Ed Miliband is right: in-work poverty is the scourge of our time
Ed Miliband has given his first Commons speech since losing the election, where he's focused on inequality and low pay in Britain. He’s almost entirely wrong on the first of those, in my view, not least because most of the problems he identifies come from perceptions of inequality, which are not driven by reality. But on low pay, he makes an important point. In-work poverty really does appear to be the scourge of our time, and free marketeers ignore it at their peril.
By poverty, I do not mean relative poverty, although that is the definition the government uses to define the word. (A household is defined as in poverty if it earns less than 60 percent of the median wage.) I prefer the approach of the IEA’s Kristian Niemietz and the Joseph Rowntree Foundation, which calculates the cost of a basket of goods that most people would consider essential to living a decent life in modern Britain.
This approach is in the spirit of Adam Smith’s conception of poverty:
A linen shirt … is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct.
According to the JRF, single working-age people need to earn at least £17,100 before tax to live decently; a couple with two children need to earn £20,200 each (versus £13,900 in 2008), and a lone parent with one child now needs to earn more than £27,100 (versus £12,000 in 2008).
Because real wages have fallen across the board since 2008, and the cost of living has risen, an increasing number of people in full-time jobs are still in poverty. My fear is that this is not simply a product of the financial crisis and Great Recession, but a reflection of a longer-term trend.
Wages usually reflect worker productivity, so simply jacking up the minimum wage is no solution to this. Any worker who is less productive than the minimum wage costs will just not be able to find a job. In general, when minimum wages rise, so does unemployment. So there is no simple way to boost workers’ incomes by forcing wages up.
Changes like automation and offshoring work (to call centres in India, for instance) will raise global living standards overall, and should be welcomed for that reason, but they may hurt the incomes of low-skilled British workers by increasing competition for the jobs they have been doing and leaving only relatively unproductive work left to be done. Some people say low-skilled immigration does the same, but labour market liberalization seems to be a tidy solution to that problem.
The techno-pessimist view that machines may simply replace workers in some jobs, without creating new ones for them to move into, is not impossible or even particularly unlikely. Even if it is wrong, improvements in automation or competition from abroad may make low-skilled workers’ marginal productivity too low to earn a decent amount. Their productivity might just not be enough to earn as much as we would like them to.
As I see it, there are three possible ways we could reduce in-work poverty:
- Reduce the cost of living. Instead of trying to raise workers’ take-home pay, we could reduce the cost of things they want to buy. Housing and childcare are two of the most expensive things in most people’s budgets. Housing could be made much cheaper if the supply of housing was increased by liberalising planning. Britain has the tightest staff:child ratio requirements in Europe, and in a labour-intensive industry like childcare that has driven costs extremely high. Allowing as many children per staff member as they do in, say, Denmark would let costs fall considerably. However, both of these reforms, as well as most other supply-side deregulations, face considerable political opposition.
- Cut taxes on low-income earners. The government has already pledged to raise the income tax threshold to be close to the minimum wage level. But National Insurance payments kick in at a much lower level – £155 a week, or 23 hours of minimum wage work. Raising this threshold, ideally to kick in after forty hours of minimum wage work, should be a major priority. But the higher the threshold goes, the fewer of the poorest people it helps, because they are already earning less than the threshold amount.
- Just give money to poor people. Whether we do it through something like a Negative Income Tax, a Basic Income, or a significantly simplified and reformed tax credits system, direct cash transfers seem to be a good way of boosting the incomes of the poor without messing markets up in other ways. If they are only conditional on income, they can be designed to avoid severely perverted incentives that exist in the current welfare system. But paying for this would mean major changes to existing benefits system, which the Universal Credit reforms have shown are a minefield. There is also a danger that this kind of system would be implemented as a costly addition to existing welfare payments, rather than a revenue-neutral replacement.
In practice, some combination of the three is probably our best bet. There is no single political grouping that favours all three of these policies; indeed the false solution of massive minimum wage hikes is popular across the political spectrum.
This is worrying, but there is so much evidence against it that it will surely fail, and accepting that we have a problem may be the first step to solving it. So, in highlighting low pay as one of the central problems of the 21st Century, allow me to say something rarely heard on this blog: Ed Miliband is right.
David Cameron is wrong and Owen Jones is right
Not quite a headline we thought we would ever offer. But it is true here:
In contrast to the nation’s deficit, Cameron’s rational, evidence-based approach to drugs has disappeared. The self-evidently catastrophic war on drugs – an unforgivable waste of life, wellbeing, treasure and time – is now to be intensified. A new crackdown on “legal highs” will now mean the criminalisation of, among other substances, poppers, a substance particularly popular among gay men interested in enhancing their sex lives.
The idea of making yet more drugs illegal is simply the wrong way to be going about things:
We have a clear choice. Do we leave drugs in the control of murderous drug gangs who destabilise entire nations – or do we regulate them, bring in tax revenues, and stop locking up harmless youngsters?
Quite so, we legalise.
We, being proper liberals, know that it's entirely your right to stick whatever you wish into your own body. Interesting parts of other consenting adults, cheeseburgers and whatever form of toot it is that brings on whatever level of toot! toot! feeling that you desire. We will not be able to convince conservatives and Puritans of this.
However, we should be able to convince Conservatives, the most pragmatic of the British political parties, that the War on Drugs simply does not work:
As a London School of Economics report highlighted last year, the 44-year-old so-called war on drugs has achieved nothing, except “mass incarceration” in the US, repression in Asia, “vast corruption and political destabilisation” in Afghanistan and west Africa and the spread of HIV in Russia. “The strategy has failed based on its own terms,” the report declared. “Evidence shows that drug prices have been declining while purity has been increasing.”
That it's morally wrong to have a war on the right to party may well be true and we'll keep on saying so. But that it doesn't in fact work is in itself sufficient justification to simply stop doing it. And if that means allying with Owen Jones, or indeed anyone else from any corner of the political spectrum, then so be it.
Far from banning any more drugs we need to legalise them all now.
Wait a minute: is the government self-interested or isn't it?
Are politicians and voters public-spirited or selfish like firms in the marketplace? Sam argued that lots of voting and legislating behaviour was 'sociotropic', and that it couldn't be squeezed into a model where actors maximised their narrow self-interest. But Sam's argument is best taken on the libertarian margin: public choice theory is probably less true than the average libertarian economist thinks; but it's probably still more true than the average person thinks. Five new papers illustrate this nicely. Firstly, a finding that goes against public choice. Public choice says governments do what's likely to maximise their own power/votes/income. The alternative is that they do what they honestly think is good for the country/citizenry as a whole. According to an experiment from Thad Kousser & Daniel M. Butler legislators play public goods 'games' (imagine game theory scenarios where you get real payouts for the outcomes you achieve) more co-operatively than undergraduates. I suppose playing less selfishly than 19-year-old students is hardly a huge achievement but it's something.
Now here's four supporting the public choice model. Jonathan Brogaard, Matthew Denes & Ran Duchin, all at the University of Washington, find that connected firms get much better government contracts. Specifically, "connected firms are 10% more likely to win a contract. Connected firms receive larger contracts, with longer durations and weaker incentive structures". Pretty nice for them, but not so nice for us, and definitely something predicted by public choice and crony capitalism.
In "A Structural Model of Electoral Accountability" by S. Borağan Aruoba, Allan Drazen & Razvan Vlaicu we discover that term limits make governance worse by leaving top politicians nothing to exert effort for after they've got as far as they conceivably can. Looking at US state governors 1982-2012, they find that first-term politicians do considerably less when they can't win a second term. They say that a two-term regime improves voter welfare by 4.2% over a one-term regime, and a three-term system could be even better.
This one's probably obvious: Joshua L. Kalla and David E. Broockman show through an experiment that donors get much more access to their congressmen than non-donors.
The experiment focuses on whether contributions facilitate access to influential policy makers. In the experiment, a political organization attempted to schedule meetings between 191 congressional offices and the organization's members in their districts who were campaign donors. However, the organization randomly assigned whether it revealed to congressional offices that prospective attendees had contributed to campaigns. When informed prospective attendees were political donors, senior policy makers made themselves available between three and four times more often. T
Finally, perhaps the most damning paper shows that perceptions about a revolving door between politics and business are borne out in fact. "Is the Revolving Door of Washington a Back Door to Excess Corporate Returns?" by Mehmet İhsan Canayaz, Jose Vicente Martinez & Han N. Ozsoylev finds that "firms where current public officials become future employees outperform other firms by a statistically significant 7.43% per year in terms of four-factor alpha". You might just think that government workers are more attracted to better firms, but show that "such financial gains are significantly reduced during periods in which presidential executive orders restrict revolving door movement", ruling this out. However, it still seems possible to me that government workers are talented and know the system and that this improves the firms' returns in 'legitimate' ways.
I still think libertarian economists might have run a bit far with the public choice model, but this is a nice reminder that for all that it does bear substantial fruit.
George just doesn't quite get it, does he?
A quite wonderful rant from George Monbiot. Apparently all those firms that pay their employees lots of money are in fact just vampires sucking the lifeblood and all that is good and holy out of said employees:
To seek enlightenment, intellectual or spiritual; to do good; to love and be loved; to create and to teach: these are the highest purposes of humankind. If there is meaning in life, it lies here.
Those who graduate from the leading universities have more opportunity than most to find such purpose. So why do so many end up in pointless and destructive jobs? Finance, management consultancy, advertising, public relations, lobbying: these and other useless occupations consume thousands of the brightest students. To take such jobs at graduation, as many will in the next few weeks, is to amputate life close to its base.
I watched it happen to my peers. People who had spent the preceding years laying out exultant visions of a better world, of the grand creative projects they planned, of adventure and discovery, were suddenly sucked into the mouths of corporations dangling money like angler fish.
It is just ever so slightly odd to hear a man reputedly of the left complaining that the workers are receiving too much money. We did rather think that was the point of said left, to ensure that the workers by hand and brain received their just allocation of the moolah.
Other than that it's the arrogance on display here from Monbiot that is so breathtaking. It may be that he thinks that the meaning of a good life is to teach, to create. But that's his view of life, one he's entirely welcome to of course, but he's not welcome to impose it on others. Others can, and do, have entirely different conceptions of what that good life is. Perhaps to be able to raise and take care of a family: something that a decent income does make rather easier. Heck, some people even enjoy being bankers.
Or to be more serious about it, what on earth is anyone doing calling finance "useless"? Or indeed lobbying? Finance is the mobilisation of the savings of this generation into the building blocks of the better world of tomorrow. This is useless? Or badgering a minister into dropping one or other of their foolish and ill thought out plans as a lobbyist does not add value to all our lives?
So it's not just that he's wrong in trying to impose his own view of life upon others, it's that he's not even got a reasonable view of what those others are in fact doing.
So, situation normal on the Guardian comment pages then.
It's a wonderful life
The name of Nigel Vinson may not be one bandied across the breakfast tables of Britain, but he has done more, for longer, to promote the cause of personal and economic freedom than most. And, raised to the peerage (as Lord Vinson of Roddam Dene) for that and for his work in re-shaping and promoting British business, his impact continues. So it is good to see a new biography, Making Things Happen, written by Gerald Frost and published by Biteback, which provides fascinating insights into Vinson's quite remarkable life, ideas and approaches. He had a good start in life, but built up his own business – and fortune – from scratch.
In the 1950s, Vinson was one of the first to see the huge potential of plastics, particularly as an anti-corrosion covering for metal. Starting from a Nissen hut in Guildford, he overcame the technical difficulties to coat all sorts of metal objects, from refrigerator shelves to aircraft parts. He would later win the Queen's Award for Industry in recognition of the company's technological innovation.
Vinson's abilities as a successful entrepreneur and enthusiast of the potential of better-managed British business, put him in demand elsewhere. He joined the Council of the CBI and became President of the Industrial Participation Association and Chair of the Wider Ownership Group – again promoting his idea that employees of a business should be participants in that business. Many other businesses sought him for their boards.
Never slow to back the things he believes in, Vinson was an early supporter of the Institute of Economic Affairs and the Centre for Policy Studies. In the early 1980s he also supported IOUS, an annual freedom conference for students: the new Culture Secretary, John Whittingdale, was one of its first participants. IUOS eventually grew into ISOS, a series of sixth-form conferences run by the Adam Smith Institute, and the Freedom Week student training course, run jointly by ASI and the IEA.
Making Things Happen is an uplifting story of how much one person with a vision can achieve – though it makes you yearn to have just a quarter of Vinson's drive and energy.
So Britain has solved climate change then
As regular readers will know we're pretty simple in our approach to climate change around here. If it's happening, we're causing it, then the thing to do about it is a carbon tax. That lovely Pigouvian Tax on externalities, just as Mssrs. Stern, Nordhaus and Tol tell us is the solution. And, for the sake of argument, while we think it's too high, we're willing to at least consider Stern's rate of $80 per tonne CO2-e. Which brings us to:
Environmental taxes hit a new record high of £44.6 billion in 2014, official figures show, as the bill for renewable energy levies rose to almost £3 billion. The data from the ONS shows that the green tax burden has more than doubled over the past two decades, from £19.4 billion in 1994. Last year saw the ninth consecutive increase in the tax burden, which stood at £43 billion in 2013. The vast majority of the taxes are those levied on transport fuels such as petrol and diesel, accounting for £27.1 billion. Vehicle duties accounted for £6 billion of the total and air passenger duty £3.2 billion. The cost of renewable energy taxes to subsidise wind and solar farms rose by more than a fifth to £2.9 billion.
So, the UK has already solved climate change. We're done and dusted. Emissions are of the order of 500 million tonnes a year in this country. That's $40 billion in taxes righteously required in order to adjust market prices. We're already charging ourselves more than that. We're done.
This is of course somewhat in contrast to the repeated squeals that much more should be done. But this is absolutely the mainstream scientific opinion here that we are cleaving to. If climate change, then carbon tax. And when the appropriate tax is in place then no more need be done, we can just wait for that alteration of prices to work through the market system.
So, what's it like to live in the first country that has actually dealt with the major environmental challenge of our times? And wouldn't it be just lovely if those who rule us realised that they've already managed that feat?
The FCA meddles with investment banks
In June 2014, the Chancellor created a Fair and Effective Markets Review (FEMR) of financial services, co-chaired by the Bank of England, FCA and HM Treasury. The report is due next month but has been widely trailed. Before we see that review, and in an effort to keep itself busy, the FCA has announced a further review covering some of the same ground, the Investment and Corporate Banking Market Study (ICBMS): “We are examining issues around choice of banks and advisers for clients, transparency of the services provided by banks, and bundling and cross-subsidisation of services.” Each of these reviews takes a year and costs you and me hundreds of millions of pounds. The FCA spends around £480m, growing at 6% p.a., and this is their biggest single project. It must cost the industry a similar amount in dealing with the FCA’s 3,000 staff. We consumers pick up the costs: every bill from my stockbroker has a £20 “Compliance charge.” That is hardly a key issue for most electors as they vote on the government every five years, so this unrestrained incubus feeds itself.
This second review is not just duplication: neither should be necessary at all. Both arise from Treasury and FCA failure to understand how markets do and should work – and we now have the Competition and Markets Authority. It was launched only last year and could perfectly well cover financial as well as other services. I would even go so far as to allege that the financial services regulators’ adversarial approach is in part responsible for the scandals. The FSA, and now the FCA, have forced banks to close ranks to deal with what must seem to them a common enemy. As Adam Smith pointed out two and a half centuries ago, putting competitors in the same room is likely to be bad for competition.
The Bank of England, by contrast, used to preside over the sector in the manner of a kindly uncle, nudging potential miscreants away from their misdoing, but not taking on the sector as a whole. Maybe the BoE can recover that role.
The terms of reference of the ICBMS seem to indicate that the FCA suspects clients do not choose their banks and advisers in the way they should, that things are not fully transparent and that cross-subsidy of services is a malpractice.
The first of these is a remarkable suggestion: that the FCA knows how clients should make decisions better than the clients do. Enough said.
On the second, in any market, the products should indeed be fully and accurately described, as the law requires. In the case of manufactured foods, for instance, the labeling requirements are extensive. But the FCA’s brand of “transparency” implies more than just product description: it means revealing everything about the product. If it were applied to oranges, it would require not just the variety, country of origin and the terms of trade proposed, but also the name of the supplier, the date purchased and the price paid by the retailer. Markets do not work this way: competition, along with proper product description, protect buyers by enabling them to compare.
The third implication, that bundling and cross-subsidies are wrong, is the most revealing. When I buy a car, I do not expect to buy all the parts and then have to put them together. I could do that, but bundling the components is far more convenient, and cost efficient, for both parties. And if I make £1 on a dozen oranges but £2 on a dozen pineapples, are my pineapples cross-subsidising the oranges? But then if the oranges sell for 50p each and the pineapples for £2, my margin on oranges is 17% and on pineapples is only 8%. Now the oranges are cross-subsidising the pineapples. Which is the more wicked?
The reality is that every market allows the seller a maximum price whittled down by competition, every seller has different costs, and some things are therefore more profitable than others. The notion of “cross-subsidies” is fantasy.
The FCA’s meddling with financial services adds cost to the sector as a whole, in addition to the growing burden of EU regulation. And it damages competition through a failure to understand how markets work. And its antagonistic approach may even be creating a climate where malpractice is more likely. In short, it is counter-productive.
The absurd folly of some anti-prostitution campaigners
That prostitution exists is a fact. That, as far as we know at least, every human society has had a form of it is, to the limits of our knowledge about this, also a fact. And as far as we can work out at least it's going to be a feature of human societies into the future. The question therefore is how should we handle it societally, not whether we can magic it off the scene or not. Our own view is that what consenting adults get up to is up to consenting adults. We do now have a society, finally, that largely keeps the government out of our bedrooms and we welcome this. Quite why this liberty and freedom should be limited when cash changes hands we're not quite sure.
All of which makes this letter to The Guardian very strange indeed to us:
On Monday 1 June it becomes a crime to pay for sex in Northern Ireland, but legal to sell it. The rationale? Prostitution is violence against women and a barrier to gender equality – so end the demand, but don’t punish the victims. I agree. We cannot continue to turn a blind eye to the minority of men who feel entitled to sexually exploit vulnerable women. In 2006 I led Ipswich’s policing response to the tragic murders of five women by a sex buyer. We cracked down on kerb crawlers, diverted women away from the criminal justice system and joined with agencies to support women to exit. It worked. But current prostitution laws prevented us from tackling demand for off-street prostitution. Northern Ireland’s new laws should be extended UK-wide so we make it as difficult as possible for pimps and sex traffickers to operate. Alan Caton Former detective superintendent, Suffolk Constabulary
That women were murdered is appalling: that this is a crime is just and righteous, whoever and whatever those women were or were doing. But people are murdered walking down the street: are we to make walking down the street a crime in order to reduce murder? People have been murdered working in supermarkets: do we make supermarkets illegal in order to reduce the incidence of murder?
No, obviously, we do not. And for the obvious reason that if walking down the street or vending comestibles are a crime then those who are attacked, injured or murdered while doing so are already criminals and thus have no protection from the police or the law.
So it is with prostitution. It is going to happen and consenting adults should have the same protections as the rest of us as they go about their consenting and consented to activities. Legalise, fully, prostitution. It may not be our life choice, either as provider or customer. But then nor are many things, all of which should be, and are, legal and protected by that full majesty of the law.
This is quite apart from that old point we learned from the Bloody Code. When stealing a loaf of bread brought a hanging, when murder brought a hanging, then why stop at the stealing? Making it illegal to purchase sex is going to increase the danger to those selling it, not reduce it.
FIFA and the wider problem of corruption
Sepp Blatter, re-elected as head of FIFA, gained so many first round votes that his opponent withdrew. Many of those votes came from Africa, Latin America and Eastern Europe. Not many came from Western Europe and North America. How could the man be re-elected after presiding over an administration that for decades has involved bribes to delegates and illegal payments by sovereign governments?
The answer may be simple. In many of the countries whose delegates gave him votes, corruption is a normal part of everyday life. You want to do business? You bribe a bureaucrat. You want to move goods across the country? You have cash ready at the police checkpoints. You want to win a government contract? You transfer funds into the secret foreign bank account of the President's sister. Corruption is endemic, and their people suffer its consequences. This could be why so many delegates seemed relatively sanguine about its exposure in FIFA.
That corruption is so widespread is a major factor holding back economic growth in developing economies. The Organization for Economic Co-operation and Development estimates it at more than 5% of global GDP, with the World Economic Forum putting it at US$2.6 trillion, and the World Bank putting the amount paid annually in bribes at over US$1 trillion.
It adds costs to business activity. The kickbacks have to be factored into production costs, raising prices and therefore reducing the volume of activity. Less wealth is created than there would be without it. Corruption is like a tax, but a particularly toxic one because of its covert and unpredictable nature. Tax incidence is public; it can be calculated and taken account of; but no-one publishes tables of bribes that will have to be paid.
Corruption causes resources to be misallocated, with contracts being awarded to firms that would not have won them in open competition. Bribes to ministers lead to construction projects for which there is no genuine market demand. Those with access to decision-makers, and with resources to bribe them with, are advantaged at the expense of those lower down the social scale with neither influence nor resources.
Because corruption is illegal, its prevalence undermines respect for the law. It also corrodes the public trust that is part of the background of successful market economies. The only antidote to it is a government with the moral integrity to uphold the law, and for a legal system that remorselessly exposes and punishes the perpetrators. The FIFA scandal is about more than football; it gives us another glimpse into a worldwide problem.
Excellent news; so there will be fewer milk farmers then?
Some people don't seem to get the point of this market thing:
The boss of British yoghurt-maker Yeo Valley has warned that the removal of the EU milk quota system, which previously capped production will be another blow for struggling farmers.Tim Mead, chairman of the Somerset-based dairy producer, said the removal of restrictions will encourage the industry to ramp up production, leaving farmers with a surplus of dairy products that they are then unable to sell.
Yes, this is rather the point of the changes.
Currently there are restrictions upon production. This means that each producer is operating at inefficient levels: they require more inputs in the form of land, labour and capital than the level of their output should require, because of those production restrictions.
So, we remove those production restrictions and the more efficient of those producers will expand their production, from very much the same set of inputs. This does of course mean that the less efficient producers then go out of buseinss. Allowing those inputs, that land, labour and capital, to be repurposed to go off and produce something else which satiates some other human desire or want.
That is, we all become richer by removing those production constraints. Because, from our same set of inputs, we get more human desires satiated. And this is the point and purpose of having an economy in the first place: to satiate, as best we can, as many human desires and wishes as we are capable of.
Removing production quotas will mean some milk farmers go bust. Good, that's the point of removing the production quotas.