Inequality and the minimum wage

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I take issue with an aspect of the New Economics Foundation report discussed here by Charlotte yesterday. It apparently finds that the reason that the minimum wage can’t tackle inequality is because it has not been indexed. As the report states in the introduction, the NEF calculates that the UK could gain 7.35 trillion of social value between now and 2050, if only the UK achieved Danish standards of equality. Being a Dane I am flattered that my country is being used as a benchmark of good policy. However, there might be some misunderstandings of how the Danish system actually works.

First of all, yes Danes pay more income based taxes than in the UK, but with the tax reform in Denmark and increasing taxes in the UK this is about to level out. We also pay a higher rate of VAT, however we have a somewhat simpler system of calculating VAT since everything being sold is subject to a 25 % tax. This is a bit simpler than the extraordinary list of rules for VAT in the UK, leaving the Danish companies administrative burden at a minimum. Regarding corporate taxes, these are actually lower than in the UK, as are capital income taxes up to certain revenue.

So what about that minimum wage? You might be surprised about this but there is no minimum wage in Denmark. The minimum wage totally depends on what job you are carrying out and what convention has been negotiated between the union and the employer’s organization, i.e. more or less the market value of labour. This is also to say that most regulation in the Danish labour market is not enforced by law but by mutual conventions. Both unions and employer’s organisations agree that the government should stay out of matters concerning the labour market. So we don’t have a minimum wage, then what about the maximum wage proposed by the NEF? We don’t have that either, but we are still one of the most equal countries in the world. If equality is what NEF want and Denmark is thier model, they need to formulate some new policies.

No escape from World Government

Indeed, it is only the potential for people – and capital – to fly to freer countries that prevents governments from being more tyrannical. Governments’ ability to force their citizens to surrender their property is constrained by competition from lower-taxing rivals, while societies that allow successful people to enjoy the rewards of their efforts can attract skilled workers away from less free societies. And this competition also enables societies to learn from one another: the oft-cited examples of superior practice abroad (be it high-welfare Scandinavia, high-growth East Asia or English-speaking North America and Australasia) rely on other jurisdictions trying different things, from which we can learn.

Neither, despite the passionate belief of those behind World Vote Now, does democracy always lead to prosperity. The Social Democratic failure of the mid-20th Century proves that. Bad policies can dominate even in democracies. Indeed, democracies have in-built features that undermine freedom and general welfare. The current economic crisis, caused by broadly similar policies across the developed world, should act as a signal warning that one world government would have the potential to get it wrong on a colossal scale.

It is questionable how democracy could work across 6 billion people, anyway. A legislature the size of the UK House of Commons would be made up of members who each represented 10 million people. I doubt many MPs will hold surgeries or canvass voters across constituencies the size of Beijing. Yet a larger legislature would not function. Consequently, politicians will simply be more remote; more isolated from voters. We should be devolving power, not pushing it ever further away.

Lastly, there is the risk of utter calamity. Recent history has contained far more civil than international wars, and they have proven far more costly in lives. They fall into two categories: wars to control the government; and wars to break away and form a new state. Both have resulted in (sometimes immeasurable) human suffering. Even democracies have not been spared. The potential suffering from a global civil war is too horrifying to contemplate.

There is an alternative. Polities could be small; close to the people: probably the only way that power can be held in check and made to serve, rather than to master, the people. Politicians could be limited to doing only that which individuals cannot achieve either on their own or by cooperating freely with their fellows. Polities could have open borders so that they would benefit from the work and resources of all mankind. They would be free to experiment and so to learn from one another.

Most of all, they would provide havens to which the victims of oppression could escape. Under a world government, minorities, non-conformists and dissidents would have nowhere to hide and nowhere – absolutely nowhere – to run.

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In 1620 a group of religious non-conformists, oppressed by the English Church and government, fled Southampton and sailed to a new world, where they founded a colony where they could practice their religion freely. For 30 years, East Germans would risk (and sometimes suffer) death or torture to cross from Communist East to Democratic West Berlin. In 2008, over 25,000 people sought asylum in the UK, many with their dependents in tow.

Yesterday, my brother sent me a link to a website advertising the documentary-film World Vote Now. This latest campaign for a world government – based upon democratic lines – asks the question “[If] democracy creates stability and raises living standards... why not introduce it on a worldwide scale?"

The Pilgrim Fathers and the East Germans entangled in barbed wire might be able to answer that question. When all is said and done, there is one, final check upon a government’s ability to oppress its people. It is the mechanism used by Cubans when they tie empty oil drums to the chassis of old cars and try to paddle to Florida, or by North Koreans who manage to sneak all the way from the Yalu River to Bejing to try to slip into foreign embassies and beg for freedom. It is the ability to escape.

The advocates of a world government would of course claim that, constituted democratically, a world government would not oppress its people. This is charmingly naive. India, the world’s largest democracy, faces more independence movements than one can easily count. The United States government spies on its own citizens in breach its own constitution. The UK has more CCTV cameras than any totalitarian state and our government would seek to vet one in seven of us and make us all carry identification papers at all times.

[Continued... CLICK HERE TO READ MORE]

A bit rich

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The New Economics Foundation’s latest report ‘A bit Rich?’ advocates a ‘fundamental rethink of how the value of work is recognized and rewarded’. This is on the back of the argument that wages paid to people in different professions don’t reflect the ‘real’, social value of their roles.

The report repeatedly reveals an automatic desire for state intervention and regulation, based upon an aspiration for significantly greater equality of outcome. Unsurprisingly the three examples used for ‘highly paid yet socially catastrophic’ jobs come from the private sector; namely banker, tax accountant and advertising executive. When analyzing tax accountants they note that “every pound that is avoided in tax is a pound that would otherwise have gone to HM revenue"; and proceed to look at “how this lost revenue could have been better spent" by the government. This analysis neglects the fact that despite huge increases in public spending and taxation in recent years few if any improvements in the state of public services can be noted. The NEF are wrong to argue that wealth is better off in the clammy fist of government than being put to productive use by those that earned it.

The report also seems strangely puritanical. Advertising executives are deemed vastly destructive because they create ‘insatiable aspirations’ and fuel the social and environmental damage caused by over-consumption – as if seeking to better your lot and consume over and above the absolute minimum is a sin. When measuring over-consumption the Joseph Rowntree Foundation’s Minimum Income Standard – categorized by the charity as the lowest income at which someone can lead a meaningful existence – is taken as the level of consumption deemed acceptable.

The report neglects the true reason for differences in wages: the need for certain skills. Almost everybody could go around a hospital with a bottle of antiseptic, but it is unlikely that many of us would be able to understand opaque tax laws that highly-paid accountants have to. To have jobs priced according to their social (read ‘political’) value and not the scarcity of required skills would result in a chronic misallocation of labour.

The report concludes that we need more progressive taxation, higher minimum wages and a national pay differential to prohibit anyone from earning over a certain amount. It is a call for socialism and all its attendant failures, and no pretence of social benefits should disguise it otherwise.

Further education reform

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Further education is oft neglected by the headline grabbing areas of compulsory and higher education. Yet it is also in vital need of reform, as an excellent IEA publication entitled ‘An Adult Approach to Further Education’ by Professor Alison Wolf makes clear.

The problem with further education is familiar one, namely too much government wrapped up in the ubiquitous quangocracy of central planning and control. Of the many intersting findings of Professor Wolf’s paper, crucial is the fact that many of the qualifications that the government promotes have no economic value at all. In fact:

A conservative estimate is that £2 billion a year of further education and skills spending – i.e. almost half of total government expenditure in the sector – is wasted, providing no benefit to individual learners or society at large.

Lord Mandelson, the country deserves an explanation for this failure.

In my opinion Professor Wolf is not radical enough. She suggests that there are valid arguments for some subsidies being continued and calls for the extension of the government run student loan scheme into further education. Instead of government subsidies individuals and employers could do far better job at deciding when to undertake further education and when not to. Where markets are free, supply and demand will be met, while the case of NIIT shows that the poorest in the world can access high quality further education services at no cost to the taxpayer. The introduction of the student loan scheme would be a distortion of the credit market, which only benefits the providers of education who are able to increase their prices in line with the increases in available credit. Government subsidies and loans do not take away the risk inherent in undertaking further education, but instead muddy the waters for consumers and providers of education.

Yet despite my reservations, there can be no doubting the immense step that would be taken if Professor Woolf’s proposals were put into action. If this area is to be subsidised, better to do it through individuals, as she suggests, than rely upon central government and quangos to try to manage over the unmanageable. Professor Wolf sums up the situation as follows: “The idea that one can plan for anything as complex as the modern labour market would be laughable if it were not that we are wasting vast sums of money attempting to do so". How true.

Relocation time

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In a previous blog I implied that those who are to be hit by the 50 percent super tax next year, would be likely to pay the tax for a year or so without taking any further measures. However, I am happy to admit that I was wrong and the reactions are already showing it. For example, the inter-dealer broker company Tullett Prebon has reacted rapidly on the government’s PBR and announced that they are willing to help employees relocate if they wish to get out of the hands of Her Majesty's revenues and customs. As reported in The Daily Telegraph, the core issue for people who wants to be relocated is the uncertainty that the British government is forcing on the private economy.

I vote for a tea party

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A few of pieces of US polling data caught my eye over the weekend. The first is that a Fox News/Opinion Dynamics poll conducted last week has found that 46 percent of Americans do not think that President Obama will be re-elected in 2012. This comes on top of the news that Obama has lower approval ratings than any previous president at this stage in their presidency, according to a survey by Gallup. The other intriguing poll result comes from a survey by Rasmussen Reports, in which 36 percent of people said they would vote Democrat, 23 percent ‘Tea Party’, and 18 percent Republican.

The really interesting thing there, of course, is that there is no political party called the ‘Tea Party’ – rather, the ‘tea parties’ are a series of anti-big government grassroots organizations that have sprung up all over the US in the wake of the Wall Street and Motor City bailouts, President Obama’s stimulus package, and the Federal government’s attempted healthcare reforms. While their policy objectives are, unsurprisingly, not clearly defined or codified, the tea party movement is very clearly a manifestation of what Grover Norquist calls the ‘Leave Us Alone Coalition’ – people of various political backgrounds who want lower taxes, limited and fiscally responsible government, and less state intervention in their lives.

As I’ve said before, this is precisely the ground that the Republicans should be re-colonizing after the disgraceful profligacy and statism of the Bush years. If they were to manage it successfully, I’ve no doubt they could win back Congress in next year’s mid-terms, and then be in a position to curb Obama’s excesses. To put it simply, the future of the ‘Grand Old Party’ lies in rediscovering common ground with libertarians, and developing a coherent, small government message. But will they realize that in time?

An education revolution

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According to the Guardian, interest in the Conservative Party’s education reforms has been growing. Hundreds are ready, willing and able to overhaul the quality of education in this country.

Parents, teachers, charities and companies have been in contact with the New Schools Network to register their interest and find out more about how to set up schools if the Conservative Party comes to power. It appears there will be no shortage in demand for Gove’s radical policy. So far Ed Balls’ responses to Gove’s position have been unconvincing and uninspiring – defending the dreadful status quo.

The words of Lesley Surman, of the BBG Parents' Alliance, reflect where the drive for improving standards of education will come from: "We are uncompromising on the level of ambition for all of our children, for our school and for our community." The BBG Parents' Alliance is in process of searching for partners to set up their new school.

Provided reform is swift and uncompromising command and control public services will have been dealt a terrific blow from education reform. If done properly, this supply-side reforms can undercut the current vested interests controlling the natural market in individual and familial expectations. Given the widespread monotonous failure of state education, the disillusioned but talented pool of young teachers and the bored, uninspired, untapped, wasting potential of majority of children – this education revolution could not come a moment too soon. For the children of this country, the election could not come early enough.

Now what about the NHS Mr Lansley?

Circular financing

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Other countries – such as the United States - have also used QE, but not to the same extent as Britain. Since March, the UK has almost tripled the size of its "monetary base". We've then used more than 99pc of that freshly-minted money to buy our own sovereign debt so Mr Brown and his ilk can keep spending, in a last-ditch attempt to prevail at the polls. As a result, the UK is now being kept afloat by a bizarre, Zimbabwe-style form of circular financing that will ultimately explode in our faces.

Liam Halligan, 'Labour's dishonesty is leading us down the road to sovereign default' Telegraph.co.uk