Crowdfunding Politics And The Public Sector

In Lipstick on a Pig, I looked at why facilitators will triumph over institutions in the markets for retail financial services. I'm now working on the next book in the series that will demonstrate similar outcomes in the public sector. Political parties, unions, government departments, churches and the European Commission are all in the frame. Do they exist to solve citizens' problems, or to solve their own problems at citizens' expense?  

Thanks partly to the Leveson Inquiry and a vengeful Rupert Murdoch, we're building a great picture of self-interest, greed and fear of transparency in key parts of the UK public sector. Riding hard on the heels of Horsegate - which perhaps typifies the alleged link between politics, journalists and police - we've of course had the allegation that Peter Cruddas, former Conservative Party Treasurer, claimed that a donation of at least £200,000 would get you to dinners with David Cameron and George Osborne, as well as the opportunity to get your policy concerns fed into the "policy committee at number 10." Cruddas claimed "my job is to get the donors in front of the Prime Minister." The Tories say "No donation was ever accepted or even formally considered by the Conservative Party" on the cruddy basis that Cruddas was suggesting (my italics). Cruddas has resigned. 

You might also consider that the Cruddas Affair has overtones of the 'Cash for Honours' allegations. And clearly politics is Big Business because campaigning, in particular, is expensive.  The UK's political parties spent over £30m on the 2010 general election (down from over £40m in 2005). And that's nothing compared to the estimated $6bn that will be spent by candidates trying to win the coming US election (as opposed to $5bn last time around).

But let's not confuse the activities of the party officials with those of party MPs and Peers who are acting in their capacity as UK government ministers. The party people can't speak for the government. The Cruddas Affair, like the Cash for Honours idea, smacks more of a lame attempt at positioning the allure of political influence as bait on the real - and less controversial - hook: the chance to hobnob with other wealthy donors in a grand setting. You could equate the plight of anyone who climbs aboard that bizarre bandwagon to investors in Madoff's ponzi scheme or 'stupid Germans from Dusseldorf' who offered insurance against sub-prime mortgage defaults. The truth is you may not need to pay any money at all to get policy suggestions into a committee at number 10, depending on the quality of the suggestion. And the sort of people who could afford large cash donations could also simply pay lobbying firms to push their pet policies around Whitehall and Westminster to greater effect. They might even simply buy lunch.  

All of which tends to suggest that the managers of political parties have little genuine interest in policy at all, let alone solving the problems of ordinary people, and are instead merely preoccupied with choosing socially attractive candidates and wealthy fools to pay for their election. 

But enough sunlight appears to have shone into this murky world for the political leaders, at least, to realise that offering to pimp the PM or sell a peerage won't really bring in the dosh. Nervously, they are casting around for an alternative. As recently noted in the Guardian, all three UK political parties last year dismissed recommendations by the oxymoronic Committee on Standards in Public Life to limit political donations to £10,000 per donor per year, require union members to opt-in to their subscriptions being used to fund the Labour Party, to provide £3 of public funding per vote, and to allow tax incentives for small donations. Now Labour have suddenly suggested that a cap of £5,000 would be sufficient, while the Tories want a cap of £50,000 - which happens to double as a membership 'fee' for their clubby "Leader's Group" though "50 City donors" gave them more than that in the year to June 2011 (isn't it notable that these figures are stale by time of publication?). 

In other words, the major parties lack confidence that an open, transparent appeal to ordinary citizens will yield the necessary war chest. Could this be because they don't believe their policy offering is compelling enough to persuade enough citizens to part with just a few pounds each...?

This myopia has parallels with the political approach to the UK bank lending crisis. Even when 'welcoming' the evidence that ordinary people are directly funding each other's personal and business plans, the politicians still cling to the notion that Big Money will eventually pull through. As a result, they refuse to make the formal changes to the tax and regulatory framework necessary to level the playing field for non-banks, implying that this whole mass-collaboration thing is somehow just a sideshow. 

Of course, as discussed in Lipstick, the same malady affected many other 'institutions' who've lost out to 'facilitators' whose primary focus is solving others' problems instead of their own.  Just ask the ad agencies whether they think their clients find Google and Facebook more compelling recipients of advertising expenditure than the traditional media.

Refreshingly, some officials like the Bank of England's financial stability director, Andy Haldane, concur:

"In the UK companies such as Zopa, Funding Circle and Crowdcube are developing this model. At present, these companies are tiny. But so, a decade and a half ago, was Google."

And none other than the current UK Chancellor said in 2007:

“With all these profound changes – the Google-isation of the world’s information, the creation of on-line networks bigger than whole populations, the ability of new technology to harness the wisdom of crowds and the rise of user-generated content – we are seeing the democratisation of the means of production, distribution and exchange. … People… are the masters now.”

On April Fools Day, I suggested that smokers and drinkers might target the excise duty they pay on beer and cigarettes at specifichealth services. I wasn't being entirely facetious. There's no reason why a majority of voters shouldn't find it compelling to direct specific elements of their taxes or savings to specific public services, projects or even political parties. But enabling that to happen would require a little more ministerial interest in granting formal regulatory status to direct finance platforms. 

Will the lure of campaign crowdfunding prove too tempting to resist further? The Tories could offer dinner with Cameron at the Olympic Stadium.

 

Where Will Your Tax Money Go? China?

Here is a fabulous tool to show how the UK Government spends our money. Here is a calculator showing where your own personal tax money goes. And, here is a forum to answer your burning questions around low cost government, waste and efficiency. These are all being developed in the course of the Open Knowledge Foundation's excellent Where Does My Money Go? project.

The forum has already settled a burning question of mine:

"What proportion of government revenue comes from personal income tax, as opposed to corporation tax?"

Answer: 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 (which of course corporations also pay for employing us) and VAT.

The government recently decided to lower the top-line corporate tax rate from 28% to 24%, and there have been protests about how large UK-based corporations like Vodafone minimise their tax. But I don't really begrudge them that. We need to incentivise private sector corporations to start here, and stay here to employ people and otherwise generate income.

I'm more concerned about how to incentivise ourselves. Corporations tax is a sideshow, compared to the fact that we individual taxpayers, who are effectively banned from incorporating, are supposed to aspire to pouring over 50% of our income into a leaky old public sector bucket - and then fund our own education, healthcare and "retirement" to the very considerable extent that the state cannot be relied upon.

The reason the economy struggles to grow is down to the horrific reality that over half of the country's economic output - and of our personal income - goes to support the public sector, which produces absolutely nothing. Civil servants should not feel slighted by that. As taxpayers they are in the private sector with the rest of us. And they have every right to feel just as alarmed as everyone else, if not more so - especially if they are sitting at a desk doing a non-job. Civil servants are citizens who are being overtaxed to pay for their own net incomes. Weird, huh?

Is this supposed to motivate each of us personally to stay in the UK and generate economic growth? Or is our declining share of income better spent on moving the family to, say, Hong Kong - or, indeed, to Singapore or China, as Jaguar advises, where people save half their income?

The reason that the current government's plans for how to stimulate growth are thin is because the government can't grow the economy. Only the private sector produces growth (though of course the government can be supportive... or not).

This coalition government can't and won't explain all this clearly, partly because it wants our taxes to keep rolling in so it can reduce the deficit in time for the next election, and partly because the Liberal Democrats in the ranks are almost as wedded to 'tax and spend' as their cousins in the Labour Party. Those people think that cutting taxes is "taking money out of the economy". But, of course, lower taxes merely leaves money in the hands of individuals - the private sector of the economy - where the public sector can't get at it.

Here's a growth hypothesis for you: If low income earners were to pay no tax, and others no more than 20% personal income tax/National Insurance plus 10% of income to a UK sovereign wealth fund that invested the money long term; and the administration functions in the public sector were halved, the UK would be growing faster by the next general election than under the current plan.

Discuss.

Image from Joystiq's coverage of tax relief campaign for UK games developers.

How To Find An Extra £8bn - Fast!

They've been desperately downing the Kool Aid in Downing Street, those who are left. No more polite chat while queuing for the tea urn during cabinet meetings, cup and saucer in hand. Now they're swarming around it at each serving, ripping the lid off and plunging their cups in.

And while we are highly amused by Gordo's ghastly predicament, we are no longer to be distracted from his latest, clunking sleight of hand.

The TaxPayers' Alliance has all the gory details, but at the heart of the matter is the fact that the UK will now officially have two sets of books, as the FT faithfully reported in mid-May while we were still goggle-eyed by certain accounting matters of a more personal nature.

One set of books will be produced under international financial reporting standards to fulfil the Treasury's "promise" to record PFI projects against government's capital expenditure totals; and another will be prepared under European standards, which doesn't bake in the cost of PFI.

I do not need to point out which set of books the Treasury uses for budgetary purposes... Nor do I need to remind you that even the off balance sheet deals are getting bailed out with taxpayer's money.

So, for a start, 60% of PFI projects will remain off balance sheet. But that's not all:

Nick Prior, head of government and infrastructure at the consultants Deloitte, said: "This clarification is extremely welcome for the future of PFI and PPPs. Government departments should now be able to bring forward projects that have been delayed because of uncertainty over budgetary arrangements."

That's £8bn worth of "uncertainty" to me and you, but not even a line item for Darling, if and when he gets up on his hind legs to deliver the next budget.

Let's hope MPs don't forget to mention the fact...

Parliamentary Reform Must Be A Messy Process

Over on Lords of the Blog we've been debating whether Constitutional reform is the answer to our Parliamentary woes. "Lordnorton" bemoans the fact that "a great many people have reform agenda, but agenda that have little coherence... We need to look at Parliament, and indeed our constitutional arrangements, holistically." He's called for a commission on the constitution, "open to all, not just the usual suspects; new technology provides the means for wide consultation. The main challenge will not be employing the new technology, but rather persuading people to submit their views."

I agree. Yet this holistic process should not be engineered from the top down in a nice orderly fashion. A dynamic, open, democratic approach which encourages broad engagement by all stakeholders cannot realistically appear neat and linear. The Internet affords the opportunity to capture, rationalise and unify apparently messy data contributed by disparate opinion-holders whose views tend to be missed in the current formal processes. Sites like mySociety already play this kind of role.

While it seems almost trite now, the BBC heralded the shift toward an interactive, dynamic political process at the "E-envoy" conference in 2002:

“Currently…we are all used to… top down provision of information …whether it’s [from] a media company or the Government to you the audience or citizen. What we want to move to is this interactive model which has lots of conversations in lots of directions. Not only do we communicate to the users in this model, they can communicate back to us and they can communicate with each other, both through us and actually independently of us… Through digital media, like interactive TV, SMS text messaging and the internet, we can create very new networks of information exchange, ones we haven’t seen before.”

"...[W]hen the [pension] reforms are explained to people
they will see that they are the right thing to do."
Gordon Brown, Financial Times 8.11.05

“He cannot allow them any serious discussion about priorities. His view is that it is just not worth it and ‘they will get what I decide’. And that is a very insulting process. Do those ends justify the means? It has enhanced Treasury control, but at the expense of any government cohesion and any assessment of strategy. You can choose whether you are impressed or depressed by that…”
Lord Turnbull,
Permanent Secretary to the Treasury,
referring to Gordon Brown, in 2002
FT.com 20.03.07

While participation in formal “party” politics has been dissipating, citizens have found alternative ways to assert themselves. Any idea that they have become generally apathetic is a myth, as recent events have shown, and the Power Inquiry noted in 2006:

“There is now a great deal of research evidence to show that very large numbers of citizens are engaged in community and charity work outside of politics. There is also clear evidence that involvement in pressure politics – such as signing petitions, supporting consumer boycotts, joining campaign groups – has been growing significantly for many years. In addition, research shows that interest in “political issues” is high.”

In a long-since deleted press release in June 2007, the Cabinet Office warmly welcomed a report that urged the facilitation of a bottom-up approach to the use of public sector information, stating:

“The Government should work in partnership with the best of citizens' efforts, not replicate them. If we really want to deliver better public services, the best way to do that is bottom up. Change is driven by better feedback, open information and more ways in which citizens can make their voices heard about what matters to them. The challenge is for all public bodies to think about how they can respond to the challenges described here."

Citizens themselves are already helping each other in online communities. If 30,000 parents were meeting in a park or football stadium to share information and tips about parenting, government would take notice. That they are doing it online simply means we have to find different ways to take their efforts just as seriously.”

And George Osborne's remarks in November 2007 have often been quoted since:

“With all these profound changes – the Google-isation of the world’s information, the creation of on-line networks bigger than whole populations, the ability of new technology to harness the wisdom of crowds and the rise of user-generated content – we are seeing the democratisation of the means of production, distribution and exchange. … People… are the masters now.”

Lest anyone doubt that a broad-ranging, grassroots, web-based discussion of policies can result in an engaging, unifying event, they should consider Barack Obama's path to the White House.

By all means list your reform proposals in the comments... here are a few from me:

1. prevent the abuse of secondary legislation as a channel for avoiding substantive debate on legislative measures;


2. wholly elected Lords;


3. 4 year fixed terms, with no government discretion as to the precise election date;


4. publication of expenses, interests, emoluments via Parliamentary web site in a format that readily permits analysis;


5. restraint on MPs/Lords taking roles in the industries they oversaw for at least 6 months after leaving office;


6. no second home allowance (but state funded accommodation in a converted local authority housing block reasonably local to Westminster);


7. requirement for both houses of parliament to approve UK's initial and ultimate responses to proposals for European directives.
   

Private Sheriffs in Cyberspace, Counter-Regulation

Last night I attended the lecture by Professor Jonathan Zittrain on "The Future of the Internet: Private Sheriffs in Cyberspace", organised by the SCL organised in collaboration with the The Oxford Internet Institute. Jonathan is a Professor at Harvard Law School, Co-Founder and Faculty Director of the Berkman Center for Internet & Society, a great intellect and a fabulous speaker.

As the title suggests, Jonathan was highlighting the role of private rule-makers in the development of Internet-based services. Helpfully, he suggested a quadrant on which you can place rule-making for all scenarios. On the vertical plane, one considers whether rules are decided "top-down" by a dictator or small group of individuals, or evolve bottom-up amongst all interested participants. On the horizontal plane, one considers whether the rules are handed down and enforced via a single hierarchy or via a polyarchy of different people or agencies. I've re-drawn it here for the purposes of discussion, and hope Jonathan doesn't mind:

You can plot various examples on the chart, with a totalitarian regime being in the upper left corner, and Wikipedia being in the lower right.

Interestingly, Jonathan suggests that the likes of Google, Apple and Facebook are top-down rule makers, because their site terms and policies are all decided by the company and not the users of their services, albeit those companies tend to be very responsive to bottom-up pressures. He cites the exclusion of certain lawful, though potentially offensive, applications from the iPhone and Facebook platforms as examples of decisions that might not be consistent with previous decisions, nor deemed constitutional in the public environment. He queries whether, in time, these might result in some alternate form of regulation and considers what that might entail.

My sense is that this scenario is not quite so clear cut, since the evolution of services or platforms provided by those companies (read iPhone apps in the case of Apple) seems primarily based on user participation, feedback and complaint, rather than board or departmental decision-making. I'm not even sure that, when push comes to shove, those companies necessarily triumph. There are significant instances where - to their enduring credit - each of those companies backed down and modified services and terms in the face of widespread user vitriol.

However, it is true that in general terms, at least before push comes to shove, such firms are the 'sheriff' of their own platforms. And it is conceivable that there could be a substantial gap in time, and a significant amount of individual consumer detriment - mild or otherwise - before any arbitrary, inconsistent or harmful exercise of corporate discretion is corrected by some kind of mass user "action". But of course this phenomenon occurs even in the context of highly regulated businesses all the time - e.g. retail financial services, as Financial Ombudsman statistics demonstrate. Offline retailers and distributors also decide not to distribute certain products on their own whim, or due to informal pressure from certain interest groups.

So the responsiveness of a service provider to its users, and the legality of its behaviour, does not seem to be a function of how that service provider or its services are regulated. But is users' trust or faith in the provider a function of the type of regulation that applies to the service?

Jonathan looks at various models for keeping the private sheriffs honest, e.g. vicarious liability for harmful material of which the service provider is on notice (see PanGloss), public law constraints on municipal authorities and 'due process' requirements. But, crucially, he points out that when users start to feel powerless they look to top-down bodies for help - i.e. towards the top left of the quadrant - when perhaps the online world is demonstrating there are more trustworthy solutions to the lower left and right. To the lower left, Jonathan cites the adherence to the robots.txt exclusion standard, whereby researchers effectively agree not to interrogate certain parts of web publisher's domains. To the lower right, he cites the broad editorial body of interested participants in Wikipedia. Either solution might be safer than entrusting control to, say, government institutions that think nothing of bending or breaking the law under the guise of detecting crime, or the vague notion of "national security".

And here's the crux of the problem. When does a trusted service provider suddenly cease to be trusted to make and enforce its own rules?

To me, this seems to me to be answered by whether the service provider is perceived to be acting in its own interests or that of its users - or when it loses its "human effect", as I think Jonathan put it in answer to a different question. Here, the Wikipedia example is an interesting one. As Jonathan noted there is a constant preoccupation amongst the Wikipedia editorial community about what Wikipedia is and what it means to be a Wikipedian. This has also been touched on in the context of brands striving to be facilitators rather than institutions. Is this human element necessary for rule-makers and service providers to preserve users' trust in them?

As I've mentioned previously in a wider context, the rise of Web 2.0 facilitators that have enabled us to seize control of many of our own retail, political and other personal experiences has been accompanied by a plunge in our faith in our society's institutions. Are they causally related, or inter-related?

In this context, it is interesting to consider a shining example of a service provider and rule-maker that has utterly lost its way, and our respect: the UK's own House of Commons. Weeks of attention on MPs' excessive expense claims - widely viewed as a proxy for their attitude to the taxpayer generally - has forced the nation's legislators to reconsider how they themselves should be governed. And it's worth noting that much of that attention has been brought to bear via the Internet. Ironically, and in line with Jonathan's observation about where we look to when we feel powerless, the MPs are looking to the upper left quadrant in suggesting yet another Quango as an external regulator of their activities - a so-called "Parliamentary Standards Authority". That such a body needs to exist raises huge questions about the ethics of the body it is supposed to supervise.

But who on earth should comprise the members of such an authority? How could it bring about a positive change in the attitude of MPs to us, their constituents?

Which brings us to the notion that the private sheriffs of cyberspace may have a lot to teach their 'real world' counterparts about what it means to act in the interests of their users in order to retain their trust. This is a notion that I explored in an article for the SCL in May 2006, entitled "Counter-regulation" - a term I used to describe when the law requires offline businesses to implement the benefits of successful online business models. So, to borrow from Jonathan, perhaps MPs should be looking to the lower left and right of the rule-making quadrant for an alternative regulatory solution that could begin to restore a human element and raise the level of our faith in Parliament. And maybe our suspicion of Quangos as merely a means to reward government supporters with a nice cushy job would also be eased if the Quango in question comprised a very large, active group of UK taxpayers.

Black Swans and Risk in Retail Financial Services

In a recent speech, the EU Commissioner for Consumer Affairs, Meglena Kuneva, signaled 5 current priorities in relation to retail financial services:

1. Address the way investment products are designed, described and marketed to consumers; and ensure that new proposals in relation to the sale of credit and mortgages "meet the high standards of modern consumer policy".
   


2. Strengthen the strict rules and enforcement on the misselling of retail investment products, in the light of "clear indications that the laws that are meant to protect consumers were insufficient and may have been repeatedly violated."
   


3. Complete by the end of the summer an in-depth study of banking fees and charges to consumers which appear to be unfairly hitting consumers.
   


4. "Start with regulators a new debate on the correct balance of risk and reward on Main Street. It seems that in recent years, risk has been significantly outsourced to unwary consumers. The question is what amount of risk and toxic products are we willing to tolerate in the retail financial market?"


5. Start a serious discussion on the regulatory oversight structure that is needed to generate accountability to consumers and to ensure consumer protection principles are consistently implemented across retail markets.

The nub of all these priorities lies in the highlighted question. I'm equally fascinated by it, even though the answer to it must surely be "nobody knows." It's part of the process of democratising the financial markets. However, as a starting point for the discussion, I'd be more comfortable with the statement that risk has simply landed on unwary consumers (and taxpayers, more importantly), rather than that it was somehow "outsourced" to them, implying intent and activity on the part of someone else. Otherwise we risk focusing on who outsourced the risk, and how, which is necessarily facing the past, not the future. Nailing those who broke the law should not be part of this debate. The fact is, the law failed to protect consumers and taxpayers from risk in the financial markets.

To put it another way, it was a mistake for us ever to have believed that we had successfully outsourced our own personal financial risk to banks, employers and governments.

The credit crunch is a Black Swan event - a surprise event that has a major impact and is [being] rationalised by hindsight, as if it had been expected. Inquiry into the why's and how's is therefore largely academic, albeit tantalizingly so. To take a counterfactual approach, one might ask whether it would have occurred if the CDO had been strangled at birth in 1987. The CDS also played a role, so we might consider the implications of it's death on a whiteboard in 1997. And we might ask the same in relation to Gordon Brown's rhetorical adoption of the so-called Golden Rule - that the government would only borrow to invest rather than to fund current spending, and in doing so it was "prudent" to maintain debt levels below 40% of GDP (implying it was also prudent to borrow up to that limit).

But we will never really know the cause of the credit crunch. And nothing we do will necessarily prevent another one.

Yet it seems likely and perfectly natural that we consumers and taxpayers will continue to rein in our expenditure, and take steps that we believe will maximise the sustainability of our income, for as long as it takes for us to feel we are able to survive another major financial disaster. As markets seem to "recover" in parallel, it will become harder and harder not to become lulled into thinking that our self-discipline is working, and that, at some ominous peak, we are finally safe...

So the real challenge is: how can we ensure that we consumers and taxpayers always understand that each of us personally bears the risk of financial disaster?

You are on your own. Pay less. Diversify more. Be contrarian!