The so-called War on Poverty

An interesting post from the Cato Institute’s Dan Mitchell on the latest poverty stats in the US. Apparently poverty was declining in the US until LBJ launched his “war on poverty” which dramatically increased the scope and scale of the American welfare state.

Mitchell adds, “the so-called War on Poverty has undermined economic progress by trapping people in lives of dependency.” Note that the US uses an absolute rather than relative measure of poverty, so these statistics really are something to be concerned about.

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Video: The riots – a mob made by the welfare state?

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Brendan O'Neill is editor of Spiked. He spoke at the ASI's The Next Generation on 6th September 2011.

Video: The riots – a mob made by the welfare state?

Brendan O'Neill is editor of Spiked. He spoke at the ASI's The Next Generation on 6th September 2011.

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Crowding out good deeds

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There's an interesting paper here on blood donations. As we know, many countries have both paid blood donors and unpaid, motivated purely by that joy of giving, blood donors. What the paper finds is that if some people are paid to donate then this dissuades others from giving without payment. Sort of a, well, if they're getting paid, why shouldn't I attitude perhaps?

On the specific subject of blood I think it's pretty clear that altruism works better than money. When the American system began to insist that blood must be labeled as paid or donated, demand for the paid blood dried up (yes, sorry). So if the users would prefer donated and we can get enough from civic mindedness, then by all means, let's use the system that works.

However, this paper takes one more step and compares the underlying question to Cameron's "Big Society".

Understanding the interaction between voluntary and paid is a key part of correcting government interventions which are held to crowd-out individual actions. For example, the current UK government has advocated the notion of a “big society”, which, although rather unclearly defined, appears to have altruistic behaviour as a central theme.

Quite: and their finding about blood is that paid donors crowd out unpaid. If people know others are being paid then they become less willing to donate. This isn't true of non-monetary rewards but is of monetary.

Which is really rather an interesting finding for the Big Society, isn't it? That we've an army of state functionaries paid for by gouging the taxpayers' wallets is actually deterring people from volunteering. We do have crowding out of charitable and voluntary impulses entirely as a result of others being paid to do those same things.

Note that non-monetary rewards do not do this, only monetary.

So, if we cull the State, move the things that need to be done into the voluntary sector, we'll find more people willing to do these things precisely and exactly because we've culled the people being paid to do them. And we've got the perfect non-monetary rewards to hand as well: called the honours system. BEMs to KBEs, the same work gets done and we've lightened the burden upon the pockets of the populace.

What's not to like?

Public sector pension contributions need to rise

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The headline figure that ‘public sector workers will have to pay an extra £3,000 a year into their pensions’ is completely misleading. Yes, if you are on a salary of £187,000 you do. But nobody earning less than £15,000 a year will pay a penny more. The average rise in contribution is just 3%, but those earning between £15,000 and £21,000 will pay just 0.6% more.

Why are these contribution rises happening at all, though? Well, partly because the government ran out of money and needs to balance its books. And partly because we are all living longer. With longevity rising at two years in every ten, men can now expect to live 17 years past the age of 65, and women 20 years. Great for us, but it delivers two pieces of bad news for public sector pensions. First, public schemes are unfunded. They are basically Ponzi schemes, which pay current pensions out of current contributions. So if more people are living longer and drawing the benefits, the contributions have to go up. And second, most public sector workers don’t retire at 65. They retire at 60. So the problem is even bigger.

And even after these contribution rises, public sector pensions remain the best schemes in the country. Only a tenth of private sector staff enjoy pensions based on their final salary. Very few indeed have their pensions indexed to inflation. And in fact, many public sector pensions are upgraded either in line with inflation or with earnings, whichever is greater. It's worth adding that ONS figures suggest that public sector workers are already 7.8% better paid than private sector workers. And they have better pensions too.

At a time when people in the private sector have been losing not only their pensions but also their jobs and their businesses, there are a lot of people out there who reckon that public sector workers have yet to share the pain. It’s a sad fact of economic life – brought on by more than a decade of reckless government borrowing and spending – but public workers need to grit their teeth and bear it. They certainly won’t find a better pension scheme, even with these increased contributions.

Welfare denationalization should be the priority

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Those who support free markets often hanker for cuts in state spending across all departments. While fine in theory, this can be misguided in practice. Take disability allowance: the government is discussing measures to introduce tougher disability tests, impose an arbitrary time limit on Employment and Support Allowance for those with working spouses, and have a six-month waiting period until disability allowance can be claimed. In any case, provision is likely to get tougher.

Those who already claim benefits are understandably concerned, and even recognise the need for reform. For example, read this heart-wrenching account on the excellent "Diary of a Benefit Scrounger" blog. Yes, some people undeservedly claim benefits, and fraud will always be rife in such an impersonal system, but with a lack of alternatives some people really do need it. One libertarian response is to repeat the mantra that "we just cannot afford it", but this is a weak argument – government makes trade-offs when it comes to allocating spending, and it seems odd that lending a hand to those in most need is so low on the list of priorities.

The other libertarian response is that forms of charity and insurance will step in as state largesse recedes. This is fine in theory, and the history of welfare provision before the welfare state backs this up, but it is something that can only happen over the long run. For example, while extraordinarily rapid growth took place, it was decades until the mutuals of the 19th Century accepted working men over the age of 40. It is one thing to expect people to insure themselves against sickness and old age when there are no state supports, but altogether heartless to remove that support when they have planned their lives in expectation of it.

So what are the libertarian solutions? Instead of cutting an already inadequate system, the focus should be on decentralising welfare to a lower, more personal level, perhaps with the aim of eventual privatisation into the hands of mutuals and other non-state institutions. Burgeoning costs due to fraud, and inadequate, uncaring coverage are the features of state-run and often even business-led insurance models. We must find ways to eliminate those problems by returning welfare into the hands of people themselves, without all the pain.

Anton Howes is Director of the Liberty League.

In (partial) defence of Philip Davies

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Conservative MP Philip Davies has been widely criticized today for saying that the minimum wage hurts disabled workers. His argument is that employers prejudiced against disabled people are less likely to hire them for a job over a rival applicant, other things being equal. This prejudice is unacceptable and we should fight it. But it is impossible to deny that it exists and harms some of the most vulnerable members of society. Minimum wage laws make this harm even worse.

If you impose a price floor above the market price for something, you will usually end up with a surplus that can’t be sold. That’s true of labour too, and a major meta-study of minimum wage papers supports this. The argument usually made against this is that the market for low-skilled labour is a monopsony – in other words, that individual firms can set the wages of the people they hire without competition from other firms driving that upwards. There is very little evidence that this theory applies in Britain today. Some say that the price of low-skilled labour is elastic. The tight margins and high labour costs of most SMEs are good refutations of this claim.

Other groups of people disproportionately excluded from employment by minimum wage laws include young people and immigrants. Anybody who is seen – however wrongly – as a risk or additional cost to an employer will find it harder to get a job than someone of equal abilities who is not seen as being an additional cost. This is bad and wrong, and we should try to stop it, but it is reality. If we pretend that it isn’t, and make policies that ignore reality, then we will make things even worse for victims of prejudice. Perversely, people who dismiss the downside of minimum wage laws are doing the greatest disservice to the disabled, because they ignore the unjust reality of employment prejudice in favour of a utopian policy that does real harm.

Davies was wrong to suggest that disabled people alone should be excluded from minimum wage laws. (If that is indeed what he said: though it is being widely reported that Davies said that the disabled "should offer to work below minimum wage", I cannot find that comment anywhere on the Hansard website. Has he been misquoted?)

In any case, partial exclusion for the disabled would be a poor solution. Critics have been right to point out that to exclude them would be a tacit acceptance of employment prejudice. But minimum wages do price people out of work, and disproportionately affect people who are wrongly discriminated against. To stop this, the minimum wage should be abolished or voluntarized for everybody, not just a select few.

Prejudice against the disabled exists and negatively affects their employment opportunities. It should be resisted by all peaceful means available, like boycotts of prejudicial firms and other firms that do business with them. These methods have proved to be remarkably successful in the past. But they will not work overnight. Government policies should be based in the real world and seek to do as little harm as possible. Policies created for a world that we aspire to, in which there is no prejudice, can have very negative real effects when applied to the world in which we do live, where there is prejudice. However much we aspire to the ought, we cannot escape the is.

Lessons from Southern Cross

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The financial woes of care home operator Southern Cross offer a salutary lesson for reform of the NHS. Southern Cross is the UK’s largest operator of care homes, looking after some 31,000 residents. It has run into problems due to an onerous rental bill and is seeking to avoid bankruptcy by a combination of selling some homes, laying off staff or renegotiating rents.

Unsurprisingly, the GMB union is calling for the government (ie: taxpayers) to rescue the company. To his credit, Business Secretary Vince Cable has ruled that out.

The problems of Southern Cross are of some concern but they don’t warrant any takeover by the government – a bailout by any other name. That would surely lead to an inexorable takeover of the industry by the government if, as and when other operators may find themselves in difficulties. That, in turn, would leave the country with yet another monolithic and lumbering enterprise unable to chop and change with changing circumstances as each such circumstance becomes a major political event.

No, much better to let the fate of Southern Cross be determined by the normal process of business evolution. The company may emerge leaner and smarter, existing competitors may benefit while new entrants may find an easy way into the market. All will have learned a great deal from the experience of Southern Cross. The whole issue will probably be resolved in weeks or months with the costs borne by private risk-takers – lenders and shareholders.

By contrast, a monolithic state provider of care homes would never come to grips with changing conditions. Costs would be shoved onto taxpayers and inadequate “reforms” would drag interminably through committees, hearings, consultations, legislation and election campaigns. The finer points of meal management will feature regularly on Question Time.

Try this exercise to see the difference. Here’s how the Guardian described the Southern Cross saga as it currently stands:

Southern Cross is fighting to stave off bankruptcy as it struggles to meet an annual rental bill of £230m. It over-expanded during the boom under the ownership of Blackstone, the US private equity group.

Now substitute a few select words to see the ultimate impact from bailing out Southern Cross or any other activity that the government of the day deems worthy.

The United Kingdom is fighting to stave off bankruptcy as it struggles to meet an annual interest rate bill of £50 billion. It over-expanded during the boom under the leadership of Gordon Brown, the Labour government’s Chancellor of the Exchequer.

Yes, Southern Cross is a tough financial workout but it will get sorted in relatively short order with limited long-term impact. Any reform of the NHS that doesn’t include increasing privatisation and decentralisation is doomed to failure.

Does inequality matter?

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Inequality doesn’t matter. Or, rather, it shouldn’t matter to policymakers if they are interested in fighting poverty and improving people's living standards. A new paper by the Legatum Institute's Dalibor Rohac published by the ASI this week, Does Inequality Matter? (PDF), exposes the fallacies behind the contemporary focus on income inequality and argues that it is a fundamentally flawed measure in policymaking.

Equality measures tell us nothing about how well-off people are, and rising living standards across the board are often accompanied by increases in inequality. If the poor get richer, and the rich get richer even faster, inequality rises but everybody is better off. Is this really a scenario that we want policymakers to try to avoid? Few poor people care whether the rich in their society drive BMWs or Rolls Royces – what they care about is the opportunities and living standards for them and their children. As the paper shows, government policies that try to "narrow the gap" between rich and poor, rather than raise the bottom up as fast as possible, are facile and misguided.

The inequality measure is flawed for another reason as well: its focus on nation-states as single units. The Gini coefficient – the standard measure of income inequality – only compares income levels within individual nation-states. Is this a useful measure, when people are more mobile than ever? Perhaps not. Rohac uses the example of a middle-income worker moving from Guatemala to the United States. This person, who was earning an above-average wage in Guatemala, now earns a below-average wage in the United States that is nevertheless significantly larger than his Guatemalan wage. She is better off by any absolute measure – and perhaps has some extra money to send home – but inequality in both countries increases. It’s hard to judge exactly how much of an impact this has on inequality measures, but it should underline the conceptual difficulties involved.

Rohac also deals with the arguments made in The Spirit Level, which argues that happiness is significantly influenced by income inequality, and the argument made by Joseph Stiglitz that the financial crisis was caused by inequality. At a time when development aid and domestic poverty are at the top of the agenda, the paper is a valuable and thought-provoking addition to the debate.

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Only nationalism can justify a welfare state

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The standard consequentialist argument in favour of the welfare state essentially says that the harm caused to rich people by taxation is outweighed by the benefit to poor people from government services. That’s probably wrong, but for the sake of argument let’s say it’s not and concede the idea that governments should redistribute resources. The question that redistributionists have failed to answer satisfyingly is, to whom should the resources be distributed?

The redistributionist argument may seem defensible if we look at one country alone – taking from the rich in Britain to give to the poor in Britain sounds good to a lot of people. But why do we only look at the poor in Britain? Compared to, say, the poor in Peru, they don’t seem to be so badly-off. The redistributionist logic would imply that money should be given to the worst-off, wherever they are. So, why give money to the poor in Britain rather than the very poor in Peru?

A redistributionist might say that a government’s job is to look after its own citizens. That argument, frequently made, has no real ethical basis. Unless the redistributionist believes that the value of, say, a Mancunian’s welfare is of greater importance than a Peruvian’s welfare, there is no outcomes-based argument for favouring the Mancunian over the Peruvian. Taking the redistributionist premise that governments can improve outcomes by taking from the rich and giving to the poor, the only moral argument for spending tax money in Manchester rather than relatively-poorer Peru is based on implicit nationalism. How many redistributionists would admit to that? Yet it is the only logical justification for preferring a big welfare state in Britain to a lot of money being spent around the world.

Some would say that it would be politically impossible to implement this kind of redistributionism. Yes, it would, but that isn’t a convincing argument. Even the argument that overseas spending delivers less bang for the buck than domestic spending is highly dubious, and returns to the question of why redistribution supposedly works inside a country’s borders and not outside them.

This is a fundamental flaw in the redistributionist manifesto. The only intellectual justification for favouring people in Britain over people in Peru for government spending would be that British people are more deserving. This is implied by arguments for a welfare state. The libertarian alternative, on the other hand, doesn’t suffer from this implicit nationalism. The outcomes we argue for treat people as equals: Free markets benefit everybody, wherever they are. I’ll choose that kind of egalitarianism over the narrowly nationalistic redistributionist egalitarianism any day.