One of the joys of doing this substack is the response to pieces, in the comments and by email, particularly those on complex policy issues. We must surely have the most thoughtful comment section on the internet. This was more true than ever for my
Re "Treasury Brain" - the problem is that there is no consequence for Government if they engage in short-term "cost-cutting" that will actually increase costs. If, when they slashed investment to pay for political priorities as you describe, analysts put out reports saying "actually this is bad news for Govt finances longer-term so this is a sell for gilts", you would see a lot less of it. But they don't - they simply look at the raw numbers for next year and write things like "Chancellor creates headroom for tax cuts". So of course the politicians are incentivised to tell the Treasury to look for short-term savings.
Jan 18, 2023·edited Jan 18, 2023Liked by Sam Freedman
Two points about the cost disease email.
One, we have a good example from recent history of how low productivity elsewhere in an economy will hold down wages in higher-productivity sectors. This is China in the early 2000's. At this time some 50% of China's workforce was still in the low-productivity agricultural sector, falling to 25% by 2019. The low productivity, and thus low wages, in agriculture meant that the growing industrial sector in China's cities only had to offer wages that were modestly above agricultural wages to hire workers when expanding production or starting new plants.
Second, I thought your correspondent misunderstood how rewards in the high-productivity sector would be allocated. If one, small sector of the economy has much higher productivity for labour than the rest of the economy, the workers in that sector will not generally see higher wages, except to the extent tht they have specialist skills that other workers don't have. This is because, again, the firms have the option of hiring and training new workers from the low-productivity sector, which they can do by offering only a modest premium on the prevailing wage. So the higher productivity will benefit capital owners in the high-productivity sector.
To make a concrete example of that: I work for a City firm that hires stock brokers and software developers for it operations at the going rate for those professions. These workers have specialist skills that command a premium, but my employer still only has to pay the going rate for their skills, and is left making some £200,000 of profit per employee per year, which accrues as equity and is generally returned to investors via dividends and share buy-backs.
I agree very much with John Gieve's comment that the Whitehall system fails to join up policy-making, policy implementation and the allocation of money. There is a particular difficulty with policies which cut across the responsibilities of different Departments - e g rough sleepers; reducing reoffending - where a policy may be regarded as a Number 10 or government priority but where a key element of it relies on a Department giving priority to an issue that that Department itself does not regard as one of the most important . For example, to seal effectively with reducing reoffending by ex-prisoners you weed to have continuity of mental health support after release and some kind of secure housing for offenders, but both DHSC and MLUHC have other priorities of their own that they generally see as more important. Rhe view I came too fro mu time in government was that we needed two significant changes to the current arrangements for spending rounds. First, a central responsibility of the Cabinet Office ahould be to oversee and drive through the effective implementation of agreed government priorities. The Minister for the Cabinet Office heeds to be empowered by the Prime Minister to bang ministerial heads together, broker or force through a compromise when Ministers are at odds and basically make dure things happen. For that Ministers authority to be accepted, he or she needs to enjoy the PM's complete trust and proper seniority (IMHO second in seniority only to the PM). As poart of those responsibilites, the Cabinet Office (particularly the government functions) should be involved in spending reviews, to ensure that money is allocated in a way that reflects agreed Cabinet priorities. Second, the Cabinet collectively need to discuss and take decisions aboiut the relative priority to give to different bids for spending. There is never, iunder Conservative or Labour governments, a Cabinet debate about whether, to pluck an example from the air, the greater priority should be two new destroyers or two new prisons (including the consequences of not giving one of them top priority). Rather, everything is decided bilaterally between the Chief Secretray and individual Secretaries of State.
On point 1) Cummings (whether you agree or disagree with his other ideas – not the time to discuss that) did try and improve the division between No 10 and No 11 by having joint SPADs etc. It seems to me that such a counterbalance on Treasury Brain made/makes sense. Although maybe a hard sell to the Chancellor as it reduces their power.
I hope your original post and this summary of comments will be fed into the Health Commission which The Times has set up. In particular, the points about queuing theory and the corollary that some spare capacity is a necessary part of an efficient system are important ones, in my view.
Interesting to see mention Baumol's cost disease but not the NHS as an effective monopsony employer of health workers. This would imply that the Baumol cost disease effect is actually being held down by the employer's collective bargaining power.
We're actually holding down people-related costs quite a lot - look at Kiwi/Aussie doctor wages and working conditions compared to ours (and migration of British doctors to the Antipodes for that matter). Not to mention the social stigma applied to non-NHS practicing doctors, though this is starting to fade because of the service degradation.
But aside from monopsony economic rents, Baumol's cost disease is also not something that could be easily reduced since productivity improvements in much of the health and social care sector might start to infringe on human dignity (no social contact - but I have an Arsewipe 9000 robot?) Or, they simply go on more high tech (expensive) solutions to problems that have only started to appear because we can live to a greater age (robosurgery and complex biologics?) with much smaller marginal gains (towards the health of primarily retired, unproductive, if worthy patients.)
Let's start with a couple of soundbites, which, of course, don't answer anything in a serious way, but, nonetheless set the scene for the discussion. Firstly, if state owned monopolies were the best way to run the economy, the Soviet Union would have been the most successful economy on earth. Secondly, before the privatisation of BT, it could take up to 18 mos to get a home phone line installed. To take the second point first. Why was this? Because the Treasury was only really interested in expenditure rather than revenue. In the private sector, this focus was reversed and soon phone lines were available more or less instantly. But note the Treasury's attitude to funding places in medical schools. It's very similar to the telephone example and places are heavily restricted. Now look at the first example. Market systems are good at matching supply and demand. Command and control systems are lousy at it. This is because markets are essentially a signalling system, which allows fast response to shortages or surpluses. Command and control systems do not (all this was examined by Hayek in far greater depth). In addition, politicians are far more likely to address the issues in ways that the electorate perceive to be good, than ways that are actually effective. Now, of
course, there is bound to be some political input into any health system, because we should rightly have a system of universal coverage. But, the more the market can play its part, the more likely the system is to be effective. This is why the European systems based on social insurance are far more effective in providing health care for their populations. You have addressed this point by saying that if we'd now known, what we didn't know in 1948, we'd have started off differently, but it is now too late. I don't think it is too late and I think we will face the same problems with our nationalised system until kingdom come. The key is to set a goal and a strategy. Of course, it would be highly disruptive to make the change all at once. But I think it is overly defeatist to say it cannot be done and I wonder if this is, in part, related to a certain overall affection for the public service model, which has been shown many times to be ineffective, but is somehow considered to be favoured for romantic rather than practical reasons.
My meta question: Why is “the Treasury doesn’t want to spend money on anything that doesn’t have a ROI of 100x this afternoon” seemingly universally accepted among British political commentators (and apparently politicians) as an immovable fact and not just a consequence of the astonishingly weak and pathetic figures that become PM? Whatever objections any department might have on any topic, there’s no written constitution and so absolutely any facet of British governance is at most a Commons majority (or two if you manifesto it and believe the Salisbury convention is a real rule) away from being changed however the presently ruling party wishes it changed. Unhappy with the Secretary to the Treasury? The PM can fire them. Unhappy having one department in charge of tax collection as well as economic modelling as well as allocating cash? Split it up. Unhappy with the Chancellor’s policies or the advice they seek or get from the department? Sack them and appoint one of your other three hundred MPs that is aligned with you/knows which side their bread is buttered on.
It’s not even very dictatorial or controversial to say out loud “the Treasury has too much conflicting work to do, I’m splitting it up so we can actually have a whole department devoted to deciding what to go invest in for Britain and a whole other one devoted to collecting taxes”.
Is Jack Smith's point about private insurance in the UK vs Canada correct? I'm in the UK and I've always considered private medical a pretty standard part of the benefits package, at least in private sector full time jobs. Is that blinkered?
Re "Treasury Brain" - the problem is that there is no consequence for Government if they engage in short-term "cost-cutting" that will actually increase costs. If, when they slashed investment to pay for political priorities as you describe, analysts put out reports saying "actually this is bad news for Govt finances longer-term so this is a sell for gilts", you would see a lot less of it. But they don't - they simply look at the raw numbers for next year and write things like "Chancellor creates headroom for tax cuts". So of course the politicians are incentivised to tell the Treasury to look for short-term savings.
Two points about the cost disease email.
One, we have a good example from recent history of how low productivity elsewhere in an economy will hold down wages in higher-productivity sectors. This is China in the early 2000's. At this time some 50% of China's workforce was still in the low-productivity agricultural sector, falling to 25% by 2019. The low productivity, and thus low wages, in agriculture meant that the growing industrial sector in China's cities only had to offer wages that were modestly above agricultural wages to hire workers when expanding production or starting new plants.
Second, I thought your correspondent misunderstood how rewards in the high-productivity sector would be allocated. If one, small sector of the economy has much higher productivity for labour than the rest of the economy, the workers in that sector will not generally see higher wages, except to the extent tht they have specialist skills that other workers don't have. This is because, again, the firms have the option of hiring and training new workers from the low-productivity sector, which they can do by offering only a modest premium on the prevailing wage. So the higher productivity will benefit capital owners in the high-productivity sector.
To make a concrete example of that: I work for a City firm that hires stock brokers and software developers for it operations at the going rate for those professions. These workers have specialist skills that command a premium, but my employer still only has to pay the going rate for their skills, and is left making some £200,000 of profit per employee per year, which accrues as equity and is generally returned to investors via dividends and share buy-backs.
I agree very much with John Gieve's comment that the Whitehall system fails to join up policy-making, policy implementation and the allocation of money. There is a particular difficulty with policies which cut across the responsibilities of different Departments - e g rough sleepers; reducing reoffending - where a policy may be regarded as a Number 10 or government priority but where a key element of it relies on a Department giving priority to an issue that that Department itself does not regard as one of the most important . For example, to seal effectively with reducing reoffending by ex-prisoners you weed to have continuity of mental health support after release and some kind of secure housing for offenders, but both DHSC and MLUHC have other priorities of their own that they generally see as more important. Rhe view I came too fro mu time in government was that we needed two significant changes to the current arrangements for spending rounds. First, a central responsibility of the Cabinet Office ahould be to oversee and drive through the effective implementation of agreed government priorities. The Minister for the Cabinet Office heeds to be empowered by the Prime Minister to bang ministerial heads together, broker or force through a compromise when Ministers are at odds and basically make dure things happen. For that Ministers authority to be accepted, he or she needs to enjoy the PM's complete trust and proper seniority (IMHO second in seniority only to the PM). As poart of those responsibilites, the Cabinet Office (particularly the government functions) should be involved in spending reviews, to ensure that money is allocated in a way that reflects agreed Cabinet priorities. Second, the Cabinet collectively need to discuss and take decisions aboiut the relative priority to give to different bids for spending. There is never, iunder Conservative or Labour governments, a Cabinet debate about whether, to pluck an example from the air, the greater priority should be two new destroyers or two new prisons (including the consequences of not giving one of them top priority). Rather, everything is decided bilaterally between the Chief Secretray and individual Secretaries of State.
On point 1) Cummings (whether you agree or disagree with his other ideas – not the time to discuss that) did try and improve the division between No 10 and No 11 by having joint SPADs etc. It seems to me that such a counterbalance on Treasury Brain made/makes sense. Although maybe a hard sell to the Chancellor as it reduces their power.
I hope your original post and this summary of comments will be fed into the Health Commission which The Times has set up. In particular, the points about queuing theory and the corollary that some spare capacity is a necessary part of an efficient system are important ones, in my view.
Interesting to see mention Baumol's cost disease but not the NHS as an effective monopsony employer of health workers. This would imply that the Baumol cost disease effect is actually being held down by the employer's collective bargaining power.
We're actually holding down people-related costs quite a lot - look at Kiwi/Aussie doctor wages and working conditions compared to ours (and migration of British doctors to the Antipodes for that matter). Not to mention the social stigma applied to non-NHS practicing doctors, though this is starting to fade because of the service degradation.
But aside from monopsony economic rents, Baumol's cost disease is also not something that could be easily reduced since productivity improvements in much of the health and social care sector might start to infringe on human dignity (no social contact - but I have an Arsewipe 9000 robot?) Or, they simply go on more high tech (expensive) solutions to problems that have only started to appear because we can live to a greater age (robosurgery and complex biologics?) with much smaller marginal gains (towards the health of primarily retired, unproductive, if worthy patients.)
Let's start with a couple of soundbites, which, of course, don't answer anything in a serious way, but, nonetheless set the scene for the discussion. Firstly, if state owned monopolies were the best way to run the economy, the Soviet Union would have been the most successful economy on earth. Secondly, before the privatisation of BT, it could take up to 18 mos to get a home phone line installed. To take the second point first. Why was this? Because the Treasury was only really interested in expenditure rather than revenue. In the private sector, this focus was reversed and soon phone lines were available more or less instantly. But note the Treasury's attitude to funding places in medical schools. It's very similar to the telephone example and places are heavily restricted. Now look at the first example. Market systems are good at matching supply and demand. Command and control systems are lousy at it. This is because markets are essentially a signalling system, which allows fast response to shortages or surpluses. Command and control systems do not (all this was examined by Hayek in far greater depth). In addition, politicians are far more likely to address the issues in ways that the electorate perceive to be good, than ways that are actually effective. Now, of
course, there is bound to be some political input into any health system, because we should rightly have a system of universal coverage. But, the more the market can play its part, the more likely the system is to be effective. This is why the European systems based on social insurance are far more effective in providing health care for their populations. You have addressed this point by saying that if we'd now known, what we didn't know in 1948, we'd have started off differently, but it is now too late. I don't think it is too late and I think we will face the same problems with our nationalised system until kingdom come. The key is to set a goal and a strategy. Of course, it would be highly disruptive to make the change all at once. But I think it is overly defeatist to say it cannot be done and I wonder if this is, in part, related to a certain overall affection for the public service model, which has been shown many times to be ineffective, but is somehow considered to be favoured for romantic rather than practical reasons.
My meta question: Why is “the Treasury doesn’t want to spend money on anything that doesn’t have a ROI of 100x this afternoon” seemingly universally accepted among British political commentators (and apparently politicians) as an immovable fact and not just a consequence of the astonishingly weak and pathetic figures that become PM? Whatever objections any department might have on any topic, there’s no written constitution and so absolutely any facet of British governance is at most a Commons majority (or two if you manifesto it and believe the Salisbury convention is a real rule) away from being changed however the presently ruling party wishes it changed. Unhappy with the Secretary to the Treasury? The PM can fire them. Unhappy having one department in charge of tax collection as well as economic modelling as well as allocating cash? Split it up. Unhappy with the Chancellor’s policies or the advice they seek or get from the department? Sack them and appoint one of your other three hundred MPs that is aligned with you/knows which side their bread is buttered on.
It’s not even very dictatorial or controversial to say out loud “the Treasury has too much conflicting work to do, I’m splitting it up so we can actually have a whole department devoted to deciding what to go invest in for Britain and a whole other one devoted to collecting taxes”.
Is Jack Smith's point about private insurance in the UK vs Canada correct? I'm in the UK and I've always considered private medical a pretty standard part of the benefits package, at least in private sector full time jobs. Is that blinkered?