Pensions: Chancellor has taken the first step on a long road to reform
There's nothing neoliberal about work for the dole
OK, so this story comes from Australia where they might be far enough away not to be quite up to speed with things. But the idea that people should work for the dole is not in fact some appalling apparition leaping from the fevered imaginations of neoloberals. It's not, in fact, even a liberal idea. It's an entirely social democratic one: you know, soft left sorta thing?
A favourite policy of talkback callers everywhere, work for the dole is also an idolised measure for the right side of politics where old-fashioned conservative selfishness dovetails nicely with the extremist economic demands of economic neoliberalism. The idea is that to receive the sub-poverty-level subsistence Centrelink payment of $250 week, dole recipients will be mandated into forced labour or deprived of subsistence completely. Currently mooted are plans for the unemployed to be mandated to pick up rubbish in the not-for-profit sector or work in aged care homes as maintenance workers.
Ah, no. Here is the impeccably social democratic and soft left M'Lord Layard on the subject from 15 years ago or so:
This long-term unemployment is a huge economic waste. For people who have been out of work for a long time become very unattractive to employers and easily get excluded from the world of work. So it often happens that employers feel a shortage of labour even when there are many people long-term unemployed, with the result that inflation rises even in the presence of mass unemployment. Thus a major objective must be to reduce or eliminate the long-term unemployment caused by welfare dependency. There are two possible approaches – “stick” and “carrot”. The evidence suggests that much the best approach is a combination of the two. This combined approach is now being used increasingly in Britain, Denmark, the Netherlands and of course in the U.S. for single mothers on welfare. In consequence in these countries there have been dramatic falls in unemployment consistent with a given level of vacancies – which in most other countries continues to rise.
The argument is extremely simple. People who are long term unemployed drop out of the labour force entirely. This is both a waste of their lives and also of the things that they could be producing for the rest of us. We therefore want policies which keep the long term unemployed in that labour force: even up to and including make work programs while they collect their unemployment pay. For this does indeed keep them connected with the world of work and aids in preventing that dual waste of their lives and out money.
This is absolutely nothing at all to do with being right wing, conservative, neoliberal or even liberal. It's an entirely social democratic analysis of the problem and an entirely social democratic solution.
It may also be a good one, might also be a bad one but that's an entirely different matter. The blame or the plaudits, whichever way around it should be, should indeed go to those who proposed it. Similarly, if it's a good idea than praise its introduction whoever does it and if a bad one condemn it.
Peronally I'm convinced by the argument and the evidence and in the absence of my preferred solution (a return of capitalism red in tooth and claw that would raise the growth level and thus reduce unemployment) support the idea that work for welfare is a good idea. Even if it did come from my old economics professor....
Apparently I'm a hyper-neoliberal
It rather surprised me, last week, that I was described by an American magazine editor as a "hyper-neoliberal". I'm really not quite sure what that means but I assume it's because I agree with points like this:
PLAN A The government subsidizes the incomes of low-wage workers. These subsidies are financed by increasing taxes on middle- and upper-income Americans.
PLAN B The government again subsidizes the incomes of low-wage workers. But under this plan, the subsidies are financed by taxing those companies that hire low-wage workers.
This is Greg Mankiw discussing the difference between raising the incomes of the working poor through some form of public payment (ie, tax credits, the EITC, whatever) and a rise in the minimum wage.
To be sure, the minimum wage isn’t exactly a system of taxes and subsidies. But its effects are much the same as those of Plan B. Unskilled workers earn more, and the businesses that hire them pay more. The main difference between the minimum wage and Plan B is that, under a minimum wage, the extra compensation is paid directly from the business to the worker, rather than indirectly via the government.
And for me this is the clinching point:
First, fairness: If we decide as a nation that we want to augment the income of low-wage workers, it seems only right that we all share that responsibility. Plan A does that. By contrast, Plan B concentrates the cost of the wage subsidy on a small subset of businesses and their customers. There is no good reason this group has a special obligation to help those in need.
I've said this a number of times before and it still remains true. There is indeed the market price of whatever it is, in this case low skilled labour. And it's entirely possible that we, as a society, communally, decide that we don't like that price. Say we think that the price of cigarettes is "too low" (leave aside how we determine too low or too high here). We tax them and that tax benefits us all in that all of us share in the public goods financed by that tax.
We might also decide that the price of low skilled labour is too low. We desire it to be higher. Precisely because it is all of us making that decision (again, leave aside concerns about majoritarian tyranny here) therefore it should and must be all of us dipping into our pockets to pay for it. We should no more insist that investors in the sort of business that employs low wage workers pays that extra wage that we desire than we should insist that smokers, or tobacco companies, get that extra tax raised as we fix that too low price of ciggies.
They're societal interventions thus it must be society that pays or collects on them.
Whether we should have a wages top up, or taxes on ciggies, is entirely another argument. This logic, assuming that we're going to have them, still stands. Societal decisions need to be paid for by society, not by some subset who can be stuck with the costs of our desires.
In this analysis I am joined, as above, by Greg Manikiw, ex-head of the Council of Economic Advisors, economic advisor to Mitt Romney (about as wet a Republican candidate as we've seen in many a decade) and also by the UK's only thinking Marxist, Chris Dillow.
And for thinking this way I am called a "hyper-neoliberal" by an American magazine editor. I still don't quite know what that phrase means but I think it's more a commentary on the political inclinations of the US journalistic caste than it is about me or the real world.
This strange allegation that Britain isn't eating
I'm afraid that this campaign and poster, "Britain Isn't Eating", confuses me greatly.
In a striking billboard advert that says ‘Britain Isn’t Eating’, the charity Church Action on Poverty uses the famous image from the Conservatives’ 1979 election poster, ‘Labour Isn’t Working’. The highly political charity poster features the same long line of people used to illustrate dole queues under Jim Callaghan’s ailing government, but this time places them outside a food bank.
OK, more people are using food banks than before. And what, pray, is wrong with that?
For the launch of the Britain Isn’t Eating campaign, Church Action on Poverty said on its website: ‘The explosion in food poverty and the use of food banks is a national disgrace. It undermines the UK’s commitment to ensuring all its citizens have access to food – one of the most basic human rights.’
Umm, but, aren't food banks providing food to people? Aren't people thereby being provided with one of the most basic human rights, access to food?
I'm perfectly willing to agree that in a country, by historical or global standards, as rich as the UK is today that we can make sure that all have access to a basic and nutritious diet. The thing is, I'm very confused by the people who are part of the system providing this, those food banks, insisting that their own existence proves that this isn't being done. For there's absolutely nothing at all that insists that such provision should be met by government. Or benefits, or pay, wages, jobs or anything else of that type. The insistence is that food should be available and that it is available through the charity of our fellow citizens is not some scandal that blots our society. Quite the contrary, it is a wonderful signifier that we do indeed still care for our fellow man.
Something that at this time of the year is a rather appropriate thing to be reminded of perhaps?
It claims ‘the single most common reason for people to need food aid is that their benefits have been changed, delayed or stopped’.
Government is incompetent and we the citizenry step into the breach. This is somehow a bad thing?
There really is a Laffer Curve you know
That there really is a Laffer Curve is obvious: tax rates of 0 and 100% raise no revenue, revenue is raised at points in between. The precise shape of the curve is of course a matter for more debate. But as the Spectator has just pointed out, and as should be general knowledge but sadly isn't, the people who face the highest tax rates in this country are the working poor. Which is, of course, entirely ludicrous.
So the same low-paid job will be worth far, far more to a Romanian than a Brit on benefits. That explains why so many foreign workers are happier, keener, more likely to apply – they actually get to keep all of the extra money they earn, while Brits have to sacrifice up to 84 per cent of it. Again, who’d be all zip-a-dee-doo-dah turning up at work when you keep just 16p in every pound you earn? Certainly not me. So there is nothing lazy about Brits. The problem lies not with our people, but an still-unreformed welfare system. Iain Duncan Smith’s revolutionary Universal Credit would lower the top rate of effective tax to 65 per cent – still too high, but a vast improvement. When it’s up an running, the Chancellor should say in every budget what this top rate would be, and aim to lower it to 40 per cent. The top rates of tax in this country are not paid by millionaires. They’re paid by the millions who are caught in a welfare trap. That’s why the Romanians spot such an opportunity here. And that’s why IDS’s Universal Credit cannot come fast enough.
Universal benefit will be better, yes, but not sufficient to take us down to more sensible levels of the discouragement of work.
The first part is that we've got to, as we here at the ASI have been saying for years now, take those working poor entirely out of the income and NI tax systems. I prefer a tax allowance (which would include both types of NI) pegged to the minimum wage. Madsen has proposed a higher, £15,000 a year allowance. My proposal is based on the political resonance of tying those two numbers together of course, not on the economics.
That is, as far as I can see, the only thing that will get that combined tax and benefit rate down to something more reasonable, like that 40%. And if we want to drive it down again we'd have to become very radical indeed, move to a citizens' basic income. Here's £7,000 a year or so for each and every adult, untaxed, and that's it. That's the welfare state in its entirety. That would drive that tax and benefit rate down to zero and I think people would be very surprised indeed at the sort of change in behaviour that sort of supply side change would create. Rather than an increase in leisure I would expect a huge increase in hours worked actually.
But the real point is that if we do want to free the working poor from tax rates that we consider entirely unacceptable for the richer among us then those are the sorts of changes we're going to have to start making.
Both China and the UK are less unequal than many think
I've long been of the view that inequality is overstated in the UK. For the very simple reason that we measure it by incomes and not by consumption. But of course, if you really are worried about inequality it must be inequality of consumption that you are worried about. And I've also long thought that UK inequality is likely to be much more overstated than the inequality of most other European countries. For our economy is dominated by London in a manner that no other European country is dominated by just the one city. The mechanism here is of course that London property prices are hugely higher than they are elsewhere in the country. And so are London salaries: but that second gets recorded as inequality of income when that first means that that is pretty much evened out by the equality of consumption of housing possible for that greater sum.
Sadly I've not seen any research that details this for the UK. But here's a nice paper that worries away at the same problem for China. Yes, China is unequal, more so than the UK or US. But they look at the variability of housing prices across the country and then take that into account when comparing the variability of incomes. And quite a bit changes:
The overstated inequality if using nominal income data is not as great if inequality is measured with the Gini index (in Figure 2, both the Theil and the Gini have been scaled to equal 1 for real inequality at provincial level). Nevertheless, not deflating for spatial cost of living differences still causes an upward bias in the Gini coefficient of 15-16%. Taking an average of the results for the two inequality measures, in round figures approximately one-quarter of apparent spatial inequality in China disappears once account is taken of cost of living differences, where these are just coming from house prices.
If, as they surmise could be true, the differences in housing prices represent a general change in non-tradeable goods prices then the reduction in the Gini measure of inequality would be greater.
Which brings me back to the UK. We do have high inequality in the UK as compared with other European countries. But I'm convinced that some of this is the effect of the much higher incomes available in London. And those higher incomes are rather offset by the higher costs of living in London: meaning that consumption inequality is a great deal lower than everyone thinks it is.
The ideal welfare system is a basic income
The British government spends more on welfare than it does on anything else apart from healthcare. The benefits system is arcane and unwieldy, a mish-mash of disparate attempts to address different social problems in a piecemeal fashion. It creates perverse incentives for those on it, such as people stuck in a ‘benefits trap’ where they lose almost as much money in benefits by working as they are earning, and distorts entire markets by inflating prices, as housing benefit does to the housing market.
Most people agree that the system is broken, though solutions differ. The Universal Credit is a fundamentally good idea that is failing because of the difficulty of implementing successful piecemeal reforms to a system as complicated as benefits in the UK, and will ultimately probably not succeed in the way its architects intend because it doesn’t go far enough. Other aspects of the government’s welfare policies, like the work programme, are completely wrong-headed – telling other people how to live their lives is a bad idea because the government is extremely ignorant. That ignorance doesn’t change just because the person being told what to do is on benefits.
The ideal welfare system is a basic income, replacing the existing anti-poverty programmes the government carries out (tax credits and most of what the Department for Work and Pensions does besides pensions and child benefit). This would guarantee a certain income to people who have no earnings from work at all, and would gradually be tapered out according to earnings for people who do have an income until the tax-free allowance point, at which point they would begin to be taxed.
For example, we could set a basic income of £10,000/year by using a cut-off point of £20,000/year, and withdrawal rate of 50%. The basic income supplement would be equal to 50% of the difference between someone’s earnings from work and the £20,000 cut-off point. A person with no earnings would get a basic income of £10,000/year; a person who earned £10,000/year would get a supplementary income of £5,000; a person on £15,000/year would get a supplementary income of £2,500; and a person on £20,000 would get nothing (and begin paying tax on the next pound they earned).
These numbers are representative: no need to tell me that £10,000 is too low or too high. What matters is the mechanism.
This has also been called a Negative Income Tax, usually by advocates on the right like Milton Friedman, but language aside the concepts are basically the same. As a side-note, I think basic incomes that are not tapered out are a complete waste of money, redistributing lots of money to people on high and middle incomes unnecessarily. It amazes me that this anti-progressive approach seems to be popular among some on the left. The exception would be if this flat-rate payment replaced the entire welfare state, as Tim Harford mentions in his column today and Charles Murray proposed some time ago.
Like the current benefits system, this would provide a safety net. But ‘benefits traps’, where people lose as much in benefits as they earn from work, would be eliminated. A basic income system like this would be at least as clear as the PAYE income tax system is, and substantially clearer than the current benefits system. The dog’s breakfast of welfare schemes that currently exist – all to address the symptoms of poverty, rather than the root – would be abolished, and with it the jumble of unanticipated and often undiscernable interactions between schemes that lead to perverse outcomes.
Best of all, a basic income is the least paternalistic welfare scheme possible. Instead of pushing would-be computer programmers into work as Poundland assistants, a scheme like this would leave decisions entirely up to the individuals involved. The discovery process that each of us is engaged in would continue, and now without mass decision-making by a central state authority.
I don’t know what amount a basic income like this should actually be set at. That would be an interesting and useful debate — what do we need for a basic standard of living? What appeals to me is the principle. Ditching most of the DWP, creating a welfare system that never discourages work, and letting people live their lives as they choose? Now that’s a welfare programme I could get behind.
Equality in death if not the time of it
New figures out from ONS means that the newspapers have an opportunity to point to the inequality of lifespan in Britain:
A baby born in the North West of England will live on average two years less than a child born in the South East, new Government figures have revealed. The figures give a snapshot of life in Britain today and reveal the divisions between life-expectancy rates for people living in different areas of Britain.
The figures themselves are correct, average life expectancy does vary around the country and across socio-economic classes. But the interpretation put on them is not correct. For no one is measuring the life expectancy of someone born in a particular place. They are measuring the age of death of people in that specific place. The error can be seen in this second story inspired by the same ONS numbers:
Eastbourne has become the first place in the country to boast a population with an average age of more than 70. The Meads district of the famously genteel East Sussex town was identified by the Office for National Statistics as having the oldest residents in England and Wales. Named by officials as Eastbourne 012B, the well-heeled area has a population with an average age of 71.1, compared with the national average of 39.7.
We do not believe that all people born in Eastbourne have exceptionally long lives. Quite the contrary, we believe that people who live long enough to move when they retire go to Eastbourne. Which of course means that people who live long enough to move when they retire must move away from some other part of the country, lowering the observed age at death in those places.
A goodly part of the inequality of lifespans is simply that people move around. And we have parts of the country where older people preferentially move to. Thus, inevitably, we end up with concentrations of the long lived in some paces and a relative paucity of them in others.
Try this for an extreme example of the same phenomenon. Measure the average age of death in a children's hospice against that in a home for those with senile dementia. We will see a very great difference in average life span, a vast inequality. One that will tell us absolutely nothing at all about the average life expectancy of those people when they were born nor of the people who were born in the same area.
Geographic measurement of lifespan inequality reflects where people die and at what age, not the potential lifespans of those born in those places: for people do move around.
On the tricky problem of benefits: pick any two from three
There's an old engineering saying, faster, better, cheaper, pick any two. Meaning that if you want your product to be better and developed faster, it's not going to be cheaper, if you want it to be better and cheaper you're not going to get it faster and so on through the possible combinations. As Arnold Kling points out, this also applies to welfare systems:
1. Use “means testing” in order to provide a significant benefit that is aimed at the poor.
2. Keep the marginal tax rate low.
3. Keep the budget cost low.
If you've got a significant benefit to the poor and you want a low marginal tax rate as people earn their way out of the means test then the taper must be shallow, making the cost of the program high. If you've got that low taper and you also want a low budget cost with a means test then you cannot have a significant benefit and so on. Andrew Biggs tries to plot a way out of this:
a limited but universal government-provided retirement benefit, set at the poverty threshold and paid to every retiree regardless of income or work history. Since the plan is universal, there’s no phase-out and thus no implicit marginal tax. Since the benefit is relatively modest, the explicit taxes need to finance it are lower than what we currently pay for social security. And unlike the current program, which leaves around 9% of seniors in poverty, the universal benefit would essentially eliminate poverty in old age.
OK, he's talking about the US pension system only and he also agrees that it doesn't make Kling's problems go away. It's a balancing of the various options, that 's all.
Moving this over to here and then to a consideration of the basic idea of welfare at all I think I'd make the same sorts of trade offs. I think that it's the marginal tax rates (combined with benefit withdrawal of course) that make the problem so pernicious. We absolutely do have people stuck in situations where they're very definitely over the peak of the Laffer Curve. Heck, the budget documents themselves point out that there's millions who face tax and benefit rates of over 60%, some even of over 100%.
Which is why I find myself moving over to the idea of the citizens' basic income, or the universal basic income to taste. We're going to have a benefit system whatever else happens so we should have one which distorts the rest of the economy the least. And the only way to get rid of those high marginal rates, at a budget cost that is anything like possible, is to make it an unconditional income. Everyone gets that (low) amount no questions asked. Given a tax allowance on top of it we've thus got people facing marginal tax rates of zero: which would rather encourage people into work I would have thought.
For this to be palatable you do indeed need to be assuming that there's going to be redistribution and a welfare system run by government, come what may. But once you have, I put it to you that a cbi or ubi is going to be the least bad of possible options.
Milton Friedman on the Negative Income Tax
Milton Friedman was born 101 years ago today. The video above isn't as snappy as many of the great Friedman videos online, but I like it because it shows the kind of libertarian Friedman was. Instead of dismissing any policy that fell short of abolishing the state as 'socialism', he came up with innovative and practicable steps towards a freer and richer world. His policy proposals are still relevant and fresh (unlike many of FA Hayek's, for instance) — as a replacement for existing welfare, a Negative Income Tax today could liberate people from the benefits trap. Daniel Hannan's piece on Friedman and school vouchers — another idea as fresh and important today as it was when he first proposed it — is well worth reading too.