The Alternative Vote #4: likely to lead to better or worse governments being elected?

 Charles Roddie is a Postdoctoral Fellow in Economics at Nuffield College, Oxford. In this essay he provides the most honest account I have read of why one might vote NO to AV: to avoid hung parliaments and left wing policies.

Is the Alternative Vote system a good idea?

What makes a voting system a good one?

AV is a proposed voting system for UK national elections, an alternative to the current first past the post (FPTP) system. The history is that Liberal Democrats have had a smaller share of representatives (MPs) than their vote share, and they would do better under other systems than first past the post, which favours the main two parties. Understandably, they feel very strongly about this, so when at the last election they were in the position of kingmaker, a referendum on AV was the main concession they required from the Conservatives to form a coalition government with them.

Now we are naturally getting a lot of arguments from the main parties rationalizing why they support or reject AV. They rhetorically attach to AV terms like fair/unfair, or simple/complex, that sound pleasant or unpleasant to most people. Perhaps if they argued more honestly, for example “vote for AV because it helps us, and we are better than those other parties for these reasons”, supporters of those other parties would take the point and vote against. The result is people think that voting for an electoral change is not about policy and governments, but about the particular aesthetics of voting.

What does a voting system do? It produces governments. So the question is: 

Is AV likely to lead to better or worse governments being elected? 

In reality the AV vote is about exactly the same issues that you vote for in a normal election: policies and governments. But it’s more difficult because we have to try and guess what the effects will be on policies and governments, which is not easy to work out. 
So if you think submitting a vote under AV is complex, or tactics in FPTP are difficult, the vote on whether to vote for AV is much harder. But we’ll try to make some sense of it.

The effects of AV
A voting change produces two effects:

1. A direct effect: Given existing parties and their positions, how will the voting scheme change which party gets chosen?
2. An indirect effect: this incorporates how parties adjust to the new system.

(This is a tautology, but it can split up the problem usefully.)

The indirect effect is much harder to gauge, and I don’t know that anyone has much idea of what it will be. Would new parties form and succeed under AV that would not under the FPTP? How will parties adjust their policies and tactics if AV comes in? 
I don’t have any strong view that these effects will change policy in any particular direction. So I’m going to look at the direct effect. The main parties and the published analysis seem to be taking the same line and assuming the direct effect is the important one here.

The direct effect
      1) Who will gain and lose MPs?

In the short term, probably parties won’t adjust to the change immediately. So the direct effect is likely to dominate.

• To estimate this, some people have done simulations based on survey data. These seem to indicate Labour and the Liberal democrats will gain, and the Conservatives will lose from AV.
• See http://www.oxfordjournals.org/our_journals/parlij/gsq042.pdf
• See also http://news.bbc.co.uk/1/hi/uk_politics/8506306.stm 
• This is consonant with the actual positions of parties: Liberal democrats strongly for AV, Labor mostly for, including the leadership, Conservatives solidly against. Presumably, they have paid consultants to analyze the question and we can rely on their supporting the position that is in their self-interest.

So who gains and loses? Liberal democrats gain almost certainly; conservatives lose probably; Labour gains (slightly less) probably.

Overall there is probably a shift to the left with AV.
      2) Majority governments

This is an easier observation, and is a consensus about AV. AV increases the likelihood of a hung parliament, where no party has a majority; so it increases the chance of coalition governments.

Is this good or bad?

• Minority and coalition governments

These are much less likely than majority governments to have the stability and internal relationships needed to govern effectively. This is a common informed opinion about political systems in the world. But importantly, and this is the key argument for me, the people who stake their money on this question are confident that this is the answer. 


The stock markets move on the assumption that this is true. Stocks fall if a hung parliament becomes likely. This is reported in the media whenever an indecisive outcome is likely. The effect is independent of policy positioning, with markets typically preferring a center-right majority to a center-left majority to a hung parliament. 


As measured by competence of a new government to manage the economy, the lack of a straight majority is bad (probabilistically speaking). The risk that ideologically very different groups will not be able to work together is a significant problem here.

• A move to the left

It’s harder to persuade people on a big question like this if they don’t already agree, but I believe this is the wrong direction to move and here are my reasons. Let me concentrate on the economics here. Left wing economic policy:

• Reduces incentives to work and invest. This is the consequence of the large taxation and redistribution system that is in place. It should be reduced in scope and not increased.
• The aim is to reduce relative poverty, but it is a burden on the activity of the private sector, including the many aims that people set for themselves, and also reduces total economic output. It also reduces the link between actions and their consequences, and leads to a dehumanizing dependence on the state.
• Overregulates business. Labour markets are particularly overregulated, with restrictions on firing, discrimination law, health and safety regulation, etc.. Firms will be risk-averse in hiring and unable to contract with completely flexible wages, causing frictions between supply and demand, i.e. unemployment. Some regulation is necessary for trust but current regulation goes far beyond that.
• Distrusts market solutions, believing instead in direct control of certain services. But markets can price goods and allocate them efficiently. Government is limited in knowledge and constrained by ideological and institutional factors.
• Suppose a government were in charge of the automobile industry and distribution of cars. Then it would ensure that everyone’s car is of the same quality. Anyone can see that is nonsense, particularly for the poor, who would want to sell theirs and buy a cheaper one, and rich, who would want to sell theirs and buy a more expensive one.
• But this is exactly what the government does in healthcare and education.
• Will become increasingly costly in a competitive and globalizing world. This world is not dangerous; people will still be able to work and make a living. But the ability to survive by transfers from wealthier people will be reduced as people and businesses can relocate if they face high taxes.

Conclusion

Moving from FPTP to AV increases the risk of hung parliaments, with their likelihood of producing governments that are less able to govern effectively. It also seems to favour left-wing parties, which I believe will lead to inferior economic policy.

The ICB interim report: leaving us in a dangerous situation.

April 11th has for months been a significant date in the diaries of bankers. This morning the Independent Commission on Banking (ICB) released its interim report, a sort of preview of the final recommendations it will present to the government in September with the aim to improve stability and competition in UK banking. 

It was not just the banking sector eagerly anticipating todays report, I have been excited about it for weeks(!), and have thoroughly enjoyed a day in a warm and sweaty office reading the report in detail with the Positive Money team.

After threats that the banks will pack up and leave the UK*, and cries that the commission's recommendations would destroy profits, meaning that nationalised RBS and Lloyds might sell at a loss to the tax payer, the markets proved optimistic this morning in response to the report as shares in Barclays, RBS and Lloyds rose by 3.28%, 2.49%, and 0.72%, respectively. Unfortunately for the public, the outcome of the market is not determined by investors with long term outlooks aligned with the welfare of society, and in contrast to the banks, our evaluation of the report was critical. 

I just want to remind you how important the influence this commission has on the government to reform the banking sector is. In the words of the commission...

" The UK was severely affected by the crisis. National output in 2010 was 4.5% below its pre-recession peak. Unemployment has risen by more than 800,000 since 2007. The  public finances have deteriorated sharply, and the 2009/10 deficit exceeded 10% GDP. There is evidence to suggest that some of the output loss economies suffer during crises is permanent. Work by the Basel Committee on Banking Supervision suggests that the cost of banking crises may exceed 60% of pre-crisis GDP. More than 80% of RBS and more than 40% of Lloyds are in state ownership as a result of the Government bail-out of the banking system."

So what does the ICB propose? 

1) Increased Competition

Competition was part of the commission's remit, and so had to be addressed. Indeed, increasing competitive pressures in the UK banking sector, which is concentrated in the hands of The Big Four (RBS, HSBC, Barclays and Lloyds TSB) is no bad thing. If we suspect that a lack of competition is allowing these firms to keep costs up, then increasing competition promises to benefit consumers by decreasing the cost of borrowing and increasing returns on savings. Providing information to help consumers choose the best bank for them, another proposal, is of course also welcome. These proposals, however, are fairly irrelevant to dealing with a financial crisis.

Crucially, the report does not address the unique lack of competitive pressure that the banking sector faces as a whole. The government promises to insure all deposits up to the value of £50,000 should a bank fail to repay a saver, and we have seen that the government bails out failing banks at huge cost to the tax payer. The possibility of external support boosts banks ratings by the ratings agencies at no cost to themselves. Haldane (2010) estimates that the government guarantee reduced bank funding costs by £57bn per year from 2007-2009. No other industry or service sector receives this kind of support, or subsidy, which fundamentally buffers it from true competitive pressures. When any other firm goes bankrupt they exit the market leaving more room for companies with the best skills and ideas to grow. The result is that banks can behave recklessly by taking on excessive risk; if they are lucky they will make high returns, and if they mess up they know that the government will help out.

2) Increased Capital Requirements

In their analysis of the recent crisis, the report describes the "explosion of leverage" in the run up to the crisis as key to explaining why the banks were so vulnerable. Just before the crisis banks lent up to 50 times the amount of capital they actually had! Increased capital requirements are being called for internationally by regulatory bodies to reduce the extent of leverage banks can take on, and reduce how hard they can fall in a crisis. Specifically, the report suggests that retail banks hold capital equal to 10% of their loans and investments, and that wholesale banks should meet the slightly lower capital requirement of 7% (in line with the Basel III accord). I think the most we can say is that these small adjustments might make the banking system slightly "less brittle"; the commission estimates that it "would allow total assets [in the wholesale banks] to be almost 30 times equity capital. And so banks could only withstand a 3.5% fall in the value of their assets before wiping out this capital." 

This leaves their final proposal to make the banking system more stable...

3) Ring-fencing

The idea behind ring-fencing is to stop risky investment activities from pulling down the retail activities (where you and I hold out current accounts) of banks by ensuring that they are each supported by their own separate pools of capital. The separation has been described as a firewall because it is not permanent, it is only activated in times of need, and only if it does not pull down the other part of the bank down too. Ben Curtis from Positive Money explains it well in a piece he wrote for Liberal Conspiracy today: "The two arms of the bank would to still be able to bail each other out in difficult times, but neither would be able to bring the other half down in a crisis."

Firstly, this proposal demands more from the regulators than they have shown to be capable of (the regulators embarrassingly failed to foresee the recent crisis): how will they know when the special circumstances in which the firewalls need to be activated hold? Secondly, because of a lack of information and transparency regulators will have to rely on what the banks tell them. This means that should the retail activities of a bank go under, the bank manager has an incentive to tell the government that their investment arm is not strong enough to bail it out. The government will then be likely to bail out the failing retail activities, and the bank's investment activities will be protected at a cost to the tax payer. Thirdly, the commission mention that even if banking crises can be contained to certain arms of bank activities, the market response could be so negative that the crisis could spread to other areas.

I listened with great esteem to Liam Halligan's damning crtique of the report on PM (radio 4). (He is currently chief economist at Prosperity Capital Management, and a highly regarded financial journalist.) He describes the ring-fencing proposal as an elegant political compromise, when what we need is leadership to get us out of a dangerous situation. You can listen here (from about 18 mins).

In sum, the commission's report provides a disappointing preview of a selection of weak and ineffective recommendations that they will make in September. I think the report betrays a bias towards the banks and the status quo, and also an ignorance by not taking seriously more 'radical' proposals. Oh, but that is for another post... I'm sleepy xx

* There is an interesting table on p.202 of the report that breaks down the amount of tax we would lose should banks move their operations from the UK, as some threaten to. Of the total £55bn the government received in taxes in 2009/10, the commission estimates that only £3bn face the "lowest hurdle to departure" and that £30 - 36 bn would be "hard-to-impossible to leave". Should we be so concerned by their threats?


UPDATE: You can watch Ben Dyson's summary of Positive Money's reading of the ICB report here.

The Alternative Vote #3: The Benefits of AV

A piece by an Economics DPhil student at Nuffield College, Oxford University, who is volunteering for the Yes Campaign.

Why should we adopt AV?  The current voting system is broken.  

• IPPR research shows that the last election was decided by 1.6% of voters in marginal constituencies.  
• Polling indicates that 19% of voters have found themselves voting tactically.  
• At the last election, less than 1/3 of MPs got the support of a majority of their constituents and around a quarter of voters voted for candidates who were neither winners nor runners up.
• Turnout has fallen lower than 60% and, across constituencies, has been negatively correlated with the size of MP’s majorities (see graph).  

These are not the signs of a healthy democracy.

AV will represent a dramatic improvement.  Under AV voters give more information.  Rather than putting a mark beside the name of one candidate, they rank the candidates putting a ‘1’ next to their first choice, ‘2’ next to their second choice and so on.  The election then proceeds through a series of rounds, at the end of each round the candidate with the least votes is eliminated.  In each round of the election your ballot paper counts as a vote for your most preferred candidate who has not yet been eliminated.  The process ends when one candidate has achieved 50% of the vote.

• MPs will have to get the support of a majority of their constituents. 
• Many seats will become a lot more competitive ensuring politicians have to pay attention to more voters than those who live in a handful of “key marginals”.  
• AV will practically eliminate the incentive to vote tactically, allowing voters to support their best candidate without risk of gifting the seat to their worst candidate.  
• By making more constituencies more competitive, it will increase the incentive to vote and help to boost turnout.

The main argument against electoral reform being used by the No campaign is the kind of lie that would make Phil Woolas blush!  They claim it is too expensive.  I won’t repeat their figure as this line of argument is an exercise in repeating a lie so many times that it becomes true.  However, it is worth remembering three things:

• 52% of their cost figure comes from new voting machines.  There won’t be any new voting machines.  AV can and will be counted by hand – that’s what they’ve been doing in Australia since 1919.
• 37% of their cost figure comes from the cost of the referendum itself.  That won’t be refunded in the event of a no vote.
• What is left of their initial figure for the “one-off” cost of AV is 22% of the regular cost of holding an election.  As far as I’m aware, the No campaign haven’t suggested cancelling elections because they’re too expensive...  yet.

The Alternative Vote is a small, simple, smart change that will make a big difference to improve our democracy.  MPs will have to reach beyond their traditional support in order to get elected.  The culture of jobs for life that has made MPs so complacent will be brought to an end.  The number of safe seats will fall and political parties will have to pay attention to the needs of more of the country rather than a few key marginals.  We must seize this once in a generation chance to reform our voting system and reinvigorate our democracy.

The financial sector is sitting on an unjustified pedestal

Forget his debatable feats as chairman of the Federal Reserve, Alan Greenspan's article in the Financial Times on Wednesday raised an insightful question that I wish was being addressed too: To what extent does a large and 'sophisticated' financial sector improve our quality of life?

Greenspan's comment piece points to problems implementing the Dodd-Frank Act, a broad set of principles designed to stop the excesses that caused the financial crisis from happening again in the USA. He argues that the lawmakers and regulators tasked with turning the principles into a set of regulations, will 1) be unable to produce a list of regulations that could deal with all possible future crises (several regulatory bodies failed to foresee the 2008 crisis!), 2) create inconsistencies among the numerous rules, and 3) fail to acknowledge the degree of global interconnectedness in the financial sector.  

Dodd-Frank has its flaws, but complicated regulation, admittedly with holes in, is the cost of complex modern day financing, which we need to maintain economic growth. Right? 

The assumption that the modern state of finance is necessary for economic growth has pervaded the air. Since the second world war, the share of GDP devoted to finance in countries like the UK (one measure of the rising complexity of the system) has increased alongside a rise in living standards, but it is not obvious that there has been a causal relationship. A complex financial sector might increase the wealth of a minority with the know how, and there are reasons to think that their disproportionate wealth could reach others through some sort of trickle down effect, but is that enough when, as we well know, the financial sector can create such instability and crisis for us all?! 

Ireland has had to put aside about €70bn to bail out its banks, an amount equal to over half its GDP! Ireland has borrowed this money from its own people, who will also be paying for the servicing of the debt for many years to come. To put it into perspective, consider that Ireland is borrowing the equivalent of €35,000 per citizen, which is equal to the average annual wage before tax! 

Banking crises won't go away, but regulation and reforms can be put in place to reduce risk and contain the cost of crises when they occur. In deciding the best steps forward, we seem to be faced with a tradeoff between reduced risk and economic growth i.e. reforms that significantly reduce risk, such as a return to the simpler banking practises of half a century ago, will sabotage economic growth. 

I think the modern financial sector is sitting on an unjustified pedestal. The UK government, and policy makers worldwide, need to consider the long term and take heed of Greenspan's comment that: "In moving forward with regulatory repair, we may have to address the as yet unproved tie between the degree of financial complexity and higher standards of living."  

The Alternative Vote #2: How does it work?

If you've voted before, the you'll know that under the present First-past-the-post system you can select one candidate from the ballot paper to represent your constituency. The number of votes for each candidate are counted, and the winner is the candidate with the most votes. Note that this means that a candidate can be elected irrespective of whether he/she has the majority of the support. 

Under AV, you're asked to rank the candidates in order, where 1 is highest. (In the proposed UK system, you don't have to rank every candidate.) The first step in determining a winner from everyone's rankings is to count all of the first preferences for each candidate. If one candidate has more than half of the first preferences, then he/she is elected. If no candidate has a simple majority, however, then the candidate with the least first preference votes is eliminated. The preferences of those voters who most preferred the eliminated candidate are not discarded though; their second preferences are taken into account, and are distributed to the remaining candidates. This procedure continues, with progressive elimination of the candidate with least support until a candidate obtains at least 50% of the votes.

I've made an example to reinforce the idea ...

  

First-past-the-post ballot paper

Alternative Vote ballot paper

An example

There are 4 candidates: A, B, C, D and 100 voters. 

The voters make their ranking and the ballot papers are collected. What happens next?

1) The first preferences for each candidate are counted and the results are A: 40  B: 30  C: 20  D:10.

Since no candidate has a majority, the candidate with the least first preferences, D, is eliminated. The votes of people for whom D was favourite are not eliminated though; their vote is re-allocated to the remaining candidate that they ranked 2nd favourite. 

2.) After the redistribution of D's votes, the results are A: 42   B: 35   C: 23.

Still, no candidate has more than 50% of the votes. C is eliminated, and the second preferences of those who most preferred C are distributed to A and B. If ones of these voters placed D in second place, then their third ranking is considered. 

3) After the redistribution of C's votes, the results are  A: 46   B: 54.

B has the majority of votes and is the winning candidate.

Note that B has won despite being fewer peoples first choice. AV works to identify the candidate that most electors would like as their representative if they cannot have their first choice because he/she doesn't have a majority support.

28/3/11

The Taxman is a Woman!

Last night at dinner I sat opposite Dame Lesley Strathie, chief executive of HMRC (revenues and customs). She was visiting Nuffield College to participate in a conference held in honour of International Women's day, which celebrated its centenary on March 8th. As well as debunking the myth that the taxman is a man, the day's presentations and discussions explored the role and position of women today in the context of the criminal justice system, the economy and politics.  

I wanted to share some of the topics that were raised...

Spot the red top and find the taxwoman!

Women continue to be under-represented in our political system, which is supposed to represent the UK democratically. Just 21% of members of parliament are female. The situation is similar in the private sector: 12.5% of FTSE 100 board directors are women. Professor Sarah Childs (Bristol University) and Anna Bird (Fawcett Society) support quotas to solve this, which require that a certain number of places on party candidate lists, or on board committees, are taken by women. They argue that quotas are the only measure that will work quickly to increase female representation. Others, like Dame Strathie, prefer to set less rigid targets alongside measures that encourage women to apply, for example by ensuring that job descriptions/ advertisements are not gendered. Janet Beer, Vice Chancellor of Brookes University, spoke of how when she became a mother, the fact that she was able to job share meant that she could continue the trajectory of her career, and she aims to ensure this flexibility is on offer to her colleagues today. 

Whilst we should aim to treat men and women equally, it can be problematic if their differences aren't acknowledged. This is particularly relevant in the criminal justice system. When Vivien Brandon, now on the women's criminal justice team, was starting out in the civil service she was set the task to forecast how the prison population would increase, so that the right number of prisons could be built. In doing so, all prisoners were treated as 'men', and she believes that this was in part to blame for the current situation in which women's prisons are located in the middle of nowhere, where the often single mothers are far from any access to their children. 

The criminal justice system in the UK is so disturbing. Women are a small minority of the UK prison population (just 5%) and so maybe they are easy to forget, but these women are the most deprived in society, and are the most likely to have experienced abuse or great trauma. Chucking them into prison for short sentences has proven not to work, and is completely inhumane. The evidence shows that good day care, and helping those women learn how to cope are the most effective ways to reduce crime.

As a young, middle class and well educated woman in 2011, I can't say I have personally had much trouble. The little sexism I have directly faced, mainly from old male academics, was easy to laugh at or shrug off. In fact, it can sometimes work to my advantage. Yesterday, however, reminded me that inequality persists markedly in our society.

Inequality can lie deeper and be less visible too; it can reside in our language, or in our expectations. I was highly recommended the work of Cordelia Fine, who strives to show that many female/male differences we assume to be innate are actually socially created.

Solidarity x

The Alternative Vote #1

Forget the YES and NO campaigns - let me introduce to you the DON"T KNOW campaign!

I'm referring to the referendum, to be held on May 5th, in which the British public can decide whether to change the electoral system from 'First past the post' (FPP) to the 'Alternative vote' (AV). 

Have you decided how you will vote, or whether you'll even bother? The YES and NO campaigns have obviously made up their minds. Unfortunately, their campaigns, fronted by superficially appealing posters and flashy promotion, provide frustratingly little information from which the ambivalent person can make an educated decision.

The NO campaign recently claimed that switching to AV will cost £250 million, a frightful sum in this time of austerity. A look at the detail, however, reveals that their claim is a gross overestimate. Half of their estimate comes from the cost of the referendum and educating the public about AV. The other half accounts for the purchase of electronic voting machines, but there are no plans for these to be bought! More technically, the cost of the referendum (£90m) is a 'sunk cost' and should not be included in the cost of AV.  Ignore their posters and ask yourself whether £30m, not £250m, is too much.

Both crusaders are guilty of trying to lure voters through celebrity support. Who's more appealing to you - William Hague, Kenneth Clark and Esther Ranson, or Joanna Lumley, Colin Firth and Eddie Izzard? Hang on, how is this relevant?

Keep an eye out for the next posts in this mini series in which I will attempt, with the expert help from friends and colleagues, to explain how AV works, and what the arguments for and against it are.

xx