The Living Wage campaign is wrong-footing the right

I’ve long taken an interest in the Living Wage campaign, both as an opponent of their ultimate goal but also as an admirer of their strategy. Their aim, I believe, is the statutory enforcement of a ‘Living Wage’, which would effectively mean a pretty hefty hiking of the National Minimum Wage across the country. Though well intended, this is a bad idea: we would need a lot of evidence to discard the Econ 101 principle that price floors cause oversupplies, which in the case of labour we refer to as ‘unemployment’ and the evidence is, at best, divided.

But the Living Wage Foundation (and the LW campaign in general) has been far too canny to call for this outright. Instead, they have focused on getting big firms like Goldman Sachs to voluntarily sign up to pay their workers at least a Living Wage.

This isn’t hugely significant in financial terms: it’s fair to assume that most employees and contractors at firms like Goldman Sachs were already earning above the Living Wage before they signed up. A jump from the NMW to the London Living Wage is very significant from the point of view of the individual employee (an extra £100/week for someone on 40 hours a week) but not too significant from the point of view of an employer like Goldman Sachs.

For these firms, signing up to pay a Living Wage may be a relatively cheap PR move. Or, to go back to that Econ 101 point: what these firms are paying for is not just the cleaning, but the image boost that comes from paying all of their their employees well. It’s possible that they’ve reduced employee breaks or labour hours, as often happens when the minimum wage is raised, but who knows.

I’m very pleased that Goldman Sachs is paying its cleaners more. I’d be pleased if more firms spent more of their marketing budgets on cash transfers to low-income workers in this way. But, as they say on the internet, the obvious point is obvious: even if Goldman can afford to pay a small number of its workers more to improve its image, firms in a less financially secure position may not be able to increase wages without bringing on the negative side effects previously mentioned. And, again pretty obviously, such PR only works if there are other firms that do not pay their workers a Living Wage.

The other interesting thing that the Living Wage Foundation has done is focus on government contractors – usually cleaners – who earn less than a Living Wage. Again, I don’t really mind this – there are reasonably good arguments that the government should set pay for civil servants as competitively as possible, but when it comes to cleaners earning a pittance, who really cares? As ‘wastes’ of taxpayer money go, this is hard to get worked up about.

This is all interesting to me because it puts free marketeers in an extraordinarily difficult position. Say nothing and the case for the Living Wage appears to be unopposable – perhaps allowing it to gain enough credibility that eventually it seems completely obvious that it should be legislated for. Go up against them, and we’re in the bizarre position of at least appearing argue against a private firm voluntarily paying its workers more because of consumer pressure. Isn’t that exactly what the market is supposed to do?

Low pay is a serious problem that will probably get worse before it gets better. We on the right do have our own answers: Tim Worstall has pointed out again and again that not taxing minimum wage workers would effectively give them a Living Wage. And reform of the welfare system to subsidise wages (perhaps through a Negative Income Tax) would be a very market-friendly way of helping the poor. But these don’t seem to have gained much traction as specific alternatives to raising the minimum wage. I’m left feeling quite glum: a voluntary Living Wage is basically a good thing, but a mandatory one would be terrible. Is there anything we can do to oppose one without seeming to oppose the other? I’m not sure.

The Negative Income Tax and Basic Income are pretty much the same thing

I’ve been talking about the Negative Income Tax lately, and equating it with the idea of a Basic Income. I think most of the policies’ respective advocates would deny that they’re the same policy. In this post I’m going to outline why that’s incorrect and I’m happy to say that they’re basically the same thing.

For the uninitiated, a Negative Income Tax is a form of welfare that replaces most existing welfare schemes with a single payment that supplements the income of the unemployed and low-paid. The payment is withdrawn as your earnings increase, ideally at a gradual enough rate that increasing your earnings (and hence reducing leisure time) is always worthwhile.

An example: a £5,000 basic payment at a 50% marginal withdrawal rate (this means that for every additional pound earned, the worker will receive 50p less in NIT payments). Someone with an income of zero would receive an NIT payment of £5,000, or just under £100/week. If they took a job that paid £5,000/year, they would receive a top-up of £2,500/year; that paid £7,500, a top-up of £1,250/year. Once they reached £10,000/year, they would receive nothing in NIT.

This idea was supported by Milton Friedman, among others, and has a reasonably strong pedigree on the right. Even libertarians who object to income redistribution in principle usually concede that a Negative Income Tax is the least bad form of welfare, because it is administratively simple and perverts incentives less than most welfare schemes. It is particularly appealing to many liberals and libertarians because it is unpaternalistic.

A Basic Income, on the other hand, is usually conceived as a flat payment to everybody irrespective of circumstance. This leads to a very big problem: assuming it replaces most forms of welfare as an NIT does, a basic income high enough for unemployed workers to subsist on would simply not be affordable to pay to everyone. A policy that ideally would be designed to help the poor ends up being a very expensive subsidy to people who do not need extra money.

Advocates of the Basic Income recognize this, and their solution is typically to use the tax system to ‘claw back’ the payment from relatively high earners. So everyone gets the money, but it is withdrawn according to earnings.

In practice, that’s more or less the same as a Negative Income Tax – the only difference is whether the withdrawal takes place at the ‘front’ of the payment (as with the NIT), or the ‘end’ (as with the Basic Income). Strange as it may seem, the policies advocated by Milton Friedman and the Green Party are the same in all but the technical detail.

But even if there is a surprising amount of agreement in terms of the kind of welfare we’d like to see, the detail may be more difficult to agree on. How much should a ‘basic income’ be? When should it begin to be withdrawn, and at what rate?

Questions like this are, I think, likely to be where what breaks up this (unholy?) alliance. But maybe not. Traditional policies like the minimum wage probably do more harm than good, and, rightfully, the question of how to improve the lives of the low paid does not seem to be going away. It will take compromise, but in the Negative Income Tax / Basic Income, we may have an answer.

Why Labour’s rent controls will do more harm than good

Now that we have more detail, Labour’s new ‘rent control’ policy is not quite as bad as I’d initially feared. Instead of the old school price ceilings that destroyed parts of New York City, Labour are proposing ‘second-generation rent controls’, which limit the ability of landlords to renegotiate rents during tenancies, and ‘make three-year tenancies the norm’.

The real-world effects of this are likely to be that expected rent increases over the three-year lease will be priced in to the starting rent, so it’s unlikely to actually make anyone better off unless there’s an unexpected increase in rents. If rents fall below expectations, this would hurt tenants.

Since landlords are bound within tenancy agreements, rises in rents are likely to be sharper than they currently are for new tenants. This means that housing mobility is likely to be reduced – tenants locked in to a relatively low rent will find it more costly than they otherwise would to move. This is very important: it looks as if lowered housing mobility causes higher unemployment, because people are less able to move to find new jobs.

Rent controls of any kind are likely to decrease the supply and quality of available housing. ‘Second-generation’ controls are less tight and so less harmful than classical rent controls, but as Hopi Sen has pointed out, the German experience does not seem encouraging. There, rents have risen far more quickly over the past decade than they have in Britain, as new construction has slowed.

There is also evidence to suggest that second-generation rent controls have a similarly negative impact on housing quality as classical rent controls. A 1985 study by the Richmond Fed found that controlled housing units were 7.1% lower in quality in 1974, and 13.5% lower in 1977, pointing to a cumulative negative effect. If classical rent controls are only worse than bombing, second-generation controls may be close to petty vandalism.

One interesting aspect of this announcement is that it may affect supply now, as would-be investors in new housing are discouraged by the prospect of stricter controls on their investment. If the measures are actually brought in – crossing the rent control Rubicon – an expectation of tighter controls may reduce supply even more.

It’s not clear what mechanism Labour is proposing to make three-year tenancies ‘the norm’, but it’s hard to imagine any effective measure that would not end up hurting tenants who want shorter leases. This probably means young people.

As we say virtually every day, the best way to reduce the cost of housing is to build more. Labour’s proposals seem counter-productive, but they’re nothing compared to the harm caused by the planning system.

We recently learned that more of Surrey is covered by golf courses than by houses. Rolling the green belt out even a bit – by, say, a mile outside London – would create space for hundreds of thousands of new homes, relieving pressure on existing housing stock, reducing rents and – a nice bonus – creating lots of jobs and adding a few percentage points on to GDP growth. We can dream.

Bleeding heart libertarianism and British politics

I have a chapter in a new publication by Liberal Reform, the classical liberal movement within the Lib Dems, in which I make the case that non-libertarians and libertarians may find a surprising amount of common ground if they put their differences of opinion about wealth and income redistribution aside. (Unfortunately, you have to sign up to Liberal Reform’s mailing list to read that piece. You use my email address to login instead: sam at adamsmith dot org)

Basically, the chapter is an attempt to sketch out a British political economy of Bleeding Heart Libertarianism, the movement that has sprung up around American philosophers like Matt Zwolinski. The main areas I identify are immigration reform, drugs legalization and ‘modern mercantilism’ (a broad term for corporate and middle-class welfare).

I do think there’s a lot of common ground between libertarians and people on the left, but for a serious dialogue to work I propose that libertarians shift their focus from opposition to wealth and income redistribution to a single-minded focus on the regulatory apparatus of the state:

I suggest that libertarians concerned with the plight of the poor should abandon their opposition to wealth redistribution in practice and focus instead on the regulatory state, where we have a much greater degree of certainty about the harm caused. For libertarians who wonder if they are BHLs, the question might be: If libertarian institutions existed and serious, significant poverty persisted, would state action be justified in acting to relieve at least some of that suffering, if we had a pretty good reason for thinking that that action would work?

I think that it would, and if you have a serious commitment to welfare so should you. The only problem should be an empirical one, which I cannot say is strong enough to reject all wealth redistribution. While I am extremely confident about the benefits of liberalising planning to allow new homes to be constructed in the UK, I feel less confident about saying that all redistribution is harmful.

So I propose a compromise: a ‘libertarian welfarism’. This might see us reform tax credits and the welfare system into a combination of universal basic income and a ’negative income tax’ that acts as a top-up to people’s wages, adjusted to give a little more to people in low-income jobs and the unemployed. The details of this approach to income redistribution are not important for now: what matters is the idea of a simple, cash-based redistributive mechanism. I find myself very comfortable with this kind of redistribution; other libertarians will be less so. But perhaps they could accept it as the cost they have to pay to persuade others about the other, much more important, things they have to say.

I expect many people to find this kind of thinking quite outrageous, but to me the really strong arguments for libertarianism are based on our beliefs about ignorance and incentives, not justice, so they should only preclude redistribution of wealth as a matter of pragmatism. There’s no intrinsic reason you can’t combine those ideas with “left-wing” beliefs about what a good world looks like any less than they can be combined with “right-wing” beliefs about the kind of world we watnt. I don’t know if libertarians will ever be able to have the same influence on the left that we’ve had on the right, but it’s worth a try.

Don’t hate the players, hate the game

I usually agree with Mark Littlewood, Director-General of the IEA, so I was surprised by his piece in the Mail on Sunday this weekend. Mark proposes a public register of everyone claiming benefits of any kind – pensions, disability living allowance, jobseeker’s allowance, and so on. This strikes me as a very bad idea indeed.

Mark’s aim is to increase public awareness of benefits claimants who are receiving much more in benefits than most people would think reasonable. This, he hopes, will increase the public’s appetite for welfare cuts. Actually, I think people overestimate how much money individual people on benefits get, but the proposals are undesirable for other reasons.

Mark says that “This wouldn’t be a matter of ‘naming and shaming’ anyone. After all, if you are legally entitled to a particular benefit, what is there to be ashamed about? Anyone ashamed to claim money from the State maybe shouldn’t be claiming it.”

In my experience, most unemployed people are profoundly ashamed of being unemployed. Removing their privacy, exposing them to gossiping neighbours and their children to bullying classmates, will just make that even worse.

And Jobseeker’s Allowance only accounts for a small proportion of the welfare budget. These proposals would also include people on disability benefits for socially stigmatized mental illnesses and physical disabilities that they would like to keep private.

Mark says that Britons “are far too reasonable to start taking up pitchforks and burning torches and assaulting imagined benefit cheats.” I am less sure. This is, of course, the same country that saw a paediatrician being hounded by vandals who confused the word “paediatrician” with “paedophile”.

These proposals would humiliate people on benefits and rob them of their privacy. They don’t deserve it. Many (probably most) of them are dependent on welfare because of the state itself, and it is senseless to make their lives even more difficult instead of tackling the real causes of their poverty.

If you think that unemployment is largely caused by government mismanagement of the economy, it makes no sense to humiliate people for being out of work. If you think that government welfare has crowded out private charity, you shouldn’t blame people forced to rely on government disability benefits. If you blame planning regulations for the high cost of housing, you should focus on those regulations before you cut off the money that mitigates the problem for a few poor people.

I wish the only problem today was the government’s unwillingness to cut spending. In fact, that spending usually exists to relieve much bigger problems that can’t be found on the Treasury balance sheet. Often, those problems are state-made.

To me, this is one of the key messages that ‘bleeding heart’ libertarians need to get across to other free marketeers. Cutting back the state is a bit like a game of Jenga – if you blithely pull away the supports that people rely on before you take away the causes of that reliance, you’ll only end up making things worse.

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