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Emissions, avoidance and other noxious matters

2 October 2015

VWWere you as baffled as I was about the Volkswagen scandal? In two respects: how could a precision engineering culture allow such a thing to happen? (There is a particular irony here: Adolf Hitler is said to have supported the firm in its earliest stages because he wanted ordinary German people to have access to motor cars as Americans had.) And also – since I am not an engineer – just what exactly did they do to the cars? Do you know any more about the “defeat” mechanism than I do? My guess is that they set up the engine management program so that emissions were reduced at a specific constant velocity, but presumably this was at the expense of some other parameter in the performance of the car when not under test conditions (for example it couldn’t accelerate as fast as it is supposed to, to top a different league table, although of course the moment you test acceleration you are kicked out of the constant-velocity program). But if that is so, were the management over hasty in condemning the practice as criminal, as they are quoted as saying – or was this just a pre-emptive PR strike based on an astute reading of the Realpolitik?

I suspect that the geeks who wrote the program took a very literal interpretation of the legal position and argued that there was no express representation that the emissions and/or acceleration response profile was what mathematicians would call “well behaved”, and that building a pathological singularity into the curve was a clever way of winning the free market arms race in motor cars. Otherwise it is difficult to see how so many people could have been involved in a deliberate conspiracy for so long without someone breaking ranks and shopping them. Or maybe they just felt that the type of cheating behind the defeat device was not qualitatively different from the artificiality of the standard laboratory-based pollution test. (Even without the VW software, all cars running on real roads in real conditions emit 4–5 times as much as the statuory pollution limits: but no one seems to think the legislators who introduced such distorted controls were criminal.)

I suspect there is an analogy to be drawn with tax avoidance, which is not (as those engaged in it never tire of telling you) the same as tax evasion. Indeed I once explained the difference in a public lecture which might even be worth quoting here:

Think of avoidance and evasion in terms of getting on a train. The evader simply doesn’t buy a ticket, and hides in the loo when the inspector comes round. The avoider, or planner as we’d prefer to be known, sets out to make intelligent use of available incentives, so that you travel from London to Leeds using special super-saver away-day tickets and changing at Crewe for half the price. The boutique [arranger of tax schemes] is simply a travel agent who has bothered to master all these tricks and charges the busy traveller a commission for pointing them out.

What of course happens to engineers whose lives are spent in laboratories, and to hapless users of tax avoidance schemes, is that they don’t always notice that the wind has changed: public revulsion at similar conduct precipitates a nonlinear response from the relevant authorities for which they receive neither advance warning nor public sympathy. Suddenly the ambiguity of clever practice takes on the sharp-edged eigenstate of cheating. The coup de Jarnac (see this earlier blog) is retrospectively outlawed.

No doubt more will emerge in the law cases that we will presumably see in coming years. Parts of this story remind me of the initial unfolding of the LIBOR scandal: many of us, including some of my former colleagues who were still in the City (albeit not on trading floors), simply couldn’t see how moving one number by a few basis points in a large population (yet to be averaged) could have any significant effect on earnings – and in any case, who suffered? It’s a bit easier to see how topping the league tables for performance and pollution would lead to sales – but what exactly is the loss to the consumer? Even if you had had the right figures and had chosen a different car, it’s more than likely that the total pollution would be no higher. Anyone buying a new car, whatever the figures, is not taking a seriously green position: you need to get out of your car and walk. If the VW didn’t head the table, they’d have bought the next best – not an electric alternative. So I’m not persuaded that total emissions are higher than they otherwise would have been – just that they are known to be higher than we thought they were. And if you want people to make fully informed choices, you have to change the statutory test which seriously underestimates emissions of all vehicles.

But what must also be obvious is that the VW scandal, just like LIBOR and tax avoidance, are just more example in the long litany of free market failures. It is the characteristic of mature markets, exacerbated by bonkers personal remuneration incentives, ultimately to lead to cheating. Product mis-selling by banks, doping in sport or even populist behaviour by governments are all the inevitable result of a first-past-the-post, winner-takes-all system. They are compounded by reductionism: the ignorance of the public which is so ready to base their consumer and other choices on the weight of a single parameter: one emission figure (or the rank in a league table of such figures). Savings account? One AER rate (even though the banks will add strings to how you get your cash so that you can’t get this rate). Broadband speed? Speedtest figures (in practice I can’t get one tenth of the rates the test shows that I experience). Inflation? CPI has been low for a generation, so there is no inflation (but why does a London house cost ten times what it did 20 years ago?). A&E waiting times. And so on, across more and more walks of life.

But of course you will say that free markets are the worst kind of economic system, except for all the others – and I’d largely agree. The best we can do is to have some independent competition and regulation authorities.

Which brings me to the real point of this post. We’ve got them already: competition authorities, conduct authorities, tax authorities, ombudsmen, all over the place. But they are almost all appallingly ineffective. Why? Why did it take the US regulators to expose VW when (as it seems) UK and European authorities had been aware for some time, and seem to have chosen to turn a blind eye?

I won’t suggest that I have a complete answer to this question. But there are some clues. Notably, because Britain has come quite late to the idea of efficient markets, the need for robust control is even younger. America, the home of the free market, had dominant monopolies in the nineteenth century, and anti-trust legislation 125 years ago: the Sherman Antitrust Act of 1890 being just the first of a number of powerful measures to combat monopolistic behaviour, otherwise known as cheating. When in pre-Thatcher’s Britain industries competed, they did so in such an old-school, bumbling manner that consumers weren’t at much risk (although the inefficiencies of incompetence were borne equally); but in a post-Big Bang world rapidly moving to maturity there was a need for controls not merely to be set up, but to catch up with the culture change even more rapidly.

That is what they have so spectacularly failed to do. In an earlier post on a completely different subject, I referred to Carl Jung’s important insight into psychological types. It is not that persons (or for that matter an organisation) cannot adopt the appearance of a different type than the one they naturally and habitually inhabit, it is that when they do so, their discomfort manifests itself in rather curious behaviour: they become unpredictable, inefficient, even twitchy, as the balance between their conscious and unconscious is no longer under control. And of course this is compounded by the deeply unsupportive hand of government (of either party) behind them: if you’re light touch, you’re blamed, but if you look as though you mean business, you’re sacked.

That’s why our relatively immature regulators are so bad at behaving in a measured and rational way. What seemed to be legitimate tax planning is suddenly branded as immoral or criminal, even when it was done years ago (you might feel that has been a deliberate HMRC tactic all along, but it’s not the only example). Exhaust emission levels were acceptable because jobs in the motor industry depended upon them – until the public found out, when the agenda was switched (and the media succeeded in persuading us that the engineers had caused the deaths of people ingesting the extra fumes).

There are some particularly good examples in consumer finance. The initial PPI complaints were handled by the Financial Ombudsman Service with their usual hapless, complaisant incompetence, in which the we-mustn’t-interfere-with-their-right-to-conduct-business principle was uppermost: subsequently this turned into one of the biggest scandals ever, measured by compensation subsequently awarded. But complaints about hidden bank charges are largely dismissed, as are the many examples where banks game the rules on advertised interest rates, although these look to me to be just the same sort of cheating. For me the definition is simple: if the small print had been visible, would the consumer have accepted the terms? But that’s not how the FOS have ruled on a good many cases. The perverse inconsistencies are legion.

What seems so often to happen is that the authorities don’t react at all to a growing stream of evidence, just like the frog in hot water. That’s why their final responses – far too late, when far too much damage has been done, when the culprits have multiplied their cheating because they are getting away with it, and when their competitors have been forced to play the same game by the very same market forces – are often so draconian and disproportionate.

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