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Decentralising the NHS could be a game-changer for the UK’s future health

Decentralising the NHS could be a game-changer for the UK’s future health

The NHS is a highly centralised organisation. During the Covid crisis, policy decisions have been made at the top and then passed down.  There has been little scope for showing initiative at a local level.

This dates back to when the NHS was set up in the late 1940s. Central planning was very fashionable at the time.

Yet as many have pointed out, no other Western health service has seen fit to copy the particular organisational structure of the NHS. There is, to varying degrees, more devolution of authority and decisions.

In normal times, the problems arising from a centralised, command-and-control system have become apparent over the years. Cancer survival rates, for example, are routinely lower in the UK than in other European health systems.

In a crisis, however, many economists and business school theorists have argued that a highly centralised structure works best. Decisive and coordinated action is needed, and this may be done more effectively from the centre.

There is a rival school of academic thought which takes a completely different view.

When a major shock such as a financial crisis occurs, decision makers face a highly uncertain environment. Local managers in a firm, for example, can understand their specific circumstances much better than can those in central headquarters. They are therefore better placed to make good decisions.

A timely paper in the American Economic Association’s Applied Economics journal examines the performance of firms during the Great Recession of 2008/9.

Nicholas Bloom of Stanford, along with his colleagues, analyse two large micro data sets of decentralisation in firms across ten developed economies.

Their conclusion is unequivocal. Companies which delegated more power from the central headquarters to local plant managers before the Great Recession happened outperformed their centralised counterparts.

The enhanced value of specific local knowledge during a crisis, when uncertainty is high, is seen as a key reason for the finding.

In the context of Covid and the NHS, the effectiveness with which the vaccination programme is being carried out appears to contradict this view.  But this did not need specific localised knowledge. It required the large-scale mobilisation of resources to deliver a very clear target.

Against this success, we can set the myriad failures of Public Health England. Its ability even to perform the basic task of collecting accurate data on the number of new cases has been brought into question.

Certainly, some local authorities embody the central planning mentality even more than PHE. But many could have used their local information about outbreaks to act much faster if the powers had been devolved to them. Local public health inspectorates, for example, have a lot of experience of practical tracking and tracing.

With decentralisation, different authorities would initially have tried different approaches. We would have had a natural experiment, as it were, into what sorts of things really worked. Successful tactics could then have been copied more widely.

One of the key lessons from the Covid crisis is the need to devolve powers within the outdated system of central planning on which the NHS is currently based.

As published in City AM Wednesday 20th January 2021
Image: CC0 1.0 Covid Vaccination via Rawpixel
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There’s little logic to 2016’s shareholder revolts against executive pay

There’s little logic to 2016’s shareholder revolts against executive pay

The crisis at BHS has focused as much on the ethics of Phillip Green’s behaviour as it has on the plight of the company itself.  Sir John Collins, who put his name forward for a knighthood, has said Green should be stripped of it if his handling of the beleaguered company is found to have lacked integrity.

Green is by no means the only prominent businessman to have faced criticism in recent weeks.  Last month, almost 60 per cent of BP shareholders voted at the AGM against the £14m pay package for the chief executive in a year in which the company reported record losses, cut thousands of jobs and froze its employees’ pay.  Hours later, over 50 per cent of Smith and Nephew’s shareholders rejected the remuneration committee’s decision on executive bonuses, despite the fact that its shareholder returns were below the median of its peer group.

It is a natural human tendency to look for specific reasons why these headline grabbing events take place. So we feel that perhaps these attacks were justified because of the varying degrees of poor company performance in each of the examples.  But Sir Martin Sorrell, who has built up a global media business from scratch and really has created shareholder value, is expected to face similar criticisms at the WPP AGM in the summer.

At the opposite extreme, the business world is replete with examples of huge rewards being handed out for poor performance with no comeback at all.  One of the harbingers of the financial crisis in the autumn of 2008 was the collapse of Bear Stearns investment bank in March of that year, and the virtual destruction of its shareholder value.  Yet James Cayne, the chairman and chief executive, walked away unscathed with the $40 million he had been paid in cash.  Fred Goodwin at RBS did have his knighthood annulled, but he was one of the very few financiers to suffer despite the ravages which they caused.

It did seem that revolts against massive pay-outs would take off in the ‘shareholder spring’ of 2012.  The august Institute of Directors pronounced that companies must respond to shareholders’ anger or risk discrediting the wider business community.    In the end, the protests just fizzled out.

In terms of shareholder discontent with executive remuneration, we have examples where poor performance stirs this up, examples where even exceptionally poor performance does not, examples where even good performance provokes the shareholders, and examples where a protest movement simply fades away after lots of initial sound and fury.

So it is challenging, to say the least, to construct a logical explanation of what causes shareholders to get stirred up.   We should think of it instead as being more like a fashion item.  Once something starts to become popular, it is likely to become even more popular, simply because it is popular.  We may just have reached a tipping point, where the large institutional shareholders now feel it is the done thing to pillory top executives, almost regardless of their performance.

Paul Ormerod

As published in City AM on Wednesday 4th May 2016

Image: Sir Martin Sorrell by Chip Cutter is licensed under CC BY 2.0

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Bank bail outs are no model to follow for British steel

Bank bail outs are no model to follow for British steel

The potential closure of the Tata steel plants, and the plight of Port Talbot is a tragedy for those directly affected. A key question is: if the banks could be saved, why not steel?  From a purely political perspective, the topic has legs.  The loyal, hard working Welshmen, fearful for their families’ futures, contrasted with the arrogant pin striped bankers, ripping everyone off.  It is a difficult narrative for the government to counter.

Away from the hurly burly of politics, the challenge takes us to some issues at the very heart of economic theory. Economics for beginners starts off with a simple diagram showing how much firms would supply of a product at different prices, and how much consumers would demand.  The point where these two curves cross tells us the price which exactly balances supply with demand.  In the technical phrase, the market clears.

A fundamental question in economics has been whether it is possible to prove that a set of prices can be found which would clear every single market, so-called ‘general equilibrium’. Supply and demand would be in balance everywhere, and so there would be no unused resources.  It is a problem which is easy to state, but exceptionally hard to prove.  No less than seven out of the first eleven Nobel prizes were awarded for work in this area.

Readers may recall having to solve quadratic equations at school. It has been proved that there is a formula which solves every such equation.  Plug in the numbers, and out pops the answer.  The general equilibrium problem is similar, but at a much harder mathematical level.  Can some formula, as we can think of it, be found which proves that a set of prices can be found for every economy?

The work may be esoteric, but it has great practical influence. Much of regulatory policy, for example, is designed to try and remove impediments to the workings of markets, to try and bring about the desired state of general equilibrium, where all resources are fully utilised.

A crucial problem for this work, in many ways the crown jewel of economic theory, is that it has proved very hard to establish that money has any special significance. It is simply another commodity. This thorny theoretical issue was highlighted by the financial crisis, which the mainstream, equilibrium models could not explain. In essence, both money and steel are equally as important.  Economists will realise I am compressing points here, but in this framework if the banks can be saved so, too, can steel.

Economists not obsessed with equilibrium, like Keynes, often take a completely different view. Money is decisively different, because it is the only product which appears in every single market.  Disruptions to money are not confined to a particular part of the economy, but have an impact everywhere.  Milton Friedman believed that the Great Recession in America in the 1930s had a monetary explanation for this very reason.  Money is fundamentally different to steel.  The banks had to be saved, steel is just an option.

As published in CITY AM on Wednesday 6th April 2016

Image: Steel by Ben Salter licensed under CCY BY 2.0

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Bring Back Cedric the Pig!

Bring Back Cedric the Pig!

Executive bonuses are back in the news. The Goldman Sachs pot of £8.3 billion has been prominent. German executive pay has overtaken that in the UK for the first time. Top management seems to have no shame. Some bad publicity today, but the fat cheque remains safely in the bank account.

How one longs for the days of Cedric the Pig! This was the unfortunate nickname bestowed upon Cedric Brown, the Chief Executive of British Gas whose salary was increased by 75 per cent to £475,000 at the end of 1994, at a time when the company was making staff redundant. This works out at just over £700,000 at today’s prices. We can usefully contrast this with the remuneration package of Iain Conn, the newly installed Chief Executive of Centrica, parent company of British Gas. We read on the Centrica website that his basic salary is £925,000. Well, perhaps not an indecent amount more than poor Cedric. But the text goes on ‘to provide continuity of incentive opportunity prior to new arrangements being established two transitional awards will be made’. ‘Continuity of incentive opportunity’ means he could be in line for share awards of up to three times his base salary, plus pension contributions and ‘other benefits’.

Compared to many leading companies nowadays, the remuneration committee of Centrica has acted with a certain amount of restraint. Last year, the average FTSE Chief Executive was paid 143 times the salary of their average workers.

Perhaps economic theory can be used to justify these various payments? An essential component of any basic course in economic principles is the so-called marginal productivity theory of wages. ‘Marginal’ here does not have its everyday meaning in English, but is a piece of scientific jargon. It means the additional value contributed to the firm by a particular worker. According to the theory, the massive increases in executive remuneration over the past two decades or so are entirely justified. People are paid what they are worth. Certainly, this sentiment is prominent in corporate justifications for pay packages. World class individuals are needed, who can deliver world class performances.

There are many practical criticisms of this description of how pay is determined. Yet even within the abstract confines of economic theory itself, it cannot be justified. Economics has no theory with which to explain the distribution of income. This result, which required many pages of maths to prove, was established as long ago as the early 1970s. The lineage is impeccable. Gerard Debreu received the Nobel Prize for his work on equilibrium theory, and Hugo Sonnenschein went on to become President of the free-market oriented University of Chicago. But only high level graduate students, once they have been thoroughly socialised as economists, are taught these theorems.

The simple fact is that executive pay is almost entirely determined by social values and norms. The sense of restraint, of noblesse oblige, which characterised much of Britain’s post-war history, has vanished. Until top management learns to behave respectably again, the problem will remain.

Paul Ormerod

As published in City AM on Wednesday 21st January

Image: Piggy Bank by Pictures of Money licensed under CC BY 2.0 

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Groupthink and the troubles at Tesco

The latest fiasco at Tesco could prove an embarrassment for more than just the retailer. There appears to have been an over-recording of profit of some £250m, and some are asking questions about the company’s auditors.

Of course, the full story has yet to emerge, and Tesco’s auditors did flag issues in their most recent report. Further, no-one is suggesting that this is remotely like the scandal at Enron, which led to the effective dissolution of that firm’s auditors Arthur Andersen, then one of the five largest audit and accountancy partnerships in the world.

But getting this sort of thing right is very tricky. Financial professionals are only human, after all, and everyone makes mistakes from time to time. Regrettably, the instinct of many people is to call for tighter regulations to “prevent this happening again”. It is a litany familiar from the long succession of inquiries into child abuse scandals, and it has hardly been a successful one.

Clamping down on the ability of professionals to make judgments, and trying to cram everything into a tick box, is a recipe for failure. This whole approach is one of the most damaging legacies of the Gordon Brown era. We also see the problem in China at the moment: the rigorous clampdown on corruption is leading to a virtual paralysis of the government machine, with no-one wanting to risk making a decision of any kind.

One of the best ways of avoiding the sorts of problems which have arisen at Tesco is to try and ensure that there is diversity within management. Diversity in this context means that opinions which differ from those of the majority are encouraged rather than frowned upon. The phenomenon of groupthink can be very dangerous indeed, as the financial crisis showed. Financial institutions, regulators and accountancy firms all relied, for example, on models of risk which depended upon the assumption that very large changes to asset prices were almost never seen. Even though it had been established beyond doubt scientifically that this was not true, groupthink prevented more realistic assumptions being built into the models.

A key practical question, of course, is how to detect when diversity is disappearing within an organisation. An intriguing recent paper by David Tuckett, director of UCL’s Centre for the Study of Decision Making Uncertainty, uses the power of computer technology to shed some light on the problem. He analyses, or rather gets algorithms to analyse, very large-scale text databases to detect when groupthink is emerging and different perspectives are being squashed. One of them is the internal email database of Enron, and the other is Reuters’s’ news feeds, containing millions of articles concerning Fannie Mae. In both cases, clear early warning signals could have been identified.

I work with Tuckett on other topics at the Centre, so maybe I see the results through rose-tinted glasses. But innovative ways are needed of trying to avoid the persistent accounting problems which dog our corporate sector. Regulation alone will not work.

As published in City AM on Tuesday 30th September

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Wall Street no smarter than Mr and Mrs Average

Lurid stories about the excesses in the UK housing market continue to proliferate.  True, there is some evidence of a cooling, as the price rises tempt more sellers into the market and temporarily increase supply relative to demand.  But at the same time we learn in the Sunday Times that the good burghers of Cobham enjoyed on average – on average! – an increase in the value of their homes of no less than £647,000 over the past twenty years.  Other areas in the Home Counties saw similar huge capital gains.

The Bank of England is known to be concerned about the possibility of a new house price bubble, of prices being driven further and further away from levels which can be justified in terms of fundamental economic circumstances.  Such bubbles end in tears, and some readers may recall the dramatic collapse in prices which took place at the end of the so-called Lawson boom at the end of the 1980s.  In many places, house prices did not regain theses peak levels until the early 2000s.

The real worry is that any such bubble would have damaging effects on the rest of the economy.  The new buzz phrase in policy circles is ‘macro prudential’.  Central banks are now much more aware of the damage that shocks in just one sector can cause, as their effects cascade across the economy as a whole.  And it was in the housing sector that the financial crisis began in the United States.

Much of the public outrage about the crisis rests on the belief that the incentive structures in financial institutions encouraged people to take huge risks, with no personal downside.  Wall Street, it is alleged, knew about the risks of a financial collapse, but simply carried on securitising mortgages of ever decreasing quality.

A new paper in the American Economic Review undermines this widespread perception.  Ing-Haw Cheng, of the Ivy League Dartmouth College, and colleagues from Michigan and Princeton analyse the personal home transaction data of managers in securitized finance in the period immediately before the housing crash.   In other words, when they were buying and selling on their own accounts, using their own money, did they behave as if they were aware of the housing bubble and the looming crisis?

The conclusion is stark.  In general, these managers neither timed the market correctly, nor were they in any way cautious in their own transactions in the housing market.  They seemed unaware of the overall problems in this market.  Indeed, a sizeable proportion of securitisation agents were particularly aggressive in increasing their personal exposure to housing in the run up to the crash.

The problem, Cheng and colleagues conclude, was not the incentive structure.  It was a problem of psychology.  Company ethos fostered both over-optimism and groupthink.  Different beliefs about the housing market were not encouraged.  A massive divergence arose between the dominant narrative on Wall Street about the housing market, and what was actually happening to prices.   Monitoring beliefs seems crucial to avoiding the next crisis.

As published in City AM on Tuesday 22nd September

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