Sunk costs and future costs

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The latest announcement of job losses in Llanelli is just one of a long line of decisions taken by companies against a background of uncertainty.  There is debate, naturally, about the extent to which Brexit may or may not be the cause.  In reality, it would be surprising if Brexit were the only cause, just as it would be surprising if Brexit were not to be a factor at all.  And companies wanting to avoid political controversy don’t necessarily put things in black-and-white terms when they make their decisions public.

But let us suppose, as many of those opposed to Brexit might wish, that it were possible to prove that Brexit is the direct, prime cause, time after time, in decisions leading to job losses.  There is an implicit assumption that, were this shown to be true, it might affect people’s views as to whether Brexit should be halted.  I think this is over-optimistic.  Once the jobs are lost, halting or reversing Brexit will, generally speaking, not bring them back (there may be a few exceptions to this, but once a decision has been taken and implemented – and the costs of so doing have been incurred – businesses would need an extremely good reason to reverse such a decision).  Effectively, the price of Brexit has by then already been paid, even if it never happens.

It gets worse.  The sunk cost fallacy – with which I’m pretty familiar after years of working on large and expensive IT projects – tells us that, having paid the price of Brexit, those committed to Brexit are more likely to double down on their enthusiasm than to change their views.  All the ‘investment’ made to date – whether in job losses or in costs of preparing for a no deal Brexit – will have been completely wasted if we don’t now proceed with the project.  I know from experience that it takes a very brave person to look at a huge sunk cost and say, ‘let’s write that off as a bad investment’ and cancel.  It’s much easier to argue, ‘well, having paid all that already, we may as well proceed’.  Assuming that repeatedly drawing attention to the huge costs which have already been incurred by Brexit will somehow change opinions is a mistake – it may actually be merely reinforcing them.

Let's have proper analysis, not ridicule

Tweet Yesterday's Sunday Times ran another of their fairly regular articles highlighting what they refer to as 'non-jobs' and 'waste' in the public sector. It was a large story – occupying a whole page – but it left me a little cold.

Picking on ridiculous-sounding job titles (and there are certainly some which easily fit that description!) makes for an easy story, but the article made no real effort to go behind the ridicule and seriously discover whether the jobs are wasteful or not.

To pick on just one example of their non-jobs – a "city events and international links officer" - I would have liked to know the answer to questions such as whether the events organised generate additional visits (and therefore spending) in the town or not. Is there, in short a net gain to the local residents? Without asking that sort of question, how can anyone form a balanced judgement?

One of the examples of wasteful expenditure they quote is the refurbishment of offices for the National Audit Office. The cost per head of furnishings certainly looks excessive to me, and the talk of marble flooring and leather sofas makes one wonder about value for money. But for me to make a proper judgement, I'd like to have known how suitable the offices were before the refurbishment - did they, for instance, comply with relevant legislation? Do we expect staff to work in poor conditions, just because they are in the public sector? I'd also have liked to know what the alternatives were, and how much they would have cost.

I would never argue that there isn't waste in the public sector, nor that there are no non-jobs which we could easily do without. It may even be that every single example quoted in the article fits into that category. But there wasn't enough information to reach that conclusion, and it ended up being just another 'bash the public sector' piece. In this case, it's the media leading the charge - but there seem to be plenty of politicans equally happy to seek a quick headline on a simlar basis.

People in Wales working in the public sector are in for a tough time, with jobs likely to go. They deserve to have their situation considered properly and thoughtfully during that process, rather than be subjected to ridicule and abuse purely on the basis of who pays their salaries.

Two legs, four legs

Tweet Around a quarter of the workforce in Wales is directly employed in the public sector. Nobody doubts that cuts in public expenditure will reduce the number employed in the sector, although by how many is still an open question. It would be a mistake to assume that the private sector will somehow 'pick up the slack'. It would also be a mistake to assume that the private sector will be immune to public sector cuts. It's not always straightforward to differentiate between the two sectors.

As an example, I work freelance through a limited company which I use to invoice customers, pay my own suppliers, and pay myself a regular salary out of irregular income. Very private sector. But a lot of my work comes from the public sector.

Sometimes, I get work passed on from other companies which have sold more services than they are able to supply in-house. Those companies are also very much in the private sector – but an awful lot of the end customers are in the public sector.

It's one small illustration, but there are many thousands of employees in Wales who appear to be working in the private sector but who are actually heavily dependent on public expenditure for their livelihood.

My point is two-fold. Firstly, if anyone working for a private company is sitting there thinking that public sector cutbacks will only affect other people's jobs, they may well be deluding themselves. And secondly, we need a better understanding of the complex relationship that exists between sectors in our economy, rather then the Public Bad, Private Good mantra which many seem happy to chant.

Faster action is possible

Tweet Last week's figures for the jobless numbers in Wales led to criticism of the Welsh Government by its political opponents. I suppose that's inevitable. To some extent, supporters of the government may have almost invited such a response by some over-enthusiastic cheer-leading for the government's Pro-Act and Re-Act schemes earlier in the recession.

We really need a calmer and more balanced assessment of the situation than using monthly numbers of jobless totals for political point-scoring – in either direction.

People start with an expectation that governments have more influence over the economic situation than is actually the case, and when things are going well, governments encourage this expectation by claiming credit for anything and everything. They should not be surprised if they then find it hard to convince people that 'it's nothing to do with me, guv' when things are not going so well. The truth lies somewhere in between.

As an example, I don't think it's fair to argue that Labour are entirely responsible for the economic catastrophe which hit us after the banking scandal (they can't really be blamed for sub-prime lending in the USA, nor for the short-selling of bank stocks, for instance). But neither can they escape all blame, given that they allowed the markets to do these things with no attempt at regulation as long as they were raking in the taxes, and were building up an excessive deficit even before the bail-outs.

Closer to home, the Assembly government cannot really be entirely blamed for the continuing job losses in the Welsh economy as the recession continues to impact on us. But neither can they entirely escape all responsibility for what is happening in the Welsh economy. (And it's really unhelpful for people to try and argue that the economic situation in Wales shows that 'the Assembly' is a failure, and should therefore be scrapped. This is an issue for government, not the legislature.)

I happen to think that Pro-Act and Re-Act have been a little over-hyped; but that doesn't mean that they were the wrong thing to do. In fact, coupled with the series of 'economic summits' convened by Ieuan Wyn Jones, they showed that a Welsh Government has the capacity to respond quickly and innovatively to situations which arise, and that's an important foundation on which we can build for the future. The approach also earned plaudits from those involved, and a degree of envy from some over the border. As a nation, we're sometimes too quick to see the negative, and ignore the positive.

How much difference the schemes have actually made is something which I hope will be the subject of a proper study in due course – it's too soon to give a final judgement at this stage. Some of the grants made, particularly to larger companies, look a little strange to me; but I do not doubt that there are a number of smaller companies in particular which have been enabled to keep people on at a time when they would otherwise have had to shed workers.

The real question revolves around what else the Government could and should have done - bearing in mind the limitations placed upon it in terms of both finance and powers. It's easy for political opponents to criticise, but where are the constructive alternatives? What would they have done differently?

For my part, I don't think that the government have gone far enough in looking at business taxation – they've certainly not gone as far as Plaid argued that they should in our 2007 manifesto. They don't have the power to cut Corporation Tax, but I do believe that they could and should have done more on the business rates issue, whilst recognising that that would inevitably have had implications for other spending commitments.

The refocusing of economic development activity away from inward investment and onto growing indigenous SMEs is happening, but it's overdue, and happening too slowly for my liking. It seems to me that the biggest problem is a cultural one – too many strategies and too much consultation rather than getting on with it. A harsh criticism perhaps, but one which I would equally make of the UK government in the same context. What we've not yet learned to do is to fully capitalise on the opportunities that devolution gave us to be more fleet of foot and more flexible.