Tax rises won’t pay for the deficit – but they might help to make Britain fairer

The central fallacy behind the strategy of ‘austerity’, so-called, was the assertion that the deficit had to be made up by cutting public expenditure. The policy was built on two key mistakes: that the deficit was something that mattered in itself, and that the belief that cutting public spending would make the books balance. Governments can’t cut their way out of a slump, because the very process of cutting increases the size of the hole the economy has to fill. The argument for paying off the debts incurred during the pandemic is open to the same objection: now is not the time to take money out of the economy.

There seems to be a general consensus, on both right and left, that tax rises would make our economic situation even worse. It’s generally true that tax takes money out of the economy, and that’s not what we ought to do when the economy is depressed. The same is true, of course, of cuts to public services, which are not just bad economics, but bad for well-being.

Does it follow, however, that tax rises have to be avoided? I think that has to depend on what kind of tax rises they are. One of the peculiarities of the way we’ve come to record ‘public spending’ in the accounts is the treatment of every form of expenditure as if it all had the same kind of effect on the economy. When people are taxed, money is taken out of the economy; when people receive benefits, money is put back in; and so, it seems, the two sides of the process have different effects on economic activity. If we look at the finance of benefits, however, we find that there is a direct relationship between tax and spending, and that in some cases it makes no visible difference to the performance of the economy. The National Insurance Fund, which took in £109bn in 2019, is an example. State pensions aren’t, properly speaking, a form of ‘expenditure’ at all. They’re a transfer payment: money is taken from one group of people (workers) to move to another (pensioners). If there are any economic implications of a transfer payment, it has to do with the possibility that the two groups will treat the money differently – they may have different patterns of spending and saving.  However, the initial assumption has to be that, unless there are reasons to the contrary, transfer payments are economically neutral.

That implies, in turn, that there are different implications of raising  different types of tax, depending on the use that the money is put to. Some tax which represents a withdrawal from the economy, and some other tax doesn’t, because the same money goes straight back in to the economy in the form of a transfer payment. The objection to raising taxation, that it will take money out of a depressed economy, only belongs to the taxation in the first category. If taxation is increased to pay for benefits, the same doesn’t apply. There may be other objections to doing that – though some of the objections, such as arguments around incentives for very highly paid people, are pretty iffy – but the effect on the economic activity overall wouldn’t be one of them.

The implication is that taxation can be used directly for redistribution without any evident damage to the economy. If, for example, we want to increase taxation to pay for the pensions, the costs of social care, benefits for disability or Child Benefit (which was developed from a combination of benefits with tax reliefs), we should be able to do that. By extension, it should also be possible to pay for some services, providing only that there is a direct equivalence between transfers (for example, wages) and the level of tax raised.

So – why don’t we do that? There are many political objections which defend established rights to property, which is at least a moral principle, even if it is one that I disagree with. By contrast, the economic arguments seem particularly thin. They are that the economy is too complex to be tampered with, and there may be unexpected effects (the argument made by Hayek); that public expenditure devalues the currency, an argument that is not applicable to transfer payments, because the amount of money they put in circulation is the same as the amount taken out; and that public expenditure needs to balance the books, which is probably wrong but doesn’t apply to transfer payments anyway.

There is one practical issue to consider, too, which is also a political obstacle: our public accounts don’t allow for it. We don’t have hypothecated taxation, which means that we can’t tie taxation to specific expenditure, and we don’t distinguish transfer payments from public expenditure used to pay for things. We can do things differently; these are conventions, and not very helpful ones. We should take transfer payments out of the public spending figures altogether, and account for them in their own right.

Enfin, le passport français

I have, at long last, my French passport.  As I explained last year, I started the process of acquiring the information to obtain it in November 2016, five months after the referendum, and it has taken until now to get the thing into my hand.  The importance is more than symbolic; it’s a European passport, and it carries the right to live and work in the EU.  I had hoped, for example, that I might be able to work again in Poland.  My state of health makes that unlikely, and in due course the suspension of reciprocal medical cover will present me with another hurdle to overcome.  I am no less shocked by the loss of fundamental rights than I was four years ago, but my attempt to petition the European Parliament was waved aside, and I regret that I  have only been able to mitigate this for myself.

Academic freedom: the problems with a contentious report aren’t mainly about statistics

A report published by Policy Exchange seeks to defend right-wing academics against the suppression of their academic freedoms.  Their cause is open to question, and I’m not sure that I should be bothering with a report that has been described as ‘methodologically abysmal‘, but I’m intrigued that there’s so little understanding of basic research methods on both sides of the argument.  On one hand, we have this somewhat inept explanation in the report itself:

The sample consists of 820 respondents (484 currently employed and 336 retired; average age of current academics is 49 and of those retired is 70). Given the approximately 217,000 academic staff working in British universities in 2018-19, our sample is proportionately many times larger than a conventional opinion survey (typically a sample of 1,500 across a national population of 60m). As such our data has a good claim to being representative of the wider academic population even though, as with all opinion surveys, there is a margin of error in the results.

A survey isn’t made more representative simply by being larger.  There are potential biases in the inclusion of a hefty proportion of retired academics and the assumption that non-responses (from page 51, 24% to 39% of the totals) don’t skew the results .

On the other hand, we have the combative response of Jonathan Portes, who comments that this would fail any basic undergraduate course on statistics.  Well, he’s right that their argument is based in bad statistics.  The reporting of the methodology and the questions isn’t systematic or complete. The size of a sample does not make it representative, and making it bigger does not make it more representative, it only magnifies the bias.  But of course this sort of thing  wouldn’t actually fail a project, because undergraduate projects are judged by what they do, not just by how sound they are.   I’m also troubled by Portes’s dismissal of ‘dubious anecdotes‘, the common complaint of those who believe in the inherent superiority of numbers.  What is the difference between ‘anecdotes’ and responses that can be counted?  Why is richer, fuller evidential material less credible than ticked boxes?  Qualitative research studies do the same kind of thing that is done in the courts: they look for evidence, and they look for corroboration of that evidence. The ‘anecdotes’ in most research studies, including this report, are the bits that really matter.  Additional note, 13th August:  Jonathan Portes has written to me to clarify that he was intending to challenge accounts that he thought were ‘fabricated’, rather than the validity of using anecdotes.

In the course of my career, I’ve taught research methods for about twenty years.  I’ve often found that neophyte students come to the subject with preconceptions about what research evidence ought to look like: ideally there should be numbers, and clear categories of response, and statistics, and statements about representativeness. That seems to be the attitude that has prevailed here.  The basic questions we need to ask, however, are not about statistics.  They are, rather, a question of what makes for evidence, and what we should make of the evidence when we have it.  The Policy Exchange report tells us openly that it was looking for corroboration of problems experienced in a small a number of widely reported incidents – that’s the background to their report, in Part 1.  Their sample consisted of academics and retired academics registered as respondents on Yougov.  There may have been some statistical biases in that process, and it’s possible that the retired academics may have answered differently to others; we do not have enough information to tell.

Their respondents pointed to a range of issues.  The questions they ought to have asked about their data, then, was not ‘is the sample big enough?’, or even ‘how representative is this sample?’   but ‘what does the evidence tell us about the issue we are looking at?’  The first thing you can get from a survey like this is a sense of whether there’s an issue at all.   The second is whether there is corroboration – whether different people, in different places, have had related experiences.  There’s some limited evidence to back that up -there are contributions from a handful of right-wing academics,  but the  report also indicates that there is a small but identifiable element of political discrimination across the spectrum.  (I’ve encountered that myself: I have been rejected more than once for jobs because the external assessor at interview objected to something I’d written about poverty.)  Interestingly there is little in the survey relating to more extreme examples, and ‘no platforming’ hardly appears as a problem.  The third is whether we can discern patterns of behaviour.  That’s more difficult to judge, and it’s where information about extents might have been helpful; the main pattern the report claims to identify is a ‘chilling effect’, that people who are fearful of consequences tend to alter their behaviour to avoid the potential harm.  That’s plausible but not conclusive.

The two main weaknesses in this report, in my view, are not about statistics at all.  The first rests in the bias of the design.  The questions asked people tendentiously about right-wing causes such as multiculturalism, diversity and family values.  An illustrative question:

If a staff member in your institution did research showing that
greater ethnic diversity leads to increased societal tension and
poorer social outcomes, would you support or oppose efforts by
students/the administration to let the staff member know that they should find work elsewhere? [Support, oppose, neither support or oppose, don’t know]

I suppose my immediate reaction would be that anyone who claims to ‘show’ a clear causal link between complex and unstable categories of behaviour, rather than ‘argue’ for an interpretation, hasn’t quite grasped the nature of social science.  (The same criticism would apply to someone claiming to prove the opposite.)  But the questions that people ask often reveal something about the position of the team that’s asking, and this is the point at which, if I’d been asked, I’d probably have stopped filling in the questionnaire.  (I wasn’t asked.  I was removed some years ago from the Yougov panel after I objected to the classification of racial groups I was being asked to respond to.  I got a formal letter from Peter Kellner telling me my participation was no longer required.)

The report’s other main weakness lies in its political recommendations, centred on the appointment of a national Director for Academic Freedom.  I couldn’t see any clear relationship between the proposals for reform and the evidence presented.

 

 

 

The European Union and the new social policy

The Journal of European Social Policy has launched a blog, intending to consider some of the implications of the coronavirus pandemic for Europe.  The first entry is a dialogue between some leading scholars about the prospects for the EU, in what Frank Vandenbroucke calls an ‘existential moment’.  Unfortunately, the editors haven’t quite grasped yet two of the most basic principles of blogging: put the blog where people can find it, and keep things short. The link to the site is here , and as that link is 379 characters long, here is a shortened form to pass on: https://bit.ly/3eNzEge

The dialogue did set me  thinking about the role of the EU in this crisis, and that of course is its purpose.  I think it’s fair to say that the experience of Brexit has shifted my view of the EU, and the answers I might give to several key questions are different from those I would have given in the 1990s (my 1996 article on “Social Policy in a Federal Europe” is accessible here).

First: what is the EU?  25 years ago, I would have said that it was a set of political institutions aiming to establish common laws and principles across nations.  The EU had asserted ‘exclusive competence’ in a range of areas, and its member states had acceded to the general principle that some things were beyond their power or capacity.  Now, I would describe the EU as little more than an association of states, where every joint action, regardless of the nominal powers of the Union, has to be negotiated and is liable to be locked in limbo.

Second: what responsibility does the EU have to its citizens?  In the 1990s, the answer seemed clear: the EU had made a commitment to offer to each and every citizen of the Union a set of rights and statuses that were distinct from, and not dependent on, the actions of its member states.  That is what the European Charter of Fundamental Rights said.  It has become clear, from the process of Brexit, that this guarantee was worthless: the EU has simply abandoned its commitments to sixty million European citizens.    The Union, it seems, is nothing more than a club, and if a member state doesn’t wish to subscribe to the rules of the club, the citizens who live there can’t expect to have access to the facilities.

Third:  what does it mean to say the EU works on a principle of solidarity?  The idea of solidarity is central to the arguments made by the contributors to the JESP dialogue –  Bea Cantillon, for example, complains that “The lack of solidarity is a shameful mockery of all the great principles enshrined in the Treaties.”  The European view of solidarity was always, I think, more nuanced than this.  European solidarity would be built, not by the adoption of universal European rights and policies, but through the establishment of networks of mutual responsibility, both within and across national borders; generalisation happens slowly and incrementally.  In the context of the current crisis, however, Vandenbroucke argues, I think rightly, that the EU already has the powers it needs to act.

 In the current context, solidarity requires large-scale ‘disaster relief’. The European treaties not only make this possible, they even demand it: Art. 222 TFEU stipulate that the Union and its Member States shall act jointly in a spirit of solidarity if a Member State is the victim of a natural or man-made disaster; Art. 122 TFEU makes financial assistance to members states threatened with severe difficulties caused by natural disasters….

If this is not happening, it is only another mark of the unwillingness of the EU to accept direct responsibility for the welfare of its citizens.   The contributors to the dialogue are fearful that the EU may not survive this crisis, if it remains inactive.  If it does nothing, it may not deserve to survive.

 

Viscount Palmerston on ministerial accountability

In the absence of a proper work schedule, I’m more inclined to read for pleasure, and at times that takes me in the direction of a  well-written history.   I came across this comment by Lord Palmerston, and was rather taken with what it might tell us about contemporary politics. Palmerston wrote to the Queen, in 1838:

in England the Ministers who are at the heads of the several departments of the State are liable any day and every day to defend themselves in Parliament; in order to do so they must be minutely acquainted with all the details of the business of their offices, and the only way of being constantly armed with such information is to conduct and direct those details themselves.

Palmerston might have seemed at times to be a loose cannon; he often made it up as he went along.  (I can forgive him a lot, for his characterisation of the opponents of public health legislation as ‘the dirty party’.)  By his lights, however, accountability forced ministers to pay attention to detail, and attention to detail called for them to be fully engaged with practice.   During the current crisis, ministers are visibly adrift and out of their depth.  The Prime Minister, notoriously, doesn’t do detail.  His ministers frequently get the details wrong, or make them up – pledges on testing and equipment are illustrative – and they bitterly resent any attempt to call them to account, whether from parliament, committees, politicians or the press.    But of course, things have moved on since Victorian times.

Towards an exit strategy

The government and its advisers have fobbed off repeated queries about an exit strategy.  There was not enough information about the progress of the pandemic; it was too early to say; they didn’t want to distract from the message of social distancing.

I don’t know what our exit strategy should be, but I know what a strategy looks like, and none of those answers is relevant. A strategy, in this context, is a review of information, priorities, options and possible choices.  It’s not an action plan – that’s what you come up with after the approach has been agreed.  And if there’s only one option, and the choice has been made, it’s not a strategy –  it’s a policy.  Claiming that this is no time to consider an exit strategy is basically announcing that the government hasn’t thought about  what the priorities, options and choices might be.

I doubt that this is true.  The government almost certainly has a strategy; it just doesn’t want to tell us what its priorities, options and choices are, in case we, the public, should happen to disagree.  Their way is the only way.   It’s a fortress mentality – the same approach that they have taken to social protection, to Brexit, and to recent measures to help business.  And invariably it leads to worse decisions than there would be if the matter was opened to informed discussion.

One of the defining characteristics of a democracy, Joshua Cohen argues, is that it is ‘deliberative’: people are able to engage, to discuss and to disagree.  For any strategy to work in the current crisis, the government has to bring people along with it.  If they don’t consult about their options and choices, it puts compliance in jeopardy.  Imposing a single, authoritative policy is not ‘leadership’; it’s arrogance.

Additional note, 8th April I am feeling the same sense of irritation at statements that the government cannot ‘review’ its policy, as the Prime Minister promised.  It is too early to end the lock-down, they say.  ‘Review’ does not mean ‘bring to a close’; it means that one looks at a policy to see how it is working.  And it’s pretty clear that while some parts of the policy are working very well, others aren’t. 

The bits that are working:

  • there has been excellent compliance from the bulk of the population, slowing the spread.  We don’t need full compliance; we just need there to be enough.
  • time has been bought for the NHS to cope – we have reasonable hopes that what happened in Italy will not happen here.
  • food distribution – the supermarkets have done brilliantly.

The bits that aren’t:

  • social care provision – the model that depends on multiple visits by peripatetic staff doesn’t work
  • the protection of front line workers
  • the protection of people’s incomes 
  • management of access to public spaces, such as parks – closing them is bad practice
  • restrictions which have nothing to do with the spread of the disease – the ending of legal transactions, stopping people going to allotments, visits to second homes (the test is social distancing, not travel) and over-zealous policing.  Whatever happened to ‘reasonable’ grounds  for going out?
  • policing of abuses.  Where is the heavy equipment that was supposed to be used for major construction projects today?   (I ask because I already know it’s not where it’s supposed to be.)

The government could take advantage of Brexit to do things differently. It probably won’t.

Over the course of the last 20 years, the EU has made a series of bad calls about the management of national economies, dominated by neo-liberal thinking on issues such as public spending, state based economic activity and social support.  Once the UK is no longer governed by common regulations, these restrictions no longer need to apply.  I have to accept that it is unlikely that the British government will do much about this, because if we look at where many of the EU’s most ill-judged restrictions have come from, it’s often reflected the free-market ideology  of British governments.  Here, nevertheless, are some of the things that a UK government can do after leaving, which members of the EU cannot.

  1. State enterprise.  Mariana Mazzucato has made out an overwhelming case for state enterprise: many of the  major economic developments of the post-war period have been made, not through the operation of an unrestricted private market, but through state action to identify, build and support new development.
  2. Sales tax.  The structure of tax in this area has been subject to EU rules on VAT.  VAT is not a sales tax, because it is not uniformly levied on sales – the way it works tends to focus on stages in the manufacturing process.  This hasn’t worked for financial or digital sectors, and the current controversy about a digital sales tax is taking place because there’s nothing there.  The US-based digital giants, and their defenders in the US administration, can hardly  reasonably object to ‘local’ sales taxes taken at the point of distribution, because that is just what happens in the states of the USA.
  3. Regionally managed immigration.  The Scottish Government’s proposal to do this has been met with incomprehension.  The approach of successive UK governments has been to focus on border control, whereas the bulk of management relies on different mechanisms entirely – housing, employment, education and public services.  There is no intrinsic reason why immigration cannot be differentiated regionally.
  4. The taxation of UK nationals abroad.  The USA taxes its citizens abroad, and the UK could do the same.  There is a good argument against dual taxation, but that is not an argument for advantaging people who move resources or profits from the UK to more favourable tax regimes.  Moving money off shore or to more favourable tax regimes should have no effect on a tax liability to pay any balance of liabilities within the UK.
  5. Procurement  contracts that meet social objectives.  Public procurement contracts that guarantee employment to locally unemployed people.  The general advice to local government has been than this is incompatible with European law; that should no longer apply.  The same should be true of locally negotiated minimum wages, such as the living wage – that runs directly counter to ECJ judgments.
  6. Moving work to the workers.   The process of regional development in the EU was based on different premises – encouraging market specialisation while cushioning the impact of that specialisation on the regions.   That hasn’t worked.  The UK government needs to return to the policies of the 1960s, moving the jobs rather than moving the people.  There is no hope for many British towns unless it is done.
  7. Freeing public expenditure.  The control of public expenditure is based on a myth, that it is government spending that drives the money supply.  It isn’t – private finance does that.  Local government needs to be able to raise funds through  its own bonds, as it did in the 19th century – along with the capacity to default (as local government can do in the USA).  There is no obvious economic case for setting global limits that apply only to the public sector.

None of this qualifies my disappointment with the deeply unsatisfactory settlement –  I am no less troubled by the disregard for citizen’s rights shown by both the British government and the European Union than I was three years ago.  Tonight, as Britain leaves the EU, I will be in Brussels.

Universalising French pensions

It’s not the first time that a French government has tried to inject a greater element of universality into its arcane system of welfare provision.  The Juppé plan, in 1995, tried to curb rising costs partly by imposing spending limits, and by trying to bring the pension rights of miners and railway workers into line with other groups.  It also proposed universal rights to health care and guaranteed access. One prominent trade unionist called that idea “the biggest rip-off in the history of the French Republic. … the end of the Sécurité Sociale.”

The current system of pensions is costly – it’s long been the case that pensioners in France are on average better off than workers.  Clearly, part of the government’s agenda over time has been to cut the cost, and that is the source of many of the protests.   If cost was all it was about, there are other things that the government could have done – raise the pension age, increase contributions, increase the number of contribution periods required, and so on.  But there are lots of other problems in the system.  The shift to precarious labour and the problems of switching between different pensions rules can shut people out. With 42 distinct pensions regimes, the system is horrendously complicated.  It takes years (literally) to work  out what someone’s pension is going to be; often the calculations begin long before a person reaches 60 and are not finished until after the person retires.   As the government plan says,

personne ne sait exactement ce à quoi il a droit. Le système est illisible, complexe, et crée de la défiance.

[Nobody knows exactly what they’re entitled to.  The system is incomprehensible, complex and it creates distrust. ]

The proposed alternative is outlined in the government plan (the link is in French). The main elements are:

  • a universal scheme for everyone – one of the principal aims is to remove inequities between people currently under different regimes
  • a points system, in place of contribution periods, to determine entitlement
  • an increased minimum pension
  • retention of retirement at 62 (that is early by European standards, but  worse than some French regimes currently offer)
  • credit for every hour for which contributions are paid  (seriously!)
  • improved protection for people whose contributions have been interrupted through care, unemployment or sickness
  • full transparency, through a personalised record of contributions and linked entitlements
  • a commitment to balance the books – the current system runs perennially in deficit
  • transitional arrangements for current workers
  • a new system of governance.  There is a commitment to consult about the value of points, but overall the new system will reduce the role of the ‘social partners’ including trades unions.

Something that isn’t explicit in the plan is the distributive element.  It’s been reported that the proposals are regressive:  the contributions required of very high paid people will be 2.8% above 120,000 Euros a year, whereas under that level the contribution will be 28%.  However, the 2.8% is purely redistributive; it will yield no benefits for the contributions.

Both sides of the argument are right.  On one hand, the government is proposing a scheme that should be less complex, fairer and  more inclusive.  On the other, the objectors will be trying to defend a scheme which, for all its irrationality and complexity, has delivered far better benefits than  a more orderly set of schemes could ever have offered.  There will, of course, be vehement protests  – it’s the French national sport, and they do it so well. But the protestors, mainly from the left and the trades unions, are  protesting against the idea of universality and state welfare, and from a British perspective, that’s a difficult position to hold.

The realignment of UK politics

What happened last night is more than the eclipse of Labour.  The Conservatives won on a populist platform: representing the will of the people in opposition to a venal political class.  The core problem with that formulation is that the Conservatives are simultaneously seeking to appeal to both of those factions at once.

This could lead  in the long term to a new  political alignment, as a class of people with no obvious political home look for different ways to have a voice.  Our political system militates against that.  It is more likely that the vote will change the Conservatives.  In the course of the next two or three years, they will be trying to appeal to their new electorate, and recruiting new members, very different from the rural and suburban heartlands they have made their own.

In the course of the next five years, then, I think we can expect to see the redefinition of coalitions of interest into two rather different main  parties, looking rather more like the parties in the US.   On the right, there will be something more like the US Republican party: mixed, angry, uncertain whether it’s  more in favour of free markets or the pork barrel.  On the left, there will be something like the US Democrats: an uneasy combination of liberals and conservatives, with a marginalised left wing.  Neither of these combinations leaves much room for social democrats, trades unions, traditional Tories or the old political centre.

Boris Johnson: in his own words

Most of the criticisms of Boris Johnson focus on the things he says that he obviously doesn’t believe.  Here are some of the things it seems he does believe.

Greed is a valid motivator of economic progress.(Source)

The real divide is between the entire class of people now reposing their fat behinds on the green and red benches in the Palace of Westminster, and the bottom 20 per cent of society – the group that supplies us with the chavs, the losers, the burglars, the drug addicts and the 70,000 people who are lost in our prisons and learning nothing except how to become more effective criminals. (Source)

A combination of economic misfortune …  and an excessive predilection for welfarism have created a peculiar, and deeply unattractive, psyche among many Liverpudlians.(Source)

Single parents are responsible for “a generation of ill-raised, ignorant, aggressive and illegitimate children”. (Source)

It must be generally plausible that if having a baby out of wedlock meant sure-fire destitution on a Victorian scale, young girls might indeed think twice about having a baby. And yet no government – and certainly no Labour government – will have the courage to make the cuts in the safety net of the viciousness required to provide anything like such a deterrent. (Source)

Whatever you may think of the value of IQ tests, it is surely relevant to a conversation about equality that as many as 16% of our species have an IQ below 85 … while 2% have an IQ above 130 … And the harder you shake the pack, the easier it will be for some cornflakes to get to the top.(Source)

I don’t believe that economic equality is possible; indeed some measure of inequality is essential …  (Source)

Ipse dixit.