Tuesday, 16 January 2018

The Legacy of George Osborne

The collapse of Carillion has been heralded as a watershed moment for privatisation. I doubt that's true. The deficiencies of public sector outsourcing and PFI deals have been known for decades, while the prospect of a major change in public sector management is probably only going to occur with a change of government, which may not happen before 2022. The refusal to bail out the business, even though it means more write-offs for state-owned RBS, suggests that the government is keen to avoid the distraction of both a specific inquest into the company and a general debate about public services and infrastructure investment, as much as a desire to protect taxpayers' money. Given the competing demands of Brexit, that is hardly surprising. While the Labour Party's robust insistence on a public inquiry has been predictable (imagine how this would have been handled pre-Corbyn), the failure of George Osborne to make his now habitual dig at Theresa May was less so.

The former Chancellor's editorial in yesterday's Evening Standard, which relegated the topic behind the scourge of plastic waste, suggested the root cause was a combination of the excessive size of Carillion and the tendency of civil servants to prefer the devil they know: "The failure to use a variety of smaller, mid-size companies undermines innovation and leaves services hostage when things go wrong". What is missing from this timid analysis is political accountability. The push for government contracts to go to more and smaller firms was a cosmetic gesture during Osborne's tenure at the Treasury that has resulted in minimal change for pretty obvious structural reasons. It has little to do with civil servants' aversion to novelty. His claim also obscures that the material change in circumstances in 2010 was the imposition of austerity. This led to Whitehall putting the screws on suppliers to reduce contract costs, which was one of the contributory factors to Carillion's eventual demise. This was a death long foretold. As the old Ernest Hemingway joke has it, "How did you go bankrupt? Two ways. Gradually, then suddenly".

Osborne, not for the first time, is being disingenuous. Dealing with a single big supplier is easier for the client, particularly when cuts erode the public sector's capacity for effective supplier management, while big companies with extensive portfolios of public revenues are more likely to secure the financing necessary to initiate large contracts without the need for the state to make formal guarantees that would appear on the national accounts. This tendency towards the big also encourages suppliers to operate essentially as intermediaries (hence the way they morph into empty brands with meaningless names), willing to facilitate any new service required by the client regardless of their actual competence or history, if only to maintain the relationship and the advantages of incumbency. The result is the consolidation of companies handling government contracts, not a flowering of supplier variety, and an ever more desperate search for low-cost sub-contractors and cuttable corners rather than a commitment to innovative service delivery.

What was being outsourced to Carillion was financial and project management, not innovation or risk. For this reason it is pointless to talk of nationalising the company, or to wonder why it is being liquidated rather than being put into administration. It isn't a going concern and it has little in the way of tangible assets. There aren't any means of production to put into public ownership and the company's institutional capital centres on the ability to win public sector contracts, which would be redundant if it were nationalised. Of the 4.43bn total assets it reported in 2016, only 144m were fixed assets (property, plant, equipment etc). Cash, receivables, inventory and investments made up 2.4bn and goodwill (representing the intangible cost of historic acquisitions) a further 1.6bn. In other words, its tangible assets were largely money or near-money, most of which appears to have been haemorrhaged over the last year. The warning that creditors may receive only a few pennies in the pound tells you not only that the cash has gone but that the contracts represented by the receivables aren't sufficient to meet the liabilities, confirming that the proximate cause of collapse was evaporating margins and an inability to secure further financing.

Both of these will have been evident for months, if not years, which is why it is entirely legitimate to demand scrutiny of the apparent under-estimation of the risk of collapse by both Carillion's board and government ministers. But we shouldn't lose sight of the fundamental issue here, namely that the outsourcing sector and PFI contracts have both been pushed by structural forces towards financial arbitrage rather than competitive service delivery, a situation exacerbated for almost a decade by the contingent demands of austerity, which has reduced both the number of contracts and profit margins. The result is a "market" made up of fragile suppliers who are obliged to grow or die; or at least win new contracts, no matter how small the profit, in order to to keep the life-support machine turned on. When even the FT describes Carillion as "a lawful sort of Ponzi scheme - using new or expected revenues to cover more pressing demands for payment", then the cat is well and truly out of the bag. This was an unsustainable model and plenty of people must have known that for a long time.

Carillion's executive remuneration was geared to winning contracts and growing, which meant that there would always be a reluctance to retrench, even when the warning signs started to flash, such as in 2014 when hedge funds began short-selling the company's shares. Other obvious signs of distress were the growing deficit in the pension fund and the imposition of abusive supplier payment terms, which were increased to 120 days in 2013 (another example of financial arbitrage - client terms remained at 30 days in most cases). This was evidence in the public domain. The apparent failure to raise any of these issues at board level points to the uselessness of non-executive directors who share the same cultural values (growth at all costs, the primacy of shareholder value, the need for superior executive rewards etc). This failure also extends to ministers, who in respect of the governance of public sector outsourcing and PFI deals have a de facto non-executive role. Their inability to read the signs, and the suggestion that they may have deliberately ignored some in order to cut the business more slack, points to a similar cultural weakness.

The centrist debate on outsourcing revolves around the concept of "drawing the line", which is a mixture of Coasian theory and liberal propriety. This suggests that getting it right is a matter of refinement and judgement. As Simon Jenkins harrumphs, "How to find the ideal mix of public sector loyalty and private sector incentive has bedevilled state procurement since the dawn of time. But there should be clear rules, as with monopoly regulation, such as limits on market dominance, debt and remuneration". The suggestion that we lack clear rules on all these matters is absurd. Public procurement is highly regulated and rule-bound, not just because of political sensitivity but because suppliers themselves appreciate the advantages that accrue to incumbents through high barriers to entry. The flaw in this abstract thinking is that in the real world public sector loyalty and private sector incentive constitute a volatile mix. There is no stable combination; no clear line. This is not necessarily a problem if one is dominant. The problem arises when a dynamic like austerity erodes loyalty and incentives simultaneously. As the public sector struggles to recruit and retain staff, and as outsourcers collapse, the government is waking up to the legacy of George Osborne.

Wednesday, 10 January 2018

Privilege and Merit

The news that Virgin Trains is to stop selling the Daily Mail is a pretty obvious distraction from season ticket price rises and the scandal of the East Coast franchise, however it does incidentally highlight the class association of the railways in popular discourse. It is important to note that while Virgin Trains offered the Daily Mail for sale to standard class passengers, it provided complimentary copies to first class passengers. The howls from Northcliffe House about "censorship" do not reflect the loss of the paltry revenue stream arising from the former, but the ending of the tacit endorsement entailed by the latter. In other words, this is about the loss of privilege rather than the denial of a human right and one that challenges the newspaper's claim to pre-eminence among the UK's middle-class readership. In claiming that its staff objected to the Daily Mail's content, Virgin Trains has endorsed the liberal activism of Stop Funding Hate (changing the world one informed purchase at a time), while stopping short of suggesting that its employees might have a say over its own offerings, such as its rip-off "free" Wi-Fi. In so doing, its implies that the Daily Mail may be less representative of "decent" opinion in Britain, which is an affront to the paper's self-image.

One point made with dull regularity when the annual price rises come round is that railways are a middle-class subsidy. This is true but irrelevant. So are roads and universities. Pretty much any public good tends to be exploited more effectively by the middle class, from the NHS to national parks, but that's not a sufficient reason to argue against public investment. The question should be whether the subsidy produces outcomes that benefit all. Railways bring wider gains for the economy and society than those that accrue to actual travellers. They allow for city agglomerations that enable larger and more specialised industries, which produces more jobs and higher average pay. The increased demand for rail travel over recent decades reflects the increasing proportion of service and professional jobs within the economy plus the related rise in property values in city centres. The result is more and more people needing to travel in from the suburbs or satellite towns. This is exacerbated in cities like London by the Green Belt, which obliges commuters to live further out, and by premium services like HS2 that seek to extend the outer limit of the commuter zone. Compared to the subsidy of the Green Belt, public spending on suburban rail travel is relatively modest.

One reason for emphasising the middle-class nature of rail travel is to suggest that the cost of nationalisation would disproportionately fall on the working class (and emblematic white-van drivers in particular) in the form of higher taxes, though as ever this avoids the broader question of incidence and the shift from wealth and income to consumption taxes. Public ownership of the railways is not a panacea, though it still has significant advantages over the use of private operators. What ultimately matters, as we saw in the 1970s and 80s, is the level of investment. The attraction of rail for both operators and financiers is the same: a natural monopoly with a guaranteed income stream. But a monopoly almost always under-invests, hence rail privatisation leads to a de facto state railway parasitised by rent-extractors focused on branding and public relations (hello, Richard Branson). The franchise model is particularly unsuited to railways because few operators can realistically bid, so there isn't a competitive market, and the strategic importance of rail transport means the state will always be on the hook, which allows private operators to bale out when their profits are threatened, as we have repeatedly seen in the UK.

The argument for introducing market discipline - that competition between suppliers will lead consumers to reveal their preferences - simply does not apply to railways. By dropping the Dail Mail, Virgin Trains is cannily giving the impression of a working market in which low sales have revealed its customers distaste for the paper: it has been judged on its merits. The same sort of thinking appears to lie behind the creation of the Office for Students, which has been in the news lately. The introduction of variable tuition fees has not led to the appearance of a dynamic price signal, largely because guaranteed student loans and earnings-related repayment mean that buyers aren't actually price-conscious (and accelerated two-year degree courses won't change that). Likewise, competition has not led to market exit by poor suppliers because supply, at the level of the individual college and within the limitations created by an annual buying round, is not elastic. University access remains a game of musical chairs in which some of the chairs are in a hard-to-reach annex. Like many other regulators, the job of the OfS will be to simulate competition in order to justify rent-extraction and to institutionally favour privileged suppliers such as Oxford and Cambridge.

The furore over Toby Young has been hitched to a variety of current phenomena, from Harvey Weinstein to campus free-speech, but the central argument concerns merit. To his liberal detractors, Young lacked both specific qualifications for the job and a reputation for probity and public service sufficient to be seen as one of "the great and good". This criticism not only elided the antagonistic purpose of the OfS but ignored the lesson of his father, Michael Young's The Rise of the Meritocracy: that all elites are self-perpetuating and merit is consequently less objective than we imagine. The younger Young's defenders (wisely) did not try to big-up his unimpressive work with free schools but instead lauded his free-thinking and "caustic wit". His supposed merit was his iconoclasm, which shows how merit can easily be interpreted to suit any agenda. Young's role as the little boy confronted by a naked emperor was intended to help improve the higher education sector by forcing it to "think outside the box", but that necessarily entailed criticising the academic and public service elite who have defined the boundaries of that box up till now.

Coincidentally, Young's appointment came shortly after the resignation as a government advisor of Andrew Adonis, the meritocrat's meritocrat, which perhaps created a contrast that was a little too stark for (liberal) public taste. Indeed, you have to wonder why the suddenly-available Adonis wasn't considered as a last-minute candidate for the OfS board role, even if anything other than chair (a role he allegedly lobbied for) might be beneath his dignity. Not only is he impeccably neoliberal and well-versed in the sector but he went out of his way to criticise "fat cat" vice-chancellors last year. I suspect the answer is that Adonis might take the brief to introduce competition, as opposed to merely simulate it, too seriously. His claims that university expansion was a mistake and that the sector operates as a price cartel were perhaps a little too iconoclastic (not to mention questionable) at a time when the government was more interested in beasting "snowflake" students as part of a misbegotten culture war. Both Young and Adonis have been left without plum jobs, but I doubt they will lose the privilege of having their fervid opinions relayed by the UK press, from the Guardian to the Daily Mail.

Friday, 5 January 2018

The Office for Fuck's Sake

There are many reasons for criticising the odious Toby Young, but the crudity of his language (aka "caustic wit") is not one of them. He is, after all, a paid entertainer. If Frankie Boyle had got the gig with the new Office for Students, rightwing criticism of the Scottish comic's language would be equally beside the point. Likewise, Young's history of making derogatory comments about women or working class kids isn't a good look for someone who is supposed to further the interests of all students, but it isn't particularly germane to his role on a body that will be acting as a competition regulator for universities. As should be obvious from the makeup of the rest of the board, which has been successfully obscured by the focus on Young, this is a typical neoliberal agency intent on the further marketisation of higher education. There will be gender and class bias, but this will be structural rather than the result of Young's powers of persuasion. The reason why he is unsuitable for a position on the board of the OfS in its own terms is that he lacks any relevant experience of business or competition regulation. Being a journalist or setting up a free school are irrelevant achievements in this context.

Young is dim enough to perhaps not realise when is being played. The timing of the announcement of the appointment, one minute into the New Year, looks less like an attempt to bury bad news and more like a calculation that booze and the bank holiday would quickly drive the debate onto Twitter, which in turn meant that wider press coverage tended to be about the ensuing outrage rather than the remit of the OfS or the business-heavy composition of its board. If Young were to step down, this would be treated by many as a moral victory, while the OfS itself would get a free pass. The battle won, the war lost. You can see a similar dynamic at work when a Berkeley professor uses Twitter to explain how Donald Trump manipulates the media agenda through Twitter, thereby ignoring the more substantive damage being done in Congress. The Tories appear to have decided some months ago (I'm thinking specifically of the spat between Jeremy Hunt and Stephen Hawking) that they have little to lose in adopting an antagonistic media stance and much to gain in terms of distraction. The elevation of Toby Young is clearly part of a wider strategy.

The root problem here is liberal morality. A good example of this came on the same day as the OfS board announcement when John Harris penned a piece in the Guardian titled "Take it from the insiders: Silicon Valley is eating your soul". Harris imagines that the tendency of tech titans to restrict their own childrens' exposure to social media is a telling admission of their product's toxicity, like a beer baron insisting that his kids be shielded from alcohol, but all it really indicates is a retreat from a public social network to a reserved space of privilege (I doubt the kids are sitting bored at home). That liberal critics emphasise the supposed addictive properties of social media (Harris wheels out the trusty "dopamine hit") is just the usual criticism of the mass as weak-willed and incapable of self-control and thus of a piece with articles on New Year resolutions and detoxing. Thirty years ago the same articles were being written about the malign effects of television and the need to restrict childrens' viewing time. A hundred years ago children were being criticised for always having their noses in books.

Having diagnosed the problem to his own satisfaction, Harris espies a solution: "There is a possible way out of this, of course. It resides not in some luddite fantasy of an army of people carrying old Nokia phones and writing each other letters, but the possibility of a culture that actually embraces the idea of navigating the internet with a discriminating sensibility and an emphasis on basic moderation". That last word is being used in a dual sense: as an act of self-censorship and as advocacy of a middle way. What Harris doesn't explain is how we are to acquire a "discriminating sensibility". Playing Snake on a Nokia 3310, perhaps. If Facebook is increasingly creating a walled garden that shuts out the world ("let us discriminate for you"), Twitter remains much more of a public space open to riotous assembly, but it is one in which propriety and judgement are becoming ever more prominent, hence the increasing number of users who feel the need to broadcast their decisions to block or report others. This performative curation of one's own filter bubble looks suspiciously like a bigger dopamine hit than making a sarky comment beneath a blue tick mark's tweet.

Eric Posner of the Chicago Law School published Twenty Theses About Twitter last July. He starts by suggesting that "People sign up for Twitter for two reasons: to obtain information and to exert influence", but then goes on to show why this is a false prospectus. There are better sources of information and Twitter is a poor medium for making a case sufficient to change someone's mind. Posner's central thesis is one of self-indulgence:

7. Twitter’s real function is to enable people to obtain validation for their beliefs.
8. People send tweets with a single overriding purpose: to get the tweet "liked" or retweeted.
9. When your tweet is liked or retweeted, you enjoy a dopamine surge.

This may sound like a reduction of humanity to the status of lab rats, but Posner is no behaviourist. What he is suggesting is that the risk/reward dynamic of Twitter is so different to the "real world" of calculating utility maximisers that the online persona can undermine the offline:

16. In the non-virtual world, successful people take care to keep up impressions, for example, they avoid making controversial statements to friends, colleagues, and strangers except when unavoidable, and even then do so in a carefully respectful way.
17. In Twitter, the same people act as if their audience consisted of a few like-minded friends and forget that it actually consists of a diverse group of people who may not agree with them in every particular on politics, religion, morality, metaphysics, and personal hygiene.
18. Without realizing it, people who use Twitter damage the image of themselves that they cultivate in the non-virtual world.

In effect, Twitter is a drug that corrodes human capital through the collateral damage it does to social relations, much like cocaine. Of course this theory only holds for those people whose Twitter ID reflects their public persona and whose real world human capital is significant. While economic liberals like Posner stress the dopamine hit, which is essentially a transactional model that leaves the idea of preference intact, cultural liberals are more likely to focus on the corrosive effect of anonymity, hence the lasting popularity of the Ring of Gyges as a trope in modern analyses of the disinhibition that the Internet enables. The one focuses on a lack of self-restraint, the other on the circumvention of social constraint. To put it another way, Posner thinks the reward (the hit) is too cheap in the short-term and the delayed cost (damage to reputation) is being excessively discounted, while cultural liberals see anonymity as a form of free-riding. What they share is a belief that the price of social media should be higher, even though its nature (the need for data at scale and the reliance on advertising) demands that the service be provided free. Twitter is a pure market because it enables the expression and ranking of almost any individual preference, but it is "irresponsible" because it does so by undermining the price mechanism.

The low cost of entry of social media is a leveller in the sense that a "speech-act" of a nobody has the same form as that of a celebrity or professional commentator. In the offline world this is rare outside of public meetings - i.e. heckles - which is why such events are carefully managed, if not avoided. But just as the speaker at a lectern or in a pulpit has a structural advantage, so Twitter creates a hierarchy of regard through the number of followers and likes. A consequence of this is that holding others up to ridicule becomes a powerful tool for the powerful, on a par with having a column in the Spectator, but as the case of Toby Young shows, Twitter still retains the potential to empower "the mob". While many "nobodies" have helped excavate Young's more objectionable tweets, the press coverage on the outrage has inevitably concentrated on disobliging comments by other "slebs" or credentialled experts. And so the game goes on. Toby Young is obviously a charlatan and a fool, but that makes him all the more suitable for the role of a patsy. He must by now have twigged that he is the sacrificial offering for the inauguration of the OfS, so presumably he has also secured a suitable pay-off. I expect him to feature in a future honours list.