The Skeletons In The Welfare State's Closet

Let me tell you something fascinating about the welfare state. As a society almost every single individual in the UK is in favour of it, but yet each individual, if asked to pay some kind of hypothetical pre-birth Rawlsian insurance to act as a safety net in case they required it themselves, wouldn't actually pay it (this is based on research in America, so one can assume it would likely apply here too). This would suggest that, in actual fact, society's collective preference for a welfare state is more akin to an Abilene paradox, where every individual feels everyone else is in favour of a fairly large welfare state, so feels they ought to be too.

A generally good rule of thumb in life is that you can see how much people value things by how they behave. From what I remember, your chance of dying on the road in a car is something like 5,000 to 1. Would you pay an extra £10 a day to increase those odds to 6,000 to 1? I highly doubt it, and neither would I. Would you pay an additional £5 per year to reduce those odds to 500,000 to 1? You possibly would, and so would I. This signals how much we value a reduced probability of dying against a certain financial cost such as insurance. Personally I don't value insurance very highly generally - so for example, I would not insure white goods or a bicycle I'd purchased., but many people would.

Now suppose you got to make a pre-birth insurance decision before you know anything about what kind of person you're going to be, the indication is that you wouldn't pay anything. For all you know you're going to be born in the shallow end of the talent pool, yet research shows you’re prepared to take the risk and not pay the insurance premium. I think the central reason for this is the disincentive effects – that is, the main problem with a safety net is that it is open to being (at worst) abused and (at best) something upon which people can become overly dependent. The study showed that individual preference, in a pre-birth decision scenario (there are parallels of Harsanyi’s amnesia principle here), favoured a welfare state that contained a population of just 0.6% (that’s six tenths of a percent) of the population.

Obviously I’m taking this as precluding pensioner welfare and people who’ve paid a lot into the system but need to claim a bit back due to short-term unemployment. This is really about long-term dependants, people struggling to find work, people abusing the system and people using welfare as a lifestyle choice. I should imagine the general feeling is that this ‘0.6% of the population on welfare’ ideal, which in terms of UK population would be approximately 390,000 people, is largely confined to people with disabilities and barriers to work (although apparently that number far exceeds 390,000, it’s more like 11 million).

It would seem that when we are being most candid with no public pressure to conform to a certain viewpoint, the UK as a population is glad to have a small welfare state for society's most needy, but is furtively quite narked about the proportion of the welfare state that enables otherwise work-fit and able people to enjoy a life of taxpayer-subsidised leisure.

There are obvious reasons why this is the case, and they are nearly all underpinned by one governing principle: that people feel it is unfair when they have to pay for benefits for others that they cannot enjoy themselves. A good example is leisure. People who work a 40 hour week have less leisure time than people who have a 40 hour leisure week and claim jobseeker's allowance. An even bigger example, and one that is far less obvious, is parenthood. People who cannot afford to have 3 or 4 children are subsidising people who can, because according to Aviva it costs upwards of £270,000 to raise a child up to the age of 21.  

Or to put it another way, if it costs £810,000 to raise 3 children, and £1,080,000 to raise 4 children, it stands to reason that for most people you have to be on benefits to afford to support families of that size and larger. Working people cannot afford to have as many children as people on benefits, and the most expensive thing working people have to pay for is the state. Moreover, state-mandated reallocations from middle earners to benefit claimants incentivises benefit claimants to have more children (and equally more people to become benefit claimants) and this increases the cost of the state further, while at the same time reducing the opportunity for more middle earners to have children.

There is no easy solution to this problem - we cannot put a cap on the number of children people can have, and we cannot live in a society where children go hungry. But I have three principal must-haves for a well-functioning welfare system, and it would appear that in the deepest recesses of their honesty, people agree with me. They are:

1) The idea of a redistributive system whereby those who are best off do their bit to help those who are least able.

2) The redistribution system must guard heavily against incentives to abuse it or become overly-dependent on it.

3) In terms of taxing those most able to help those least able, it is best to tax in ways that do not discourage work, innovation or productivity.

Pretty much everyone already openly agrees with number 1, and pretty much everyone agrees with number 2, although they are more cautious about admitting it. But judging by the current state system of redistributive taxation, an awful lot of people have not got to grips with number 3 yet, which is a shame because getting number 3 right is the most effective way of helping people on benefits.  

Finally, the 2016 release of the much lauded movie I, Daniel Blake by Ken Loach, and the rise of Jeremy Corbyn in the same year, has prompted thousands of people to take to the streets and declare war on a capitalist system that has left benefit claimants maltreated and disregarded by heartless bureaucrats. While I'm sure there are plenty of people for whom this has been the case, when it comes to the overall picture, nothing could be further from the truth.

The stats are far too numerous and lengthy for this blog post, but go and research just how much the welfare state has expanded and proliferated as a proportion of GDP since Ken Loach first began his film career, and you'll see it is gigantic compared with 50 years ago. Consequently, Loach and Corbyn - the self-proclaimed defenders of the poor - are picking the wrong enemy in capitalism, because it is only thanks to the kind of economic growth that comes from trade and competition that we can afford such a large and costly welfare state.  

 

 

  

 

Could A Basic Income Work?

Recently Tim Harford, in an article in the Financial Times, talked about the idea of a 'basic income' - a much vaunted idea in some circles and a much deprecated idea in others. It's not even an idea that's more popularly left or right - figures as far to the right as Friedrich Hayek and Milton Friedman, and groups as far to the left as the Green Party have both come out in support of it, although as you'd expect they differ on the nuts and bolts of the mechanism.

But can it work? Obviously, as most people would concur, it's ridiculous and absurd to offer a basic income universally, because lots of middle and high earners don't need it. However, a basic income given to people who have no work-based earnings or low earnings from work would be okay, as long as it tapers out according to a certain threshold of earnings, but in a way that doesn't disincentivise work either.

Whether there is a basic income system that could get the balance right between managing the varying and complex needs of a whole range of people and not being too expensive and bureaucratic, I'm not sure. I'm even less sure about whether our politicians are intelligent enough to devise such a system.  

If such a thing were to work then off the top of my head I could envision it being along these lines. The government could set a basic income of x per year by using a cut-off point of y per year, and a withdrawal rate of 50%. That means that a basic supplement to a person's income would be equal to 50% of the difference between annual income and the y cut-off point. So a person out of work would get the basic income of x, and a person who earned an amount lower than y would get a supplementary income, and this keeps narrowing as earnings increase up until y.

So, picking a figure for simplicity's sake (a proper study would need to be done by people with all the facts to hand to find the optimal figure), if y = £17,000, and the basic income is £8,000, someone earning nothing gets a basic income of £8,000, someone earning £11,000 per year gets a £3,000 supplement (half the difference between his or her earnings and y), and someone on £15,000 per year gets a £1,500 supplement, and so on, and then when y is reached (£17,000) there is no supplementary income, and y is the point at which every pound earned thereafter is taxed. There are still serious issues about how any basic income would be paid for - because simply raising taxes to cover the costs only adds to some of the problems the government would be looking to solve.

Whether it's with a basic income, or other kinds of change, something needs to be done to revise our welfare system - it is anachronistic and has evolved far beyond the original scope of its intention, in a country that's very different from the one at the time of its inception in the late 1940s. The method of tackling a diverse range of welfare needs in a one-size-fits-all fashion is now entirely unworkable, as is the perverse conflict between whether a claimant is better off working or on benefits. Basic income or no basic income, the UK has for a long while now needed a new Beveridge Report for the 21st century.

Making Supermarkets Hand Over All Unsold Food Doesn't Seem Like The Answer To Me

It's Bank Holiday Monday, I was just about to cook some lunch before going out, and then right now this article just landed in my inbox - it's a campaign for David Cameron to make supermarkets hand over all unsold food to charities.

This is as a result of what's happening in France, where a group of French MPs have tabled a draft law to make it compulsory for supermarkets to hand over to charity all unsold food still fit for consumption.

It's a noble idea, surely? I mean, if there is one thing the State can be good for it is in gently nudging socially desirable preferences in the right direction, right? I can go along with that: I do actually want much more to be done for good causes, and a nudge that compels big supermarket corporations to do more for charities is no bad thing in principle, and full of good intentions.

However, in practice this is problematical, because when you legally compel businesses to behave a certain way over and above what they are in business for you then impose extra costs on them, such as extra labour and extra resources to collect, store and administer the goods - and those costs end up filtrating into other areas of society. Such enforcement will have spillover costs that are, at present, invisible to the government officials enforcing this.

Will the governments that enforce this law contribute towards all these extra costs, plus the additional costs of refrigeration for both the charities and the supermarkets? But perhaps even more disconcerting is the likelihood that with this potentially oppressive legislation the State then has the power to penalise shops who don't give their quota to charity, meaning threats of fines will affect supermarkets' buying habits (buying artificially low, keeping stocks at a minimum to avoid wastage, etc) which then has a knock on effect of lower prices, which hurts employees, manufactures, delivery drivers, and maybe even farmers too.

It may even be the case that in not enforcing a supermarket food-donation system that will only increase the supply of free food we avoid creating an unhelpful dependency food welfare, rather like how in not giving money to beggars we do more good for them in the long run.

All that said, it is easy to see why such a campaign is growing in popularity (over 100,000 signatures at the time of writing) - tonnes of perfectly edible food is literally being thrown out on a weekly basis across the country, and this needs to change. I once heard a manager of a supermarket say that the main reason they didn't give thrown out food to the homeless is that they were afraid of being sued in the event of someone getting ill. Would a government that passed this food-donation law allow an 'eat at your own risk' mandate to stand for those consuming the leftover food? I seriously doubt it. It's all very well politicians having these noble ideas, but so often they aren't thought through properly, and I suspect here is another fine example of that.

There definitely is a square hole problem of food shortage in this country, and a square peg solution of lots of thrown away food in supermarkets available to be consumed, but I'm not sure this proposed government law is the solution. What we need is more innovation in getting people to give generously, more awareness raised, and more government-led investment that can help the poorest and vulnerable in society get back on their feet and find work.  

What People Keep Getting Wrong About Food Banks

Something I've been hearing rather too much of recently - from politicians and from political commentators - is that the increasing number of people relying on the foodbank scheme is evidence that poverty* is increasing in the UK.

People who make such a claim are confused. It is evidence of no such thing. Irrespective of whether or not poverty is on the increase, the number of food bank users is not the right metric to use to determine the number of people in poverty. Increased food bank use does not necessarily mean increased hardship - it probably means increased help for those in situations of hardship. Here's an illustration that will show why.

Imagine a village called Poppellville consisting of 100 people. Ten years ago 30 of the people in the village were below the median line and only 2 of them were getting help from food banks, as the foodbank scheme was still in its infancy. Fast forward to the modern day, 18 of them are below the median line, and 16 of these 18 are receiving help from the foodbank scheme. Clearly this increase in people using the foodbank scheme in Poppellville is not coinciding with an increase in poverty. In absolute terms, there has been an 800% increase in the number of people in Poppellville now benefiting from food banks over those ten years, while poverty has dropped by 40% in that same time period.

That illustration sums up what's probably the case in the UK. Rather than food banks being an indication of increased economic hardship, they most likely are a demonstration of our increased ability to respond to economic hardship with donations of food for those that need it.

* For simplicity's sake, I'm using the woeful definition of poverty that the UK Child Poverty Act 2010 uses - a definition over which I've been critical in the past.

What They Don't Tell You About 'Poverty' In The UK

Millions of public sector workers walked out on Thursday during a massive coordinated strike against what they are calling ‘poverty pay’. These are people with jobs and pensions complaining because they are only getting a 1% pay rise - they are not starving children in Africa. While I don't deny that times are hard for some people in the UK - using the word 'poverty' to describe their pay strikes me as being quite distasteful when you consider how relatively well off they are compared with the world's neediest, like these children in the picture below.

British public sector workers claiming to be stricken with poverty are a bit like people with migraines claiming they have brain tumours. But it is not entirely their fault - they have been given licence to make claims of poverty thanks to the ineffectual way our government defines it. This problem is exacerbated by the fact that according to a recent BBC bulletin, there are apparently "over 13 million people in the UK living in poverty", with the majority of them either working or coming from a working home.

What does it actually mean to be in poverty, and how has the government got it so wrong? To see how they have got it wrong, let's first see a definition of 'poverty' that gets it just about right. Here's a definition as an absolute measurement on a global scale: a person is in poverty if they are eating less food than is required to sustain the human body (approximately 2000–2500 calories per day). That's an efficient measure of poverty, because anybody in the world can have their well-being measured according to daily consumption of food (the same could be applied to access to clean drinking water).

Sadly, unlike the global definition I just described, the UK measurement of poverty is nothing like as efficient - it is actually pretty meaningless. Officially, the UK Child Poverty Act 2010 measures poverty as:

"Each household income that is below 60% of the median income"

Not only is it the case that, when translated into real terms, no one in this country is in absolute poverty compared with developing world poverty - it is also the case that making UK 'poverty' relative poverty based on having earnings below 60% of the median income is a meaningless statistic because you could literally double every single person's household income and still have exactly the same number of people in poverty in the UK. To tell us that poverty is on the increase in the UK we hear that:

"Studies show that in 2012, 33% of people in Britain were living below the poverty line. It has more than doubled since 1983, when the figure stood at 14%."

Alas, this tells us no such thing. All that means is that there were 14% of the population below the median line in 1983 and now there are 33%. This statistic misses the most important factor - it doesn't factor in absolute growth, and how each person's absolute situation is different to 30 years ago. In reality, there can be more people below the median in the present day, while their absolute wealth is still greater than it was in 1983. You could even reduce poverty by lowering the median, because that would bring lower earners closer to the median, even though in real terms their wages remained unchanged.

Furthermore, aside from the aforementioned absurdity that the government could double every single person's household income and still have exactly the same number of people in poverty - what's even more foolish about the median line definer is that the government could actually reduce poor people's poverty by taking some of their money as long as they took more money from those richer than them.

In evaluating their 'poverty' status the public sector workers are concentrating on their disposable income when they should be focusing on their overall consumption. If escaping poverty is about having the basic necessities in life - food, drink, housing, heating, education and health care, then household income is not an accurate measure of whether someone is in poverty. I know public sector managers who earn much more than the average public sector worker but whose disposable incomes are less than those earning an average wage. Are we to conclude that because some managers have only half as much disposable income as their co-workers that they are to be classified as being in poverty? Clearly not.

This is a good analogy for British people in general - most of the basic necessities obtained (either from earnings, government spending or government welfare) constitute consumption, not disposable income. It is easy to exaggerate the differences in the former by focusing on the differences in the latter - but this is absurd because it is the former that is the proper indicator of poverty. Until the government sorts its definition out, disgruntled workers will be only too willing to claim poverty for themselves, and these absurd incongruities will endure.

Misunderstanding The Basics

Here's a rather misleading headline doing the rounds today:

While the issues are serious, that’s exactly the kind of irresponsible and counterfactual way that you’d expect a Daily Mirror columnist to frame the question.

Here are my brief answers to the misjudged insinuations:

1) We have more millionaires than ever before in the UK because the market rewards success and innovation.

2) We've handed out 1 million food parcels because people are caring and want to help, and have found the means by which they can now assist those with less to eat than themselves.

It's odd how the reactionary media see Foodbanks as a sign that things are getting worse. Things might be getting worse in a lot of places, but there's every chance they might be getting better. Either way, an increase in Foodbanks is not necessarily a sign that things are getting worse - it's probably a sign that more people are now being helped than was previously the case. Here's an analogy. In the first year of their inceptive period the Samaritans received thousands of calls. That didn't mean suddenly everyone was getting depressed that year, it meant suddenly more people had someone on the end of a phone to offer support. That's probably the case with Foodbanks - it doesn't mean more people are now hungry, it more than likely means more hungry people are getting practical help, and that communities are doing more to provide that help.

Of course, it may still be the case that these Foodbanks are bad portents, and indictments of very bad times for many, but however that's addressed, it certainly is nothing to do with the fact that there are now more millionaires in the UK than ever before. This is a strange fallacy of the left - they have this foolish idea that it's because successful people are successful that unsuccessful people are unsuccessful. Anyone with more than a basic GSCE grade in economics would know that's absurd. Let me illustrate how it really works with two analogous statements:

A) Hunger occurs not because food is bad but because some cannot participate in eating food.

B) Inequality occurs not because trade is bad but because some cannot participate in trade.

People struggling in a free market are struggling because they haven't yet been able to capitalise in a way that benefits them. They perhaps haven't fully developed their skills yet, or they haven't yet found their vocational niche in a supply and demand market that rewards industry and innovation. Perhaps many never will – and that’s a worry, and it ought to be a signal that they need all the help and support that can be offered to them. But admitting that does not entail falling into fantasy. The current plight of those people, and the wages of low earners, are not dictated by the wages of high earners, they are dictated by the market value of the skills and labour. If the Chief Executive of a company had a government-mandated extra £50,000 a year knocked off his salary it wouldn't mean that the same firm's staff on £18,000 a year would suddenly find a wage increase. That is not how the employment market works, and nor should we want it to.