Does Brown's Story Improve With Age?

Plenty of things improve with hindsight, but could the image of Gordon Brown's time in government really be one of them? 

In "Saving the World"?, William Keegan does an admirably succinct job of restoring some balance to the disastrous picture that emerged after 13 years of New Labour. 

In particular, he relies on his deep knowledge of recent global economic history to emphasise the glorified status Gordo attained through ten years as Chancellor, eight years as chairman of the IMF’s political committee, and his almost sycophantic association with Alan Greenspan. It appears to have been this status that enabled Brown to affect disdain in meetings EU finance ministers, to successfully resist his party's urge for Britain to join the Euro, and which culminated in his ability to convene urgent meetings with G20 leaders during 2008.

William also manfully contends that Brown is entitled to both kudos as an outstanding member of the economic elite and shelter in the safe harbour of the “general consensus” – fostered by his idol, Alan Greenspan – “that the sophistication of modern financial markets had reduced the dangers of a crisis.” 

This I don't buy. For all his ‘listening’ and ‘taking soundings’ amongst his fellow members of the economic establishment, Brown was simply afflicted with groupthink (which we've since learned was rife at the IMF). That he appeared to wake up earlier than others was merely because Northern Wreck was the first retail domino to fall and he had to respond. It was just luck. And it was also luck that taking shares in banks was an option open to him, but not to a right wing US administration (as explained in Too Big To Fail).

Another criticism would be that William only seems to trace the financial crisis to the failure of the Bear Stearns funds in 2007. But that was merely when the financial establishment first realised or conceded there was a problem (as also explained in Too Big To Fail). Anyone who's read The Big Short or Fool's Gold will know that many significant players had been saying (and betting heavily) for years that a crisis was brewing amongst the very banks with whom Gordon was enraptured during his long years at the Treasury and in the IMF. Indeed, William hints at this when he explains how the economist Raghuram Rajan was "subjected to brutal criticism by leading colleagues and disciples of Greenspan's" when he warned "the great and the good" of the impending doom at a conference which Brown attended in 2005. 

In that far deeper context, Gordon's surprise (and outrage) at the sorry state of UK bank finances in 2007-08 merely cements his place amongst the elite groupthinkers who had dismissed explicit warnings for many years. Far from being an especially progressive thinker on the subject of banking calamity, he was actually caught flat-footed by the fundamental flaws others had pointed to in his very own financial system. 

In those circumstances it was the least Gordon could do to keep the ATMs working. On that particular front, he was (perhaps) making the best of a bad job. He should not be seen as having engaged in some kind of heroic quest worthy of an exalted place in the history books.

While William patiently contends that Gordon didn't cause the financial crisis itself, he also properly concedes that he did much to ensure it would be a very long journey out of it. He explains Brown’s avowed and deliberate ‘stealth’ approach to taxation and social welfare spending; the refusal to build any social housing; the unbridled expansion of public sector (complete with higher pay and pensions than the private sector); and the creation of many huge off-balance sheet PFI projects under the guise of ‘prudence’. These things, coupled with a feeble understanding of what the banks were up to, are what should combine to prevent Brown's tenure being seen in a positive light.

Amidst all this, Brown's brief tenure as Prime Minister is almost a footnote - which is strange given his elevation to that role coincided with the peak of his economic profile. William does a good job of highlighting the irony that Gordon really wasn't suited to the job that he'd schemed for so long to obtain. He also points out the irony that Gordon's tendency to dither, vacillate and procrastinate, which had worked to keep Britain out of the Euro, failed when it came to seizing the political initiative with an early general election. 

All in all, an important guide to the Brown years.

Buzzword Bingo!

PR supremo Julia Streets has finally 'opened her kimono' to reveal 'key learnings' from her years as both fan and critic of corporate 'buzzwords'.

Her serious message - very humorously delivered - is that we should avoid creating confusion in the workplace by writing and speaking as simply as possible, especially with people from other countries, communities or industries. For instance, I love her story of the chap who was concerned at the request for staff to 'push the envelope' because he thought they were being asked to offer bribes. And I recall that a London-based colleague I called from New York couldn't understand why I was mildly annoyed at having been 'blown off' for lunch. 

I agree with Julia - as a general rule. We should certainly commuicate clearly. That includes explaining the meaning of words or expressions our target audience might otherwise have to look up. One also has to be careful not to torture metaphors, as Julia points out, or to mix them into a metaphorical stew. And I share her distaste for acronyms. I nearly drowned in them while working at Reuters, until someone told me to look them up in "RAD" on the company intranet. Yes, the "Reuters Acronym Dictionary" had its very own acronym.

But (being a lawyer) I feel obliged to at least make a plea in mitigation for the humble buzzword, if not to defend it altogether.
 

There is a certain richness - and at least mild entertainment - in speaking graphically about an otherwise tedious topic, like law or finance. At a recent conference about regulation, for example, I'll admit to referring to perverse tax incentives as the "elephant in the room", which we were all obliged to politely ignore. I even pointed to the imaginary beast in the corner. It seemed a suitably mild, yet evocative image for a group that included senior policy-makers, and I think people got it... The point of such metaphors is to conjure a reasonably entertaining yet informative picture in the minds of the audience. Preferrably an image that speaks a thousand words which you won't have to.

So I think Julia attacks the metaphorical-buzzword-as-boredom-relief a little unfairly. Although, rather tellingly, she concludes with a helpful guide on how to play 'buzzword bingo', complete with word-grid. 

Overall, this is a very useful book that should be used as the basis of an online resource to which we can all contribute - rather like Roger's Profanosaurus (which even has an app). Follow-up dictionaries in this space could include a guide to words that have been misused to the point they are meaningless (apparently there are 15 you shouldn't use on LinkedIn), and a 'devil's dictionary' of words that contain toxic levels of irony. 

No doubt they too would make a great Xmas present.

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.

Bailout Fund Ratings And Snake Oil Don't Mix

The response to the downgrade of the Eurozone bailout funds from Aaa has yielded a fascinating political response from the head of the fund. 

Moody's, the ratings agency, says the €700bn European Stability Mechanism (and the the EFSF it replaces) is now a riskier proposition since France lost its Aaa rating earlier this month. It considers that, if the full fund were needed, France would have to stump up 20%. The whole purpose of the fund is to invest in the debt of weaker Eurozone member states whose creditworthiness is highly correlated. So, if one runs into economic trouble, they all do. That also makes for a "highly concentrated credit portfolio." And if push came to shove, Moody's doesn't think France would prioritise it's ESM contributions above its own debt payments. Similarly, in that event it would be unlikely that other member states would make up France's shortfall.

Both the chairman and managing director of the ESM were keen to claim political support for the fund. The ESM's chairman said:

"The 17 euro area Member States are fully committed to ESM [and EFSF] in political and financial terms and stand firmly behind both institutions."

And the ESM's managing director said:

“Moody's rating decision is difficult to understand. We disagree with the rating agency's approach which does not sufficiently acknowledge ESM's exceptionally strong institutional framework, political commitment and capital structure."

Of course, the political reality is actually the flaw in the single market and Euro fantasy: there's no credible plan to discipline profligate states, as the continuing Greek tragedy demonstrates. Those who negotiated the Maastricht Treaty foolishly believed such states would ultimately behave in the interests of the Zerozone, just as Alan Greenspan thought the boards of Lehman Brothers and others would refrain from driving their firms into a wall out of concern for the interests of shareholders and taxpayers... snake oil. 

The only real disciplinary option is for creditor states to 'send the boys around' to the debtor states. In that event all political solutions will have been exhausted, and the 'European Union' long gone. 

So Moody's is right to discount the politics - and the ESM's credit rating.

If the politics is not to further undermine the ESM, politicians have to demonstrate that the disintegration of the Euro zone is survivable. 

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.