We need a Negative Income Tax, not a Living Wage

The new Living Wage rate was announced today. I’ve written a bit about the Living Wage already. If it’s private, it’s probably not a big deal, although it could still lead to unemployment. I suspect it’s done by big firms that don’t have many low-skilled workers as a PR move but I quite like PR moves that involve paying low skilled people more. And I worry that people will generalize from those big firms to assume that the whole market could bear a mandatory Living Wage, which is almost certainly untrue and would be very harmful to many of the people it’s supposed to help.

What’s more interesting is the problem of low pay in general. Even though unemployment has fallen a lot in recent years in the UK, real wages have barely risen at all. Even as wages do begin to rise on average, it’s possible that wages for low skilled workers may not as jobs for them are outsourced to cheaper countries. The ASI has proposed raising the personal allowance (including National Insurance threshold) to the minimum wage rate, but this doesn’t do much good for part-time workers or currently-unemployed people who would earn below the minimum wage if we scrapped that, as I think we should.

So low pay may be a problem without any clear solution, for which most popular ‘solutions’ don’t actually work.

But there may be a fix that does work – a Negative Income Tax or a Basic Income. As I’ve written before these are actually very similar even though one is almost exclusively supported by right-wingers and the other almost exclusively by left-wingers. As ever in politics, we’re speaking different languages.

A Negative Income Tax is a form of income top-up that only looks at an individual’s income, not whether they are in work or not, and tops that income up automatically if they are earning less than a given amount. The extra money is withdrawn at a tapered rate, so that for every pound you earn from work, you lose (say) fifty pence in top-up, ensuring that workers always have a clear incentive to demand higher wages, and that work always pays more than joblessness for unemployed people.

This would replace lots of existing working age benefits, including Jobseekers’ Allowance, council tax relief, the Employment and Support Allowance and tax credits. You could probably implement a decent one without increasing total expenditure. The exact rates can be determined by running trials across the country.

A Negative Income Tax like this would almost certainly be a boon to people on low pay, and would avoid most of the problems that minimum wages and current welfare schemes face.

Indeed the main objection may simply be that it is redistributive. That’s where I break with many of my fellow libertarians – I want free markets because they make poor people’s lives better, and I am OK with redistribution if it’s done in a market-friendly way that makes poor people’s lives better too. If this sounds surprising, remember that this puts me in the same boat as Milton Friedman (who campaigned for a Negative Income Tax) and FA Hayek, and indeed in the same utilitarian philosophical camp as Ludwig von Mises.

I suspect low pay will continue to be a problem for many years, maybe becoming even worse as automation renders some people permanently unemployable. It is necessary but not sufficient to simply rebut other people’s bad ideas.

In the Negative Income Tax we have a policy that can actually go a big way to solving the problem, and hopefully replace some of the harmful policies we have right now. Rhetorically, I think we free marketeers need more positive solutions to policy problems, and if we could get over our squeamishness about endorsing certain forms of ‘good’ redistribution, we may be able to surprise people into listening to and maybe even agreeing with us. If low pay is indeed the long-term problem that it seems to be, the Negative Income Tax’s time may finally have come.

David Cameron vs feminism

Today there was a minor kerfuffle about the Prime Minister’s refusal to wear a t-shirt that says “This is what a feminist looks like” after Elle, a women’s magazine, asked him to do so for a marketing campaign. Elle had a go at Cameron, saying that “It should be simple. Do you believe that men and women are equal? Do you believe men and women should have the same rights? The same opportunities? Yes? Then you are a feminist.”

Well, that sounds pretty reasonable! I don’t see how anyone could object to that. But the plot thickens later on. All these unobjectionable, bland claims apparently relate to quite specific public policy issues, like unequal pay and political representation for women. According to Elle, we need feminism because “for every £1 a man earns in the UK, a woman earns 80p. Women make up only 35% of senior managers in the UK and an estimated 30,000 women a year lose their jobs as a result of pregnancy-related discrimination. In politics, fewer than one in four MPs is a woman, and there are only five women in the cabinet out of 22 ministers”.

In other words, we need feminism so we can do something about very specific issues (presumably in specific ways, since the Fawcett Society is involved which has specific policies to address all these things).

This sounds to me like a ‘motte and bailey’ argument. Scott Alexander explains in more detail in part two of this excellent essay here (if you have the time, read that, not this). The name come from medieval times, when a ‘motte’ was a defensible castle surrounded by a profitable village called the ‘bailey’. Everyone would work out in the bailey until they got attacked and had to retreat to the safety of the motte.

A motte and bailey argument starts off by defining itself in very defensible way. “Feminism means thinking that men and women should be treated equally.” That’s the safe, defensible motte.

It then extends that reasonable-seeming claim to all sorts of controversial claims – unequal political representation demands all-women shortlists; unequal pay demands more invasive laws to equalise pay between men and women. That’s the bailey where the actual (political or cultural) advancements can be made.

Let’s say you attack the bailey by saying that you’re not a feminist because you think the policies advocated by feminists are bad, or the problems they identify are not even problems at all. Maybe you find, as Ben recently has, that “if you control for background (i.e. skills and talent) and exit (i.e. women staying in the workforce) women earn more than men and get more aggressively promoted than men”, which implies that the claims made by feminists about unequal pay needing new laws are simply incorrect.

Feminism may also be wrong about many other things, such as claims about men and women’s brains being biologically the same or the pervasiveness of a ‘rape culture’. These are substantive elements of what feminists define as feminism, and they may be right or wrong. It’s legitimate (albeit quite possibly mistaken) to think these claims are wrong, and hence to decline to wear a ‘This is what a feminist looks like’ t-shirt.

But do that and many feminists will retreat into the defensible motte, as Elle have today. David Cameron doesn’t think men and women should be equal! David Cameron doesn’t think men and women should have the same rights! Feminism is very simple!

This is dishonest and manipulative. And an open society requires honesty in political discourse. David Cameron is often accused of pandering to fashion. He deserves credit for refusing to do so this time.

The ECB is fiddling while Europe burns

If not quite burning yet, the eurozone is kindling. For once, most people agree why: money is very tight.

The central bank’s interest rate is low, yes, but this is not a good measure of the stance of monetary policy. What matters is the interest rate relative to the ‘natural’ interest rate – ie, what it would be in a free market. It’s difficult to know what this natural rate is (as Hayek would tell us) but we can look at things like nominal GDP and inflation to help us guess. Both are way, way below levels that the market is used to. Deflation is back on the menu.

As Scott points out, whatever you think about the American or British economies since 2008, the Eurozone looks like a case study in central bank failure:

The eurozone was already in recession in July 2008, and eurozone interest rates were relative high, and then the ECB raised them further.  How is tight money not the cause of the subsequent NGDP collapse?  Is there any mainstream AS/AD or IS/LM model that would exonerate the ECB?  I get that people are skeptical of my argument when the US was at the zero bound.  But the ECB wasn’t even close to the zero bound in 2008.  I get that people don’t like NGDP growth as an indicator of monetary policy, and want “concrete steppes.”  Well the ECB raised rates in 2008.  The ECB is standing over the body with a revolver in its hand.  The body has a bullet wound.  The revolver is still smoking.  And still most economists don’t believe it.  ”My goodness, a central bank would never cause a recession, that only happened in the bad old days, the 1930s.”

. . . And then three years later they do it again.  Rates were already above the zero bound in early 2011, and then the ECB raised them again.  Twice.  The ECB is now a serial killer.  They had marched down the hall to another office, and shot another worker.  Again they are again caught with a gun in their hand.  Still smoking.

Meanwhile the economics profession is like Inspector Clouseau, looking for ways a sovereign debt crisis could have cause the second dip, even though the US did much more austerity after 2011 than the eurozone.  Real GDP in the eurozone is now lower than in 2007, and we are to believe this is due to a housing bubble in the US, and turmoil in the Ukraine?  If the situation in Europe were not so tragic this would be comical.

There is a point here. Economic news, by its nature, tends to emphasise interesting, tangible, ‘real’ events over things like central bank policy changes (let alone the absence of changes).

Of course that can be deeply misleading. The stance of money affects the whole economy (at least the whole economy that does business in nominal terms, which is pretty much everything except for gilt markets), and the Eurozone is experiencing exactly the sort of problems that the likes of Milton Friedman predicted that tight money would create.

Overall, the Euro looks like the most harmful institution in the world, except perhaps for ISIS or the North Korean govt. It may be unsaveable in the sense that it will never really be an optimal currency area, but looser policy (which free banking would provide) would probably alleviate many of the Eurozone’s biggest problems. Instead, what Europe has is the NHS of money – big, clunking and unresponsive to demand.

And the ECB seems wilfully misguided about what it needs to do. The only argument against this is that surely—surely—Draghi and co know what they’re doing. Well, what if they don’t?

Seumas Milne’s dodgy statistics on African poverty

Seumas Milne’s column last week blamed globalisation for migrant deaths in the Mediterranean. The column isn’t that important, but this bit jumped out at me:

As the catechism of “free market” deregulation has been imposed across the world under “free trade” and “partnership” agreements and the destructive discipline of the IMF, World Bank and WTO, capital and resources have been sucked out of the developing world and tens of millions of people have been driven into urban poverty by corporate land grabs.

That is why the number living on less than $2 a day in sub-Saharan Africa has doubled since 1981 under the sway of rich world globalisation. Africa’s boom has been in resource exploitation, not in most people’s living standards. So it is hardly surprising that migration from the global south to high and middle-income countries has more or less tripled over the past half century.

Actually, the percentage of people living on less than $2 a day in sub-Saharan African has fallen from 72.2 percent to 69.2 percent since 1981. The total number of people on $2 a day has doubled because sub-Saharan Africa’s population has doubled (p. 96). “Free market deregulation” has nothing to do with it, except for the fact that infant mortality has fallen substantially.

I know this because it is in the same paper that Mr Milne’s figure comes from, on the same page, in the same table. It’s a pity that he did not think to mention the data that directly disproves his claim.

Screen Shot 2014-10-16 at 09.25.27I wrote a letter to the Guardian pointing this out but they didn’t print it. It’s also worth pointing out that African poverty fell by 38% between 1990 and 2011. (h/t Anonymous Mugwump.)

Screen Shot 2014-10-16 at 09.38.06

 

Being economically worth less does not mean you are worthless

I’ve just been on Channel 4 News discussing Lord Freud’s comments about letting people with disabilities choose to work for below the minimum wage. I haven’t watched it back but I gather from Twitter that I fluffed it a bit – unfortunately the producers put me up against two people without telling me, so I got flustered. 

The thing I said that upset people the most was that some people with severe disabilities or learning difficulties may be economically worth less than people without. (One of the people I was debating apparently thought I said ‘economically worthless’.) 

Lots of people have taken this to be a comment on the moral value of people with severe disabilities or learning difficulties. This is an error. The value of a person’s labour is equivalent to what others will pay them for a given amount of time, also known as their productivity. When Lord Freud talked about people not being ‘worth’ the minimum wage, this is what he meant.

It has absolutely nothing to do with how important they are as a person. Some very good people are unproductive because they are inexperienced, they don’t have economically-valuable talents, or they are disabled. Some very bad people are very productive because they did well in the lottery of life. Indeed this is something I care about very strongly, and it has led me to abandon beliefs I once held quite strongly in favour of mechanisms that would redress some of this imbalance.

Perhaps it was a bad choice of words to say ‘economic worth’ because many people are unaware of the above. I can understand that if you heard me say someone was ‘economically worth less’ (let alone ‘economically worthless’!) that you might think I was making some comment about that person’s value as a human being. I’m pleased, at least, that many people who disagree with me nonetheless give me the benefit of the doubt, and I hope I’d do the same.

I think Freud’s comments were motivated by a sincere desire to make disabled people’s lives better off by allowing those that want to work to do so, with their wages topped up by the taxpayer. Whether or not you agree that this is a wise move it does nobody any favours to suggest that anybody in this debate thinks people with disabilities are not valuable as human beings.