 50p tax rate). It's yet another dodgy dossier!

Except... when you actually read it, Darling's 150 page Tory costing paper turns out to be rather good. Obviously we shouldn't take the headline total seriously, but at the detailed level it's a useful pricing guide to all those vague aspirations that the Tories have been tossing around for months. For example:

• Extra revenue likely to be raised by that famous non-doms tax? A mere £50m pa (official HM Treasury estimate, confirming our long-held scepticism about George's claim that it would raise £3.5bn pa - see here).
• Cost of transerable personal tax allowances for married couples? £4.9bn pa (official HMT estimate).
• Cost of maternity nurses for all? £492m - £2.8bn pa (official HMT estimate).
• Cost of 45,000 additional single rooms in NHS hospitals? £9.5bn over 5 years (official HMT estimate).

So Darling's actually given us something useful. Suddenly we've got HMT's handy guide to the cost of those Tory tax and spend teasers. Sure, you can argue with the assumptions underlying their cost estimates, but they are all spelled out in detail, and this is a lot more than the Tories have provided themselves.

Which neatly highlights what's so very wrong with the way we currently manage our tax and public spending debate. Despite being in the biggest fiscal hole since WW2, our politicos are conducting an election campaign based on evasion and half truths. None of them are being candid about how their own sums add up, and we find ourselves in the ludicrous situation of turning to Labour to tell us what the Tory plans would cost, even though we know Labour's own plans are riddled through with deception.

Given the grim decades ahead we need to address this. So here's a suggestion: when George sets up his Office for Fiscal Responsibility, it should do more than simply monitor the incumbent's policies. It should also issue costing estimates for the main alternative policies proferred by the opposition parties, especially in the months leading up to an election.

PS Talking of credibility gaps, Fraser Nelson does a horribly good job on Cam's campaign launch speech at the weekend. Calling on Cam not to take us for fools, he highlights the continuing mismatch between Tory pledges to spend more on the NHS, overseas aid, and high speed railways, and the disagreeable fact that we have no money. We surely deserve better than that.

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Back To Basics: Seth Godin.

Back in 2000, I downloaded the two hundred pages that constituted Seth Godin's brilliant Permission Marketing. Since then I've had the pleasure of attending his seminars and talks, and when I started blogging he generously warned his readers of that fact.

He writes shorter books these day and his new one Linchpin is published this month. It's about answering the crucial question of how you make yourself the linchpin of your market and/or your company. That ties in directly with the ethos of my "back to basics" questionnaire and I'm thrilled that he agreed to answer these five questions as well.

How do you get new business?

New business gets me.

This sounded unattainable to me for decades as I scrambled, often one check away from bankruptcy, to build a business, a product, an organization... but then, after a while, I discovered that people would contact me asking for this or that. The hard work isn't getting them to call, the hard work is breaking away from whatever pack I'm in, whatever ice floe I'm on and create an event or a product or an idea that people actually want to be a part of.


How would you advise others to do so?

Find 1,000 true fans. Earn the right to coordinate the actions of 1,000 people in a tribe. Connect and lead. Create ideas that spread, and find a niche small enough to be important in (but big enough to matter).

Do this while you're doing your day job (not easy). But if you do it a little, every day, for years and years, you'll find it. Which is a lot better than doing the hustle, every day, for years and years and not finding it.


How has this changed in recent years and why?

I think it's now clear that the internet makes this sort of connection and leadership significantly easier than it used to be. It brings with it more copycats and more competition, but it's still clearly a win.


How would your advice differ for someone who is just starting up?

I think now you get to skip a lot of steps that others used to have to take. Tickets that had to be punched. Now, you can start out fast, without paying as many dues. There's a big if. The if: you must have great stuff. Great ideas. Amazing art. Connections that work. Insights that people can't help but embrace. That's not easy, but in just about every segment, someone is doing just that.

Don't try to be the "next" of any successful person. That person is already occupying the slot. Be the next you.


How do you balance this with keeping existing customers satisfied and coming back?

People don't come back merely because you met spec. Lots of people meet spec. They come back because they got more than they paid for, more than they bargained for, and they're motivated to get even more of that.

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Pruning The Public Sector Paybill

New Year - New Resolve

2010. We'll get going by wishing BOM readers a prosperous survivable New Year.

Right, enough pleasantries - back to that fiscal hangover. With George's first make-or-break budget now less than 6 months away, we need a much clearer focus on precisely how he and Cam are going to deliver the spending cuts the markets are expecting.

As we know, the task is huge. Depending on whose sums you believe, to balance the budget, we need to cut public spending by between £100bn and £150bn pa. That's 15-20% of public expenditure, or £4-£6 grand per household.

To put it another way, if Cam/Oz fail to cut public spending, they will need to increase taxes by £100-£150bn pa. Which would require, say, increasing VAT to 30% and doubling the standard rate of income tax to 40p (see here).

So what to cut?

As we blogged many times last year, one of the prime targets has to be the public sector paybill.

When last sighted (2008-09), that was running at £160bn pa in cash terms - 11% of GDP. This year, we estimate that percentage has risen to nearly 12%, reflecting the decline in GDP and the fact that public sector employment has increased again. And this is a burden that has got a lot heavier through the years of Brown's reckless spending splurge, with record numbers of new public sector jobs and higher pay all round :

It's complete madness. And note that this definition of pay excludes the net accrual of future public sector pension benefits. They currently add a further £40bn pa or so (see here - Table D.1). So the true overall public sector paybill is more like 15% of GDP*.

But at least the problem is now getting some airtime. George has promised to freeze pay for public sector employees earning more than £18k pa, the LibDems promise a total freeze, and even Labour will impose a freeze on the top 40,000 (see here for a handy summary of main parties' cuts proposals, produced by - yes, of course - the TPA). None of that is enough, but it's a start.

And the msm are preparing the way. Today's Sunday Times reports its own investigation (see here):

"Public sector workers earn 7% more on average than their peers in the private sector — a pay gulf that has more than doubled since the recession began.

Official figures show that staff employed by the state are enjoying bigger pay rises, working fewer hours and receiving pensions worth up to three times as much as those in the private sector.

Civil servants, National Health Service staff, council officials and other public sector workers have enjoyed a “golden age” under Labour, according to an investigation by The Sunday Times."

They've also produced some neat graphics summarising the key stats:

So what's to be done?

In the IOD/TPA cuts paper published last September, we recommended a two year pay freeze for all public employees except soldiers on the frontline, a 5% pay cut for the richest 10%, and increases in employee pension contributions and various other employment benefit reductions. Over two years we estimated that would build up to a £16bn pa total saving, or around 10% of the cash paybill.

Nobody says it will be easy, and Cam will need to face down our militant and over-mighty public sector unions. But make no mistake - this is the scale of saving we will need.

And if we don't do it?

BOM's friend Ted Bromund at the Heritage Foundation draws our attention to an identical struggle now taking place across the US.

There too, heavily unionised public employees have been been "coddled and spoiled" (as the Economist puts it), doing much better than most private sector workers, and imposing a cost burden taxpayers can no longer afford. The average pay of a Federal worker is $71,000 pa, compared to $50,000 in the private sector. On top of that, the public sector still offers medical insurance, and the kind of pension entitlements most private sector employees can only dream about (see here). What's more, public sector employment has been pretty constant through the recession, whereas the private sector has shed 6% of its workforce (see here).

So what are US politicos doing about the problem?

Yes, that's right - they're doing everything they can to avoid taking on the unions. Which means that instead of fundamental reform (such as scrapping their expensive defined benefit pension schemes), they're resorting to stop-gap measures such as recruitment freezes and asking employees to take unpaid leave. In other words they're passing the pain on to their customers via reduced service levels.

But in the US, states and municipalities can go bust, which means that local fiscal problems go critical a lot more than we're used to here. At least one city has gone bust precisely because it failed to grip its paybill (the Californian city of Vallejo - see here). And there are now some signs of minds being concentrated and political resolve beginning to stir, with New York leading the way on sweeping pension reform.

So as we wait for George to show us that axe he's supposed to have, we'd do well to watch the US. If the choice is between taking on the unions and bankruptcy, the sooner we put down the markers, the better.


*Technical nerd note: the accrual of future pension benefits does not cost the government anything in current cash terms - the government simply accrues a liability to pay those benefits in the future. In effect, the government is funding part of its paybill by borrowing from its employees. But that doesn't mean the taxpayer burden is any less - it simply means we have even more debt.

PS Highlight of the Xmas period? No contest - PD James does BBC R4 Today. Tyler purred with delight as she ripped into Mark Thompson over BBC pay, schmoozed Jumping Jack Straw into bashing the police for becoming the form-filling pc non-police Labour always wanted, and gently roasted Sir Ian Blair for failing to keep us safe. Almost worth the licence fee. Can't they make her Today's editor for good?

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