Welfare

Can we nail a fallacy that is becoming received wisdom, regarding the uncompensated withdrawal of child benefit payments to higher earners, as proposed under the UK government's Comprehensive Spending Review?

The rhetoric claims that it is unfair to tax the poor in order to pay benefits to the rich. This ignores the reality that our web of taxes and benefits cannot be treated individually in their effect on people's incomes. What matters in practice is the net position of each individual or household, after all benefits have been received and taxes have been paid.

Someone paying £20,000/year of tax and receiving £2,000/year of benefits is not a beneficiary of the state or of lower-earning taxpayers. They are a massive net contributor, whose effective tax rate is marginally reduced by the effect of the benefits. This is the sort of situation that all those whose child benefits have been withdrawn find themselves in. They are being pinged for increasing amounts of tax. Child benefit was one way that the impact of those increased taxes on families with children (who generally struggle more to make ends meet than families without children) was somewhat mitigated.

There are major problems with the marginal effective tax rates (i.e. how much of each extra pound is surrendered in tax or withdrawn benefits) on low earners, which are often higher than the marginal rates on mid-earners, and are a massive disincentive to find more work. Ian Duncan-Smith's proposals will hopefully ameliorate this poverty trap.

But in no reasonable sense is someone on £15,000 paying taxes so that someone on £45,000 can receive benefits. The marginal rates should not be confused with the net effective tax rates (i.e. the ratio of the net cost or benefit of welfare payments and tax impositions to earned income), which generally increase as one goes up the income scale. Someone on £15,000 is very likely receiving more in benefits from the state than they pay in taxes, giving them a negative effective tax rate. Someone on £45,000 is almost certainly paying much more in taxes than they receive in benefit, even before the proposed change to the child benefit rules.

The untapered withdrawal of child benefit from anyone in the higher-rate tax brackets creates a rare case where the marginal rate of effective tax is over 100% and disposable income after accounting for taxes and benefits actually falls as earnings increase. People will of course respond to this perverse incentive by trying to work round it in the usual ways.

If someone uses this rhetoric about poor people's taxes paying for rich people's benefits, you know they are bullshitting you: knaves or fools as usual. If they want to defend the policy with any degree of intellectual integrity, they should make the case why parents earning over £45,000 should be paying an even higher effective tax-rate than they were before the change was proposed, given the 40% and new 50% rates of income tax, National Insurance, and limited number of reliefs from these burdens. They would be wrong to make this case, but at least they could do it with integrity.

The All Party Parliamentary Group On Peak Oil (APPGOPO) has released a report backing Tradable Energy Quotas (TEQs) as "the fairest and most productive way to deal with the oil crisis and to simultaneously guarantee reductions in fossil fuel use to meet climate change targets". This should serve as a warning to classical-liberals that (a) not everything that uses market mechanisms is a free-market or liberal concept, and (b) despite the presence of one or two saner members in their midst (such as Vince Cable and David Laws), the Liberal Democratic party (to which APPGOPO's chairman, John Hemming MP, belongs) is still fundamentally a beard-and-sandals, Fabian, Rawlsian, meddling, fiddling, egalitarian bunch of moralizing whackjobs, who would happily suck all the fun and reward out of life in the name of "fairness".

TEQs, as the name suggests, is "an energy rationing system" where each adult receives an equal quota of energy (measured in carbon terms) that they are entitled to use annually, calculated as equal shares of 40% of the total amount of energy/carbon permitted to be consumed annually under a falling profile set by the Committee on Climate Change in accordance with the national Carbon Budgets that have recently been enshrined into law. This system is allegedly designed "to prevent the intense competition for fuels that will otherwise develop, and to ensure that every energy-user can access their fair share".

So far, so student-socialist, but the cunning of the modern socialist is that he has learned to dress his communist wolf in a capitalist fleece. So the remaining 60% is bought in weekly government auctions by banks and brokers (no rent-seeking opportunities there) on the instructions of their clients in all those organizations who want to be allowed to use energy. And trading is allowed between possessors of the initially-egalitarian personal quotas and of the auctioned rights. The system thus lays claim to be a "market mechanism", combining "social justice" with the efficiency of capitalism in the approved manner of the Third Way prophets.

It is, in this way, different only in detail of implementation, from other cap-and-trade mechanisms, though the details are particularly draconian and deluded. Capitalists (of the type that we need to save capitalism from) who extol the virtues of cap-and-trade and yet look at personal rationing like this and shudder, ought to ask themselves if they haven't been fooled by the inclusion of the word "trade" in an approach that is fundamentally about overriding the efficient allocation of scarce resources by means of state-imposed rationing. Trading mechanisms within these rationed systems are no more than publicly-authorised black markets, which have the same benefits as real black markets under state-rationed systems, but do no more to eliminate the inefficiency and iniquity caused by the distortions that result from such a system.

We are already familiar with a system that distributes resources on the basis of social utility and provides incentives for people to use more or less of the resource depending on its scarcity. It is called the free market.

Speaking of the IEA (see previous post), Richard Wellings, their excellent Deputy Editorial Director, has posted a piece on their blog, on the recent slew of climate-change policies and targets from the Government. It is mostly well-judged, but there is one point where we diverge. I need graphics to illustrate why he is mistaken, so I'm posting here rather than in the comments section on his site.

Richard rightly criticizes the impossibly ambitious targets, the delusional claims about the benefit to the economy, and the impact on what remains of our industry of increasing the costs of energy. But he overstretches when he brings domestic consumers into the picture:

"Then there is the impact on the less well off. People on benefits, for example £64 per week Jobseeker’s Allowance, may already be using around one third of their (non-housing) incomes to pay utility bills inflated by existing environmental policies."

Actually, we have the cheapest domestic energy of the EU-15 countries. Here is the comparison for gas (from European Commission, DG TREN Staff Working Document, Report on Progress in Creating the Internal Gas and Electricity Market, 11/3/1009, SEC(2009) 287):

Notice that only 6 New Accession countries had cheaper domestic gas than us (on old, unsustainable, subsidised Russian prices), so not only all the other EU-15 countries were dearer, but several of the New Accession countries as well. And notice that the reasons why domestic gas is so cheap are not only that the untaxed price is competitive, but significantly that we apply less tax to our domestic gas than any country except for Latvia. Doesn't look like domestic gas prices are too inflated by existing environmental policies, does it?

According to David Kidney, Energy Minister with responsibility for fuel poverty, the Government has "spent £20 billion helping people in fuel poverty since the year 2000" (it's near the end of the interview).

At 3.5 million, the number of homes in "fuel poverty" in 2006 was significantly higher than it was in 2000 (see graph from DEFRA's UK Fuel Poverty Strategy 6th Annual Report 2008), and that was before prices went really high.

Is it possible that the Government's strategy is not working? Have we wasted a colossal amount of money trying to encourage improvements to energy-efficiency and usage whilst keeping domestic energy prices as cheap as possible? Is fuel poverty a bogus concept that gets in the way of rational energy policy?

Or is £20 billion to make things worse a good return on investment (to use the Government's favourite word for spending)?

Just came across a post on Richard Murphy's blog (via Bishop Hill and Tim Worstall, who have both been laughing at a more recent contribution from him) that claimed to show that cutting public-sector jobs would cost the government more money than it would save. For him, this means that we should increase public-sector employment to deal with the government debt problem. I have posted a comment, but I don't know if it will get moderated away, so I thought I would stick it up on here as well, just in case...

You appear to have demonstrated that welfare provisions are more generous than we can afford, and that the combination of tax and withdrawal of benefits creates a very high effective rate of tax on those just above the mean earnings level.

By your maths, someone with gross pay of £25,000 has a disposable income that is £7,365 higher than someone who is earning nothing. That is an effective tax-rate of over 70%. Not great reward for the effort involved. No wonder public-sector employees don’t cost us much more than the unemployed - but is that something to write home about? What you are saying is that we don’t reward people doing work much more highly than people doing nothing.

Your conclusions do not necessarily follow from this calculation. One might equally conclude that we need to rebalance our tax and welfare system so that effective and marginal rates of tax are lower and people are better rewarded for work.

Sorry I've gone quiet again.

Although I work in the energy industry, my greatest passion (policy-wise) is the perversity and cruelty of welfare policy and the overwhelmingly negative effect it has on our economy and the wellbeing of those it affects, rich and poor alike.

I was recently lucky enough to sit next to Shaun Bailey, and chat to him about welfare issues. Shaun's descriptions of the follies of welfare policy are powerful and authentic. However, for me, he has not yet followed his diagnosis through to the logical prescription: Basic Income plus Flat Tax (BI+FT).

I have been planning for some time to put together a website to set out a political programme, to be called Freedom and Responsibility, based on Austrian, classical-liberal, individualist principles, in which a BI+FT approach is a central plank. The conversation with Shaun motivated me to get on with it. That is what has been distracting me from Picking Losers. It may take some time (although I have already programmed the system that allows you to compare the outcome of the current system and a BI+FT system for your household's disposable income over a range of earnings).

In the meantime, here are a couple of gems that I gleaned as I updated myself on our current welfare system (I first got into the tedious detail while lying in bed with a ruptured Achilles and watching the Tory party conference on TV around 3 years ago - ah, those were the days...). You may already be aware of these, but they exemplify for me the stupidity and perversity of the current system:

1. When calculating entitlement to Pension Credit (a top-up to the State Pension for those with little additional income), the state takes account of the amount of savings that the pensioner has. The basic Pension Credit can be worth upto around an additional £1800. If the pensioner has more than £6000 of savings, the Pension Credit is reduced on the basis that each £500 over the £6000 will yield income of £1/week (i.e. £52/year). So the government, whose policies have been primarily responsible for the fact that you are doing well to get over 1% interest on a savings account, treats pensioners as though they get over 10%. When did anyone last get 10% on a savings account? If you were on a modest wage, would you bother saving more than £6000 (which would contribute under £100/year to your income at the moment) for your retirement, faced with this extraordinary disincentive? 
2. If you are unemployed and receiving Jobseekers Allowance (JSA), and find a part-time job paying over £2600 p.a. (for contributions-based JSA, zero for income-based JSA), your JSA will be reduced by £1 for every £1 that you earn. That is a 100% marginal effective tax-rate! You will be no better off earning £5000 p.a. than you would have been if you earned £2600 p.a. (and in fact worse off for some, once one takes account of other benefit withdrawals). There are also ridiculous penalties under the JSA for savings, given current savings rates. It has made little sense for quite some time now for low-medium earners to put money away for a rainy day - the government will penalise them for it until the money is gone.

The mindless, heartless stupidity of it makes me seethe. As does the equal stupidity of commentators who allow that Brown and Balls, the architects of our dysfunctional system, are either intelligent or compassionate. They are clever in the art of intimidatory politics, but utterly unintelligent, verging on sociopathic.

ConservativeHome's ToryDiary reports on a Right-to-Move policy to be announced tomorrow by Grant Shapps. Under this scheme, "good social tenants can demand that their social landlord sell their current property and use the proceeds, minus transaction costs, to buy another property of their choice – anywhere in England.  The new home will remain a state-owned property but will aid mobility."

The policy was developed by Tim Leunig (of the LSE) for Policy Exchange. Tim has some interesting ideas, but he is stronger on transport (which I understand is his speciality) than housing and planning issues. It was Tim, for example, who was partially responsible for the Policy Exchange paper suggesting that we should stop resisting London's economic gravitational force, allowing some northern cities to die and developing more cities in the south (as though it is the job of a central-planning office to decide this sort of movement). And it was Tim who came up with the scheme to deliver cheap social-housing by getting landholders to sell land cheap to councils who would then grant themselves planning permission and sell the land to developers at a large profit.

This latest idea exceeds Tim's usual daftness when he ventures away from transport. As I posted in the comments at ToryDiary:

Right-to-buy was about moving people from the public sector to the private sector.

Right-to-move is about keeping people in the public sector, but trying to pretend that the public sector can be made to offer similar flexibility and freedoms to the market.

I'd rather social-housing was as inflexible as possible, to give people the incentives to get out of it. It should be a minimal safety-net, not a public service.

Better still, change the welfare system to a Basic Income (BI) including an allowance for minimal rent, place an obligation on councils to provide housing to minimal standards at costs linked to the BI to people falling into tightly-controlled eligibility criteria (with costs recovered from local taxation), and leave it to people and markets to choose what to do about their accommodation.

Typical Cameroon/Policy Exchange idea. It has little in common, other than the name, with Right-to-buy. Tim, you're much better at transport; I'd stick to that, if I were you.

It is getting to him - and so soon too.  That is to say Alan Johnson is already suffering from his role as Secretary for Health as it makes him come out with bizarre policy suggestions.  The latest one sounds as though it should have come straight from David "Dave" Cameron's mouth.  I am, of course, talking about the £120 fruit and veg allowance for pregnant women.  The idea being, it will mean that pregnant women will have enough disposable cash to buy life's luxuries - or at least what Johnson thinks is a luxury - fruit and veg and therefore passing on the benefits to th

Government targets are often classic examples of picking losers.  The intentions are almost always spot on, but the result is aiming for a target for all the wrong incentives.  For example, crime is too high - set the police a target to get it down, the measure is often number of arrests; the result is a number of easy targets are hit while the real problem remains.  Or take this example - and this one is a depressingly good example.  The government had concerns over the lack of child care leading to adoption.  Therefore the government introduced policy for more children in care to be adopt

The going rate for a serving soldier who comes home from war suffering from "permanent severely impaired grip in both hands" is a £16,500 one-off compensation payment.  Probably just as well for the tax payer given the thirst for war Britain has had over the past five years or so.  To me that does seem a little low, however, seeing as the soldier will not be able to get employment in anything involving his hands again (just about everything, then).  There is the old argument that this is what they sign up to and they should expect the worse - but I'm still not sure that means

Another recurring story on PL - the benefits system. Anyone who can get their head round the complexities of this system deserves a few financial handouts and tax credits. It seems those who control it are not up to speed, they have been conned out of £2.5bn (TWO POINT FIVE BILLION POUNDS) through fraud. The Commons Work and Pensions select committee has described the benefits system as "stunningly complex".

The latest publication from the IEA landed through the letterbox yesterday (I can't say plonked or thudded, because the IEA publications are always of eminently digestible proportions). It is on one of the most important subjects of modern policy and economy - happiness.

There is an increasing tendency amongst academics and politicians to decry policies that deliver simple economic freedom, and to talk up policies that try to deliver social benefit, usually at the expense of economic freedom. The pretext is a growing body of work that argues that prosperity and happiness are not linked, and suggests alternative approaches to maximising happiness (most commonly, though with little empirical or logical justification, the reduction of income inequality). In these demotic times, what modern politician can resist the call to maximise the public's happiness? Certainly not most of our bunch of intellectual lightweights.

The IEA booklet, Happiness, Economics and Public Policy, by Helen Johns and Paul Ormerod, tackles this body of work head-on, in its own terms. It examines critically the statistical merits of the happiness data, and the claims that standards of living are unimportant to happiness, and that other factors such as economic inequality are more important. It finds most of the happiness literature wanting.

This is a necessary counterweight to the burblings of politicians like David Cameron and "economists" like Lord Layard on the need for policies to try to maximise General Wellbeing (GWB) or Gross National Happiness (GNH), rather than Gross Domestic Product (GDP). It is to be hoped (but not expected in the race to the wishy-washy centre-ground) that politicians will read this booklet and stop sniffing Layard's glue.

With a few exceptions contemporary commentators on economic problems are advocating economic intervention. This unanimity does not necessarily mean that they approve of interventionistic measures by government or other coercive powers. Authors of economics books, essays, articles, and political platforms demand interventionistic measures before they are taken, but once they have been imposed no one likes them. Then everyone - usually even the authorities responsible for them - call them insufficient and unsatisfactory. Generally the demand then arises for the replacement of unsatisfactory interventions by other, more suitable measures. And once the new demands have been met, the same scenario begins all over again. The universal desire for the interventionist system is matched by the rejection of all concrete measures of the interventionist policy.

So wrote Ludwig von Mises in his 1929 book, A Critique of Interventionism. He could have been writing of the state of our political and academic debate today.

The Sunday Telegraph reports that "Gordon Brown is drawing up plans to vary the minimum wage region by region across Britain". The original intervention - a standard minimum wage for the whole country - has been judged by academic economists to be too blunt an instrument. Although the call is for more flexibility, the proposals are not simply to remove or reduce the minimum wage. Instead, they propose that we should tell each region the level of pay below which jobs should not be offered. That's an interesting definition of increased flexibility.

What the academics intend is that the minimum wage should be reduced in those parts of the country where a national-average minimum wage exceeds the level at which people might be willing to work and able to sustain a reasonable quality of life (though this is made literally and figuratively academic by the punitive nature of the means-tested withdrawal of nationally-harmonised benefits on the effective marginal rate of taxation). The objective is to allow some jobs to be created or legitimised, which currently cannot be afforded in compliance with the law.

Gordon, however, cannot reduce the minimum wage in those parts of the country, because the unions will not wear it. So it is suggested that, instead, he will raise the minimum wage in London and possibly the South-East. Because, from a socialist perspective, this is not about allowing people to find jobs, this is about micro-managing the economy to ensure that no one is getting more or less than they deserve.

The result, if implemented, will not be an increase in flexibility and the creation of jobs in areas of the country where costs-of-living are lower, but a reduction of flexibility and the destruction of jobs in areas of the country where costs-of-living are higher. Genius.

The Tories and LibDems, of course, now support the minimum wage too. I wonder what new interventions they will be drawing up to offer their refinements on this "improvement", and what all three of them will propose when these changes also fail to deliver the artificial boost to the incomes of poorer members of society that they all hoped they could compel by legislation, in contravention of the most basic laws of economics. It's so much better fiddling with this sort of superficial, bureaucratic, managerialist, economically-illiterate tinkering than actually doing something about the structural problems, most of which the politicians themselves have created, isn't it?

In the past few months I have gone on about letting our children take a few risks and if they fall over and crack a bone then all the more for them in terms of growing up.  Putting children in cotton wool isn't going to benefit anyone - not least our hopes of Olympic gold in 2012 or our prospects for waging another immoral war somewhere.  Well, maybe, just maybe, our councils are listening.  The ultra PC world of local government is having to fork out some serious cash at the moment because of cuts and grazes to children in the playground.  Amazingly, children injured at English schools

A quick tale of an award winning government agency for you.  I haven't mentioned the Child Support Agency for a time and yet incredibly it has just won an award.  Of sorts.  The Child Support Agency has been condemned by MPs as “one of the greatest public administration disasters of all time”.  Now that, ladies and gentlemen, in a world of NHS IT systems and the Home Office, is truly a remarkable achievement.  So how have they won this dubious accolade?  Well, I will run you through just a few of its acts of incompetence to demonstrate:

Iain Dale has demolished in a few short words Ming Campbell's proposal to abuse local-authority powers to get more social housing built, so effectively that even the LibDem NorfolkBlogger agrees with him. This has provoked an unintentionally funny response on NorfolkBlogger's site from Tim Leunig, Lecturer in Economic History at the LSE, and original author of Ming's proposal:

"In what sense are CLAs illiberal?
They:
1) Allow local authorities total control over how many houses are built in their area
2) Allow local authorities total control over what proportion are social houses
3) Will lead to lower house price inflation, so that hopefully your child and mine can afford to leave home in 2030

Freedom and social justice: a good combination, surely?"

In what sense is "total control" by the authorities "illiberal"? If you need to ask, Tim, you are probably beyond help.

Forget the legacy and the lecture circuit. Tony Blair has no intention of retiring from the front-line, nor even of being a good back-seat driver. He is preparing for the next phase of his political career, not for life after politics. How else are we to interpret his article in yesterday's Telegraph?

Mr Blair is positioning himself as the voice of wizened authority, of hardbitten realism, of painful lessons learned through bitter experience. Even the picture accompanying the article displays a harder-nosed Blair, staring out from the paper with a look of contempt that seems strangely familiar.

Anthony Blair	Alan B'Stard

The Telegraph interpreted Mr Blair's article as an admission that he "got it wrong on problem families". But that was merely a tasty morsel offered out to a right-wing journal. It was not the main message. The main message was that you need experience to understand the real causes and solutions to social problems, experience that Blair has and Cameron does not.

Lord McKenzie of Luton, Parliamentary Under-Secretary (Lords) at the Department for Work and Pensions, today "called on the expertise of businesses, government and charities to discuss and agree what constitutes 'good work'." As he explained, "we need to figure out exactly what 'good work' is, so that we can ensure workplaces are happy, healthy and productive".

Here we go again. To Labour, everything is standardisable and reducible to the average or the lowest common denominator, and then enforceable by government mandate. In their eyes, my idea of what constitutes "good work" must be the same as yours, which must be the same as everyone else's. All they need to do is work out what this standard of "good work" consists of, and then insist that all jobs conform with this standard.

Why cannot I decide whether a job is acceptable to me, and accept or refuse employment offers accordingly? If the quality of my job disappoints, why can I not be left to decide whether it is sufficiently disappointing that I should look for a new job? If I can find nothing better than my existing job, am I better off having my unsatisfactory job regulated away (assuming my standards of satisfaction conform with the average), or putting up with something less than perfect until something better comes along? Why does government need to intervene in this area? My terms of employment are a matter for me and my employer alone.

Pregnant Germans are trying to delay the birth of their babies until 1 January, the BBC report, because parents of babies born after that date will receive 25,200 euros (£16,911, $33,300 at current exchange rates) to "ease the financial burden of parenthood".

The handout is part of German plans to increase the national birthrate, which, at 1.37 children per woman, is well below the 2.1 children per woman needed to maintain the population level (assuming that immigration is not an acceptable alternative way to maintain the population level).

The Telegraph nearly wrote this entry for us. They have listed the winners from the recommendations of Michael Forsyth's Tax Reform Commission: