The Pin Factory Blog

South Africa has a long-running unemployment crisis, which is hitting the country's poor hard. The New York Times reports that during the 1990s, the country’s trade unions negotiated minimum wage laws that were restrictive and artificially high. This has meant that, since the start of the global downturn, foreign businesses investing in South Africa cannot afford to pay wages there and remain profitable, and have had to shut down as a result. South Africa’s unemployment rate has been one of the highest in the world for over a decade. South Africa is a sad example of the fact that minimum wage laws end up hurting, rather than helping, the poor and unskilled.

The economics are simple, but ignored by many: if the cost of a person’s labour is higher than the productive value of that labour, the firm will be making a net loss and fire that person. Ordinarily that person would reduce his wage asking price, but minimum wage laws prevent that and make unemployment the only option. This doesn’t affect skilled and valuable workers whose productivity and wage rates are much higher than the minimum wage level, but it can have a brutal impact on those who are unskilled and unproductive, for whatever reason – a lack of education, a language barrier, a disability, or something else. These are the weakest in society and minimum wage laws create a price floor that excludes them from the workforce.

The South African experience gives an example of this principle. The ‘Rainbow Nation’ has the highest immigration rate of any country in Africa, with migrants from Lusophone and Francophone Africa moving there for better work opportunities but often have little grasp of the country’s spoken languages. It also has a significant population of AIDS sufferers, a syndrome that severely inhibits its carriers’ ability to work. These people have enough obstacles to work and may be quite unproductive workers as it is. The last thing they need is a government price floor to their wages that bans employers from hiring them. South Africa is an unhappy example of the universal consequences of minimum wage, which governments ignore at their weakest citizens’ peril.

I didn’t know whether to laugh or cry last week after reading two mutually exclusive, incorrect views of economics in the papers. They were both on time preference, one of the most important factors in economic growth, and both showed a profound ignorance of their topic.

The first, by Tom Stevenson, a professional fund manager, said that: “The trouble is that humans are seemingly hard-wired for short-termism. Ask someone if they prefer £10 in a year or £11 in a year and they will, rightly, opt for the £11. But ask them if they would prefer £10 today or £11 tomorrow and they will invariably put out their hand for the money straightaway.”

I don’t know who Mr Stevenson asked, but the latter claim is a fairytale. Quoting Adam Smith, Stevenson exhorted us to learn “self-command, by which we are enabled to abstain from present pleasure in order to obtain a greater pleasure in some future time”. How much time is apparently not an issue, although £10 today versus £11 tomorrow implies an interest rate (i.e., a time preference) of 10 per cent per day. Plenty of people would accept this bargain rate on a £10 windfall. [Cont'd...]

Researchers at the University of Milan have discovered an "elixir of life", made up of amino acids and antioxidants that can boost the age of mice by 12%. The research team believes this "philosopher's stone" could be used by humans. In a number of years we could expect to see something similar appear on the market: not only does it boost lifespan, but it increases stamina and muscle co-ordination, so we may see many sprightly pensioners in coming years.

This may help reduce government spending on social care, particularly for the elderly, which was expected to double by 2035, but with life expectancy already on the rise and fast outstripping birth rates, such a move could force governments to raise the state pension ages much sooner than expected.

The original 1908 old age pension was to paid at 70, at a time when life expectancy was around 50. Nowadays, life expectancy at birth is just under 80, and the state pension age will be 65 for both men and women by 2020. The new 'triple lock' on pensions means that they are unlikely to become less generous, so a further, faster increase in the pension age will be necessary. This age crunch was already inevitable - there will be a point at which supporting pensioners will be a huge burden on a much smaller number of younger, working taxpayers.

The Chancellor George Osborne has already hinted at plans to raise the age to 68 by 2046, but if we are to see a jump in life expectancy to something approaching 90 thanks to this "elixir", then a faster increase is inevitable. The unpleasant alternative would be to wait until it is too late, when the young people of today and of the future will have to shoulder our burgeoning state pensions, and then risk the uproar of those having to endure a sharp increase in the state pension age or a cut in its generosity. Much like dealing with the deficit, pension reform needs to be done as soon as possible so that a larger crisis can be averted.

Although I’m usually not a fan of the Prime Minister’s, I don’t agree with people like Janet Daley that his party conference speech was dull. In fact, I thought it was one of the most exciting speeches from a politician in office that I’ve heard in a while, and it suggests that the coalition government might be prepared to be radical on market reform. I’m wary of reading much into political rhetoric but together with this week’s policy announcements, which I broadly welcome, there is cause for optimism.

I’ve already written about the proposals to cut child benefit for high income earners. I’m broadly in favour of them, although they should be coupled with reductions in income tax and their implementation leaves a lot to be desired. But what’s really interesting about these is that they tackle the idea of ‘universality’ in benefits – that is, the idea that everyone should pay into a big government pot, and that everyone should get something from that government pot. This is bad economics, because it assumes that ‘the rich’ are a bottomless pit of tax revenue, and it is also bad for society.

Benefit universality reduces personal responsibility and reduces choice by roping everybody into a single, one-size-fits-all system irrespective of their wants or needs. It says that one way of living is good – in the case of child benefit, having children – and one way is bad – in this case, not having children. Cameron’s speech, which touched on this issue, put the question into a wider perspective of promoting personal responsibility. I still haven’t figured out what the “Big Society” is, but if it is about removing the state from people’s decisions about their private lives, it might not be worthless.

The cuts are tiny in terms of overall government expenditures, but they set an important precedent: that welfare should provide a safety net for people in dire need, not be a second stream of income for the bulk of the population. Along with Michael Gove’s free schools and Iain Duncan Smith’s moves towards a single, unified benefits system, this speech potentially has big implications for the future of the British welfare state. We may be seeing the start of a move away from the state-providing model of welfare, where ministers run the health service and education system, towards a state-facilitating model, where the government gives a monetary welfare safety net to the country’s poorest while allowing individuals in society to handle the rest.

I basically agree with Sam's take on the end of universal child benefit. When resources are scarce, you should target them on those most in need. Giving benefits to families earning twice the average wage at a time when you are trying to reduce spending seems an odd policy. But there are certainly problems with the way this change - taking the child credit away from higher-rate taxpayers - has been designed.

The obvious one is that a single-earner household earning £45,000 will lost the benefit, while a two-earner household could potentially still receive it while bringing in £88,000. This seems both absurd and unfair. But another serious issue is that withdrawing child benefit in this way will create very high effective rates of marginal taxation for people crossing the boundary from the basic- to the  higher-rate income tax bracket. It is undoubtedly peculiar that while welfare secretary Iain Duncan Smith is doing his best to get rid of high marginal deduction rates for the unemployed, chancellor George Osborne is recreating them further up the income scale.

But that highlights a broader point - does it really make sense for one government department to be announcing all sorts of ad-hoc tinkering with the welfare system, while another is bringing forward a radical overhaul of the entire system? It does seem to me that a better approach to this issue would be to abolish the child benefit altogether, incorporating a 'child element' into the proposed universal credit for the unemployed (and those on low incomes), while putting some of the savings towards raising income tax allowances across-the-board - which would soften the blow for working families. 

I went on Radio 5 Live on Monday night to discuss the government's proposals to remove child benefit for people earning in the high income bracket last night, which you can listen to here. My overall point was simple, and a repetition of my post on Monday: cuts in benefit have to be made, and it is right that the first cuts be made in welfare payments to the richer sections of society. If there is a welfare safety net, let's target it to the people most in need.

I was bewildered to hear the head of the Child Poverty Action Group arguing against this. Although the lives of people earning over £44,000 a year are often hard, nobody could call that poverty when the average wage in the UK is closer to £26,000. As I said on the radio, I think that a lot of the arguments against these cuts coming from groups like the CPAG are strategic – they are aimed at protecting the welfare state by fighting any effort to roll it back, no matter how sensible. This sort of ideological opposition to cuts in any form are wrong. We have to be pragmatic.

Most of the callers were concerned about the fact that couples where both families work and earn less than £44,000 each will still get the benefit. They are absolutely right to be angry – it's ludicrous that families bringing in up to £88,000 a year are receiving government benefits, and I hope that the Treasury finds a way to cheaply avoid this situation. Means-testing would likely cost a prohibitive amount, reducing some of the savings that will be made – there is no point in cutting off your nose to spite your face in the interests of 'fairness'. As I said last night, the real issue here is whether it's just for people with children to be given welfare paid for by taxes on people poorer than them, on childless people, and on pensioners.

The caller whose point most resonated with me was Matt, who spoke about the difficult job and long hours he works for his family. Once he's worked long enough to be on the higher rate of tax, after tax, national insurance and pension deductions he only takes home around 40p out of every pound he earns. In other words, the taxation is so high in Britain that it's generally not worth his while to keep working once he reaches the higher tax threshold. This hurts him and his family, and reduces the amount of money taken in by the Exchequer. But Matt's case isn't an argument for higher benefits for people like him: it's an argument for lower, flatter taxes.

Yesterday the Chancellor announced the great idea of withdrawing child allowances from those who shouldn't need them. It’s such a great idea that, desperate for money as he is, he has deferred it to 2013.

To avoid the expense of means testing, he plans to give all mothers child allowances, as now, but then ask “households with a higher rate taxpayer” to own up to taking the money on their tax returns. Then the Revenue will add the allowances to the tax bill. Give the mother the money and then take it back from the richest member of the household who may, of course, be a lodger.

But “households” don’t do tax returns, individuals do. So, whose tax return does it go on if the mother has little or no income? And suppose the mother forgets to tell the higher rate taxpayer that she’s had the money? Or he forgets?

The tax advantage of not being married, or in a formal partnership, will increase sharply. Didn’t David Cameron make a big fuss about promoting marriage? This does the opposite.

Finally, the bureaucracy in administering all this will increase sharply.

Osborne has made this change in a ham-fisted way that will remove most of the good that comes from it, and missed an opportunity for better reforms. Even Gordon Brown wouldn't have dreamt up an approach as silly.

...and only one person were of the contrary opinion, mankind would be no more justified in silencing that one person than he, if he had the power, would be justified in silencing mankind.

- JS Mill, On Liberty.

Geert Wilders’ trial in the Netherlands for allegedly inciting hatred against Muslims is a damning indictment of the state of free speech in that country. I strongly disagree with most of Mr Wilders’ statements on Islam – most of the problems associated with mass immigration could be resolved by limiting the welfare state’s privileges for migrants, and Mr Wilders also makes little distinction between his objection to the Islamic faith and to Islamic people themselves. This is unpleasant, but irrelevant. The law cannot pick and choose between the statements it likes and does not like, and nobody should be restricted from saying something simply because it is unpopular.

There are two reasons for this. The first and most important reason is a simple one of justice. Since Mr Wilders is not causing harm to anybody else by speaking critically of Muslims and Islam, it is unjust to punish him for his speech. The fundamental basis of a society in which people are free is the freedom of individuals to do what they want, so long as it doesn’t impede other people’s ability to do the same. The state steps in when those spheres of personal freedom inhibit each other. Clearly, Mr Wilders’ speech, irrespective of what he has said, doesn’t affect anybody else’s freedom of action. To violate the principle of free speech in any case is to disregard the individual’s sphere of private liberty and it should not be done in any case.

The second reason to respect Mr Wilders’ freedom of speech, even if you don’t believe in the intrinsic value of individual liberty, is that it would have highly negative consequences for society at large to disregard the principle of free speech. If the state is to judge the value of each statement on a case-by-case basis, it will prevent unpopular but potentially true things from being said. Few people knew better the importance of free speech than Socrates or Galileo: Arguments in favour of prosecuting Mr Wilders imply that the trials of people like these were flawed only in their use of evidence, not in their fundamental approach to speech. The truth is often unpopular, and the only way to ensure that society progresses is by protecting the rights of everybody to speak, no matter what they have to say.

For many Londoners, the commute into work yesterday was one sent from hell. Most Underground services were brought to a complete standstill thanks to a 24-hour tube strike by the RMT and TSSA unions. That morning at the Conservative Party Conference, London Mayor Boris Johnson called for legislation demanding a 50% threshold for the calling of industrial strikes by Transport for London workers.

If this legislation were to be established, it would be a godsend to many London commuters. Standing on a cold platform, listening to somebody shouting into their mobile beside you, while waiting for your extremely delayed train into the city is nobody’s idea of fun, and the strikes have brought many parts of the city to a standstill. However, Boris is not making things easy for himself by bluntly describing the tube strike as ‘a load of cobblers’ – whatever his feelings about the strike, this not probably the best way to go about winning strike sympathisers over to his side. Still, many Londoners feel the same way.

Boris’s proposal is fair and reasonable to both London commuters and London Underground employees. London can’t be threatened by Tube strikes every other week just because a handful of employees throw their toys out of the pram over wages. Instead of disrupting everyone’s travel, these things must be discussed properly as adults. Strikes may have been effective in the past, but times have changed and this one hasn’t done anybody any favours, including the tube workers. They have lost themselves a day’s pay, achieved little politically, and have left their fellow Londoners in an extremely bad mood.

The Chancellor’s announcement this morning that child benefit will be cut for high earners is excellent news, for more reasons than one. It is obviously high time that government welfare payments be cut and in times like this it is quite reasonable that the first cuts be made to those payments that do the least good in terms of providing a safety net. Cutting child benefit for the rich may create a little discomfort for them, but far less than cutting benefit for the poor and unemployed. Though I question the need for child benefit at all, it is right that the first welfare cuts be made to the lowest-hanging fruit.

Moreover, cutting a universal benefit like child benefit means that the Chancellor has decided to be brave and think about the long-term political consequences of his actions. Many Conservative canvassers during the last election were bewildered by the refusal of high-income earners to vote for their party because they would lose some of these universal benefits, despite the fact that their net tax-benefit burden would be lower. This is a consequence of a universal benefit system where the costs – taxation – are dispersed and relatively unseen and the gains – child benefit in this case – are concentrated and visible. All people on benefits will be reluctant to vote them away even if it will mean a net gain for them, and it takes political courage to break this vicious cycle.

I'm also heartened that these cuts are being made despite the fact that they will directly affect the journalists reporting on them, many of whom earn enough to be left out of the new income threshold. The fact that the government is prepared to face these vested interests head-on is encouraging.

Of course the cuts in benefit need to be deepened and widened. Policy Exchange’s Neil O’Brien says that of the people on the winter fuel allowance, 82% are not in ‘fuel poverty’. There are countless other benefits which were designed to make more people feel dependent on the government to win their votes. We can no longer afford these benefits, and I’m glad to see courage from the government in cutting them.