Public Sector Jobs As Welfare

Enough pyramids already

How many of our 6m public sector jobs are just another form of welfare?

The reason I ask is that listening to today's BBC coverage of the continuing debate over National Insurance Contributions (NICs), the question didn't get a mention.

The BBC naturally began the day by giving prominence to Labour claims that the Tory plan will cost jobs because of the associated spending cuts. But as the day progressed , it gradually dawned on them that all parties are planning to cut spending, so all parties will cut jobs. And that's A Very Bad Thing.

And on one level of course, it is a bad thing. Nobody likes to see people losing their jobs.

But the trouble is public sector jobs cost money. And right now, we don't have any money. So unless we cut spending on public sector pay, we'll have to find the money by some other means - like increasing NICs, which will cost up to half a million private sector jobs.

However, even setting aside that point, how many of these jobs are producing valuable output - stuff the rest of us actually want?

Suppose for a moment we weren't under the money cosh. Suppose we had fiscal flexibility to employ all our current public employees and maybe some more on top. Would that make sense?

Consider this famous quote from John Maynard Keynes:

"If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of repercussions, the real income of the community, and its capital wealth, would probably become a good deal greater than it actually is."

Which is more or less the current Labour argument - keep all our public employees in jobs because, although many of them are doing the public sector equivalent of burying bank notes and digging them up again, at least they're in employment, which must be a good thing.

Keynes went on to extol the benefits of ancient Egyptian culture:

"Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York."

What he's saying in essence is that there's a mass of people who for whatever reason cannot produce anything that other people want to buy. So the best thing to do is employ them on public projects. Projects that don't compete with the stuff other people are producing , by reason of the fact that these projects don't produce anything of any actual value to anyone (other than the producers themselves and the high priests/commissars).

This is public employment as welfare. And when we look at the high dependence on public sector jobs in the depressed regions of Britain today, we can see it's more than an empty slogan.

The one slight snagette is that welfare employees still need paying (even the Egyptian slaves still needed feeding). Which means that someone else has to part with the fruits of his own labour in order to provide the wherewithal. And all he'll get in exchange is the sight of another new pyramid, or if he's lucky, a government promise to repay the loan in some distant future, probably in debased coinage.

Getting low skill, low productivity, welfare dependents into work is going to be one of the very toughest challenges facing Cam's government. Given the catastrophic fiscal legacy, leaving them on the public payrolls will not be an option.

PS Interesting article here about the ancient Egyptian economy. It was essentially a command economy, with high levels of taxation and slavery. Life expectancy was 24. Keynes was a towering genius who shed huge light on the way economies work. But he was also a member of the Bloomsbury group of champagne socialists, who had little faith either in the market's ability to invest rationally, or to provide jobs for all. He believed in the existence of noble commissars, such as his good self, who could plan and organise things much more scientifically. Not a lot of people know that. Or at least, they choose not to remember it.

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Refresh And Renew.

Seth Godin posted about Levy Flights the other day. This was not a reference to an obscure dancehall performer, but a discussion of the similarly obscure statistical distribution pattern that I first came across in Kristakis and Fowler's Connected.

A Levy flight basically illustrates that behaviour focuses in a small area for a period of time and then when that area becomes uninteresting, there is a flight/leap to another area quite some distance away where another period of grazing follows.

Seth's post sounded a little fatalistic to me, but Connected highlighted two interesting features of actual network behaviour. Firstly, when people make the larger leaps, the size of that average leapp is much greater than was expected under a random walk; but, secondly, those transitions actually occur more slowly than a Levy flight would predict.

That seems to me to suggest that customer ennui is not inevitable and that there might be more hope for retaining customers if you both make their experience continually excellent and refresh it regularly.

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State Dependency Vs Economic Growth

Governments can never deliver prosperity

The dividing lines are suddenly becoming clearer. Labour is offering a continuation of the high spending high taxing policies pursued over the last 13 years, and the Tories are finally starting to spell out the alternative.

The argument over National Insurance Contributions (NICs) precisely captures the point.

Labour says that the increase in NICs is necessary to finance £6bn extra public spending. They say that cutting that spending will cost tens of thousands of public sector jobs (now estimated at 40,000), and cause untold damage to public services.

The Tories say that increasing NICs will destroy even more jobs (it could be half a million - see this blog). Moreover, the £6bn spending cut will not damage public services because it will be deliverable from cutting costs not services. After all, it's less than 1% of total public spending.

The debate is a very familiar one: do we think that public spending is required to shore up the economy, or do we trust the private sector to do the job?

Socialists have always mistrusted the market. NuLab accepted it under sufferance, but only so long as we were in the long boom. Once we hit the bust they immediately reverted to type, nationalising the banks and stoking up public spending even further than they'd already done.

The problem with that approach is the same as it's always been. By increasing the size of the public sector, the government squeezes out the market sector. And it's the market sector that delivers long-term sustainable growth.

Now, according to Labour, that's not what they intend. According to them, they'll cut the public sector back down again as soon as the time is right - as soon as the economy has returned back to self-sustaining growth. In other words, they want us to believe this is simply a timing issue.

But the real world isn't like that. In the real world, once the public sector has expanded, it's the devil's own job to cut it back down to size (aka the ratchet effect). And once private sector employers have laid off the staff to pay for the additional taxes, it's the devil's own job to get them to rehire - especially if the economy is bowed down under massive government debts.

The net result is that the economy becomes even more dependent on state support, and even less able to generate growth and prosperity for the future.

Just in case you'd forgotten, the key to long-term prosperity is productivity growth - delivering more output with fewer inputs. And on that measure - despite constant claims about so-called efficiency savings - the public sector has turned in a truly abysmal performance.

As we blogged here, the ONS estimates that during Labour's first decade, public sector productivity fell by between 0.3% and 1% pa (the smaller fall depends on a number of tenuous assumptions such as counting the increased passes in our dumbed-down state exams as, ahem, "quality improvements").

Over the same period, private sector productivity increased by 2.2% pa.

It's no wonder our business leaders are up in arms. They're the ones who've had to struggle and sweat and sack surplus staff in order to deliver that productivity growth, while public sector managers have just sat on their spotty behinds avoiding any such tough decisions. Why shouldn't the public sector start feeling the heat? There must be millions of ways to deliver productivity growth without torching services.

Consider this. If the public sector could match the private sector's productivity record, within 5 years we'd be saving around £70-80bn pa. And the cumulative saving would be about £200bn, straight off our soaring debt mountain.

At the same time, we'd be releasing resources for redeployment in the private sector - the bit that earns Britain's way in the world, generates the growth, and ultimately pays all the taxes.

What's that? Redundant public sector employees would be fit for nothing other than joining the dole queue?

Listen, Tyler successfully made the transition. And according to Mrs T, if Tyler could do it, anyone can.

PS Driving along yesterday, Tyler listened to a depressing report from the Walton area of Liverpool (see vid above for Jackson tour). It's an area that has been totally whacked by welfare dependency. Unemployment is high, crime is rife, and hopelessness pervades. During the discussion, some prof was asked what we should do? Was more money needed? He said money was already being spent - lots of it - but it hadn't done the trick. What was actually needed was small business entrepreneurs to create jobs. Unfortunately Liverpool doesn't have many of them, and it was difficult to see how they could be created. Well, screamed Tyler at the radio, I've got an idea. Cut taxes on small businesses in Liverpool (and Hull and various other apparent basket cases) to zero. Start here. And while you're at it, see this excellent DT article by Fraser Nelson.

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Cardiac Arrest On The Forecourt

Change like cutting fuel tax back to 80s levels

This afternoon Tyler suffered a cardiac arrest on the forecourt. A credit cardiac arrest. For the first time ever, the price of filling his fired up gas guzzling Quattro topped 80 quid.

80 friggin quid!

Tyler can still remember being shocked when the Iran Iraq War sent the price of a gallon soaring to the exhorbitant level of £1. But that's a dream compared to today's all-time record price of £5.46 per gallon.

Fuel prices have now reached record highs. Is the problem greedy oil barons and speculators, as Bishop Snow preaches, or our hippy eco-wibbling government?

Here's a chart based on the official price series from the Department of Energy and Climate Change. It shows the pump price of unleaded petrol, and the amount accounted for by tax (duty and VAT):

The impact of tax jumps right out: of today's average £1.20 per litre pump price, just 42 pence actually pays for the petrol. The other 78 pence (65%) is duty and VAT, going to the government. Which means that of Tyler's 80 quid, a staggering £52 went to the government. Or to put it another way, without tax, Tyler could have filled up for £28.

So we can be quite clear - when it comes to the level of pump prices, it's the government that's squarely to blame.

However, when it comes to the 28% increase in pump prices over the last 12 months, it turns out that tax only accounts for just over one-third of it (despite the 2.5% hike in VAT and this week's increase in fuel duty). The rest is down to market fluctuations.

Driven by the realisation that the Far East is still growing, and commodity hungry, the dollar price of crude oil is up two-thirds over the past year:

Which brings us back to sterling. Oil is priced in US dollars, and as sterling gets weaker against the dollar, our forecourt prices automatically rise.

As it happens, sterling is a little higher against the US dollar over 12 months, but it's still down a whacking 25% since 2007. And unless we tackle our fiscal problems with convincing determination, sterling will soon be heading down again.

At which point, you'll get a load of old timers like Tyler saying "I remember when we could afford to run motorcars. Why, petrol was only £1.20 a litre".

So take this as a warning.

And fill up tomorrow.

Oh, and if you find a candidate who doesn't subscribe to the eco-wibbling idea that fuel taxes should be increased for ever, you might let me know.

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Fire Up The Doomsday Machine - Brown Could Still Lie His Way Back

Somebody needs to look at this - fast

If he had the energy, and the sun wasn't shining, Tyler would deconstruct Brown's grossly misleading account of history on BBC R4 Today this morning.

Like all that stuff about "boom n bust" somehow only being the government's fault if it's accompanied by inflation - LIKE WHAT IT WAS UNDER THE EVIL TORIES - and how he's cut income tax (overlooking the fact that the basic rate of tax is only one element of the calculation - you also need to take into account the real value of allowances and rate bands, not to mention his increase in National Insurance contribution rates).

But meh... Tyler needs to get out into the sunshine.

So let's content ourselves with the latest sighting of the Doomsday Machine.

As BOM readers will recall, the D Machine is a four-wheel drive beast that can do 0-£5 trillion in well under a decade. At its heart is a turbocharged debt interest payment accelerator that works like this: the government spends far too much money and starts running a big deficit; debt builds up and interest costs start to rise; government revenues fail to keep pace, and there has to be more borrowing just to pay the debt interest; lenders take fright and raise their interest rates; the economy slows further, government revenues sag, there has to be even more borrowing to pay the interest costs, interest rates rise again, the economy sags some more, there has to be more borrowing to pay more interest; and the pressure goes on building up, right up to the moment when the turbocharger explodes, at which point the D Machine is engulfed in a fireball of hyper-inflation.

It couldn't happen here?

The Bank for International Settlements disagrees. In a recent paper on the international outlook for public debt, they point to the UK as being the worst placed of any major economy.

On current policies, they project that by 2040 government debt interest payments in the UK will have ballooned from their current level  under 3% of GDP up to nearly 30% - worse than any other country. The following chart shows public sector debt interest payments as a percent of GDP:

Or to put it another way, by 2040 the average family would be paying (in today's money) over £10 grand every year just to pay the government's debt interest bill.

And by 2040, the BIS estimates that our official public sector debt (ie excluding Enron items like public sector pensions) will be a staggering 550% of GDP (dotted red line):

Of course, this can't happen. Our credit will have been cut off long before we get to debt at that level. By then, we'll either living in a hyper-inflation bartar economy like Zim, or we'll have somehow somewhere found a bunch of politicos with the cojones to cut spending seriously.

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Throttling The Goose

Wake up Polly

According to the Office for National Statistics, the richest 10% of households pay a quarter of all personal taxes (including income tax, National Insurance, VAT, Council Tax, and sin duties).

Good thing too, you say - they're rich, so they can afford it.

And you do have a point. Especially when you consider that this richest 10% get 30% of all the income (ie households original income, before taxing account of tax and welfare benefits).

But then again, these rich households contain the very people we're going to need to drag Britain out of the mire. The contain the entrepreneurs, the high skill professionals, and yes, the bankers, on whom we will depend to create the wealth of the future. Which means we need to be very careful before whacking them with yet higher taxes.

Unfortunately, as you may know, yesterday saw the introduction of the new 50p tax rate for everyone getting over £150 grand pa. It also saw the abolition of the tax-free persconal allowance for anyone getting more than £100 grand (the allowance is progressively clawed back as income rises above £100k, imposing an effective 61% tax band between £100k and £113k).

It's certainly not the way to get the economy moving again. But the really stupid thing is that it's most unlikely to raise any additional tax revenue (see this blog). Indeed, by encouraging high earners to rearrange their affairs in order to avoid the tax, it could easily reduce revenue.

Just as a reminder, when Thatcher's government cut the top rate of income tax, it substantially increased payments from top taxpayers. In 1979, the top rate was cut from Labour's lunatic 83% down to a somewhat saner 60%, and then in 1988 it was cut again to 40%. And the share of income tax paid by the top 1% of taxpayers virtually doubled, from 11% in 1978-79 up to 21% by the 1990s.

For future reference here are the figures (including the proportion of tax paid by the top 10%):

To summarise, history tells us that cutting top income tax rates increases the amount of tax paid by the rich.

HMRC estimates that nearly three-quarters of all income tax last year was paid by the richest 25%. We have now put that in serious jeopardy.

So why hasn't multi-millionaire Dave Cam pledged to reverse Labour's top tax increases?

Don't be daft - you know why.

We'll just have to hope that really he does understands the damage it will do, and somehow finds the courage to reverse it as soon as he gets his feet under the desk.

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Talk The Talk: Use Conversational Language.

Sainsbury's have a Twitter account. They presumably think it will help them engage in conversations with their customers on a human level. But do their customers really want to talk to "colleagues"?

When seeking to engage the external (aka real) world, don't use the alienating internal language of the corporation. Just say "talk to us".

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