Immigrant benefit claims are an argument against the welfare state, not an argument against immigration
Research released by the Department for Work and Pensions reveals that an estimated 371,000 non-UK nationals were claiming work-related benefits when they first registered for a NI number. Sir Andrew Green of Migration watch was quick to use this as a means to lobby for stricter controls on immigration.
The BBC article quotes Keith Best of the defunct Immigration Advisory Service as stating that ‘it was "very, very difficult" for migrants to claim benefits in the UK. He said you have to have "status" to claim and you were not entitled if you came in as a student or on a work permit, for example.’
However, as the DWP research points out:
‘Non-EEA nationals who are subject to immigration control within the meaning of section 115 of the Immigration Act 1999 are excluded from income-related benefits. This prevents access by persons, for example, who are subject to public funds conditions or do not have lawful status. People given certain types of leave to enter or remain in the UK may be eligible for income related benefits, including people who have been granted:-
- Refugee status;
- Exceptional leave to enter or remain;
- Humanitarian Protection;
- Discretionary leave; or
- Indefinite leave to enter/remain’
Furthermore, under EU law EEA nationals with ‘worker status’ are automatically eligible for the same benefits available to UK nationals. Nationals from accession states can also be eligible for benefits, a condition which has prompted the most lurid newspaper stories about Bulgarian Big Issue sellers. It should also be observed that these benefits are only those administered by the DWP and do not include the health, housing and educational benefits which are far more easily accessed. Migrant access to these services provokes protest from prior residents who, justifiably, feel they have a prior claim and are being ‘queue-jumped’ or excluded. Benefits are, therefore, the cause of some of the friction between immigrant and pre-existing communities who perceive themselves in competition for state largesse. Surely the solution is to remove the source of the tension altogether?
Simply reducing immigrants’ access to benefits would be difficult because of EU and other legislation. In some cases it would simply be impossible; the NHS for instance, but we should also remember that transportation is heavily subsidised. It would also represent discriminatory treatment of immigrants – why should they be denied certain benefits available to others especially as such benefits are not based upon a contributory principle?
To my mind, however, the logical conclusion of this research is not tighter controls on immigration. I am a supporter of freedom of migration but this is actually irrelevant to the issue at stake here, contra Sir Andrew Green. This is an issue of state benefits and not migration. From an anti-migration perspective removing state benefits as a whole would be a more effective means of ‘selecting’ which migrants we would prefer to have than those currently being put forward (short of free movement, Gary Becker’s solution may be the best I’ve seen).
It would certainly eliminate the present absurdity of incentivising migrants to come to the UK, especially those who are likely to be a burden rather than an asset, and then erecting costly means of screening them. It would also radically alter the cost-benefit equation of immigration – without a state welfare system an immigrant would only be an economic asset. They would probably find fewer vacant jobs to come for – without the high marginal withdrawal rates created by the state benefits system we would find a far larger number of those currently in receipt of benefits willing to enter the job market fully. We need hardly repeat the fallacious idea that migrants are ‘taking our jobs’, as if there were a fixed amount of employment in the economy.
The root of the problem here is the existence of the benefits themselves and not the fact that migrants are claiming them. As the DWP research remarks, over 5.5 million people in the UK are claiming DWP benefits (of a working age population of around 29 million) so that migrants only constitute 6.4% of claimants. Education, health, transportation etc are ‘freely’ available to all. If social welfare, health and education were entirely or even largely based on private contribution mechanisms then the issue would not even arise or would only arise in a very few cases.
As Hayek observed in The Constitution of Liberty, ‘There is clearly no merit in being born into a particular community, and no argument of justice can be put forward in favour of a particular individual’s being born in one place rather than another... Rather than admit people to the advantages [gained by the reallocation of wealth] that living in their country offers, a nation will prefer to keep them out altogether.’ This latter option is a mistake, even if it were available. Of course, such an outcome as that hoped for here is hardly likely, but it does serve to demonstrate one of the many unintended problems that the welfare state creates. The solution to them is to eliminate the cause and not to try and treat symptoms.
Actuarial truths
An actuary isn’t where dead actors are buried; it’s someone who tells you about a problem you never thought you had and in a way you can’t understand. Actuaries are the butt of jokes that they’re dull folk – accountants without the charisma. Their function is to assess the financial impact of risk and uncertainty, thinking through everybody’s worst nightmares – accidents, catastrophes, injury and death. In short, they talk about things we’d rather not.
Last Tuesday, the Association of Consulting Actuaries (ACA) released its 2011 Pensions Trends Survey, detailed numbers on the demise of the defined benefit pension scheme. Ninety percent of such schemes in the UK are closed to new entrants while 40% are closed to future accrual. Right on cue, Shell UK announced a couple of days later that it’s closing its defined benefit scheme to new hires and this by one of the best-run schemes around.
Both underscore the reality of the modern world – we have collectively failed to adequately save for retirement and to recognize huge changes in employment practices. Defined benefit schemes are a nostalgic relic of a bygone era when employment was for life and that life was relatively short. This led to the assumption that pension provision is the responsibility of employers, reflected in the joke that General Motors was a huge pension fund with attached car-making facilities.
As the ACA survey shows, market forces are tearing this notion apart with employers switching to defined contribution schemes – bunging a chunk of cash into a pension pot from which the employee arranges a pension when the time comes. This is a brutal but inevitable response to the real world.
The regulatory regime is now scrambling to keep up but little forward-thinking has gone into the issue beyond affordability: the employer as pension provider is still the working assumption. These days, life-time employment with one company is rare. Indeed, more and more people don’t even work all their lives in one country. Many now have a plethora of small pension schemes, perhaps even in different countries. This is costly to the worker from an economies-of-scale perspective or from scheme consolidation costs. Meanwhile, employers are still burdened with the costs of running a pension scheme.
In a small way, the government is moving in this direction with the introduction of NEST, a mandatory pension scheme for small employers who now don’t offer one. But this is a piecemeal approach with all the pitfalls of any other government scheme.
Why not go the whole hog and privatise National Insurance into a dozen or so independent pension schemes? Initially, at least through the transition, mandatory minimum employee contributions would be required, say 10% of income for younger folk and rising by some formula with age. Companies could redirect their current pension contributions to wages, allowing employees to top up the mandatory minimum to maintain their overall pension savings rate of NI plus company scheme.
In the meantime, the government could start negotiating with other countries for mutual recognition of similar official pension schemes so mobile workers can a maintain a consistent savings regime for their retirement wherever they happen to be employed.
And actuaries will continue to be with us, expecting everyone to be dead on time.
Social housing is too subsidised!
Over at my gaff we've been having a little shout about housing benefit, the idea that, horrors, people might have to make do with less than the annual median wage as a subsidy to their lifetyles (the annual median wage before tax that is: the new caps will still allow above the post-tax annual median wage to be paid in housing benefit). And up in the comments popped someone (presumably a political operative alerted to the monstrous allegations we were making that, you know, perhaps this isn't a Third World standard of living that such subsidies force upon people) who insisted that:
Council rents are not, in any way shape or form, directly or indirectly, subsidised by the tax payer.
Which is really quite remarkable. For we know very well that council (or if you prefer, social) rents are below market rents. The subsidy must be that difference between the two.
We even know how much that subsidy is. At least we have a couple of attempts at quantifying it. The Hills Report told us that the annual cost was some £6.6 billion. The ONS tells us that the market value (ie, the capital value) of below market rate tenancies is some £600 billion.
We tried to point this out a few times but our visitor was having none of it. That there isn't a direct transfer from general taxation to social renters means that there's no subsidy, full stop. Even after the concept of opportunity cost had been explained (repeatedly, in several different forms) it just didn't sink in.
Which leads me to a wish for this coming year. There are really only two things that you have to know about economics. As with, say, the two things about boxing: hit, don't get hit. In economics these are 1) incentives matter and 2) opportunity costs. The first of these we all intuitively grasp, the second sadly vast swathes of the country do not. And the wish is that we get the education system sufficiently sorted out so that every child does indeed understand this vital idea.
For those of you who haven't got it, it is this. Because we are not charging market rents for social housing there is some money left on the table there. It might be that £6.6 billion. This is thus £6.6 billion of government money that cannot be spent on something else: teaching children economics say. It might be that £600 billion as a capital value: if we were able to sell all of that off at true market prices then we'd have three times over the £200 billion we need to invest in renewables according to DECC.
That we are doing one thing with the resources at our command means that we cannot be doing something else with those same resources. The opportunity cost of lower than market rents is not teaching children economics, not having money to spare to build a renewables system.
Please note, for those who still do not understand. This does not mean that lower than market rents is a bad idea. I think it's a bad idea, true, but that's a very different thing. All that opportunity cost means is that lower than market rents are indeed a subsidy, the cost of that subsidy being what we cannot do with the resources we've allocated in that manner. Maybe the cost is worth it, maybe it isn't: but we do have to start by acknowledging the cost and then comparing it to what else we could be doing with that money.
Just as an example. There's a recent report that says that the UK needs £5 billion a year investment in renewables. We have Hills telling us that we lose, by not charging market rents, £6 billion and change a year. Imagine that was the only money we had.
Maybe below market rents is a better use of the money than renewables. Maybe it isn't. But I do, as does every economist across the land, insist that as we cannot have both plumping for one means that the cost of having that one is the loss of not having the other.
So yes Virginia, social rents are subsidised. And the cost of the subsidy is all the other things we cannot do with that £6.6 billion (or £600 billion). And if every schoolchild in the land understood that then not only would there be fewer confused commenters on my blog but politics, which is after all the allocation of our tax money, would be immeasurably more efficient.
On Nick Clegg's "youth contract"
Nick Clegg, the UK's Deputy Prime Minister, today unveils a 'youth contract' scheme to help UK employers hire more young people and expand youth apprenticeships. He's concerned that over a million 16- to 24-year olds – almost one in five – are not in education, employment or training.
So am I. But another Gordon Brown-style government 'initiative' is not the way to get young people into work. We need to reduce the cost and the risk that employers face when taking on young people. We need to get rid of the minimum wage, which is pricing young people out of starter jobs, and radically cut back workplace regulation.
Employers are petrified about taking on young people, who may have little workplace experience and are therefore an unknown quantity, because they fear they cannot get rid of them if they do not work out. They would much rather have experienced employees. So it is no surprise that youth unemployment is so high.
Leviathan is swallowing the voluntary sector
According to the Charities Aid Foundation the UK is one of the most generous countries in the world for charitable giving. The UK has a large and very diverse voluntary sector with an income of £55 billion this year. Worryingly, charities are increasingly being co-opted into the apparatus of the state and being turned into dirigiste organisations reliant upon and supportive of state aid. This is not just a logical fallacy – organisations supported via taxation cannot ipso facto be termed charities – but a serious problem.
From the Charity Commission data we can observe that there is considerable consolidation occurring in the sector, with large charities (income >£10 million p.a.) now accounting for 56% of the sector, up from 43% ten years ago. This coincides with the period beginning in 1997 where the successive Labour governments increased funding to charities as part of their attempts to reform ‘public’ (i.e. socialised) services. According to a report by the National Council of Voluntary Organisations’ (NCVO) Funding Commission government funding of charities has increased from £8.4 billion in 2000/01 to £12.8 billion in 2007/08. “As a proportion of all income to the sector it now accounts for just over one third (36%)”. 77% of charities receive no government funding, so there are relatively few charities gaining all the largesse. But don’t worry, it’s not just HM Government doing this – the EU is also doling out large grants to charities and has spawned a small industry in navigating the complex bureaucracy.
Given these concurrent phenomena it is amazing that the link between them has not been fully observed. There can be little doubt that engagement with the bureaucratic procedures and compliance with big government and receipt of state funding has led to ‘big charity’ consolidation. As with other sectors, regulation and subsidy erects barriers to entry and reduces competition and innovation (yes, there is competition in the voluntary sector and yes it is necessary and beneficial).
We have arrived at a point where the ‘voluntary sector’ is rapidly losing its voluntary characteristics but instead marches to the beat of the politicians’ and bureaucrats’ drums. As the NCVO report tells us:
“[G]overnment funding has not helped them to become more resilient. Charities working in these areas have very limited reserves or assets to call on. As a consequence, they are potentially vulnerable to cuts in public spending; changing political priorities; and / or changes to the way services are commissioned and procured.”
Yet these effects notwithstanding, groups such as Cutswatch have grown up to lobby for greater charitable involvement in public service provision. Charities were particularly vociferous in their opposition to government funding reductions. Once hooked on the drug of taxpayer’s money it’s hard to let go.
Best guesses suggest that the sector will probably see a 7.7% fall in government spending (£911million) by 2015/16. However, I suspect that this may be pessimistic. The Coalition Government’s nebulous Big Society agenda seeks to increase charitable involvement in ‘public’ service provision particularly via the Open Public Services White Paper. An analogy with the problems of the Private Finance Initiative can be drawn. While public service reform is vital and necessary I see it as profoundly dangerous to increase charitable involvement in and reliance upon government and their transformation into recipients and providers of taxpayer-funded services – in other words, QUANGOs. A symptom of where we stand is that there is an Office and a Minister for Civil Society – no, that’s not a joke.
Instead, government’s focus should be on reducing taxation, red tape and decreasing barriers to entry for innovative and small charities – supply side reform in other words. The best thing government could do to promote philanthropic activity would be to slash taxation whilst at the same time divesting itself of many welfare functions (which would fund the tax reductions) that free markets and charitable organisations would be far better at performing. An economy and society less harassed and restricted by government would be far better able to support philanthropic giving in time and money. Moreover, many of the problems that charities seek to assuage such as drug addiction, educational failure and poor housing are caused by government intervention. Eliminate this intervention and we would have far less need for charity!
Charities and voluntary activity fulfil a vital role in civil society. As statist economists are fond of telling us, markets are imperfect in that they do not provide certain goods in ‘sufficient’ quantity. QED – to the statist - this is an argument for government intervention. To the Classical Liberal, shortcomings in markets instead constitute an argument for philanthropy and altruism as intervention by the state can only lead to greater government failure and unintended consequences. If the state continues to co-opt voluntary organisations it will further erode the basis of civil society and ultimately lead to even greater intervention to ‘correct’ the inevitable failures of government controlled ‘charities’.
The minimum wage is hurting the worst off
There is every chance that the last Labour government will not be treated kindly by history. The legacy of Blair and Brown, in all likelihood, will be seen as one of a broken society and a broken economy.
Yet one of the most serious travesties of those 13 years has perhaps not been given the attention it deserves. With the latest unemployment figures showing that 16-25 year olds make up almost 40 percent of Britain’s jobless population - and the manifestation of a so-called ‘lost generation’ of NEETs (not in education, employment or training) – it is arguable that Labour’s failure of young people is their most unforgivable crime.
The Sunday Telegraph reported this week that ministers have been warned by government pay advisors that the minimum wage is pricing young people out of work. The latest increases mean that 16-17 year olds must be paid a minimum of £3.68 per hour, with 18-20 year olds being paid at least £4.98. These figures may not seem like much, but they are costing a generation of young people their futures.
Tim Butcher, the Low Pay Commission’s chief economist, told the Telegraph that the ‘minimum wage effect’ has forced businesses into cutting jobs for young and inexperienced workers. Free-market economists have been saying this for years. In austere times firms are less able to recruit young employees – whose jobs may well have been saved by lower market-priced wages – due to the minimum wage rendering them unaffordable.
The minimum wage is often cited by the left as a rare example of how state intervention in the economy can be a force for good; it prevents the exploitation of workers by a free market that drives wages down and serves only the interests of employers, so they say.
But in reality the youth minimum wage is hurting the very people it set out to protect. By pricing them out of employment in the infancy of their working lives it has contributed to a generation of young people hooked on state handouts and with few prospects for the future. The key question is this: between lower pay and an abject inability to work, which is the greater evil?
The minimum wage for young people quite possibly has its heart in the right place; it just simply does not work from an economic perspective. David Cameron says he plans to ‘fire up the engines of the British economy’ and wants to focus on the plight of the young people. It may seem perverse, but cutting the minimum wage might just be the way to do that.
Pick one of two: free immigration or a welfare state
As we all know Uncle Milt told us that we could have either a welfare state or free immigration. We can't have both: for we'll attract an awful lot of immigrants with a generous welfare state. Bryan Caplan presents a little chart that shows another, supporting, reason for this:
There's a correlation there between places that are racially mixed (yes, I know, human "races" is a misnomer, think of tribes, cultural backgrounds, whatever, but race is a reasonable enough word with that caveat) and having a low welfare state. The thinking is that people are happy enough to build a safety net for "people like us" whoever that us happens to be. But not so keen on putting hands in pockets (or having the State's hands in our pockets) for those who are the other. Thus culturally homogenous places seem happy enough to have large welfare states, societies that aren't not so much.
Which leads us to an interesting place: it's quite obvious that the greatest increase in human flourishing and wealth comes from an open immigration policy rather than a large and all encompassing welfare state. We can move an Ethiopian taxi driver from an income of a couple of thousand $ a year to $30,000 a year just by moving him to New York City. That's something that almost no welfare state could manage. No politically achievable one at least.
So, if we cannot have both a welfare state and also free immigration, but free immigration improves the general human lot more than a welfare state, then shouldn't we get rid of the one we currently have and pick up the one we don't? Have free immigration and not the welfare state?
Those ever longer working hours
You'll recall how were all worked like slaves by The Man? Capitalism holding our noses to the grindstone, how working hours are getting ever longer?
Well, no, not really:
I can't see that increase in working hours either. So we've one parp in the face of those who keep telling us that we're getting this work/life balance thing wrong. But we can go further too. Market or paid working hours are only part of the work that we do. We all also do unpaid working hours inside the home, so called household production. The cooking, the cleaning, general maintenance and so on. And hours spent on these activities have been falling even faster than those paid working hours.
The net result of all of this is that we are enjoying ever more leisure time: yes, including even commuting and everything, we're getting more leisure than any of the previous generations.
Which is of course just as it should be. As we're generally getting richer (OK, last couple of years apart) then we're choosing to take some of that greater wealth in more leisure, not just chasing after ever more money for shiny gewgaws. Our work/life balance is indeed changing: and it's us doing the deciding about how it shall change which is of course what annoys the people who think they should be telling us what to do.
A slight correction on US poverty levels
Tom links up to a post with this graph about US poverty levels.
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The thought is that since the war on poverty began there's been no decrease in poverty: thus the war on poverty doesn't reduce poverty, perhaps it even confirms it?
There's certainly the possibility of welfare dependency however, US poverty line statistics are such a mess that that's perhaps not the best explanation possible. What has really changed since the mid 1970s is that we've changed the way we measure the effects of trying to alleviate poverty.
Unlike the rest of the world the US does not measure poverty after all the things we try to do to alleviate it. UK poverty statistics, for example, give us the number of people still in poverty after we've given them money, cheap housing, tax credits and all the rest. US poverty statistics however used to do this but no longer do.
The reason is that the US numbers include the market incomes of the poor plus the direct cash transfers they get as welfare. They do not include Section 8 (our housing benefit), Medicaid, Food Stamps nor the EITC (tax credits to us). The EITC for example costs $80 billion a year, raises 5 million above the poverty line on its own (just the Federal one, most States have one as well on top) but none of the effect of that is in that graph.
When did the EITC start? In the mid-1970s. When did all the move from straight cash welfare, which is included in those poverty figures, to goods and services in kind, which are not included, begin? In the early 1970s: exactly when we see poverty flatlining.
It all sounds a bit odd, I agree, but there is a real answer to the question "How come the US spends hundreds of billions a year on alleviating poverty and doesn't seem to alleviate much poverty?". The answer is that no one is counting the poverty alleviated by spending hundreds of billions of dollars a year.
Strange but true.