Free nursery places for 3 year olds appears to have no impact - an example of Government Failure?

Wednesday, October 22, 2014
by Jonny Clark

Reports out over the last couple of days suggest that government spending on free nursery places for 3 year olds since 1998 has not produced any valuable educational or economic outcome. The policy was introduced as part of a series of reforms introduced by Tony Blair when he came to power in 1997. The Blair Government saw it as a method of reducing the differentials between educational attainment of poorer and wealthier sections of society and promoting a speedier return to work for some mothers.

Researchers studying the impact of the policy during the 2002 to 2007 time period, where spending on the policy amounted to more than £7bn found that the education received at age 3 had some impact on attainment at age 5 but any improvements were lost by age 11. The research suggested that the policy had only a minor impact on enabling more women to return to work earlier. Also, there is evidence that 5 out of 6 users of the free place would have gone to a paid-for equivalent at age 3 anyway.

So, does this offer us a good example of government failure in economic and social policy?

Nicky King, of Radley College in Oxfordshire, uses the iCause acronym to remember how to analyse government failure. The letters stand for:

I – inadequate information

C – financial cost/opportunity cost

A – administrative errors

U – unintended consequences

S – self interest

E – (lack of) expertise

How does the free nursery place issue stack up to this analysis? You could argue that the policy implementation may well have been based upon inadequate information – perhaps from academic research that actually couldn’t prove the impact of the policy until it was actually in place. The policy sounds like it should work but was it something that a popular (in terms of votes) government would do to please the electorate (S – self interest). The unintended consequence is the fact that the vast majority of users of the free places would have paid for educating their 3 year old anyway increasing the burden on the government revenues. Of course, there is a significant opportunity cost here – the policy remains in place at a time when the government are cutting back on lots of other public services.

Nicky’s ‘What Went Wrong?’ activity is available as part of the Wow Economics CPD event and resource pack, with details available here.

Click on this link to see an article from the Telegraph about the free nursery place policy.

Public sector pay and pensions are why the deficit stays high

by Paul Ormerod

Why can’t the UK government get its deficit down? This question has been exercising commentators recently, in the light of the latest assessment from the Office for Budget Responsibility (OBR) that George Osborn will once again miss his target for the deficit in the 2014/15 financial year. Of course, the size of the deficit has fallen, from the £157 billion which Labour bequeathed in 2009/10 to £108 billion in 2013/14. But it does just not fall as much as either the OBR consistently predicts it will or the Chancellor would like it to. This limits the ability of the government to deliver tax cuts in advance of the election next year.

A common, and plausible, reason is that there has been a shift in how the economy operates. Output has recovered strongly, but earnings have not. The bargaining power of employers is stronger, many members of the workforce have a more flexible attitude to how much they work, so take home pay rises remain below inflation. As a result, the amount of tax flowing into the government’s coffers is not as much as would be expected on the basis of evidence from previous economic recoveries.

But the fundamental reason is that remuneration in the public sector remains too high. The recent strikes by Unite and other unions show that many people on the conventional Left seem to believe that the purpose of public expenditure is to boost the private consumption of those employed in the sector. The continued existence of annual increments in much of the public sector has no counterpart in the private sector. In the latter, pay increases have to be earned. In the former, for many workers they are automatic.

An argument which is used to justify the gap between pay in the public and private sectors is that the level of qualifications of public sector workers is on average higher. This is entirely spurious. What counts is not what goes into the production process of an organisation, but what comes out at the end. Countries in the former Soviet bloc, especially the East European satellites, had high levels of educational attainment. But the quality of much of what they produced was very low. The Trabant, for example, was a very popular car made in the old East Germany. But once trade with the West was opened, its value fell to essentially zero.

Gordon Brown started off well as Chancellor. He kept us out of the Euro and kept a grip on public spending. But he began to have delusions in the early 2000s that he had solved the problems of boom and bust and could do anything. Brown started to stuff money into the pockets of Labour’s core vote in the public sector. The result was that a structural deficit emerged in the UK’s public finances before the crisis of 2008 struck. Any Chancellor who is serious both about fairness and about eliminating the deficit needs to cut make serious reductions in public sector pay and pension entitlements.

Paul Ormerod is an economist at Volterra Partners, a visiting professor at the UCL Centre for the Study of Decision Making Uncertainty, and author of Why Most Things Fail: Evolution, Extinction and Economics.

Black Gold Challenge

Tuesday, October 21, 2014
by Tom White

If you have a short break coming up - and you're new to economics - now would be a great time to collect together some resources about the extraordinary recent shift in the oil market.

I've challenged my microeconomists to use a tool like Storify (or something similar) to put together a collection of resources relating to supply and demand for oil.  What might explain the sudden plunge in price?

Perhaps you can also persuade your teacher to give a small prize or award for the best one!

I had a quick go: mine isn't perfect, but it could give you some ideas of what to include in your collection of articles.  You can find it here.  Geoff has been busy too (see here).  It's such a great source of stimulus ideas and discussion points.

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