The start of a political meme
A small exercise in trying to spot where a political meme starts out. For this little story is making its way around the web and I am sure that it will become a standard part of the talking points over the minimum wage in the US. It's this idea that servants today are being paid less than servants were in 1910 America. It comes from this piece by David Cay Johnston:
Consider the family cook. Many family cooks now work at family restaurants and fast-food joints. This means that instead of having to meet a weekly payroll, families can hire a cook only as needed. A household cook typically earned $10 a week in 1910, century-old books on the etiquette of hiring servants show. That is $235 per week in today’s money, while the federal minimum wage for 40 hours comes to $290 a week. At first blush, that looks like a real raise of $55 a week, or nearly a 25 percent increase in pay. But in fact, the 2013 minimum-wage cook is much worse off than the 1910 cook. Here’s why: The 1910 cook earned tax-free pay, while 2013 cook pays 7.65 percent of his or her income in Social Security taxes as well as income taxes on more than a third of his pay, assuming full-time work every week of the year. For a single person, that’s about $29 of that $55 raise deducted for taxes. Unless he can walk to work, today’s outsourced family cook must cover commuting costs. A monthly transit pass costs $75 in Los Angeles, $95 in Atlanta and $112 in New York City, so bus fare alone runs $17 to $27 a week, eating up a third to almost half of the seeming increase in pay, making the apparent raise pretty much vanish. The 1910 cook got room and board, while the 2013 cook must provide his or her own living space and food.
There's an amusement at complaining that the cost of government has gone up there.
But given that these numbers are broadly correct what is the problem with the basic argument being made? That servants are now paid less well than their comparators 100 years ago?
For this certainly isn't something we would expect to see at all. Inequality now is no higher (at the very least it is no higher) than it was then and the median and mean wages have very definitely risen over that time span. So, given what we do know about wages in general of the past century how can we reconcile this?
The answer is of course that in looking at a cook Johnston is not looking at a fast food worker now. Yes, they both prepare food but a cook in 1910 was a senior and important part of the servant household. It was a position reached only after many years of work at a lower level. The cook was, along with the housekeeper and the butler, very much part of the management of the household and part of, to use a very strange phrase indeed, the servant aristocracy. You would also only find cooks in a grander house. To compare such to current day fast food workers is just being historically obtuse.
The correct comparison for a current day fast food worker would be to the sort of serving jobs that an untrained teenager might hope to get in 1910. And in the cooking side of things that would, in 1910 terms, be scullery maid. Who would, in London, have been paid perhaps £10 a year, or at the exchange rate of the time, some $50 a year.
And yes, I do think we can support the contention that today's fast food workers do make more than that $50 a year as adjusted for inflation.
But there we are, of such tricks are political memes created.
The Universal Credit can still improve Britain's welfare
Clearly, responding to the challenges posed by 21st Century welfare is not as simple as throwing more money at the problems to make them go away. With hundreds of thousands of people failing to claim benefits that they are entitled to, any reform must aim to reduce the complexity of the claiming benefits for eligible individuals, whilst increasing work incentives. Ensuring that our welfare system is simple to use for those that need to is an important step on the road to raising the incomes of the less well off to a reasonable standard.
Sources: Office for National Statistics/HBAI statistics from Department for Work and Pensions
It is these goals of simplicity and increasing work incentives that inform Universal Credit (UC), which first came to prominence in Iain Duncan Smith’s exposition of the scheme in a speech to the Conservative Party Conference in 2010. Discussing his intentions, he hoped that Universal Credit would “restore fairness and simplicity to a complex, outdated and wildly expensive benefits system”.
Almost three years down the line, Universal Credit still features prominently in the media, but largely for the wrong reasons. There is no doubt that there have been serious shortcomings in the implementation of Universal Credit to date, which have been detailed in the National Audit Office’s latest report on the progress of the project. The report highlights millions of pounds wasted on failed IT programmes, unrealistic timetables for implementation and a lack of transparency; these issues hardly fill one with confidence for the future of UC.
It is hoped that the recent appointment of Howard Shiplee (former Olympic executive) as director-general of the project will bring the experience and skill necessary to steer Universal Credit back on course. This piece will argue that despite the negative publicity surrounding Universal Credit’s implementation thus far, the concept itself is still worth supporting and will help large numbers of people find work and escape severe poverty. Behind the partisan games of political football being played out between parties lies consensus; all three major UK parties support Universal Credit in principle, and the reasons why will be set out below.
How does Universal Credit work, and what are its advantages?
Universal Credit is part of the Coalition’s Welfare Reform Act 2012, and aims to replace six working-age benefits/tax credits with a single welfare payment: income-based jobseeker's allowance, income-related employment and support allowance, income support, child tax credit, working tax credit and housing benefit. This payment will be accompanied by a single, constant taper rate (the rate at which a benefit is reduced to take account of earnings) of approximately 65%.
Consolidating all existing working-age benefits and tax credits into one payment simplifies the system massively: one application, one statement of earnings and entitlements, and one coordinating agency. A welfare system comprehensible to those that need to make use of it is essential. It ensures that the greatest possible number of those in severe poverty are provided with the minimum income they are entitled to. Making the UK’s benefits system easier for claimants to understand will help ensure that taxpayers’ money goes to those that need it. Therefore, the adoption of Universal Credit is expected to substantially increase take-up amongst those eligible to claim: tackling the trend of rising severe poverty that has taken place over past years.
Of course, it is essential that those who claim benefits are encouraged to find work, and the most effective way of doing so is by ‘making work pay’. This is, at least in part, accomplished through a lowering and streamlining of effective marginal effective tax rates (METRs). Marginal effective tax rates represent the amount of money forgone by working more hours through loss of welfare money and paying taxes. METRs under the current system are often inordinately high and unpredictable (see examples in the charts below). As a consequence, they act as a major disincentive to work for many people.
Universal Credit will help to address problematic marginal effective tax rates by introducing a single taper rate of 65%, meaning that those on low earnings will be better off on UC and work will pay more. Work incentives are also increased by the inclusion of an “earnings disregard” (£700 per year for single people): a significant improvement on the standard £260 per year (£5 per week) of the current system. UC’s taper rate will therefore only apply to earnings above this threshold, improving the attractiveness of work.
It is inevitable that in the short-term, more resources will be required to set-up the machinery by which Universal Credit can operate effectively. Official estimates tout the figure of £2.4bn as the total cost of implementing UC, but focusing purely on the short-run cost fails to highlight potential efficiency savings and the reduction of various costs that arise from unemployment. In the Centre for Social Justice’s report Dynamic Benefits, welfare reform proposals largely indistinguishable from the DWP’s version of Universal Credit are estimated to increase UK GDP by £4.7bn. In fiscal terms, the short-term costs of Universal Credit borne by the taxpayer are more than compensated for by significant increases in employment and the consequent prosperity this engenders.
Answering the detractors
There have been various criticisms levelled at UC which raise legitimate concerns about the specifics of the DWP’s proposals. One of the most common objections is that Universal Credit will be managed largely online, meaning that those who struggle to connect to the Internet or lack computer literacy may have trouble claiming benefits they are eligible for. Whilst it is true that without suitable provision of computing facilities and guidance this would affect some people, plans to install 6,000 new computers across Jobcentres is likely to remedy any lack of digital access. Claimants who can make use of the online system from home will benefit from not having to travel to their local Jobcentre, and at worst there will be no change from the current system for those who require assistance with their claims.
A further potential drawback of Universal Credit that has been highlighted is the move to welfare payments on a monthly basis, rather than the current system’s varying weekly, fortnightly and (in some cases) monthly payouts. The Social Market Foundation’s report on Universal Credit, Sink or Swim?, cites a sample of thirty households affected by the move to UC: the majority of which held negative opinions of monthly payments. This opposition stemmed largely from the issue of having to budget more responsibly, and concerns about running out of money before the end of the month. However, it can be argued that encouraging greater responsibility for financial planning could prove advantageous for households: for example, gaining experience of budgeting in jobs with a monthly salary. Moreover, the Department for Work and Pensions is looking to include the options of advance UC payments and alternative payment arrangements in extenuating circumstances, helping to mitigate any difficulties experienced from adjusting to monthly budgeting.
Conclusion
After starting in October this year, Universal Credit is due to expand to Jobcentres in Hammersmith, Rugby, Inverness, Harrogate, Bath, and Shotton; it is planned that this expansion will be completed by Spring 2014. Whether the government will meet its objective of UC being fully operational across the country by 2017 seems unlikely, but it is hoped that with new management and swift responses to the criticisms highlighted in the National Audit Office’s recent report, this important reform to Britain’s welfare system will be up-and-running by the target date.
The temptation to confuse valid criticisms of Universal Credit’s implementation with condemnations of the overall policy itself must be resisted. No policy is perfect, but as discussed above, there are concrete benefits that Universal Credit can bring to the lives of Britain’s poorest people. It will incentivise work, alleviate poverty, encourage responsible budgeting, and (in the long-run) bring the plethora of economic gains that are linked to increased employment. In these ways, the Universal Credit can work.
Should Britain have a written constitution?
Should Britain have a written constitution? Actually, while there are unwritten bits such as royal prerogatives and parliamentary conventions, most of it is indeed written. There is the 1215 Magna Carta, bits of which are still in force (though limitations on the monarchy started earlier, with measures such as the 1100 Charter of Liberties). And there is the 1689 Bill of Rights that limited the monarch’s ability to raise arbitrary taxes and interfere in justice and elections. There are various Acts of Parliament that are accepted as constitution, such as the 1689 Act of [religious] Toleration, the 1689 Habeas Corpus measure, the Reform Act of 1832, and more recently, the devolution measures. Not to mention various EU laws.
But no Parliament can bind its successor, so in theory any of these measures could be ripped up at any time. That is hardly a constitution at all: one of the points about a constitution is that, once it is agreed, it should be hard to change. Yet simple majorities in Parliament have proved enough to change our fundamental relationship with the EU, to change radically the composition and powers of the House of Lords, to reorganise local government, to limit access to trial by jury (too bad, Magna Carta), regulate free speech in newspapers (sorry, Bill of Rights), to hold suspects for prolonged periods (ho hum, Habeas Corpus) and much more.
It is an old but true adage that hard cases make bad laws. Until recently, we have maintained the principle of free speech, reckoning that even though it may be abused, on balance we gain more from people being able to speak their mind. But nasty cases such as racial abuse and phone hacking have torn up that long-held part of the constitution, and in the blink of an eye.
Some 95 members of the House of Commons (and 45 members of the Lords) are part of the payroll vote – ministers, whips and other government officers. Another 95 would probably love to be part of it, and there are equal numbers of aspirants for office on the Opposition side too. Parliament was originally set up to protect the public from the Executive, but now at least half of it is part of the Executive, or the shadow Executive. How can we then expect Parliament to limit Executive power over our lives?
Or limit itself, for that matter? There are no limits on government spending, deficits, debts, or on the ability to create new and arbitrary taxes (such as the 50p top income tax rate, which proved to be not just an envy tax, but a counterproductive envy tax)?
Answers on a postcard please. We could probably start by moving the Executive out of Parliament entirely. After all, we have set up a Supreme Court across the square from the House of Commons (another change in governance that the public were not asked about), so why not confine ministers to their ministries and only allow them out to be grilled by Commons committees? Then perhaps Parliament would revert to its original role, of protecting us from government power, rather that extending it.
Dr. Eamonn Butler is author of Foundations of a Free Society.
Raise wages, perhaps, or possibly lower benefits
We have one of the usual arguments here about immigration. An employer, in this case Dominos, says that they could hire 1,000 people immediately if only people could be bothered to to do the work they are offering. The response was that perhaps they should try paying a little more in order to encrouage people to apply:
The immigration minister, Mark Harper, has hit back at employers who say they have to recruit foreign workers from outside Europe to fill low-paid jobs by telling them they should offer better wages. Harper said that Lance Batchelor, the chief executive of Domino's Pizza, should reflect on the salaries he was offering if he could not fill 1,000 vacancies without recruiting unskilled staff from outside Europe. The immigration minister told the Commons home affairs select committee: "He should probably pay his staff a little more and he might find them easier to recruit. It's a market."
That's a fine answer as far as it goes: but it's not really a complete analysis of the situation. For what it's leaving out is the rigging of that market by government itself. We're all aware that we have a serious problem with the tax and benefit withdrawal rates on the low paid in this country. There are millions who face marginal rates above 60% and even tens of thousands facing them of over 100%. And it is indeed the change in disposable income which is the incentive to work or not, not the wages that you are nominally being paid.
OK, now think of this same problem from the other side. Say Dominos is paying £7 an hour (I've no idea what the correct number is) and they cannot get the labour at this price. Sure, perhaps they should offer more to get what they want. But precisely because of the high tax and benefit rate they have to offer much more to change behaviour. If they offer another £1 an hour then only 40 p to nothing of that gets through to the disposable income of the worker they're trying to incentivise. So part of their problem is indeed that the government taxes the working poor too highly. A rise in hte personal allowance would help here.
But there's one more thing. Recent immigrants are not given access to hte full panoply of the welfare state and its subsidies. Therefore, as they work they face lower benefit withdrawal rates and thus greater changes in their disposable income from taking work or not. We've thus a rather perverse set of incentives built into how we do things. Recent immigrants are always going to be more likely to take low paid work than indigenes are, simply because we've structured the welfare system to create the incentives this way.
The Internet Watchmen
As Tim Worstall notes, new government plans to block online terrorist and extremist content are extremely worrying. Along with the introduction of default 'opt-out' porn filters and the criminalisation of rape porn, they are another example of Cameron's politicised censorship of the web. Whereas reducing the proliferation of child abuse images is a good thing, this new measure results in the censorship of ideas. Furthermore, whilst it is relatively straightforward to identify child abuse imagery, it is much less so (and arguably impossible) to decide which ideas are 'too dangerous' to viewed in the UK.
Aside from these issues there is also the question of how such a content block would work in practice. In many ways, how to block can be as problematic as the censorship itself.
The government has said that it wants to model the new blocking unit on the Internet Watch Foundation: a part-EU, part internet industry-funded UK 'hotline' for child abuse imagery. The IWF assesses material submitted by the public and flags up UK-hosted content to be removed by service providers. Content from outside the UK is added to a URL 'blacklist' which ISPs then block UK access to.
There are a number of issues with this model. First, there is no guarantee that what the IWF flags up is actually illegal. With no legal clout, the IWF acts on content it deems 'potentially illegal' - and there is little to stop legitimate content getting wrongly marked. One controversial case saw a picture of an album cover on Wikipedia getting blocked until the backlash forced the IWF to reverse their decision. Appealing against the IWF's decisions can be a difficult and opaque process, not least because of the difficulty of appealing against the illegality of an image you can't even see.
Despite the IWF's lack of legal authority, the Open Rights Group claims that their blacklist has never been assessed by a court or legal body. This makes their actions rather murky. Given its sensitivity ISPs can't see the content of the blacklist to make their own judgement; they must either block all of it or none. On top of this, there are also problems with the technology ISPs use to actually block the URLs - which can be unreliable and block too broadly.
In addition, from April 2014 the IWF will shift from a being reactive body -acting only on content sent to it - to a proactive one, actively seeking out images of abuse behind pay walls and on peer-to-peer networks. This approach is another step in the active policing of the web, and is also likely to be followed by the new anti-extremist unit.
Issues of political and religious censorship are much more complicated than that of child pornography. The unaccountability of the IWF and its lack of judicial oversight therefore make it a poor model to copy for what is an incredibly controversial (and dangerous) policy. Since the new unit will be publicly funded, its decisions may come under greater legal scrutiny. On the other hand, a government-funded body could become politicised and overzealous in its mission. In any case, a clear due process and a rigorous appeals system will be absolutely essential.
Crime & security minister James Brokenshire says an update on the proposals will arrive shortly, though the fact that civil liberty groups claim not to have been consulted on the matter is rather worrying. The sensible thing to do would be to scrap this idea altogether. Since this is unlikely to happen, both the politics and the technicalities of the initiative are bound to prove difficult indeed.
Taxes were too low in the UK this year by precisely £604.48
The Guardian, not that it has quite realised it, has proven that in the very worst case taxes were too low in hte UK by £604.48 this year. Here is the proof:
Members of the public have donated almost £900,000 to the government so far this financial year to help pay off the national debt or boost public spending, figures from the Treasury show. Clearly the 11 contributions, ranging from 78p to £520,000 and totalling £898,539.80, are a drop in the ocean of Britain's £1.2 trillion national debt, which chancellor George Osborne announced last week was set to be £18bn lower than forecast in March. But it is the highest amount since £1.08m was given in 2010. The figures, supplied under a freedom of information request, showed that most of the money donated since April – more than £897,000 – was in the form of bequests. Gifts and unclassified payments add up to £604.48.
This is, of course, rather different from what most people actually say about taxes. But then we do know that there is this thing called revealed preferences. Do not look at what people say as a guide to their true views but at what they do. And if you think that taxes are too low then you will indeed send in some extra cash to the Treasury. And some people did as above to the tune of that six hundred quid. We can ignore the bequests as those aren't actually bourne by the people doing the bequeathing. The incidence of those gifts is clearly upon those who did not inherit it instead...and as we know it's rather easier to call for other people to pay more in tax than it is to be willing to cough up yourself.
I've made this point in several different places over the years but it has only just occured to me that I've been missing a trick. For we do have estimates of how much tax people ought to be paying but aren't through a varietey of means. Let's take the egregious Richard Murphy's £120 billion estimate of not paid tax as a result of tax avoidance and tax evasion. We can even pretend that this figure is correct if you like. Now we can apply revealed preference to this. That number might be what politicians say people should pay but by the revealed actions of the populace in dodging it it isn't what the populace thinks the tax take should be. That is, if we look at additional taxes voluntarily offered then taxes are too low by a few hundreds. And applying exactly the same logic we can also say that taxes are too high by £120 billion. And that latter sounds more likely to me too.
No, Britain isn't a developing country
Britain is a developing country, says Aditya Chakrabortty. He bases this largely on the fact that it is below some poor countries on a number of international rankings. (Never has an article owed so much to Wikipedia’s “List of countries by” pages.) Some of the rankings seem obscure: is Barbados's superior ‘ground transport’ system worth caring about? Does Mali beating the UK in terms of business investment tell us anything? Others rely on the reader not knowing much about the country Britain does worse than: the UK may have a worse road network than Chile, but Chile's Public-Private Partnership roads have made it a regional leader in infrastructure.
One thing that Chakrabortty is particularly concerned about is graphene, a super-strong substance first isolated in 2004 and pioneered by scientists at the University of Manchester. What worries Chakrabortty is that South Korean firms are bringing graphene to market much more quickly than British firms. This, he says, is emblematic of “a familiar pattern of generating innovations for the rest of the world to capitalise on”.
I guess that’s supposed to be a bad thing, but it doesn’t sound like it to me. It’s good when inventions spread beyond their birthplace: to use Matt Ridley’s metaphor, the ideas ‘have sex’ and mutate more quickly. Overall, the world – and Britain, if for some reason that’s all you care about – has done well from Tim Berners-Lee’s world wide web being capitalised on by non-Britons in Silicon Valley. Germans are better off that Japanese firms make cars as well as Volkswagen, and Finns are better off that Californians tried to make mobile phones better too.
Chakrabortty might object that he doesn't mind South Koreans doing well with graphene, he just wishes Britons were too. But why graphene in particular? Chakrabortty’s counterpart in Seoul could write an identical piece worrying about South Korea’s relative weakness in finance, tourism, the cultural arts, or telecommunications. When firms in different countries specialise in different areas it is pointless to look at any single product or sector to judge which country is healthy.
There’s not much point in comparing the growth of rich and poor countries – poor countries are playing ‘catch up’ and can grow quickly by applying innovations already developed elsewhere. But if Britons should be worried about something, it’s the UK’s centralised public sector, which, lacking the profit motive as a crucible for new ideas, is less innovative than international equivalents. For instance, the British health system essentially free rides on innovations in America.
Chakrabortty asks “How can any nation that came up with the BBC and the NHS be considered in the same breath as India or China?”. Good question.
Chart of the week: US home equity withdrawal picks up
Summary: US mortgage equity withdrawal has picked up – but the scope for more isn’t there
What the chart shows: The chart shows mortgage equity withdrawal as a share of the change in personal disposable income
Why the chart is important: In 1957, US households’ equity in their houses was three times the value of their mortgages. As recently as 1989, it was twice as much. By Q1 2009, the value of the mortgages was close to twice the equity. Since then, by dint of furious deleveraging, US households have restored parity between mortgages and homeowners’ equity. In recent quarters, they have taken to withdrawing some equity from housing in order to underpin spending. But, the scope to do so on a pre-crisis scale – when mortgage equity withdrawal could reach up to 10% of the change in disposable income – is no longer there. This means that US consumption will depend on the actual change in household incomes, with some input form a pure wealth effect. Given the current weakness of US income growth, this means that the American recovery, while continuing, will remain sluggish.
One of those plans that gang aft agley*
I think we'd all probably consider it desirable that children get to go to school and to go out and play rather than have to labour for their bread from an early age. However, quite how we achieve that wondrous state is something that is more contentious. For there's good evidence from India that simply making child labour illegal increases the amount of it that happens.
There are many policy options to readdress this. Bans and regulations against child labour are among the most popular worldwide. When perfectly enforced, bans force employers to forgo the use of child labour. However, it is not clear that such laws will always lead to reductions in child labour. In reality, governments in countries where child labour is prevalent, rarely have the capacity and resources to perfectly enforce regulations on child employment, as documented in a recent study by economists Eric Edmonds and Maheshwor Shresthra (2012). According to a simple model by Kaushik Basu (2005), when bans are imperfectly enforced, they raise the cost of hiring children, as employers anticipate facing stiff fines or other penalties when caught using child labour. Thus, when imperfectly enforced, bans may simply lower the wages that children are paid. If families send their children to work out of necessity, this can have perverse effects, as it lowers the income for families relying on child labour. Therefore, a drop in child wages may compel families to supply more child labour, rather than less.
If the entire brood is starving then you might send one or two out to work and try to educate the others. But if that ban on those first two leads to their wages dropping you might need to take all of them out of school. And it is very much this sort of effect that they've found.
We might say that this could be solved just by perfect implementation of the law: well, good luck with that among India's 1.2 billion people.
My own opinion on this is that many of the things that we consider desirable aspects of society, no child labour, the economic emancipation of women, education, shorter working hours and so on, they're the results of an increase in economic wealth, not a cause of it. Sure, there's something of a feedback going on but it's being rich enough to not need the child's paltry wages that leads to their being educated. That child mortality rates fall (an excellent example of people very definitely getting richer that doesn't necessarily show up in monetary of GDP figures) so that women can do something else with their lives rather than just pump them out. That there is that surplus available to invest in education, that again there is that surplus available to even have the concept of leisure, it is this that drives the improvements we wish to see. Not the passing of laws that insist we must have these things, or stop doing them, but that as wealth increases we can afford not to do the undesirable things and also afford to do the desirable.
It's growth first in other words.
*Whatever it is that this phrase actually means.
How do politicians manage to believe such things?
I'm slightly boggled by this statement:
Tim Farron, South Lakes MP and chair of the all-party parliamentary hill farming group, said: "We need to do all we can to support our farming industry, particularly in the uplands where life can be a real struggle. This support and funding could make a massive difference to upland farmers throughout Cumbria and help show the next generation that there is a real future in a career in farming."
It appears to me to be an example of cognitive dissonance. For we're also being told this about that same occupation:
An upland farmer earns, on average, only £6,000 a year, which has led to a number of people leaving the industry.
That you can only earn £6,000 a year as an upland farmer is proof perfect that there is not a real future in a career in this type of farming. It is true that not everyone is paid their marginal product but for self-employed people like these hill farmers it is indeed so. Their earnings are exactly the measure of the value that their labours are adding. And given that we're in a country where the GDP per capita is some £25,000 (recall, this includes all of those who do not contribute to the money economy at all) they are producing remarkably little value as compared to the rest of us.
This is telling us that hill farming is something we should stop doing therefore, not something we should be devising ways to prop up. We would all be richer if these farmers simply stopped and went off to do something else.