Spotting Worstall's Fallacy in the wild

In a discussion of Joe Stiglitz's new book in The Observer we see this:

Back in 2008 the top 20% of households in the country were estimated to be worth 92 times more than the bottom 20%. The latest estimate puts the gap at more than 100 times. And a further £12bn of welfare cuts are planned by the new Conservative government. The gap between rich and poor is unquestionably widening.

That conclusion may or may not be right but it's most certainly not supported by the evidence which is given of the contention. That evidence coming from this ONS report:

Total net wealth is defined as the sum of four components: property wealth (net), physical wealth, financial wealth (net) and private pension wealth . It does not include business assets owned by household members, for instance if they run a business; nor does it include rights to state pensions, which people accrue during their working lives and draw on in retirement.

It's known as Worstall's Fallacy simply because our own Tim Worstall bangs on about it so often. We cannot measure inequality (or poverty, any number of other things) without taking into account the things we do to reduce said inequality (or poverty, or any other problem). It's only when we look at the post-attempt to solve the problem situation that we can turn our minds to whether we should be doing more, or possibly less, to try to solve this problem.

So, note that our definition of wealth there does not include that state pension: something we do to reduce the wealth and income disparities between those who can save for a private pension and those that cannot. Note that it includes private housing equity but not the capital value of a below market rate tenancy for life ("social housing"). It does not include the capital value of health care, or education, free at the point of use, for all the citizenry. It does not include whatever capital value we might ascribe to the social insurance policies that will provide us with an income in the case of economic misfortune.

We do all of these things because they make people wealthier. Perhaps not as wealthy as other arrangements might make them, but the essential driving point is that we consider health care, education, social insurance and so on make people wealthier. Thus, in our discussion of wealth we must include them. We cannot look solely at the market distribution of purely market wealth and even attempt to decide whether more or less should be done to try to change that distribution. We must look at the post- all the redistribution we already do situation to be able to make a decision.

To switch from wealth to income to make this point. The TUC has done the calculation about income inequality. Between the top 10% and bottom 10% the market inequality is about 30:1. Maybe that's too high, maybe that's not high enough, your moral choice. When we take account of taxation and benefits that falls, and when we take account of government provided services, that health care and eduation and so on, it falls again. To 6:1. Again, you can say that this consumption inequality is still too much, or not enough, your moral choice. But 6:1 is very definitely different from 30:1.

And what is the relevant ratio to be looking at if we want to make a decision upon whether to do more redistribution or less? Quite, it's obviously that 6:1 one, not the 30:1. And so it is with wealth or poverty or so many other problems. The number we need for our decision is the extent of the problem on the ground, not the extent of the problem before all of the things that we already do.

Assigning reasonable capital values to the effects of both the welfare state and government provided services brings the 10/90 wealth ratio down to anywhere between 20:1 and 5:1. We could and would defend anywhere in that range dependent upon assumptions. Is that too much? Not enough? Entirely up to your moral choices. But it's very different from that 100:1, isn't it, and it's also the relevant number we need to use when thinking about what to do next.

What excellent news about British social mobility

This isn't the way that anyone intends we should read this ONS report of course but it is also a true and valid way of reading it.

Almost a third of the UK population experienced income poverty in at least one year between 2010 and 2013, official data shows.

The figures, published by the Office for National Statistics (ONS) on Wednesday, show that approximately 19.3 million people had a disposable income of below 60% of the national median at some point during the four-year period.

Word. And the actual ONS figures:

In 2013, the UK persistent poverty rate was less than half the overall poverty rate of 15.9%. By comparison, in many other EU countries, the persistently poor make up a higher proportion of those in poverty.

Since 2008 (the first year for which comparable EU longitudinal data are available), the UK has consistently had a persistent poverty rate lower than the EU average.

Almost a third (33%) of the UK population experienced poverty in at least one year between 2010 and 2013, equivalent to approximately 19.3 million people. In contrast, across the EU as a whole, a quarter (25%) of people were in poverty at least once during that period, with a larger proportion of people in the UK experiencing poverty at least once over those 4 years than in many other EU countries.

Worth noting one point: this is relative poverty. So, it's against median income. Further, it's against median income in each country. So we are not, not at all, stating that people in Britain have a lower living standard than those in, say, Romania.

Note first that that persistent poverty is half the average rate. That's pretty good, don't we think? And note also something else. Britain has greater variability in poverty. Variability in income is also known as economic mobility (or as the phrase has become these days, social mobility). For us to have more people who slip into poverty for a time, but not have more people in poverty overall, means also that more Britons must rise up out of poverty. That is, we really do have greater social mobility.

We doubt very much that anyone else will make this point.

There is no such thing as pensions tax relief

Once again we've the sight of a politician not grasping reality when planning a raid on other peoples' money:

Ms Reeves said: “It cannot be right that those on high incomes paying 40 per cent tax only have to save £600 to generate £1,000-worth of pension savings, while those on middle and low incomes have to save £800 to generate the same amount.”

“Replacing tax relief with matched contributions, or a system that was even more progressive, offering higher relief to those on lower incomes than those on higher incomes, should be explored.

“At present, the pensions tax relief rewards those who already have the highest savings and can most afford to save.

“This seems to be a very inefficient use of the £20bn spent on pensions tax relief and is in urgent need of attention.”

There is no such thing as pensions tax relief. There is however something that is pensions tax deferral.

Tax relief would be that you do not pay tax on money put into a pension and also do not pay tax on the pension when it is received. You are relieved from taxes that is. This is not what happens. Instead, you do not pay tax on the money put into a pension: but you do pay the normal income tax on the pension once it arrives. This is not tax relief: this is tax deferral.

Two points flow from this. The first is that we've actually got to call this what it is: it's delaying what tax is paid, not abolishing it. The second is that the costs of this are nothing like what the claim is. Because we do indeed collect income tax upon pensions. And whatever that amount is must be offset against whatever amount anyone wants to claim is deferred. The net amount could go either way, we simply don't know.

Incomes in retirement are usually lower than during a working life and so the tax collected might be less than that deferred as a result of lower tax rates. Or, perhaps, the investment pot has grown so that the income tax collected in the, say, 20 years of retirement is greater than the tax deferral granted in the 40 years of working. We simply do not know the answer there (maybe someone does, but we do not). But until we do know that we cannot have any clue at all about whether tax deferral actually leads to a loss of Treasury revenue or not. It will affect the timing, obviously, but the amount?

What is being done here is to look only at the cost of the deferral upon revenue and to ignore the income that results from said deferral. And if this is the way that we're going to discuss public policy then God Help Us All.

Are benefits a subsidy to workers or employers? Yes

There's an interesting claim out there that benefits are just a subsidy to low wage employers. They can get away with paying low wages because we taxpayers then top that up. Alternatively, we might think of benefits as being subsidies to those people who, for whatever reason, have incomes lower than we think they ought to be. There's an answer to which of these is true, that answer being: yes. Jeremy Warner is one this subject here:

Much the same process is evident today in the growth of Britain’s low-wage, low-productivity economy. There is little incentive for employers to improve their productivity, and therefore their wage levels, when labour is subsidised to the degree it now is from general taxation.

By the by, the tax credit system – enormously expanded and enhanced under Gordon Brown – has created a kind of client state of those partially or entirely dependent on the government for their way of life. It has locked in votes as well as disrupted the normal market process by which the general standard of living is raised.

We would make a slightly different point. Whether benefits subsidises the employer or the employee depends upon which benefit. More specifically, a benefit that is paid because of low income, regardless of whether someone is in or out of work, is a subsidy to the recipient. And it's also an anti-subsidy to the potential employer. It raises the reservation wage (the amount that must be offered to get someone to come into work). However, a benefit that is paid conditional upon being in work will end up as being a subsidy to that employer: for it lowers again that reservation wage.

Here in the UK we really only have one major work conditional benefit, working tax credits. Those really are a subsidy to low wage employers. The impact of the rest of the benefit system is to raise wages.

The interesting out come of this is that if you want wages for the low paid to rise then you should almost certainly be arguing for the abolition of working tax credits. Not that this would increase the incomes of the poor but it would stop that subsidy of low wage employers.

A puzzling policy committment from Scottish Labour

Perhaps we should spend too much time puzzling over whatever it is that Scottish Labour wishes to promise us all given that current indications are that there's not going to be a Scottish Labour soon enough. But their attitude towards food banks does deserve some puzzling over:

His announcement came the day after he promised a £175 million anti-poverty fund that he said would be used to end food banks in Scotland.

Why would we want to end food banks on Scotland?

It's entirely true that use of food banks has soared in recent years. But it's also true that we've got to be very careful in determining whether this is a supply shock or a demand shock. And all the evidence we've got is that it is indeed a supply shock. As the Trussell Trust itself points out, back a decade and more there simply were no food banks (OK, perhaps two or three) in the UK. Now there's a great network of them, alleviating the number of tens of thousands of people each week.

It is possible that there was no hunger back a decade. But anyone with any experience of the benefits system of the past would not claim that it did not make mistakes, that it did not underpay, take a long time to pay, take weeks to start getting the impoverished some cash to alleviate their hunger. Some of us here have direct experience of just those situations.

So, it is not that the benefits system is worse today than it was: it's that we've a new technology, those food banks, to deal with an already extant problem. That is, it's a supply shock, not a demand one.

At which point we come to something of a logical puzzle. The little platoons have worked out a way, a very effective way, to deal with the inefficiencies of the State. The response is thus to nationalise by that very State the thing that alleviates the State's inefficiencies?

Umm, why not just leave the little platoons to get on with the job they are doing so effectively?

These people are mad you know

Sad to have to say it but this is a most startling claim:

Private landlords are benefiting from subsidies worth the equivalent of £1,000 for every household in the UK, the campaign group Generation Rent has claimed, with tax breaks and housing benefit bolstering their gains from house price increases.

Figures shared with the Guardian by the group suggest landlords could be gaining as much as £26.7bn a year from the taxpayer, equal to £1,011 each for the country’s 26.4m households.

So, how have they calculated this figure?

The group’s figure is made up of £9.3bn of housing benefit paid on behalf of low-income tenants, £1.69bn through the “wear-and-tear” tax relief landlords can claim on their properties, £6.63bn of tax that landlords do not have to pay on mortgage interest payments and £9.06bn of tax landlords do not pay on their annual average capital gains.

Oh dear. Capital gains, capital gains on anything at all, are only taxed when a transaction takes place. Thus the not taxing of a capital gain when a transaction does not take place is not a tax break. Similarly, the paying of interest for the purchase of a business asset is tax allowable. This is true of buying a JCB for a building firm, buying a house to rent out and buying a mobile phone mast to provide service to said house. This is not a tax break therefore. It's simply a cost of doing business that must be included before calculating the profit which will be taxed. Wear and tear relief is very much the same thing.

Housing benefit is a little more complex. We can indeed view it as a subsidy to landlords. For without housing benefit being paid we might expect rental prices in general to be lower. We might also view it as a subsidy to low income tenants of course. That's what it's intended as. The way to decide between who is getting that subsidy is to ask, well, what would happen to prices in the absence of it? If we think that removing that £9.3 billion subsidy would mean that rents in general would fall by £9.3 billion then it is indeed a subsidy to landlords. If we think that prices would stay largely where they are but that poor people wouldn't have anywhere to live then it's a subsidy to those poor people. And, of course, if it's the first then we should simply abolish that subsidy immediately.

Which is rather the point of that thought exercise: those who claim that it is a subsidy to landlords should be campaigning for the immediate abolishment of that subsidy. They ain't, so they don't really think it is, do they?

Spotting C Northcote Parkinson in the wild

That Parkinson's Law is generally applicable is obvious. But in the great man's work there are other observations which we can spot occasionally out there in the wild as it were. That the Royal Navy will have more Admirals than ships has been true for some time now, that committees and bureaucracy will, in the end, strangle the life out of any and every organisation is also obviously true. He also pointed out what is happening here:

Civil servants went on a £1billion spending spree in just eight weeks to hit the Government’s target of spending 0.7 per cent of the nation’s income on overseas aid.

The extra cash was spent at the end of 2013 on humanitarian programmes in Syria and the Philippines and a fund which was started by billionaire Bill Gates to help victims of Aids, Tuberculosis and Malaria.

MPs said the fact that the taxpayer funds were spent so quickly raised serious questions about whether value for money was achieved. Civil servants are now set to be called in front of an influential committee of MPs to justify the spending.

The point of spending by a bureaucracy is not to provide value for money. Nor is the point of political spending to actually achieve anything. In this story we combine those two to lethal effect.

The point of political spending is to allow a politicians to announce that something is being done so vote for me. Doesn't matter what is being done, how effectively it is being done or even whether it needs to be done at all, let alone with other peoples' money. The point is the purchase of those votes.

Similarly, the point of a bureaucracy is not to provide value for money. It is to spend the budget allocated to that bureaucracy and to thus make the case that the budget, and thus the bureaucracy, should be larger in the next budget period.

These two have combined here to produce the sight of a bureaucracy shoveling money out the window, into and on anything at all, in order to enable the politicians to purchase votes.

Well done everyone.

The solution Parkinson offered to such problems was simple. It isn't possible to reform such practices. One must simply stop doing the thing itself. No, we don't mean stopping charitable aid to poor people if that's what we all decide we want to do. But stop running it through these inefficiencies of government.

Unemployment, home-ownership and accommodation vouchers outside London

In a much earlier post, Tim Worstall pointed to the findings of Blanchflower & Oswald (2013), which is particularly important when considering that increasing home-ownership is something that the government has been encouraging. They showed “that rises in home ownership lead to three problems: (i) lower levels of labour mobility, (ii) greater commuting times, and (iii) fewer new businesses.” Alarmingly, they found that “rises in the home-ownership rate in a U.S State are a precursor to eventual sharp rises in unemployment in that state… a doubling of the rate of home-ownership in a U.S. State is followed in the long-run by more than a doubling of the later unemployment rate”. They also postulated that since “the time lags are long”, this could explain why “these important patterns are so little-known.” This means that the “negative externalities” felt from housing policy in this time-period may be felt further down the line and that future generations may be in for a nasty unemployment shock. In the UK, we have lots of council housing but still, we supposedly don’t have enough low-cost housing. Milton Friedman famously suggested that, if we want to continue funding education in a way whilst ensuring that it is of a higher quality than what is currently provided by state schools, we should introduce education vouchers. Analogously, if we insist that society should house those who cannot house themselves, why don’t we introduce accommodation vouchers or housing vouchers which people can spend either on an extremely cheap mortgage (though, admittedly, the claim is that we’re short of low-cost housing) or on going towards rent for another place.

If current tenants of council housing are given the choice between vouchers and their current unit, we may see enough people move out for the council housing itself to be sold to real-estate developers which would, therefore, enable development of more accommodation over and above pre-existing units. This would help plug some of the government’s budget deficit, possibly increase the amount of low-cost housing and ensure dispersion rather than concentration of relative poverty (this last possibility would enable effective local, communal altruism).

Of course, such a policy may not be feasible in London where rents are already very high (due to the government’s ridiculous land-use policies) since accommodation vouchers may only serve to increase them further. However, in the rest of the country, rents are far more reasonable and haven’t grown as quickly as they have in London.

Ultimately, the provision of accommodation vouchers in regions outside of London and the sale of council houses could raise some much-needed revenue and lead to reduced house cost and increased labour mobility at the cost of higher rents.

The UK just isn't as unequal as people seem to think

We've often said around here that the national inequality figures overstate the actual amount of inequality that there is in the UK. Yes, there's very definitely regional inequality in incomes. But there's also significant regional inequality in the cost of living. Not all that surprisingly (with the exception of parts of the SW) the higher living costs (most especially housing) are also where the higher incomes are. The UK is very much more unequal in such regional terms than most other countries simply as a consequence of London's domination of the economy. What that in turn means is that consumption inequality, the only form of inequality that we could possibly really worry about, is a lot smaller than the income inequality that we all normally measure.

And from the Taxpayers' Alliance recent report, this little snippet:

The analysis showed a geographical divide in taxpayers and benefits recipients. Households in the East Midlands and London, as well as the south east, east and south west of England paid more in taxes than they received in benefits. All the other regions received more in benefits than they paid in taxes.

Households in the North East of England received an average of £3,175 more in benefits and benefits in kind than they paid in taxes, whereas in London households paid £4,119 more in taxes than they received.

The tax and benefit system also reduces that regional inequality even further.

We're really not as unequal as everyone likes to say that we are.

On the subject of poverty porn

We here at the ASI thoroughly support the idea of food banks. Who wouldn't support the idea of voluntary cooperation to feed the hungry? Even, of a private sector organisation that was able to fill in for the malevolence and or incompetence of the State? However, that's not to say that we need go overboard and swallow uncritically everything we're being told by the poverty porn campaigners. To take just one example, this piece in The Independent.

 Christmas shoppers are expected spend £1.2bn today, as 13 million consumers hand over £21m every minute. But while those who can afford it stock up in the desperate rush for gifts on “Panic Saturday”, another 13 million people will have more sobering reasons to worry – living in poverty in a festive Britain characterised as “two nations” divided.

That 13 million living in poverty. It's a highly arguable number. Depends on what your definition of poverty is and how you're calculating it. And the way that it is calculated is that it's a measure of inequality, not of poverty. It is less than 60% of median income adjusted for household size either before or after housing costs. To get that 13 million figure it is after housing costs. If before, it is rather lower:

The number of people in the UK living in poverty fell by 100,000 in the past year to 9.7 million, according to official figures.

The data suggests the percentage of those in poverty is at its lowest level since the 1980s.

Poverty is defined in this context as when households have an income before housing costs below 60% of the median.

Note that this is still not a measure of poverty. It is a measure of the income distribution perhaps, of inequality, but not of actual poverty.

Fortunately we do also have a measurement of poverty, of actual material deprivation:

Trends in combined low income and material deprivation and severe poverty: New material deprivation items were introduced in 2010/11. The proportion of children living in low income (below 70 per cent of equivalised median household income, BHC) and material deprivation and severe poverty (below 50 per cent of median household income and in material deprivation) for 2011/12 has fallen to 12 per cent and 3 per cent respectively in 2011/12, representing a 1 percentage point fall for both measures compared to 2010/1122. As the proportion of households with children falling below the 70 per cent and 50 per cent low-income thresholds remained the same in 2011/12 compared to 2010/11, this fall was primarily driven by a decrease in the proportion of families experiencing material deprivation.

That is, whatever it is that is being done about poverty is reducing it by the measure that most of us would use in a colloquial sense. Material deprivation is falling. This might even be at the cost of more inequality in the use of those relative numbers. Possible causes there are reductions in general benefits and the targeting of that benefit and or tax system at the truly poor rather than simply at those just under 60% of median. Which, if reducing poverty is your goal seems like a pretty reasonable idea to us really.

What has really happened here is that in the past few decades the institutional definition of poverty has changed. Beveridge was not worrying about whether families had 50% or 60% of what everyone else had. He was worrying about whether there was dripping on the bread for tea. As that problem largely became solved the definition was shifted so that we are all urged now, in the official figures, to worry about inequality, not that actual poverty that so effectively tugs at our heartstrings.

Essentially, as the problem was solved the definition was changed so that there would still be something to berate us all with.

There are, of course, other inconsistencies in the numbers being thrown about:

The Trussell Trust warned it is expecting its busiest Christmas ever in providing emergency rations – with one million people now relying on food banks run by the charity and other organisations.

That's not so either. The general meaning, the colloquial takeaway from that, is that 1 million people are dependent all of the time on those food banks. Not so at all. The actual number is that over the past year 1 million people or so have been served by a food bank once or more times (and generally the limit is three days food in one visit and only three visits allowed). That gives us 8,200 people actually relying upon a food bank on any one day.

Yes, we can still say that that's too many people, we can still say that we're delighted that people give up their own time and money to fill in for the inefficiencies of the State. But it is a rather different picture of the scale of the problem being solved, isn't it?

As 2014 draws to a close there are 13 million people in poverty – including 27 per cent of the 2.5 million children in the UK, according to the Child Poverty Action Group (CPAG).

Again this is inequality of income, this is the below 60% of median equivalised household income. This is not poverty nor is it material deprivation.

Inequality in the UK is now so extreme that the five richest families are wealthier than the bottom 20 per cent of the entire population, according to Oxfam.

Of course. This happens with absolutely every conceivable wealth distribution. For it is entirely possible to have negative wealth (in a manner that we do not record negative incomes). That newly minted Oxbridge graduate about to start earning £100k a year in the City is recorded as having negative wealth as a result of student loans. The truth is that if you've got a £10 note and no debts then you are richer than all of the bottom 20% households in the wealth distribution. No, not just richer than each one of them, richer than all of them in aggregate.

Meanwhile, the housing charity Shelter predicts that 93,000 children will be homeless this Christmas, as the number of homeless families trapped in temporary or emergency accommodation exceeds 60,000.

Interesting how that number is made up don't you think? As a society we provide temporary and emergency housing for those that need it. When we do so they are still classed as being homeless. This does have an inevitable effect: the crisis never goes away, does it?

The general numbers we get thrown at us about poverty in the UK are not actually about poverty in the general meaning of that word. They are about inequality in the distribution of income. Of course, you can worry about that inequality if you want to do so. But the reason those measurements have been changed, the reason that the "relative" so often gets dropped from "relative poverty", is because those who wish to spread this poverty porn know very well that most of us are concerned about, would happily do something about, actual poverty and as to inequality, well, there's a general reaction of "Meh".

As such we must be fed the figures about relative poverty so as to tug at our heartstrings as if it were absolute poverty, that material deprivation.

Or, the TL:DR version: they're fiddling the figures.

Finally, one further calculation. There's some 8,000 people a day receiving those food parcels. Let's say each parcel is worth perhaps £30 (we've got to use some sort of estimate after all). That's around and about a £90 million a year problem. One of the solutions proposed is that the minimum wage should be raised up to the Living Wage. That's a pay rise of £2,000 a year for 1.3 million people or so (taking only the number paid the current minimum wage, not including any effects on those between it and the Living Wage).

It's a £2.6 billion partial answer to a £90 million problem.

It might well be better to continue with the food bank solution.