The Benefit-Industrial Complex

Anyone following the progress of the government's “Universal Credit” welfare reform program will know that (1) its signature provision is the creation of the so-called Benefit Cap limiting the amount of benefits that any one person or family can claim in a given week to £350 or £500, respectively.

Lesser known is (2) that “under Universal Credit, the default position will be that all housing costs for both social and private sector tenants” – currently paid out as a single, discrete benefit but soon to be subsumed within the benefit cap – are to be paid directly to claimants, whereas previously it was paid directly to claimants' landlords.

That the second of these proposals should be controversial is a little surprising, considering the fact that paying one's rent is the sort of thing most people will do for a substantial majority of their working lives. So I was puzzled to see Mark Easton, BBC News' Home Editor, excoriating the government, and accusing it of being “secretive*... on a matter that affects the lives of hundreds of thousands of the most vulnerable people in Britain”: the proposal to, in his words, “force social housing tenants to pay their own rent”.

Easton's objections followed three lines. First, he argued, social landlords' business plans rely on suffering only 2% aggregate arrears; such plans would be thrown into disarray if Housing Benefit claimants are given responsibility for managing their own affairs (which, he argues, would increase monthly arrears to as much as 30%). Second, he continued, existing social tenants have “little or no experience of monthly budgets,” get their benefit in cash weekly, and therefore are not predisposed to – or capable of – managing their own finances. Finally, he concluded, many have not chosen to access banking facilities or do not have regular access to the internet, both of which are necessary to use the new Universal Credit regime.

The capacity argument has been invoked frequently in relation to the Universal Credit – Shelter, for example, made representation during the public consultations preceding the 24 November Report of Session on Universal Credit that there is “considerable apprehension as to how many social tenants will manage their incomes”.

This argument is probably honestly made out of concern for humanity and backed by evidence. That it also makes it morally appropriate to burden the taxpayer for the market risk of landlords in the Housing Benefit tenant market arising from failure on the part of welfare beneficiaries to manage their finances is another question, especially when we consider the practical character of the libertarian reply.

Human beings have paid rent with reassuring frequency for millennia and statutory frameworks have regulated these payments since 1772 – 1772 B.C.E., that is (cf: the Code of Hammurabi, sections 50 and 51). Furthermore, the internet access required by Universal Credit is available free of charge at public libraries and for a small fee on mobile phones and at internet cafes around the country. The internet is used daily by billions of people of all ages, creeds and nations, and with highly variable degrees of intelligence. It is no stretch to say that able-bodied adult British claimaints of sound mind should be able to combine these two competencies and pay their bills.

Politically, Easton's concern for social landlords and their businesses is more interesting. Trials of the beneficiary-pays system have shown that the increase in arrears has made letting to DWP tenants uneconomic, and the reform means that private sector landlords “will pull out” of the benefit claimant housing market (at page 93) – a problem amplified from the perspective of local authorities who are duty-bound to find housing for these persons and “increasingly... have to advise people to look for housing in the private sector.”

What is left unsaid by Easton is the scale of the private sector's involvement in welfare provision relating to housing. It is vast. In Northern Ireland alone, the Select Committee's report notes, “we think ['think?'] there are 60,000 private landlords who currently receive payment of Housing Benefit direct – about £250,000,000 a year” – £4,100 per landlord, or £148.00 for every man, woman and child in Northern Ireland. While I do not have exact figures to hand, if this were extrapolated on a per-capita basis nationally, the level of private sector benefit realised would rise to nearly £10 billion – roughly 45% of the total Housing Benefit bill, and nearly 1% of GDP, roughly equal in heft to the 2012 Olympic Games.

Viewed thus Housing Benefit is less a welfare program than a national industry, operating on the scale of value-added giants like automobile manufacturing (£54bn) or defence (£45bn) and capable of distorting the market to the detriment of the working taxpayer. As a component of income allocated towards housing, Housing Benefit has long outstripped private wages. As a subsidy it disrupts the supply of property for private renters, providing what is in effect a national minimum rent while driving up rents for non-beneficiaries in the process, thus striking the propertyless taxpayer from three directions.

And as a safety net it fails too – while senior editors of the BBC and Labour MPs invoke in the system's defence the inability of its beneficiaries to demonstrate the financial acumen of a Bronze Age Babylonian tenant farmer, the Commons Work and Pensions Committee report on the subject states, matter-of-factly, that “many benefit claimants will never be able to take up or return to work.” When the question of whether Britain can continue to afford its welfare state is an open one, this is clearly the wrong approach.

Quite irrespective of the relative merits of welfare provision, the existing system is ripe for reform. The government's efforts to date are a welcome first step.

*  So secret, in fact, that his article was published a full two days (24 November) after a report published by the House of Commons Work and Pensions Committee on the subject (22 November), and after months of public consultations with interested parties. But I digress.

The Benefit-Industrial Complex

Housing benefit is a national industry, says Preston Byrne. In this article he argues that it sustains a national minimum rent and drives up rental costs for everyone.

Anyone following the progress of the government's “Universal Credit” welfare reform program will know that (1) its signature provision is the creation of the so-called Benefit Cap limiting the amount of benefits that any one person or family can claim in a given week to £350 or £500, respectively.

Lesser known is (2) that “under Universal Credit, the default position will be that all housing costs for both social and private sector tenants” – currently paid out as a single, discrete benefit but soon to be subsumed within the benefit cap – are to be paid directly to claimants, whereas previously it was paid directly to claimants' landlords.

That the second of these proposals should be controversial is a little surprising, considering the fact that paying one's rent is the sort of thing most people will do for a substantial majority of their working lives. So I was puzzled to see Mark Easton, BBC News' Home Editor, excoriating the government, and accusing it of being “secretive*... on a matter that affects the lives of hundreds of thousands of the most vulnerable people in Britain”: the proposal to, in his words, “force social housing tenants to pay their own rent”.

Read this article.

DSC_0039.jpg

We really do need to lower UK corporation tax rates you know: They're the highest in Europe

There's a rather sad misunderstanding about corporation tax in the UK at the moment. Everyone seems to think that we've got a low corporation tax here. When we don't in fact: we've got rather a high one. Oh, sure, we've a low headline rate: but that's very much the smallest part of corporation tax. The much more important part is what are the reliefs, the allowances, what can you claim back, what is actually taxable. Which gives us the effective rate:

It's very difficult indeed to describe the highest EU corporation tax rate as "low". The difference is, while we've a low headline rate, we also allow many fewer exemptions from having to pay that low rate (largely Nigel Lawson's work I believe).

And the importance of this is this:

This isn't just a theory: It appears to be true for that most economistic of organizations, the multinational corporation.  When multinationals are deciding which country to invest in, they don't pay that much attention to marginal tax rates.  According to Glenn Hubbard
 
...investment location decisions are more closely related to average rather than marginal tax rates. 
 
When making the go/no-go decision, corporations care more about their long run tax bill.  That's because the marginal decision is the go/no-go decision.
 
Yes, average and effective tax rates are the same thing.
 
It's not good enough our just having a low or competitive headline corporation tax rate. We also need to have a low effective rate. Good grief, at the moment we're twice Ireland's rate.

Monopolies only work if they're not contestable

A little story from the annals of my corner of the weird metals industry. You'll recall all those stories of how the Chinese had cornered the market in rare earth metals. Then the wily Orientals rather scrutably decided to, once they were 97% of the supply, restrict exports, reduce production and rub their hands with glee as they collected monopoly profits. All in all an example of how they had got it right through industrial planning and we in our free market foolishness had got it wrong.

So let me bring you up to date with what's happening:

The shares and rare earth prices plunged in 2011 as buyers pursued alternative raw materials and used stockpiles. Lanthanum oxide, a rare earth used to refine gasoline, has dropped 53 percent this year, according to Shanghai Steelhome Information data. Cerium oxide, used in glass polishing, has declined 56 percent and neodymium oxide, used in magnets, has fallen 46 percent, the data show.

Prices have indeed done that. But not particularly for the reasons mentioned, although they play a part. The real reason is this:

Molycorp and Australia's Lynas Corp (LYC.AX), some of the few rare earth producers outside of China, are ramping up production even as prices have dropped sharply since early 2011, dragging shares of other producers as well. "We remain very concerned about what will happen as new supplies from Molycorp and Lynas totaling 57k tonnes hit up against a ROW (rest of the world) demand estimated at 40k tonnes in 2011 ...," J.P. Morgan analyst Michael Gambardella said in a note to clients.

Here's what really happened. China did indeed end up with a production monopoly on rare earths. For they were willing to sell as much as anyone wanted at a price they were willing to pay. (A small personal note, the one rare earth that I really deal with I used to import into China, as it was the only one they didn't in fact produce in quantity.) Oooh! A monopoly, that's bad!

But as soon as they tried to exploit that monopoly then, given that rare earths aren't rare (nor earths), people started to contest that exercise of monopoly power. To the point that prices are falling, we're looking at over supply at current price levels. In fact, Bayan Obo, the largest Chinese mine (and the world's) was closed for November in a bid to keep prices up. There's even more. Another of the Chinese producers, Jiangxi, is largely owned by the family of the incoming Chinese President, Ji Xinping. And there's been quite a lot of rules and regulations trying to put some of the smaller operations out of business: on purely environmental grounds you understand.

And yet global prices continue to fall as global supply rises.

Which brings us to an interesting observation. Monopoly, purely and simply as monopoly, is neither a bad nor a good thing. If someone's the lowest cost producer and can supply total demand then why the heck not leave it as a monopoly? The difficulty comes if someone attempts to exercise those monopoly powers, to gouge consumers in some manner. And for many to most monopolies the exercise of such power leads to competition and the breaking of that monopoly power.

This isn't always true: and we should most certainly take action when that competition cannot, for whatever reason, arise. But as long as a monopoly is contestable then there's usually pretty much nothing wrong with the existence of said monopoly. As the Great Rare Earths Scare of the last few years shows us. As soon as anyone tried to rook consumers by exercising that monopoly the monopoly disappeared.

Free markets beat central planners once again. Oh Dear, such a shame, eh?

50,000 views for our "Economics is Fun" videos

Among the most fun things I did this year was the series of short videos about economics.  My book Economics Made Simple was published in January, so I decided to upload some YouTube videos to put across its basic ideas in a snappy way, taking only about 3 minutes for each. They were not really scripted, except that they were based on the book.

Xander stepped in, and there were just two of us.  I was presenter and he handled cameras, lights, sound, filming, cutting, editing and graphics.  We recorded them over a three-week period, doing several per day.  I picked up whatever was to hand at the last minute to use as a prop. For the first one I collected the office bell on the way up to the mezzanine overlooking the street, and rang the bell for each error.  We deliberately tried to keep them user-friendly and with an amateur look to them, instead of a slick finish. I wore a different T-shirt for each of the 20 videos.

The series took off well, and we advertised them on Guido's site to keep up the momentum.  The total views now exceed 50,000, and we've had many invitations to give talks to schools from teachers who've seen them.  We called the series "Economics is Fun," and it was.  It's much better than calling it "the dismal science."

Cheaper drugs are a feature of legalization, not a bug

Even advocates of drug legalization concede that the move risks an increase in drug use. Milton Friedman, a passionate advocate of drug legalization, noted that a fall in price would be expected to bring about a greater level of demand. Those who advocate decriminalisation of drugs, rather than legalization, often make this point in defense of their position.

Indeed, if marijuana were legal, it might be incredibly cheap. One book estimates that a joint may be as cheap as things we commonly regard as free (such as sachets of artificial sweeteners).

In practice, the effects of drug legalization on total consumption are unknown. The Netherlands, with its liberal drug policy, provides some interesting insights, but it is impossible to say whether these would carry over in other countries. For example, adult use of marijuana in the Netherlands is about the same as in other European countries.

It is important to separate total consumption from the more important factor: the impact of legalization on addicts. A rise in non-dependent users of drugs should not be a cause for concern. If people can use drugs recreationally without feeling reliant on them, then all the better. We should embrace the different ways in which people choose to enjoy their lives. It is those who become addicted that we should be more concerned for.

By reducing the price of drugs, we can help to free the vulnerable from the costs of their addiction. It is the high prices of drugs (as a result of their legal status) which causes users to resort to crime to pay for their vice. It is these high prices, and the inelastic nature of the demand addicts have for the product, that causes users to reduce their consumption of other goods rather than of drugs. This in turn means that drug users face worsening diets and unsafe living conditions. These can be more threatening than the drugs themselves.

There are many other benefits that would follow from liberalising drug policy (such as taking the economic activity of drug distribution out of the black market), but our chief concern in considering the issue of drugs should be those most at risk. Government intervention that drives the most vulnerable to commit crime is heinous indeed. By compounding the problems of addicts with higher costs we make their position worse. Addiction need not be so devastating.

Three reasons to oppose new regulation

During a downturn, calls for regulation to protect the most vulnerable grow more common — and more worrying. The costs of regulation are costs on goods and on jobs, and likely to reduce the availability of both. When the economy is floundering, further regulation will serve to put the brakes on growth. Here are three reasons to oppose more regulation.

Regime uncertainty

If businesses can’t be certain of future regulation, this disrupts their future planning. Even in the absence of the state it is difficult for entrepreneurs to anticipate future patterns. Often heavy handed and clunky regulation is thought out by those with little knowledge of the businesses they attempt to control.

Regulators can also be captured by large businesses who find it easy to be compliant with more regulation. It is small businesses who can not cope with this complexity who suffer most. Rather than protecting the public, a climate of meddling regulation can scare off new businesses, and in turn new activity and jobs.

Old regulations become obsolete

You have probably seen a compilation of ancient and bizarre laws still on the statute books. Rules on how horses and carriages may be used are still around. While no government has deregulated in such areas, innovation has made the rules all but redundant. As the electric telegraph replaced the letter, the phone replaced the telegraph, and so now do voice over IP and other forms of electronic communication replace it.

We can rely on human progress to invent new things that politicians have not yet found ways to restrict. It is interesting to note that since the financial crisis it is technology, the least regulated sector, that has performed best. If government does not introduce new regulation, then politicians need not pay so much lip-service to deregulation. Human creativity will do the job for us.

Markets do it better

The good news is that government is not the only regulator. Voluntary exchange leads to market-based regulation. It is in the interest of firms to not sell a product that poses a risk to the consumer. Companies do not tend to sell dangerous furniture. If a product is poorly constructed, such that it may cause injury, the producer could face reputational damage. It is this direct feedback mechanism of profits that makes the businessman accountable to consumers. To truly empower the 99%, the regulation of the market over firms is direct, as opposed to sluggish democratic processes.

Handcuffs.jpeg

Innovation: in a wing-view mirror, darkly

We live in a society of well-intentioned regulations to ensure consumer technology complies with only the best of standards.  Examples include long-standing regulations specifying the curvatures of vehicle wing mirrors, or the European Commission’s recently introduced (voluntary) “universal standard” to ensure all mobile phones use the same charger.

Each regulation attempts to achieve an optimal outcome at a static point: wing mirror regulations ensure consumers have a basic safety standard, while a common European phone charger cuts down waste and ensures consumers can always find the right charger regardless of which phone they use.

As laudable as these aims may be, they pose a practical problem as the economy and the sum of technology are not static. Rather, the dynamic nature of market innovation upsets the regulator’s tidy picture.  For example, this summer a new wide-angle mirror was designed that could theoretically eliminate the blind-spots which have plagued automobile wing mirrors for over a century. This development cannot be implemented without changes to regulation put in place in the 1960s, a time when such innovation was unforeseen.

Whether such regulation should be introduced in the first place is also debatable. Any regulation to ensure motor safety is premised on some minimum standard, but even such safety standards could be determined by a competitive market in the short to medium term without regulation, which would allow greater flexibility to incorporate changes in technology more readily.  Moreover, often regulations cannot be changed once in place because – from a public choice perspective – such regulation can become captive to protectionist interests. 

In the United States, to take one example, the NHTSA’s Federal Motor Vehicle Safety Standard 111 prevents the importation of vehicles with foreign-compliant mirrors, without extensive modification.  It remains to be seen how regulators react to the new blind-spot-less mirrors, but in the meantime, such regulation locks us into a more static vision of the economy and the market, delaying the trends of innovation which could lead to – literally – better ways of looking at the world.

The ancient Greeks, seeing themselves as the pinnacle of civilisation, writes Murray Rothbard in Economic Thought Before Adam Smith, aspired to an ordered utopia which could be kept static, unencumbered by the messy forces of change and creative destruction.  The Socratic ideal was that of an essentially “frozen society”, heavily regulated according to argued collective and public interests, and consequently “not a society of creative and dynamic individuals and innovators.” 

Today, rather than a Socratic over-regulated society, we need a free, dynamic market to be an incubator for innovative ideas, where change is often closer than it may at first appear. We need not confine our vision to one static, regulated reflection of the “state of the art” just yet.

magicmirror.jpeg

Silly union rules have always harmed people

We all know that militant trade unionists went over the top in the Sixties and Seventies. But the rot set in a lot earlier. During the First World War, the American government nationalized the country's railways. They were returned to the private sector in 1920, in a dilapidated state.

The Pennsylvania Railroad was desperate to repair the damage to its infrastructure and the staff's morale. It realized that its staff were an important asset and that they needed to be motivated to prevent technical faults and ensure the network worked smoothly. So Ivy Lee, the company's PR advisor, argued that "The employee must want to do his job for all it is worth or [a train wreck] may happen". The company agreed, and decided the best way to get enthusiastic staff was to pay its staff better than any other railway.

At this point, the trade unions had a tantrum. According to Ray Heibert's biography of Lee, the unions opposed the pay rise because, they argued, pay scales had to be set nationally for all the railways.

How generous of them.