Vast state payrolls will veto reforms

Allister Heath
MORE evidence of a growing public-private divide: 57 per cent of extra UK jobs created during 1997-2007 were either officially on the government’s payrolls or “para-state” – technically private but dependent on government funding. And that was before the private sector jobs bloodbath since 2008.

Manchester University’s Centre for Research on Socio-Cultural Change calculates that of the 2.24m net new jobs created in 1997-2007, 1.27m were state or para-state (the latter includes the likes of rubbish collecting, government funded private nursery education and private healthcare and various consultants) including an astonishing 81 per cent of the 1.1m extra jobs taken by women.
In the North East, 79 per cent of new jobs were state-dependent, compared with 41 per cent in London and the South East, both still bastions of private enterprise. There was a net drop of 37,000 private jobs and a 105,000 rise in state and para-state jobs in the West Midlands.

Separately, the Centre for Cities calculates Birmingham suffered a net loss of 60,000 private jobs, against 90,000 gained in education, health and public administration in 1998-2008. Hull lost 4,000 private jobs and Doncaster 5,000; 70 per cent of the 1.2m net additional jobs created in cities between 1998 and 2007 came from education, health and public administration.

Public spending needs to be cut; the great worry is that the state’s payrolls are now so large – and the vested interest for more spending so powerful – that Tories and Labour alike will be too scared to act until it is too late.

There is widespread support for the latest proposal for financial institutions to pay an insurance fee to fund future bail-outs. Taxpayers would be protected and banks charged a rational price for insurance they have been receiving until now for free - a sensible idea if one believes such a facility should be available in the first place.

That is where the problem lies. The scheme would enshrine the bail-out culture and promote risk-taking; the present state of affairs would become “legitimised” (which is why so many bankers support it). The levy assumes there will always be systemic crises; that banks will never be allowed to go to go out of business; and that taxpayers will always cough up. All three assumptions should be rejected. The goal of monetary and financial policy should be to eliminate systemic crises (invariably triggered by loose monetary policy and exacerbated by undercapitalised banks); the use of contingent convertibles (CoCos) would allow the automatic recapitalisation of banks without state involvement in a crisis; and we need to reform bankruptcy law to allow even the largest firms to be unwound in a controlled manner that doesn't disrupt markets (there is work going on around the world on how to achieve this).

Deposits should be properly insured, with a fee paid as part of a pre-funded scheme managed by trustees; but what is currently being proposed would prop up entire institutions, not just depositors. Proper deposit insurance reform would also force consumers to be more prudent (insurance could be paid directly by consumers with rates dependent on the market’s assessment of a bank’s risk). None of this is on the agenda, however.

Supporters of the consensus should remember that insurance always creates moral hazard. People who insure their possessions always report more theft than those who don’t. Insuring bail-outs will just trigger even more bail-outs.