Social insurance and unemployment

In a free labour market, the worker gets his marginal product.This is what his labour is worth to his employer and this is the equilibrium wage. With compulsory social insurance, the employer pays a part of this wage not to his employee, but to the insurance system on his behalf. This part is, with a clever turn of phrase, called the “employer’s contribution" although in effect it is money the worker should have got as part of his wage. From the remainder, the worker, too, must pay for his insurance. This is, with a straight poker-face, called the employee’s contribution (fraudulently suggesting that he is only contributing this part, although in effect he contributes both parts).  If this labour is worth 100 and costs his employer 100, the employer pays 20 in its own name and 20 in its worker’s name to the social insurance schemes. The worker takes home 60 and believes that his wage is 80. Some part of this, however, he gets not in cash, but in natura, in the form of social insurance. This is harking back to the 17th and 18th century when in some trades workers were paid partly or wholly in goods rather than cash. This system that cheated the workers was repeatedly outlawed and gradually went out of use until it was reborn in Bismarck’s Prussia as a measure of benevolent paternalism. It has, of course, become a standard feature of “social" policy in most countries.

Since cash is always worth more than what somebody else has chosen to buy for you for the same amount, workers would normally prefer to get their wage of 80 all in cash rather than partly in kind, ie. in insurance. If they realised that their wage is really 100 and they only get 60 of it in cash, they would be very, very upset and would insist that “social" legislation should stop treating them as children. Believing, however, that on top of their wage of 80 their employer is spending a further 20 to insure them more fully, they imagine that the system treats them quite well.

Be that as it may, the final result is that employing a worker costs 100, much of it spent on insurance that the worker  values at less than 100 and perhaps even less than 80 because however much he may value social insurance, he does not value it higher than its cash cost .Compulsory “social" insurance, which is a wage in kind to the worker, drives a wedge between what the employer pays for labour and what the worker really gets.

This wedge can be justified by the paternalist view that it is better for the worker if some of his money is spent as the state chooses rather than as he would choose. Nevertheless, it remains the case that thanks to this system, insurance is imposed at a cost that is higher than it is worth to the worker. Moreover, the cost of labour is pushed above, and the demand for labour below, the level at which workers are available for employment. With other things equal, unemployment must become the chronic tendency.

Extracts from a speech introducing Liberale Vernunft, Soziale Verwirrung, 27 January 2009 in Zurich.

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Among my triad of perpetually repeated social mantras is the idea that society is a good thing if and because it functions as a mutual insurance association. It protects everyone from life’s unforeseeable ups and downs by indemnifying the losers out of the gains of the gainers. The association, being mutual, is programmed to break even, everybody has a random probability of being a gainer and paying a premium or being a loser and collecting compensation. Since losses reduce happiness more than gains increase it, everyone is made happier, – at least ex ante, which is what matters.

The fallacy of this schema resides in the obvious fact that due to different endowments and capacities, some people are always more likely to end up as gainers rather than losers and others are more likely to end up as losers rather than gainers. Mutual insurance where some always pay premiums and others always collect them is not just, at least not in the sense supposed by the fallacy of society providing equitable protection against risk.

There is, however, a real-life variant of this scheme that we find in most industrial societies, namely compulsory social insurance by payroll deductions. This system, quite apart from its morally dubious premises, is probably responsible for the tendency to chronic unemployment being more prevalent in modern industrial countries than the tendency to excess demand for labour.[Cont'd - click 'read more']

Tough Guy: The antidote to health and safety

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On Sunday (1st February) I took part in the annual ‘Tough Guy’ challenge in Perton. This is an annual event to separate the men from the boys in terms of mental and physical fitness.

The event consists of a timed assault course covering 21 major obstacles with plenty in between. The obstacles range from crawling through drain pipes (some of which have dead ends), climbing over huge towers, jumping pits of fire, swimming through tunnels (in muddy ice cold water) and crawling under barbed wire through mud and gravel. The event was great fun, but was no mean feat – I couldn’t feel my legs or hands for about half an hour, and couldn’t hold a cup of coffee with spilling the entire contents due to my shivering.

I am amazed that the infamous Health and Safety officials, that purge this country of any fun and excitement we have in our spare time, have not managed to dig their claws into Tough Guy. The reason for this is that every competitor has to sign their own ‘Death Warrant’, declaring that if they are injured (there were a few broken limbs and many more cases of hypothermia this year) or are killed (as happened some years ago) they or their families cannot hold the organisers at all responsible.

This system works superbly, it puts the emphasis of responsibility entirely on the individual, and in return they ensure that they are physically fit to compete. This does not mean that the organisers neglected competitor safety. There was an army of literally hundreds of ambulances, paramedics and fire crews ready to help any injured competitor.

Tough Guy is a perfect example of how people have more fun and act just as safely if the responsibility of their welfare is given directly to the individual. Without Health and Safety rules breathing down our necks, and without organisers being scarred senseless by the threat of lawsuits, we can all have great fun, and raise money for charity in the meantime.

Blog Review 860

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What is beneficial to the regulators is not necessarily beneficial to the regulated.

Maybe those WalMart jobs aren't so bad after all?

Backseat driving saves lives.

Do the brothers really want to be calling for equality?

It's not necessary to agree with everything here to admire the brio with which it is said.

On the US stimulus: surely the burden of proof rests with those who want to spend near a trillion dollars rather than those who don't?

And finally, seriously tough food safety rules.

Reflections on a snow day

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I didn’t make it into the office yesterday, because of the 8" of snow that fell on Sunday night made it just about impossible to get anywhere in London by public transport. Where I live, on the border between Putney and Wandsworth, there were no trains, tubes or buses running at all. A lot of people seem to have been moaning about that, wondering how one night of snow can bring the capital to a standstill.

Well, the reason we can’t cope with snow is that it so seldom happens. And I don’t have a problem with that. Apparently this was the heaviest snowfall for 18 years – why bother being prepared for something that only happens once or twice a decade? Imagine all the money that would be spent on snow-ploughs and action plans and training (and, no doubt, health and safety assessments). If you ask me, we’re better off just waiting for it to melt.

After all, it’s not like most of us can’t work from home. Whether it was editing documents, writing articles, emailing authors and so on, nothing on my ‘to do’ list yesterday really required an office. Just to underline the point, I even did a radio interview from the telephone in my bedroom. All of this has of course been possible for quite some time now, but remote working is yet to take off. There are obvious reasons why, but as London’s transport network gets filled further and further beyond its capacity, I can see remote-working becoming more and more popular.

Just after lunch, I went for a walk in the park. There were people everywhere, and they all seemed very cheerful – the snow clearly bringing out the best in them. It was also obvious how many Australians and South Africans there were living in the area. Following the oil refinery strikes in Lincolnshire, and the secondary action across the country, the free movement of people is very much in the news, and very frequently under attack. But what a strange and different place London would be without it.

The social market economy

The major thesis of the social market fallacy is that production and distribution are somehow distinct from one another. The purest form of this gross error is the slicing-the-cake simile to which it is often reduced in its popular versions. The social product is the cake, it is all ready, baked and now it is up to some social consensus to decide how to slice it, how big a part to give to labour, to capital, to management etc. Indeed, it sounds plausible that the cake is baked first, distributed afterwards. J.S. Mill was the first to plant this fallacy in the popular mind. For in fact production and distribution happen simultaneously and are interdependent. Who gets what part of the cake is decided while it is being produced (and partly before it). The reason why each factor of production takes a part in baking it is that by contract or tacit custom it is promised to get a certain slice of it. It is this promise that is being broken when the government, inspired by the naïve idea of the “social market", overrides the distribution that had induced the cake to be baked by a redistribution once it has been baked.  But this cake cannot possibly be the same as the one that would have been  produced if the promise of free market contracts and thus  market-determined wages and profits, had been and could have been expected to be kept.

As a last-ditch defence of the “social market", its more sophisticated advocates might admit that the cake called into being by redistribution may well be a bit smaller or taste less well than the one that would have been produced in response to the natural distribution. But this probable shortfall, they argue, is the price we pay for making the distribution, more equal, hence morally superior. The moral superiority of a more equal distribution is an affirmation that is perfectly arbitrary, a bluff waiting to be called. It draws its force from the confidence with which it is announced. An attempt to derive it from something deeper and less subjective than itself is the recourse to arguments of social justice.

Extracts from a speech introducing Liberale Vernunft, Soziale Verwirrung, 27 January 2009 in Zurich.

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The idea underlying the social market economy is that the free market efficiently produces a quantity of goods and would distribute them in a certain pattern among the economic agents who produced it, but that this distribution can be made morally and practically better by making it more “social". This can be done by interventions that do not react back on the productive functions of the market, leaving it free and untroubled. In addition, the economy yields a bonus, so that total production is not only (morally) better distributed, but also greater than it would otherwise be; for in the social market economy, relations between employers and employees are more peaceful, less antagonistic and hence more productive than in a mere market economy.

Let us deal with the minor issue, the bonus first. History provides only meagre lessons about why social upheavals happen and how they are prevented, but such lessons as it does give tell us that revolutions happen after oppression is relaxed and social order is disrupted more by the appeasement of tensions than by the tensions themselves. Concessions to the weaker party teach it that it is entitled to concessions, and will demand more. Industrial relations tend to be worse and strikes more prevalent under heavily redistributive left-wing governments.  There is not the slightest evidence that the rise of the welfare state was conducive to industrial peace and productivity, let alone that it “saved Europe for capitalism" after World War II. [Cont'd - click 'read more']

ISOS: Economic and Social Policy: What Next?

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In case you missed it, we will be holding our first Independent Seminar on the Open Society (ISOS) of 2009 on the 24th February at the Emmanuel Centre in Westminster. We have a strong lineup of speakers that includes Douglas Carswell MP and Jeremy Browne MP. There are places still available. Please click here for more information on how you can join us.

Déjà vu

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The country snowbound, trains not working, strikes and industrial disruption, the Labour government massively in the red, economy sliding to disaster... It's just like the 1970s all over again!

Blog Review 859

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Revisting Ricardo on rent (and Tim Harford on Ricardo on rent).

No, we really don't want to insist that politicians do nothing else in their days than politics. In fact, given the mess they make of politics, can't we insist that they all have other full time jobs? Perhaps if they find enough energy to interfere in our live anyway we could insist they do mandatory overtime?

It doesn't matter whether compulsory volunteering is temporary or permanent: it's still slavery.

The structure of a tax system is indeed extremely important.

Words of wisdom as a quote of the day.

On the (in) efficiency of government.

And finally, no more insane than some investment selection procedures.

The optimum size of government

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Richard W. Rahn, senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth, has an interesting article in the Washington Times on the optimum size of government. 

Rahn explains that economists from the Institute for Market Economics in Bulgaria have determined new estimates of the optimum size of government. They conclude that its optimal size is less than 25 percent of GDP.

Rahn claims that: “Rather than increasing the size of government, the empirical evidence shows that sharply reducing taxes, regulations, and government spending down to at least 25 percent of GDP would do the most to spur economic growth and create more jobs over the long run". As the excellent Peter Schiff has also argued, reducing its size is the one thing that governments can do to lessen the impact of the financial crisis.

There are of course problems with just looking at GDP as an indicator of the impact of government upon the economy. Through various regulations, the government has so many other ways to lesson the economic competitiveness of the people. Just take a look India before and after Manmohan Singh rightly threw much of License Raj in the intellectual dustbin of history. It is strange that while developing countries are continuing to unburden themselves of regulation with such profound effects on the lives of people, the UK and other more developed countries are heading in quite the opposite direction.

Frankly, 25 percent of GDP does not go far enough for me. This would take us back to pre-WWII levels; instead, we should be aiming to return to pre-WWI levels of less than 15 percent. However, given that UK public spending is over 40 percent of GDP, 25 percent would be a very welcome step.

There are more than pragmatic reasons to believe in small governments, but economic analysis such as this should be enough to convince individuals on the fence, though not many politicians I suspect.

The beginning of the end of the American Dream

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Faced with a deteriorating global economy, the initial rhetoric of global leaders was to oppose a return to protectionism to keep the wheels of trade turning and credit flowing. However, the current pro-protection American administration may well jeopardise this recovery effort and in effect hasten the decline of American growth, draw out the recession and delay its recovery.

Obama has promised change. His website proposes to “enhance competitiveness" and “create jobs" by repealing tax breaks for corporations retaining earnings overseas, and using those savings to lower corporate taxes for companies with operations in the U.S. However, according to the Wall Street Journal, America has the world’s second highest corporate income tax rate of 35% and nearly all of corporate America has extensive operations overseas. Raising their taxes would cause corporate America to lose greater market share to foreign competitors. 

This ties in with the Patriot Employer Act of 2007 introduced by Obama where he advocates American jobs for American workers. But he failed to realise that companies forced to increase wages and benefits will have to pass back additional costs to the already burdened consumer and make significant cutbacks on hiring. What he should have done instead was to create less incentive for jobs to go overseas by cutting back on the high corporate tax rate for all companies. 

Obama’s website stresses that he will “fight for a trade policy that opens up foreign markets to support good American jobs" and “amend the NAFTA" to alleviate the unfair burden placed on Americans. But as the Heritage Foundation points out, NAFTA countries conduct $2.2 billion trilateral trade daily that supports U.S. jobs and bolsters productivity and investment. Coupled with the deteriorating environment and dwindling domestic consumption, a sudden enforcing of trade barriers may cause other countries to retaliate leading to drying up of the export economy. Already burdened firms will go bust and thousands more jobs will be lost.

American policy makers must tread carefully.The CATO Institute rightly suggests that they must “focus on reforms that remove impediments to work, savings, investment and production". Otherwise, non-productive businesses and the increasing flight of capital will contribute to poverty and increase burdens on the state machinery, hastening America’s decline as a place of opportunity, prosperity and growth.