We should lower our food trade barriers with the rest of the world and stop subsidising farm owners (like err… Prince Charles). That would put a dent in our rising food costs and set up more mutually beneficial relations with the developing world.

According to the DWP the government has decided that £55 pw is the minimum I need to live on.

This being the case, how could MPs decide that they should receive £100 pw just for food?

Good post.

As I said over at Duncan’s Economic Blog with reference to this posting at your own site (on which I can’t comment for blogger.com technical reasons):

‘This then presumably feed directly into our US friend’s view (Post Keynesian Observationns) that:

‘The same $10 million dollar salary spread over 100 people generates much more spending that it does if it’s all one person. Income distributions have been deteriorating for the past 40 years and they did the same thing before the Great Depression. Economic growth, when it comes, must be directed toward wage earners and not those scraping the profits off the top.’?

A coherent case for redistribution not just on the grounds of fairness but in terms of increasing demand and consequenrtly more sustainable growth should be more central to the narrative of the economically literate left than it is at the moment, especially as the very principles of egalitarianism as a good thing in itself come under threat from the new wave of NL thinking (corruptions of Sen and all that).’

Duncan agreed completely by the way, and I’ve now written a tie-up post on this stuff.

An important point to remember is that the cost of living varies dramatically depending on where you are in the country. Over the past 5 years, I’ve lived in London, Bristol, West Wales and Northamptonshire. Every time I’ve moved I’ve been surprised by the differences in the cost of living, particularly around housing and transport.

So my point is that the minimum income you could live on in London is a lot more than the minimum you could live on in rural West Wales. Since people on low incomes are pretty likely to be stuck where they are, this is an important consideration.

To go a little off topic, the minimum wage needs to reflect these findings. It is plain unethical to employ someone but pay them less than they need to live on.

http://petespolitics.wordpress.com

“The same $10 million dollar salary spread over 100 people generates much more spending that it does if it’s all one person”

Hmmm. So if the money is not spent, it is saved? Correct? and Keynes claimed that saveings=investment.

And we are in this position because we have had too little saving and not enough spending.

So you are saying greater inequality of income would have prevented the recession?

James @5

Yes, I am saying that greater equality of income at both domestic and international level (and these are linked but different issues) would have resulted in a better balance between import/export, surplus nations/deficit nations etc., and therefore militatted against the growth of the housing bubble (Graham Tuner’s the Credit Crunch is persuasive on this, as is Krugman’s Return of Depression Economics).

I sense you have a set of questions/comments that will come from this, and of course my comment here is only brief. If you really want to engage you might want tio drop into the latest post at Duncan’s Economic blog and follow the links from there to my place and back to Don Paskinis’ as well as some other people arguing for equality as a driver for macro-economic stabilty. See http://duncanseconomicblog.wordpress.com/2009/07/02/a-new-political-economy/ for starters ad go from there, not least to the Us economist he links to a lot about this stuff.

I’ve also asked Sunny if he’ll cross post at LibCon my recent effort around this whole equality if income = potential for sustainable demand, but it might be a bit turgid for his editorial tastes – my posts usuallly are.

Paul,

Define redistribution in the sense you mean it here. Do you mean that we should strive to raise the earned incomes of those at the bottom of the income spectrum and close the gap with those at the top or do you mean redistribution in the sense of taxing the rich and giving it to the poor.

The gulf between those two position is very wide.

Redistribution through the tax system broadly accepts that the market correctly rewards people relative to their value to the market. It then says that much of this money must then be given up and handed over to other people whose value is less.

Thus the market is responsible for gross income and the state is responsible for net income.

However, the presumption that underpins this system is that the market does in fact reward people justly. This presumption is clearly flawed. And not just because of some political judgement along the lines of “a nurse is worth more than a banker” – if we believed that then we should also tax those on low wages whose income was derived from activities we deem unworthy.

Pay is unfairly distributed because the labour market is full of inconsistencies. For example, executives at Nike are rich, in part because they have consumers in the EU and producers in China. They are thus able to exploit a gigantic wage arbitrage.

The wages of factory workers who remain in the EU are, in turn, suppressed by the lower cost of chinese labour. Because of this, EU governments subsidise those near the bottom of the income spectrum with cheap housing, tax credits and so on – but this becomes self reinforcing. The more subsidies the poor are given, the lower the minimum wage can go.

If you earn the minimum wage and have access to housing benefit and free healthcare and so on, then you might, just about have enough to live on (at least while you remained employed) but your employer is not paying the full cost of you living a decent life. And when companies can hire workers for less than the value of their labour then their shareholders can keep the difference. In theory, the profits these shareholders make are then taxed and the money can be handed back. In practice, a very great deal of hard work goes into ensuring that this does not happen.

This is precisely why the income gap has yawned ever wider in recent years – not because the market correctly values those at the top of the income spectrum but because many companies have been able to access cut price labour – either in low cost countries where living conditions are below those we would accept here or have reaped the benefits of the wage restraint those low cost countries have imposed upon the working populations of higher cost countries.

There are other reasons of course, the Government allowed the housing market to boom – benefitting older homeowners at the expense the young and, ironically, the very people that they were subsidising to live in social housing whose costs are far below market value.

The more you redistribute, the worse this problem gets. Therefore redistribution must fail in the long term – and the more it fails, the wider the income gap gets and the greater the temptation to redistrubute more.

The answer is not to tax and spend more – the answer is to fix the broken market by raising living standards and labour costs across the globe. when companies bear the true cost of living for all their staff then income inequality will be massively reduced. (and those who still manage to get filthy rich are more likely to have done so by increasing the sum of human potential rather than by rent seeking or arbitrage).

I have written too quickly to be concise but I think that I am expressing myself clearly. I should point out that this is not a call for a low-tax, devil-take-the-hindmost policy. What I am saying is that setting up markets to deliver equality is far more powerful than tax.

To give one example, during the housing boom, the government raised three time more in stamp duty than it “invested” in new social housing. Given that stamp duty generally reflects 1-2% of the transaction value of properties coming to market, it is clear that the malfunctioning market was VASTLY more powerful than the redistributive policy designed to ameliorate its effects.

As an example of the above, I notice that the Minimum Income Standard to which Don links allows for outgoings of £66/week on rent. Sure, fine, if I had a council tenancy. But if you don’t then a decent, private sector rent in most parts of London would be rather more than double that. Suddenly the minimum income standard needs to be 40% higher.

Hi George,

Paul and I agree with you – this new political economy can’t all be done through redistribution through the tax system (though this will be part of it), but as you’ve suggested here and elsewhere by more fundamental changes, e.g. through a more active industrial policy.

The only thing I’d quibble with is that (historically) fixing the broken markets and ensuring employers bore the true cost of living for their workers has gone hand in hand with a redistributive tax system, rather than being an alternative to it, as in 1950s America etc.

“£13,900 a year before tax ”

Note those last two words.

So, how much does someone earning that pay in tax? Couple of grand, inc NI? Tad more?

Which gives us 11.5 k, something like that.

What do you earn if you work full time full year on min wage? About 11.5 k isn’t it?

So, all those who work full time would be out of poverty if only we’d stop friggin’ taxing them!

Slash govt spending by 35 billion and simply raise the personal allowance so that it’s the same as min wage full time.

Simples……and yes, there’s 35 billion that can be cut out of the budget, easy. 14 billion to the EU, 3 billion or so on regional development agencies, BERR has at least 5 billion spent on things that don’t need doing…….dang, we’re almost there already.

Shite, Tim – I almost agree with you!

Where we do disagree is where to cut the cash. While I do, fervently agree that the amount paid to the EU should be cut, I do think that it should be for efficiency savings within the EU – like, guess(?) MEPs expenses and the bureaucracy there is within the EU – that would help all member states.

Slashing the database state would save billions overnight. We do not need a new Trident – again, that in itself would save billions. There is so much that could be saved just by ridding the country of New Labour’s authoritarianism it would be worth it.

The tax slider needs to be moved way, way above what it is now. Take everyone out of taxation at 13k – but I have said that before. And I ain’t no economist.

George V @8 and Don P @10

Sorry – missed these replies yesterday. George V, that’s a really interesting comment and I’m grateful for time setting it out so lucidly. As Don P says on my behalf, I largely agree that taxation is only a bit of the (perhaps shorter term) answer, and that the real (certainly) more challenging anwer is the increase of basic wages internationally; as you say, doing it only domestically/regionally keeps the key imbalance where, say, EIU wages can be supressed etc.

That in the end is where the (international) trade union movement comes in.

As for the views on the self-fulfiling gap created by tax-based measures redistribute, I’m not sure I entirely agree that ‘The more subsidies the poor are given, the lower the minimum wage can go. Yes, it may happen, but is that an inevitability or is merely a consequence of the power the owners/capital have had to date, and which I’m suggesting needs to change whether by TU strength or govt action to redress inequality, or both.

There’s more to pull out from your post, of course, and I’ll try to do so at my blog when I get chance, maybe this weekend

Hi Tim,

How are you doing your calculations?

I make it full time on minimum wage = 5.73 * 35 * 52 = £10,428.60

Amount of income tax payable on that = (10428.6 – 6475) * 0.2 = £790.72

Amount of national insurance = (10428.6 – 6475) * 0.11 = £434.90 [I may have got this calculation wrong, but it won't be an under-estimate]

Might be wrong about all this, but the key differences between these calculations with what you are saying:

- People on the minimum wage earn about £1k per year less than you are suggesting
- and pay a lot less income tax and NI than you suggest (c. £1,250 rather than £2,000)
- therefore, your policy solution of cutting taxes for low paid workers would not make sure that low paid full time workers get the minimum income standard

Of course, one compromise which I would be extremely happy with is to raise the minimum wage to the level that your argument assumes it is (about £6.30/hour), and raise tax thresholds so that people start paying income tax and NI once they earn the minimum income standard or above.

The difference is here:

“5.73 * 35 * 52″

I tend to use 38-40 hours as being full time work. ONS actually tells me (for 2003 admittedly) that average hours for full time workers are more like 43 hours per week, including both paid and unpaid overtime.

So people working full time (assuming that full time is what everyone else working full time is doing in terms of hours) on minimum wage are making about 1,500 more than you assume (at 40 hours) or 2,400 more than you assume at 43 hours.

That is without including any overtime payments of course.

Secondly, my tax and NI numbers are not for those making minimum wage. They are for those making that 13,900 pre tax number which you and Rowntree portray as being the poverty level (not one I have a problem with actually. As Adam Smith said, it is not a necessity to have a linen shirt but if society states that a man without one is poor, then, by the standards of that society a man who cannot afford a linen shirt is indeed poor.)

That’s, by my also incomplete calculations, 1,500 or so in income tax.

Earnings threshold for NI is 5,715 this year and rate is 11% above that. so 900 for the year.

So, on 13,900 (the claimed poverty level) our bod is paying 2,400 a year in tax and NI. Net income to be above that poverty line is thus 11,500.

So, someone working 38.5 hours on minimum wage all year would be at that poverty line.

If, of course, they were not being taxed on those earnings.

Which really just leaves what number of hours is our definition of “full time”. 35 hours seems pretty low. What people on average work sounds better, at 43. Or we could split the difference at 39 and my point still stands.

People working full time on the current minimum wage would be above the Rowntree poverty line if they were not taxed on those earnings. Thus the solution to such poverty is to reduce the tax paid by them.

Simples.

“ONS actually tells me (for 2003 admittedly) that average hours for full time workers are more like 43 hours per week, including both paid and unpaid overtime.”

But you can’t use unpaid overtime to calculate how many hours people are getting paid for, surely?

“But you can’t use unpaid overtime to calculate how many hours people are getting paid for, surely?”

Sure, but that’s the way they calculated the number. All I was looking for was some rough indication of what is the length, in hours, of the average working week for those who work full time.

You seem to think it’s 35 hours. I think it’s longer. I’ve given an indication of where my number comes from. And yours is from where?

For it is that length of the working week which is the difference between our incomes for those on minimum wage, isn’t it?