The Pin Factory Blog

I’m a pragmatist who’ll take a cut in spending as it comes, so I’m broadly supportive of the cuts to child benefit. But the plan to penalize people who fail to comply with the Treasury’s quick-fix method – requiring mothers to disclose the incomes of their cohabitees – underlines how broken the current benefits system is.

‘Universal benefits’ are not really universal at all. In the case of child benefit, they are a transfer from childless people to people with children – not a vertical transfer from rich to poor, but a horizontal transfer that rewards one life choice over another. (Some would say that society needs children to be born to support the old age pension system. But since we already have a declining birth rate, this is more an argument for pension reform than for maintaining child benefit.)

What this means is that arguments in defence of child benefit that say that cuts to child benefit will favour one group at the expense of another are mistaken – they already favour one group (people with children) over another (people without children).

The cuts to child benefit are good and should go further, but they’re being implemented in a way that is so ham-fisted a way as to make even the most committed cutter wince. Plans to fine anybody who doesn’t comply with the measures are misconceived – if you are a family who has a lodger and don’t know how much they earn, prepare for a hefty fine. Furthermore, setting the bar at the higher income cap will only increase the disincentive to work for people on the margin and reduce overall economic output. Now is not a time to discourage economic activity.

We need a more radical approach – child benefit should be scrapped altogether.

If there are very poor people who cannot afford to support their children, either let this be included in the ‘Universal Credit’, or allow private voluntary charities to provide for them. But horizontal wealth transfers that reward one lifestyle over another should be ended both because they are unjust and they skew incentives. The government claims not to want to ‘pick winners’ in the economy, so why do they pick winners in society?

 Have you heard of NEST? If not, you probably will – and soon.

The National Employment Savings Trust was created by the previous Labour government to facilitate implementation of the Pensions Act 2008 which aims to greatly increase the number of people saving towards their pension. The Act requires virtually all employers to automatically enrol their staff into a qualifying workplace pension scheme. The new coalition government confirmed this week that the scheme will go ahead as planned in 2012.

In broad terms, the Act calls for employers to put in a minimum contribution, together with the jobholder's contribution and the government contributing the rest in the form of tax relief. Specifically, all employers will have to contribute a minimum of 3% of a jobholder's qualifying earnings which, when added to tax relief and the jobholder's contribution, gives a total minimum contribution of 8% of qualifying earnings. The contribution level will be phased in to reach the 8% minimum by 2017.

The role of NEST is to offer “a new workplace pension scheme…designed specifically to meet the needs of low-to-moderate earners and their employers.” In effect, it’s a basic and simple scheme, offering smaller employers an easy way to introduce the now-mandatory pension-savings requirement. Its structure is that of a non-departmental public body, accountable to Parliament through the Department of Works and Pensions (DWP). In other words, a government agency.

The NEST website goes to some length to stress its independence from the government through its trust-based structure and limited mandate to serve the low-paid and the smaller employer. And, to be fair, the folks running NEST, both Trustees and management, do mostly come from outside government.

The risk, though, is that NEST soon becomes too big for politicians to not meddle. Consider NEST’s own numbers. It points out that some 750,000 employers currently offer no workplace pension scheme at all. Since most of these would be small businesses, it’s not hard to imagine most of them signing up for NEST’s quick and ready offering. The DWP itself is hoping that “between four and eight million people will start to build up savings…in a workplace scheme.”

Coincidentally, The Pensions Regulator (TPR) this week reported that only some 2.5 million people currently have pension savings in a Direct Contribution (DC) scheme but that just 1 million are actively contributing. (By contrast, some 2.5 million are contributing to private Define Benefit schemes, a dying species.) TPR notes that some 130 large schemes dominate the DC business but also notes that there’s another 44,000 schemes with fewer than 12 members.

All this suggests that NEST has the potential to get very big, very fast and, in the process, squeezing out many smaller private schemes. Remembering that National Insurance began life as a pure insurance scheme against illness and unemployment, NEST’s development over the coming years will bear close monitoring.

It's one of the traditional moans here in the UK: that supermarkets just suck the life out of a community. One day there's a nice little High Street, the butcher, the baker, the ironmonger, all ready with a cheery greeting and loal prices for local people, next there's a supermarket and nothing is left but a howling economic wasteland.

That no one ever gets forced into a supermarket seems to get missed in this story: as does the obvious point that if the inhabitants of this Barsetshire town really did value the cheery greeting and the local prices the opening of a supermarket wouldn't change their behaviour, would it? It would be the supermarket that went bust, not the local traders.

But, in an attempt to prod people a little into thinking about what it would be like with no such national chains of supermarkets, why not look at somewhere that doesn't have such? Detroit perhaps?

Just in time for the winter holidays, the government has announced that it plans to hike the Air Passenger Duty by up to 50%. The measure is defended as a revenue-raising ‘green’ measure, but it fails on both counts. What’s more, it’s the worst kind of tax – one which directly penalizes fun.

The first defence of the levy is that it will raise revenue for the government. Maybe so – any form of taxation will do so. But this is the sort of tax that has a strong disincentivizing effect on people’s decisions about where to travel. The levy for European flights is one sixth of that of, say, a flight to the Caribbean. The government already massively taxes air travel, and adding more taxes will simply kill the goose that lays the golden eggs. The Laffer curve applies as much to consumption taxes as to anything else – tax something too much and revenues will decline as the cost of that activity outweighs the benefits.

The second defence of the levy is that it is ‘green’. Again, this is partially true – if you stop people from doing things that generate CO2, you will marginally reduce the amount of CO2 in the atmosphere. But the Air Passenger Duty is a blunt tool – it doesn’t differentiation between airplanes of differing CO2 output, and it taxes flights to the Bahamas (4,347 miles from London) more than to Los Angeles (5,448 miles) or Hawai’i (7234 miles). I’m not convinced of the need for any anti-CO2 measures, but even I was, this would be a bad way of going about it.

This duty hike is especially rotten because it taxes one of the most fun things most people have in their lives. Spending months toiling in boring jobs, with even lower-rate taxpayers already forced to pay nearly 40% of it to the government through income tax and VAT, is often only bearable because of the hope of a few weeks away in an exotic country. Certainly, the ministers behind the hike won’t be affected, and like cigarette and alcohol duties this is a regressive tax that will hit the people least able to pay the hardest. Adam Smith once wrote that taxes should be proportionate, nonarbitrary, convenient and low. I’d add one point – that they don’t try to stamp out fun.

And Plod finds him searching under the lamp post. "Is this where you lost them?" "Nah, over there!" " So why are you looking here, under the lamp post?" "Because this is where there's the light to find them!"

No, I didn't think it was all that funny when I first heard it when I was five either. However, it is a useful description of what some people do. Look where it's easy to look rather than where they might find something. And is this true of economists? Is there, for example, much too much research done on the economies of rich countries and too little on those of poor ones?

Fact 1: “Just” Income: There is a strong correlation between GDP and publications—a doubling of GDP leads to a 37 percent increase in the number of publications on the country. The US is bang on the regression line relating GDP to publications—a lot more is produced on the US because it is big and rich. Surprisingly, most countries in Sub-Saharan Africa are also on the regression line! In fact, there is no “SSA penalty” in the production of empirical research—there is very little work on most SSA countries mostly because they are poor and small.  That 36,649 papers were written on the US between 1985 and 2004 relative to 4 on Burundi, 5 on Benin or 20 on Niger is largely explained by income and population size.

You could read that as a yes: and you probably will read that as a yes if you're subject to the great folly of our times. That it is poverty that needs to be explained, poverty that is unusual, some even insist that poverty is created. Something which simply isn't so: poverty is the natural condition, poverty is how all of the world has lived until recent centuries and poverty is how far too much of the world still lives.

It is the creation of wealth which is the historically unusual thing: indeed, the existence of an economy complex enough to be worth studying which is the exception. So it makes perfect sense that economic research should concentrate on the rich countries. They're the place that have economies to study for a start. But much more important, it's riches, wealth, that are the keys we are searching for: that they happen to exist where there are the lamp posts of universities, libraries and a really good cup of coffee to imbibe while researching is convenient, sure, but then that's just another way of saying, the existence of universities, libraries, and good coffee, that these places have economies worth studying.

Plus, of course, the surplus over and above day to day survival for the population sufficient to support researchers to try and work out why there's a surplus capable of supporting researchers.

Do we really want more politicians? Even worse, do we really want more do-gooder teenagers to aspire to be career politicians? The UK Youth Parliament is one of those things that probably sounded good in theory, but in practice has ended up a bit of an embarrassment to those involved who should know better.

I don’t really object the ‘Members of Youth Parliament’ themselves – it’s all a bit earnest and precocious, but they’re young and it’s hard to justify any strong dislike towards them. But it’s important to recognise that the Youth Parliament isn’t a debating forum – it’s a backslapping ‘youth advocacy’ organization. Having watched part of it today, I can attest that few of the issues discussed are really debated at all.

Few teenagers have heard of the ‘Youth Parliament’ – these ‘MYPs’ are not representative in any way. Frankly, if the ‘MYPs’ were characters from the teen comedy The Inbetweeners, it’s pretty obvious that they would all be Will, the show’s nerdy, self-righteous narrator.

The grown-ups behind the UKYP are railroading these earnest kids into political careers. I think I’d rather that they be encouraged to read a good book and figure out what it is that they believe, rather than allowing them to indulge in their adolescent tantrums about university fees and the like. It’s easy to bash careerist politicians, and with good reason: rather than doing something that people willingly pay for, they rely on coerced taxation to make a living. We should all be so lucky.

To be fair, not all politicians are bad. The good ones usually go into politics after having achieved something in the private sector – that is, after having done something that people are willing to pay for voluntarily. And even many of the clever ones who start off well are ruined by the political system. But the ones who spend their lives working for the state are not the best, and there’s no need to try to make more of them.

Whose idea was it to encourage teenagers to go down this unproductive path, rather than to do something that people value and are willing to pay for voluntarily? If these people are ‘the future’, we may be doomed to another generation of sentimental, poorly-reasoned political representatives. Let's hope they aren't.

The Treasury forecasts 490,000 public job losses as a result of this month's budget measures. But the Office for Budget Responsibility reckons that 1.8m jobs will be created in the private sector.

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Between 1994 and 1999, Canada, Sweden and the UK each tightened fiscal policy by about 7% of GDP. That made public-sector employment fall by 50,000 in Canada and Sweden, and 294,000 in the UK – but private-sector employment grew by 1.7m in Canada, 250,000 in Sweden and 1.95m in the UK.

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According to the Office of National Statistics, 308,000 private-sector jobs were created over the summer, more than offsetting the 22,000 that were lost from public-sector bodies.

Via Philip Aldrick.

When David Cameron first mooted the idea of a Big Society, many were left perplexed about what it was and more importantly how it could be achieved. Today a charity from the southwest, The Somerset Community Foundation, may have shown us how this broad concept can be practically applied.

They have launched the “Surviving Winter Appeal” that aims to tackle the issue of fuel poverty among the elderly in Somerset. It is estimated that in the UK 33,000 pensioners are unable to afford to heat their homes over the winter months despite receiving winter fuel allowance. The coalition has pledged to continue to pay universal benefits to the elderly, with all those over 60’s receiving between £250 and £400. This does not make sense – there are many pensioners in this country who could fund their own winter fuel without this subsidy.

This Big Society-style scheme aims to solve this problem of unnecessary provision, by encouraging those who do not need the government’s money to donate it. Then it can be reallocated to those who do need the extra funds. Lords Ashdown and Cotter have already pledged to the appeal, as well as the prominent businessmen Michael Eavis and the Bishop of Bath and Wells.

Examples of Cameron’s Big Society are something that has so far has been hard to find. The concept is loose and its application unclear, but this scheme may start to indicate the route that charities and voluntary organisations need to explore if they are going to fit the Prime Minster’s vision of how this country should operate.

It seems that what David Cameron meant by the Big Society was that charities and voluntary organisations would take responsibility for ensuring the correct allocation of scarce resources, which in this case is government money. This scheme is hugely worthwhile and tackles the very real problem of fuel poverty. But ultimately it raises the question of why winter fuel payments are universal to begin with. The actions of a few good people cannot excuse the irresponsible spending of a profligate state.

The problem with the housing benefit row, as with the broader row over the welfare cuts, is that many have lost sight of a simple fact: that incentives matter.

The government’s proposals would cap housing benefit at £20,000 per year. Iain Dale has already posted a good response to this on his blog – a quick look at the property section of Gumtree shows that £20,000 per year is plenty of money to rent a spacious house within travel range of anywhere in London. As Iain’s correspondent says, maybe these houses aren’t on Kensington High Street, but how many of ours are?

There is an injustice in asking people who commute for an hour a day into London to work to subsidize people who do not work to live in the most desireable parts of the city. As with so many welfare schemes, there is a net transfer of wealth from the working to the idle dressed up in the name of compassion.

But this is only half the problem. The other half is the perverse incentives that the current housing benefit system creates. Welfare rewards failure – this is a tautology, and does not necessarily outweigh the compassionate argument for welfare. But by rewarding failure with state subsidized houses in highly desireable areas, the system makes failure a more attractive option than success for many people.

The welfare system is necessarily blind to circumstances, to prevent bureaucrats from abusing their positions of power as the sole arbiters of welfare. If the welfare system was denationalized and delegated to private organizations (I am resisting the urge to invoke the ‘Big Society’) it would allow for a multitude of organizations that could look at circumstances and give to the genuinely needy.

Any worries about a lack of private giving should be quickly dispelled when you consider how many people are ‘outraged’ at these cuts. Doubtless, they would jump at the chance to give their money to a charity that pays for Kensington mansions for the unemployed, allowing the rest of us to give our money to people we see as being more needy in a more equitable way.

Many talk about the difference between the ‘deserving poor’ and the ‘undeserving poor’. Some of this is the eye of the beholder – I don’t want to pay for anybody to live in a house in Kensington, but perhaps Polly Toynbee does. A privatized approach to welfare would leave us both happy, and allow for a welfare system that does not systemically encourage failure.

From xkcd.