It’s the minimum wage that’s keeping youngsters out of work

From the Independent: 

The young are the new poor

The Independent – Cahal Milmo
A study by the Joseph Rowntree Foundation has warned that young adults and employed people are now more likely than pensioners to be living in poverty in Britain because of the surge in insecure work and zero hours contracts.

The reason for this is the minimum wage, which also explains why we have nearly 1m youngsters out of work entirely.

While the minimum wage for young people does not seem high – £5.13 an hour for 18-20-year-olds, and £3.79 for under-18s – the fact is that many young people do not provide that much value to an employer. Indeed, when National Insurance and other costs are added, the value of an unskilled young person is often negative. Young people have to learn the habits of work, turning up on time each day, the skills needed in the job, and ‘soft’ skills such as how to get along in a team with colleagues, how to deal with customers, how to react when things go wrong, and so on. It may take many years of training and job experience to lean these skills.

That is why for centuries we have had apprenticeships in which young people earn very little but learn a trade. But minimum wages – plus the heavy burden of workplace regulation which makes it very difficult to let someone go once they have been hired, however inappropriate they turn out to be – make employers more reluctant to take on people with few or no skills and experience.

The result is that minimum wages hurt those they are supposed to help. Employers do not take on young people, or those without skills, or those nearing retirement, or people with poor social or language skills, or ex-prisoners, or people with mental health issues, because their business cannot carry the cost of giving them the support and training they need to become more productive than the cost of employing them.

The winds of political change

UK by-elections (like last week’s in Rochester and Strood, where the UK Independence Party gained its second MP) have always been an opportunity for electors to vent their contempt for the national politicians, before things return to normality at the general election. By-elections generally do not matter; general elections do. So voters’ actions are perfectly rational.

But few people, even the pollsters, are predicting that things will return to normal at the general election in May 2015. Though Scotland did not vote ‘Yes’ to independence in its recent referendum campaign, the performance of Labour, the main ‘No’ campaigners, was humiliatingly poor. But the Scottish National Party is now piling on support. It now has 90,000 members – roughly half the number that the Conservative and Labour parties are able to achieve, even though their UK-wide base is twelve times larger than Scotland alone. Again, the SNP has often done well in by-elections, but never managed to break through in UK national elections. But now there is a real feeling that normality will not return this time, and that the SNP will steal anything up to 40 Westminster seats from Labour.

The Liberal Democrats, the Conservatives’ coalition partners in government, are meanwhile being humiliated just about everywhere. In the Rochester and Strood by-election, they lost their deposit for the eleventh time running, polling just a few hundred votes. Their core supporters think they have sold out to the Conservatives, while voters who want to send a rude message to Westminster have thought UKIP a much better way to do that. In the past they voted for the LibDems, but now the LibDems are part of the Westminster establishment that they despise.

The main parties, then, find themselves no longer leading the agenda; what will decide the election is how these minor parties fare in May 2015. But this phenomenon is not unique to Britain. All over Europe, minority parties are shaking the political class and winning footholds in the legislature.

What is going on, and why? Perhaps we have to look outside the political process to understand. In commerce, for example, traditional business models have been fundamentally disrupted by the internet. Retailing in particular has been rocked by new suppliers, new ways of shopping and new delivery systems. With things like Amazon Click & Collect, why do we need a Royal Mail – even a private one, as it is now. And much the same is happening in politics too. Small communities can find each other, and organise and mobilise, and cause real problems for the traditional parties.

Given today’s technology, there is no reason for people to settle for off-the-peg goods and services. They can be made to your specification, and shipped direct to your door. Barriers to entry have been swept away, as new suppliers with new ideas and not much more than a website can suddenly enter the market and challenge the incumbents.

It is the same in politics. When people have a choice of umpteen different TV or phone or utility packages, they become increasingly contemptuous of national and local government ‘take it or leave it’ services. When Air B&B or Über enables people to access services in an instant, they wonder why they have to fill in forms and queue up in council offices. What is the point of a Met Office when you can get the weather on your phone from countless other providers?

And national parties find it harder to dominate the national debate, as newspaper sales have been falling, because more and more people get their news from online channels – and not necessarily from the traditional media companies, but from a huge number of new media channels, plus (increasingly) social media and other sources. Activist groups can find each other and mobilise. The domination of traditional media and traditional parties is being eroded by people power.

Through internet and communications technology, we can also bypass government services more easily. Telephones were a nationalised industry thirty years ago, but nobody even thinks about re-nationalising them today. And given the new multiplicity of information and entertainment channels, more and more people are asking why we really need the BBC – that one-time flagship of the British establishment – as a state broadcaster.

The internet also makes it easier to find a private doctor or a private tutor, or indeed to find a job and an apartment. Self-help groups provide help to patients or parents that the lumbering government systems simply cannot provide. Who needs government?

Not many of us, any more. Nearly as many people in the UK (176,632) told the census that their religion was Jedi than there are currently members of the Conservative Party. With falling memberships, party candidates are becoming increasingly irrelevant to most people. They are chosen by a dwindling core of of grey-haired Conservative activists or hard-line-socialist Labour ones, with outdated, intolerant or patronising policies to match.

The politicians’ response has not been to understand these new trends (their attempted use of social media is, as we have seen recently, usually disastrous) but to insulate themselves. Politics is no longer something that successful people in other fields did for a few years as a service to their country, but a full-time career, carefully preserved as such.

No wonder people are upsetting their applecart. And no wonder that they cannot understand why.

The John Blundell Studentships

We are pleased to announce the creation of the John Blundell Studentships.

Named after the former Director General of the Institute of Economic Affairs, who died earlier this year, the Studentships are designed to help talented pro-freedom students who are unable to fund themselves for postgraduate work. We aim that this support will help create intellectual ambassadors for freedom among the rising generation.

John was a tireless promoter of the free society and the free economy. An incalculable number of teachers, students, activists, professionals and even politicians were first brought to an understanding of these ideas, and to their own commitment to them, through the work of John Blundell.

This initiative will continue his life’s work, of developing minds and ideas, into the future. There is no more fitting memorial. His wife, Christine Blundell, says “John would have been delighted.”

More details will be announced soon. In the meantime, we welcome your suggestions, pledges of support and memories of John. Just drop me a line at eamonn.butler@adamsmith.org.

Gordon Tullock: a great economist with no degree in economics

It is sad to report the death of Gordon Tullock. He was a friend, likeable and respected as a great economist – even though he had no degree in economics.

He came, rather, from a public administration background, which was why he was the perfect partner to co-author The Calculus of Consent (1962) with James M Buchanan. The book was a counterblast to the ‘welfare economics’ of the day, which saw market failure and prescribed cost-benefit analysis and government intervention. But the book showed, comprehensively and clinically, how there was  government failure too. Politicians and officials are not angels, and their decisions are motivated by their own vested interests. Elections too are not a measure of ‘the public interest’ but a contest between competing and conflicting interests, which no amount of cost benefit analysis can resolve.

The book became the foundation for what was to be an entire branch of economics – or perhaps political science – called Public Choice. The public choice economists, applied the tools of economics – the science of choice – to the democratic decision process. They found that the behaviour of voters, politicians and bureaucrats in the political market place is little different from the behaviour of buyers and sellers in economic markets. They too are self-interested and largely motivated by maximising their own ‘utility’, rather than that of ‘the public’.

Following this approach, Tullock, Buchanan and fellow thinkers in the ‘Virginia School’, which focused on real world political institutions, realised that democratic processes were too often a very messy, exploitative and irrational way to make choices. They concluded that we should not be dewy-eyed about government decision making, and that we should limit it only to the things that are both crucial to do and simply cannot be done any other way.

Buchanan, in particular, emphasised the need for constitutional restraints so as to curb the exploitation of minorities by majorities, or of the silent majority by activist interest groups. On that front, Tullock will be particularly remembered for his delineation of the concept of Rent Seeking. The concept, and even the term, predated that work, but his contribution was to show how the cost of lobbying for government perks and privileges was economically inefficient and politically corrupt. He observed – the ‘Tullock Paradox’ – that the cost of rent seeking was often very low in proportion to the potential payoffs. A little lobbying can win potentially massive privileges (such as ‘quality’ regulation that effectively keeps out the competition). So it is no surprise that the lobbying industry has grown so large. And the more that government’s range, power and tax take expands, the larger are the potential gains.

Many of Tullock’s friends and colleagues were disappointed that he did not share in James M Buchanan’s 1986 Nobel Prize. He never complained about it; and he will still be remembered with respect and affection.

For more on the Public Choice School, see Eamonn Butler’s Public Choice – A Primer

The mansion tax is theft, a bit at a time

Labour’s mansion tax was already starting to unravel even before Shadow Chancellor Ed Balls tried to save it with a few palliatives today. When you have left-wing Labour MP Diane Abbott complaining that the mansion tax would be little more than a tax on Londoners, and when other MPs and candidates nursing slim majorities are worrying that the tax might hit their own voters, and not just rich Tories, you know it’s time to throw in the towel.

Strange, is it not, how politicians never ask how they could cut their own spending, but only think about how they can raise taxes from other people. Mr Balls reckons he can raise £1.2bn from the tax, which he says would come in handy for the NHS, he reckons (though the emerging black hole in the NHS budget is much larger than that). How does he know? He says much of the tax would come from foreigners with big houses in London, but does not seem to know how many of them there are. No, as usual, it will be the Great British public who foot most of the bill, and not just the rich. Tens of thousands of homes in London will be caught by it, for example, where the average price in a ‘prime area’ will probably hit the £2m mansion tax threshold by the time of the 2015 election. And ‘prime’ includes areas like Battersea and Clapham, not just swanky Kensington and Chelsea.

There are already plenty of taxes on property. Not only is there the council tax, but there is stamp duty when you buy a house and inheritance tax when you give it to your kids. Now the plan is to add another, of perhaps £4,000 a year.

We all know what will happen. The tax will be imposed on properties of £2m, and over the years, thanks to (politician-created) inflation and (politician-created) planning restrictions, the cost of property will rise. More and more properties will be hit by the ‘mansion’ tax (yes, including broom cupboards in Kensington), just as more and more people now pay the 40% higher rate of income tax, which was originally targeted at the wealthy but is now paid by people like teachers and police officers.

And our tax (and subsidy) system is already highly progressive. Wealthier people pay higher taxes of many kinds, while poorer areas get subsidies through the local government finance system.

The mansion tax is theft, a bit at a time. There will be many people who happen to live in large houses but have little or nothing in the way of income (such as those on pensions) with which to pay the tax. Perhaps the house was their childhood home and they can’t face moving. Moving is a strain even for the most robust of us. Ed Balls says, well maybe poorer people could defer the tax until they sell the house or pass it on after their death. But that makes the tax even more complicated – it is going to need a means test and a lot of extra bureaucracy, more lines on the tax form and all the stuff that has already got us in such an overtaxed bureaucratic pickle. This is a tax we could well do without.