Perverse incentives

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George Osborne is reportedly looking for £13 billion of savings from government expenditure.  That’s no small potatoes.  As they used to say in the USA, “A billion here, a billion there, and pretty soon you’re talking real money”.  Especially with large spending departments like Health and Education – and Foreign Aid – ring-fenced, this inevitably means huge pressure on the government’s massive welfare budget.

In turn, pundits expect the axe to fall on Gordon Brown’s pet project – tax credits.  Wages too low?  Never mind.  Uncle Gordon will give you a top-up.  This was a very clever policy in two ways.  First, it makes many millions of people effectively clients of the state, and therefore (in the Brown view) more likely to vote Labour.  Second, it is very difficult for the next government to reverse, without being seen (at least by the left) as brutal and heartless and committed to child poverty.

It is also another example of the left’s failure to think a policy through, to analyse the knock-on effects, the perverse incentives, the unintended consequences, the moral hazard.

What Gordon was effectively saying to employers was “Look guys, you can pay really low wages.  Don’t lose any sleep worrying whether your workers can afford a decent breakfast.  There’s no need for you to pay a living wage – the government will top it up”.  In a very real sense, the tax credit is not a benefit to low-paid workers.  It’s a subsidy directed to bad employers.

(An aside – you can see the same effect with the Common Agricultural Policy.  Those clever Tesco buyers know exactly what it costs to grow a ton of wheat, or produce a pint of milk.  And they also know just how much Single Farm Payment each farmer is getting.  They negotiate accordingly.  So what we intended as a subsidy for farmers, which I’m quite comfortable about, becomes a subsidy to Tesco).

But there’s a deeper question on low wages.  How is it that low wages are endemic in the UK?  There’s a basic principle of economics that when there is an excess supply of any product or service, prices fall.  If you get a good harvest, the price of wheat tumbles.  If the world is awash with oil, the price of oil dives.  And if there’s a surplus of unskilled and semi-skilled labour, wages fall – or are compressed and fail to rise.  That’s what we’re seeing now.

And the reason for the glut of labour?  EU Free Movement policies.  With wages in the UK many times higher than those in Bulgaria, or Croatia, or Romania, we’re getting exceptional levels of immigration, which are causing wage compression.  Gordon’s tax credits are, indirectly, subsidising the EU’s free movement policy – another hidden cost of EU membership.

Then there’s productivity.  Economists constantly wring their hands about the UK’s poor productivity record.  But one major factor affecting automation and investment – and therefore productivity – is the availability of cheap labour.  There’s a clear trade-off between labour costs and investment in automation.  Put simply, if labour is cheap, and looks likely to stay cheap, there’s less incentive to invest. I believe that this must be at least a  significant factor behind the UK’s productivity problems.

When we eurosceptics debate against the other side, they often say, dismissively “Oh, you eurosceptics simply blame everything on the EU”.  True.  We often do.  And often, as in this case, we’re right to do so.

We need to leave the EU, to control our borders, control immigration, allow wages to rise to a realistic level, and against that back-drop, start phasing out Gordon’s superficially attractive, but ultimately destructive, tax credits.

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22 Responses to Perverse incentives

  1. “Those clever Tesco buyers know exactly what it costs to grow a ton of wheat, or produce a pint of milk. And they also know just how much Single Farm Payment each farmer is getting. They negotiate accordingly. So what we intended as a subsidy for farmers, which I’m quite comfortable about, becomes a subsidy to Tesco”

    And yet I have never heard a single other politician, even those who call themselves Eurosceptics — and I probably take a stronger interest in politics than most people (my wife, in fact, says that I’m obsessed, living, sleeping and drinking politics) — mention this one before. Why is there so much which is off limits to any party but UKIP?

  2. Ex-expat Colin says:

    Certainly can see the increasing cheapo in poor IT performance. Those non indigenous so called software engineers do write/amend some sad scripts and suddenly…..bang goes a bunch of bank functions. The Bobs!

    As the Donald said…some are good?

    During the 60/70s in the RAF I knew pay was cr*p. Slight annual pay rise and into a new tax band…back you go boy. I left as a result thinking, one day when my age group gets into power it’ll be better. For some maybe, but the rest of us are now subjected to the infernal job competition from those who have been invited (?) here…because they know how to live on a couple of bucks a day. The back bedroom recruitment agencies are at it constantly.The task to be performed has to be sorted out eventually by an experienced contractor. And sometimes thats after about a year of complaints.

    For a job in the banking sector IT (London) you will need bank experience….I kid you not. Not that it has improved their p*ss poor performance! So you could be real good/reliable at configuring and maintaining major IT systems anywhere…but?

  3. I distinctly remember the late Nigel Farage (now an alumnus of Ukip after his defection to Breitbart News) talking about the massive influx of Romanian and Bulgarian immigrants. He was immediately set upon by every single person in any form of Meeja. The Right Reverend Keith Vaz of the Honeyed and Carefully Controlled British Accent, even went, as I remember, to Heathrow to see if any of the immigrants were on the first plane. None were travelling Business Class. He was triumphant.
    Guess (again) who was telling the truth?

  4. Ernest says:

    Being aware of copyright, is one allowed or permitted with permission to post this article on Facebook?

    Kind regards,

    Ernest W. Hartland UKIP Member WSM

    On Tue Jun 30 04:37:49 CDT 2015, Roger Helmer MEP

  5. davidbuckingham says:

    Roger. Totally agree about tax credits – they are surreal – taking with one hand and giving back with the other. Add to that the mismanagement and confusion of the paperwork which has forced thousands into major debt – paying back thousands through genuine misunderstandings. But this is the first time I’ve found myself disagreeing with you on specific ruminations. Apologies for length,
    no time to write anything shorter as G B Shaw said I think.

    Farming subsidies? To edit Lenin, taxation is theft. Subsidies by definition take from the profitable producer and bail out failing business. Hidden colateral damage includes the jobs, efficiencies, goods and services stolen from that successful, taxed, producer, consumer and job-seeker; hidden and invisible because there is no trail – just a lower living standard remote and disconnected from the underlying cause [and no control condition to compare it with].

    EU subsidies impoverish ‘Third world’ enterprise and agriculture. Butter mountains may have disappeared but the policies remain. The best foreign aid would be 1. to remove the protectionism that destroys the democracy of the market 2. to campaign for rule of law and free markets to replace subsidies to corrupt dictatorships. In short emphasise universal GLOBAL FREE TRADE – and fight the whole principle of ANY subsidies and government control of economies. A spinoff is that where there is free trade there is peace. Take the power out of the hands of politicians.

    On immigration, maximum free movement of people globally is a natural ideal not to be feared. Absolutely we should regain control over our borders, with criminal and terrorist safeguards. But even Labour now admit it’s been WELFARE BENEFITS that have attracted immigrants to the UK. Revolution! Who saw that coming? EU immigration should be called what it is – PRIVILEGE over the rest of the world’s population. Personal health insurance guarantees, wealth and support conditions etc can’t be exactly rocket science to get right.

    The massive advantage of immigration is the increase in demand each and every immigrant creates – increasing business and trade for indigenous business – a growing economy. Contrast with living conditions on a desert island. An immigrant is only a burden where there is free welfare – otherwise they are typically energetic, independent and resourceful; they pay their way, needing jobs to supply their needs as much as occupying them. They have to eat, clothe themselves, live somewhere, socialise etc etc. It’s a virtuous trading circle – unless they are getting something for nothing. As for those few who fall by the wayside, the UK as a free market low-tax country should be even more awash with voluntary philanthropy given the high level of socialist sentiment here. I remember vividly it was mostly voluntary aid that assisted after the tsunami a decade ago.

    • I agree that in an ideal world we’d have no subsidies. But British farmers have to compete in a global market where everyone else is subsidised, so unless we want to be 100% import-dependent, we need to maintain farm support. But I agree that the CAP as it stands in unacceptably protectionist.

      I do not agree about free movement. As long as average wages in UK are 8x those in Romania (for example), very large numbers of Romanians will seek to come here. This places unacceptable strain on our social cohesion and social infractructure. We need to agree on the numbers we can absorb, and then within that limit select the skills we need. And we must stop discriminating in favour of Europeans and against highly qualified individuals from elsewhere.

  6. Jane Davies says:

    All I can see is the proverbial chicken and egg scenario. Take away the subsidies first and allow the poor to descend into even more poverty and make them suffer for however long it takes for the court of public opinion to forces the wages up, slowly. Or wait until the wages rise therefore taking people out of the tax credit band.The former causes more suffering, especially for the children and the latter is not going to happen without raising the minimum wage to a realistic level and forcing companies to pay up and then of course we will see these huge organisations laying off workers to keep the wages bill down so their bottom lines remain in the billions. It would seem once this particular treadmill was entered it’s almost impossible to get off. The vile Gordon Brown started this merry go round instead of forcing the minimum wage up to a level where people could actually live independently. It would seem Labours credo is to create dependency which in turn creates loyalty.

    • Ex-expat Colin says:

      Eggs..bit of a problem in USA with chicken/avian pox/flu whatever. So the USA has a shortage of eggs to which the EU is providing…Canada next? Not sure what you get with their eggs …same as ours really?

      • Jane Davies says:

        Guess what…some of our eggs here have been found to have………..drum roll……..salmonella in them!
        The ghost of Edwina crosses the pond!

      • Ex-expat Colin says:

        Ah but, but, the company I worked for is providing IT/Computer forensics services to the cops. That’s all about whats still on your hard drive even though you deleted it..not difficult at all.

        Here in deepest Worcestershire a man was selling thousands of free range eggs to Tescos and others until one day it went wrong somehow and we had his computers/drives. Well, the eggs weren’t as described of course and he took a £30k odd fine. Two years later a friend of mine re visited with cops…same old, same old.

        I just cannot understand why after 70 yrs in this place I am so rabidly cynical. Its simply one after another almost on an hourly basis. No cure either?

    • davidbuckingham says:

      Ah…. I’m sure the technicalities could be overcome by the right people – but here’s a start… LOWER TAX AND LOWER SPEND GOVERNMENT – wages and jobs don’t grow on trees – they’re the result of a healthy economy where the cake is growing rather than being divided into ever-smaller pieces – so….

      eg a low flat income tax and much lower corporation tax, enhancing/attracting investment > more new business > more jobs > higher incomes > improve everyone’s living standard and reduce cases of hardship.

      – lower taxes for those now on tax credits who are over the threshold to cancel out the loss, leaving the worst off to claim on one single simplified benefits system as needed – minimising unproductive bureaucracy, paperwork time and costs.

      – a flat tax system with a simple tax return on a postcard. Higher revenue can come from lower tax flat rate schemes, reduction of accountancy and size of inland revenue depts, increase in productive work and economy gen.

      – scrap the govt designated minimum wage which puts the low-skilled out of work – it’s an arbitrary target that tries to defy realities. [invented 100 years ago by eugenicists to let the lower ranks die off]. Left to its own devices the free market naturally tends towards full employment and finds appropriate wage levels organically. To caricature, two unskilled men at a lower wage are better than one at a higher wage – and in the real world some kind of employment is better than none. The alternative of robbing the productive is counter-productive for everyone – to be avoided or only as a last resort, rather than institutionalised.

      An employer will pay the most the business can sustain to get the best person and therefore best job done. Higher pay and better working conditions attracts better happier employees and productivity at all levels of pay and responsibility.

      In these idyllic circumstances the country should be awash with voluntary [ie non coercive] philanthropy for extreme cases, especially with extra cash in our pockets from lower taxes. Concern for others is second nature in a benevolent society like ours after all.

      – NB reduce government spending to reduce level of tax requirements and pay off the deficit

      – introduce a REVENUE LOTTERY to replace taxes and expand it as much as the market will sustain – a voluntary system with big incentives – and again more cash available with lower taxes.

  7. Ex-expat Colin says:

    Any point in going to/via France. Our trucks are backed up both sides for the second time in a week:

    http://www.dailymail.co.uk/travel/travel_news/article-3144238/Cross-Channel-chaos-French-strike-action-causes-misery-thousands-Port-Calais-closed-Thursday-tourists-left-STRANDED-sea.html#v-4330314888001

    Whats happening about it…not a lot! A lump of long barbed wire around the port. That’ll be the second one.

    la,la, la

  8. Ex-expat Colin says:

    And..for your future entertainment and criminal record we have today:

    This email is going to everyone at the BBC, on behalf of Danny Cohen.

    Dear All,
    Today is a big day for the BBC, for TV and for BBC Three.
    The BBC Trust has just published its provisional conclusions which indicate support for our proposal to reinvent BBC Three online, extend CBBC by two hours and develop BBC iPlayer further so that we can do more premieres and include more third party content.
    We all acknowledge the difficult choices we’ve already had to make – against a backdrop of a frozen licence fee and a 26% income cut for the BBC. In an ideal financial world we would have made this transition more slowly over time. But this wasn’t the choice we faced and so we’ve worked to come up with a plan which we believe helps secure the BBC’s long-term digital future.
    Our ideas will allow us to innovate with fresh ideas and new forms of content and do more for young people across the range of platforms they now use. We will continue to make award-winning premium quality long-form TV but the reinvention online will also allow us to give young people what they want on the devices they choose – and crucially put them at the heart of what BBC Three does going forward.
    I want to thank Damian and the team who have worked tirelessly on the proposal. I know it hasn’t been easy.
    Following today’s report we’ll consider the areas the Trust have asked us to address and respond in due course. This is a provisional conclusion and we still have some more work to do.

    la,la, la…….and on

  9. David says:

    Yes state dependency is rubbish.

  10. Pingback: “No benefits – reform or no reform” | UKIP Hillingdon

  11. Richard111 says:

    That BBC email… interesting the concentration on ‘young people’. Most are probably not paying any licence fee yet get highest level of attention for new products. No bias on the BBC of course. /sarc

  12. Ian Terry says:

    I just wish that all the years that I have been working (53) I had been subsidised to get my a**** of of the mattress before actually going to work. Is it not New Zealand that have stopped farm subsidies they seem to be doing alright but i undersdtand that alot of slack went out with the changes.

  13. Ian Terry says:

    We here in dictatorship Scotland have heard via the Energy Voice in the Press and Journal 30th June 2015 in an article written by Cameron Brooks that the Scottish MSPs are up in arms over the decision to stop the on shore subsidies next April.

    They are going in mob handed to Mr Cameron with a letter virtually demanding that decision is reversed.

    It is about time that Westminster less 56 Scottish MPs told the Holywood devolved parliament that they can no longer go on milking a system which enables them to have all these Community Benefits which lets them off of the hook paid for by the 50 million residents in the rest of the UK.

    As far as we up here are concened it would have been better to stop them end of July at the latest as there will now be the biggest charge to get applications in since the Light Brigade.

    If the Scottish Parliament want subsidies to remain then let them pay for them and pass the costs over to the Scottish people. Then wait and see what happens.

    The only good thing is that now a decision has been made about subsidies that during the length of this parliament more decision are made to further reduce all renewable subsidies across the board and start heavily taxing those who lease their land out for these projects with totally no regard to the impact on the local communities and the impact on property values.

    If Heathrow and HS2 goes ahead those most affected will get compensated. What do we get? Nothing.

    It is time to stop this gravy train and get fracking. The predictions by the speculators if it as good as they think it is should only get loans not subsidies. If the government wants it then the protesters will have to stand aside the survival of this country comes way before their arguments. Without cheap energy for industry how the heck do they expect the national debt running at 1.5 trillion to be addressed?

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