IEA Blog

“Today we invite you to come with us on a special journey; to open your eyes and look at poverty. Open your ears and listen to the voices of poor people! Open your heart and meet people! Open your mind and understand that we are all human persons!”

With these colourful words, the president of Caritas Europa launched his organisation’s campaign “Zero Poverty”. At a time when personal insolvencies, housing repossessions and unemployment figures are at extremely high levels, one should assume that such an initiative must be a worthy endeavour.

So what exactly is Zero Poverty about? The presentation on the campaign website is ambitious:

“Our vision is Zero Poverty. No one should live in poverty. [...] Anyone can help to make the ZERO POVERTY vision a reality. You can find out how on our website.”

The “how” refers to 13 missions specified by the initiative. Supporters are advised, for example, to buy Fair Trade coffee and flowers. They are also asked to buy local products, both because it “guarantees jobs in the area”, and because “they are often organic products”. Further, saving energy is recommended, because the world’s poorest are most affected by climate change. Suggestions include “one minute less in the shower every day” and to “use less water for cooking”.

Nobody denies that Caritas’ work on the ground is extremely valuable. However, their attempts to appear fashionable by sounding like a campus workshop are less impressive. We learn from their campaign materials that minimum wages and welfare payments are too low, that globalisation leads to downward-pressures on wages and working conditions, that executive pay is excessive and therefore a strengthening of corporate social responsibility is required, and that the “female perception of the role of women is not matched by an equivalent change in attitudes among many men”.

Caritas’ targets are not just potential volunteers or potential donors. While the importance of civil society actors is mentioned, this is immediately qualified by adding that “this does not mean that governments can leave it up to ‘everybody’ to alleviate poverty; on the contrary they have to take up their role.”

This role is a highly extensive one, according to Caritas. Governments should increase child benefits, sickness benefits, welfare benefits, pensions, plus spending on healthcare, social housing, homecare, public employment and many other programmes.

With its impressive network of social service providers, the unique strength of Caritas is their vast local knowledge and long-standing experience in the day-to-day practice of poverty mitigation. In their field, there could hardly be a more authoritative voice. That is precisely what makes it so disappointing that Caritas engages in a campaign which reminds one of a school teacher who attempts to imitate teenage slang to appeal to his pupils.

Shadow Chancellor George Osborne leads the chorus of tut-tutting at means-tested child tax credits going to “better-off” families and seems to believe that we would save enough to bail out the national debt were they restricted to “needies”.

Needy “clients” will typically be on a plethora of “targeted” benefits – to pay their rent, council tax, etc., and will get a whole range of free goods and services. By definition, anything “targeted” has to be withdrawn if and when people are deemed non-needy. Do this suddenly and there is the loss of a hundred or more per cent of any extra income above the cut off point for entitlement. The only way to cope is by phasing out gradually – and the more that is “targeted” the more that has to be withdrawn and the further the taper has to extend up the income scale. The effect is still minimal over crucial reaches of the income distribution, with claimants facing severe losses.

If credits stop suddenly at lower income levels many more people will see nothing or have a negative income if they try to improve their fortunes. David Cameron promises to let people keep a large slice of their out-of-work benefits when they get a job; necessitating a further big phase out at a higher point. Another way to avoid tapers extending to “better off” levels is to drastically reduce the value of means-tested credits and benefits or – stop targeting needies. 

There is an immediate appeal to “targeting the needy” – not just because of conspicuous compassion, but the suggestion of a cheap and precise way to address a problem. Bang, bull’s eye, solved! Dynamic consequences, what are they?

Sadly, there is not a finite supply of needies, even really, truly needies, but a multitude of hopefuls on the margins clamouring to be let in; altering their circumstances, dumping their assets, and staking their claim to be “needier than thou”. Tax credits were first given to working families, then non-working families and now childless workers.

Putting qualifying conditions on one benefit causes migration on to another. Once the youngest child reaches 16, a hefty and increasing slice of the burgeoning lone parent population goes straight on to long-term sick benefits – the interim measure until the state pension can be accessed. There are the benefits to get off benefits; accumulating one on top of another as seemingly convenient ways to counteract the disincentives of the one that went before. Not worthwhile to work? Make up the wages of the low paid, even for a few hours work. Pay a bonus for putting a toe in the labour market, maybe £20, £40 extra a week. Sticking at the maximum benefit for the minimum hours?  Have an extra benefit to extend your hours. Got children? We will pay to care for them - more than your labour is worth.   

About 30% of spending by government is now on a maze of around 40 benefits and tax credits, their administration and policing. If it is so cheap and useful, why is the vast accumulating expense of targeting needies drowning us in debt, even though it has done little other than further social dislocation? Where in the world has means testing been other than counter-productive? Countries that have – as Britain used to – universal tax allowances for dependents, a minimal safety net and enforcement of responsibility for family members, also have lower rates of poverty, inequality, household fragmentation and welfare expenditure.

Patricia Morgan is the author of The War Between the State and the Family.

I suppose I am not the right person to be giving an unbiased take on the Pope’s recent remarks to the English and Welsh Bishops on their ad limina visit to Rome on this secular economics blog. However, the Chief Rabbi has waded into the debate making similar points to those I have been making, and also quoting F. A. Hayek, so I feel justified. The issue also has a lot of parallels with those that Len Shackleton frequently blogs about: freedom of association and freedom to contract in labour markets go hand-in-hand.

In case you have missed the debate, the Pope has told the Bishops that they should continue to speak out against legislation (specifically equality legislation) which circumscribes religious freedom. The usual example given is where legislation restricts the freedom of relgious schools to choose not to employ practising homosexuals. Though the debate is often seen in those terms (that is, about the employment of gay people) so that easy headlines can be written about discrimination against that group, it should also be mentioned that the same school would not wish to employ a headteacher who was a practising non-married heterosexual (or re-married divorcee) either. There is a constistency in the Catholic position which some gay activists respect.

The problem is that we have moved from a free society to one based on rights. Freedoms do not conflict (or at least they are managed by agreements – contracts) whereas rights do conflict because they impose duties as a corollary. Let us take the example of a right to the adoption of children by gay couples – something that has led to the disbanding of Catholic adoption agencies. In a land governed by “freedom” gay couples would be entitled to adopt through any agency which wished to provide services and the Catholic adoption agencies could offer their services to whoever they chose (let us say just to married couples – but see below). Indeed, specialist gay adoption agencies could spring up. In a land governed by “rights”, gay couples have a right to have adoption services to be provided by any entity that provides adoption services. That imposes a duty on Catholic adoption agencies and circumscribes their freedom (and the net result is a reduced variety of adoption agencies). Rights come into conflict. Does the Church have a right as a religion to set up an adoption agency in accordance with its moral views? Not if homosexuals – or unmarried heterosexuals – have a right to adoption from all agencies. Do homosexuals – and unmarried heterosexuals – have a right to adoption from all agencies, without discrimination? Not if Church groups have a right to set up adoption agencies in accordance with their moral views. Resolving these incompatible rights can only lead to open conflict (the current position – where there is a great deal of bitterness on both sides of the debate). Yet, if all accept freedom as the basis for social and economic relationships, there need be no conflict though each side will, no doubt, want to persuade the other of the correctness of their views.

This argument can be widened to freedom of association more generally. I am perfectly comfortable with women-only clubs, socialist-only clubs and freemason-only clubs though I would not want to be a member (indeed could not be a member) of any of them. Similarly it should be possible to have men-only clubs and so on. And religious groups should also be free to form associations and act in accordance with their own moral principles.

But the Church has only itself to blame on many of these issues. The continental influence in general, and soggy-socialist influence amongst the English-speaking Bishops, has made the Church at large often conflate “freedom” and “rights” in public statements and not distinguish effectively between them. The Church’s own consistent theory of rights is somewhat different from most secular understandings and this is not articulated well either and is certainly not well understood. Bishops in England and Wales have not spoken out against “rights-based” equality legislation until it affects their own patch. And Catholic agencies have also acted inconsistently. It was not consistent, for example, for Catholic agencies to facilitate adoption for heterosexual singles and then turn round and say they would not do the same for gay couples because a child needs both a mother and a father and should be put in that setting if at all possible. Jeremy Paxman very effectively nailed the now Archbishop of Westminster on that very point on Newsnight and the whole argument surrounding Catholic adoption agencies was then finished in the view of many people.

The Church could simply extend one of the great planks of Vatican II. In dealing with the communist countries it effectively said that the Church will not try to create Catholic government if she were given full freedom to operate in communist countries – including the freedom to speak out against oppression of human dignity. This would mean the defending of what the Church regarded as genuine human rights deriving from natural law (for example – the right to hold property). It should cherish and speak out in favour of freedom of association more – even though there would be many associations formed that the Church did not like! The Church should pursue its mission by persuasion. “Rights” agendas, unless strictly limited in scope, lead to conflict. There is no logical end-point to a “rights-based” legal code which gives rights to some and imposes unacceptable duties on others, whereas we can live in freedom harmoniously. Indeed, once such rights-based codes are accepted in principle, we put in place the vested interests that will simply work for their extension, so we create a huge “human rights and equality” industry. Of course, not all problems will be resolved by making freedom the basis of law. One thinks of abortion, for example, where most religions would believe that the unborn child should get the same legal protection as those who were born but some believe otherwise. However, a belief in freedom in general surely provides the only widely-acceptable basis for religious freedom in a secular society.

You couldn’t make this one up. A spectacularly unsuccessful contestant in Britain’s Got Talent, Emma Amelia Pearl Czikai, has lodged an Employment Tribunal case against the ITV programme makers, claiming disability discrimination. Her argument seems to be that, as a result of cervical spine neuritis, she gets head and shoulder pain which affects her ability to hear properly in amplified arenas and causes her to sing out of key. Thus the derisive comments made about her singing by Simon Cowell were unfair and discriminatory.

Although many people may not be displeased to see Mr Cowell himself on the spot for a change, this case (which may or not be accepted, of course) is significant – not for its own sake, but for what it tells us about the seemingly endless expansion of the scope of employment law.

Readers may not be fully aware that you don’t have to be employed to be covered by employment law on discrimination. Any unfairness in recruitment processes can make an employer liable. In this case Ms Czikai seems to be arguing that the BGT auditions are part of an elaborate recruitment process for a contract of employment – to wit, a recording contract. It is a well-established principle that an employer who doesn’t make reasonable adjustments for a candidate’s disability, and makes disparaging remarks about him or her in the “interview” process will be liable for unlimited compensation. On these lines, it is quite possible Ms Czikai will succeed in her claim.

The possibility of large amounts of compensation, coupled with the fact that legal cost orders are very, very rarely imposed on unsuccessful claimants, must surely be a factor in the ever-wider expansion of the scope of discrimination claims (see previous post on climate-change belief). Last year disability discrimination claims rose by 19%.

Fear of tribunal claims is in turn a major cause of the expansion of the personnel/HR function in larger businesses and the public sector (where a disproportionate number of claimants, unlike Ms Czikai, are to be found). The Chartered Institute of Personnel and Development now has 135,000 members busily trying to anticipate problems and creating hugely complicated “best practice” procedures : twenty years ago it had just 40,000. In smaller companies and charities, where a specialist HR function is unknown, a wrong call can lead to an organisation being put at peril.

Save the Children has recently been quoted regarding their findings on “severe child poverty”, which is rising. Indeed, it was increasing before the recession and, according to the charity’s estimate, 1.7m children are affected.

As usual, one could debate forever and a day the meaning of a term such as “severe child poverty”. Anti-poverty initiatives have a preference for strong language. This puts some critics off, because they believe terms invoking images of extreme hardship should be reserved for describing the type of misery one finds in the Third World, or in past centuries. For the campaigners this is tantamount to “denying poverty”.

So let’s leave semantic issues completely aside for a moment: I believe Save the Children’s severe child poverty (SCP) indicator makes a lot of sense, and their accompanying policy paper provides a valuable contribution. They identify worklessness, disability and lack of savings as risk factors, and find a geographical concentration of child poverty in London. These findings deviate somewhat from the ones provided by the more common indicators of relative and absolute poverty.  

They do so because SCP is a combined measure of consumption and income. It identifies a household as poor when it lacks at least two items out of a pre-defined basket of essential goods. Additionally, income must be below 50% of the contemporary median.

SCP can identify a number of things which income-based indicators miss. Firstly, it includes information about income dynamics. If you lose your income today, you will not suddenly be poor tomorrow. Your fridge, computer and furniture will not suddenly evaporate. Also, while worklessness may not always compare so badly with low-paid work on a snapshot measure, over time it does. Maybe that is why the paper makes a strong case for poor parents’ (re-)integration into the labour market, instead of simply calling for higher unemployment benefits. Secondly, SCP captures regional price differences. It is not misled by the higher nominal incomes in the South East. Thirdly, SCP can reflect unobservable variables, which can make households with identical incomes enjoy vastly different living standards.

The only criticism I have is that there seems to be a certain knee-jerk reaction to call on the government for “urgent action”. Is the lack of progress in recent years not a reason to suspect that the state-centric approach to poverty alleviation has met its limits?

●  Gary Becker explains how to increase employment

●  Samuel Gregg discusses Latin America after the Left

●  JP Floru advocates a market for tigers

●  George Leef reviews The Legal Foundations of Free Markets

●  Keith Boyfield on the flight of bankers from the City

●  John Papola and Russ Roberts’ “Fear the Boom and Bust“, a Hayek vs. Keynes Rap Anthem (video)

Like other developing countries, Pakistan is deploying microfinance as a way of lifting people out of poverty. The basic assumption is that poor people lack access to affordable capital and once credit is streamlined they can build micro enterprises and lift themselves out of poverty.

However, apart from anecdotal case studies, there is no conclusive evidence about the impact of microfinance on poverty alleviation. Furthermore, some studies suggest that microfinance certainly does help the poor but not necessarily through building up their enterprises.

According to the Consultative Group to Assist the Poor (CGAP) most of the poor use micro loans as a reliable instrument to smoothen their consumption or when in need of a large amount of cash. The most worrisome fact for the poorest of the poor is their income volatility.

The recent estimates released by Pakistan Microfinance Network suggest that the country’s potential micro finance market is about 27.4 million borrowers, whereas microfinance currently reaches around 1.8 million people. However the more interesting statistic from Pakistan is that microfinance savers have surpassed microfinance borrowers by a comfortable margin, as the former category includes around 2.14 million accounts.

Does this mean that, amongst the poor, the savers outnumber entrepreneurs investing money in their business? The CGAP study seems to lend credence to this paradoxical finding. As it is dubious to claim that the poor people have earned their savings through their micro enterprises, this finding only points in one direction. The poor have deposited their own savings into the system, aiding its operation – although it has always relied on external support. It also suggests that the micro savers would necessarily be different from micro borrowers, which is supported by the fact that only one out of seven saving accounts are mobilised through microfinance institutions – the rest are managed through conventional banks.

It is claimed that the default rate of the microfinance borrowers is very low – around 2.5% worldwide – a statistic which is used to argue that poor people are reliable in repaying their loans. Evidence from Pakistan’s experience, available to the author during his research, does not refute this number but suggests a painful explanation. Most of the microfinance borrowers do not repay money on time from business profits – they repay it by borrowing from another source – which could well be another microfinance institution. Thus the reported default rate actually conceals the dynamics of micro businesses and creates a potential hazard. Unfortunately, the CGAP study also points in a similar direction – poor people find the micro loans very useful – and accessible – for their consumption needs, so regardless of the source of cash for repayment, they would normally pay.

It is evident that microfinance has helped the poor in managing their cash flows and in sustaining their income levels; however, it has not necessarily helped them to come out of poverty by increasing their income levels. We can’t turn people into entrepreneurs by just providing them with capital – if this were so, we would not have seen countless examples of “rags to riches” throughout the world without the aid of any formal credit!

Keith Richards seems to be a personified refutation of the laws of human biology. After decades of self-abuse, Richards is still alive and kicking, and in better shape than many contemporaries who have lived ascetic lives. Yet nobody has ever argued that embarking on a Richards-lifestyle was a “recipe” for staying fit, or at least no detriment to that aim.

In the economic policy debate, the same logic is sometimes employed. Friends of big government often present the economic success of Sweden and Denmark as the “proof” that high taxes do not hamper wealth creation, and can even be conducive to it provided the money is well spent.

There is no point in denying it: Sweden and Denmark are prosperous, well-run economies. They do have their economic ailments; but they fare generally better than otherwise similar economies on the continent, where the state is also huge but well below Nordic dimensions. So is the tax burden unimportant after all?

Probably not. In a recent paper, two economists have estimated several countries’ “Laffer curves” for the taxation of labour and capital. According to their estimates, Sweden and Denmark are already above the revenue-maximising point for the taxation of capital, and just short of it for the taxation of labour. By permitting growth in the tax base, cutting capital taxes would be a free lunch for their governments, while cutting labour taxes would be a super-saver menu (and it goes without saying that from a classical liberal viewpoint, maximal tax revenue is hardly a desirable aim). Swedes and Danes may withstand high levels of taxation with the resilience of Norse warriors, but they are not impervious to it either. 

An alternative interpretation of the Nordic countries’ success is that they compensate for their high tax burden by performing exceptionally well in other areas. In the latest Index of Economic Freedom, Sweden and Denmark beat the United States in seven out of ten categories. Scandinavophiles are strangely selective in what they perceive to be the essence of the Folkhemmet-model. They are very keen on importing Scandinavian levels of taxation, but you never hear them talking about Sweden’s light levels of business regulation, or Denmark’s liberalised labour market. But this is tantamount to advising an up-and-coming guitarist to adopt Keith Richards’ lifestyle, instead of studying his guitar tabs.

In the Guardian recently, Michael Arthur and Wendy Piatt, representing the Russell Group of the 20 leading British research-intensive universities, made the following plea:

“Our politicians must take a responsible approach to the funding of higher education and recognise that it is one of the jewels in the country’s crown, worthy of protection because of the extraordinary value that it brings to our society, international competitiveness and economy.”  

Unfortunately the special pleading of powerful interest groups for protectionism is now centuries old and all previous attempts to protect so called “national champions” have all failed miserably. Therefore the protection of national champions in higher education (or “jewels in the country’s crown”) will only restrict competition, discourage innovation and encourage inefficiency, thereby depriving students of lower prices and/or greater choice. As a result the sector will continue to stagnate and we will all be worse off.

As previously noted by Neelie Kroes (European Commissioner for Competition Policy) in 2007, protectionist pressures can and must be resisted and “[t]hose who put up barriers, or who don’t want to take them down, need to know that they are acting against the interest of their economy and their citizens.” In 2006, the EC Competition Director General was far less charitable when he described national champions as being illegal, immoral and fat!