Artillery Row

Bidding for bribes

Inviting local areas to bid for central government money is a terrible idea

On Wednesday, the Chancellor Rishi Sunak announced a £4 billion “levelling up fund”. Any “local area” (are some areas not local?) will be able to bid for money from the fund for projects that improve “the infrastructure or everyday life” – better transport, shopping malls, libraries and so on. And the government will replace the old “complex and ineffective” approach to funding such projects with “a new holistic place-based approach to the needs of local areas”.

‘Holistic’ is one of those words that carries no information except that the person using it is bullshitting

It is a shame that Mr Sunak has succumbed to the consultant-speak of modern politics (or perhaps he brought it with him from Goldman Sachs). “Holistic” is one of those words that carries no information except that the person using it is bullshitting. And “place-based” is just as bad. How could any approach to regional spending not be place-based? I suppose we should count ourselves lucky that Mr Sunak did not also tell us that his new approach will utilise joined up thinking and leverage synergies, moving forward.

But the problem with the policy is not merely in its expression. Inviting local areas to bid for central government money is a bad idea.

To see why, consider a game the American economist Mike Munger plays with his students. He tells them he has $100 that he is going auction off to the student who makes the highest bid. But, unlike normal auctions, bidders must place their money in an envelope and Munger keeps the money submitted by the losing bidders. His students all bid much less than $100, of course. But once their bids are added together, Munger usually makes a profit of about $50 after paying $100 to the highest bidder.

What has this got to do with Sunak’s levelling up fund? After all, the bidders will not be offering the government money for the grants. Probably not. But competing for the grants will still be costly. Bidders will need to make their case to the relevant government officials. And they could spend a lot on preparing it and explaining it. For example, they might hire consultants to produce a report on the merits of their project and to provide advice about the best way to pitch it to the government.

How much will bidders be willing to spend on chasing the grant? Well, imagine you were bidding for £10 million and some consultants offered to help you for a fee of £1 million. Should you hire them? The answer is yes if they will increase your chance of winning by more than 10 percentage points and no if by less. Suppose you reckon they will, and you spend the £1 million. Your four competitors (let’s say) may well have made the same calculation, and also spend $1 million each. The competition to get the £10 million has cost half of it!

The Levelling Up fund is a political example of what Catholic theologians call an occasion of sin

This is much worse than what happens in Munger’s classroom. In that case, there is no net loss because the bidding process is almost costless. Money has merely been reallocated between Munger and his students. In the case of “local areas” bidding for central government money, we have not only the transfer from taxpayers to the winning bidder, but the expense of the competitive bidding process. This expense does not add to the money available for grants, nor produce anything else of any value. If not engaged in this zero-sum competition to lay their hands on taxpayers’ money, those working in the endeavour could have been doing something valuable, such as fixing air-conditioning units or flipping burgers.

Why do politicians favour these bidding schemes when the rent-seeking they encourage is a deadweight cost to society?

The answer is that it benefits politicians. Sometimes the rent seeker will simply bribe a politician or other government official with money or prostitutes or lavish holidays. Members of the Committee that decides which city will host the Olympic Games event have an absolute ball in the process of making up their minds.

Of course, such things would never happen in the UK. Still, there are benefits to British politicians in allocating money in this expensive way.

Most politicians are decent people and, all else being equal, they would like their policies to benefit the population. But they also have families to feed, jobs to keep, ambitions to fulfil and, therefore, elections to win. When allocating central government spending, they cannot help but consider what it will mean for their electoral prospects and, since they prefer to be in government, for the prospects of their party. This inclines them to spend money on highly visible projects that create lots of jobs in marginal constituencies.

They know which constituencies are marginal, of course. But it is not so clear from Westminster what the potential projects are, nor which will provide the greatest improvement to their electoral prospects. The bidding process helps to provide this information. A well-advised bidder will make it abundantly clear in his grant application that the spending will be looked upon very favourably by the local population: “very favourably indeed, minister”.

But the process will be managed by bureaucrats in the Treasury and other departments, the politicians protest in their defence. Yes, yes. But those bureaucrats answer to ministers and junior ministers and special advisers, with their families to feed and elections to win.

Mr Sunak seems like an especially decent politician. He may not intend his Levelling Up Fund to be a device for using taxpayers’ money to buy votes in marginal constituencies. But that is what it will happen. The Levelling Up fund is a political example of what Catholic theologians call an occasion of sin.

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