Sunday, October 31, 2010

Who's side are you on?

The Tea Party is a fascinating movement. First of all there is the question of whether it is a movement at all, or simply a charade set up by billionaires with an eye for 40-something home-makers (an 'astroturf' movement). Second, there is the appalling lack of ability to speak coherently and knowledgeably displayed by some of the candidates (listen to Sharron Angle on healthcare reform here). Third - how will they do? Will people's fury at the economic crisis be translated into simplistic anti-government rhetoric?

We'll see. But if frustrated Americans respond to the Tea Party's appeal in large numbers, it will once again raise lots of questions about why Americans vote against most reasonable assessments of their interests by promoting tax cuts for the super-rich and limiting redistributive government spending which would benefit most people in US society.

Somehow, people have trouble recognizing their interests. Part of the reason for this is, of course, that it's not always that easy to figure out what your interests are. Very often people make their political choices by simply taking sides, rather than analyzing complex issues - after all, why should voters spend time getting informed? They only have one vote. So instead, they identify. And for a lot of people, a middle aged woman with conservative values (Angle) looks far more like 'their kind of person' than an aging politician who has spent too long in Washington (Reid). Given the difficulties of figuring out how health care reform is likely to work, a 'mom' like Angle who talks about 'getting government out of your life' rings bells with a lot of people. Certainly more than an over-educated black guy who has lived in Indonesia and, someone told you, wasn't even born where he said he was.

There is a lot of instinctive, emotional behaviour in voting. Poli sci hasn't done a great job of understanding this kind of behaviour so far.

Friday, October 29, 2010

Never waste a good crisis

Rahm Emanuel dixit. And promptly, did exactly what he said one shouldn't do (although I would agree that Obama hasn't been nearly as disappointing as many commentators think).

But Cameron and Clegg are not wasting this crisis. In fact, under the guise of emergency measures to save us from the terrifying vengeance of the bond markets, the current Con-Lib coalition government is actually recalibrating British public spending in fundamental ways. Labour increased public spending in a range of areas, including health, education, pensions and some benefits for the low paid and workless.

But the coalition is not reducing spending in ways proportionate to Labour's increases. Instead, in fact, they are freezing health spending - by far the biggest beneficiary of Labour's largesse - and cutting areas where Labour barely increased spending at all.

In fact, therefore, we are witnessing a major redistribution of spending as well as cuts. And it is a redistribution which will largely favour the elderly - health and pensions spending will be safeguarded - and harm mostly the poor, and especially poor children. The hardest hit will be children - mainly in London - who will have to move house and change school when the housing benefit cap is implemented.

The housing benefit system is clearly disfunctional. But is the only way to deal with it capping benefits and forcibly relocating beneficiaries? The real winners in the housing benefit game are private landlords, already incentivized with colossal tax privileges, and whose windfall gains due to the housing market bubble have yet to be touched by the coalition.

The pretence that deficit reduction has anything at all to do with fairness is wearing thin after only a week.

Friday, October 22, 2010

Clueless dorks

Brad DeLong describes Cameron, Clegg and Osborne thus:

'Shame on David Cameron. Shame on Nick Clegg. Shame on George Osborne.
Their shame would not be quite so great if they had a theory about what elements of spending will grow to offset their 9% of GDP planned fiscal contraction. Is the pound supposed to collapse and are exports than to surge? Is the prospect of rising unemployment in the U.K. supposed to greatly enhance business confidence and trigger a surge of private-sector investment? Is the 30-year gilt yield supposed to fall from 4% to 1% and that reduction in the cost of capital cause a surge of capital formation throughout Britain?
Cameron, Clegg, and Osborne don't tell us.
They don't tell us because they are clueless dorks.
They don't even have a theory about how the economy will avoid a double dip.
They hope that--somehow, some way--Mervyn King will save them from themselves.
But if they actually carry through with their policies, I don't see how he can.'

Apart from the fact that I share this pessimism about the prospects of the squeeze, the most depressing thing is that I have no confidence that Cameron, Clegg or Osborne could give any kind of coherent answer to the questions DeLong poses.

A desperate gamble

UK Polling Report has the results of a YouGov poll for the Sun newspaper carried out after the announcement of the Spending Review. Interesting reading. First, 47% of those polled felt the deficit crisis was the fault of the last Labour government, and voters had little faith in Labour to deal with the problem. But the good news for the coalition ends there.

Fully 49% felt the government was cutting too fast, and a remarkable 81% expected public spending cuts to increase overall unemployment, suggesting that growth-friendly fiscal consolidation is not a theory accepted by British voters. Only 34% agreed with the statement that 'the coalition had brought the country back from the brink of bankruptcy', the line pushed incessantly by government since Wednesday (45% disagree).

Most impressive is that fully 55% agree with the statement that the spending cuts are 'a desperate gamble with people's livelihoods'.

All in all, the British public feel that Labour left a terrible mess, but have little confidence in the current government's approach. The upshot in party political terms is that Labour are up on 40% to the Conservatives' 41%, whilst the Lib Dems languish at only 10%. In other words, the Conservatives seem to be getting all the benefit from the coalition, with the Lib Dems taking the strain. Centre-left Lib Dem voters, one can only assume, have been 'smoked out' as more left than right, and are moving back to Labour. How sustainable this will be is hard to guess, but Nick Clegg has work to do, and Ed Miliband has an extraordinary opportunity to place Labour firmly back in position as the dominant party of the centre-left.

Thursday, October 21, 2010

Let's inflate! No, really!

From Jacob Viner in 1933, via Milton Friedman via Brad DeLong (no, I'm not joking):

"it is often said that the federal government and the Federal Reserve system have practiced inflation during this depression and that no beneficial effects resulted from it. What in fact happened was that they made mild motions in the direction of inflation, which did not succeed in achieving it....
[If] a deliberate policy of inflation should be adopted, the simplest and least objectionable procedure would be for the federal government to increase its expenditures or to decrease its taxes, and to finance the resultant excess of expenditures over tax revenues either by the issue of legal tender greenbacks or by borrowing from the banks..."

No Plan B?

Glad I didn't vote Lib Dem

The Institute for Fiscal Studies has made its first assessment of the Spending Review, concluding that it was broadly regressive, with the exception that the top 2% of the income distribution will end up contributing the highest proportion of their income of any group. However, it is worth pointing out that the main reason the top 2% contribute more is that Labour introduced measures, chiefly the 50% tax rate, which the Con-Lib coalition has not removed.

In sum, the IFS shows that the best guess for the distributional impact of the spending cuts and tax changes is that they will affect families proportionally more as we go down the income scale (indeed, it is hard to imagine how any deficit reduction plan based chiefly on spending cuts could do any different).

What is a little alarming is the aggressive nature of the government's response to this assessment by a respected, non-partisan body. Clegg called it 'distorted nonsense' and claimed, rather tenuously, that the IFS was failing to take into account the progressive effects of policies such as the 'pupil premium'.

Odd that a government whose policies are informed by the view that throwing money at a problem doesn't work should imagine that a redistribution of a couple of billion to schools in poorer areas will counteract the effect of the various benefit cuts announced yesterday. After all, hadn't Labour got us into this mess by its misguided profligacy in the name of social engineering? Similarly misleading comments came from Cameron, who claimed the budget was progressive because people paid a greater proportion in tax as you move up the income scale. Sure, unless he was thinking of cutting higher rate tax to 20%. The argument is not that the tax and benefit system is not progressive at all, it's an argument about how much more or less progressive you make it.

Yet another example of double-speak is the bizarre accusation (in Osborne's speech) that Labour is at once a party of 'deficit-deniers' who would not cut the deficit, and at the same time a party whose plans would have meant greater spending cuts than the current government is proposing. How exactly does that work?

My guess is that the only way to push through such brutal medicine is to launch a campaign of mass disinformation. Something tells me they might be getting some assistance on that: Rupert Murdoch has come out in praise of the coalition, arguing amongst other things that 'the financial crisis must not be used as an excuse by governments to roll back economic freedom'.

Chance would be a fine thing.

Wednesday, October 20, 2010

Austerity bites

Nice debate in the New York Times about Britain's new austerity mood. The most interesting point, Andrew Lilico of the Policy Exchange explaining the obsession with deficit reduction in the following terms:  "we have this internal fear of losing control of our deficits and having foreigners telling us what to do. There is also a sense that deficits of this scale are morally lax".

I've heard of a lot of reasons why the deficit should be reduced, but moral laxity is a new one.

The Old Politics of the Welfare State

George Osborne's spending review has, as trailed in the days leading up to today's announcement, taken an axe to a swath of government activities. Cuts of £81bn over the parliament, out of a public spending bill of just over £700 bn, take a huge chunk out of the state, particularly if we consider that the biggest ticket item - health - was (apparently) spared any cuts at all. The strain is taken by the welfare bill - something in the region of £11bn altogether, including cuts on social housing, disability benefits, and help for children. Indeed, undermining help for children seems to be the leitmotiv of government policy, kicking off with the cuts of child benefit for high earners, through to the cuts to Sure Start, childcare credits for lone parents, and, of course, schools (whose capital budgets are decimated).

This is truly horrible. The gusto with which this administration has taken to rolling back the state is alarming - you get the clear impression that this is what they wanted to do all along. We'll see what the political response is, but it would be truly amazing if this passed without major social upheaval, even if the government's macroeconomic gamble pays off and growth resumes in spite of the squeeze. And if this pushes us back into recession, with an estimated million jobs lost and no-one hiring...

One headline today talked about the 'deepest cuts in government spending for 90 years'. Anyone remember what happened last time?


Today the government's Comprehensive Spending Review will be announced - we'll find out exactly how the pain will be distributed. The Bank has prepared the terrain by hinting at an expansion of quantitative easing to try and compensate for the blow to demand implicit in the spending cuts.

Mervyn King yesterday suggested that the coming decade would be a 'sober' one. The hint is that we have overdone it and need to dry out. The funny thing is, just as the party that ended in the gutter was getting going, Mervyn was talking about a 'Goldilocks' economy, and developing his 'Maradona theory ' of monetary management. I have no particular animosity towards King, but I am left wondering why, given his past record, we should believe his prediction that we are heading for sobriety, rather than despair.

Sunday, October 17, 2010

Inequality, again

Nice op-ed by Robert Frank, stating the obvious which is seemingly non-obvious to many - article here. Bizarrely, substantial numbers of voters are still opposed to tax increases at the top in the US. Why? Well, they may buy the line that this will reduce incentives and make everyone worse off (economic ideology). Or they may think one day they too will be rich (false consciousness). Or they may simply not know the facts about where all the money is going, and how the super-rich are contributing less and less. Or they may think 'tax cut - yey' and happily accept the crumbs while ignoring the cake ('Homer Simpson gets a tax cut' in Larry Bartels' neat metaphor).
Either way, free market capitalism and the concentration of power around a narrow elite is looking pretty healthy considering what's been happening in the last 3 years.

The Todd Henderson story

I got to this one a bit late... Anyone who missed it is encouraged to read here, here and here. It's a pretty instructive story about the times we live in (as well as the risks of blogging...). Henderson is a Professor at Chicago Law School, and blogged on Truth on the Market that he could barely afford the tax rises advocated by Barack Obama on people earning $250,000 p.a. (tax rises which are unlikely to happen anyway by the looks of things). Between private school fees, nannies, cleaners, gardeners, two cars and the morgage on his $1 million house, Henderson and his wife (an oncologist) had no money left at the end of the month and therefore couldn't afford to contribute more to government finances.

A real 'let them eat cake' moment.

The fascinating thing about this - apart from the blinkers Henderson wears as he goes about his life - is just how difficult it is for even exceptionally wealthy people to feel comfortable these days. As Brad Delong points out, instead of looking at those worse off than himself,

Instead, Mr. Xxxx Xxxxxxxxx looks up. Of the 100 people richer than he is, fully ten have more than four times his income. And he knows of one person with 20 times his income. He knows who the really rich are, and they have ten times his income: They have not $450,000 a year. They have $4.5 million a year. And, to him, they are in a different world.

In other words, Henderson is dissatisfied because he knows people way richer than he. This is grist to the mill of Wilkinson and Pickett, who in The Spirit Level argue that very unequal societies have costs to everyone, even the wealthy. This is clearly true - Henderson makes a fortune (at least double what a Law Professor of similar status would make in the UK), and yet he feels hard done by because of the even greater wealth available to others in his social circle. Academics are notorious for this - well educated people who are very well paid by the standards of the vast majority, but who are also disproportionately likely to have bankers, hot-shot lawyers or simply heirs to substantial wealth amongst their acquaintances.

But there is more to this. Henderson feels stretched to the limit by costs which at least in part come about because of the individualization of risk and lack of social solidarity in the United States. He has to pay huge private school fees, because public schools in Chicago's South Side are not good enough, and the main reason they are not good enough is because they are populated by poor Americans, and better educated Americans abandoned them a long time ago. Two cars are a necessity because mass transit is not an option for daily life in a deeply socially divided city (admittedly, Chicago is not really the best example of this). Health insurance is a big expense, and various investments to save for a pension - given the relatively ungenerous coverage of Social Security - is another pressing need.

In short, Henderson is well off, and doubtless griping largely because of his inability to look around him. A quarter of million bucks a year should be more than enough for anyone, and Henderson is either too ignorant or too self-absorbed to realize quite how much money that is for the overwhelming majority of Americans.

But there is an objective reason for his dissatisfaction. Even relatively high incomes just don't provide quite enough security in a deeply divided society.

Friday, October 15, 2010

How to revive the economy by closing down universities

Robert Skidelsky has a nice article making the argument against fiscal retrenchment (alternative link here). At least someone is making the argument. Whether or not Ed Miliband will sign up to to a real opposition view is still an open question: in a sense he doesn't have to: if the Con-Dem cuts destroy the economy, he will benefit anyway, because he was proposing slower cuts. But this does mean that almost no-one in public life (except Skidelsky and a couple of other FT columnists, in fact) is making the case that cutting government spending could make both the recession and the deficit worse.

Today the newspapers were trailing a leak suggesting that 80% of the government's funding for university teaching could be cut. It's to be hoped that this doesn't happen because either we will have to give lectures in football stadia, or most current students will have to drop their studies and seek work. An 80% cut is simply insane, unless..

Unless they are planning to simply withdraw government support as they roll in the new tuition fees arrangement. Quite who is going to explain to students that they will have double the debt for (at best) the same quality education, is not clear at the moment.

But back to macro. The Guardian education supplement is usually 10 pages longer: the total block on recruitment in British universities simply means that unemployment amongst aspiring academics will explode. Fewer students will gain the training needed to become productive workers. How exactly is that going to help the economy recover?

This is getting desperate. Either the government is playing mind-games with us (which is what I hope), or they're committing to a 'liquidationist' approach to the crisis. It didn't work so well last time it was tried.

Foreclose the banks

There is a big row in the US over foreclosure. It turns out that some banks have been over-eager in taking back properties from defaulting mortgage-holders, including one case where a house was seized from someone who didn't even have a mortgage.

The fascinating thing is how big finance is reacting. According to the Wall Street Journal, a typical view on Wall Street is as follows:

"Talk about a financial scandal," a Wall Street Journal editorial this weekend joked. "A consumer borrows money to buy a house, doesn't make the mortgage payments and then loses the house in foreclosure—only to learn that the wrong guy at the bank signed the foreclosure paperwork. Can you imagine?"
"The problem is they don't deserve to be in that place. They probably deserve to be there less than they used to," the source continued, referring to incomes lower now than they'd been when the loans were made in the first place. "You do need to foreclose, and you need to go back to people living in houses that are consistent with their income levels."

This is outrageous on so many levels.

First, who sold the mortgages to these consumers in the first place? Did prospective buyers have to twist the banks' arms to get them to finance purchases at ridiculous asking prices? Anyone who has bought a home in the UK or the US in the last decade knows that banks were throwing money at potential borrowers like there was no tomorrow. Other people's money. Let's remember what a financial institution does. It takes money from savers, and invests it in the hope it will grow and make a profit for both the bank and the investor. The money the banks lent out to homebuyers was not their money - it was money they were supposed to invest to make a profit for someone else. If the mortgage-holder defaults, then the bank has not done its job - it has cheated the investor. People will surely go back to living in houses consistent with their income levels if banks limit themselves to making realistic loans.

Second, hang on a second, didn't the banks come very close to their own foreclosure, before they were bailed out with $700 billion of TARP and an ocean of cheap money? How can they get high and mighty about what a defaulting mortgage-holder 'deserves', when they themselves would have been closed down two years ago but for a dose of state socialism? I'm sure most homeowners would have stood a better chance of staving off foreclosure had Ben Bernanke lent them money at 0% to tide them over hard times.

That'll do for now. But in case anyone was deluded into thinking the people who work in finance had any clue about what has happened to us since 2007, this should remind them that the oligarchs have no intention of saying sorry for anything.

Wednesday, October 13, 2010

Browne and out

So, it looks like tuition fees are heading up again.

This is a hot political potato, in much the same way the child benefit cut is proving - governments cut the wealthy's entitlements at their peril. The apparent proposal actually ticks many of the same boxes: it requires the upper income groups to contribute more, and is therefore bound to provoke deep opposition. In this regard it is interesting that a Conservative government should propose it, and even more interesting that the Lib Dems will have so much trouble over the issue, since they even opposed the introduction of much lower fees in the late 1990s.

Of course, this opposition, when made on principled grounds, is legitimate and probably right. Why should higher education be different from all other kinds of education, which are provided basically free at the point of delivery? It is true that the beneficiaries from higher education on the whole take most of the benefit for themselves, but surely this is true for lower levels of education too. Yes, the majority do not receive higher education, but these days around 40% do, so it can't really be argued that the majority end up subsidizing the minority. After all, the educated minority will end up paying multiples higher taxes over their careers than most of those that do not go to university, so in a sense they pay for it already. Why not completely socialize higher education? After all the externalities in terms of more productive workers and innovation through research accrue to society as a whole.

There is a very strong argument for a free market in tuition fees, with no up-front payment and subsidized and partly means-tested loans. This is basically what we have already, but with no real market, since the fees cap is set too low. This means that Oxford University charges the same as the University of Central England, which doesn't look like such a good deal for the student who takes on a loan of 10s of 1000s to go to UCE. With higher fees, Oxford graduates will have to pay back higher loans which will reflect in part the fact that they get a more valuable service.

The problem is political: New Labour never actually managed to convince people that fees and loans were ultimately in the interests of most graduates. Prospective students, and more importantly, their parents, do not equate a personalized debt (no matter how heavily subsidized) to an equivalently sized tax liability. This is important because a key part of the argument for loans was that graduates would still end up paying a large amount in extra taxes if the government had to pay for everything, and that universities would also be of lower quality because they would be starved of investment by short-sighted  politicians. But very few people actually look at it that way, and the argument has therefore been lost. '£90,000 to put two children through university' roar the headlines, as if graduates earning too much too much to claim child benefit for their kids were in any sense still their parents' responsibility.

So, this policy may well be right, or at least not much less wrong than the various policies that came before. But this doesn't matter, because the political argument is an impossible one to make, and will probably destroy the coalition.

What's wrong with English football part 4

Last night's 0-0 draw at Wembley has got to be one of the dullest games I've ever seen - in fact after an hour I started doing email and wasn't looking when the Montenegrins hit the bar. Fabio was refreshingly honest to point out that England were lucky to draw.

Not there is anything surprising about England failing to break down a team full of unknown former Yugoslavs. The former Yugoslavia is one of the most successful parts of the world for producing sports stars, with an enviable record in tennis and basketball as well as the beautiful game (see Why England Lose by Simon Kuper). Montenegro - a country with the same population as Leeds, as the ITV commentators pointed out - has a wealth of players with basic technical ability, ability that the vast majority of English footballers lack. That, added to a good basic tactical sense, gives them every chance of holding off a team like England which relies essentially on headers from deadballs. And they were missing their best player, Vucinic.

The England players are unable to pass the ball  with sufficient precision, and can't control the ball adequately under pressure. These are basic technical flaws, hidden when they are partnered by more talented foreign players in their club teams. It's back to the drawing board: teaching kids to kick the ball properly would be a start. Given the FA's reluctance to invest in coaching, this looks unlikely to happen.

Saturday, October 9, 2010

Let's inflate!

Big output gap, no prospect of devaluation solving the problem for anyone, large deficits to deal with without completely suffocating the economy through cuts, lots of hard-to-move debt on household balance sheets.

So here's the idea. The central banks should announce an inflation target of 7% (a figure accepted by many economists as creating no real problems provided it is stable - which of course it often isn't), and print as much money as they can to achieve it (presumably buying up all the government debt needed to keep deficits running). If it doesn't work, we're still where we are now. If it works too well, there is interest rate cuts and deficit reduction to push it back down.

Now I may have missed something obvious here, and I'm not trying to argue that high inflation has no risks. But, the current situation is unsustainable - who's to say the costs of a bout of inflation would be higher?

Just a thought.

PS Declared interests: a big mortgage on a devalued property and a collapsing pension fund.

Friday, October 8, 2010

Welfare reform in hard times

The debate around the proposed welfare cap gets more surreal by the minute. Everyone (just about) can agree that there is something absurd in welfare recipients getting more than an average family's income from paid work. But the moment you look into the details, the whole thing falls apart. Essentially, the only reason anyone can receive large amounts of welfare benefits is if they have several children to look after. So the 'undeserving' poor can only be punished (or incentivized) by effectively withdrawing financial support aimed at their children. Who of course, cannot be blamed for their predicament.

As a result, the coalition is in a big mess over this. Lord Steel, this morning on the Today programme, was cornered by Evan Davis into suggesting that the cap would not apply 'retrospectively' - ie to people who already have children. This is clearly not what the government is planning. However the only way a Liberal Democrat (or indeed anyone in possession of human empathy) can make sense of the policy is to deny that it will actually involve removing welfare support from real live children. So, like the child benefit cut, the coalition will probably end up cack-handedly finessing the policy so that it doesn't have the intended effect. So, no money saved, no reform.

The academic literature on welfare states has generally stressed how 'sticky' welfare institutions are and how difficult it is to cut back on spending. After all, the pioneer of the 'new politics' thesis in welfare state studies - Paul Pierson of Berkeley - developed his argument by studying the US and the UK in the 1980s, where determined efforts to cut the welfare bill were actually made. If Mrs Thatcher couldn't reform housing benefit or remove the poor's incentives to have children rather than work, why should we think that touchy-feely Cameron and Clegg will manage it?

The government looks like it doesn't know what it is doing. After all, IDS does not give the impression of being a man who has seriously analyzed the causes and dynamics of poverty in Britain. So what will happen? Well, probably a few high profile changes which sound impressive but only have marginal effects. Either that, or rioting in the streets.

Wednesday, October 6, 2010

The Deserving Poor

Cameron's speech today opens a Pandora's box, by suggesting that fairness involves what people 'deserve'. This is, on a superficial level, obviously attractive and intuitively right. But the moment you delve into the policy detail, it unravels pretty damn quick.

The Tory spinners were insisting tonight that the removal of child benefit for high earners and the cap on welfare payments reflect this notion of fairness and merit. So it is not fair that a 'man' (in Cameron's example) works long hours to pay taxes to sustain a family of welfare dependants next door. So fair so good. But what do you do about it? The welfare dependants will normally be receiving large amounts of benefits because they have children to support. But how can children be undeserving (as Jeremy Paxman pressed an uncomfortable Jeremy Hunt on Newsnight)? Similarly, it is intuitively sensible that families dependent on welfare should not receive four-figure sums in housing benefit to allow them to live in central London, when hard-working taxpayers have to commute miles to go to work. But if you cut their housing benefit, families (again, nearly always with children) will be forcibly relocated to different neighbourhoods, or even cities, leaving behind their schools and whatever social relations they may have built and creating ghettoes in the cheapest areas of our cities.

The notion of the deserving poor is therefore back with us. The sad thing is that we are talking about children here. The non-working poor without children receive very little from our welfare system (Jobseekers Allowance is £66 a week, which would barely keep my Oystercard going). So any serious cuts to the welfare system will penalize parents and children. Cameron's idea of fairness sounds great until you see homeless children out in the rain.

Tuesday, October 5, 2010

Please don't give me a pay rise

Will be the cry of parents currently earning £43874 per annum. The IFS lays down the incoherences of the Child Benefit cut here. As they put it: "a one-earner couple with an income of £43,875 would need a pay rise of £2,975 or more to ensure they were no worse off after paying income tax and national insurance and losing child benefit".

Don't touch my tax allowance

So now it turns out that since cutting child benefit for high earners is unpopular, the Tory high command has dusted down an old idea - the married couple's tax allowance - to try and win back favour. Won't do the trick with me I'm afraid: I'm not married.

This is a genuine policy mess, and they've only just announced it, which must be some kind of record. First, none of this was in the election manifesto. Sure, there is a big deficit, blah blah blah but we knew that before the election, and there is no serious case that the deficit has proved any worse than expected: if anything the numbers are improving. So why no mention of cutting higher rate taxpayers' child benefit, or capping welfare at £500 a week? Philip Hammond stammered on Newsnight that they are 'in a coalition', but the Lib Dems are not on record as having asked for either of these things, so I'm not sure that is a ready excuse (and given the reception of these ideas in the press, I'm sure the LDs are hiding behind the curtains on this one).

But worst of all, policy is informed by a combination of confusion and malice. Confusion because cutting child benefit for higher rate taxpayers may be simple to administer, but will produce real injustices, since a couple earning each below the threshold will keep their child benefit, whilst a family with one earner marginally over will lose it. I can imagine salaried workers pleading for pay cuts here. Malice because even higher rate taxpayers struggle with the colossal costs of bringing up children, with nursery fees in London routinely above four digits a month. With one child, CB is a nice top-up for a high income family, but with 2 or 3 it starts to look like real money -  £2500 a year for 3 kids. And to remedy this, the Tories are thinking of introducing a married couple's tax break which, if extended to higher rate taxpayers, would eat up all the savings of the CB cut.

All very amusing, no doubt, to higher rate taxpayers with no kids, who can continue spending their post-fisc income on skiing trips and Mini Coopers. The Conservative policy seems to be: don't have children. Accompanied, of course, by a cap on immigration. If you want to raise money from higher-rate taxpayers, there is a simple, efficient and equitable way of doing it: raise the higher rate. Making it 41% would not change anyone's life, and the pain would be shared precisely in line with ability to pay. It's called progressive taxation.

Monday, October 4, 2010

Don't touch my child benefit!

After hearing George Osborne's speech, announcing cuts to child benefit for higher earning families and a £500 per week ceiling on welfare payments, I went to pick up my daughter from her North London school. I estimate the majority of families whose children attend the school will be penalized by these policies: first, of course, because these are policies that almost by definition affect families rather than the childless. But second, because of the social mix of most London neighbourhoods. Parents at our school divide into two main groups: high-earning professional families in which at least one parent is a higher rate taxpayer, and low paid or non-working families who receive child tax credits and housing benefit, which in London can very easily go beyond the £500 cap. As things stand, pretty much all the parents will take a hit.

By far the most serious, of course, is the benefit cap. Let's think about this. If a family with no earnings have to rent in the private sector, than hardly any families with more than one child can stay in London. The government presumably hopes some of these people will find work (family-friendly work?). But in times of recession, who wants to employ the long-term unemployed? But this also raises the crucial question of how the cap will actually be applied: will families be forced to move, taking their children out of school and ending up in neighbourhoods or towns outside London where they have no family or friends? Or does the government hope they will just disappear? Moreover, the projected savings are only around half a billion pounds, which underlines just how little Britain actually spends on benefits: the vast majority of benefit recipients already receive a good deal less than £500 per week, which is not a lot of money to bring up a family with if you have to pay the kinds of rents typical in the South of England.

These policies have in common that children will suffer to pay down the deficit. In the case of higher rate taxpayers the suffering is relative. But even here, the better off are being discouraged from having children, which is already a hugely expensive adventure. There must be better ways of raising a couple of billion quid. A couple of pence on higher rate income tax, for instance?

Friday, October 1, 2010

Red Ed and the press

I've got a bit irritated by some of the press coverage of Ed Miliband, implying that there was something radical and sinister about his politics, and that Labour would have been bound to win back power under his brother's leadership. This suggests that most of the media find anything left of Tony Blair to be beyond the pale.

Philip Stephens, normally a good bet for helping us make sense of the world, gave a simplistic account of the electoral dilemmas facing Labour in Tuesday's FT. Here's my response.

It's still a bit early to say what Ed's strategy will be. But either way it is likely to be much punchier about social justice and how to regulate capitalism than anything New Labour has come up with in the last 16 years. The main point I was trying to make in the letter to the FT is that the centre-ground doesn't have to mean slavish adherence to neoliberalism: middle income groups don't have any obvious interest in deregulating finance or trimming public provision. The trick Ed has to pull off is bringing poor and middle together in a social coalition in favour of fairer capitalism. The point that fairer capitalism doesn't have to mean less efficient capitalism is only controversial in the UK and other English-speaking countries, it seems to me. I make these points in an interview to the Italian newspaper (formally the paper of the Italian Communist Party) L'Unita' here.

The other interesting development of the week is the collapse of the Irish austerity plan. Ireland did everything they were told to do very early on, and now find themselves on the brink. Meanwhile in the UK, gilt prices went up on the news that the Bank of England was considering further quantitative easing. This suggests that markets are coming round to a Keynesian view of the prospects for the next few years. My guess is the Con-Dem coalition will be smart enough to seize the opportunity to ease off on the cutting (which of course has barely started).