Stumbling and Mumbling

Harrassing the unemployed

Why are the two main parties so keen to force the long-term unemployed and sick into work?
I can't believe it's from a new-found concern for the taxpayer. If someone moves from unemployment or incapacity benefit into low-paid work, the taxpayer saves on IB and JSA, but pays out working tax credits instead, so the saving is small. A quick glance at the Tax Benefit Model Tables suggests that moving someone from unemployment to full-time minimum wage work saves the taxpayer around £200 per person per week, even including the taxes they pay. This means that even if we could  get every one of the 172,000 who have been unemployed (pdf) for over two years into full-time work, we'd save just £1.8bn.  That's less than 3 pence for every £10 of government spending.
I suspect there might be 6 other reasons for the concern:
1. A belief that the unemployed are leeching off the rest of us, that we're being taken for mugs. Personally, though, I don't feel this. I get more annoyed that slovenly pen-pushing civil servants, idle jobsworth coppers, posturing politicians and superfluous bureaucrats are getting big money from the taxpayer.
2. Paternalism. All studies (pdf) show that the unemployed, on average, are significantly unhappier than those in work. So perhaps forcing people to work might be good for them eventually.
But is this really true? Why don't some of the the unemployed recognise that work is in their own interest? And if the average unemployed person is unhappy, why add to his misery by pandering to the prejudice that the unemployed are workshy? 
3. A desire to increase the supply of labour and so raise profitability.
Again, I'm not sure. An unskilled and lowly motivated worker is only marginally profitable. And the minimum wage limits the extent to which an increased supply of workers will bid down capitalists' costs.
4. A protestant belief that work is our moral duty.
5. A desire to reduce immigration. If indigenous people find work, we'll have less need for those east Europeans. 
6. A desire to look tough. And the easiest target for politicians wanting to look macho is the weakest and most vulnerable.
My hunch is that this last reason is the most powerful. 

Incapacity Benefit & knowledge

Tory proposals to cut the numbers claiming Incapacity Benefit show the absurdity of our welfare system.
Let's start from Willem's point. There's a simple reason so many are on Incapacity Benefit rather than Jobseeker's Allowance - Incapacity Benefit pays £22 a week more.
But why? There are three reasons, all of them suspect.
1. There's a distinction between the deserving and undeserving poor. The able-bodied unemployed are less deserving than those unable to work, and so should get less.
2. It's possible to distinguish between the able and the ill.
3. Doctors have an incentive to so distinguish.
All three presumptions are dubious. Why should someone unlucky enough to be made redundant get less than someone unlucky enough to be ill?  We can't often easily distinguish between depression and being down in the dumps, or between back pain and  malingering. And why should doctors try to do so? Faced with a sob story from a doe-eyed patient, why shouldn't a GP sign off on giving them an extra £22 a week? Chris Grayling's plan to have an "independent" assessor decide who should get IB and who JSA doesn't solve this problem.
Instead, there's a simpler alternative - a flat-rate payment to all, a citizen's basic income. This would replace the tax allowance for those in work, and IB or JSA for those out of work.
One virtue of this scheme is that it recognizes that the state just cannot know enough about every individual to judge whether they should be on IB or JSA or neither.
Also, because it's paid to all, it not only gives everyone an incentive to work but also makes it impossible for politicians to look tough by bullying the vulnerable.
There is, then, a policy that's economically rational and humane.  And which, therefore, has zero chance of being implemented.

The IQ red herring

These posts by Tim and Andrew raise a question: why are many defenders of free markets so interested in IQ?
Leftists would reply that there's an ideological motivation at work - the belief that inequalities of income are legitimate if they can be shown to result from natural differences in IQ.
But I can't believe that this is the reason, because this is a howling error.
First, the correlation between IQ and earnings is low. This review (pdf) of the literature estimated that a on standard deviation difference in cognitive skills is associated with only a 10% difference in wages.
Such a small effect surely accords with common sense. You only have to look at you boss to see that the link between IQ and success is weak. Even if we ignore rent-seeking, height, beauty, luck and incentive-enhancing preferences (pdf), lots of things make for high earnings: hard work, creativity, interpersonal skills. And these have little relationship with IQ.
But even if there were a tight correlation between IQ and earnings, this would do nothing at all to legitimate inequality.
Imagine a communist dictator were to allocate all jobs according to IQ scores at an early age. Earnings and IQ would then be perfectly correlated. But this society would be neither efficient nor just nor even legitimate.
The link between IQ and earnings therefore tells us nothing about the desirability of an economic system.
The reasons why right-libertarians are relaxed about inequality is that they believe either that it results from free transactions, or that it has beneficial consequences. The link between IQ and income - whatever it is - is irrelevant.
So why are so many people interested in it?

Equal opportunity: a thought experiment

This report from the Sutton Trust shows that poor but bright kids are slipping behind richer stupider ones, showing that parental background strongly influences life-chances. How worried should we be by this?
A little thought experiment will help. Imagine two equally rich societies, A and B, both with GDP of 30.
In society A, nine people have incomes of 1 and the other of 21. This society has equal opportunity, so everyone has a 1 in 10 chance of having 21 and a 9 in 10 chance of getting 1. Expected income for everyone is 3: ( 0.1 x 21) + (0.9 x 1).
Now, in society B, nine people have incomes of 2 and one has 12. However, one person has a 30% per chance of getting 12, whilst the other nine each have only a 7.8% chance. Opportunity is unequal.
In this society, the nine people have expected income of just under 2.8: a 7.8% chance of 12 and a 92.2% chance of 2.
Which society is better - A or B? It depends in large part upon risk aversion. If they were indifferent to risk, the nine less favoured people in B would prefer society A. Their expected income would rise from 2.8 to 3.
However, if they had Rawlsian maximin preferences, they'd clearly prefer B: the worst-case outcome is twice as good in B as in A.
For more plausible risk preferences - modest risk aversion - there's little in it. The choice between equal opportunity with big inequality of income versus unequal opportunity with greater equality of outcome is therefore a close call.
One consideration here is how big incomes of 1 and 2 are. If an income of 1 is a lot, people might prefer equal opportunity, as they have a lot to fall back on. But if 1 means grinding poverty and 2 means a decent life, they'll prefer B.
There's another consideration - other-regarding preferences. These enter in two conflicting ways.
First, people might object to society B because they hate the thought of someone doing well through a rigged lottery. Such people might prefer A, even though they are risk averse and so would prefer society B for themselves.
This, though, raises the question of what status other-regarding preferences have in politics? Should we pander to envy?
Second, assuming that societies A and B are equally rich begs the question. If people work hard in order to give their kids better opportunities, society B - which gives them superior chances - will be richer. If this effect is strong enough, and taxation sufficiently redistributive, the worst-case income in B might be greater than the expected income in A.
So, why is equal opportunity so valuable? 

Superstars and "talent"

Top bosses and film stars get multi-million pound salaries because talent is scarce. Everyone knows this. Which is a shame, because it's bull, as this fantastic paper by Marko Tervio explains.
Start from the premise that talent is initially unknown, and can only be revealed by working with expensive equipment. So, for example, we can only find out if a manager is any good if he's in charge of a big venture, or if an actor has box office appeal if he's in a mega-costly film. It is, therefore, very expensive to learn who's got talent and who hasn't.
What's more, people with talent cannot offer to share this cost with employers, either because of lack of cash or risk aversion: people don't pay for the chance to become bosses or film stars.
In these conditions, what's scarce isn't talent, but revealed talent. There might be loads of people with the ability to be film stars or bosses, but only a handful get the chance to show what they can do. Marg Helgenberger gets big money not (just) because she's a better, more popular or more beautiful actress than others, but because she's a proven quantity.
This has three consequences:
1. The industry employs lots of mediocrities on good money - people just above the threshold of acceptable competence. Employers prefer these to untried but potentially better workers because the risk of a single failure - the box office flop of a $100m film, or the failure of a large company - far exceeds the possible benefit of finding lots of people a little better than the barely competent.
2. Output is inefficiently low, and prices high. This follows from the industry being staffed by the barely competent rather than the brilliant.
3. People who have proved that they are genuinely brilliant earn huge salaries as economic rent.
Tervio illustrates this with Hollywood films. Compare films today with those made by the studio system of the 1930s and 40s.
Today, there's vast inequality among film actors, as there's only a handful of proven box-office stars, and the quality of films is indifferent.
By contrast, the studio system allowed potential stars to share the costs of revealing their talent with producers, by entering long-term contracts which gave low pay even to stars; the lower cost of making films then also helped. This allowed for many more great films to be made, as more great actors could enter the industry, but with less inequality among the stars.
In this sense, superstar salaries arise not because talent has become scarcer, but because it's become harder to reveal talent.
In other industries, however, the opposite trend exists. Clive reminds us that in the 1980s a mere economics writer got a flash Beemer from the Indy. This would be unheard-of today. This is because back in the 80s, it was hard to reveal a "talent" for writing on economics. Today, any idiot can do this (see here, passim), so revealed talent has become more abundant.
(For Katherine).

Should we compensate the ugly?

Gonzalo Otalora wants good-looking people to pay more tax, to compensate ugly ones. Is he right?
Luck egalitarianism, as defended by Richard Arneson (pdf) says he is. This says  people should not be worse off than others because of brute bad luck, things they have no control over. And being born ugly is such bad luck. And it's costly. Even leaving aside the impact it has on one's social life, it's economically damaging. Ugly people do less well at school and earn less than good looking ones - so much so that some turn to crime (pdf).
So, why shouldn't ugly folk get compensation for such damaging involuntary advantages?
There are practical problems. Should the state hand out money to Rio Ferdinand and Wayne Rooney on account of their mingingness, only to take it back on account of their footballing talent? And beauty is a positive externality; do we want the state to encourage Emily Procter to try and drab herself down? Do we really want bureaucrats deciding who munts and who doesn't?  This isn't just intrusive and costly, but also - as Liz Anderson points out - humiliating. 
Then there's Nozick's famous self-ownership objection. Some things, he said, we should just let lie. Or there's Lang's "see-saw" (pdf) objection. If we compensate people for the brute bad luck of being ugly, we impose brute bad luck upon the good-looking - they suffer the bad luck of being good-looking in a society in which they get taxed. Shouldn't they get compensation from the ugly to compensate for this?
I confess, I'm not sure. But are the arguments for taxing the good-looking really obviously more absurd than those for taxing the rich?

Ending child poverty

In pointing out that it is failing to meet its child poverty targets, the Joseph Rowntree Foundation reminds us that the government can't even do simple things.
The thing is, it should be technically  easy to abolish child poverty, on the government's preferred measure. This is because this measure is relative - below 60% of median equivalized income. Setting benefit rates and tax credits  to create a guaranteed income of 61% of median income would therefore solve the problem.
And this can be done quite cheaply. The IFS has estimated that it would cost only £4.3bn - 0.3% of GDP - to meet the government's target of halving child poverty by 2011. It's cheap because many families are only slightly below the poverty line, so a few pounds would lift thousands out of poverty, as defined.
So, how can there be a problem? There are two answers that aren't as powerful as thought:
1. Low pay. However, because marginal withdrawal rates are so enormous, higher pay would do little to relieve poverty, except insofar as a few pence might be sufficient to lift some people over that 60% threshold.
2. Take-up rates for tax credits are low. However, it seems that this is mainly because richer households don't take the money. Table 4 of this pdf shows that, among families on less than £10,000 a year, the take up rate is close to 100%.
Instead, the reason for the failure of policy is given away in table 4.5 of this pdf. It shows that a child in a family where no-one works has a 78% chance of being in poverty, compared to just a 2% chance if s/he is in a family where the parents work full time.
The government's response to this has been to encourage people into work. Whilst this worked during the post-1997 economic upswing, its effectiveness has since stalled.
Which raises the question. Could it be that a good way to reduce child poverty is simply to increase out-of-work benefits?
Or is it that the "target" of cutting child poverty is in fact a lower priority than creating incentives to work (if we are being generous to the government) or stigmatizing the unemployed?

Why universities should favour the rich

Should universities make more effort to attract students from poor families? The government thinks so. But I'm not sure. I reckon there are (at least) five reasons why universities should discriminate in favour of the rich:
1. Equality. Such discrimination would reduce the value of degrees. At the moment, Oxford graduates get better jobs partly because employers believe one has to be clever to get into Oxford. But if they knew that Oxford only took rich kids, this signal would weaken and one part of the Oxford premium would disappear.
2. Welfarism. Denying a university place to a public schoolboy hurts him not only by denying him what he expected but also by blighting his life-chances. Having Eton and redbrick on one's CV signals to all that - except in rare cases - one was too thick to get into Oxbridge despite the best schooling money could buy. That's nasty.
By contrast, giving the Etonian's place to a snotty-nosed oik doesn't provide a sufficiently offsetting gain in welfare. Sure, the oil would gain a higher income. But this is offset by the loneliness and isolation he suffers from not fitting in, not so much at Oxford but in the "high-flying career" he endures thereafter.
So, net, there's a loss of aggregate well-being.
3. Legitimating hierarchy. The belief that universities must recruit talented people derives in some part from a belief in hierarchy. The idea is that companies and government departments can be controlled from the top down, if only people of sufficient ability are in charge. And the job of universities is to find and develop that ability.
But this is an illusion. Centralized control fails because no-one - not even the best and brightest - has the ability to know everything, as Hayek pointed out.
If society were denied a pool of talented people, organizations might give up the futile search for people smart enough to manage them, and look instead for more open and egalitarian forms of control. This process might be accelerated if having rich duffers in charge caused more organizational failure.
4. Social capital. Michael Young pointed out the evils of meritocracy 50 years ago. It would, he said, lead the rich to become smug and contemptuous of the poor, whilst the poor would end up "morally naked" and feeling like failures.
"Noblesse oblige" was wildly exaggerated. But it recognized a truth - that when the rich are rich because of luck they will be less arrogant.
5. Rawlsianism. John Denham says: "An individual's success should be determined by talent and hard work, not where they went to school." Why? One's talent and capacity for hard work are as much a result of what one got from one's parents as where one went to school. All are, in Rawls' words, "arbitrary from a moral point of view." So what's the meaningful moral difference between them?

Sexism at Starbucks

Women have to wait longer than men to get served in coffee shops, according to this new paper. It estimates that, even controlling for women's tendency to order fancier things, they have to wait an average of 20 seconds longer than men.
In shops with all male employees, the average wait is 37 seconds longer. But in all-women shops, it's an insignificant seven seconds.
This could be because male employees want to spend time flirting with female customers - though this is controverted by the fact that people of below average appearance also have to wait longer (albeit only slightly). Alternatively, it might be because women are thought (rightly) to tip less. Or it might be that staff think male customers have less time to wait.
Whatever, there's a serious point here. Discrimination can exist even in competitive markets, contrary to what Gary Becker predicted. There's more evidence here (pdf).

Inequality, trust and subprimes

I've got a puzzle. It runs like this.
There's lots of evidence that economic inequality makes people suspicious of each other. People in unequal societies trust each other less, and societies that have become more unequal suffer a loss of social capital; the evidence is surveyed here.
And there's good reason to think that a lack of trust is bad for an economy. It worsens the market for lemons problem. It diverts potentially productive resources into keeping an eye on other; look at how spending on security guards and CCTV has risen. And it makes people less willing to lend and invest.
This much, I guess, is pretty well agreed upon by the Left.
But it doesn't fit with this year's big economic story - the subprime crisis.
This arose because lenders were way too trusting: "I see you earn $100,000 a year Mr Spuckler. Very well, here's a loan for $500,000." With obvious results.
So, what's the explanation? Is it that inequality doesn't always reduce trust, even when it should? Or is it that a lack of trust doesn't have the growth-depressing effects which it should in theory - because competitive market forces (the pressure to sell loans) outweigh untrustworthiness?
If so, the subprime crisis - far from being evidence of capitalism's instability - is actually evidence of how healthy the system is; competition can overcome the barriers to growth generated by inequality.
Or is it that trustworthiness - and by extension social capital - is not as economically beneficial as thought? Or what?