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Redefining the Poverty Debate Redefining the Poverty Debate Why a War on Markets Is No Substitute for a War on Poverty

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Redefining the Poverty Debate Redefining the Poverty Debate Why a War on Markets Is No Substitute for a War on Poverty Redefining the Poverty Debate Redefining the Poverty Debate Why a War on Markets is No Substitute for a War on Poverty KRISTIAN NIEMIETZ The Institute of Economic Affairs First published in Great Britain in 2012 by CONTENTS The Institute of Economic Affairs 2 Lord North Street Westminster London sw1p 3lb in association with Profile Books Ltd The author 8 The mission of the Institute of Economic Affairs is to improve public understanding of the fundamental institutions of a free society, with particular Acknowledgements 9 reference to the role of markets in solving economic and social problems. Foreword by Gisela Stuart 11 Summary 15 Copyright © The Institute of Economic Affairs 2012 List of tables and figures 18 The moral right of the author has been asserted. 1 One-club golfers – a critique of the poverty All rights reserved. Without limiting the rights under copyright reserved above, industry 25 no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, Anti-poverty lobbies, then and now 25 mechanical, photocopying, recording or otherwise), without the prior written Wrong priorities in the poverty debate, and why it permission of both the copyright owner and the publisher of this book. matters 30 The opposition to low-paid employment 35 A CIP catalogue record for this book is available from the British Library. The state-centric poverty alleviation strategy: a ISBN 978 0 255 36652 6 fair-weather approach 41 eISBN 978 0 255 36682 3 Many IEA publications are translated into languages other than English or 2 A new anti-poverty approach 50 are reprinted. Permission to translate or to reprint should be sought from the Taking on the critics 53 Director General at the address above. 3 Housing 56 Typeset in Stone by MacGuru Ltd [email protected] House prices on the rise 56 Why are housing costs a problem? 59 Printed and bound in Britain by Hobbs the Printers What is going wrong? 74 What should be done? 86 5 5 4 Childcare 91 9 Welfare 174 Childcare costs on the rise 91 Polarised work incentives, polarised employment Why does it matter? 93 patterns 175 What is going wrong? 97 From resentment to reciprocity 184 What should be done? 99 A denationalisation of welfare 192 5 Food 102 10 Conclusions 205 Food prices on the rise 102 Real incomes are determined by prices and incomes 207 Why is it a problem? 103 Pro-poor policy – the impact of market reforms 209 What is going wrong? 104 Who will benefit? 215 What should be done? 110 Pro-poor policy – the need for welfare reform 217 6 Energy 117 References 225 Energy prices on the rise 117 Why is it a problem? 118 About the IEA 250 What is going wrong? 124 What should be done? 132 Summary 139 7 Regressive taxation 140 8 Work – supply and demand 146 Work is better than its reputation 146 Workless households: scale and significance 151 Single parenthood: a digression 156 Labour demand 163 Implications for policy 172 THE AUTHOR AUTHOR’s ACKNOWLEDGEMENTS Kristian Niemietz joined the IEA in 2008 as Poverty Research I would like to thank Philip Booth, Peter King, John Meadow- Fellow. He studied economics at the Humboldt Universität zu croft, Séan Rickard and J. R. Shackleton for their highly appreci- Berlin and the Universidad de Salamanca. In 2007, he gradu- ated feedback and suggestions. ated as Diplom-Volkswirt (MSc in economics), with a disser- tation on the privatised pension system in Chile. During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005) and at the IEA (2006). After graduating, he went on to work for the Berlin- based Institute for Free Enterprise (IUF). Kristian is currently a PhD student in public policy at King’s College London, where he also teaches economics. His IEA monograph A New Under- standing of Poverty was awarded the 2011 Templeton Freedom Award and the 2012 Arthur Seldon Award for Excellence. 8 9 FOREWORD ‘Beveridge tells how to banish want. Cradle to grave plan. All pay – all benefit’, read the front page of theDaily Mirror in 1942. We were promised a revolution under which ‘every citizen willing to serve according to his powers has at all times an income sufficient to meet his responsibilities’. But what started off as a safeguard to look after the poorest in our society has grown beyond recognition. Some thirty million people – almost half the total population – now receive income from at least one social security benefit. Expenditure on social protection represents by far the largest single area of government spending. In 2012/13, at £200 billion or almost 30 per cent of government spending, it is one of the highest levels in the world. Does this mean we have conquered poverty? Far from it, argues Kristian Niemietz, the author of this monograph. He is highly critical of what he calls the ‘anti-poverty lobby’ and finds the current benefits system to be neither an adequate nor indeed an effective response. He rejects the view that the answer lies in increasing benefit levels. Helping the poor to free themselves from poverty should not be about absolving the individual from all responsibility and nurturing a culture of victimhood, entitlement and dependency. An undue focus on the level of actual support can perpetuate a cycle of helplessness. Beveridge identified idleness as one of the giant ills of modern society. The provision of 11 redefining the poverty debate foreword social security has raised living standards, but it has also created possible, as this would lead to a fair and adequate distribution of a vacuum in which individuals most in need are no longer seeking the country’s resources, while still providing for the poorest. to empower themselves. Despite expressed fears that this would make the poor poorer The 1997 Labour government denounced the Tory legacy of and the rich richer, he persisted. When Germany ended rationing one in five non-pensioner households having no one in work. It (six years ahead of the UK) it set prices free, encouraged initiative promised to make work pay, so that no household would be better and revived the economy. Erhard understood that government off out of work than in work. It introduced tax credits and benefit control could not work: government could never know enough tapers, as well as a minimum wage to provide a baseline, but, in to adequately allocate resources to deliver prosperity to everyone. terms of its strategy, it did not go much beyond looking at rates Only the market could distribute wealth justly. As Erhard said: of benefits. ‘Need would be overcome through growth. Inequality would The experience of the US welfare-to-work programmes become irrelevant through growth. The market, because it pointed to the dangers of a population of the ‘working poor’. provided people’s needs, because it raised their standard of living, But it is wrong to paint low-paid work in a negative light. Being was social.’ in work is as much about work as it is about social inclusion. Both Erhard and Beveridge understood and acknowledged the Incentives to get the unemployed back into work should not be importance of work. For Beveridge the nation needed a national portrayed as exploitation or ‘slave’ labour. Some of the benefits health service; tax-funded allowances for children and full that support low-earning workers such as working tax credit are employment to make social security work. For Erhard economic shown to encourage greater reliance on the benefit system, rather growth would make inequality irrelevant. than encourage work. These concepts are as important today as they were then. The If increasing benefits doesn’t deal with poverty, what does? global financial crisis of 2008 has led some to associate capitalism The book makes a strong case for a radical, market-oriented with the causes of poverty. Hence tackling poverty has become approach. Make those things needed for basic living more afford- synonymous with restraining capitalism. able by reducing their overall price. While this will help everyone, This publication argues that anti-poverty measures that are it will help the poor disproportionally more. But do we not need potentially very cost-effective are overlooked simply because to protect the poor from the ravages of the market? Or can we they run contrary to the received wisdom of governments and harness the power of the market by challenging vested interests anti-poverty campaigners who focus only on income trans- and monopolies? fers. The author, Kristian Niemietz, provides a great service by At the root of post-war German success was the introduction dismantling the arguments of the poverty campaigners; chal- of the social market economy championed by Ludwig Erhard. He lenging the politicians; and making a strong case for a market- wanted the German people to have as much economic freedom as oriented anti-poverty strategy that will encourage work and raise 12 13 redefining the poverty debate real incomes. This is an important publication that deserves wide attention. gisela stuart SUMMARY Member of Parliament for Edgbaston November 2012 The views expressed in this research monograph are, as in all IEA • In the past intellectual movements promoting free trade in publications, those of the author and not those of the Institute particular and a free economy more generally were regarded (which has no corporate view), its managing trustees, Academic as having a pro-poor agenda. The current poverty lobby, Advisory Council members or senior staff. however, is focused entirely on government benefits as the solution to poverty and very rarely addresses government interventions that raise living costs.
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