The Pin Factory Blog

We should always be very, very, careful with the poverty numbers that come out from the US. For they calculate their poverty level in an entirely different manner to everyone else. We and the rest of the industrial world look at what people have after all the things we do to alleviate poverty. After tax credits, housing benefit and all the rest. This is sensible, because what we want to know is not how much poverty is there before we start to help but how much is there after the help we already do give: how much remains to be done in essence?

Have a look at this calculation here. They've got it a little bit wrong in that the minimum wage worker doesn't have more disposable income than the $60,000 a year household, rather they have a larger consumption bundle. And, of course, it's really consumption that defines poverty, not either income or disposable income.

But here's the important point. When the calculation is done of how many poor people there are in the US the only part of that assistance that is included is the TANF amount. That $2,040 going to the extremely poor family. For the only thing that is counted in determining poverty is cash income: the effects of the tax system (and thus tax credits) and benefits in kind (food stamps, Section 8 housing vouchers etc) are ignored. That some $32,500 in various assistances offered to the minimum wage household is simply not taken into account at all.

Which, when you think about it is really rather strange. For that minimum wage household is enjoying a consumption bundle considerably higher than median household income for the US as a whole (which is $49,000 or so, but that's a pre tax number, and as we can see, the min wage household has higher consumption than the $60,000 one).

And the implication of this is that, to the first level of approximation at least, is that there are no working poor in the US. The problem has already been solved. The US welfare state is sufficiently large, sufficiently redistributive, that working at minimum wage leads to a better than median lifestyle and consumption bundle.

What poverty?

One of the challenges that think tanks face is getting a complex idea across to politicians who often don't have the time or interest to listen. Take the idea that, if you cut back state functions, the private sector will always step in with the cut in government expenditure boosting the private sector. It is tempting to go into a lot of economic explanation as to why, though sometimes it's as simple as government suppliers, benefitting from state subsidy or lower borrowing costs, being able to drive off competition. Occasionally, it gets slightly more complex, like when we look at the effects of government borrowing soaking up credit from lenders at the expense of private firms.

Fortunately, there are some interesting real-world examples to demonstrate the point. Take the effect of councils cutting back on pest control. With just 10% having cut this local government function, and 30% now charging for the service, there appears to have been a dramatic increase in the populations of rats, mice, cockroaches, bedbugs, wasps and moths. And of course, a massive boost to the pest-control industry. Lodi, producing rodenticides, saw a 25% sale increase. Beaver Pest Control, a 44% increase in call-outs over the last three years for rodents. Rentokil, a 24% in crease in call-outs for bedbugs, and a staggering 231% increase in wasps' nest call-outs. Killgerm sold 18.5% more insecticides and had 59% more call-outs for moths last year. No additional resources are being consumed here – as the state shrinks, the private sector expands to fill the vacuum and does so more efficiently.

If this is what happens when one small branch of local government provision is eliminated, just imagine the effect of sawing off a larger branch, perhaps of central government. The price of individuals having to pay for pest extermination (rather than general taxpayers) gives people a reason to take responsibility for their actions – minimising litter and unhealthy messes around the home which attract pests in the first place. The possibility of footing the bill for pest control rather than getting it for free from your fellow council-taxpayers is likely to make you think twice about leaving that dirty plate out or cheekily brushing those crumbs onto the carpet, and in the long run means fewer pests and fewer resources spent on controlling them.

A couple of weeks back I said that I thought that Iceland might well come out of all of this in rather better shape than Ireland. They've admitted their bankruptcy, defaulted, devalued and now seem to be growing again. Paul Krugman agrees:

What’s going on here? In a nutshell, Ireland has been orthodox and responsible — guaranteeing all debts, engaging in savage austerity to try to pay for the cost of those guarantees, and, of course, staying on the euro. Iceland has been heterodox: capital controls, large devaluation, and a lot of debt restructuring — notice that wonderful line from the IMF, above, about how “private sector bankruptcies have led to a marked decline in external debt”. Bankrupting yourself to recovery! Seriously.

But where I argue with his statement is that he's saying Iceland is heterodox, Ireland orthodox. Countries of course aren't companies or people but the orthodox response to bankruptcy is to admit it and restructure. Devaluation is a time tested tactic as well: as the UK's experiences in 1931 and 1992 (coming off the gold standard and the EMS respectively) show. As Argentina more recently and any number of other times and places show.

What Ireland (and Greece etc) are trying to do now is the heterodox path: given that they can't have an external devaluation they must have an internal one and that the political demands of the European Project seem to rule out default (at least at present), they're not able to do what the orthodoxy prescribes for them.

If you can't pay your debts you've got to default (or the nicer sounding euphemisms of restructure, impose haircuts,) and if your cost base is too high then you should devalue. This isn't, pace the Professor's description, odd, unusual or even slightly different. It's the straight textbook reaction to being in this place where everyone would really prefer they weren't.

As part of its push for transparency in public services, the government has released a “UK health atlas”. Its aim is to show the variations in health spending and outcomes in primary care trusts around the country. The findings show huge disparities in provision. The idea behind this release of information was to encourage patients to put pressure on the lowest performing primary care trusts. It has, however once again highlighted that the NHS suffers from serious disparities in the quality of care provided. This suggests that the system of healthcare provision in this country has to be radically overhauled.

There are huge discrepancies in spending between primary care authorities – for example, there is a fourteen-fold difference between the highest and lowest expenditures on hip replacement surgeries in different authorities. Some health authorities spent two and half times as much on mental health care compared to others. These variations clearly indicate that the postcode lottery of healthcare is still a major problem. The atlas was standardised to take account of various social and patient factors, so variations in spending cannot fully be explained by these elements.

The lack of a price system means that it is impossible to know which trusts are at fault – are some spending too much, or are others spending too little? What is the optimum amount of money to allocate to hip replacements? Giving power over health spending to a bureaucrat means that spending decisions will be made without the necessary information that a price system would convey.

The most important step to improve the NHS is to break its monopoly on the healthcare market. There should be a move towards the state becoming the regulator rather than the manager of these hospitals, and the provider of funds to support patients rather than of services. Because there is no price mechanism, there is currently an enormous amount of bureaucracy in the system, which all too often results in bad performance of services. The lack of competition means that hospitals can underperform without any incentive to improve. Breaking up the NHS would be a big task, but by doing so the government and the charities would see better care for patients.

'As the financial disaster in the Republic of Ireland continues to worsen and doubts are cast over the continuation of the euro, Irish bank chiefs have rolled out beleaguered country's new currency. Earlier this month, Fianna Failure Agriculture Minister Brendan Smith announced that free cheese would be handed out to deprived citizens "to contribute towards their well-being".' – Link.

Readers of this blog will be well aware of Tim Worstall’s ability to cut through muddled thinking and write clearly about the real solutions to the world's problems. Tim has been particularly strong writing about the politics of global warming, and next week will be launching his new book on the subject, Chasing Rainbows. The book takes on the global warming alarmists on their own terms, accepting the IPPC’s science, and uses the logic of economics to argue that the ends that environmentalists want is best achieved through more globalization and freer markets, not government interventions like cap-and-trade.

The book is thought-provoking and laugh-out-loud funny – from Tim, you’d expect nothing less – and comes with recommendations from Matt Ridley (author of the Rational Optimist), Madsen Pirie, and Tim Harford, the Undercover Economist. I’m happy to say that Tim has allowed us to give ASI Blog readers the book’s full introduction to download, so you can see for yourself. The download is available here, and you can pre-order the book at Amazon (at 20% off) here.

The book launch will be held this Tuesday November 30th. For full details, see here.

It seems as if the Liberal Democrats may be reading this blog. We can't say for sure, but after a truly lamentable start to how university reforms were being presented, they appear to be taking the advice of classical liberals. Rather than making the reforms about deficit reduction and accepting the unpopularity of a rise in tuition fees, they are attempting to redefine the debate. They might not be taking our ideas but they are certainly converging on them: Already, they've done something similar to my suggestion of renaming it so as to differentiate the scheme from up-front tuition fees: I proposed something akin to a "graduate income repayment", and now we hear Nick Clegg (as well as John Hemming) talk about a "graduate contribution scheme".

The Liberal Democrats have finally found their message. Now they simply need to shout a little louder, and a little more. Students aren't stupid, but up until now some extreme socialist activists have misled them: not having actually read the proposals, they readily act upon any number of myths. On closer inspection, the National Union of Students (NUS), having vowed to hound Liberal Democrat MPs as traitors, actually has fairly similar proposals to the coalition government's.

Remarkably, the NUS appears to have got away with this gross hypocrisy: although they would end graduate contributions after 20 years rather than 30, and would set an unrealistically low level of contributions, a system of income-related graduate contributions would remain. The government's proposals fulfill their call for an end to up-front fees for part-time students, and are actually substantially more generous with regards to lifting the repayment threshold from £15,000 per year to £21,000: something the NUS would have kept the same.

The key difference is in abolishing the ability of universities to set their own fees, instead having all funding centrally directed - presumably according to perceived "need" rather than rewarding universities based on their popularity with students. I'm certain that the vast majority of student fury was directed against paying more rather than against maintaining a market in higher education. How absurdly ironic that even the first reason is based on a myth: students would in fact pay less per year under the new system.

One of the more positive outcomes of Ed Miliband's election as Labour leader is that his social liberalism is beginning to manifest itself in party policy. He made it very clear during the campaign that he thought the previous government had gone too far with its assault on civil liberties. Now Ed Balls, amongst the most authoritarian and statist members of the shadow cabinet, is admitting the same: he has indicated that Labour may back moves to reduce the period of detention without trial from 28 to 14 days. He has also dropped any calls for the use of ID cards, although the position on the use of CCTV will remain the same.

So what? Well, the mark of a successful government is not one that enacts bold reforms, but one that makes those reforms politically irreversible. The easiest way to do this is to achieve cross-party consensus on reform, or else cause a tectonic shift in political debate, making certain realms unelectable. New Labour emerged as a response to Thatcher and Major – it dropped the more economically illiberal elements of Labour policy in order to become electable. Likewise, the Conservatives have had to become increasingly socially and culturally liberal in response to the Blair years.

Although the consensus may be shifting in favour of civil liberties, we must ensure that it shifts far enough. As Alex Deane of Big Brother Watch rightly points out, the debate must now move towards whether we want to go lower than 14 days. Shifting the political tectonic plates takes incremental change, but the shift must not end with what an ostensibly liberal Labour party will accept – the defence of civil liberties has the potential to become the coalition government's most enduring legacy if it takes truly bold steps to secure them.

The Bishop of Manchester this week called for News Corp's £12 billion bid to take control of BSkyB to be blocked. It follows Vince Cable’s referral of the bid to Ofcom, the UK’s communications industry regulator, based on concern that the deal will threaten media plurality in the UK. There has been a growing and unfounded anti-Murdoch sentiment fomented by his media rivals based on the allegation that he has a monopoly over British media. This is mistaken.

In terms of media plurality (sustaining a diversity of views in the media), Murdoch has done a great deal to encourage plurality and innovation through his investment in the UK media scene. Like all profit-driven ventures, success in media comes directly from satisfying people’s wants: Sky News wouldn’t exist without Murdoch’s money and we would probably still be watching three or four TV channels without his support for satellite TV.

James Murdoch also made a strong point when he highlighted how much News Corporation have invested in UK media. Their investment has led to the creation of over 30,000 jobs in the UK over the last 40 years and News Corp’s commitment to innovation, particularly in digital journalism, has changed the face of news provision. Meanwhile in print journalism, Murdoch runs the Times at loss. Without his passion for print media and his deep pockets facilitating long-term recovery, it would most likely collapse. It’s also worth noting that only Murdoch’s support has allowed the Times to experiment with charging for online content – an innovation that may secure the future of other independent newspapers if successful. It’s rather ironic seeing Mark Thompson, Director General of the BBC, calling for Ofcom action against BSkyB when Thompson is the man running the market-dominating, government-funded media monopoly.

As Stephen Foster has argued, the media world is kicking up a fuss about Rupert Murdoch not because of concerns about media plurality, but because they are afraid of the competition. The vilification of Rupert Murdoch as a ‘media tyrant’ gives cover to his rivals to run to the regulators to protect them, rather than trying to compete by offering better services.

Behind all the headlines of the forthcoming Royal Wedding and of Ireland’s ignominious financial collapse, there was an election for the new General Secretary of Unite, the UK’s leading trade union with 1.4 million members. The official winner was Len McCluskey, but the real winner was apathy. Just 16% of Unite’s membership actually voted, with the winner securing a measly 7% of the total membership’s vote.

It is well known that trade unions have had difficulty in organising valid ballots – think of the shambles relating to recent strike votes at British Airways. But a 16% turn-out for such a key trade union post is woeful.

How has trade unionism come to his? After all - allowing for amalgamations - McCluskey’s predecessors include such household names as Jack Jones and Hugh Scanlon. Compared with the 1970s when the trade union movement exuded power, it is now marginalised. Like rusty seaside piers, it seems part of history.

Unquestionably, the major contraction of UK manufacturing industry has greatly reduced trade union membership. Furthermore, as the UK faced seemingly endless strikes – remember British Leyland at Longbridge and Ford at Halewood - in the 1970s, the election of Margaret Thatcher as Prime Minister in 1979 had a massive impact on trade unions.

Various Acts in the 1980s severely curbed their activities and materially changed their legal liabilities. Clearly, with heavy job losses now certain in the public sector, there will be widespread trade union action.

But it is in the pensions field where trade union officials, with the right expertise, could add so much. Millions of employees have precious little idea of their pension options and entitlements – explaining them in clear language would be so very beneficial and, rather than agitating for strike action and mass protest, union reps could play a valuable role in helping their members navigate the complex tax and pensions systems. John Foster Dulles famously asked if Britain had a role once it had lost its empire - do the trade unions now have one?