The little things just seem to matter more to our politicians

Two announcements seemingly made out of the blue this week reminded me that politicians are very good at shouting about things that are at best symptoms of a wider problem, while completely ignoring the real issues.

The first came on Monday, with George Osborne’s announcement that fees on payday loans were to be capped. Very good you might say, but is this a solution to anything significant? The problem is not really the fees, but the scandal that so many are driven to take out these loans in the first place. If you do nothing to tackle the underlying causes, it doesn’t matter how you regulate these loans, people will still need to seek out alternative sources of finance, and payday loans – even with capped fees – will still be pretty bad news for most. So a solution to the problem should start with seeking to increase the number of secure jobs and the level of wages so that fewer people need to take out payday loans in the first place. Any discussion of that taking place? A bit from Labour maybe, but detail free and pretty weak.

The second announcement came today. Cameron has been all over the TV today talking tough on benefits for EU migrants. From what he was saying, you could be forgiven for thinking some sort of crackdown is about to take place, when actually, all he’s really talking about is at best enforcing the existing rules more effectively, and at worst just announcing what is already happening. This article from the European Commission is quite a good mythbuster of EU migrant’s rights to benefits. At the moment we also have the Government criticising Labour for a lack of transitional controls in 2004, and Labour criticising the Government for not extending controls for Romanians and Bulgarians which lapse on January 1st.

This is really all a side issue though. Without wishing to go all UKIP on you, the real issue should be about whether or not free movement of labour (and capital) within the EU is a good thing at all. I don’t think it is, because regardless of what you think about immigration in general ISTM that having no controls whatsoever about who can come here to work from 27 other counties is a very dumb idea. Surely each nation state has the right to decide who it allows to come and live within it’s borders? It might decide more migrants are needed, maybe less, but without free movement of labour, the ability to decide is removed from nation states. I can’t see that the benefits outweigh the costs.

These are two issues then that the main parties largely agree on (however much they pretend otherwise), and there is no discussion taking place about other alternatives. Energy prices is another example. You’d think there was a huge disagreement between the Government and Labour about how best to make them more affordable, but when you actually look at their positions, they really aren’t that far apart. A real solution would probably involve some new state energy company or total nationalisation, but this is never even discussed.

When you watch politicians debate on TV, what they’re arguing fiercely about is not over opposing visions for the country, but some minor administrative matters (e.g “You wasted £xm on this IT project. Well you’re wasting this much now”). It’s quite unedifying and largely prevents more important discussions taking place.

I don’t have a solution to this problem, it may be an intractable one. This is just an observation that, in the grand scheme of things, ‘big’ announcements like we’ve had this week are actually rather trivial, and despite the sound and fury in arenas like PMQs, the actual differences between the main parties are still incredibly small.

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Who’s winning the welfare war?

Two significant events this week – the start of long-awaited cuts to certain benefits, and the conviction and sentencing of Mick Philpott – has led to the outbreak of a war of words over the rights and wrongs of our welfare system.

Grant Shapps and Iain Duncan Smith kicked things off last weekend, with Shapps pointing at some Government figures and then lying about what they told us about welfare and IDS telling Jon Humphrys he could live on £53 a week. This led to the heart-warming sight of a petition set up to challenge IDS to prove it garnering almost 450,000 signatures in less than a week. There were also stories about some of IDS expense claims, like £39 for one breakfast and £110 for a bluetooth headset added to the ridicule.

Then came Mick Philpott and the Daily Mail’s nasty front page on Wednesday:

There was also this fairly objectionable and fact-free piece in the Telegraph by Allison Pearson. At first, the linking of Philpott’s crimes to the welfare system were confined to the right-wing press but then George Osborne decided to give everyone the benefit of his wisdom on the matter saying:

“Philpott is responsible for these absolutely horrendous crimes… But I think there is a question for government and for society about the welfare state – and the taxpayers who pay for the welfare state – subsidising lifestyles like that, and I think that debate needs to be had.”

In response to this assault on the welfare state, many on the left pushed back admirably, providing detailed and fact-laden rebuttals to some of the propaganda being put out by the media and the politicians. Owen Jones in particular repeatedly called out those on the right who sought to score political points from the Philpott tragedy:

Bloggers also played an important role in getting some facts about welfare out there. In particular this post and this one struck me as being important contributions.

So I would say those of us defending the welfare state definitely have the facts on our side, but this brings me to the question posed in the title above – Who’s actually winning the welfare war?

People on the left like John Harris have been cautioning for a while that polling shows people in favour of more cuts to welfare, and George Osborne certainly thinks he is on the right side of the argument. At the same time, there are also voices from the right urging caution over appearing to be “foaming-at-the-mouth” over welfare. Owen Jones on the other hand sounds more optimistic, tweeting:

Until last week, I doubted we could win the poisoned welfare state debate. Changed my mind. With courage, honesty and determination we can

— Owen Jones (@OwenJones84) April 6, 2013

At the moment I’m somewhat less pessimistic about where this will go. The reason is amply illustrated in this video clip from one of Stewart Lee’s standup shows:

The truth is, an awful lot of people seem to be impervious to facts or reasoned argument. Here’s another (mindboggling) example. Look how Richard Dawkins patiently explains the evidence for evolution, while the creationist lady just keeps repeating “where is the evidence” (I like to imagine Dawkins just going into a room on his own and screaming after these type of interviews 🙂 ).

Bringing it back to this week’s welfare debate then, after tweeting a link to Johnny Void’s excellent post explaining in detail how it would be very difficult to make a profit from benefits by having more children, someone replied to my tweet to say:

@alittleecon @johnnyvoid I got told I was a "liberal twat" for sharing this "liberal bullshit". LOL

— Peter J. Nicholls (@Peter_Nicholls) April 5, 2013

The Daily Mail also ran a poll on Thursday asking whether people thought benefits contributed to Philpott’s crimes. Around 70% agreed. Now often, when the Mail runs hateful articles, the comments underneath show people in disagreement with the article’s content, but under this one, the three most popular comments were:

“It was not the benefits that killed the children but sure as hell he was the master of abusing the benefit system and he is the prime example why we need the benefit changes introduced and more to come hopefully.”

“Sound right to me. Why should I pay for the lifestyle choices of others? My wife an I stopped at 2 children because we could not afford more!. How many more are there claiming large amounts of money pushing out kids year after year?”

“This is what happens when there is benefits system that makes it pay to breed, the more kids the merrier. Limit all benefits payments to two children only NOW!”

Now to me, these comments (particularly the third one) are batshit crazy, but it seems to be what a lot of people actually think, hell, a lot of people I know personally think like that. I don’t think people are impervious to facts, just that it takes no time at all to repeat a lazy stereotype about welfare, but much longer to rebut it. It seems to be much easier to spread fear and resentment with a few lies and some unrepresentative extreme case than it is to persuade through coherent argument and facts and figures.

I think those who defend welfare (and public services in general) need to come up with some better strategies for dealing with misinformation of this kind, because there is undoubtedly a lot more of it on the way. Owen Jones is doing a good job, as are a number of Guardian columnists and notably some relentless disability campaigners who are trying to fight back, but the Labour Party don’t seem know which way to face at present. I’d be interested to hear if people agree with me, or are more optimistic. We all need a bit of hope!

What to do about Britain’s ‘welfare culture’

There’s been a lot of talk this week by politicians and in the press of the problem of Britain’s welfare dependency, its something for nothing culture which is slowly but surely destroying the nation. Some even seem to think this ‘evil’ can drive people to kill their own children. So this is surely a national emergency that we must tackle without haste. The Government say this is exactly what they are doing. They are ‘making work pay’. George Osborne says:

“For too long, we’ve had a system where people who did the right thing – who get up in the morning and work hard – felt penalised for it, while people who did wrong thing got rewarded for it. That’s wrong.”

Quite right. Before now it was too easy to just sit back and rake it in on £71 a week Jobseeker’s Allowance. And who hasn’t thought about doing it themselves? I know I’ve often thought about jacking in my job and replacing it with a jet set lifestyle on benefits, thinking about the sports cars and holidays in the Caribbean that £71 pounds a week could buy me. What luxury!

Seriously though, we must make work pay. Thank god George Osborne knows what he’s doing then. To make work pay for those at the bottom he must be increasing the minimum wage right? Wrong! Increasing working tax credits then? Nope! But at least the Government have increased the income tax threshold. Surely that will benefit those at the bottom the most? You’d think so, but you’d be wrong again. When Universal Credit comes in people will be assessed based on their post-tax income so for every £1 they gain from the tax threshold increase, most or all of it will be clawed back through benefit reductions.

So instead of demonising those on welfare, or implementing policies that actually achieve the opposite of their stated aims, what would a real solution look like?

It seems blindingly obvious that there are at least three glaring issues to be dealt with:

1. There are not enough jobs. Even at the height of the boom this was still the case.

2. Many of the jobs that are out there are low-paid, temporary or part-time.

3 Housing is short in supply and damn expensive

Issues 1 and 2 can actually be fixed with one policy – a job guarantee. We need to accept that the private sector (efficient and awesome as it obviously is) will never be able to produce enough jobs for everyone that wants one. As productivity increases over time and more and more jobs become automated this problem will only increase.

If the private sector cannot create the jobs, the government must step in and be prepared to hire all those left behind. It should not be beyond the wit of man to design a jobs programme that provides great social benefit without going into direct competition with the private sector.

Job guarantee jobs should pay a living wage. This will tackle problem 2 by forcing the private sector to up its game by improving the wages and terms and conditions it offers.

And problem 3? Housing. We could try to hassle people into moving into smaller homes by charging them extra for a ‘spare’ room, or we could actually tackle the real issue – lack of supply of affordable housing. Government should directly fund local council on a per capita basis to build 100,000 council houses nationally per year. The Government wants to cut the housing benefit bill by £2bn (although they’ve actually increased it by more than £3bn). This should achieve that and then some. It might also create one of two jobs I would have thought. And as we would be building the damn things, lets make them environmentally sustainable homes as well. This will reduce incidence of fuel poverty amongst residents of social housing.

To conclude then, the hallmark of this Government has been a crushing timidity on the big issues, coupled with a nasty desire to reach into people’s live and moralise about their views on how people should behave in the fictional world they have built where jobs are plentiful and if people would just pull themselves together, the country would be back on its feet in a fortnight. With a little ambition and a willingness to take off the fiscal straight-jacket our politicians seem to have donned, it’s easy to envisage what at alternative path might look like. Anyway rant over.

On welfare cuts and automatic stabilisers

Cuts to welfare spending seem to be in the headlines daily nowadays. Every time a bad bit of economic news is announced (which is often), the prospect of yet more welfare cuts seems to raise its ugly head. Just this week, following the terrible Q4 growth figures, there was a story in the Independent about certain ministers who are pushing for further cuts to welfare.

There are a number of issues around welfare which are regularly discussed. These include ‘fairness’ and ‘making work pay’. A lot has been written on both sides of the arguments on this, so I’m going to focus on the likely economic impact of welfare cuts.

Now a key argument on welfare cuts is that the deficit needs to come down and everyone needs to contribute (we’re all in this together remember). Putting aside the fact that I don’t think we should try to reduce the deficit at the expense of jobs or living standards, I want to look at whether the claim that welfare cuts help reduce the deficit stand up to scrutiny.

A lot of people would say that the purpose of working-age welfare benefits is to provide a subsistence level of income for those who are either unable to find work, or unable to work altogether due to ill health or disability. While that’s true, welfare payments also serve a very important macroeconomic function. They act as an ‘automatic stabiliser’.

What are automatic stabilisers? From Wikipedia:

“In macroeconomics, automatic stabilizers describes how modern government budget policies, particularly income taxes and welfare spending, act to dampen fluctuations in real GDP.”

In other words, in a boom, the government collects more taxes and pays out less in benefits which helps put the brakes on to prevent the economy from overheating. Conversely, in a slump (like the one we’re in now), less tax is collected and welfare payments soar as people lose their jobs and businesses make less sales. This acts to prevent the economy going into free-fall. The stronger the automatic stabilisers, the shallower are the slumps and the quicker are the recoveries.

In response to criticism of his economic policies, George Osborne has claimed his plan is flexible because he has “been prepared to let the automatic stabilisers operate..”. I’m not sure what he means by that. What would not letting them operate look like? I suppose you could stop paying benefits to new claimants, or make people pay the same rate of tax even when their incomes fall, but no sane person would advocate that. So in Osborne’s world, ‘flexibility’ seems to mean not taking complete leave of your senses.

In any case, the Government are not letting the automatic stabilisers operate, they are trying to weaken them all the time. Bedroom taxes, Atos reassessments, cuts to council tax benefits, these all weaken the automatic stabilisers. What does this mean? It means that income will be taken out of the pockets of the poorest (who by the way spend most of their income), who then spend less in local businesses. These businesses then make less sales, leading to the government collecting less in tax, while the businesses might decide they don’t longer need as many staff, or even go bust.

Spending is a circuit. It goes round and round the system, not stopping after its first use. The government thinks by cutting the amount it pays benefit claimants by x pounds, it will save x pounds. It’s easy to see the flaw in this logic though. If you give someone £100 less in benefits, that’s £100 less going into the economy. Someone else has lost £100 in income (unless that person’s taxes are cut by the same amount, but the Government are not proposing to cut taxes). The actual saving for the Government will not be £100, but a figure much much smaller. It could even be negative if the cuts further depress employment. The welfare bill could actually go up.

This, in a nutshell then is why cutting spending by x pounds is only cutting the deficit by (-)y pounds. This confuses all sorts of people who are starting to claim austerity is not happening because the deficit is rising.

What the cuts to welfare also mean is that the next time there is a crisis, it will be much deeper, because our new, weakened automatic stabilisers are not strong enough to stop the slide and spark the recovery.

There’s actually a strong case for strengthening the automatic stabilisers. You could do this on the tax side by perhaps linking national insurance rates to the unemployment rate, or on the welfare side by guaranteeing jobs for those who are made redundant following an economic slump.

Cutting welfare in a slump is a very dumb thing to try to do. It won’t work and will make things worse. They will be disastrous on an individual level for many families bearing the brunt of these cuts. With jobs not being created in sufficient number (no matter what the Government tries to say), there’s no possible way the cuts can act as an ‘incentive to work’, and as we’ve just seen, in macroeconomic terms, weakening automatic stabilisers in a slump is an awful idea. Dumb, dumb, dumb.

More arguments to counter myths about austerity

This post follows on from part 1 here. Here’s three more commonly heard arguments made to justify austerity or policies associated with it.

1) Gordon Brown spent all the money and now there’s none left. Just ask Liam Byrne

This line of argument conjures up a couple of misleading images. The first is that somehow there was a bank vault somewhere full of money which Gordon Brown kept dipping his fingers into and spent without putting any aside for a rainy day. He didn’t “fix the roof while the sun was shining” as right wing buffoons are fond of saying.

This is quite easy to counter. The next time someone says we’ve run out of money, just ask them how that is possible when the government can print money? They’ll probably look at you like you’re mad, and then say something about hyperinflation, but they will have to concede that we can’t actually run out of money.

This moves the conversation onto inflation. Won’t printing money cause inflation? Printing money cannot and does not cause inflation. If the government printed £100bn and just left it in an account at the BoE, how could that be inflationary? It’s the spending of money that can generate inflation, but government money creation is no more inflationary that private money creation by the banks. The inflation comes from too much money chasing too few goods i.e. the constraints are real – the ability to produce goods and services – not financial. Money can and should be created up to the point where the economy is at full employment. If the private sector does not create sufficient money to get us there, the government should make up the shortfall.

The other part of point 1 above I object to is the oft repeated line about Liam Byrne’s famous “no money left” note. If anyone drops this into the conversation, it’s your turn to look at them like their crazy and say i) the note was a joke; and ii) Liam Byrne is a joke.

2) Cutting x will save £y

This is a very common argument we hear, often in relation to welfare cuts e.g. uprating benefits by 1% will save £3bn and this will reduce the deficit by £3bn. That is the gross saving only though. The government may pay out £3bn less to benefit claimants, but this in turn means they have £3bn less income and £3bn less to spend on goods and services in the private economy. Those business then have less sales which means they pay less tax. Because of lower sales, they may need to let staff go. Those staff in turn then may claim benefits, so it’s easy to see that cutting payments to benefit claimants may actually end up increasing the deficit rather than decreasing it.

This is why you hear a lot of right-wingers say that there have been no cuts. They see the deficit rising and think its because the government is not cutting enough, when in fact it’s the cuts themselves that are increasing the deficit, and outcome predicted by many Keynesians.

3) What would you cut?

This is a common response by those in favour of austerity to those arguing against the cuts. There are a couple of unspoken assumptions behind this statement: i) deficit reduction must be a specifically targeted policy and is an end in itself; ii) the only way to achieve this goal is to cut spending and/or increase taxes.

The first assumption is false because it misunderstands what a deficit is and what it tells you. I explained this a bit in part 1. What the government should actually target is unemployment, poverty, living standards etc i.e. things that actually impact upon people’s lives.

The second assumption is also wrong. In fact the opposite is true. I would argue that cutting spending and raising taxes will increase. not decrease the deficit, and any attempt to cut the deficit through austerity will ultimately fail.

With these two things in mind, the question “so what would you cut” should be rejected out of hand. The question we should be asking is how best to reach full employment, how to reduce poverty, increase living standards. Only when we start asking these questions will we start to find solutions which actually bring about economic recovery and reduce the deficit to boot.