Tuesday, October 21, 2008

How to boost the economy, fight poverty, reduce crime and make yourself feel sick

Well, it looks like we’re having a recession. Anything we can do to soften the blow?


The Tories are suggesting a small cut in national insurance payments for very small businesses, lasting six months, as well as allowing small businesses to defer VAT payments for six months. It doesn’t seem like much, and it isn’t. Does anyone think the economy will be peachy again by April?

But they can’t propose anything significant in the way of fiscal stimulus – they’ve been pushing the too-much-public-borrowing line very hard, and have been insisting that “the cupboard is bare”. They have to say that, give or take a morsel, we’ll have to tough it out. And, indeed, even this modest, short-term NI cut is to be funded by cutting business tax reliefs and allowances elsewhere.

Labour, conversely, is planning to bring forward some public infrastructure projects a couple of years. This will have a bigger effect, but will be slower to enact.

A US study [PDF] of a range of different fiscal stimulus policies is telling here. Will Hutton sums it up:

Douglas Elmendorf and Jason Furman show that by far the quickest and most effective means is to put cash into the hands of the unemployed by raising unemployment benefit, increasing temporary cash payments to them for specific items such as food and clothing, and making benefit unconditional for longer. It is not just they need the cash; they spend it fastest.
The next most effective measure is to increase spending on the national infrastructure - housing, roads, ports, hospitals, schools. The trouble is that there tends to be such a long time between the decision to spend and execution, so that too frequently spending kicks in not during the recession but the upturn. Tax cuts are the least effective. None act quickly, although reducing the tax on employment - payroll and employer national insurance contributions - does moderately well.

So, boosting unemployment benefit, eh? On that subject, another study [PDF], by Stephen Machin and Olivier Marie of the LSE, has something to report. They looked at the effects on crime of introducing job seekers allowance in 1996, a less generous and more conditional system than its predecessor:

We study crime rates in areas more and less affected by the policy before and after JSA introduction. In the areas more affected by JSA introduction, crime rose by more. These were also the areas with higher outflows from unemployment and particularly to people dropping off the register but not into work or onto other benefits. Studying the relation between crime and sanctions after introduction also confirms that areas where more people were sanctioned were those where crime rose by more. As such these results seem to reflect that benefit cuts and sanctions in JSA shifted people off the benefit system and raised crime.

So there we are. More generous and less conditional unemployment benefit is a very cost-effective way of stimulating the economy, as well as the fact that it alleviates poverty among those who can’t find work, and it may also help to fight crime. Oh yes, and I said it could make you feel sick. Well, see what happens when you phrase it this way: increasing public borrowing even further so that we can pay feckless workshy scroungers with criminal tendencies not to nick stuff. Got the stomach for that?

Another thought is that similar effects (bar the nausea) might be achieved by introducing a citizen’s basic income.


donpaskini said...

Good post.

Worth noting, though, that citizen's basic income wouldn't have the same fiscal stimulus advantages as increasing unemployment benefit, because it gives money to people who won't spend it, as well as people who will.

Tom Freeman said...

Absolutely. A CBI (could we trick the Tories into supporting it by cunning use of the abbreviation?) could accompany an income tax increase higher up the scale, so that people earning above a certain level remain unaffected by its introduction. Of course, what level it might be set at and and what other benefits it might replace are pretty big questions.

Chris said...

The third principle in the first paper you mention is that the stimulus be temporary - assuming that's not just a stick to beat people who want to make the Bush tax cuts permanent, doesn't that argue against raising benefit (unless you've got a strong enough stomach to cut it and be meaner about it when out of recession) or introducing a CBI*? Also, isn't the point of the tax cuts partly to get the middle classes to spend money on the things that they will otherwise cut out, areas of the economy which are not going to receive the same spending boost with increased benefits? I'm sure there's a bit in The West Wing where Josh explains to Donna just what they hope she'll spend her money on.

*I'm unsure of the term because the word 'citizen' doesn't conjure up good images for me, the result of reading too many Judge Dredd stories.

Tom Freeman said...

Yeah, I think their emphasis on it being temporary is mainly with longer-term budgetary worries in mind. Which is a fair point, and it certainly would be politically hard to undo a benefit increase/tax cut later on.

They also mention a rise on direct credits such as food stamps, which would equate over here to something like a one-off payment to everyone in whatever benefits/earnings category. I wonder if something could be done with the winter fuel payment this year, maybe extending it to other groups than pensioners.

As for trying to stop the middle classes from cutting their discretionary spending and so targeting a stimulus at them, there's a fair chance that they'll use at least some of it to top up savings or pay off debt, which doesn't give the same sort of kick to consumption as does targeting poorer people.

Chris said...

This is the bit I was thinking of

CHARLIE Why did you call it a rebate?
LEO So people would spend it. If they thought it was an advance, they might save
CHARLIE It was an advance.
LEO Did you spend it?
CHARLIE I paid my VISA bill.
LEO We would have preferred it if you'd ate in a restaurant or travelled.

Chris said...

Darn return key. I meant to add...

I take the point about the middle classes paying off their VISA bills, and about the benefits increase getting the money more efficiently into the economy in general, but if you want to spread the loot around - getting people to eat out or travel as well as spend money on food and clothes - you might have to target it more. The money spent on benefits will eventually get to the people who might spend it in that way (assuming they don't pay off loans with it) but is that 'trickle up' more efficient in getting money spent in multiple economic areas?

Similarly, government spending on things might not go quickest back into people's pockets but it has other advantages - educational publishers who know in advance that there will be no spending freeze don't feel the need to cut half their proposed list 9 months before they would begin to get money for their works, for example.

Chris said...

Sigh. And again... I think it's a very good idea about the winter fuel payments because it's easier to get people to accept these as temporary (although, again, how quickly will they trickle up?). I think you could grandfather in extensions to benefit terms to be triggered by specific conditions. But I think it's impossible to extend benefits in general and then expect to tell people when the economy is better - when unemployment goes down and the government's revenue goes up - that you're going to cut them, if only because you would apparently be increasing the crime rate. And since you need these as stimuli, the next downturn you would have to do the same thing again.

Tom Freeman said...

Trickle up - I've not heard that one before!

But yes, what matters is not that money gets pumped into one bit of the economy but rather through lots of it.

Strangely, the highish inflation could make people spend money now, while it's worth more, rather than hoard it. Especially if they don't trust the banks...

Another option would be to print banknotes with expiry dates. Or auto-destruct mechanisms. That'd encourage pretty quick spending.