Stimulating the economy: a partly baked proposal

I have written before about plans to inject money into the economy, and for the present I am going to leave aside the arguments for and against doing it. The Conservatives are pleading for tax reliefs; Liberals, for a rise in the tax threshold; Labour, for a cut in VAT and more quantitative easing. The question I want to address is a simple one: what is the best way to inject money into the economy?

There seem to me to be three main criteria. The first is effectiveness: the money needs to arrive in places where it will stimulate the economy. Too often in the past, indiscriminate financial stimuli have led to inflationary demand or to money leaking abroad. Second, there needs to be some consideration of the distributive impact. Third, the stimulus has to be practical: one of the reasons why Labour went for a VAT cut was that it could be done immediately, when changes to income tax would have been much slower. Cutting income tax fails on all three criteria. VAT meets the third criterion; it has limited benefits for the second, because VAT is only slightly regressive; and it fails on the first.

Some benefit payments could serve more effectively as a stimulus than tax cuts could. Although there is a case for higher benefit levels in general, the implementation would be too slow and complex, and it would be politically controversial. It is however feasible to make additional payments to the recipients of certain benefits. Child Benefit goes to every family with a dependent child; Winter Fuel Payment (disregard the label!) is an ad hoc payment to every older person. In other words, the administrative mechanisms exist to deliver one-off payments directly and rapidly to individual households. The distributive effect would be generally progressive (it could be made more progressive still if the payments are treated as taxable); and it would lead to an immediate, localised stimulus to spending that would fall roughly in proportion to the prevalence of deprivation. And if such payments happened to do a little to alleviate child poverty, that is a side-effect I think we should be able to bear with equanimity.

More on Personal Independence Payment

Following the Lords debate, and disquiet in the press, I should perhaps add a further comment on PIP. The government’s assumption that the reformed new benefit will have fewer claimants than DLA seems mainly to have been predicated on a longer qualification time, removal of those with lower dependencies and some special rules, like the removal of some entitlements to people in residential care. At the same time, the government is proposing a redefinition of rules which will make the benefit more accessible to people with psychiatric illnesses; and it has made no proposal about the very large numbers of older people who have continued on DLA in preference to claiming Attendance Allowance. If that was the whole story, it could mean that PIP will have as many claimants as DLA; it might even have more. But it is not the whole story. The prospect of reducing the number of claims radically seems to depend primarily on the process of re-assessment and disqualification of existing claimants, and the government does not need its reforms to pass to achieve that.

Limits to growth, again

More than 200 years ago, Malthus argued that the world was going to run out of resources, because population inevitably increased faster than our ability to provide for it.  The argument has been disproved time and again, but its adherents  remain convinced that it must be true sooner or later.  It doesn’t seem to matter how often the arguments are shot down in flames – there is always someone ready to pick up the standard.  This week’s New Scientist has four pages praising The Limits to Growth, the book that argued that come what may, we were going to run out of the things we need.  Part of the problem is the flakiness of the predictions – the birth rate has not followed the projected path, and nor will most of the consequent projections.

The NS article comments that economists claimed that “Limits underestimated the power of the technological fixes humans would surely invent.”   If you can’t counter an argument, misrepresent it.  The basic objection from economists is not that new technologies will inevitably appear – even if they might.  The point is that many alternative technologies  already exist, and costs are relative. If a resource becomes scarce, it will cost more, and other technologies which are initially too expensive become  preferable.

The fundamental economic mechanism is one which pushes people to use substitutes. As coal has become more expensive, options for producing energy which once seemed unrealistic – nuclear power, bio-fuels – start to be feasible.  As wood has become more expensive, plastics have expanded.  If food production through conventional methods becomes unsustainable, there is a range of viable technologies, such as hydroponics, which stand in readiness.  There is, certainly, an incentive to develop new technologies, such as electric cars, water purifiers or solar power, and many will be developed, but that is not the central mechanism. We will never use the last piece of coal, the last drop of oil, or the last lump of copper; long before then, it will cost too much.  The argument that we are about to run out of resources is just plain wrong.

Rising unemployment

The Chartered Institute of Personnel and Development estimates that unemployment figures are likely to reach 2.85 million in the coming year, equivalent to 8.8% unemployment.  In principle, this figure should be independent of the claimant count – people who are unemployed do not necessarily qualify for benefits.  In practice, it may not be.  Part of the government’s current policy is to disqualify people from long-term incapacity benefits, in the form of Employment and Support Allowance.  The medical reassessments have led to many people leaving the benefit rolls – 36% of reassessments are brought to an end because the claimant is no longer entitled, but that reflects a certain turnover in the figures anyway (for example, among women who have had to claim sickness benefits while pregnant).   More important for the unemployment figures are the further 39% who are found to be fit for work.  It is not immediately clear how many of these people will go on to claim Jobseeker’s Allowance instead of ESA, but those who do will be redefined as actively seeking work.  If only a third of them make that shift, it will increase the unemployment figures by more than 300,000 – taking the figures well over three milllion.

Plan C

The government has represented its spending plans as the only option available. The Labour opposition has called for an alternative approach, “Plan B”, involving Keynesian stimulation of the economy through tax reductions and quantitative easing. It looks as though the government is sticking to “Plan A”: but is it? The recent spending review points to the gradual emergence of an alternative strategy. In November, the government announced funding for 250,000 work experience placements and 160,000 job subsidies, all aimed at young people aged 18-24. Less prominent, but possibly more significant in the long term, were the low-key declaration of a National Graphene Institute, and recent announcements about support for life sciences. These initiatives suggest that the government may be starting to move in the direction of a policy to foster development in selected industrial sectors. That, ironically, was the policy of the Labour government in the 1970s, which sought to pick winners through the National Enterprise Board – for example, its investment in Inmos and microchips.

"Government cannot create jobs"

I am puzzled by the repeated mantra that government in general, and the Scottish Government in particular, cannot create jobs. Of course they can; for example, every job in Parliament is created. Nor is it true that public jobs are not “real” jobs. Real jobs we need more of include, for example, police, cleaners, teachers, janitors, carers, street and park wardens, or guards. If we invested more in builders, plumbers, painters, gardeners or people to mend roads, it would do a power of good. Part of the argument was made by Keynes: it makes more sense to pay people for doing something than it makes to pay them for doing nothing, and the economic benefits of engaging people in paid employment will be considerable. But there is also a social benefit in ensuring that people are integrated into the economic structures and have the basic entitlements that work brings. If we judge certain activities only by the standards of costs, then it will often seem cheaper to use heavy machinery to repair holes in the road than it is to get human beings to do it – but we cannot afford the machines, and we have labour to spare. (I do not understand the case that CCTV is more cost effective than a street warden; CCTV is very expensive, and a camera cannot actively intervene during an incident.) Creating jobs is often worth doing in its own right. We need to start thinking about costs and benefits across the wider economy.

The age of austerity

Now that cuts in public spending are on the agenda, a parade of experts has been in evidence, arguing for a new kind of welfare regime. However, what they are arguing for looks a great deal like the policies the same people have been pushing for over twenty years – a programme of privatisation, individualised services, diversity and a withdrawal of the state from direct provision.(1)

Precisely because these arguments have been running for more than twenty years, we can form a pretty clear picture of what happens when services are based on these principles. The policies may seem in principle take expenditure off the books of the public services, but that is largely illusory: the most expensive services are nearly always paid for ultimately by government, and the costs are still largely held within the accounts. The central argument is that the private sector is supposed to be more efficient than the public sector. That efficiency is largely achieved, however, by adverse selection – refusing to do things that the public services are bound to do; and the main way that private services have reduced cost is simply by reducing labour costs. Partial provision by the private sector still leaves the public services to provide residual services. The appropriate comparison to make is not between public and private services, but between the total cost of services where there are different patterns of service provision and delivery. Taken in the round, the combined effect of expenditure in the private sector, the development of regulatory mechanisms in the public sector and the maintenance of residual public services has been generally more expensive than services were when services were planned, delivered and strictly rationed by a sole provider.

Personalisation, diversity and consumer choice are not cheap options. There are no good grounds for believing that such policies save money.

(1) e.g. R Hewit, Public service reform is the only way to avoid cuts, Scotsman 1.3.2010

Financial socialism

There may not be much to chuckle about in the current financial crisis, but complaints in the US about “financial socialism” (e.g. in Forbes magazine) offer Europeans some wry amusement. The US has never really understood what socialism is about; it seems to be some kind of infection, where exposure to a mild but toxic measure, like a publicly funded library or a school, turns people into brainwashed automata. Socialism, in most of Europe, refers to forms of social organisation for collective benefit. Socialists like Robert Owen, R H Tawney or Richard Titmuss stood for principled, moral intervention in social and economic organisation. (I have been puzzled by the number of commentators – like Matthew Paris in the Times – who seem to think that this has something to do with Marxism. Marxism had no time for principled idealism, or for collective groups working together to improve things, or for the idea that governments should intervene to make economies work better. The socialist parties in most European countries had very little to do with Marx – marxist parties in Europe were “communist”, not “socialist”.) The Parti Socialiste Europeen, the largest bloc in the European Parliament, is committed to “principles of freedom, equality, solidarity, democracy, respect of Human Rights and Fundamental Freedoms, and respect for the Rule of Law.” In respect of financial markets, equality, solidarity and social justice implies much more than regulation for greater stability. Whatever one makes of the Paulson plan, “socialist” is not a word that springs to mind.

There is a different word for pragmatic intervention intended to achieve order and stability: that word is “conservatism”. The standard view in conservative thought was powerfully expressed by Edmund Burke (incidentally, as much a supporter of the American revolution as he was a critic of the French one). “Government”, Burke wrote, “is a contrivance of human wisdom to provide for human wants.” The idea that government should take action as needed to regulate, balance and protect people is fundamentally conservative, and it has been a cornerstone of the “christian democracy” of central Europe for sixty years.

The European constitution and the treaty

The European Union claims that the newly agreed treaty is not a revival of the abortive proposal to establish a constitution. A House of Commons Select Committee has complained that the new treaty has most of the same elements as the old, rejected one. They are both right.

The abortive attempt to establish a European constitution might be seen as a fundamental criticism of the character of the EU. I suspect the reasons for the treaty’s rejection in referenda is more pedestrian. The responsible committee, chaired by Valery Giscard d’Estaing, made a thoroughgoing hash of it, being unable to select the principles that mattered, and trying to include every aspect of EU policy. Even for those who (like myself) support the principles of the European Union, it was a thoroughly uninspiring document. The procedures for the French referendum made made the full document available to everyone – and the document, which is as hard to read as a telephone book, was unlikely to win any friends.

A constitution is a foundational statement. It needs to be communicative, transparent, and justiciable. Every constitution needs to set out the basic institutional framework. It needs to state primary legal rules – rules of recognition, change and adjudication. It should probably state fundamental principles, like the Bill of Rights in the US constitution. But it should not include policy. Instead of confining itself to constitutional issues, the “constitutional treaty” sought both to consolidate the content of previous treaties and to include substantial elements of previously agreed policy – issues like the environment, agriculture and fisheries, and commercial rules. However important these may be, they are not constitutional principles; and whatever the merits of the policies may be, it is very questionable whether the policy which is appropriate now should be expected to be appropriate a hundred years from now. More than nine-tenths of the constitutional treaty was clutter – although it may have contained important policy decisions, it should not have been in a proposed constitution at all.

At the same time, the constitutional treaty included many issues on which there were new agreements. Some of those agreements were fundamental, like agreements on the principle qualified majority voting. Some were not, such as the specific designation of voting arrangements in respect of different policy fields. The member states and the Commission are reluctant to lose sight of the areas they agreed; and so the proposals have been revived in the new treaty. In other words, the new treaty is largely made up of the clutter that should never have been in the proposed constitution. The new treaty does duplicate the constitutional proposals – but it is not a constitution.

Europe still needs a constitution – the specification of institutions, primary rules and basic principles. This treaty is not it. One has to hope that eventually, proposals will be made for a genuine, effective constitution – but it has to be done without elevating every policy area in the EU to the level of fundamental principle. As a modest proposal, there needs to be a word limit. The constitution should not be longer than ten pages; there should not be more than about seventy five clauses. It needs to be served up in plain language. Then, perhaps, it might be worth voting for.

Inheritance tax

Recent political debate in the UK has been seized by an abstruse discussion of the merits of inheritance tax. Politicians have been wrong-footed; no-one, it seems, can remember what the tax is for, which makes it rather difficult to justify.

There are four main arguments for taxing people on legacies.

  1. Inheritance tax is highly progressive. It is solely related to ability to pay.
  2. The capital gains on a person’s principal residence property are untaxed while someone lives there, and finally realised only when when they do not; death and probate are the best time to tax. Other property which is held would have been subject to capital gains tax.
  3. Both the capital gain on property, and the legacy made after it, are unearned windfalls. The taxation of legacies is unrelated to economic incentives.
  4. The persistence of inherited wealth across several generations is one of the major sources of inequality in the UK.Inheritance tax breaks the link.

The case against inheritance tax is that

  • People’s holdings have been taxed once already. This is largely untrue. The principal source of wealth in the UK is not holdings derived directly from income, but real property; the main reason why large numbers of estates have been brought into the tax bracket is the increase in house prices.
  • People have an aspiration to pass their goods to their children. They may have, but that is possible only if they have children. There are no criteria to distinguish family legacies from others.
  • Inheritance tax is inequitable. The taxation of residences leads to inequities when people who share the residence are required to pay tax from capital they cannot realise directly.

Only the final criticism has major substance – but none of the current proposals attempts to deal with it.