Pass The Parcel

FRIDAY, FEBRUARY 12, 2010

Pass The Parcel

The wrapping fell off this one

OK, cue the music. The game works like this:

1. individual and company players build up huge parcels of debt they can never pay off;
2. the bank players who've lent the money to the individual and company players pass on the parcels as quickly as possible;
3. the music slows down, and the bank players suddenly realise that they're now holding other people's parcels which they suspect are not worth anything like what it says on the label;
4. there is a frenzy of parcel passing, until suddenly the music stops;
5. the bank players realise they are still holding stacks of parcels, they have no idea which is which, and no idea what they contain;
6. shrieking and general pandemonium: the bank players threaten to abandon the game unless somebody else takes the parcels away;
7. the government players hastily step in and gather up all the parcels from the bank players and re-label them as government debt;
8. the music starts again - a bit faster;
9. with nobody else borrowing, the government players build up huge further parcels of debt - debt they can never pay off;
10. the music slows down, and the market players who've lent the money to the government players suddenly realise that some of their government debt parcels aren't worth anything like what it says on the label;
11. there is a frenzy of parcel passing, until suddenly the music stops;
12. the market players find they are all still holding stacks of parcels; worse, some of the smaller government debt parcels have started to tick;
13. more shrieking and general pandemonium: the market players threaten to abandon the game unless somebody else takes the ticking parcels away;
14. the biggest government players agree to take away the smaller government debt parcels and re-label them Big Government Debt; some players start edging towards the exit
15. the music starts again - faster still
16. the big government players suddenly realise they are holding all the other players' debt parcels, and there are now no other players to pass them on to; there is a general rush for the exit;
17. the ticking gets a lot louder and horrified players realise the exit is locked;
18. the music stops and the big government players start screaming that it's all someone else's fault and that anyone who's still got any money has got to hand it over in tax.

*****

Something really horrible is underway: taxpayers in the big western economies are being stuffed with everyone else's bad debts. Here in Britain, we've already had to bail out the bankers, and now - whatever Darling may say - we're at risk of having to bail out the PIIGS.

Much more fundamentally, the longer the government borrows on the current humongous scale, the bigger the debt burden that will be loaded onto our backs for decades to come.

Now there are those who say right now we need the government to run a big deficit, because everyone else wants to run a surplus. That is to say, individuals and companies are slashing their spending in order to repay their own debts, and if government wasn't prepared to fill the gap, aggregate spending (aka demand) would collapse. You will recognise good old textbook Keynesianism.

But this argument overlooks a most incovenient truth. Which is that in the Keynesian textbook, government runs a temporary deficit to get the economy through a temporary (ie a cyclical) weakness of private sector demand. However, our current situation is that we're facing apermanent cut in private sector demand, reflecting a permanent cut in our GDP.

The cut comes about because around 6% of our GDP was wiped out by the collapse of the bubble and its associated jobs and profits (and 6% is HMT's figure - it could be higher). It will not return.

And what that means is that however much we might like to shore up demand in the economy, we simply don't have the necessary level of national income to support the current rate of government spending. Sure, in the short-term, the government can continue to fund it by borrowing 13% of our GDP. But at some unknown point - call it 24 hours after George delivers a weak budget in June - the cost of that funding will shoot up as the markets take fright.

Yesterday, money historian Niall Ferguson had an excellent piece in the FT describing the very real risk that deeply indebted America could head into a sovereign debt crisis every bit as bad as Greece's. As he says:

"Explosions of public debt hurt economies in the following way, as numerous empirical studies have shown. By raising fears of default and/or currency depreciation ahead of actual inflation, they push up real interest rates. Higher real rates, in turn, act as drag on growth, especially when the private sector is also heavily indebted – as is the case in most western economies, not least the US.

Although the US household savings rate has risen since the Great Recession began, it has not risen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the Federal Reserve and reserve accumulation by the Chinese monetary authorities."

In terms of fiscal malaise, our situation is actually worse than the US. But Fergusson's piece highlights the global nature of the crisis. When the US catches a dose of higher bond yields - as it surely will - we will go down with a bout of double debt pneumonia.

Yes, I know - I'm getting my metaphors in a twist again. But frankly, that's not surprising - the grim prospect of double digit bond yields on our vast mountain of government debt is enough to twist anyone's metaphors.

THURSDAY, FEBRUARY 11, 2010

Does The Swedish Model Actually Work?

The independent Kunskapsskolan schools certainly look better*

As regular BOM readers will know, Tyler is a big fan of the Swedish free schools model - the one that allows new independent schools to set up in competition with local authority schools, and then lets parents choose whether to have their children educated in an authority school or have the authority pay for a place at the free school. Choice and competition to drive improvement - what could be better? Which is why Tyler is so excited about the Tories' promise to adopt roughly the same model in the UK.

So you can imagine Tyler's distress at Monday's Newsnight report which basically said the Swedish model is failing in Sweden itself, and has notdelivered the improvement in standards supporters claim (you can watch the report here, along with Gove's somewhat back-footed response here).

The basic charge seemed to be that, while the new free schools are fantastically popular with parents, those parents are the very same pushy bourgeois elements that are the bane of commissariat life everywhere. And while the new schools may help their pampered undeserving offspring, everyone else gets left behind. With the result that in the international league tables of scholastic achievement, Sweden is now actually falling back.

Can that possibly be true? Tyler scrabbled around on the internet for the international league tables.

The best known of these is the OECD's Programme for International Student Assessment (PISA), which applies a consistent set of student tests in reading, maths, and science to 15 year-old pupils across (now) 57 participating countries. And so far, there have been three PISA surveys, the first in 2000.

We blogged the latest 2006 study here, focusing on the alarming plunge in the relative performance of English schools. But how did Sweden do?

It turns out that Sweden beat England in reading and maths, but fell below in science (see league tables here). Overall, Sweden was ranked 10th in reading, 21st in maths, and 22nd in science (out of 57 countries).

So is that a decline over time? Here are Sweden's league positions from the first PISA in 2000: reading 9th, maths 15th, science 10th. Which would indeed seem to indicate a decline.

However, when you look at the two league tables more closely, you find that it's less a question of Sweden falling back, and more a question of some sparkling new entrants joining the PISA programme since 2000, and going straight into the top ten. These include countries like Hong Kong-China, Macao-China, Taiwan, and some of the new EU members from the East. It seems to be the survey itself that's changed, recognising for the first time the huge competitive challenge all the decrepit old western economies are now facing.

So what's the truth about progress in Sweden? How can we find out?

Tyler turned to the New Schools Network, a most excellent new operation with the energetic Rachel Wolf as its Director. They talk Tyler's language:

"The Network aims to improve the quality of education – particularly for the most deprived – by increasing the number of independent, innovative schools within the state sector.

Schools should drive social mobility. Talent and hard work, not background, should determine success. Yet successive governments – of all parties – have failed to make opportunity equal in our schools. The wealthy can buy a good education - paying for private schools or by buying a house in the right neighbourhood. Others are denied those options. The Network believes that allowing new schools – accountable to government, but not run by politicians – will raise achievement across the country. We will help groups who want to set up new schools, and work to create the conditions which allow them to succeed."

Spot on. And here's how they summarise the detailed evidence from Sweden (and see here):

• Students in Swedish free schools get much better scores than in traditional schools. The Grade Point Average (GPA) in free schools is 20 points higher than in state schools.
• Swedish free schools improve standards across the local authority. Several studies have found that an increase in the number of children attending free schools improves performance across the area. A study by Anders Bohlmark and Mikael Lindahl of Stokholm University found that an increase in the percentage of free schools in an area increased pupil performance across all schools. Most of this increase was due to competition in the school sector, forcing all schools to improve their quality. Åsa Ahlin of Uppsala University found that a ten per cent increase in the number of children attending free schools led to a five per cent increase in Mathematics performance across the area. Similarly, the National Agency for Education found that municipalities with larger proportions of pupils in independent schools were more likely to say that the presence of independent schools in their jurisdiction had contributed to school improvement in compulsory schools in their municipalities.
• Parents are happier with new independent Swedish schools. 91 per cent of parents whose children attend free schools are happy with the results compared to just 63 per cent of parents at state schools.
• Parents think independent schools are a good idea. The Swedish National Agency for Education has found that more than 90 per cent of parents think that parents and children should get to choose what school children attend. More than half of parents think it is good for schools to compete with one another.

Now it is true that a full assessment of Swedish experience is hampered by the fact that until very recently, there has been a dearth of standardised testing across all schools. But what evidence there is looks pretty compelling to Tyler.

And as NSN quite correctly point out, there is considerably more evidence on the results of very similar reforms in the US - ie their Charter Schools. And that evidence is unambiguous - choice and competition really does lift all boats, both in the new independent Charter Schools, and in the remaining state schools.

The bottom line is that Tyler is now even more convinced this is the way to go. As we've blogged many times, Gove and Cam must be prepared for huge opposition, both from the teaching unions, and it seems from the state broadcaster. But they must press on. The PISA study underlines that we face fearsome competition from the new players in the global economy, several of whom seem to do better in education than we do.

We really have no option - we need to secure the very best educational opportunities we can possibly provide for all our kids - not just the rich ones.

*Footnote - the chart is taken from this Policy Exchange paper. It shows the average grade scores in the independent Kunskapsskolan chain of schools, compared against the average scores across all the schools in the municipalities in which they operate, and also the national averages.