Time for Time Limits
A new ASI report, Time for Time Limits: Why we should end permanent welfare, finds that a 5-year limit on Jobseekers’ Allowance (JSA) across workers’ lifetimes could save the Treasury £300-350m per year, as well as boosting labour markets and putting a break on self-fulfilling cycles of dependency. The paper, authored by Peter Hill, a lecturer at the University of Roehampton, reviews President Bill Clinton's 'Personal Responsibility and Work Opportunity Reconciliation Act' (PRWORA) which coincided with a massive decline in welfare rolls from 5 million to less than 2 million families by 2006. The act is credited for saving the US government over $50bn between 1996 and 2002.
In some states, there was a decrease in benefits caseloads of 96%, as well as an unprecedented drop in female unemployment and improvement in their financial status even in low paying jobs, and a drop in child poverty. Furthermore, comprehensive econometric analyses suggest that 6-7% of decreases in unemployment counts (and 12–13% of those in female-headed families) are as a result of the introduction of time limits. Although difficult to estimate the exact impact on the UK labour market ex ante, a similar effect on Claimant Count Unemployment could be expected; this translates to an estimated reduction in the benefit bill of £300–350 million based on current spending.
Though Universal Credit is innovative in tackling benefit withdrawal cliffs that make working very unattractive to some households, it does not put any limits on its unemployment insurance provisions. More radical reform like time limits has potential beyond the government's current schemes.
Just as the US ended welfare as an entitlement programme, the paper argues that the UK should also take the radical step of ending JSA being funded from general taxation and instead return to a form of ‘Unemployment Insurance’ funding from NICs. This would mean operating the welfare system as a genuine self-funding insurance scheme managed through the UK Government Actuary’s Department.
Why do rich parents give birth to rich kids?
The kids and grandkids of the wealthy tend to be wealthy. Well: that's not quite true. Kids of American football players and lottery winners and those who get wealthy through luck often squander their inheritance. And while giving your kids money makes them richer, it doesn't tend to make their kids (i.e. your grandkids) richer.
This little paradox has driven researchers to wonder why wealth is persistent, if it's not purely handing down the cash. Traditionally, scholars have divided into two camps: nature and nurture.
Families stay rich because they have prudent genes that stop their ancestors from squandering their fortunes, and because they have genes that make them good at earning more money. Or families stay rich because they give their kids skills through schooling, speaking lots of words at home, having books around for them to read, pushing them into high prestige careers, and linking them up with connections.
Lots of research points in the direction of genetics, finding that genetics explains about 50% of every important human trait, while the other 50% is largely down to 'nonshared environment'—rather than 'shared environment' (i.e. family upbringing).
For example, the gold standard meta-analysis, recently published in Nature Genetics, looked at 17,804 traits over 2,784 publications studying 14,558,903 twin pairs, and found that the average genetic contribution to a trait was 49%.
This extends to complex facts about a person, like lifetime income and wealth. For example, among Swedish twins wealth was found to be about 20-40% heritable (i.e. down to genetic factors), while 20-year average income in men was about 60% heritable.
But comparing identical and non-identical twins isn't the only valid study design for dissecting the differing impacts of nurture and nature (though it is valid). You can also look at twins reared apart and you can look what happens when a child is adopted into another family—do they end up looking like their biological or adoptive parents?
We know that adoption can temporarily boost IQ but other evidence suggests this may be driven by non-randomness in the study design or peter out once the child leaves the family environment. What's more the gains might boost measured IQ but not intelligence.
But a new study suggests that adoptive parents are the main drivers of children's wealth, with biological parents unimportant by comparison. However, this new study finds that the result is not through transmitting human capital down the line or even through children earning higher income, but simply through transferring cash or learned prudence—i.e. kids investing better.
The paper (pdf), from Sandra E. Black, Paul J. Devereux, Petter Lundborg, Kaveh Majlesi, looks at a sample of 2,519 Swedish adoptees born between 1950 and 1970, and finds that the rank of a child's wealth is correlated 0.23 with their adoptive parents' wealth (and 0.65 when bequests are taken into account). By contrast it correlates only 0.12 with the rank of their biological parents. The results for levels of wealth, rather than ranks in the wealth distribution, are very similar.
So does this tell us that the rich buy private school, tutor their kids, make them learn violin, and help them with connections and so on? No! The authors rule out this possibility, and suggest only two possible options: financial gifts (which they cannot track) and learned prudence (which they provide evidence for in another paper).
(Note, the authors tell us that income is more biological than adoptive. Human capital is not being driven by upbringing. We might reasonably guess that a couple of generations down the line nature is driving wealth more than nurture.)
I work for a think tank so I think about policy conclusions and I think this fits pretty nicely with Adam Smith Institute ideas. What can you do to raise people's wealth? None of the things that pushy parents do seem to help their kids be rich except two: give them cash, and teach them to save more and save better.
The latter seems a bit more politically practicable, but the problem is that most financial education schemes seem to have no impact. Maybe the only way you can teach this stuff is something as long-lasting and comprehensive as being adopted. (I'm open to being wrong here—it would be great if there were doable financial literacy interventions that had lasting impacts.)
But we can give people cash. And funnily enough that is ASI house policy.
A certain disconnect from reality here
The idea that prisoners should be banned from smoking in their cells has reared its ugly head again. The true reason that such a ban is not in place is that, for the time of their sentence, their cell is their home. We do not ban people smoking in their own homes: we therefore do not ban prisoners smoking in their cells. We also do not want to give the government, any government, the power to ban people doing something entirely legal in their own homes: thus we do not want to grant this power to ban prisoners smoking in their cells. However, even given all of that, this does show a certain disconnect from reality, doesn't it?
Deborah Arnott, chief executive of charity Action on Smoking and Health, said there was no evidence to support claims that depriving prisoners of tobacco could lead to riots.
“Prisons all around the world have gone smoke-free with few problems and, in the UK, all high-security psychiatric facilities have already gone smoke-free, as have prisons in the Isle of Man and Guernsey, without any trouble,” she said.
Not paying much attention to the news, is she?
On Tuesday, hundreds of prisoners lit fires, broke walls and smashed windows in a 15-hour riot at a Melbourne prison in what authorities believe may have been a reaction to a smoking ban at the remand facility. It was one of the worst prison riots in recent memory and authorities and commentators moved quickly to either condemn or support the state-wide prison smoking ban.
No, she's not:
Police armed with tear gas and water cannons were on Tuesday evening still attempting to contain a riot that broke out at a maximum security prison in Victoria earlier in the day, after prisoners became angered by the introduction of a smoking ban.
All staff were evacuated from the prison in Ravenhall, Victoria, after several hundred prisoners rioted.
This happened only a few weeks ago.....at the end of June.
This will put the cat among the pigeons
Disturbing findings for a central tenet of the prevailing left wing educational ideology:
Teenagers facing the ire of parents over their exam results may have found the perfect excuse after a new study concluded that exam success is largely inherited. Scientists at King’s College London discovered that up to 65 per cent of the difference in pupil’s GCSEs grades was down to genetics. Previous research found that genetics could influence core subjects like English, mathematics and science but it now appears that they also play the same role in humanities, languages and art. It suggests that if parents have struggled to draw, learn a second language or understand algebra, their children are also likely to find those subjects difficult.
For that prevailing ideology is that it is entirely the environment and education itself which determine such things. Danny Dorling once put it as anyone could grow up to be professor of social geography at Sheffield University: something which prompted us to comment that obviously anyone had. The implications of this blank slate idea being that differences in outcome must be due to differences in access to resources. Thus poor people do badly because they are poor, deprived even simply be inequality.
That 65% of academic success (to the point that passing exams is that success) blows rather a hole in this idea.
We should not, of course, immediately lurch over into the errors of social darwinism though. For this is just a restatement of what should be blindingly obvious about a mammalian species. There are indeed mutations, there's a shuffling of the genes in every generation. We should therefore be assuming that there will be variance other than simple and direct inheritance of intelligence, just as with any other genetically determined characteristic. Thus all should have access to the same opportunities but we just shouldn't be surprised when outcomes are not equal.
Let's call a thing what it is shall we, a spade is a spade after all
It's not so much the pettifogging that annoys, although there is a tinge of that, it's the hijacking of an honourable description that really irks:
A typical household has 40 plastic carrier bags stashed away at home, ministers have claimed, as new figures showed the number of bags used by shoppers rose for the fifth year running. British shoppers took home more than 8.5 billion single-use carrier bags from supermarkets in 2014, 200 million more than in the previous year, figures from charity WRAP show.
Charity: the giving of money to aid mariners in peril on the seas perhaps. Or alms to house the destitute. But the most important part of the description is voluntary.
Following the review we worked closely with Defra to develop a programme of work, in line with sharpening our strategic focus, that will make a significant contribution to helping the UK achieve its environmental objectives and obligations, such as achieving the 50% household recycling rates by 2020, but at less cost. As a result grant funding from Defra for 2014/15 has been confirmed at £17.6m (2013/14: £25.7m), expected to reduce to £15.5m in 2015/16.
Financial Results for 2013/14
WRAP‟s total income for 2013/14 was £65.4m (2012/13: £63.2m) of which the majority (98.9%) was grant funding from government and EU sources. Although the underlying grant funding from Defra reduced compared to the previous year, the addition of the Resource Efficient Scotland programme and the timing of activity in EU funded grant schemes, notably the ARID capital grant scheme in Wales, resulted in a marginal increase in total income.
This is not a charity. This is a tax funded arm of the central bureaucracy. As such it most certainly isn't voluntary.
It has to be said that a caring society would indeed have a place in it for those who get their kicks counting plastic bag hoarding by household. But it's not entirely obvious that those working hard on the minimum wage should be charged tax to pay for it. Perhaps it should be paid for, voluntarily, in a charitable manner, by those who share this minority taste?
At which point we are going to revert to calling a spade a spade. WRAP is not a charity, it is a collection of tax leeches.
The euro is driving Finland to depression
The Finnish economy has been hit by three shocks over the past decade:
- Nokia has more or less disappeared;
- The paper industry is in crisis;
- And recently the Russian crisis has hurt Finland's economy too.
These have all caused a very significant change in Finland's current account balance, which over the past 15 years has gone from a sizeable surplus (around 9% of GDP in 2001) to a small deficit (around -1% of GDP in past four years).
This would under normal circumstances require a (real) exchange rate depreciation to restore competitiveness. However, as Finland is a member of the euro such adjustment has not been possible through a nominal depreciation of the currency and instead Finland has had to rely on an internal devaluation through lower price and wage growth.
However, Finland's labour market is excessively regulated and non-wage costs are high, which means that the internal devaluation has been very sluggish. As a result growth has suffered significantly.
In fact, Finland's real GDP level today is around 5% lower than at the onset of the crisis in 2008. This makes the present recession – or rather depression – deeper and longer than the Great Depression in 1930 and the large Finnish banking crisis of the 1990s. Rightly we should call the present crisis Finland's Greater Depression.
European Central Bank policy obviously has not helped. First of all, the 2011 rate hikes from the ECB had a significantly negative impact on Finnish growth. Second, the shocks that have hit the economy are decisively asymmetrical in nature. This means that Finnish growth increasingly has come out of sync with the core Eurozone countries - such as Germany, Belgium and France.
Hence, Finland is a very good example that the eurozone is not an "Optimal Currency Area", where one monetary policy fits all countries.
Concluding, the crisis would likely have been a lot shorter and less deep had Finland had its own currency. This would not have protected Finland from the shocks – Nokia would still have done badly, and exports to Russia would still have been hit by the crisis in the Russian economy, but a currency depreciation would have done a lot to offset these shocks.
To illustrate this, compare the pegged economies (in red in the graph below) of Finland and Denmark with the free-floating economies of Sweden, Iceland and Norway (in green).
Should Finland leave the euro now? It's hard to say, but it seems clear that Finland shouldn't have joined in the first place.
Are there other options? Yes. Significant labour market reforms that weaken the power of labour unions and reduce non-wage costs would make internal devaluation easier. But such reforms are notoriously hard to implement politically and the discussion and the response from the Finnish government to the Greek crisis has shown the Finnish governing coalition is extremely fragile. This is hardly a government, which should be expected to be able to push through the needed reforms.
See also my three earlier blog posts on Finland:
http://marketmonetarist.com/2014/11/16/great-greater-greatest-three-finnish-depressions/
http://marketmonetarist.com/2015/07/23/peggers-and-floaters-the-story-of-five-nordic-countries/
Lars Christensen is a Senior Fellow of the Adam Smith Institute and blogs as the Market Monetarist.
Opposing environment-friendly rice with higher yields
The MIT Technology Review reports that scientists have produced a genetically modified rice strain that emits far less methane than traditional varieties. It emits one thirtieth as much in summer and half as much in winter. It does this because a single gene from barley has been inserted to make the plant yield 43% more grain per plant, so less carbon goes into the roots and the soil to be converted by microbes into methane.
Despite its enhanced yield and lower greenhouse gas emission, it is estimated that it could be 10-20 years before it becomes available to farmers. This is because scientists will have to use traditional breeding methods to produce a rice that is scientifically the same, including the same gene. As Chuanxin Sun, the report's senior author, puts it:
“Right now of course it’s a GMO issue, and we cannot deliver this variety directly to farmers. We have to use traditional breeding methods and breed the new, society-acceptable variety for farmers.”
It is thanks to completely unwarranted scare stories from environmental groups that progress in genetic modification has been held back. Millions of children have suffered blindness or death because of opposition to 'golden rice' modified to biosynthesize beta-carotene, a precursor of vitamin A, to combat a shortage of dietary vitamin A in some areas.
Millions more live at precarious subsistence levels because they are denied access to GM crops with enhanced yield or greater saline or drought resistance. Innumerable field tests have failed to show adverse effects on humans, yet many in the environmental lobby campaign for all GMOs to be rejected. They do not hesitate to trample down experimental crops planted with the support of democratically elected governments.
Many of the NGOs will undoubtedly oppose the new rice, despite its hugely increased yield and smaller environmental footprint. Scare stories are what they do, and they keep the subscriptions and donations rolling in.
Perhaps it's time to abolish statutory holiday pay
We can imagine some getting a little outraged at this suggestion but perhaps it's time to remove one of the great distortions in the labour market: it's time to abolish statutory holiday pay. Currently:
Almost all workers are legally entitled to 5.6 weeks’ paid holiday per year (known as statutory leave entitlement or annual leave). An employer can include bank holidays as part of statutory annual leave.
Self-employed workers aren’t entitled to annual leave.
From the US we hear that these sorts of rules are killing parts of that gig economy:
This is one of the first startup casualties as a result of the worker classification issue that has gripped the tech industry. Many companies in the gig economy, such as Uber, Postmates, Luxe and Sprig, classify their workers as contractors instead of employees. As a result they don’t have to foot payroll taxes, social security benefits, vacation time or other fees. But workers have filed lawsuits over the issue, and it’s now become a heavily debated talking point among the presidential candidates.
Loading the employment of labour with all of these things (and we could add maternity and paternity leave and so on) makes labour cost more to employ. Well, obviously. but insisting that people take a defined bundle of benefits reduces the value of selling our labour. For if we receive instead just the cash we can decide ourselves, according to our own personal utility maximisation calculations, how we are going to allocate the rewards of our labour over children, retirement, leisure and other forms of consumption. what this problem in the gig economy is doing is making those costs plain to all: some people are willing to do things in exactly that all cash manner and do the allocations themselves. Insisting that they take the defined bundle destroys those jobs they're quite happy doing.
Of course, some will say that everyone must therefore be forced into that standard bundle. But we think there's a liberty argument to be made for instead destroying the very idea of that standard bundle being imposed. Let wages be paid in cash, only cash and purely cash and everyone then gets to decide how they're going to structure their leisure, retirement, child rearing and everything else.
Why should the State insist on either a minimum or maximum amount of leisure for us?
Nudging people to do what they want to do
Not all of us in the Adam Smith Institute agree on everything all the time. Life would be duller if we did. One topic that divides some of us is the notion of 'nudge.' Thaler and Sunstein wrote a book under that name in 2008, describing ways of "changing the choice architecture" so that people find it easier to do what they want to do, but fail, perhaps because of inertia, to follow through upon.
Two thirds approve in polls of organ donation after death, but less than 30% were completing the form. The US driver's licence application gave applicants the choice, and they had to choose yes or no. The number volunteering as organ donors shot up to the two-thirds who approved of it. The choice to volunteer had been made easier. Other countries have followed suit with similar results. Some add a third option: "I do not wish to make a choice at this time."
The BBC news magazine's Home Editor, Mark Easton, has described some successes by the No. 10 Behavioural Insights team, colloquially known as the Nudge Unit. They boosted job applications by unemployed people by personalizing the invitation. A simple request to turn up for potential jobs at a supermarket saw 11% come forward. When the person's name was added to the request ("Hi, Sam…"), it rose to 15%. When the JobCentre adviser signed it at the bottom ("Good luck, Michael.") the proportion turning up rose to 27%.
The team managed to boost black and ethnic minority (BME) applications to become police officers by adding the words "Congratulations! " and telling applicants they had been "selected to participate in the next stage of the assessment process." It added "What is it about being a police officer that means the most to you and your community?"
Whereas previously the situational judgement test had been successfully completed by 60% of white applicants but only 40% of BME candidates, the revised wording saw the BME percentage rise to more than match the success rate of white applicants.
Some in the ASI are suspicious of this approach, partly because it involves a decision about what should be nudged, meaning about behaviour that should be encouraged, and partly from a fear that the technique could easily be abused to promote behaviour that people don't want to do. These should certainly be watched, but if the technique uses polling to ascertain what people would like to do but find difficult, then it can be helpful.
The technique has been used to help people pay their tax arrears more promptly, and to encourage people to put more aside into their pension funds. Many countries are now adopting these techniques, and the Nudge Unit sells its services to other governments. Whatever else can be said, to libertarians 'nudge' is better than compulsion.
Perhaps a closer connection with reality might be in order?
We will admit to being fascinated by the coming car crash that is the Labour leadership competition. While we're intensely political here, we're not party political. But we do think that perhaps a slightly closer connection with reality might be in order. Here's Jeremy Corbyn's latest policy idea:
“Under these plans Labour 2020 will make large reductions in the £93 billion of corporate tax relief and subsidies.“These funds can be used to establish a National Investment Bank to head a multi-billion pound programme of infrastructure upgrades and support for high-tech and innovative industries.
That £93 billion comes from a paper discussed here. That £93 billion also has no connection to this universe that we inhabit. But despite a certain amount of to and fro between the report's author and your current humble scribe it simply was not possible to convince that report's author that depreciation is not a subsidy to business. He really is under the impression that capital allowances mean that the government buys stuff for companies to use: rather than just not taxes them on the money they use to buy them for the obvious reason that companies are taxed upon their profits. And the cost of buying something to use to make stuff is obviously a cost of business.
Yet only a couple of weeks after the publication of a report of such obvious fatuity we've got it as the cornerstone for a national economic policy after the next election.
All most amusing but we might recommend just a slightly closer connection with reality.