The P2P Jobs Market

The UK has an army of 4.6 million self-employed people, according to the Office of National Statistics - the largest it's been since we began recording such figures 40 years ago. That's 15% of the UK workforce. Even more significant is that 732,000 of the 1.1m people who have found work since early 2008 are self-employed. Fewer people have been leaving self-employment for employee roles over the past five years than used to be the case. Perhaps that's because of the recession. But over that period numerous services have emerged to support self-employment, and it seems possible that we'll see an even greater shift towards that way of working in the future.

So, who are the self-employed, and how do they find work?

The largest increase in self-employment since 2008 has been among 'managers, directors and senior officials'. But, hey, every self-employed person might claim to be a manager. So it's more noteworthy that the top 3 self-employed roles of 2014 have been building trades, cab drivers/chauffeurs and carpenters. The figures also show that professional and technical occupations are heavily represented.

How do these people find work?

No doubt word of mouth has a lot to do with it. But we've also seen a rise in the number of online marketplaces that match self-employed people with those who need work done. Indeed, TaskRabbit, a leading US marketplace, chose London as testing ground for a more automated model that it later rolled out in the US to replace its initial manual auction service. While TaskRabbit currently seems to cover the broadest range of services, there are many other such marketplaces in the UK, such as RatedPeople, Trustatrader, MyHammer, MyBuilder, TradeAdvisor, Checkatrade and so on. Note that Amazon has launched a 'local services' offering in the US, which suggests it may one day do so here.

The prevalence of cab drivers amongst the self-employed may help explain the growing number of taxi apps and car-share services.

Meanwhile, SchoolofEverything (a client of mine from 2007, on the back of my experience of P2P lending), enables anyone to make money from giving lessons in almost anything you could think of (...no, not that).

At any rate, the growth in both the number of self-employed people and the services that help them find work, suggests that self-employment could be an even more popular model in the future. The rise of the P2P economy?

Involve The National Audit Office in Project Planning

So, two weeks have passed since the revelations of the latest (known) public sector IT disaster, and related wasted expenditure. But I'm willing to bet that nothing has changed in the way projects are planned, and we'll see many more juicy stories in future.  

Perhaps some kind of pre-emptive strategy would be in order...? 

Surely the National Audit Office is by now rammed with people who can spot the seeds of doom in just about any public sector IT project it cares to look at. So why not involve them at the start?

Forget all this talk of economic recovery, only the civil servants can save us now.

BS2 and The Planning Fallacy

In his excellent book Thinking, Fast and Slow, Daniel Kahneman explains that governments tend to reward bidders who over-estimate the utility of large-scale projects, while under-estimating the cost. This is known in the trade as "The Planning Fallacy". While Kahneman cited research that demonstrates the fallacy in relation to many railway procurement exercises over many years, we also saw if firsthand recently in the West Coast railway fiasco. Now the government is trying its hand again, with BS2 HS2.

The Planning Fallacy suits all those involved, except commuters and taxpayers. At the time of the West Coast debacle, costs were about 40% higher on Britain’s railways than comparable European networks. And taxpayer subsidies, adjusted for inflation, had reached approximately £7 billion per annum. Approximately 10% of trains didn’t arrive on time. Only 42% of rail customers were satisfied with value for money for the price of their ticket. Only 69% said there was sufficient room for all passengers. And only 80% of rail customers were satisfied with punctuality.

This spring, the figures don't look any better. In fact, only 29% of UK commuters thought they got good value for their rail fares. Adding a fancy new rail project doesn't seem likely to fix their day-to-day experience.

There are numerous hard-headed dismissals of the alleged viability of HS2, including John Kay's piece yesterday. And it wasn't reassuring to learn from a Channel 4 news interview with the Transport Secretary that he has set aside a £14bn 'contingency' in an apparent budget of £40bn. It smells like 'waste' to me.

There must be ways to spend that kind of money to improve the lot of today's commuters, rather than saddling the next generation with a whole load of BS.

Only Civil Servants Can Save The British Economy

That's the conclusion I reach from reading Lord Young's report on Growing Micro Businesses. The report makes it clear that government plans to fund small business growth and harness public spending power are still medium term options. Absent substantial growth, all we can do in the short term is make sure our tax revenues aren't wasted on a day-to-day basis. Can our public sector colleagues plug the leaks?

The scenario

Public spending is still roaring away at 44% of UK GDP and tax revenue barely exceeds 35%. This represents a yawning chasm that remains to be filled with higher taxes and/or spending cuts - unless GDP grows substantially faster. This would make public spending less of a drag on the economy (35% is the ideal number) and produce more tax revenue to pay off public debt and narrow the deficit. Unfortunately, the productive economy is limping along, largely due to problems in the UK (and EU) banking systems. This is particularly bad for the UK, as businesses rely on only a few major banks for over 90% of funding.

The growth strategy

Unable to improve the flow of funds to the productive economy via the banks, Lord Young's report reveals that the government's growth strategy depends heavily on educating over 4 million small businesses about alternative ways to finance increased production and employment, and using public sector procurement to buy more from those smaller businesses. Theory has it that, as they grow, the rest of the private sector will also benefit, and away we go...

Awareness of alternative finance

Unfortunately, Lord Young notes that the government is yet to come up with "a robust, evidence-based strategy for communications to all micro, small and medium sized businesses" to explain the alternative funding options available. Some money is being offered via alternative finance platforms, which leverages their private marketing spend, but apparently the government still needs to issue more information on support schemes via Gov.uk (the 3rd attempt at a government portal).

However, educating SMEs about non-bank funding options is only one side of the equation. Success also depends on persuading mainstream savers and investors to put money into alternative channels. This collides with the £400bn ISA programme, which massively subsidises bank deposits and regulated investment funds that don't support the productive economy. Countless people have explained this particularly vicious circle to the government. But the Treasury seems determined not to level the playing field, either by extending the ISA scheme to include alternative financial services or by reducing the size of the incentive that favours only bank deposits and regulated funds.

This is a problem that seems unlikely to be resolved any time soon.

Smarter public procurement

So where are we on the road towards smarter public sector procurement?

Unfortunately, the smarter procurement drive is mired in the need to "simplify and standardise procurement practice across all parts of Local Government, health trusts and the wider public sector".

This seems an enormous challenge. The next step, for example, is to initiate consultations on reforms to public sector procurement standards...

So actually getting the public sector to buy more from SMEs from the top down is likely to be a very long way off.

The last card - plugging the leaks

That leaves only one option in the short term: civil servants spending less and more wisely.

That doesn't mean slashing welfare payments, and so on. It means wasting less money in the context of the £166bn the public sector spends on its own goods and services.

Surely not all of this needs formal consultation. I mean, isn't it partly a mindset? Thriving private sector businesses recognise the need for constant change to remain aligned with their customers' evolving behaviour and changes in the market, and public sector organisations face the same challenge. Yet we hear little about how the public sector evolves to be more customer-aligned and efficient. Do public sector workers realise the scale of the opportunity to help? Surely they aren't resistant to the idea - after all, they must be among the most publicly spirited people in the country...

It's unfortunate that the public focus is preoccupied with the other side of the government balance sheet. It seems such a waste of time and resources to get distracted by the moral panic about how much more tax foreign corporations should pay, when we could be getting so much better value for the crushing amount of tax that each of us already pays personally.

The process of hauling people before the Public Accounts Committee alone costs money. And we have to be mindful that reforming international tax treaties will rest on the shoulders of public sector staff who may well spend, very inefficiently, huge amounts on travel and other services in the negotiation process. 

Ironically, even the argument about extra tax revenue demonstrates why it's critical to fix all the holes in the bucket before pouring more money into it.

What Happened To 'Class A' Political Journalism?

My appetite whetted by this week's local electoral melodrama, I've been searching for some Class A political journalism to feed my lust for pragmatism. 

There were little flashes of it from a few of the TV people. Michael Crick, who blew the lid off the Andrew Mitchell stitch-up, was rude as hell to Farrago, no doubt furious at having stuck to him like a leech in the hope of discovering anything coherent and coming up empty-handed. That left the usually mild-mannered Gary Gibbon to go after the rest of the gang. Desperation set in after the AutomEtonian responded to every single question with the line that this week was simply about local councils. He genuinely seemed to forget he was the Prime Minister, and I guess it's easy to see why. This seemed to put Gary in such a foul mood that he went after Flash Nick and Millibore like a mortar crew on speed. Each prevarication was interrupted with a fresh round down the tube, and another explosion of disbelief at the factually-twisted response. 

The only problem with the Gibbon assault was the apparent premise of the questions on capital spending: that it's the job of the state to fill every hole in the infrastructural landscape. Creating a whole new mountain range out of UK public debt is strange medicine indeed, whatever the cause. Ironically, Flash Nick went closest to a straight response, saying that while they'd barely invested a bean of new public money, the coalition has done a great job of attracting private capital to public projects. If that's true, then let's hope they've overcome the planning fallacy, and the PFI vultures leave a little flesh on the state carcass for the rest of us. 

As for Ed, well... 

In the end, the howling in my soul could only be quieted by re-reading "Fear and Loathing on the Campaign Trail '72". Forty years on, nothing has changed. The vicious wheels of the party political machines are still flattening the best interests of the citizens into the road in the rush for power and patronage, and Thompson's substance-fuelled take on the political animal is so brutally right that the recognition will make you laugh like a hyena. This, for example, could have been written today:

"This also reinforced my contempt for the waterheads who ran Big Ed's campaign like a gang of junkies trying to send a rocket to the moon to check out rumours that the craters were full of smack."

Now why doesn't anyone write about politics like that anymore?

Is it merely because today's journalists are sober, or have they abandoned hope that we can produce anything different to the current stage-managed pantomime?

Thatcher Failed To Make It Personal

Whether you loved or loathed her, you have to be impressed that 23 years after she was hunted out of office Margaret Thatcher's funeral is as divisive as a Poll Tax riot.

Clearly Britain has failed to 'move on' from the Thatcher years, which suggests to me that the work she started was on the right track but is seriously incomplete. I mean, if her policies had been just plain wrong-headed or disastrous, Britain would have dropped them like hot coals - or the notion of 'light touch' banking regulation. Instead, we're still trying to balance Thatcher's blast of economic reality with its personal and social impact.

Whatever your politics, it's clear from all the recent commentary that Thatcher was focused solely on improving the way the failing British economy 'works'. She spent her energy arguing relentlessly with people about the nature of the problems, their causes and the improvements that should be made to resolve them. The resulting policies obviously appeared 'right wing', but this was largely by comparison with the dogmatic lunacy espoused by the economic lemmings in charge of the Labour Party and trade unions at the time. Their policies seemed predicated on the private sector operating as a charity for the public sector, rather than economic sustainability. Thatcher's opponents were not arguing either on the same rational terms or with the same rigour. Her disciplined approach ruthlessly exposed dogma, from both left and right, and homed in on the most feasible economic solution. Then she rammed it home...

While Britain's reward was increased productivity and employment, far too many of its people were ill-equipped to cope with this fairly brutal brand of politics. Thatcher is infamous for the quote that "there's no such thing as society" which is often unfairly given without the qualification she gave it. But even the full quote reveals a serious flaw in her approach:

"They are casting their problems at society. And, you know, there's no such thing as society. There are individual men and women and there are families. And no government can do anything except through people, and people must look after themselves first. It is our duty to look after ourselves and then, also, to look after our neighbours."  Women's Own, 1987.

Thatcher's words "and then" raise the issue of when, which we naturally interpret as 'when we have enough for ourselves'. But enough is never enough. Our society is obsessed with personal rights and entitlements, rather than the duties and obligations which must be performed if those entitlements are to be delivered. After all, who ultimately bears the responsibility for delivering everyone's rights and entitlements if not each of us personally? Thatcher was right to the extent that the state cannot perform our personal obligations for us - ultimately, it can only act as a facilitator for our own endeavours - but it was a mistake to assume that society would automatically benefit if each of us looked after ourselves as a first step. Perhaps this was as much a flawed belief in the 'efficient markets hypothesis' as that of Alan Greenspan (and Gordon Brown) a decade later.

At any rate, we are now faced with the fact that, in Thatcher's own terms, we are not looking after a fairly large number of our neighbours. While it's worth noting that Thatcher's governments produced consumer-oriented legislation such as the first Data Protection Act (1984), the Hospital Complaints Procedure Act (1985) and the Consumer Protection Act (1987), it took British society several more decades to establish even a basic sense of 'customer service', and most of the UK's institutions are still not designed around the 'customer'.

In my view, we will continue to struggle with significant social imbalances until we grasp the idea that society and the economy only 'work' if each of us - whether acting as individuals or employees of corporations or the public sector - acts in ways that are sustainable for both ourselves and society at the same time. It's not a matter of looking after ourselves first "and then" our neighbours, as an afterthought. Our activities have to be aligned to be sustainable. And only by focusing on our duties and obligations to everyone else will we secure our own rights and entitlements. That is the fundamental concept behind what I would call “the Personal State”. It's time we built it.

Image from DelhiNewsRecord.

Submarine Welfare

The Tory spin machine was in overdrive today, with the Chancellor linking a fatal house fire to excessive social welfare payments, while the Prime Minister used the recent bout of North Korean toy-throwing as the kind of "extreme threat" that justifies Britain's entire nuclear submarine programme. Hell, why don't we just pay for Trident straight out of the welfare budget and be done with it?

Given the gravity of the UK's economic predicament, you might have thought our political leaders would be sticking to hard facts, rather than inciting moral panic. But you'd be wrong. Party politics is all about cynically exploiting fear and greed:

"while narrowly targeted policies will fail to draw on the strength of middle-class political pressure to defend welfare, policies with wider coverage actively recruit the sharp elbows of the middle class." Source: The Solidarity Society: why we can afford to end poverty, and how to do it with public support. Fabian Society, 2009

That's right, the Tories have been tearing pages out of the Left wing playbook, even if they're trying to work the same trick in reverse. Blame all bad stuff on the welfare state, so most voters will want to spend less on it.

Ironically, the Left seem to think they got this idea from the Right, as explained by Rhiannon Lockley in her “Red Book” essay on "Understanding the Psychology of the Working Class Right Wing": 

 "...the key achievement of propaganda is to make the belief being transmitted internalised to the point where its origin is lost and it is accepted as natural and self-discovered by the individual... The volume and diversity of negative messages about scapegoated groups in the right-wing media today does much to achieve this, and it is also supported by the factual style of reporting which presents arguments as definite rather than exploratory." 

The truth is, they're all at it... endlessly spinning and scapegoating instead of solving the root cause of real problems. And we're paying for it. Big time.

So how do we get these people to focus on the real issues? Where do we start?

I think we need to play them at their own game. And the best place to start is closest to home. We should link all our ills to government waste - not the welfare budget or the healthcare budget, but the £166bn that the public sector wastes on itself - nearly a quarter of the UK's entire annual exenditure. Every time a politician strays from a discussion of the hard facts in any area, we should ask them how he or she is going to spend less on travel or communications costs, or office space or, dare I say it, expenses.

Once they demonstrate an ability to get that basic level of waste under control, they can graduate to discussing how to control state taxation and spending in other areas. But the bizarre rants of North Korean leaders and random criminal acts, however tragic, should be a long way down the list.   

LSE Gets It: More Pragmatism, Less Politics

Having recently made the same point, I'm encouraged to see the London School of Economics setting out in detail some of the ways in which the UK could benefit if pragmatic political consensus were to replace party-political dogma. 

However, it would be wrong to think that this approach is only needed in the areas of education, infrastructure and innovation, on which the LSE's report focuses in particular. It's a general shift in attitude that is required in every aspect of our lives. 

This doesn't simply mean that politicians and civil servants should adopt a different top-down attitude. It means inverting the institutional narrative altogether. Politicians and the public sector must adopt a pragmatic, bottom-up view of what works and what does not work at the individual level, for the common good. The public sector must monitor and disclose publicly whether - and, if so, how - its activities, regulations and incentives distort all kinds of local and national markets in favour of private and public sector institutions, thereby constraining innovation and competition. Critically, this extends to the wasteful way in which the public sector purchases its own goods and services.

In practical terms, that shift in attitude requires the civil service and politicians to focus on obtaining data, defining problems, measuring their scale, analysing root causes and implementing lasting solutions. After all, hard choices are easier for more people to accept when they can be shown to be driven by harsh reality rather than party political dogma.

While, fortunately, there's plenty of evidence to suggest that this change is already underway as part of longer term trends discussed on this blog, the voices of institutions like the LSE are critical to those trends becoming mainstream behaviour sooner.  Let's hope similar reports follow from others shortly.

Pragmatism Grows At Night

In "India Grows at Night" the writer and commentator Gurcharan Das shares his insights into how India's growing, pragmatic middle class can achieve the country's necessary political and economic reforms. While inspired by Das's presence in Tahrir Square two years ago, these insights also resonate with the plight of Western democracies whose growth is inhibited by extractive private and public sector institutions.

The title of the book comes from Das's belief that India's knowledge economy powered her economic growth because: 

"Bureaucrats did not know how to regulate it and could not choke it with red tape, in the way they stifled India's industrial revolution through licences, permits and inspectors... India's knowledge economy literally grew at night while the government slept."

But India's problems are not over. Das explains that the "puzzle is... how can a vibrant democracy with a rising economy and an energetic civil society have allowed the state and governance to decay"?  He then describes the evolution of the Indian state from before British rule until today, tracing the tensions between social and official structures, and the shortcomings of the political system and key market failures.

Despite different starting points, this 'decay' also awaits Western democracies who have not been alert to the need for ongoing political and economic reforms. There's an ominous familiarity, for instance, in the complaint that the Indian state is preoccupied with the quantity of schools and other public services rather than their quality - "which is what really drives shared prosperity." The problems in our financial system are well rehearsed.

Das's description of the reasons for India's institutional decay is also echoed in Phillip Blond's explanation of the 'political bankruptcy' in Western countries. I understand them both to be saying that right wing policies allow the concentration of wealth amongst relatively few extractive institutions and their management and investors, rather than creating an environment in which widespread entrepreneurship can flourish. Meanwhile, left wing policies that are designed to 'redistribute' income through taxation and public spending are grossly inefficient by comparison to markets. The self-interest of partisan politics has gone too far, and legislators have no real commitment to the common good. Electoral battles fought along social and cultural lines distract everyone from critical long term issues, as well as being dangerously divisive. As a result, we lack appropriate regulatory frameworks and incentives to address market problems that stifle innovation and competition. Not only does institutional decay reflect the bankruptcy of dogma-ridden political parties, but as that decay constrains growth the economy itself drifts into liquidation.

Das argues that successful reforms will only be achieved through more active political participation by the members of the rising middle class, since they are the most conscious of the problems and the most impatient for the necessary reforms. He argues that the intransigence of existing Indian political parties creates the need for an entirely new, 'bottom-up', liberal political party. Das explains that this is a 'classical' rather than a 'social' liberalism - tolerant on social and cultural matters, yet wary of state intervention where the private sector and the market can be more effective.

This also seems to reflect the "renewed political idealism" and "participative democracy" for which Phillip Blond argues. 

In UK terms, this would seems to place Das's vision for a 'liberal party' somewhere between the Tories and the Liberal Democrats. And it seems quite telling that UK voters have forced those two political parties into coalition.

However, I disagree that the formation of a new political party or even a new political idealism is a necessary pre-condition for achieving political and economic reform.

As discussed in Lipstick On a Pig, the bottom-up approach that Das refers to has already been unleashed, largely enabled by the Internet's 'architecture of participation'. The 'Arab Spring' and developments in sub-Saharan Africa emphasise both the global nature of this phenomenon and its effective political impact. This process of 'democratisation' requires no more structure than the social media and a city square, and its power lies in the fact that it isn't confined to politics or economics. Greater transparency, knowledge and reform in one area creates the desire for change elsewhere. The result is both seismic and chaotic, yet significant reform is bound to be 'messy', not orderly and neat. As a result, I've suggested we're seeing the evolution of a "personal state" in which we're acting pragmatically as individuals in a highly collaborative fashion through the services of facilitators, rather than passively relying on our institutions to set the pace of reform.

New political parties and ideals might well emerge in this environment, but they will be a symptom of reforms achieved by each of us acting personally, not the cause.   

Waste: The UK Government Shopping Channel

Whatever you think about taxes, we have to put an end to wasteful public spending. This is not about making 'cuts'. There are no hard choices here, no job losses. This is about staff being intelligent in how they spend money. 

Believe it or not, the government is trying to reduce waste. Today's example is the 'mystery shopping' channel that enables suppliers to report poor public sector purchasing practices, as explained in the short video embedded below. But I've been disappointed not to see more signs that the public telecoms bill has fallen by 30-40%, as Green reckoned it could (progress on IT strategy is reported to be slow, and limited to central government). And I'm yet to see the total figure for travel expenditure (let alone any reduction), despite an announcement in 2011 on central procurement of travel.

But, hey, let's applaud progress where we can.

After 18 months of mystery shopping over 300 complaints have been received. Of all complaints made about 80% are said to relate to the buying process itself, followed by contract mis-management (7%), bureaucracy (5%) and technology/systems (5%). A more detailed breakdown of the 240 'process' complaints suggests significant problems with pre-qualifying suppliers and poor 'purchasing strategy'. Central government is responsible for a third of complaints, but most relate to the NHS and other 'wider public sector' bodies. About 80% of cases referred resulted in a "positive outcome" - a great achievement from zero. The recommendations (summarised below) provide further insights.

However, it would be helpful to know how this complaints process fits into a more comprehensive approach to improving the public sector procurement process. I suspect that 300 complaints in 18 months represents too small a sample of all procurement opportunities to be relied upon as a guide to root causes of major problems. And the fact that 20% of complaints were not resolved satisfactorily leaves a lot of room for improvement. While it's critical to seek and listen to 'customers' comments and complaints, I would prefer to see a more data-driven approach overall, with simple metrics aimed at detecting problems in each step of the end-to-end procurement process. One can then look at which steps are attracting the most complaints, from whom and the value at stake before dedicating resource to figuring out root causes and improvements. There are also plenty of internal suppliers and customers to the procurement process whose complaints will be important to capture in addition to those of SME bidders. Maybe that more comprehensive approach is inherent in the suggested lean sourcing process, but I haven't seen specific mention of it yet. 

It will be critical to understand the bigger picture and to see how this programme develops over the next few years.

Recommendations:

• Public sector buyers have been told not to use "pre-qualification questionnaires" for contracts with a value below the relevant EU procurement threshold.

• A supplier's history of dealing with the private sector must also be given the same weight as any record of selling to the public sector.

• Insurance only needs to be in place once the supplier has actually won a tender, rather than when responding to a tender.

• Buyers are encouraged to engage with suppliers before a tender to ensure the tender document makes sense from the start of the bidding process, to avoid endless changes along the way or even cancellation because the wrong product is being requested. That also enables SMEs to group together to win a tender against big suppliers.

• Dynamic marketplaces and the Contracts Finder portal are designed to avoid all SMEs having to sub-contract to a large supplier (and the inevitable fat mark-up). But more time needs to be provided to answer some advertisements.

• Specifications should also be drawn broadly enough to enable more suppliers to compete for the work.

• Faster payment of invoices is critical. The public sector buyer is responsible for ensuring that prime contractors pay sub-contractors within 30 days of the receipt of a valid invoice in goods and services contracts.

• Public sector buyers must not charge suppliers for the right to bid. Instead, the cost of promoting "framework agreements and other catalogue type arrangements should be related to the value of business a supplier derives from those arrangements, rather than an upfront charge."

Image from Malvern Hills District Council.

The Personal State

This decade is not going well for Britain’s institutions. The 2010 election did not magically restore our faith in a scandal-ridden Parliament. Bail-outs failed to improve the conduct of UK banks. Our public sector finances are in an appalling state. And as more sunlight has revealed the self-serving conduct of our mountainous bureaucracies, the gradual melting of our trust in them has become an avalanche. We want to know how rotten our institutions really are. More importantly, however, we want new models that work. 

As explained in “Lipstick On a Pig”, this plunge in faith in our institutions coincides with trends that are democratising the means of producing goods and services. Using digital technology we are personalising the one-size-fits-all experience traditionally offered by the likes of record labels, publishers, retailers, banks and political parties, and manufacturing our own physical products using desktop industrial machines. Rather than merely accepting what is ordained from the top down, both individually and as members of the ‘crowd’ we are shaping products, markets and political policies to solve the problems we encounter in our day-to-day activities. 

This process of ‘democratisation’ is being facilitated by organisations that are intently focused on helping us solve those problems. I call these organisations ‘facilitators’ to distinguish them from ‘institutions’, which exist to solve their own problems at our expense. The characteristics that I believe mark an organisation as being either a facilitator or an institution fall within broader themes of alignment, openness, flexibility, transparency and responsibility. In other words, a 'facilitator' solves its customers’ problems openly, flexibly and transparently, and takes responsibility for the impact of its activities on the wider community and society. 

Why are these features so critical? You might argue, for example, that focusing on ‘creating shareholder value’ or maximising management and staff compensation have proved to be more successful for some organisations than focusing on customers. As Anthony Hilton, Financial Editor of the Evening Standard, once said, “The City has done very well over the past 50 years dreaming up any old product and shoving it down peoples' throats.” 

But if that’s such a successful strategy, why are those City firms suddenly the subject of scandal after scandal and fine after fine for mis-selling and other misconduct? Why aren’t they able to recover quickly from their mistakes and move on? Why is Parliament labouring over new banking and financial services legislation? Why are people taking to the streets in protest? 

Because these firms are not 'facilitators'. 

In “Lipstick on a Pig” I explored the distinction between facilitators and institutions in the context of financial services, which then marked the latest consumer frontier. That sector also provides a great illustration of how organisations that produce complex products with hidden fees that their own staff can neither explain nor justify to customers become hooked on revenue and profits that disappear when the regulators finally wake up. How clubbing together with competitors leaves the whole club vulnerable to the same event or the consequences of the same mistake. How ignoring complaints and covering up problems leaves an organisation unable to understand the causes of issues it needs to fix. And how, when it finally emerges that the institution is not managed in the interests of the wider community, that community will no longer support it.

Since then, however, the frontier has expanded to confront the public sector and how society works – or doesn’t - as a whole. So I've been focused on the extent to which the public sector shares the same institutional characteristics that afflict our banks, and how facilitators are emerging in that wider context to help people solve their day-to-day problems that are being ignored. 

Whether an organisation is a facilitator or an institution is ultimately a matter of personal judgement for each of its customers. You might consider that a supplier is on the cusp of either category. Some will shift categories over time - although the drift from facilitator to institution appears to be easier than reform the other way. Some may never be reformed. Instead, they will gradually wither away while alternative models grow around them. 

Ultimately, however, the success or failure of our institutions and the facilitators that replace them is down to each of us. We are obsessed with ‘our rights’, but we must also realise that each of us bears responsibility for the wellbeing of everyone else. With our rights come duties and obligations that each of us must perform personally. The state cannot perform these obligations for us. The state can only act as a facilitator for our own endeavour. This is “the Personal State”. 

The Personal State is a simple concept. But it is of course a hugely complex dynamic, fraught with deeply-rooted life and death problems. For it to operate effectively, each of us must act pragmatically - in an informed way, rather than by adopting “uninformed, stupid practice”. That means no longer describing problems in terms of political dogma and propaganda. It means thinking critically and practically to identify and solve real problems. It means praising what works and explaining what doesn’t. It means spending, saving and investing our money in productive ways, and declining state benefits we don’t need. It means finding ways to improve the efficiency and productivity of the public sector to reduce public spending. Of course we must punish the gross mismanagement of our institutions and other violations of public trust. Yet we must also encourage entrepreneurs to engage in survivable trial and error, in order to promote innovation, competition and growth. In short, we must help each other wherever we can. 

Now a state like that would be worthy of some lipstick.

Image from Makeup Artist.

Waste: A Panic Closer To Home Than Foreign Taxes

It never stops

As the moral panic over taxing foreign companies continues, MPs and other politicians must be increasingly relieved not to be focusing on far bigger problems closer to home.

For a start, the UK government has a lot of trouble keeping track of its own finances, which must suit those on the inside very nicely. While France, the U.S. and Australia can produce a comprehensive set of government accounts in less than nine months, it took 20 months to produce the UK’s first set of “Whole Government Accounts”, covering 2009-2010. Worse, the Public Accounts Committee was “surprised to find that Treasury did not have a grip on trends in some key areas of risk or plans for managing them.” 

Now you might be worried that the government wrote off £10.9bn in unpaid taxes, and perhaps a bit personally alarmed that it expected to pay out £15.7bn for clinical negligence claims. 

But let's get this into perspective. According to the Institute of Fiscal Studies, the government spent just under £700bn in 2010-211, up £30bn on the year before. At about 50% of GDP, that alone explains why our economy has ground to a halt. Of the total, 60% went in just 3 areas: social welfare (30% or £200bn), health (18% or £120bn) and education (13%). After that came defence (6%), public order and safety (5%), personal social services (4%), transport (3%) and housing (2%). Spending on trade, industry, energy, employment and the environment together only add up to 3% of total spending.

The UK government has never received tax revenues above 40% of GDP, and by far the majority of what it does receive comes from individuals. In 2008/09, the UK government collected £41.8bn in corporation tax and £149.6bn in income tax. Together, we and the corporations paid about another £180bn in National Insurance and VAT.

So we need to forget about taxes if we're to have any chance of turning around the public accounts. 

Public infrastructure projects and government consumption are great places to start. And they provide plenty of big corporate scalps to go after.

The Private Finance Initiative (“PFI”) was invented in 1992 as a way of funding the construction and operation of public infrastructure using private funds, so that the cost could be kept neatly off the public balance sheet. While initially attacked by the Labour government, the programme was massively expanded once they came to power in 1997, after the Health Secretary now infamously remarked, "when there is a limited amount of public-sector capital available, as there is, it's PFI or bust." 

As a result, there are 717 PFI contracts in the UK with a total capital value of £54.7bn. The woolly "Whole Government Accounts" put the present value of payments due to private financiers at £131.5bn. However, the true cost to taxpayers has since been discovered to be about £300bn, including running costs and interest payments at rates well above what the government could command directly. Yet the Treasury have trumpeted savings of only £1.5bn so far.

Government also tends to reward bidders who over-estimate the utility of large scale procurement projects, and under-estimate their cost. This "Planning Fallacy" is explained in Daniel Kahneman's book Thinking, Fast and Slow, and the recent West Coast railway fiasco is a case in point. Such a tendency can only suit the public and private institutions involved. It certainly isn’t benefiting commuters or taxpayers. Costs are about 40% higher on Britain’s railways than comparable European networks. And taxpayer subsidies, adjusted for inflation, have reached approximately £7 billion per annum. Approximately 10% of trains don’t arrive on time. Only 42% of rail customers are satisfied with value for money for the price of their ticket. Only 69% say there is sufficient room for all passengers. And only 80% of rail customers are satisfied with punctuality. 

But if you really want to indulge yourself in a good panic, you need go no further than the government's own expense accounts and the suppliers who benefit. 

In his review of government financial efficiency in October 2010, Sir Phillip Green found that “the government is failing to leverage both its credit rating and its scale” in its expenditure of £166bn on goods and services. He attributed the inefficiency to poor data, fragmented procurement activity, the lack of motivation to save money, the absence of budgeting processes and inconsistent commercial skills across departments. 

The Green review estimated that the government could save up to 40% on its telecommunications bills by acquiring its own telecoms capacity. Travel savings were harder to get at. Two widely varying estimates were put on central government travel, before the real figure of £551m emerged. No figures could be discovered for the wider government travel bill (I'll bet it's those pesky railways again). There were also 71,000 central Government buyers with payment cards that had a monthly spending limit of up to £1,000, none of which was monitored. Railways again?

Phillip Green declined to estimate the total waste or the corresponding savings opportunity, but said rather ominously: 

“There is a huge opportunity that has been clearly identified both in central Government and beyond, but without a clear mandate, energy, focus and commitment, this cannot be delivered.”

Sadly, however, notwithstanding this "huge opportunity", it seems our MPs would rather focus on the amount of tax paid by foreign corporations. Even where those corporations are abiding by UK tax law and the sums to be gained (if any) are paltry by comparison to wasted expenditure that might be saved. 

What a waste.

The Bumper Book of Government Waste is available here.

Feel The Fear And Forego Child Benefit Anyway

The Inland Revenue is busy cleaning up part of Gordon Brown's poisonous legacy by clawing back Child Benefit payments made to households earning more than £50,000. Either you decline it, or you'll pay the equivalent in tax as a "Child Benefit Charge".

Given that you paid the government to pay you Child Benefit in the first place, you would be insane (or extremely passive aggressive), not to simply decline it. 

But if you do decide to hold onto the benefit undeservedly, the Child Benefit Charge means you know exactly which tax is being used to repay any Child Benefit you receive. Screwy, but it should teach you a lesson.

This also exposes Gordo's trick.

In paying child benefit to higher earners, Brown was trading on their greed, as well as their fear. He knew higher earners would feel justified in receiving the benefit because they already paid so much in tax and felt they should get something back. The stupidity of paying the government to receive a needless benefit would not dawn on them because it was all done indirectly, by stealth. There was no tax labelled "Child Benefit Charge", as there will be going forward (at least for undeserving recipients). As a result, he knew higher earners would struggle to believe that taxes would ever be reduced if they voted to restrict Child Benefit only to deserving families. The government would always find another sneaky use for the tax money.

The current government has had no alternative but to lift the lid on this nonsense. Public spending must be narrower and more targeted if the government is to spend less, get rid of the structural deficit, and release the tax drag on the economy.

Ideally we would seeer clear links between taxes and what they're used for - like crowdfunding public services.

Clearly income tax cuts are a long way off. But rather than shoot the current government as the messenger, we should blame Gordo and his Nude Labour cronies, including Balls and Milliband, for this predicament. None of those people must ever be allowed anywhere near the nation's coffers ever again.

Stop The Moral Panic Over Corporation Tax

MPs and the media have a responsibility to put the corporation tax issue into proper perspective.

The outrage is not how 'little' corporations pay. It's how much tax the rest of us pay, and how much the public sector wastes while failing to improve services. The media, MPs and campaigners should be focusing on how to make domestic spending programmes narrower and better targeted, rather than second-guessing international tax treaties over which the UK has little control.

Similarly, we can't lose sight of the need to incentivise foreign private sector corporations to operate in the UK. They employ people, generate income for local UK suppliers and compete with UK-based businesses to keep them from charging us whatever they like for goods and services.

But this is not 'the big story' either. 

The real story on the growth and employment front is that the government must do more to foster an environment in which entrepreneurs can thrive and expand their businesses. According to the Institute of Economic Affairs, just 6% of new firms create over half of all new jobs in the UK. Compliance costs, product market regulation and employment protection have remained a constant drag on the ability to grow businesses, despite efforts to eliminate red tape.

Attacking a few foreign corporations over their tax affairs won't help the government spend tax revenues more effectively or enable UK entrepreneurs to thrive. Especially when, ironically, those same foreign companies happen to provide British start-ups with plenty of meeting space, low cost server capacity, online marketplaces, software and customers...

Careful What You Incentivise

Two things seem to be choking the flow of money to people and small businesses in the UK: broken regulation and perverse incentives. Yet there's a tendency to focus more on regulation, and to only see the obvious incentives - like bankers bonuses. Some innovative self-regulation in retail finance has been welcomed by the UK government, and banking reform creeps ahead. But all this could prove futile if problems with incentives are not also addressed. To fix those, we need to look below the surface at the more fundamental incentives at play in the financial system. In particular, we need to understand the extent to which the likes of ISA schemes and pension investment rules are limiting competition and innovation in financial services and inhibiting economic growth. I've summarised some recent debate on this below, and added some comments on the government's latest defence of the ISA scheme. I'd welcome your thoughts.

Some of the perverse incentives have been outlined to government by tax colleagues previously (in Annex 3 to this document). In essence, the contention has been that certain tax relief selectively favours banks and the suppliers of regulated investments to the detriment of innovation and competition. In particular, the tax free ISA system funnels ordinary people's savings into UK bank deposits on a vast scale, which the banks then fail to lend. This effectively discourages and inhibits those same people from diversifying, one alternative being to extend finance directly to other creditworthy people and businesses through peer-to-peer platforms. As a result, it's been suggested that the ISA system should be extended to cover such direct finance. Indeed, in his response to the Red Tape Challenge, Mark Littlewood, Director-General of the Institute of Economic Affairs and a 'Sector Champion' said:

"...it is surely worth noting that the present format and definition of the ISA wrap may have raised “barrier to entry” problems for new financial products and it may be beneficial to review these to stimulate innovation in the sector."

But the impact on innovation is merely the tip of the iceberg. It's the impact on the wider economy that must be understood.

There is overwhelming evidence that the UK's small businesses are cash-starved. They represent 99.9% of all UK enterprises and are responsible for 60% of private sector employment. Their output is critical to the UK's economic growth, which has stalled. Yet they face a funding gap of £26bn - £52bn over the next 5 years. Critically, the four banks which control 90% of the small business finance market are lending less and less to them. This is a red flag. You might think from their enormous market share that these banks would consider small business lending to be very important and a retreat from that market unwise. But, as the economist Richard Werner has pointed out, the reality is that only about 10% of the overall credit issued by our banks goes to productive firms. The other 90% goes to fund deals involving financial assets which don't count towards economic growth figures. So for these banks small business lending is actually a sideshow. They clearly make their money elsewhere.

Yet the ISA scheme had lured savings and investments of £391bn from UK adults by the April 2012, half of which is in cash deposits in these same banks. And they pay nothing for it - a paltry 0.41% in interest after 'teaser rates' expire, according to a 'super complaint' by Consumer Focus in 2010. 

In other words, the government appears to be incentivising workers to plough their savings into banks which virtually ignore the sector on which most of those same workers depend for their income. 

Contrast this with the position in Germany, where 70% of the banking sector comprises hundreds of small, locally-controlled banks who provide 40% of all loans to SMEs.  In an ironic twist, the UK government now sees peer-to-peer platforms as a similar conduit for a new German-style government-directed lending programme. But it appears never to have openly considered that the limited scope of the ISA scheme is part of the problem. 

In March, the goverment defended the narrow scope of the ISA scheme for the reasons extracted here. In September, the government gave a different response (see p. 13 here). In the hope of sparking wider debate on the issues, I've set out the current defence of the status quo below (my additions/comments in square brackets). I welcome any comments.

"HM Treasury believes that there is not a strong enough case for [making bad debt relief available to P2P lenders], as creating an exception would add complexity to the tax system and is difficult to justify when other [unspecified] forms of investment do not qualify for bad debt relief. Moreover, the current tax treatment of P2P investors is not necessarily a barrier to further expansion, as witnessed by the impressive growth in the industry in recent years.

...HM Treasury does not believe that P2P loans are suitable for inclusion in ISAs. The risk profile of P2P lending is too high [compared to what? cash ISAs? stocks and shares ISAs?], and it is unlikely that the platform can satisfy some of the [unspecified] features essential to the operation of ISAs.

Consumers tend to view ISAs as a relatively safe and simple investment vehicle [this fails to distinguish between cash ISAs and stocks/shares ISAs. And are they safe?]. ISA investments are thought of as relatively low-risk, and consumers should be able to get access to their funds whenever they wish. This is less likely to be the case with P2P lending than with existing ISA Qualifying Investments [this could be cured by permitting secondary markets in P2P loans]. 

Similarly, existing Regulations require ISAs to be operated through an ISA Manager [regulations could include P2P platforms], who invests through persons or firms who are authorised by the FSA, and thus have access to the FSCS [this does not mean you can't lose the principal in your stocks/shares ISAs, or stop banks paying 0.41% interest on cash ISAs]. As far as we are aware, current P2P lending platforms are not conducive to the ISA Manager role, are not regulated by the FSA, and do not offer Financial Services Compensation Scheme (FSCS) protection [any or all of which could be changed by regulation].

Finally, in order to be included in an ISA, P2P loans will require to be listed as a Qualifying Investment. Qualifying Investments are identified generically. It would be extremely difficult to restrict a generic description such as “loan” only to loans made via P2P lending platforms [but none of the qualifying investments are so generic, being limited by reference to 'banks', 'building societies', 'recognised stock exchanges' etc., so why not by reference to 'P2P platforms'?]. Exclusion from the ISA wrapper does not make this type of lending exceptional; rather, it puts it on the same footing as investment in stocks and shares issued by unlisted companies [how are these activities equivalent?]."

We're Up $hit Creek: Invent Paddles

While it's fun picking over the bones of old financial scams and scandals, it's not really getting us anywhere, is it? After four years of it we're still up the proverbial creek without a paddle.

I'm not saying we should cease catechizing the cretinous crews of our crappy institutions. That's simply too much fun in a disgusting place that's short of laughs.

But when we're up Sh£t Creek without a paddle, clearly we need new paddles. 

Trouble is, the ordinary old paddles aren't much good in sh*t, so there's no point waiting for them to be magically delivered by the paddle-gods. We need to invent new ones. We need to experiment with different shapes and sizes. We need to make some howling errors in paddle design. Some canoes need to capsize - lots of little things must go wrong if we are to paddle our way down Sh€t creek to wherever it is you are when you're not up there.

Invent a paddle today!

Image from Truth Addict.

More Latitude

I was at Latitude, the festival, on the weekend. Had a great time, and settled in on Sunday night to watch Ben Howard and then Paul Weller to finish the show. The main arena filled with thousands of people in their twenties for Ben Howard and then... they turned and left. Just drained away, leaving about a hundred people near the front. While predictable, I guess, it was still an incredibly chilling experience to be left standing there virtually alone ahead of what was supposed to be the headline act. Eventually the rest of the middle aged set moved in and Mr Weller put on a stellar performance. But I haven't been able to shake the feeling of all those twenty somethings not seeing anything in it for them. And it's proving way too tempting to extrapolate from that to the current economic scenario.

Where do we think economic growth is going to come from? Who are we going to be relying on to get the job done in the next decade? Who needs to be inspired to achieve something out of the current mess? Who should have been encouraged to go nuts that night ahead of turning up to work on Monday morning, hungover but happy?

Okay, we're all living and working longer and the old stuff is still good. But let's be aware there are a lot of old snouts still in the trough. Let's give the younger ones a bit more latitude.

Innovation Is Vital For Growth, Not Just Cost-Cutting

There's a lot of concern about how to grow the UK economy. Some have pointed to banks and the public sector as 'the enemies of growth' because they are 'extractive', rather than inclusive 'facilitators'. Government spending is too high, as are taxes, and there's a concern that national public sector pay awards have 'crowded-out' private employers. Banks are not lending. 

But there's much more to this, of course. 

Clearly even the generous private credit available during the noughties merely went on houses and consumer spending, rather than building sustainable and globally competitive businesses, especially in the regions. As Steve Randy Waldman of Interfluidity recently explained in the context of southern Europe's troubles, it's the poor allocation of capital, not lack of finance or high labour costs, that causes "an incapacity to produce tradable goods and services in sufficient quantity." Governments aren't alone in their ability to waste money and other resources.

How do these things fit together?

Experience shows that countries whose governments try to spend more than 30 - 35% of their overall output (GDP) gradually produce less and less. That's because governments impose taxes to pay for spending (and borrowing), and tax is a 'deadweight cost' or economic inefficiency. As output declines, the government receives less and less tax so ultimately must spend less on public services. Those services then start to break down. Eventually, everyone speaks Greek. UK government spending is about 50% of GDP. Yet tax receipts have averaged around 38 per cent of GDP over the last twenty years and have never exceeded 40%. The UK government can a funding gap (deficit) of up to 2.5% of GDP before it becomes a 'structural deficit' - an albatross around the country's neck that takes a special effort to remove - George Osborne's current challenge. By contrast, the Australian and Swiss governments spend around 35% of GDP (source: OECD, IEA, p. 47).

On a regional basis, the UK picture gets worse. Public spending in London and the South East has remained under 40% of regional GDP. But public spending equates to 45% of regional production in the East, and a whacking 70% of what the North East produces. Public spending in England is cruising at 50% of national output, while in Scotland it's at 60% and in Wales and Northern Ireland the good citizens are dragging around a millstone of government expenditure equal to 80% of their GDP  (source: HM Treasury, hat tip IEA, p. 57).

So, if you live somewhere outside London and the South East your community has a choice. Either you ask the government to start spending a hell of a lot less on you. Or you make sure the region produces enough so that government spending only represents about one third of your output. Pick neither and you'll αρχίσουν να μιλούν ελληνικά.

It's possible that high public sector pay rates make both of these tasks harder - it means the government is spending more (on its staff), and it's more expensive for businesses to hire the staff they need, so they charge higher prices and their products are are less competitive.  Public sector pay is mainly agreed centrally, in national pay awards. Those who work in more expensive places than the average, like London, get paid a bit more. But employees who work in places where it's cheaper to live than average don't get paid less. So their communities will find it harder to keep government spending in the right proportion to what their community produces.

But this does not necessarily mean labour costs are the main reason for some regions being more competitive than others. Steve Randy Waldman, of Interfluidity, argues that competitiveness is about capital much more than labour:

"... to the degree that unit labor cost statistics capture what they claim to capture ... European workers, North and South, have come to earn roughly equal pay for equal product. Southern European workers do earn less overall, simply because they produce fewer or lower-value goods and services than their Northern neighbors. [But] unit labor costs are not the problem at all: it is the scale of aggregate output. And what determines the scale of aggregate output? Is it the laziness of workers? No, of course not. We all know that when residents of poor countries emigrate to rich ones, the same weak bodies and flawed characters that produce very little at home suddenly explode into economic vigor. The difference is “capital depth”, broadly construed to include all the physical equipment, business organization, public infrastructure, and governance that collude to enable two small hands and a broken mind to accomplish outsize things. Workers’ pay level is not the problem in Southern Europe [or, say, UK regions]. It is deficiencies in the arrangement of capital, again broadly construed, that have left Greece and Spain unable to produce value in sufficient quantity to compete with their neighbors."

 As a result, Steve suggests: 

1. "If Southern Europe lacks competitiveness, the part of the cost structure that needs to be reformed has to do with rents paid to capital rather than the sticky wages of workers; and

2. "The European periphery was rendered uncompetitive by toxic patterns of capital allocation." For this he cites Arnold Kling's recent paper for the Adam Smith Institute, which concluded:

"...economic progress involves creating new patterns of [sustainable] specialization and trade [PSST]. When new opportunities suddenly emerge, there can be periods in which high productivity growth in industries with relatively inelastic demand creates a surplus of workers. It takes time for entrepreneurs to discover new ways to exploit specialization and comparative advantage, and it takes time for the labour force to adapt to new skill requirements. These real adjustments are needed in order to restore full employment."

In short, the UK and each of its regions needs to foster self-employment and entrepreneurship, by creating an environment in which it's easy to start and grow new businesses. Removing the difference between public and private sector pay may help incentivise public sector workers to move to the private sector - as could laying off more public sector workers. The necessity to find new work may be the mother of invention, after all. But that doesn't remove the ultimate need to focus on fostering the process of creating new businesses for those workers to join.

Image from NE Generation.