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What can we do about poverty?



The CSPP has rightly said that a proper debate about poverty is vital. Aside from the moral imperative to care deeply about and consider the vulnerable and those in need, the issue divides us in Scotland.

CSPP Chair Professor Richard Kerley recently wrote a blog post in which he asked “What would you do about poverty and inequality?” , which sought to generate debate on the problem.

Here we publish the second response received to this question (the first was by Main Street Consulting), written by Eben Wilson of TaxpayerScotland. 

Further articles and contributions on this issue are welcome and can be sent to info@cspp.org.uk for consideration.

 

Part One: Don’t disrespect the potential of the poor

The CSPP has rightly said that a proper debate about poverty is vital. Aside from the moral imperative to care deeply about and consider the vulnerable and those in need, the issue divides us in Scotland.

That division holds a mirror up to a deeper intellectual divide; that between the “poverty lobby” who seek more state action to reduce poverty, assuming better policy is the cure, and a perceived uncaring affluent class who prefer to castigate benefit dependancy and indolence, assuming self-reliance is the cure.

I want to step back from that; seeing the division in the terms of political economy.  Can an observational perspective on that division offer us anything in the way of policy choices that would create any progress in this intractable issue? Beware, the dry dispassion of any economist can stick in the craw of many with aspirational solutions to poverty using state power, but bear with me, I too care deeply about those who are poor; they challenge our claim to civilised decency.

These are real people

I start with the idea of “those who are poor” in that last sentence. I used the term deliberately to avoid talking about “poverty” which instantly turns the lives of other human beings into a constructed phenomenon. If we offer this construct, we immediately lose sight of a range of circumstances for which the essence of proper analysis is about incentives, interests and behaviours of individuals dispersed through society in location and happenstance.

Deconstructed, “the poor” offer a chaotic mass of behaviours, making policy highly complex, yet this doesn’t deny us the role of seeking out rules that help define that complexity with its embedded interests and incentives and so developing rational policy choices that optimise those behaviours.

Let me risk simplification.  In an entirely non-pejorative way, let’s say that some people are “non-competent”; they could well be incompetent, incapable or indolent but so are a few senior executives that I know and we are not casting aspersions here. We are merely saying their behaviours are such that they are not financially solvent or socially included.

The goal is more than just opportunity

Our moral aim is usually stated as offering “opportunity”; Nicola Sturgeon uses this term a great deal. I would refine that; our aim is to enfranchise the poor into the possibility of opportunity.  That is, as a political economist, I would look at their interests and examine their incentives and see what might allow them to aspire to improvement of their condition.  Note the “allow to”, not “make”; classical liberals seek to release human energy, not mandate change through managerial process.

Now, I am well aware that for those of a hard-left persuasion this begs the question as to whether we have to accept an economic world in which your condition depends on what you produce for others.  Economic liberals and collectivists can be ships passing in the night on this. The argument about whether the Labour Party performed badly in the recent election because it did not offer “aspiration” rests precisely on this dissonance.

I ask you therefore to accept my goal as an observed tabula rasa starting point, prior to any idea that a central state is necessary to re-distribute wealth based on the, for me, rather pessimistic notion that some of us are inevitably non-competent and will be exploited by the talented – a perspective that for me disrespects the poor as our social neighbours and disrespects those with wealth-generating capabilities.

Three rules that offer optimism

To reduce poverty, we have to release as many people as possible to maximise their potential. I have three touchstone rules for this.

First, don’t crush capital enhancement.  Many put great emphasis on “educational attainment” here, which is part of individual capital, and they are surely correct particularly if we augment lifelong learning rather than simply focus on better schools.  But I would widen that. We need to avoid benefit traps that reduce the rewards of self-reliance. We need to avoid distanced support; the welfare officer behind the glass with the thick rule book and baffling decisions even she does not understand.  Most importantly of all, we need to allow the poor to build their own capital and generate the optimism that they can do that for themselves.  I will suggest how later.

Second, don’t make it expensive to be poor.  The second richest decile in our income distribution spends 9% of their money on indirect taxes, while the second poorest pay 49%. We have a cock-eyed tax system.  [1]  It pretends to be re-distributive, but high tax rates are so disruptive to behaviour that over time exceptions and reliefs have burgeoned for the rich, while transfers and entitlements for around half of households pass through the state bureaucracy back to those who paid the original taxes. This ridiculous money-go-round creates poverty because the payroll and sales taxes, and land use restrictions that feed it raise the prices of everything. Crucially, this state-generated “cost-of-living crisis” makes life for the poor much more difficult.  Those without the productive value of knowledge and talent rely mainly on working time to make income. But each unit of time is proportionately less valuable when living costs are higher. High taxes induced by high re- distributions force the poor into multiple zero hour contracts. I would choose a life on benefits if my aspirations were crushed in this way. By the way, legislating those contracts away will make things worse, not better, we will just take work away from the poor. We should concentrate on policies that make their time more valuable and less expensive.

Don’t stigmatise the rich. Now I am going to hurt some feelings. The answer is not to pummel the rich. They may appear quiescent, but be warned that they will change their behaviour. They will hide their wealth, they will move away, and they will decide to produce less.  The losers will be the poor. The rich also have the ability and connections to adjust the policies of the state for their own benefit and we should remember here the fear of politicians that political success truly is about the economy. We must avoid inducing cabals of corporatists stroking the state for subsidy and protection.  Big business and big government are a toxic mix when what the poor need is new small caring and flexible employers.

I celebrate the rich for another reason. They offer tomorrow. The rich, in the sense of the cash rich nouveau-riche are, frankly, bonkers. They produce and buy the avant-garde, the whacky new ideas that induce new products and more economic trade for all.  The rich, in the sense of wealthy entrepreneurs who invest, are also bonkers, because they sink their money into new potential and are prepared to lose it when they do, but will work seven days a week to make sure they don’t.  The Scottish left have a very strange idea of business and profits; a dinosaur focus on big employers, bowler hatted bosses, and fat profits being pocketed for personal aggrandisement.  Ninety eight percent of Scottish businesses have less than 49 employees; only 0.7 percent are deemed corporates with more than 250 employees, and even fewer are large corporates. [2]  It’s the minnows that we need to grow to create Scotland’s tomorrow, because they bring disseminated non-routine local jobs to our poor unemployed dispersed across cities and towns who cannot afford to travel far to work or move house.

Again, all of the above rules are predicated on the acceptance that what we obtain in life is built on what we produce; a fundamental tenet of market economics which stout leftists see as a problem to be dealt with, not accepted.  You can take that view, and design policies which prioritise or mandate the collective, but you have to accept unseen and often unintended consequences. As Frederic Bastiat the French economist and philosopher pointed out, there is that which is seen and that which is unseen[3]. Too many Scottish policy choices are made to cater for aspirations which are seen, too few taking into account the unseen consequences which follow.

In Part Two I shall consider how what we aim for, and what we actually achieve, might be reconciled. Oddly, the solution starts with Polish doughnuts.



[3] In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause - it is seen. The others unfold in succession - they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference - the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee

 

Part two:  Enhancing the potential of the poor

In my first blog I sought to persuade that “poverty” needs to be looked at as in issue about people, widely spread out and with diverse conditions. There is a tendency to chaotic and complex variations in circumstances; continually changing such that state policy inevitably struggles to keep up.  In doing so, it inadvertently devalues the economic existence of the poor through repressive welfare policy, regressive taxation policy and the inadvertent destruction of wealth.

Couched in the presumption of the political economist that economic life is bounded by the fact that our income is linked to what we can produce, I sought to focus on the interests, incentives and consequent behaviours of the poor as a way of finding out how to improve their potential.  I now propose some policy notions to achieve this.

We should avoid Polish doughnuts

I was on the wrong side of the iron curtain at the point that it fell and while there met a Professor Bliklé in Warsaw who retained the grand tradition of those under communism of having two jobs.  He was a both a professor of economics and the owner of a high-class bakery which serviced the communist party with canapés for embassy parties. It had thus survived the onslaught of collectivism which had taken over the entire productive economy. [1]

Bliklé introduced me to the delights of the communist doughnut. This, to the state, was not an object of sugary delight, but a formula. That is, the state mandated the amount of flour, sugar, milk et al which was to be used in its production. Those ingredients were supplied through a centralised supply chain on a quota system. Input output analysis told the state how well it was doing in creating doughnuts from those ingredients.  All doughnuts were created equal and mandated to be that way. As the Scottish Government would put it, there was a single outcome agreement based on a mandated policy for process and outcomes. 

Of great concern to Prof Bliklé was that if he hired a new young baker who was wayward with the flour, the input output ratios of flour to other inputs would also go wayward and he could be thrown into jail for “profiteering”.  However, with a wink of his eye, he told me that of course of course as an economist and a businessman he could both do arithmetic and design doughnuts with the correct proportions to allow him to meet both the state’s needs and those of the local Warsaw community. The state, he added, did not know much about doughnut making. Such is totalitarian communism.

Now consider how we deal with the poor in Scotland. We have a fully state-controlled monolithically managed welfare system, care system, health system and education system.  The funding for these entities is based on a centralised rationing system for state supplied tax revenues.  Central to their operations is the sad fact that the knowledge of what is actually going on is extremely limited, not only at the front line, but the whole way down the administrative chain.  This is by necessity true; multiple policy agendas are embedded in our monolithic state entities and are handled by strategic management techniques that rely on top-down hands-off dictats on vision, goals and targets; with upward information flows that are often totally at odds with reality.

We have designed a bureaucratic Polish doughnut machine. The poor are, quite literally, subjects of this arrangement.  The left call it more democratic than any market mechanism, but of course our state collectives are distinctly undemocratic, they are really paradises for managerial socialism in which political interests and incentives, which dramatically reduce potential service productivity, get in the way of what needs to be done at the front line.

How to escape

The fundamental disconnect is between what the poor want to obtain from the state and what the state can provide under present policy arrangements.  The interests of the poor are to get on with their lives, and so sometimes get involved in some Bliklé-like shenanigans to make best use of what they can obtain from the state; while all the incentives for the state bodies are to ensure the preservation of their machine operations to meet the requirements of their political masters.  No-one is to blame for this, the compassionate state has every good intention and aspires to good compassion, it’s just that it has created a method that mandates rather than produces efficient output, fails, then asks for reports as to why failure has happened.  Political economists put this failure down to a reality that politicians have discretion without knowledge.

The solution lies in removing this disconnect between user and payer.

If you think I am now going to suggest a policy of privatizing the whole lot you are wrong. We could contract out a lot, and already do so, but there is a market singularity here; you cannot reasonably put a price on either a human life, or the civilised imperative of allowing proper dignity in living that life.  

While you cannot put a price on proper dignity, you can put a price on the behaviour of the poor as against the price to the taxpayer who pays for their support.  It is those prices that provide the connection between user and providers.  We need policies that agree these prices. 

I like to state the goal here as the finding of policies that create “un-poverty”[2]. This means:

Policies based on principles and subsequent rules that are de- politicised, by being based on transparently numeric arrangements that design-in visible simplicity for users and payers.

Policies that allow recipients a choice of support levels.  I am not unhappy about localised variations in benefits if the provider is localised and agreed to by the recipient – that diversity provides knowledge to other providers.

Policies that offer a transparent price of any support measure to the payers as well as the user. 

For economists, the answer to this has always been the same; we have been mad to discard the contributory nature of the welfare system as proposed by Beveridge.  This has destroyed the link between what we pay for and what we, or others, get.

More recently, more and more economists have also proposed introducing personal welfare accounts where mandatory tax savings are allocated to yourself to be used first in times of need. Singapore, Chile and Australia have already implemented it in some areas.  Of course, the very poor do not pay tax (but a yet larger cohort of working poor do) and so those who do save also have a social distribution obligation to help build accounts for the very poor. 

At the recipient side, a policy of a guaranteed minimum income for the poor would be accompanied by incentive levies and bonuses for efforts to improve their lot.  Every survey of welfare has shown that, in the UK at least, people are happy to support others if they believe they are making an effort to become self-reliant.  We must not create poverty victimhood and a subsequent attitude of self-regarding entitlement; that destroys social cohesion.

TaxpayerScotland has worked up a full proposal on a welfare system of this nature. [3] Among other things includes a measure that many find startling, that National Insurance payments should be paid from the first pound of earnings; the money of course goes to yourself. We are seriously concerned that the present divided political position we find in Scotland needs serious attention – if we are all in a fight against poverty, we need inclusivity and cohesion to mean that we include the poor in that fight for themselves. If they pay their bit too, however small, the affluent cannot stigmatise them as different and somehow unworthy, we start from the neutral idea that they just happen to be poor and together we can “un-poor” them.  We then mutualise our efforts to generate un-poverty between us – if possible through localised arrangements.

Will the rich help?

I want, finally, to come back to the division of rich and poor, the so-called inequality debate. I am going to make myself unpopular here again.  The first thing is to advise that many of the claims made about inequality are simply false. Inequality is not getting worse; it has hardly changed since 1990.[4] In fact, across the OECD countries, inequality is remarkably similar; there are outliers in the data like the super-rich and teenage single mums, but the great mass of people in the developed world lie in a common range of incomes that are in fact rising slowly through time, including the incomes of the lowest deciles. It is worth remembering that a three percent growth rate doubles the average wage each 25 years. That’s why most earners don’t blink at a £3.50 cup of coffee and a £40 per month satellite TV bill; when we work we have a huge amount of revenue earning capital at our fingertips.  We do, of course, need more of this kind of money-go-round to reduce poverty, lifting all boats in a tide of new wealth-creation which in our world needs lower tax rates.

What is most worrying for me in Scotland is that aspirations to equalisation, the political rhetoric of equality creation, are doing an enormous amount of damage to our social cohesion.  I often mix with “toffs”, and the threat of more progressive taxation, of more spending to ameliorate housing benefit cuts, of any policy that threatens private property ownership, and of policy choices about renewables that defy physics all exercise the affluent greatly.  Are they not Scots too? What happens if they turn or go away, or wheedle yet more privileges within the controlled state systems?  That way lies more inequality and more poverty plus a disdain for liberality and kindness on the basis that self-preservation comes first.

No one wants those divisions, but we risk creating them.  We are back to Polish doughnuts here. The lesson of communist egalitarianism was that it crushed the spirit of the people, Professor Bliekle used to say “it has turned us grey”.  Consider this, present policy has led to the hand book on Welfare Benefits and Tax Credits produced by the Child Poverty Action Group being 1,740 pages long and costing fifty nine pounds.  I challenge anyone to declare that such a mechanism for supporting the poor is efficient or effective in delivery.  It’s quite simply mad, Scotland should change it.


[1] The bakery still exists and you can see its doughnuts being made at https://www.youtube.com/watch?v=rltWForl8vs

[2] You can’t say “end poverty” which is most likely impossible, you can’t say “diminish poverty” which sounds unambitious. Equally, “minimise poverty” sounds patronising, while “optimise poverty levels” is immoral. 

[3] http://www.taxpayerscotland.com/pubs/Building_our_Providence.pdf. This was our submission to the Commission on Welfare Reform.

       
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