No one should ever get benefits of more than £10,000 a year
The current government has announced that no family will get more than median income in benefits each year. I'm afraid that they're still being hopelessly over-generous here. And I would call into evidence the Baron Skidelsky to prove it to them as well. No one should ever be able to garner benefits of more than £10,000 a year. For as the Noble Lord tells us:
The case against making increased GDP per capita the overriding policy objective is that it doesn’t deliver the increased happiness or welfare if promises. In 1974, the economist Richard Easterlin published a famous paper, “Does Economic Growth Improve the Human Lot?”. The answer, he concluded, after correlating per capita incomes and self-reported happiness levels across a number of countries is probably “no”. In a refinement dating from 1995, Easterlin found no relationship between income and happiness above an average per capita income level of between $15,000 and $20,000. Other findings confirm Easterlin.
Well, there we have it. Over $15,000 a year you just don't get any happier. This is usually applied to the idea that people who do make more than that £10,000 a year can have chunks of cash nicked from them to be given to those with less with no loss of human happiness. And let us do our ideological enemies the honour of exploring their own argument. Which is, as we can see, that more than £10,000 a year doesn't make you any happier.
Thus, while those with more than this might have room to lose some income in order to make others happier, those who already have £10,000 a year won't be made any happier by gaining more. Nor will anyone receiving benefits of £10,001 be made happier, indeed, someone currently earning £9,990 currently will be made maximally happy by being provided with only another £10.
That is, that our argument that money doesn't make you happy provides an absolute cap on how much it is that the welfare state should try to supply to the poor. We have in fact reached Nirvana: we know how much money to move around, the maximum amount of money that can possibly be usefully applied to making people happier. And that amount isn't £10,000 per person per year. It is only the amount by which each person receives less than £10,000 through their market activities. Or, compared to what is currently spent, virtually nothing.
All we have to do is rejig the system so that everyone's income is topped up to that £10,000 a year level (and why yes, this would include housing benefit, it would even include services in kind like education and the NHS) and we are all as happy as can possibly be.
The only reason this could not possibly be true is if that you don't get happier having more money isn't true. So which idea do the redistributionists want to give up? For it is either more than £10k doesn't make you happier therefore no one needs more welfare than to provide them with £10k or, if more than £10k does make you happier then, well, more than £10k does make you happier.
I just get so angry at this nonsense
Yes, I'm sorry, this is one of my little hobby horses. But the way people misuse statistics, most especially the US poverty numbers, really just does annoy me. Here's a piece from what I regard as a good man doing good work. But it still angers me deeply:
According to census data released Thursday, nationwide the number of people in poverty has grown to 48.5 million, or almost 16% of the population, the highest poverty number in the more than 50 years that it has been recorded. And while the data, although grim, appears to indicate the economy is slowly rebounding, it also provides some insight into what's working in our fight to feed the hungry, and what to expect in the coming months and years.
Food stamps work. According to the latest figures, food stamps lifted 3.9 million individuals out of poverty, including 1.7 million children, keeping food on the table for many families. Food stamps are working exactly as they should – effectively responding to the economic realities of the time. Without them, the emergency hunger relief network in this country could not cope.
Now the bloke who wrote that runs a food bank. I think poverty alleviation's a good thing and I think that voluntary collective action to alleviate poverty is a very good thing indeed. So I've no problem at all with what he or his organisation do: I think they're both admirable and praiseworthy. It is purely the juxtaposition of those statstics that angers.
For that 48.5 million in poverty number is before we take account of the 3.9 million lifted out of poverty by food stamps. As it is also before the number taken out of poverty by almost all of the other things that the US does to alleviate poverty. Like tax credits, housing benefits, medical care and so on and on.
Everyone, just everyone, looks at the US poverty numbers and says "but that's terrible!". Without understanding that they are the numbers before poverty alleviation. Unlike the numbers of every other country where they are after poverty alleviation.
And yes it is an important point. Whether you are of left or right, whether you think there should be more done or less. For currently one side can say "look, we're spending hundreds of billions curing poverty but we've got just as many poor people so let's just stop spending the money". The other can say "look, we're spending hundreds of billions curing poverty but we've got just as many poor people so let's just spend more and more money". Because no one at all is counting the effect of the money being spent. And that is important: for what everyone would really like to know is "how effective is the money already being spent and how much more/less should we be spending?".
Which no one ever does ask because of the near insane way that the US measures poverty.
Making society friendly again
Imagine a society in which welfare was provided not by the state, but by competing private organisations performing services such as insurance, savings, pensions, primary medical care and unemployment aid, and whose success and continuing function depended on how well they provide these services.
Welfare would be provided at a much more intimate level and would be results-orientated as consumers demanded better services with their wallets. Levels of social capital and community action would be higher, as current taxpayers would no longer feel as if they had already ‘played their part’ by paying taxes — which, in our state-centric system, are distributed ineffectively and often to rent-seekers. Participation in these societies could create a stronger feeling of ‘belonging’ among their members.
This kind of system was a reality before the birth of the welfare state, which began with Lloyd George’s provision of National Insurance in 1911 and set firmly on its path by William Beveridge’s social policy report in 1942. The ‘friendly societies’ that preceded the welfare state provided specialised welfare benefits that directed capital where its members’ values lay, in a pluralistic way that was starkly different to the monolithic approach of the modern state.
The competitive nature of these private welfare societies meant that they aimed to provide top quality service in a capital efficient way. This competitiveness also meant that there was a very large profit incentive to find cheats and strip them of their benefits, which in turn would mean more help could be diverted to the truly needy. In turn, unemployment was dealt with faster and more personally, aided by the inter-member sense of community. Further, members could choose where their money was going and join those societies that were most in line with their values.
Friendly societies still exist today, providing financial services and thriving on an ethos of mutuality, economy and community. However, they are held back from their vast potential by the nanny state that pervades our society under the guise of ‘wealth redistribution’, in reality providing an inferior service than could be achieved privately, increasing our reliance on the state and discouraging charity and community values. Many in the UK and elsewhere see state welfare provision as the backbone of our country and fervently expound its virtues, because they have never known anything else. But a look back into history shows that privately owned welfare societies worked in the past, and could work for us once again.
Britain's productivity conundrum
UK unemployment is falling, hours worked are increasing, while output is still stagnant (or even decreasing). What does all this mean? How can the private sector create more jobs, while the total output it produces is still stagnating or even decreasing? Some economists seem puzzled by this saying that one set of data in this case is wrong. Even though this might be true as one of the two parameters is misleading, there are deeper explanations for this prevalent occurrence in the past few months.
It is not surprising that the first reaction on the market is a decrease in productivity (see graph below) as more people employed are actually producing less. This can partially be explained by an increase of hiring due to the Olympic Games, since none of these people are creating value or output growth for the economy, but nonetheless have paying jobs.
Source: ONS, Labour Market Statistics, July 2012, pg. 8
Lower wage growth would suggest that unit labour costs are decreasing which is making workers cheaper and more likely to find work. However, looking at the graph this doesn’t seem to be the case. But the question still remains: what is driving productivity down?
If we turn to statistics, we can blame the faulty data reporting and faulty measures of economic activity such as the GDP, or the way we define employment. However, we always use this data and if it serves as a sort of a benchmark in good times, there is no reason why not use it in bad times. The efficiency and precision of the indicators is a debate for itself, but I leave this for another time.
As for employment, personally I would always rather look at the employment-population ratio, an indicator that paints a much more precise picture of economic activity since it takes into account people leaving the workforce, which usually biases the unemployment figures downwards. In that perspective, the labour market isn’t improving, it’s still in distress.
The second explanation for a temporary drive in employment compiled with a stagnating output can be seen in the manifestation of the government’s job policies. While the British government is going head over heels to try and bring more people into work, their programs of incentivising employers to hire more workers are an example of a severe labour market distortion. No wonder productivity is rapidly falling. Employers hire people only to get the government benefit. There is no economic incentive for an employer, apart from the government subsidy he receives. The additional worker won’t create new value; his or her marginal product is very likely to be diminishing.
And since these programs are only at their beginning stages, productivity is likely to become even worse in the years to come. So what’s the point of the policy? Simple, it shows good numbers and thus relaxes the pressure on the government. The fact is that this is just another ‘Potemkin village’ designed to skew the public opinion into showing that the government is actually doing something to help the economy. But here’s the catch – whatever it does, it only hurts the chances of recovery.
The public is bemused into thinking that the government must address the market failures created by reckless bankers or the finance industry. That wasn’t the issue at all; market failures were in that particular case created by a series of government initiated policies. Ranging from the distortions on the housing market, the credit market, the banking risk, the overall systemic risk and even the European contagion – all these areas were cramped by excessive risk taking which was supported by the regulatory environment and policy decisions.
The market (i.e. the people engaged in interactions and decision-making) simply reacted to the vastly distorted signals sent to them. So the proper way of fixing this can only lie in the market itself, as long as its recovery signals aren’t being distorted. Having the government subsidize employers to hire more people simply to increase head count, or having the government force banks to reach lending targets to SMEs or pre-determined ‘winners’, are exactly the type of wrong and distorted signals that are preventing the recovery.
One is leading to rapidly declining productivity, and the other is making banks lend money to businesses which already have enough of it, thereby completely excluding the ones that actually need it to expand their productive activities. To paraphrase Arnold Kling and Nick Schultz from their excellent book From Poverty to Prosperity: “markets often fail, that’s why we need markets.”
There is only one way of resolving the issue of declining productivity and competitiveness, and it’s not an employment subsidy, it’s a labour market reform.
One easy step to a cost-free Living Wage
I was on Radio Five Live this morning in discussion with the Living Wage Foundation’s Director, Rhys Moore. The news hook was the story today about Whitehall cleaners demanding a pay rise, which I’m actually pretty sympathetic to – I’d rather public money went on a slightly higher wage bill for cleaners than the considerably higher wages of the many, many unnecessary quango staff that the government pays for, the bloated public service, and so on.
I quite like the Living Wage Foundation – they work to get businesses to voluntarily pay their low-paid staff more, and I understand that they don’t target small businesses. I’m glad that PR campaigns can be used to pressurise firms into raising low-paid staff’s wages and improving working conditions. That’s a feature of the free market that we should cherish.
Where I probably disagree with many Living Wage fans is that I think it would be a bad idea to make this mandatory. The price floor on wages that a minimum wage creates prices some people out of the market. if a saleswoman who could only sell £10,000 worth of cars a year wasn’t allowed to be hired for less than £11,000 a year, why would a car dealership hire her and make a £1,000 a year loss?
The people who tend to lose out are young people – the term “NEETs” (Not in Education, Employment or Training”) has entered policy wonk lexicon in recent years as youth unemployment has grown and grown. It is arguable about how much of this is down to minimum wage laws – the empirical evidence is conflicted, and macroeconomic factors are obviously a significant component of the current problem.
Raising the minimum wage to a Living Wage level would do nothing for these people, and would push people at the margin into making a loss for their employers.
Nevertheless, low wages are a serious problem. As Tim Worstall has pointed out, the real travesty is that we take so much money in tax from low-wage workers. In fact, the difference between the after-tax Living Wage and the before-tax minimum wage is virtually equal to the tax burden imposed on minimum wage workers — £12,154/year with the Living Wage, £12,160/year with an untaxed minimum wage. In other words, if minimum wage workers didn’t have to pay tax, they would be earning a Living Wage.
Taking these workers out of tax would square the circle of the Living Wage debate – they would be earning a basic salary without more people being pushed out of employment. Indeed, by making work pay more, some people at the margin of earning benefits would be enticed into work – a much-needed carrot to the government’s stick of reducing benefits.
It would only mean a small cut to government revenues – the bottom 50% of taxpayers pay just 11% of taxes. But, as I said this morning, if we can’t find additional savings in health, education, defence, corporate welfare and civil service spending to reduce the burden on people at the bottom of the wage ladder, we need to have a serious think about our priorities.
It is indefensible that we tax the poorest workers while simultaneously tolerating politicians talking about the need to, somehow, improve their lot. There is a simple solution that should appeal to Living Wage supporters and free marketeers alike: stop taxing the poor, and stop it now.
Take care before rushing into government action
I can't decide whether news this weekend, that British ministers are expected to introduce a cap on the amount that individuals pay for care during their lives, is welcome common sense or yet another smash and grab raid by the middle class.
The plan, based on proposals by economist Andrew Dilnot, would be to cap the costs that people in England pay for care at £35,000 over their lifetimes. Pensioners would be expected to insure themselves at that level, then the state would pay any further expenses.
The Adam Smith Institute looked at this idea of sharing the costs of care between the individual and the state back in the 1980s and '90s. There were heartbreaking cases of people whose funds had simply run out, leaving them with nowhere to go. And the cost of providing the residential care of an ageing population was starting to cripple local authorities. In answer to the first problem, many analysts proposed that social care should be provided free under the NHS, just as medical care is. That seemed to us to be a fate well worth avoiding, not least because it would make the second problem even deeper.
We looked instead around the world and found some places that had innovative solutions: that people were expected to provide, or insure for, their own care for a couple of years (around the average time that people tend to spend in residential years), and then the state would pay anything beyond that. The logic was the residential care was becoming uninsurable. With such large rises in longevity, no underwriter knew exactly how long people might spend in care: it was an almost open commitment which no private firm could sign up to. So the idea of an individual/state partnership seemed logical: insure what is insurable, and have the state provide the rest.
Public policy development is all about starting from where you are, and we were (and are) starting from a wonderland in which healthcare is provided free at the point of use, while social care is not. If you can work out whether an elderly person's bath is 'medical' and should be paid for by the state, or 'social' which should be paid for by the individual, you are brainier than I am. And if you can work out how to restrict state spending on care to the people who really need it, ditto. The partnership plan seemed the best of a bad set of options.
But those downsides remain in the policies that will be announced in detail this week. A cap of £35,000 on care spending will certainly make long-term care insurable. So that is a gain. But equally, plenty of people who could afford to pay for their own social care will find themselves being subsidised by taxpayers. The average house price in the UK is £226,887 (even higher in England, where the new policy will apply), and many of those in need of residential care at the end of their lives have already paid off their mortgage.
The argument is that elderly people have to sell their homes to afford their time in care, leaving less or nothing left for their children to inherit. But should taxpayers really be subsidising the care of well-off home owners? Remember that most tax is actually paid by the poor – simply because there are more of them. Should a cleaner in Cleethorpes really pay higher taxes to fund carers for the wealthy of Wokingham?
We are used to the middle and indeed upper classes doing well out of the welfare state, of course. Being moneyed, educated, confident and pushy, they can barge to the front of the queue for medical care, buy homes in the catchment areas of the better schools and bully officials to maximise their benefit entitlements. Does this sound much different? Precisely why should people with large assets not be obliged to sell them to provide for a lifetime need like social care, rather than expecting other people to bail them out?
It may sound harsh in the individual case, but remember the hardship done to others through the higher taxes that are required for it. Taxes that just make the difference between whether a firm succeeds or fails, and whether people keep or lose their jobs. The fact that the hardships caused are more diffused and harder to identify than the evident hardship of those forced to dip into their wealth stockpile does not make them any less real. And don't people save in things like property supposed to be for a 'rainy day' anyway?
The other interesting feature of this proposed policy, we now learn, is that nobody has the faintest idea how the government might pay for it. The cost has been put at £1.7 billion a year. In other words, ministers are committing to an expenditure that is not only massive but will fall, year after year, on future generations who do not even get a vote in the matter because they are as yet under the age of majority or indeed yet unborn. But how the tax will be levied is anyone's guess.
This again is typical of how the middle-class representatives of the middle-class population expand government programmes for their own benefit. Instead of working out how much tax people are willing to bear and then deciding what can be afforded within that budget, our politicians promise expansive benefits from now to eternity: only once we have started to enjoy them do we get the bill. But by then it is impossible, politically, to prize them off their beneficiaries. It's the old public choice problem again: the beneficiaries have a concentrated interest in keeping their benefit, while for taxpayers it is just one extra tax among many. But those many taxes add up.
Housing benefit changes would only plaster over the cracks in government policy
It is encouraging to see that the Coalition is looking into welfare and changes to improve how the state treats the poor. After all, a lower welfare bill means the stress on the poor through taxation can be reduced. Proposed measures to scrap housing benefit for under-25s however, are poorly thought out.
Many claimants of housing benefit do so in order to subsidise low wages. Some 93% of households who made claims in the last year included at least one employed adult. Rather than seeking to subsidise the low wages of the employed, we should be seeking to reduce the taxes they pay.
Lifting those on minimum wages out of tax altogether would be a good way of achieving this, effectively securing a ‘living wage’ for all who are employed. Having a greater post-tax income is preferable to an equivalent in-kind benefit for housing, most clearly because it gives the poor more choices in alleviating their own poverty. Present arrangements give offspring financial incentives to live apart from their parents. In reality the young poor may be better served with money for transport than by an in-kind benefit for housing. These people are better placed to determine what they need than government.
The reasons for needing housing benefit in the first place are largely driven by state failure. Prime among these are examples of urban planning, which so often fail to actually meet the needs of the poor. Instead these projects serve to generate political capital as governments can be seen to care about regeneration. Similarly, the middle classes are often able to use planning law to protect the value of their own property. This in turn limits the ability of property developers to generate new stock, bringing about high prices in this sector. Steps to liberalise planning law and to reduce the size of the green belt would reduce property prices and help to reduce rents.
Many have already pointed to alarmingly high youth unemployment figures for reasons as to why it is wrong to specifically target under-25s. They are right to note this, but it is not through benefits that these problems can be solved. Rather, legislation such as minimum wage and employment law serves to reduce the number of employment opportunities open to young people. Government’s fetishisation of Higher Education has served to further distort employment markets.
This policy would create new problems by further complicating an overly complex system of benefits, while not properly addressing the real issues with welfare and housing that currently harm not just the taxpayer, but most importantly the young poor themselves. A sincere attempt to reform would have the state get out of the way of young people and allow them to help themselves.
Hauling down the kite
In his first Reith Lecture this year (video), Niall Ferguson draws attention to the debt overhang confronted by most democratic countries. He points out how much worse it is than commonly supposed, in that much of it does not appear in the official figures. For example, when unfunded liability for US Medicare, Medicaid and Social Security are included - the programmes America is committed to pay for in future years - the US debt is thirteen times the officially published figure.
It used to be called 'kiting' if you kept issuing bigger cheques to pay for the previous ones. The problem is how to bring down the debt kite, and The Adam Smith Institute published part of its answer in 1995. Instead of having future generations dependent on the support of future taxpayers, the ASI proposed a means whereby they could, starting at birth with an initial gift, build up funds over a working life that would pay for their own needs in retirement. The ASI called this "The Fortune Account" (PDF), and it attracted much favourable attention and publicity.
Before the child reached working age, relatives could help build up its account with tax-protected gifts, and once paid employment began, each person would pay into their own account to build up enough funds for their future needs.
A major advantage of the proposal is that it removes a huge liability from government and lifts a huge burden from future taxpayers. It builds up real funds, creating a massive investment pool to facilitate future growth.
The IPPR later produced a much weakened version of the proposal, and now the Centre for Policy Studies has helpfully responded with a fairly vigorous one, calling the funds super-ISAs. This is good news. This is an idea whose time has come again 17 years after it was first mooted. With debt and future liabilities very much ringing alarm bells, it is time to look one by one at these entitlements, and to devise alternatives which replace future dependence with self-funded responsibility by people for their own futures. The Fortune Account is back on the agenda.
It’s time to end our exploitative minimum wage laws
As a libertarian student, I was always opposed to minimum wage laws on the grounds that they restricted free choice and would increase unemployment. I was often told that after living in the real world for a while, I would see that a minimum wage is absolutely essential and that living below it would be exploitation. Well, since entering the ‘real world’ last year, my views on the minimum wage remain unchanged.
Firstly, exploitation is subjective. For those who are 21 years old or over, the national minimum wage is currently £6.08 – do we really believe that the moment they earn £6.07 they are being exploited? Why should it be left to government bureaucrats to arbitrarily decide what constitutes exploitation? Payment should be between the employer and employee. If the employee doesn’t like the offer being made they are free to refuse it and if they are willing to accept it, then it’s not for anybody else to label it exploitation.
It’s true that many will receive a low income under such a system. Those who are more fortunate may feel sympathy for them and have a genuine desire to help. Yet by enforcing minimum wage legislation they are in danger of hurting those very people they are intending to save. The workers in question are likely to be young and low skilled, which means an employer is unlikely to hire them if they’re forced to pay a high wage. This principle is already widely accepted and it is why the minimum wage for 16-17 year olds is just £3.68. This gives them one advantage over those who are older and better skilled.
An important factor in this debate that is often overlooked is that those earning less than the minimum wage would be gaining valuable experience and leaning new skills. The importance of this is not to be underestimated – thousands of young people in this country are willing to take on unpaid internships in order to gain these benefits.
Presumably those who believe that earning less than the minimum wage is ‘exploitation’ are also opposed to internships, on the same grounds. Yet I myself was an intern receiving ‘expenses’ that amounted to less than the national minimum wage (whilst living in London). It’s true that I had to be frugal, but it paid off as the experience has now led to full time employment. If the national minimum wage supporting do-gooders had their way, I would never have been able to move to London and I would be worse off. Well intentioned or not, nobody else should have had the right to stop me from freely choosing to pursue that opportunity and that is why the concept of a national minimum wage is wrong.
