The basic problem with foreign aid

One of the slightly odd things about the modern world is that we've all become rather better at emergency aid and rather worse at development aid.

Emergency aid now tends to work with the grain of the economy. For example, in times of famine send in money - then let the market, incentivised by the cash, deliver the food. Instead of the ridiculous idea of loading ships with food which takes 8 months and more to arrive, neatly not feeding the starving but still destroying the market for the next crop. 

Development aid is more often than not the application of those policies which we've rejected at home. Planned economies, for all the nonsense spouted by the likes of Momentum, are rather out of fashion in the rich countries. So all those who would play with the lives of others by telling them what to do are off in the aid agencies.

Yes, certainly, we exaggerate, but not by all that much. Oxfam these days insists upon peasant farming as the long term solution for Africa's ailments, just as one example. Fortunately, officialdom is realising this error:

Foreign aid risks making Third World countries dependent on handouts by prioritising “short-term and immediate results” instead of “lasting change”, an official review warns.

The Independent Commission for Aid Impact warns: “The Department for International Development’s results system is not currently oriented towards measuring or reporting on long-term transformative change – that is, the contribution of UK aid to catalysing wider development processes, such as enhancing the ability of its partner countries to finance and lead their own development.

One way of putting this is that we should be aiding them to do things themselves, not doing things for them. Instructing, say, on institutions - the tolerable rule of law, reasonable taxes - and even paying for such if necessary. Rather than telling them where to put the steel plant they don't need nor want.

At which point a modest proposal. The official development aid budget is some £11 billion a year we believe. Almost all of what is spent upon development, rather than emergencies, being wasted (Ethiopia's Spice Girls comes to mind). So, why don't we not waste it?

We know very well what has caused the largest reduction in absolute poverty in the history of our species, this neoliberal globalisation of the past 40 years. Trade, not aid, that is. So, let us trade more.

We declare unilateral free trade to the world. This benefits us in aggregate, benefits the poor out there individually and in aggregate. But there are those here at home who would lose from it. Those currently protected by our own import barriers to such trade. It's also a standard part of economic thought that when an overall increase in wealth is possible, as free trade would bring, it is possible for those who gain to compensate those who lose leaving all truly better off.

Excellent. We use that currently wasted foreign development budget to compensate (through retraining perhaps, that sort of thing) those at home who would lose. We combine the most effective poverty reduction program known, that neoliberal free trade thing, with not wasting the development budget and compensating those few who would lose from this most efficient of all possible plans.

The only problem is that it seems to be politically impossible. But then that's not stopped us in the past if we're honest about it. 

Why do neoliberals support a Negative Income Tax?

This morning, I spoke at the LSE’s Citizen's Basic Income Day on the neoliberal case for a basic income (or ideally a Negative Income Tax). I’ll be tweaking the presentation for our regular sixth form seminars, but below is an approximation of my remarks (thanks to our former Executive Director Sam Bowman for laying the groundwork):

Neoliberals support an efficient welfare state that guarantees a minimum standard of living for every citizen: ensuring that wealth created by globalisation and automation is spread across society. The design of that welfare state should avoid poverty traps created by high and inconsistent marginal tax rates: some people on Universal Credit only keep 20p of every extra £1 they earn (although this is still an improvement on previous marginal effective tax rates of up to 95p per £1). It should also be minimally paternalistic, which means as little means-testing as possible and delivery in the form of cash/bank account payments rather than funds that can only be spent on certain goods or services (e.g. housing benefit, food stamps). Finally, it should be a comprehensive overhaul of all benefits (including housing benefit), with the exception of disability benefits.

Following in the footsteps of Milton Friedman, we therefore support a Negative Income Tax (NIT) paid to individuals (including children) with a fairly low, uniform withdrawal rate. The base amount for the NIT should be set high enough to ensure a basic standard of living, with econometricians using experimental data to help determine the exact level of base payment and withdrawal rate.

We plump for a Negative Income Tax over the (very similar) Citizen’s Basic Income (CBI) option, although we would still support the latter if it were the only proposal on the table. While NIT claws back money from higher earners by withdrawing payments as earnings increase, CBI does so through the existing system of taxation (i.e. after the initial lump sum is paid to everyone). The problem with CBI is that giving rich people money then taking it away again through taxation is inefficient: “when the government transfers money, it does so in a leaky bucket.”

A Negative Income Tax could also make it easier to implement other parts of the neoliberal agenda, such as phasing out the minimum wage, introducing a carbon tax, and auctioning off visas. Minimum wage laws aim to guarantee a basic standard of living for those in work, but economic evidence shows that they have disemployment effects and slow down job creation. A Negative Income Tax accomplishes the aim of minimum wage laws without killing jobs and gumming up the labour market, rendering such laws without justification. Carbon taxes—which aim to compensate for externalities generated by pollution—are currently extremely unpopular, but linking revenues to the base NIT level is one way of making them politically palatable. The same link could potentially be established for state revenues from a visa auction system, which would make the well-documented link between immigration and economic prosperity more obvious to people already living in this country.

There are many objections to Negative Income Tax (and Citizen’s Basic Income) from the left and the right. On the left, detractors worry that the system will subsidise employers paying below-subsistence wages, undermine wider socialist struggles, and have negative effects on marginalized groups like disabled people, parents of multiple children, and those with high housing costs.

On the first point, I defer to the Cato Institute’s Ryan Bourne discussing the similar case of tax credits: “employers generally pay people according to the productivity of their work, not some preordained amount to compensate them for a set standard of living.” While the experience of tax credits suggests that wages may drop slightly in the short-run as more people are encouraged to enter the labour market, this effect will quickly dissipate as the supply of labour adjusts accordingly. There’s also the oft-overlooked point that an income floor tends to increase the overall bargaining power of labour!

The claim that NIT/CBI will be used to justify more neoliberal policies at the expense of left-wing ones is partially true. But what this criticism overlooks is that a free market welfare system accomplishes what many on the left desire: poverty alleviation, increased worker bargaining power, and an end to (most) paternalistic means-testing.

Keeping disability benefits separate from the NIT/CBI addresses their potentially higher welfare needs, and targeting payments at individuals (including a rate for children) deals with varying family size. As for those facing high housing costs, it’s important to compare a Negative Income Tax with the failures of housing benefit (which should be abolished). Transition measures are necessary to avoid those receiving housing benefit being left in the lurch, but an equivalent cash payout as part of an NIT/CBI would encourage more efficient allocation of housing stock while stopping rents being hiked up. And of course, the best long-term solution to unaffordable housing is sweeping supply-side reform.

Opposition to Negative Income Tax from the right tends to focus on the purported cost, the potential for widespread idleness, and long-term political risks. It’s vital that cost is viewed in comparison to our current welfare system, and it’s important that those concerned with the overall size of the state remember that its scope also matters. That said, cost remains an open question that can only be decided by detailed analysis of any concrete proposal: like this one for an American system.

Even if it’s fiscally viable, doesn’t paying everyone an unconditional lump sum kill the incentive to work? Well, not really. Our recently released paper Basic Income Around The World looks at the evidence from Basic Income experiments and finds little evidence of workers exiting the labour market or significantly reducing hours worked: most reductions in the famous American and Canadian experiments were for time spent between jobs.

Perhaps the strongest objection I’ve come across from a centre-right perspective is the worry that any NIT/CBI would be ‘bid up’ and rendered harmful by the political process, as parties compete to offer the highest minimum level of income. As the Institute of Economic Affairs’ Steve Davies put it:

Given that, it is for many a racing certainty that it will be bid up by political competition to a damaging level and that there will also be constant and often successful efforts by special interests to create specific add-ons or separate benefits in addition to the UBI, which will lead to the re-creation of much of the existing welfare state but now in addition to a UBI. This will defeat the main point of a UBI for those who want to replace the costly complications of the existing welfare system.

The best answer I have here is that the future of any policy is uncertain, and any NIT/CBI could also be bid up or remain in rough equilibrium. More work needs to be done on the possibility of an independent political body (think of the Low Pay Commission or the Bank of England) taking responsibility for setting the details of such a policy out of the hands of politicians. In the end, the future of our welfare system is in our hands, and a Negative Income Tax should be the long-term goal.

Polly insists Tory NHS policy is working and working well

This is not, of course, what Polly Toynbee thinks she is saying yet it is still so. Her claim is that recent Cameron/Conservative policy concerning the National Health Service is working and working well:

After Brexit, David Cameron’s second worst legacy is his assault on the NHS. His explosive 2012 Health and Social Care Act was designed to privatise it into small pieces, while an eight-year funding droughtyields new worst ever figures every month. The wonder is that the service still treats so many so well. The number of GPs fell again last month, while graphs for nurses, emergency doctors, ambulance staff and just about everything show a relentless downward trend. Waiting times for cancer treatments rise, as do delays to treating older people’s hip fractures after falls.

The NHS is now the top cause of public anxiety, according to Ipsos Mori. Is there any good news? There is: the Institute for Fiscal Studies finds a continuing steep rise in NHS productivity, treating ever more people, far outstripping dismal overall UK productivity rates. Hold on to that fact,....

The grand problem with the NHS has always been that productivity. As many, including Polly, have told us it has its own inflation rate. 4% or so in fact. That is, unless the budget increases by that amount each year then there will be insufficient resources. Some of this is Baumol's Cost Disease - productivity is more difficult to increase in services than in manufacturing. But the cure to it, in so far as there is to something structural like that, is more markets, as it is in manufacturing and agriculture. Markets and competition are the causes of productivity increases. As someone as notable as Paul Krugman has pointed out, it's entirely possible that the entirely non-market Soviet economy managed not to increase total factor productivity one whit between 1917 and 1989. 

We are not entirely on board with thinking that recent NHS policy has been perfect, to put it mildly. Yet the general gist, more internal markets, more competition, we approve of. And here we have Polly Toynbee no less telling us that it has been working.

Productivity in the NHS is increasing faster than in any other sector of the economy. No, don't wonder whether that is true, just consider the statement and the source. If it is true, as is stated, then that must, definitively, mean that recent NHS policy has been successful at dealing with the system's most glaring fault, the slower than the rest of the economy productivity growth.

And look at our source - Polly Toynbee. Good news, eh? It would be even better if she realised what is was she was saying....

Students should celebrate lecturer strikes

Starting on Thursday, academics and lecturers at 61 universities represented by the University and College Union will strike for 14 days. According to the Sunday Times, affected universities are planning to dumb down final exams to ensure that the walkouts do not affect final grades. Essentially, it means that students will get to graduate with the same grades but with less material to revise and a few more lie-ins in lieu of morning lectures. This should be cause for celebration for most students, but the ungrateful beggars are complaining.

Students are demanding compensation. The Telegraph reports:

Georgia Davies, a 21-year-old second year English and Modern History student at the University of St Andrews, calculated that 14 days of lost lectures represents £768 of her tuition fees.

“I get 12 hours a week in lectures and tutorials which means that a single hour costs me £32. Consequently 14 days of action is the equivalent to not getting £768 of face-to-face contact with my lecturer,” she said.

“While students support their lecturers in this dispute, they also want to get value for money for the fees they have to pay.”

Are students being cheated? Are they still getting value for money?

It depends on why degrees are valuable in the first place. There are three candidates.

1. Consumption: Attending lectures and seminars is interesting and fulfilling.

2. Human Capital: Education increases skills and makes you a more productive (higher earning) worker

3. Signalling: By studying you prove to employers that you’re intelligent, hard-working, and conform to society’s expectation.

In his new book The Case Against Education, George Mason University Professor Bryan Caplan argues persuasively that the majority of the benefit of a university education comes from signalling: not from increased human capital or consumption value.

Caplan backs up his case with solid statistical evidence. He points out that the human capital theory falls flat. First, he points out that much of what’s learned in school beyond numeracy and literacy isn’t useful in most graduate jobs. Second, that’s probably a good thing given that most students forget most of what they learn as soon as they’ve taken their final exam.

Ben Southwood, formerly of this parish, has previously blogged that moving a kid from a worse to a better school has almost no impact on their life chances. While the IFS found that school absences have no measurable effect on students’ long-run productivity.

The education as consumption angle is also flawed. It’s true that some students do enjoy learning (I was one of them), but that lecture attendance is embarrassingly low (strangely this changes if lecturers take a register) and that many students fail to do the reading ahead of a seminar suggests for many education is a means to an end.

It may seem controversial at first, but most students implicitly accept the signalling model. They look for ‘easy firsts’. They bin their revision notes and sell their textbooks after an exam. They probably think that cheating is wrong, but they almost certainly think that cheats benefit if they can get away with it. Failing an exam carries a much greater cost than passing and then forgetting what you have learnt.

Neither Caplan nor I argue that education is 100% signalling. There are, of course, some human capital benefits and some consumption benefits. But the signalling model has much greater explanatory power than its alternatives.

If Caplan and I are right that higher education is mostly signalling then students should welcome lecturer strikes. Signalling is positional. Being able to get top grades in my Freshman year should be enough to signal that I’m smart, hard-working, and conformist. But if everyone else is doing three years, then I look like a slacker who can’t follow things through and isn’t willing to do what is expected of me. Signalling is effectively an arms race – and like an arms race both sides are worse off from having to engage in it.

By cancelling lectures and forcing universities to dumb down their final exams, striking academics have inadvertently signed an arms treaty. And for students that should be cause for celebration.

 

The Ruling Class

Last night, I watched a debate on Danish television in which they discussed something rarely talked about in Denmark - and when it’s discussed, things often get heated. The theme was public sector employment.

In the wake of the recently concluded negotiations on fiscal policies, the liberal government have had to shy away from some of the “historical big tax cuts” they promised at the end of last year. However, that’s not the only area where they’ve had to notch down the expectations. They’ve promised to cut spending and even reduce the size of the public sector. Yet they’ve been unable to gather support in the current coalition or elsewhere in parliament, which has led them to downgrade their goals for public spending.

Under the previous social democratic government the public sector grew with an average of 0.5% a year. The goal for the current liberal government is to reduce this growth to 0.3%. They have failed. So far this parliament average growth has been 0.75% and things aren’t looking to brighten up in 2018 when 1.1% growth is expected.

The incumbent Danish government has made several attempts at reforming key areas in the Danish welfare model but has failed time after time, making negligible progress. Why is it so difficult to reform the public sector? Danish politics is often characterised by consensus but on this specific topic the agreement stops. This is what they discussed, among other things, last night:

Part of the explanation, it is suggested, might date back to the 1970’s and the Danish Marxist (although I’m sure other Marxists would argue not in its purest form – splitter!) Jørgen S. Dich. Dich was an economist, a seldom voice of reason (to some degree) on the left, and author of the book, the Ruling Class (Danish: Den Herskende Klasse), a critical assessment of the Danish welfare state.

As the title suggest, Dich uses Marxist class theory to scrutinise the public sector. In his analysis, he reaches the conclusion that the capitalists aren’t the ones exploiting the workers, the new ruling class of public employees are. Dich argues that, while public employees nurture their own interest on the pretext that they are improving everyone's welfare and at the same time are securing themselves high wages and good labour relations, the workers are kept in the illusion that the only conceivable alternative to the enormous public sector is social uncertainty and sickness. Meanwhile, the public sector grows ever larger. Dich’s book was - and still is today - highly relevant. You’ll hear many critical voices of the welfare state in Denmark who agree with Dich but none of them are from the left.

Another possible explanation is that politicians increase their commitment to sunk costs because they’ve invested a lot of time and money into their projects and don’t want to see their projects fail (as explained in this study). The problem with the public sector in Denmark is the epitome of that exact study.

The public sector is the raison d’être of the Social Democratic Party and the left. With time the public sector has become the 'pride' of the Danish people, much like the NHS has for the British people. The key difference is that a larger number of Danish politicians recognise the problem. However, the political willingness to break the alliance of politicians and the public sector, or even try to raise productivity, is simply non-existent. Understandably perhaps, since there’s an emerging pattern that public sector employees lean more to the left than the rest of the population. Any party on the right suggesting they would cut spending would be accused of treason and any party on the left suggesting the same would be accused of political heresy.

Try pointing out some of the problems in a debate and you’ll instantly be blamed for defaming all public workers even though the Danish Productivity Commission has stated that there are critical problems with the Danish productivity - in the public and private sector alike. The same Productivity Commission states that part of the reason for this are the disruptive taxes imposed on businesses. Given the small size of Denmark, the Danes are reliant on the rest of the global economy doing well, which leaves less room for increased taxation. Businesses, and the taxes they generate, are the foundation of the public sector and they are currently hurting because of increasing demands for more spending due to changes in the demographic and living conditions.

The fact that public employees are voters as well as employed by the state creates a circle of incentives that might help answer the question I asked earlier: Why is it so difficult to reform the public sector? Ludwig von Mises noticed in 1944 in his book Bureaucracy that the public employee is in a peculiar situation. Not only is he an employee, he is also an employer. Mises continues:

And his pecuniary interest as employee towers above his interest as employer, as he gets much more from the public funds than he contributes to them.

This double relationship becomes more important as the people on the government's payroll increase. The bureaucrat as voter is more eager to get a raise than to keep the budget balanced. His main concern is to swell the payroll.

Coincidentally, public sector employees in the lower quartile of earnings earn 10% more than employees in the private sector. Additionally, the public sector grew from 382,000 in 1970 to 835,000 in 2012 - over 40 years the public sector has more than doubled. In the same period the private sector has shrunk by 7%. Overall, ⅓ of the workforce is employed by the state.

This leads to a number of implications. Demand for workers in the private sector is rising, and with lower wages, so the private sector might not be able to compete with the public sector. If Denmark wants to maintain the public sector without raising taxes and hurting businesses, it ought to raise the public sector’s productivity. This seems to be difficult, however, because of the public sector’s centralised collective agreement system. Contrarily, the private sector provides a framework for companies to work under but it is highly decentralised and companies are able to induce productivity by offering things like better salaries and working hours,providing an opportunity for more effective use of resources. The private sector used to having a centralised agreement system but it was changed in the 1970s due to its inefficiency – something the public sector should consider doing as well.

Although I don’t agree with Dich on most areas, it’s remarkable that an economist on that side of the spectrum noticed these problems back in 1973, when the amount of public employees was half of what it is today, and when no politician on the left today was willing to admit to these issues. They’ve been thoroughly explained by the Danish Productivity Commission over several years, yet political stubbornness dominates the debate. The foundation of the public sector is shaking and it will eventually collapse if the Liberal Party doesn’t find the political courage to force change.

Regulators tend not to think about consumers

An interesting little example of why regulation isn't quite the way to promote the consumer interest:

Rail bosses have blamed fire safety and anti-vandalism rules after passengers complained new uncomfortable seats feel like "solid metal".

Govia Thameslink admits the seats on the new Class 700 trains are considerably firmer than older designs. The seats have limited padding, because cushioning is deemed as a fire hazard by the Department for Transport (DfT), according to the rail operator.

They also have to be made from graffiti-proof material, which the DfT said has a "firm feel".

Travellers have complained the seats are hard and narrow,

We have no view on how hard and narrow train seats should be. Nor, in fact, about how flammable or graffiti resistant they should be. But then that's rather our point. That we don't know leads us to a reasonable conviction that the regulators don't either.

For said regulators are going to regulate to fit their sole aim. Those commissioned with preventing fire alone will insist upon something that just doesn't burn, those against teenage scribbling ditto. Rather lost in such concerns will be the purpose of the enterprise, producing something which passengers desire to sit upon. The complexity, the balance between differing desires, will be lost in a purely regulatory world.

Which is what is happening here. The provider of the service, varied places for posteriors, isn't allowed to make that trade off which they are best placed to make, between their needs and desires and those of their customers. Someone, even many people, from outside that knowledgeable group are able to insist upon their own designs. Which is why we end up with seats which don't burn but which aren't worth sitting upon.

Which is where our own view comes back into play. We do have a vision of regulation and one which does work. Owing very much more to the Common Law principles than this sort of level of detail. General principles - don't kill the customers, don't poison them etc - using post facto enforcement and design revision. And let the people who know, that interface of consumer and producer, then get on with things. 

We thoroughly approve of Westminster's voluntary tax idea

Westminster council has decided to ask the richer among its residents to provide a voluntary top up to the tax revenue:

Officially, it’s not a guilt tax. Westminster council prefers the term “community contribution” to describe the idea that its millionaire residents might like to make a voluntary donation on top of council tax. It is, they say, merely a chance for the wealthiest to “invest in their neighbourhood”.

We thoroughly approve for it aids us in working out who is prepared to really walk the walk.

For it's really not difficult to find those who will talk about the desire, even necessity, for more taxes. It's rather less common to find people who will cough up. It was one of us, back in 2005, who first got the numbers out of the Treasury for those who had voluntarily paid extra tax in the previous year. 5 - and 4 of those were dead. Those numbers haven't changed greatly in the intervening years.

This is the difference between expressed preferences and revealed. What people really think is found in what they do, not what they say. And as we have found, and as we expect this new initiative to find, there are very many fewer people willing to pay more than the number who will call for more to be paid.

After all, even those who call for very much higher tax rates do still fill out tax forms to work out how much they must pay, rather than scribbling a cheque for some randomly large amount, don't they?

Paternity leave and the gender pay gap

We've no particular institutional view on paternity leave. We are after all liberals so how people wish to order their lives is up to them. We'll not therefore insist that people should, or should not, follow any particular form or fashion in familial life.

We will though comment upon claims which are obviously untrue. Such as this:

The first thing to understand is that fathers and mothers want the same thing.

Of course both desire many of the same things, a healthy child and all that. But in terms of work and time off, career development and so on we know that this isn't true. For we know about the gender pay gap.

It's taken a long time, as all such socially awkward revelations do, but it is now generally agreed - among those who have thought at least - that the gender pay gap stems from different, on average, reactions to the arrival of children across the genders.

Men and women aren't paid different sums, mothers and fathers earn different amounts, the differences coming from their own choices about how they wish to order their lives once that exalted status has been reached. As we say, took a long time to get here but we are all now acknowledging reality.

But given that this is reality then it cannot be true that mothers and fathers - on average, always on average across those populations - desire the same things concerning children, work, time off and leave.  

We really do think that it's worth having a shufti at reality before trying to design policy you know....

Skateboards and why we overstate inflation

One of the little problems of modern life is that we can see, with our own very eyes, that the society around us is getting richer. We can do more things, faster, better, than our forefathers. Yet when we try to look at real wages it seems that we're not advancing at all, or only marginally. A goodly part of the answer is that we're calculating the real part of wages wrongly. At which point, skateboards:

If I flip to the back, there are mail-order ads for skateboard decks. The going price, depending on brand, is around $42. All of this is to say that while some things in skateboarding have changed a lot over the past 28 years, the cost of boards has essentially stayed the same.

Or if we measure that in real prices, adjusting for inflation (and guessing here, not actually doing the calculation) then skateboards have halved in price. This is roughly what we would use to compare to wages. The more general inflation rate is made up of all of the things we buy, weighted by how much of each of them we buy. There will be some things going down in real price, some in nominal, some rising in both and so on. "Inflation" is the sum of all of them, times those weights.

And yet we've an obvious problem here.  Today's skateboard is better in quality than that of 30 years ago. So, has the price really been static in nominal terms? Well, no, it hasn't. And the process of adjusting for that change in quality is "hedonic" adjustment.

This is obviously important when discussing, say, computing power. And great effort is expended to try to account for it. With a measure of success too. But our problem is that such adjustments really should apply to just about everything we use and or purchase. Even the humble skateboard.

Inflation these past few decades really has been overstated as a result of our not properly accounting for increases in quality. The usual guesstimate is 1 to 2% a year or so. Which makes a heck of a difference summed over a generation to real living standards - those things we're told haven't been improving.

This is one of those times when with a choice between an economic statistic and your own lying eyes go for the oculars. Living standards simply have been improving, whatever the estimates of real wages.