"**** My Victims"

You're going down Bliar

"**** my victims. I carried them for 20 years, and now I'm doing 150 years."

What a brilliant Cagneyesque line. Never mind that he broke the law, Bernie Madoff fingers his greedy victims as the real culprits. He tells a fellow prison inmate:

"People just kept throwing money at me. Some guy wanted to invest, and if I said no, the guy said, 'What, I'm not good enough?' "

You've got to love him. Here's a man who lied and cheated and ran the biggest Ponzi scheme America has ever seen. When the scam finally imploded, his punters were ruined. Yet it turns out he was the real victim himself.

It's like say... oooh... I dunno... suppose some bunch of snake oil politicos promised a bright new dawn of plenty for all, got elected by a gullible public, spent borrowed money like there was no tomorrow, got elected again, spent even more, and carried on like that for years. Obviously when the scam finally imploded, the public would turn on them, sling them out of office and into jail.

Those politicos would probably feel like victims too. After all, if the stupid voters hadn't fallen for the fantasy hook line and sinker, they would never have insisted on such fraudsters staying in power for so long.

Of course, in the real world that could never happen. Failed fraudster politicos don't go to jail. They go to the House of Lords.

PS So just why are busted disgraced Labour getting so much uncritical airtime? Ex-gay marriage and keeping us out of the Euro, every other single thing they touched has turned into a major disaster we now have to somehow sort out. And yet the humbugs currently standing for the Labour leadership - people like the arch-hypocrite Abbott - are treated as if they're perfectly reasonable and respectable members of the community. As for their attempted volte-face on mass immigration, and their stated belief that it's perfectly OK to assassinate Tory leaders... don't get me started.

Wanted - 4m New Jobs

We need 4m of these

Judging by the rhetoric, it really does seem Cam gets it. Public spending needs drastic surgery and Cam sounds like he's ready to wield the knife. Thank goodness.

The question being asked now is where will all the post-cuts jobs come from?

To recap (see this blog), Labour increased public sector employment by around 1 million. Which means that the official public sector payroll is now just over 6m (including 200,000 in our nationalised banks). To that, you need to add those who are effectively employed by the public sector but for arcane historical reasons are not counted on the official payroll (eg GPs and university lecturers). You also need to add in a bunch of subcontractors (including those notorious consultants) who are doing jobs that were traditionally done by public sector staff themselves. We reckon that takes the overall total to at least 7 million, or about one-quarter of all those currently in employment.

The cuts mean that number has to fall. How much? Cuts of 20% in overall Departmental Expenditure Limits have been widely touted, which on a base of 7 million could translate into 1.5 million jobs.

1.5 million new jobs would be bad enough, but of course, the much discussed jobs shortage could be even worse than that.

As we all know by now, in addition to the 7 million employed by the government, there are a further 6 million people of working age living on benefits. They too are a burden taxpayers can no longer afford, and Cam has instructed IDS to get them back to work.

How many of them will be looking for jobs?

Well, 1.5m of them are on Job Seekers Allowance (JSA), so in principle all of them need jobs. In reality of course, there will always be a certain level of short-term frictional unemployment, so let's call it 1m new jobs needed.

A further 2.6m are on Incapacity Benefit and Employment Support Allowance (ESA). Everybody understands many of these people are fit for work and simply disguised unemployed, and while we don't know precisely how many, the general estimate is 1m. So that's another 1m jobs needed.

Then there are 0.7m lone parents supported by benefits. Again, the expectation is that most of them ought to be put back to work - call it 0.5m.

So totting it all up, to employ all these people coming off the public payroll and welfare, we will somehow have to discover around 4m new jobs. All of them in the private sector.

Can it be done?

Well, the good news is that last time we faced a similar problem back in the 70s, the economy did subsequently manage to generate millions of new jobs. In fact, over the subsequent thirty years, nearly 6 million net additional jobs were created. And that was despite an eye-watering 4 million slump in manufacturing jobs.

Where did the new jobs come from?

Admittedly, 2m came in health, education, and public administration, largely taxpayer funded. But even more important, jobs in finance increased by a whopping 4 million. And they weren't funded by taxpayers.

Here's the complete picture (click on image to enlarge, and see this blog for more details):

Now, I know what you're thinking - we can't depend on high risk finance for our future jobs. And you know, you may be right (although personally, Tyler reckons finance will surprise us - it has always been an industry in which we excel, and the global opportunities remain vast).

So finance aside, where will the jobs come?

Answer: we have absolutely no idea.

And neither does anyone else.

The truth is that back in the 70s few would have forecast the pattern of jobs growth over the next 30 years, and it's no different today. Seers such as Will Hutton's Work Foundation may reckon they can chart the path ahead, but here on BOM we're much less confident (and see here for a good demolition job on the Work Foundation's past record - HTP Ben W).

But what we are much more confident about is that given a chance, the market will deliver. And the six key steps Cam must take to give it that chance are as follows:

1. Cut taxes - especially business and payroll taxes
2. Slash red tape - including restrictions on working practices
3. Abolish the minimum wage - alongside a programme of welfare cuts, we need to junk the minimum wage - low productivity workers in high unemployment towns like Dewsbury simply cannot find jobs at those rates (see this blog)
4. Break up public sector monoplies - especially in the world's boom industries of healthcare and education - private sector providers would soon build expertise and sell it around the world
5. Decentralise - including giving our old bombed out industrial cities charter status (eg see this blog) - remembering that the bulk of these new jobs will be required in precisely those areas
6. Cap immigration - yes, we know we all benefit from some high skill migrants, but as we've blogged many times, net net Labour's open door policy hasn't made us richer, whereas from Slough to Lincolnshire, it has taken low-skill jobs from low-skill unemployed locals.

None of it is easy. But as Mr Cam told us this morning, nothing is going to be easy.

Red Books

Not in great shape

What's black and white, and red all over?

Yes that's right - it's the books.

And now Cam has finally seen them, he's shocked. It turns out Brown/Darling made some preposterously optimistic assumptions on growth and debt interest:

“There were two levels of optimism in what the [Labour] government was forecasting. One was trampoline growth of 3% and above, and the second theory was that interest rates would always stay low.

One of the most shocking things is the extent of the interest we are paying on our debt. If we don’t do anything about it, it is going to be £50, £60, £70 billion.

It is going to be huge. We will be spending more on debt interest than we do on educating our children and defending our country. It is totally irresponsible what we are left with.”

Who would have thunk the books would show that?

It would of course be churlish to point out that both of these "shocks" have been blogged to death on BOM for the last several years (eg see here). The main thing is that Cam is now fully seized*.

And now that he's on the case, he identifies some other old BOM favourites for cuts:

“You have to address the massive welfare bills. You have to address public sector pay bills. You have to address the size of the bureaucracy that has built up over the past decade.

Otherwise you will have to make reductions across the board which you don’t want to do. We need to address the areas where we have been living beyond our means.”

As we've blogged many times, the public sector paybill and the welfare bill together comprise nearly 60% of total public spending - they have to be cut. And while Cam has already announced a partial public sector pay freeze for next year, it now sounds like he's going to extend it into the years beyond (as recommended by the TPA/IOD cuts paper here). Good.

So will George's budget avoid further tax rises?

Unfortunately, Cam still refuses to rule out a VAT rise, which now seems a virtual certainty. However, he is back peddling on the prospective CGT rise. Claiming he "did not come into politics to punish people who want to do the right thing and save”, he suggested  there would be relief for those who hold assets for a long period (something like Brown's short-lived taper relief).

But whatever the specific decisions on tax and spend, there is one thing Cam and George absolutely must do - they must make absolutely certain the budget delivers the full package. Maybe not the final detail on what individual programmes each department will cut - that will come in the autumn spending review - but everything else must be there (including the so-called "spending envelope" for Departmental Expenditure Limits).

*Footnote Yes, we know - as Mrs T keeps saying, it's all very easy for Tyler to sit at his keyboard in his pyjamas tapping out tales of fiscal doom, but Cam has to take the country with him. Blaming the books may be the oldest formula in the, er, book, but like all fairy tales, it resonates with something deep in our collective soul. You can't really blame Cam for using it. Especially when he already looks terminally knackered.

PS BOM banned in Beijing. One of the junior Tylers has just returned form China, and reports that BOM is banned there. Which is very encouraging. Especially since Guido is not banned. (We've blogged China several times, and presumably we're banned for posts like this).

Locked Into Welfare Dependency

Humanitarian relief gets the aid headlines, but Haiti only cost HMG £20m - the rest came from private donations

In this New Age of Austerity it has always been baffling why our £7.3bn pa overseas aid budget should be ringfenced and protected from cuts.

Yes, of course, we all understand the Nasty Party's political desire to rebrand itself - although we should note they haven't offered the same blanket guarantee for welfare here at home, where cuts will be seen to be a whole lot nastier than cutting aid to some faraway country with people about whom we know nothing.

But these are tough times, and political decontamination aside, the key point about overseas aid is that there is absolutely no serious evidence it actually works.

Specifically, economic aid - which comprises the vast bulk of that £7.3bn - has had no discernable effect on economic growth rates in recipient countries. When the IMF conducted its own comprehensive statistical study of all the evidence since 1960 it concluded:

"We find little evidence of a robust positive impact of aid on growth... To be more concrete, in the cross-sectional analysis, we find some evidence for a negative relationship in the long run (40 year horizon)... We find some evidence of a positive relationship for the period 1980-2000, but only when outliers are included. We find virtually no evidence that aid works better in better policy or institutional or geographical environments, or that certain kinds of aid work better than others."

A pretty damning assessment - no convincing evidence it works overall, and no evidence that tweaking the details makes any difference.

So why has aid failed?

The theories are many but they largely boil down to the fact that aid has propped up dysfunctional and corrupt regimes in recipient countries, and has grossly distorted incentives across the wider economy. As this excellent overview by Zambian aid guru Dambisa Moyo puts it (and you really should read the whole piece):

"Over the past 60 years at least $1 trillion of development-related aid has been transferred from rich countries to Africa. Yet real per-capita income today is lower than it was in the 1970s, and more than 50% of the population -- over 350 million people -- live on less than a dollar a day, a figure that has nearly doubled in two decades...

...A constant stream of "free" money is a perfect way to keep an inefficient or simply bad government in power. As aid flows in, there is nothing more for the government to do -- it doesn't need to raise taxes, and as long as it pays the army, it doesn't have to take account of its disgruntled citizens. No matter that its citizens are disenfranchised (as with no taxation there can be no representation). All the government really needs to do is to court and cater to its foreign donors to stay in power...

Then there is the issue of "Dutch disease," a term that describes how large inflows of money can kill off a country's export sector, by driving up home prices and thus making their goods too expensive for export. Aid has the same effect. Large dollar-denominated aid windfalls that envelop fragile developing economies cause the domestic currency to strengthen against foreign currencies. This is catastrophic for jobs in the poor country where people's livelihoods depend on being relatively competitive in the global market."

Now that is enough to make anyone grind their teeth - western taxpayers shelling out billions to inflict rotten governments and uncompetitiveness on the world's poorest people - consigning them to perpetual welfare dependency and dirt poverty (we have blogged this many times - see previous posts gathered here).

So why haven't we just stopped? Why haven't we slashed our aid spending back to what most of us always thought it was in the first place - ie disaster and humanitarian relief (which would mean cutting roughly 80% of our aid spending).

The answer is twofold.

First, western politicos do not wish to be seen as nasty - they much prefer to be photo-opped on stage with Saints Bob and Bonio, bathed in golden light.

Second, the global aid industry has now grown very powerful and can make life extremely uncomfortable for those who seek to cut its food supply. The big consultancies and NGOs making up this industry have large and sophisticated lobbying and propanda arms (largely funded by the very taxpayers they are fleecing). Even the mighty IMF had to bow before them, issuing a post-publication disclaimer of that damning research report quoted above:

"This Working Paper should not be reported as representing the views of the IMF."

Now, in fairness to Mr Cam and his team, they do at least seem to understand there's a problem. Back in January we blogged their sensible decision to fold the DfID budget in with that of the MOD and the Foreign Office, so that we can at least start to use the cash to support our strategic national objectives. And now Andrew Mitchell says he'll try to demonstrate we taxpayers are getting value for money:

"We will never maintain public support among hard pressed taxpayers for this vital and large programme unless we can demonstrate independently that when we spend £1 on development we are actually getting 100 pence of value.

We need to move the whole approach of aid and development towards looking at the results, what we are actually achieving on the ground, and away from an approach which is too dominated by impact and putting money on the table."

Which sounds like a much better approach than what we've seen previously. Moreover, he's already stopped the lunacy of aid to Russia and China - China FFS! - although he's not yet done anything about the equally ludicrous flow of aid to booming space programme India (see this blog).

But as we've said many times, words are one thing, action something else. We will need to follow Mitchell's progress very carefully.

PS Talking of locked into welfare dependency, the TPA's Research Director Matt Sinclair was on BBC R4's Moral Maze this week talking about the need to reform welfare benefits here at home. Well worth hearing, and you can do so here.

Feet Of Clay

The Pru's soon-to-be-ex-CEO in conference with St Bob

Here on BOM, we write a lot about mendacious self-serving politicos and overpaid incompetent public sector managers. They're our stock in trade - the dreadful people who consume half our national income.

Cynical? Well, we long ago learned that even the brightest and the best of these people have feet of clay. When by some chance we've enthused about one of them, more often than not, that person promptly lets us down (eg see our many posts on boonie king Sir John Bourn, the now disgraced ex-head of the National Audit Office).

The depressing case of David Laws is a prime example. Here was a man we praised at the start of last week - praised for his clear grip on the most difficult problem we face, and his apparent willingness to take the political heat in order to promote the national interest. A man to admire.

The next thing - blow me down - it turns out our shining new hero has been up to his grubby haunches guzzling in the trough. Sure, he may have been shopped by dark homophobic forces working to undermine the coalition, but that's no excuse - he's the one that did the guzzling.

Worse, it seems his emergency replacement - who let's face it, is only just out of secondary school and obviously knows next to nothing about matters fiscal - may have already been involved in second home flipping and rinsing his travel perks.

Feet of clay. But still daring to stand in authority over the rest of us.

Yes, we can all see that.

But what to do?

Our prescription is simple - break up the public sector, privatise where possible, localise where necessary.

Simple, yes, but surely there are just as many egregious plonkers running private companies. Why should anyone believe they'd be any better than the lot running the public sector?

Yup, there's definitely some truth in that. And as it happens, we've just witnessed a Grade A case in point.

You will have seen that the Prudential's hugely overpriced $35bn bid for AIG's Asian business has collapsed in ignominy and bitter recrimination. The Pru's Chairman Harvey McGrath, and Chief Exec Tidjane Thiam, are widely seen to have brought this fine old British company to the point of catastrophe through their Fred the Shred style mix of arrogance and incompetence.

They may have talked a great story of sunlit uplands and plenty for all, but when it came down to it, they were apparently quite prepared to sacrifice the financial interests of their shareholders to further their own vaulting and vainglorious ambitions.

Unsurprisingly the shareholders are furious - especially since they now understand the CEO was actually trying to dump them:

"Thiam faces a bigger charge: forgetting that although the money and deal was Asian, crucially it depended on a vote by British investors. Thiam's proposal was to create a vast new Asian-focused insurer where the shares and the value of the company would be in Asia, at the cost of the existing shareholders.

As one expert observer said: "Tidjane wanted to fire his current investors and get some new ones. He just forgot about the vote."

Now, we know some other people who'd like to fire their traditional supporters and get some new ones, don't we. It's no surprise that the ambitious Thiam has already had one spell as a politico, and that according to one rumour, as a French citizen, he has set his ultimate sights on the Presidency of La Belle France itself.

It's all so very very like the behaviour of our own dear politicos.

And yet there are some key differences.

First, these jokers have been stopped by their voters (aka the shareholders). Under the Pru's constitution they could not proceed with the lunacy without holding a referendum to get shareholder support. And there has been a shareholder rebellion the like of which the City has not seen in many a year*. If only we voters had such a lock on our Westminster politicos.

Second, there will be consequences both for the management of Prudential and probably the company itself. Private sector companies that screw up like this tend to get eaten by rivals who haven't. Choice and competition mean that evolutionary rules apply. Unlike one-size-fits-all Big Government, private sector companies cannot make huge and wasteful mistakes with impunity. Nature ensures change and improvement.

So yes, feet of clay exist all over.

But only in government do we carry on pretty well along the same old road irrespective of whose feet are on the control pedals. We desperately need to break it up.

*Footnote - As others have pointed out, the Pru shareholder rebellion could be a turning point in UK corporate governance. For the first time in living memory, institutional shareholders have flexed their muscles and said no to a high-rolling high risk management team. That's precisely what the textbooks say they should do, and precisely what they didn't do during the great financial bubble. Maybe there is hope for the future after all.

How The Poor Got Richer

They've never had it so good

You'd never guess it from the constant wailing of the poverty lobby, but over the last half century the poor have got a whole lot richer.

A standard measure of poverty is net income of the poorest 25% of households (specifically, the bottom quartile point). And as it happens, the Institute for Fiscal Studies have recently published a compilation of the official figures going back to 1961 (obviously it's far too much to expect HMG to publish its own compilation). They have helpfully adjusted the figures for inflation so we can see the underlying trends in real income.

The figures show that the real income of this poorest group has approximately doubled since 1961, an average annual growth rate of 1.4% pa (ie the growth in income at the bottom quartile point).

In fact, it turns out that in real terms the bottom 25% are now considerable richer than were the top 25% in 1961*.

Just think about that.

Tyler remembers 1961 very well. His family were most definitely not in the top 25%. They had no car, no TV, no phone, no fridge, no central heating, and certainly no foreign holidays. Yet in truth they did not consider themselves poor. His father was earning the average national wage in manufacturing (£16 pw), and the Tylers were all housed, fed, and clothed. Not what anyone could call dollar-a-day out and out poverty.

But the top 25%, wow, they were living the life of larry:




So what we're saying is that the bottom 25% today have a higher real income than those people in the 1961 Saab 95.

How on earth can that be called poor?

As we've blogged many times, poverty as defined by the poverty lobby and the government today is miles away from what most of us actually think of as poverty. Today's poor have material resources way beyond those of the affluent middle classes back in the days of SuperMac and never had it so good. And even further beyond what Tyler and millions of others knew as children.

Ah yes, I know - the world has changed since 1961. Everyone's so much richer today. Virtually every household has a telly, a fridge, a telephone, and central heating. 75% have a car. Having those things may have made you rich in 1961, but these days it's a given. You can have all of that and still be poor.

Except of course, you can't. If you're housed, clothed, fed, and in possession of a fortune in consumer durables, then sorry, you are not poor. By both historic and international standards, you are in fact pretty rich.

And as Iain Duncan Smith sets about his much heralded welfare reform programme, he needs to remember that. Poverty in Britain was conquered long ago.

Yes, there are plenty of people who live sad dysfunctional workless lives. But that's nothing to do with lack of material resources. That's to do with poor education, destructive personal behaviour, and our grotesque level of welfare dependency. None of which will be solved by yet more welfare cash.

Which is why we have long argued for reformulating our definition of what constitutes poverty. Ideally, we'd like to switch to an absolute standard of poverty such as they have in the US. But if we have to stick with a definition measured relative to median income, we'd settle for dropping the current poverty line at 60% of median income, and switching to a 50% line.

Why?

First, because we estimate it would save £20-30bn pa from the current welfare bill. And second, because it would increase the attractiveness of work relative to welfare (ie it would make the poverty trap problem a whole lot easier to solve).

And as it happens, Tyler has recently been working on a TPA paper on precisely this issue - watch this space.

*Footnote update - Tyler has quite rightly taken to task for slack use of statistical terms in this post. Matthew T has spotted that our figures for the bottom 25% and the top 25% relate not to the average income of those two segments of the population, but to the quartile points - ie the income of the 25/100th  household in the distribution. So all we're showing is that the 25/100th household in 2008-09 is now richer than the 75/100th household in 1961. It's a fair cop, but we'd argue the 25th percentile point is still a widely used "breakpoint" between the poor and the not poor. We'll do some more digging within that bottom 25% when we have a moment.

How To Rebalance The Economy

Set my people free

Yesterday Cam gave his first major speech on the economy as PM. It contained much that was good: cut the deficit, cut red tape, stabilise the banking system, improve our schools, reform welfare to make work pay, fight protectionism.

Yes, a big tick for all of that.

But his speech included another bit. One that we're not nearly as comfortable about.

It starts off fine:

"Today our economy is heavily reliant on just a few industries and a few regions – particularly London and the South East. This really matters. An economy with such a narrow foundation for growth is fundamentally unstable and wasteful – because we are not making use of the talent out there in all parts of our United Kingdom.

We are determined that should change."

Yes, good - we all agree that must change. Our depressed regions have remained depressed for far too long, and we have always believed they have huge potential (eg see our posts on the city by the bay).

But it's Cam's next bit that makes us wince:

"That doesn’t mean picking winners but it does mean supporting growing industries – aerospace, pharmaceuticals, high-value manufacturing, hi-tech engineering, low carbon technology. And all the knowledge-based businesses including the creative industries...

An early task will be to reform and refocus regional support and the RDAs. And Yorkshire is a priority...

Support from government, civic leadership, business investment and expertise – this is how we’ll help to rebalance our economy across the country. And there really shouldn’t be any limit to our ambitions.

Let’s make Humberside lead the world in carbon capture and storage. Let’s make Bristol a centre for marine energy parks. Let’s make the Mersey a global trading centre once again..."

Oh, Dave. You're sounding soooo horribly familiar.

It's H Wislon with his catastrophic Selective Employment Tax to boost manufacturing, Heath with his expensive lame ducks waddling themselves onto the public payroll in the name of industrial policy, Uncle Jim with his zillions poured into hi-tech industries of the future scrapheap (see this blog), and even St Maggs with all that cash poured down the gullet of BL. And as for Brown with his money burning Regional Development Agencies, R&D tax credits, etc etc, we don't even want to remember it (and er, Dave... weren't you going to axe the RDAs at one point???).

But look, Mrs T has given Tyler strict instructions not to carp until at least we've seen the budget. So we won't.

Instead, let us praise Cam's good intentions, and his sincere wish to help the regions. And simply make a helpful suggestion.

The best way to help our struggling old industrial cities would be to set them free. Slash taxes and regulation and watch private sector entrepreneurs do the rest. Instead of some hugely expensive and ultimately doomed attempt to force Hull into being the world leader in carbon capture and storage, set the city free. Give it charter status and watch it go. As we blogged in February:

"Given its prime location facing Europe, we've long believed Hull has huge potential, and yet it has failed dismally to exploit it. Suppose it became our own version of a Charter City - minimum wage and working hours regulations abolished, social benefits for working age citizens abolished (maybe a 5 year phased withdrawal), central government economic and planning and regulations abolished, no more central government development assistance but a 10% flat rate income tax, 10% Corporation Tax rate, and no capital gains tax.

Public spending as a percentage of GDP would obviously fall sharply, and those that depend on public spending would certainly feel the squeeze (although social welfare recipients could be given the option of staying on benefit if they relocated outside the City). But against that, Hull would attract entrepreneurs and private investment on an unprecedented scale - and with its easy European access, much of the inflow would come from overseas. There would soon be jobs for all.

Yes, yes, of course. We can't do it because of the 53rd EU Directive on not doing stuff. And there's also the question of human rights. And anyway, we might end up with all kinds of Coketown beastliness, and children being sent down the mines. And... well... anything might happen... it's impossible to predict.

Yes, yes, we know all that.

But have you ever been to Hull?

Do you honestly think faster trains and better broadband are the answer?"

Please Dave - think radically. The people trapped in all those bombed out places far from Notting Hill deserve it.

PS As for Laws, just how depressing is that? Here's a guy who seemed a perfect example of cometh the hour cometh the man. We've been hugely impressed. And now we find he's just like all the rest. I'm frankly amazed he says his cover-ups and lies were because he didn't want the world to know he's gay. I thought the world already knew - we certainly all did. And nobody cares about it one way or the other. But what we do care about is him wangling his expenses. Depressing.