Social Care: Who should pay, other than those who benefit?

07/23/2021 Nick Cowen Current Events, Liberty Britain, intergenerational justice, National Insurance, pensions, United Kingdom

Guest post by Dr Wesley Key

When Boris Johnson became Prime Minister in July 2019, he promised from outside 10 Downing Street that “we will fix the crisis in social care once and for all.” With his premiership since being dominated by Brexit and then Covid-19, little has since been heard about how this may be achieved, but reports in July 2021 suggest that a rise in the basic rate of income tax or in National Insurance Contributions (NICs) is being considered in order to increase Social Care funding for England. Such a move would break a Conservative manifesto pledge and would also be highly contentious in terms of intergenerational fairness.

Other potential options put forward to help to fund Social Care (and other public services) in England have included: An extra tax on people aged 40-plus (similar to the system in Japan), levying NICs on private pension income, reducing tax relief on pension contributions (to a maximum of 20% for higher rate taxpayers), raising the Upper Earnings Limit (UEL) for NICs, and making workers over state retirement pension age liable to pay NICs at the same rate (or a reduced rate) as ‘working age’ employees. Work by the IFS in 2018 implied that NICs paid by workers over state pension age could potentially raise £1-1.5 billion annually, not accounting for the behavioural changes that such a policy would inevitably lead to. Regardless of the amount of revenue raised, such a system would be morally justifiable in terms of: Older workers losing their current privileged position within the personal taxation system; older people who are sufficiently healthy to carry on paid employment helping to fund the social care needs of others in their birth cohort who are in poorer health (perhaps due to working in more physically demanding job roles earlier in life).

Whilst this reform would see the national insurance system return closer to its Beveridgean roots (Beveridge did not intend that NICs were solely a way of accumulating state pension entitlement), it would be insufficient to properly fund a Social Care system that included a lifetime cap on care costs along the lines of that proposed in the Dilnot Report on Social Care: Commission on Funding of Care and Support, 2011. It is therefore also recommended that the UEL for National Insurance contributions is significantly increased, along with the NICs rate for earnings above the UEL, as it is iniquitous that, in 2021-22, earnings over £967 a week are liable to just 2% NICs, compared to 12% NICs paid on earnings of £184-967 a week.

By reforming National Insurance in the above ways, this could help to better fund England’s creaking Social Care system, potentially enabling a lifetime care costs cap to be introduced, and without raising taxes on employees aged under 66 who earn less than £50,000 per year. Such an approach would be compatible with Boris Johnson’s 2019 pledge to ‘fix’ social care and with retaining his expanded support base among lower paid working age people across the Midlands and Northern England. It would also be justified in terms of intergenerational fairness in a period when government spending on pensioners has risen by more than spending on younger age groups.

New ‘summer eating allowance’ hard to stomach for low earning taxpayers

07/12/202007/12/2020 Nick Cowen Current Events, Economics, Politics Britain, COVID-19, pensions, public finance, redistribution, subsidies, United Kingdom

Rishi Sunak on the economy and lessons learnt from the Covid-19 ...

[This is a guest post by Dr Wesley Key, Senior Lecturer in Social Policy at the University of Lincoln.]

The announcement on 8^th July 2020 by Chancellor Rishi Sunak that the government will refund 50% of the cost of meals out during Mondays-Wednesdays in August 2020, at an estimated cost to the taxpayer of £500m, will, for many reasons, be hard to stomach for low paid working age taxpayers who cannot afford to eat out themselves. For such people, paying the rent, heating their homes and feeding their children will often leave little or nothing left over for dining out.

This new ‘summer eating allowance’ is likely to disproportionately benefit affluent older people with high levels of disposable income, whose custom typically helps to sustain many eating outlets during the mid-day/afternoon periods of the working week. The very same affluent older people who have qualified, with no means test, for free prescriptions aged 60-plus, for a free TV licence if a household member is aged 75-plus (up to August 2020), for a Winter Fuel Payment if a household member has reached state pension age, and for free local bus travel if they have reached women’s state pension age, regardless of their gender. The very same older people to benefit from the seven-fold rise in UK private pension income during 1977-2016.

Low paid and benefit dependent parents may also wonder why Chancellor Sunak is splashing out such a large sum of taxpayers’ cash, given that it took the efforts of Manchester United footballer Marcus Rashford to change government policy on 16^th June 2020 to ensure that children eligible for Free School Meals continued to receive the relevant food vouchers during the elongated summer vacation period. This ‘COVID Summer Food Fund‘ was eventually set up at an estimated cost of £120m, less than a quarter of the cost of Sunak’s ‘Eat out to help out’ scheme, a.k.a. the ‘summer eating allowance.’

In the longer term, when the reality of tax rises and/or spending cuts to pay for the COIVD-19 bailout begins to bite, the government needs to focus on intergenerational fairness and ensure that well off pensioners pay their share of the nation’s debt. It is time that a government made non-poor over-60s purchase their medication via a Prescription Prepayment Certificate (PPC), which in 2020-21 costs younger adults £29.65 for 3 months or £105.90 for 12 months, sums well within the reach of people in receipt of private and state pension payments. It is also time to make employees aged 65-plus pay a tax of the same rate as the employee National Insurance Contributions paid by younger workers, in order for older workers to fully contribute to the funding of the public services that they use more extensively than their younger colleagues. Such moves to cut the benefits received by, and increase the tax taken from, healthy, active people in their 60s and 70s would help to increase the funding of the social care services that are largely used by people aged 80-plus who are no longer able to undertake paid work and are entitled to face lower user charges for the social care that they require to ensure a degree of dignity and independence in old age.

Populism versus Constitutional Democracy

12/02/201803/11/2019 Nick Cowen Books, Current Events, Liberty, Politics Brexit, Britain, constitutionalism, Europe, European Union, Eurosceptism, Ireland, Norway, populism, Referéndum, state constitutions, Switzerland, United Kingdom

What is the difference between a conservative and a reactionary? A conservative knows when she has lost.

A conservative respects the status quo for the sake of stability. The reactionary rebels against it. Unfortunately, it is the reactionary impulse within Brexit that now threatens to hem in the liberties of British citizens, and threaten the rights of foreign residents, for a long time to come. A looser but productive relationship that Britain could have had with the European Union was lost, first at Maastricht in 1992, then again at Lisbon in 2007. A conservative recognizes this loss and adapts her politics to the new landscape. The reactionary tries to reconstruct those lost pasts in vain as the chaotic debates in Britain and the increasingly disappointing outcome illustrates.

Does this mean that referendums are bad? Do they only embolden radicals and reactionaries? It depends. If referendums are used to rubberstamp the decisions of a party in power, or as a way of deferring political judgement, then they are useless at best, dangerous at worst. By contrast, if they are part of the fabric of a democracy, and act as a real veto on constitutional change, rather than a populist rallying point, then they can be enormously valuable. They act as an additional check on the political establishment that might be irrationally fixated on some new governance structure. It ensures that every major change carries with it some level of majority support.

Ten years ago, I wrote a monograph Total Recall: How direct democracy can improve Britain. I advocated supplementing representative democracy with a norm or statutory requirement for referendums on constitutional issues and new local initiative powers. I focused on direct democracy in US states that mean that US state elections often involve both voting for representatives and on propositions. Referendums are required for state constitutional changes. In some states, citizens can initiate new legislation through propositions.

There are parallel constitutional requirements in force in parts of Europe, particularly in Switzerland, Norway and Ireland. It is hardly a coincidence that direct democratic mechanisms have slowed down European integration wherever they have had statutory rather than merely advisory force. Ireland had to go to the polls several times to get the ‘right’ answer but at least this meant that a majority of Irish eventually accepted the new EU arrangements. By contrast, Switzerland and Norway, against the wishes of their political establishments, took European integration only so far before settling with generous trade relations and much more limited political integration. The cost-benefit calculus of their arrangements are up for debate, but few would deny their legitimacy. Britain’s future position, by contrast, may turn out to look much worse and all because its people never had the chance to say ‘no’ until long after the facts on the ground changed.

It’s the ability to say ‘no’ that’s important, with the implication that the status quo must still be a viable option. A people cannot be legislators. Mass votes can’t add up to complex judgements to inform actionable law. Hence the Brexit referendum for leaving the EU for an unknown alternative was bound to lead to chaos which, in the long run, may undermine the legitimacy of representative government, let alone popular democracy, rather than strengthen it. There is no status quo ante to return to.

At the time I was writing Total Recall, the spirits of referendums never voted on haunted British politics. Referendums were promised on adopting the Euro and the European Constitution. Both were abandoned when the Government realized they would almost certainly lose. So we stayed out of the Euro but signed what became the Lisbon Treaty. This turned out to be a deadly combination that eventually led to Brexit. The Euro is quite badly managed as an economic scheme. As a political mechanism, however, it binds members of the Euro much closer together. Leaving the European Union, as Britain is doing, is perilous and costly. Leaving the Eurozone would be even more difficult as it would involve establishing a new currency from scratch. If New Labour had been serious about putting Britain in a federal united states of Europe, it should have gone all in with the Euro from the beginning.

So Brexit could have been avoided but not by ignoring majority sentiments. If British referendums were constitutionally mandated rather than the random outcome of internal (in this case, Conservative) party politics; if referendums were required to change the status quo rather than a mechanism for a belligerent minority to relitigate past losses, then, like Switzerland and Norway, we would be in a much better position now.

Will our political leaders learn this lesson for the future? That I doubt.

On Robert Allen’s defense of the High-Wage Economy hypothesis

07/23/201807/23/2018 Vincent Geloso Economics, History Britain, economic history, Great Britain, High wage hypothesis, Industrial Revolution, Jane Humphries, Judy Stephenson, Leonardo Ridolfi, Robert Allen, United Kingdom

The high-wage economy thesis is a topic I have blogged about many times before as I think it is an important debate among economists and economic historians (see notably here and here, see also this contribution of mine to the Journal of Interdisciplinary History). For those unfamiliar with this thesis, here is a simple summary of the idea advanced by Robert Allen: high wages relative to capital units was a key force in the industrialization of Britain and thus it explains why the Industrial Revolution was British before if was anything else.

As I have explained in the aforementioned blog posts, I am unsure of where I stand regarding this idea. I tend to be skeptical, but I have stated the evidence needed to convince me of the opposite. In the past year or so, there has been an avalanche of articles on the topic including this article by Humphries and Weisdorf, a follow-up working paper by the same authors, another paper by Judy Stephenson and a working paper by Stephenson (bis). Today, Robert Allen replies to his critics in this working paper.

I find that some of the points are convincing, however I must take issue with a particular point that falls into my ballpark as Allen mentions my work on wages in France (the aforementioned article in Journal of Interdisciplinary History). In my research, I pointed out that Allen’s computations underestimated wages outside Paris. With the correct computations, the rest of France does not appear as poor relative to England as Allen suggests. Allen concedes this point but then goes to state the following:

Geloso (2018) has pointed out that the Strasbourg unskilled wage series for 1702-64 is low in comparison to that of comparable towns, and workers may have received food, which has not been taken into account. This is a perceptive point, but its implications are limited. The most important use I make of the Strasbourg evidence is in calculating the ratio of the wage to the user cost of capital. If the Strasbourg wage in this calculation is raised to that of neighbouring towns, the wage-capital cost ratio does rise but only by a small degree. The reason for this somewhat surprising result is that the wage is also an argument in the formula for the user cost of capital–building workers have to build the machines and the mills that house them–so the denominator of the ratio increases as well as the numerator, although to a lesser extend.

This is a incorrect characterization of my argument. First, I did not state that wages in Strasbourg did not account for in-kind payment. I stated that in-kind payment was evidence that the wages did not pertain to Strasbourg! The wages from the primary sources were for a city some 70 km away from Strasbourg, they did not concern unskilled workers and they included large in-kind compensation. To correct for this problem, I compared agricultural wages in England with those around Strasbourg that had been collected by Auguste Hanauer. What I found was the the lowest wages in farming were equal to 74% of farm wages in Southern England (as opposed to 64% with Allen’s stated wages). While I did not report this in the article because I had doubts, it is worth pointing out that the high bound of farm wages in Strasbourg is above the level reported for Southern England (which acts a proxy for England – see table 2 in my paper). As Strasbourg is a proxy for living standards outside Paris, my finding suggests a much smaller gap in living standards. It also entails a much more important change in the cost of capital to labor (wages are in the range of 50% above those suggested by Allen and sometimes they are higher by more than 100% which would mean a halving of the relative cost of capital! These are not peanuts to be thrown on the sidewalk!

Second, I ought to point out the nature of my argument. I was not trying to prove/disprove the high-wage hypothesis. My point was much more modest. The mirror of the question as to why the industrial revolution was British is why it was not French. France had a large population offering large returns to scale (in both economic and political organizations) and an array of navigable rivers that facilitated internal trade. It also key pockets of Lancashire-like industrialization such as Normandy (for textile) and Mulhouse (the French Manchester). As such, it is an entirely reasonable endeavor to try to situate living standards in France relative to Britain. If France was massively poorer than England, then Allen has a greater likelihood of being correct. If it was closer to an equal footing (I do not believe that anyone places France above England in circa 1750), then Allen’s critics have a greater likelihood of being correct.* However, regardless of the answer, the data does not infirm/confirm the high-wage hypothesis. It merely situates relative likelihood. As I point out that wages were quite above those postulated by Allen, I am merely stating the extent of the reasonableness of being skeptical of the high-wage hypothesis.

Finally, it is worth pointing out that the work of Leonardo Ridolfi is absent from Allen’s reply. The latter’s work is very important as it echoes (in a much richer manner) my point that wages outside Paris were not as low as cited by Allen.**

*As I assume a greater equality of capital returns across both countries, the smaller the wage gap, the smaller the relative differences in capital/labor costs ratios.

** Ridolfi shows France had incomes equal to 64% of English incomes circa 1700. However, I am skeptical of this figure. This is because, while I trust the index produced by Ridolfi, I am unconvinced about the benchmark year to convert the index into international dollars.

In memory of Christie Davies: defender of the right to joke

12/30/201712/30/2017 Nick Cowen Culture, Liberty Britain, Christie Davies, humor, jokes, mirth, moral psychology, morality, satire, Sociology, Soviet Union

As we approach the end of 2017, I remember this year’s sad passing of Christie Davies. Davies was a rare academic beast: a classical liberal sociologist. Despite representing a minority perspective in his discipline, he was able to thrive and leave a mark that will continue to influence scholars for generations.

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