Towards a free-market anti-poverty strategy
14 November 2013
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Economic Theory
13 November 2013
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15 November 2013
Government and Institutions
Poverty campaign groups in the UK are heavily fixated on increasing welfare transfers and expanding social services. To organisations like the Child Poverty Action Group and Oxfam, tackling poverty is essentially synonymous with reversing welfare cuts, and reverting to the expansionary social policies of the boom years.
Yet these policies were already pursued ambitiously in the decade up until the recession, when the British welfare state was inflated to Scandinavian proportions, and the success has been modest. For a while, living standards of low earners did improve, but this strategy never developed a momentum of its own. It only worked as long as ever-increasing injections of state money were forthcoming. Now that it is no longer viable, the poverty industry has no alternative to offer, since its whole agenda is based on welfare expansion. This leaves a huge vacuum, waiting to be filled with ideas for an alternative strategy.
In one important respect, the coalition is already broadly on the right track in this regard. With the Universal Credit and accompanying welfare changes, the coalition is undertaking some sensible steps to tackle chronic worklessness and welfare dependency. Given the UK’s extremely high proportion of children in workless households, these steps are more than necessary.
But welfare reform cannot be the only ingredient in an effective anti-poverty agenda, because it does not address the concerns of those in low-paid occupations who, despite reasonable working hours, still struggle to pay their bills. A comprehensive anti-poverty strategy must aim at raising the living standards of low-to-middle income earners more broadly.
The most promising way to achieve this is to address the causes of the UK’s exceptionally high level of basic living costs. This is an area with a lot of room for improvement. Housing costs in the UK are among the highest in the world. Childcare costs are considerably higher than in most other developed countries. Food prices and energy prices are less unusual in an international perspective, but still a lot higher than they have to be. And the overuse of ‘sin taxes’ makes the structure of consumption taxes highly regressive.
Housing is the most important one of these areas. Historically, the rule-of-thumb formula has been that a region’s average house price is between two and three times the average annual income in that region. Nowadays, in most UK regions, house prices are more than five times the average income, and rent levels have increased alongside. The reason is not hard to find. Due to overly restrictive planning laws, and local decision makers bending over backwards to appease ‘nimby’ groups, the UK has built fewer new homes than any other European country over the past three decades (relative to population size). The economics of this is simple, but the politics is extremely difficult, since the nimby machinery is well-oiled. For a start, ‘nimbys’ never call themselves ‘nimbys’, of course. They describe themselves in more winsome terms like ‘countryside campaigners’, ‘conservation groups, ‘concerned local citizens’ or simply ‘the local community’. They are also good at diverting the housing debate towards red herrings such as brownfield sites, empty homes, underused homes, second homes, land banking, or immigration. Yet the determinants of house prices are quite well researched, and most of the literature shows that the single most important factor is the severity of building restrictions. There are other factors, but none of them can explain more than a small share of Britain’s housing cost explosion. The only way to resolve the issue is to allow a massive expansion of the housing stock.
A government which aims to address this issue must abandon the comfortable illusion that groups like the Campaign to Protect Rural England can be reasoned with. A reform-minded government must find the courage to confront such groups, and expose them for the vested interests that they are, rather than back down as soon as a few sound bytes (‘concreting over the countryside’ etc.) are thrown at them.
Childcare is another area which contains huge efficiency reserves. Once a relatively informal sector, it has been turned into a highly standardised and regulated profession, which has wiped out the market’s low-cost segment. Public childcare subsidies in the UK are on a par with Swedish levels, but the difference is that in Sweden, these subsidies cover almost all childcare costs. British parents, in contrast, are still faced with steep out-of-pocket payments. A thorough deregulation of the sector could make childcare more easily affordable, which, as a positive side-effect, would facilitate labour market participation among parents.
In the coming negotiations with the EU about the possible repatriation of competencies, an opt-out from the wasteful Common Agricultural Policy should be one of the top negotiating points. The aim of this must not be to replace the CAP with an equally wasteful British equivalent, but to establish an unsubsidised agricultural sector that is fully exposed to free trade. This is how New Zealand and Australia have brought domestic wholesale food prices into line with world market prices, a boon for low-income consumers.
Environmental policy also needs a good deal of tidying up. Environmental protection is a laudable aim as long as it means improving environmental quality at a tolerable cost, but modern environmentalism has become a form of moralistic anti-consumerism, which is no longer really about the environment. Many ‘green’ taxes in the UK already exceed available estimates of the environmental cost of the taxed activity, which means that they have ceased to be genuine environmental taxes. This should be rectified. Most importantly, the renewable energy subsidies that are forced on consumers via their electricity bills – a green tax in all but name – should be scrapped entirely. They are just another example of an industrial policy which attempts to pick winners, and ends up breeding white elephants.
Finally, the overuse of ‘sin taxes’ has to stop. Insofar as people’s lifestyle choice impose costs on others, these should be dealt with directly. For example, there is no reason why a hospitalisation with alcohol intoxication should be free of charge. User fees, not sin taxes, are the appropriate way of dealing with such costs.
These are ways of addressing the high cost of living, which, if pursued decisively, could lead to a virtuous circle: with living costs tumbling, out-of-work benefits could be reduced to keep the living standards of their recipients constant while the living standards of the low-paid increase, thus improving incentives to work. At the same time, fewer people would be exposed to benefit withdrawal rates, which would improve incentives to, for example, move from part-time employment to full-time employment. This would lead to a fall in benefit expenditure and an increase in tax revenue, which could then be used to finance tax cuts for low earners, improving work incentives further.
A free-market anti-poverty agenda would be economically sound, fiscally neutral (at worst), and workable even in an adverse economic climate. It would not cost taxpayers any money, but admittedly, it would be hugely expensive in terms of political capital: if a party is looking for a way to upset a multitude of noisy interest groups at once, this is it.
This article originally appeared in Crossbow magazine.
Yet these policies were already pursued ambitiously in the decade up until the recession, when the British welfare state was inflated to Scandinavian proportions, and the success has been modest. For a while, living standards of low earners did improve, but this strategy never developed a momentum of its own. It only worked as long as ever-increasing injections of state money were forthcoming. Now that it is no longer viable, the poverty industry has no alternative to offer, since its whole agenda is based on welfare expansion. This leaves a huge vacuum, waiting to be filled with ideas for an alternative strategy.
In one important respect, the coalition is already broadly on the right track in this regard. With the Universal Credit and accompanying welfare changes, the coalition is undertaking some sensible steps to tackle chronic worklessness and welfare dependency. Given the UK’s extremely high proportion of children in workless households, these steps are more than necessary.
But welfare reform cannot be the only ingredient in an effective anti-poverty agenda, because it does not address the concerns of those in low-paid occupations who, despite reasonable working hours, still struggle to pay their bills. A comprehensive anti-poverty strategy must aim at raising the living standards of low-to-middle income earners more broadly.
The most promising way to achieve this is to address the causes of the UK’s exceptionally high level of basic living costs. This is an area with a lot of room for improvement. Housing costs in the UK are among the highest in the world. Childcare costs are considerably higher than in most other developed countries. Food prices and energy prices are less unusual in an international perspective, but still a lot higher than they have to be. And the overuse of ‘sin taxes’ makes the structure of consumption taxes highly regressive.
Housing is the most important one of these areas. Historically, the rule-of-thumb formula has been that a region’s average house price is between two and three times the average annual income in that region. Nowadays, in most UK regions, house prices are more than five times the average income, and rent levels have increased alongside. The reason is not hard to find. Due to overly restrictive planning laws, and local decision makers bending over backwards to appease ‘nimby’ groups, the UK has built fewer new homes than any other European country over the past three decades (relative to population size). The economics of this is simple, but the politics is extremely difficult, since the nimby machinery is well-oiled. For a start, ‘nimbys’ never call themselves ‘nimbys’, of course. They describe themselves in more winsome terms like ‘countryside campaigners’, ‘conservation groups, ‘concerned local citizens’ or simply ‘the local community’. They are also good at diverting the housing debate towards red herrings such as brownfield sites, empty homes, underused homes, second homes, land banking, or immigration. Yet the determinants of house prices are quite well researched, and most of the literature shows that the single most important factor is the severity of building restrictions. There are other factors, but none of them can explain more than a small share of Britain’s housing cost explosion. The only way to resolve the issue is to allow a massive expansion of the housing stock.
A government which aims to address this issue must abandon the comfortable illusion that groups like the Campaign to Protect Rural England can be reasoned with. A reform-minded government must find the courage to confront such groups, and expose them for the vested interests that they are, rather than back down as soon as a few sound bytes (‘concreting over the countryside’ etc.) are thrown at them.
Childcare is another area which contains huge efficiency reserves. Once a relatively informal sector, it has been turned into a highly standardised and regulated profession, which has wiped out the market’s low-cost segment. Public childcare subsidies in the UK are on a par with Swedish levels, but the difference is that in Sweden, these subsidies cover almost all childcare costs. British parents, in contrast, are still faced with steep out-of-pocket payments. A thorough deregulation of the sector could make childcare more easily affordable, which, as a positive side-effect, would facilitate labour market participation among parents.
In the coming negotiations with the EU about the possible repatriation of competencies, an opt-out from the wasteful Common Agricultural Policy should be one of the top negotiating points. The aim of this must not be to replace the CAP with an equally wasteful British equivalent, but to establish an unsubsidised agricultural sector that is fully exposed to free trade. This is how New Zealand and Australia have brought domestic wholesale food prices into line with world market prices, a boon for low-income consumers.
Environmental policy also needs a good deal of tidying up. Environmental protection is a laudable aim as long as it means improving environmental quality at a tolerable cost, but modern environmentalism has become a form of moralistic anti-consumerism, which is no longer really about the environment. Many ‘green’ taxes in the UK already exceed available estimates of the environmental cost of the taxed activity, which means that they have ceased to be genuine environmental taxes. This should be rectified. Most importantly, the renewable energy subsidies that are forced on consumers via their electricity bills – a green tax in all but name – should be scrapped entirely. They are just another example of an industrial policy which attempts to pick winners, and ends up breeding white elephants.
Finally, the overuse of ‘sin taxes’ has to stop. Insofar as people’s lifestyle choice impose costs on others, these should be dealt with directly. For example, there is no reason why a hospitalisation with alcohol intoxication should be free of charge. User fees, not sin taxes, are the appropriate way of dealing with such costs.
These are ways of addressing the high cost of living, which, if pursued decisively, could lead to a virtuous circle: with living costs tumbling, out-of-work benefits could be reduced to keep the living standards of their recipients constant while the living standards of the low-paid increase, thus improving incentives to work. At the same time, fewer people would be exposed to benefit withdrawal rates, which would improve incentives to, for example, move from part-time employment to full-time employment. This would lead to a fall in benefit expenditure and an increase in tax revenue, which could then be used to finance tax cuts for low earners, improving work incentives further.
A free-market anti-poverty agenda would be economically sound, fiscally neutral (at worst), and workable even in an adverse economic climate. It would not cost taxpayers any money, but admittedly, it would be hugely expensive in terms of political capital: if a party is looking for a way to upset a multitude of noisy interest groups at once, this is it.
This article originally appeared in Crossbow magazine.
11 thoughts on “Towards a free-market anti-poverty strategy”
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It’s the laziness underlying this line that undermines the housing section of this article:
“They are also good at diverting the housing debate towards red herrings such as brownfield sites, empty homes, underused homes, second homes, land banking, or immigration”.
Calling them red herrings and then conveniently stepping over them is implicitly acknowledging them as holes your argument just cannot deal with. For example the Local Government Association regularly provides updates on the growing number of plots with planning permission granted but no development taking place the figure in August being 400k.
http://www.local.gov.uk/media-releases/-/journal_content/56/10180/4107631/NEWS
Ignoring the inconveniences of undeveloped plots, brownfield sites that could be redeveloped and land banks, whilst calling people who want to protect their living environments “Nimbys” and whining about restrictive development policies is itself a red herring so you don’t have to make an explicit argument in favour of rapacious development of greenbelt (which is highly desired by private development interests who recognise very clearly the opportunity for abnormal profits in the short-run due to to the higher externalities possible relative to the revenue they can generate). Always remember the precise difference between a “Nimby” and someone opposing unsympathetic and unsustainable development is purely a matter of whose pocket your in. Most local authorities want sympathetic and sustainable development that integrates with what already exists and minimises the externalities, the funding model imposed on them by central government ensures this, but developers couldn’t care less because they are not going to live there and greater externalities equal greater profits.
“Calling them red herrings and then conveniently stepping over them is implicitly acknowledging them as holes your argument just cannot deal with.”
-It can, very easily. Go through my housing/planning articles here on the blog, if you’re interested. I’ve debunked all that nonsense many times over. Here’s a starter: http://www.iea.org.uk/blog/help-to-buy-issues-wont-be-solved-by-taxing-speculators
“calling people who want to protect their living environments “Nimbys” and whining about restrictive development policies is itself a red herring”
I call them Nimbys because they are Nimbys. Their so-called ‘arguments’ are risible excuses and post-hoc rationalisations.
Agree with almost all of this, but good luck with trying to recoup the cost of hospitalisation from alcoholics!
Kris, I just don’t find your arguments consistent with my real world experience as a district councillor in the south east of England, in a ward surrounded by greenbelt that is under constant threat. I’m not even against development, I just want it to be sustainable and sympathetic, and that can be achieved when the developers reign in their most rapacious instincts and work with local councils and residents. Even in my area with its high house prices and vast swathes of land constrained by planning regulation there is no physical shortage of brownfield land available for development. I’m under no illusions that developers would pounce on the removal of restrictions on greenbelt, but I’m not convinced it would be the panacea some think (and I’m not suggesting you do think this is a panacea), the people currently priced out of the market won’t suddenly have the resources to start concreting the greenbelt, and the developers who do have those resources will still be looking for the short-run abnormal profits they can achieve from the externalities, and ultimately the local community will pay that price because even the heaviest section 106 deal or CIL won’t cover the externalities. There is no physical shortage of land now, so releasing more to the same interests that are already throttling the supply will not resolve the issue.
Sustainability means different things to developers than it does to local communities and local authorities, if they can maximise profit by generating externalities it doesn’t matter as they get to walk away once they’ve sold up. Now I’m absolutely not against a profit being made by developers, but I am against abnormal profit paid for by externalities pushed on to the local community. The current system is already weighted in favour of the developers, most applications go through unchallenged, the ones rejected are to put it bluntly very often piss-takes, a recent application in my ward wanted to turn a double garage in a built up area into a block of flats (no room for a front or rear garden, no parking spaces, no amenity space, not even a fire exit), and when that got rejected they tried again for a bungalow on same footprint with same problems. One proposal that rises every couple of years is to stick in a massive housing estate of McMansions in the middle of actively farmed agricultural lands, beautiful views of an AONB but no infrastructure to support it as it’s a mile out from the nearest small village. There’s certainly a premium to be made there as long as the relevant local authorities (and ultimately the tax payer) pick up the massive externalities.
Government policy is weighted in favour of development, there is huge pressure on local authorities to tow the line; the reduction in central funding and the consolidation of previous development related grants into the new homes bonus (a repackaging of existing grants only with less money in total) are pushing development, the new CIL cannot be used to block development, whilst core strategies can be challenged if they don’t give up enough land to developers. If you want to see the real world examples of how developers have the whip hand go visit a few towns and villages in the south east and look out for the glut of unsold retirement hutches with countless more slated for development whilst the screaming demand for starter homes is ignored by developers, the local planning authorities are effectively powerless to intervene.
But councils want sympathetic and sustainable development, they really need the money, but they can’t just bugger off when the last unit is sold, and the residents that elect them want the same. The reason why the clamour for the greenbelt comes from development interests and not local residents isn’t just because they are Nimby’s, its because even the local residents who cannot afford to own their own home, who are in rented housing or on waiting lists want to protect where they live, are they are far more interested in the undeveloped brownfield land they can see right in front of them than than the greenbelt land out of town which the developer wants to put McMansions.
Kamo – I appreciate your reasoned points, one does not always get that from those who oppose Kris’ ideas. I live in the type of area for which you are district councillor (perhaps you are my district councillor!). However, a policy that is really going to deliver huge numbers of houses – and not all densely packed in – is going to require new building on virgin land. A 0.25 acre garden is, quite frankly, better than a 0.25 acre piece of farmland (with lots of dense housing nearby) from an environmental point of view in many respects. Many people who are in jobs which would have allowed them to buy a McMansion 50 years ago are not going to get near it anywhere in their lifetime. We do have a mentality of building the largest number of homes in the smallest plots – using up green space where it is most scarce. So, the question is, really, does (say) 10 acres of farmland have a greater environmental amenity value to the people living near it or does it have a greater value to people who could live in houses on it. We could develop mechanisms to help broker these problems such as providing cash transfers to very local people affected and to parish councils affected – this could be determined in a competitive way (some parish councils might want the money, others the green fields). Then developers would have to balance the cost of building on brown land with the cost of the alternative compensation. This would at least provide a way, however imperfect, of weighing different economic and environmental goods. If we only respond to immediate elector pressure based on the type of houses electors believe they could afford now, under the current regime, we will only ever build the sort of flats that keep springing up where I live. We can have a market that better weighs the long-term economic benefit of building more, bigger and non-densely-packed housing with environmental goods.
I think the supply side is very important, though it’s also true that demand has risen through immigration, fissure of households and rising expectations of property ownership – things which the government cannot easily influence, and maybe shouldn’t try. Kristian, why are things different in Germany?
“why are things different in Germany?”
-To be honest, I have no idea how the planning system works there. House prices have never been a big issue while I lived there, so housing policy is not a topic one would read about in the news. What I do know is that 1.) a lot more land is being released for development, and 2.) attitudes towards development are totally different. Whenever I visit my old region, I notice at least one new major development area somewhere. Yet I’ve never heard anyone whining about the countryside being concreted over – there is no such thing as a ‘Campaign to Protect Rural Germany’ (fortunately). That is not because people are any less attached to the countryside than here. (They are, if anything, more attached to it.) But when people there talk about ‘the countryside’, what they have in mind is the forests, the heaths and the meadows, not some muddy stubblefield on the edge of town. There are no greenbelts, and none are needed, because when decisionmakers release land for development, they naturally prioritise plots that are scenically unspectacular.
@Kamo, I don’t have the kind of local knowledge that you have as a district councillor, but there’s one thing which makes absolutely no sense to me. If it was so easy to build on brownfield land, why on earth would developers not be doing it already? I couldn’t think of a more profitable investment than building and selling (or renting out) a house in the UK. House prices (and rents) have never been so high, and construction costs have never been so low, leaving a massive margin in between. Are developers not interested in making profits? I get your point that building on greenfield land may be more profitable still, but if that can’t be done, why wouldn’t they go for a second-best solution? You don’t let a fantastic profit opportunity go to waste just because another one, which you can’t get, would have been even better. It is a bit as if you were saying “In my local area, the streets are littered with £20-notes, but nobody can be bothered to pick them up, because they all want the £50-notes that are lying around outside of town (which they don’t have permission to pick up)”.
Development does happen on brownfield sites, its pretty common to see large single or double plots acquired, demolished and rebuilt as blocks of flats or other much higher density development (6 flats on the site of a former bungalow is not uncommon).
But ultimately the decision to sit on undeveloped brownfield land comes down to low costs of financing the debt versus taking a reduced profit (or even a loss in some cases) in the current market. Some developers paid too much before the crash and won’t turn a paper loss into a real loss, in a recent case the developer admitted they couldn’t break even without massive overdevelopment despite being in an area where average house prices are probably more than double national average. Some see the current costs of changing the use of the land to be too high relative to the current returns they think possible (in a small district I know three substantial derelict urban sites in this category – in one case the owner is being fined by the local authority on a regular basis for failing to maintain the derelict site – but the maximum fines are so low he’ll just take it). In other cases the brownfield site adjoins greenbelt they also own and the developer is expecting a relaxation of planning law. Others the developer has saturated the market with the wrong type of development and is pausing before they continue, there are only so many retirement hutches and small flats you can put in a district that is screaming out for starter homes (but the density of retirement hutches and new build flats is much higher than starter homes so developers can afford to can afford to carry unsold units, especially if they are smart with the ownership structure of their companies, and planners cannot really stop this even if they were so inclined).
I used to be sceptical on the idea of a land value tax, but I think it could make a real difference now, as it’s a cost that cannot be mitigated with clever structuring of debt. At the moment developers are controlling the supply of house building, just giving them more raw material doesn’t actually seem to fix that.
“Some developers paid too much before the crash and won’t turn a paper loss into a real loss” -But that’s precisely what I’m saying: this is the sort of behaviour which only makes sense in a severely supply-constrained market. It is a normal occurrence in most markets that people sometimes buys something in the anticipation that they can sell it for a high price, and then find themselves unable to do so because the market price has fallen in the meantime. In other markets, what people do in this situation is bite the bullet, and sell it at the price that they can get. It makes no sense to hoard something for years in the hope that prices will eventually go up again, because there is always the risk that they WON’T go up again, in which case all the hoarding was for nothing. End the supply constraints, and much of the hoarding will go away as well.
“Some see the current costs of changing the use of the land to be too high relative to the current returns they think possible” -Which probably means that the cost IS too high, which, in turn, would mean that brownfield development is not the panacea it is claimed to be.
This is all extremely interesting. I’m sorry I’m a bit late with the comment. I can’t claim to understand planning laws as you (all) clearly do, but one thing I did pick up is the idea that it makes no sense to hang on to a loss making investment, rather than bite the bullet. This may well be true from a rational standpoint, but people aren’t rational. I’ve watched from the inside very large institutional investors hang onto loss positions because they don’t want to admit (to whom I don’t know because everybody involved knew about the losses) the losses. It is all too normal for people to hang on to losses if they can rely on pull to par because losses count “psychologically” as “my money” whereas profits are “someone else’s”. Behavioural finance is a strange beast.
Perhaps though, a temporary government intervention to free up this land could help? A one year tax, based on the length of time the land has been held payable only if the brownfield site owner still holds the land at the end of the year. The tax doesn’t apply in following years. It is a one off effort to get brownfield sites back in the market held by those who want to use them.