Replacement Rates, Unemployment and Poverty Traps

On the 4th of December the Department of Finance published a short report on Replacement Rates and Unemployment. The six-page document can be accessed here.

What are Replacement Rates?

The replacement rate for given income levels measures the proportion of out-of-work benefits received when unemployed against take home pay if in work. While there is no pre-determined level of replacement rate which would influence every individual’s decision to work, clearly the higher the replacement rate, the lower the incentive to work. A replacement rate in excess of 70% is considered to be excessive.

Thus it is a measure of how much of a person's family income would be replaced if they were to lose their job/income and start receiving social welfare. Why they are of concern in Ireland is nice captured in this letter which appeared in The Irish Independent back in April. Andy's friend may be imaginary but the general argument is true.

High replacement rates lead to Unemployment Traps which occur

"when a person’s out-of-work family disposable income compares favourably with his/her in-work family disposable income, thereby resulting in disincentives to work.

A related problem are Poverty Traps which occur

"for those in employment when an increase in an employed person’s gross income results in a reduction in net income, thereby resulting in disincentives to work for higher earnings or work for increased hours. This can arise because of a move into a higher tax bracket or because of withdrawal of social benefits as gross income crosses certain thresholds."

The Department produces replacement rates for three income levels

1. The national minimum wage (NMW) = €17,542
2. 67% of the average industrial earnings (AIE) = €22,535
3. The average industrial earnings (AIE) = €33,634

and they are reproduced in the following table.

Summary:

• Single people with no children (28% of Live Register cases) face high replacement rates at the national minimum wage, although below 70%. Replacement rates are not an issue for higher earning single people.
• Couples with no children where both are not working (10% of Live Register) face high replacement rates at each income level up to AIE, though these are under 70% except at NMW.
• Couples with one or two children where both are not working (5% of Live Register)have higher replacement rates again. These are 70% and above for couples with one or two children who would earn at two thirds AIE (c. €22,500) or less.
• One-Parent Families (29% of Live Register cases) have low replacement rates except where out-of-work income is supplemented by Community Employment Scheme (CES) earnings.
• There are significant welfare benefits for couples for one working at NMW or two thirds AIE; as the other spouse can claim entitlement to means tested JA.
• Rent supplement has the potential to introduce significant disincentives to work and is received by 12% of cases on the Live Register.

For example, of couple claimants in receipt of rent supplement 43% have no children and they could face replacement rates as high as 102% if the maximum rate of rent supplement (based on Dublin rates for a couple with no children) was paid out-of-work and no rent supplement paid while in-work, i.e. they would have a higher family income if they remain out-of-work!

dd

People respond to incentives - the science cheat edition

As we well know all of economics can be summarised by just four words - "people respond to incentives" - the rest is commentary.

Thierry Henry handled the ball because the benefits of cheating were greater than the cost. What incentives can we find that underlie the academic and scientific fraud that has taken place at the Climatic Research Unit in the University of East Anglia for at least ten years?

A quick check of this spreadsheet reveals some of the answers. Click it and see where the money to keep Phil Jones and his buddies happily engaged in fraud in the CRU has come from.

The file reveals details of 53 projects in with Prof Phil Jones is the sole or a joint PI (principlal investigator). The 53 projects see Jones allocated £13.7million pounds at an average of just over £250,000 per approved grant application. That is a lot of money to be playing around with.

Where did this pocket money come from? Prof Jones and his cronies are hugely grateful to the taxpayers of the UK, the US and the EU for funding as they have received grant after grant from the UK Met Office, the US Department of Energy, the EU Commission and several other public bodies.

If somebody has a story they want told and are willing to pay to have that story told it is only human nature that someone will gladly help them out when the right incentives are in place. This is a superb explanation of what happens.

Universities and departments have set policies to attract climate science funding. Climate science centers don’t spontaneously spring into existence – they were created, in increasingly rapid numbers, to partake in the funding bonanza that is AGW. This by itself is not political – currently, universities are scrambling to set up “clean energy” and “sustainable technology” centers. Before it was bio-tech and nanotechnology. But because AGW-funding is politically motivated, departments have adroitly set their research goals to match the political goals of their funding sources. Just look at the mission statements of these climate research institutes – they don’t seek to investigate the scientific validity or soundness of AGW-theory, they assume that it is true, and seek to research the implications or consequences of it.

This filters through every level. Having created such a department, they must fill it with faculty that will carry out their mission statement. The department will hire professors who already believe in AGW and conduct research based on that premise. Those professors will hire students that will conduct their research without much fuss about AGW. And honestly, if you know anything about my generation, we will do or say whatever it is we think we’re supposed to do or say. There is no conspiracy, ust a slightly cozy, unthinking myopia. Don’t rock the boat.

Gender wage discrimination starts early

The BBC report the results of the 2009 Halifax Pocket Money Survey. Halifax have been carrying out the survey since 1987 and have found that over that time pocket money has increased by more than four times the rate of inflation. Halifax are most interested in the savings behaviour shown but there are some other interesting findings.

The UK average pocket money for 2009 is £6.24 a week which is an 11p or 1.8% increase on the 2008 figure but is still substantially below the 2005 high of £8.37 a week. The UK's Office of National Statistics combined the Halifax survey with their own data to create the following graph.

Children with family incomes in the highest income decile received the biggest amount of pocket money. Interestingly, the next highest recipients were children whose family incomes were in the lowest income decile. The data do not allow us to determine if pocket money is a substitute for or additional to other expenditure by parents across the income deciles.

The higher than inflation increases in pocket money have not been evenly distributed with those in the 8-11 age group getting an average of £4.80 a week in 2009 which is some 425% above the 1987 figure of £1.13 reported here. Those in the 12-15 age bracket are getting the higher amount of £7.44 a week but this is "only" some 215% higher than the £3.46 their counterparts from 1987 were receiving. The survey also reports big regional variations across the country but one of the more standout findings is that:

Across the country, boys received an average of £6.88, compared with girls' £5.58.

This difference of £1.30 per week equates to a pocket money differential of about 23%. Gender wage discrimination, it seems, starts early!

Ireland may be neutral but her money is not

Bloomberg recently ran a report looking at the returns earned by Irish Life, Ireland's biggest fund manager. The report begins:

Dec. 3 (Bloomberg) -- Irish Life Investment Managers, Ireland’s biggest fund company, is defending its top-ranked returns by investing in makers of military equipment.

Brendan Moran, who oversees 15 billion euros ($22.6 billion) as head of global equities at the Dublin-based company, bought Lockheed Martin Corp. and BAE Systems Plc because he predicts defense budgets will stay high.

“Their share prices haven’t gone up; the earnings haven’t come down,” Moran, 42, said in an interview at Bloomberg’s Dublin bureau. “As a consequence, they are more attractive to us on valuation.”

The U.S. government in October authorized a further $130 billion for military operations in Iraq and Afghanistan, bringing to more $1 trillion the amount spent since the Sept. 11 terrorist attacks. President Barack Obama said Dec. 1 he will send an extra 30,000 troops to Afghanistan next year.

The 12 members of the Standard & Poor’s 500 Aerospace & Defense Index trade at an average ratio of 13 times their earnings compared with an average 22 for companies in the Standard & Poor’s 500 Index.

Public opinion in Ireland is in favour of our neutrality stance. After the first Lisbon Treaty research conducted on behalf of the Department of Foreign Affairs indicated that uncertainty about Irish neutrality was a significant issue in the rejection of the Treaty. The Irish Defence Forces will not be sending any equipment or personnel for military operations in Iraq and Afghanistan. But we will be investing plenty of our money into the effort.

You can listen to a short interview with Brendan Moran here who airs his concerns about the impact changes in global defense budgets may have for his Irish investors. Neutral how are you!

Who's smart?

New Geography has just released a survey of the world's smartest cities and lists "the 'smartest' cities not only by looking at infrastructure and livability, but also economic fundamentals". Singapore comes out on top with Amsterdam the only European entry, though the list is a little Americentric with seven cities (four US, one Mexico, one Brazil and one Canada) on the list.

1. Singapore: The 21st-century successor to 15th-century Venice, this once-impoverished island nation now boasts an income level comparable to the wealthiest Western countries, with a per-capita GDP ahead of most of Europe and Latin America. Singapore Airport is Asia's fifth-largest, and the city's port ranks as the largest container entrepot in the world. Over 6,000 multinational corporations, including 3,600 regional headquarters, are located there, and it was recently ranked No. 1 for ease of doing business.

This country has an aspirational plan based around Building Ireland's Smart Economy. Maybe Ireland (population 4.45 million) should be having a look at what Singapore (population 4.75 million) is doing to smarten up. Reading Singapore's Success: Engineering Economic Growth would be a good start. This reveals that Singapore implements many economically efficient (though politically unpopular) policies so that Singapore:

• has unilateral free trade
• admits unusually large numbers of immigrants
• supplies most medical care on a fee-for-service basis
• means-tests most government assistance
• imposes peak load pricing on roads, and
• fights recessions by cutting employers' taxes

Brian Caplan offers three possible explanations of the paradoxes of Singaporean political economy.

Serious floods lead to broken windows

In an article in yesterday's Irish Times, the ESRI's Prof Richard Tol suggests that the clean-up operation may boost the economy. A short extract gives the main details.

Prof Richard Tol of the Economic and Social Research Institute (ESRI) has said that while the flooding has caused widespread damage, there may be an unexpected fillip to the economy once the clean-up operation begins. “Floods are bad but flood restoration can actually provide a stimulus to the economy,” said Dr Tol.

Dr Tol pointed out that he was not downplaying the impact the floods had on people who lost their homes and businesses, some of whom were not insured. However, he said that one of the unusual consequences of the restoration work, once it begins, is that it will provide an economic stimulus, generating local work and business in construction, engineering and in retail sales.

“What the water has done is it has destroyed many things. But once insurance is paid, there will be a lot of money coming into the country. Most of the funds will come not from Irish insurance companies but will be called in from international reinsurers. So it will be mostly coming from abroad, which is a stimulus.”

He said that consumption would increase in affected areas as restoration work began, providing a measurable boost. “As such there is a silver lining to the flood,” he added.

A silver lining! An estimated €250 million euro worth of property has been destroyed and Tol finds a "silver lining". Quick, get the ESB to open up more dams! The path out of the recession has been found. Surely they'd be able to cause at least double the damage again in no time at all and we'd have twice as much of this "silver lining". And don't send the army in to help people. Have them get out the heavy artillery (they do have guns, don't they?) and blow up buildings and stuff on high grounds that escape the floods. Pretty soon we'll have enough "silver lining" for everybody.

Richard Tol, what are you at? Yes the floods will lead to expenditure on repairs but that money will come from reduced expenditure elsewhere. Open your other eye! Have you every heard of The Lesson which Hazlitt brought to us from the work of Federic Bastiat. You must have!

Here is Hazlitt's piece on the simplest application of The Lesson as proposed by Bastiat. The Broken Window is short enough to reproduce here in it's entireity. Read it. Think of the €250 million that will be spent on flood repairs. Read it again.

Let us begin with the simplest illustration possible: let us, emulating Bastiat, choose a broken pane of glass.

A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

Aren't all these international insurance companies nice to be giving us this "stimulus" money to pay for the flood repairs and they'd never want it back. Would they?

UPDATE: Prof. Tol took his ideas from the paper of record and put them over the airwaves with George Hook on Newstalk's The Last Word. You can listen to the short interview by going here.

I hope they don't teach what they preach!

Today has seen Finbar Geaney of the Dublin City post primary branch of the TUI make a number of media appearances. He started the day on RTE's Morning Ireland, later on he spoke on Lunchtime with Eamon Keane on Newstalk and finished the with an segment on Today FM's The Last Word with Matt Cooper. His RTE interview is available here.

What did he say? Here is an extract from a press release issued by the TUI Dublin Branch.

Speaking at press conference in Dublin today Finbar Geaney of the Dublin City Branch of the Teachers Union of Ireland said that we are witnessing the greatest betrayal in the history of the Irish trade union movement. The ICTU officials have bought the entire government agenda and are behaving now as government agents within the trade unions. However this pay cut will be resisted and the union leaders who are attempting to foist in on their members will be replaced through the action of ordinary members.

Ireland is a rich country and it is time to make the multimillionaires and billionaires pay for the crisis which is their creation.

Geaney claimed that people were gambling "hundreds on billions" on the stockmarket and that had Sean Quinn being taxed for one billion he would not have been able to lose in trades involving shares in Anglo Irish Bank. He also claimed that a broad increase in taxes on Denis O'Brien, Bernard McNamara and other high net worth individuals is the optimum route out of the crisis in the public finances.

Another group give a similar set ideas here (This group is related to Finbar Geaney though he named in an article in the pamphlet. Though he may not be entirely unrelated if he is the same Finbar Geaney who wrote this 1972 piece). Anyway the set of proposals that include:

• Overhaul the tax system to create an equitable system. Make the rich pay more tax.
• Emergency legislation to close the tax exile rule which allows the wealthy to abscond without paying taxes.
• Remove all property-based tax incentives.
• Tax all income over €100,000 at a surcharge rate of 70 percent.
• Introduce a special 3% wealth levy on all income producing assets and houses, except the family home, for those earning more than twice the average industrial wage.
• Cut VAT rates and increase capital gains and corporation tax.
• Introduce a 35-hour week, while preserving existing pay rates in order to create extra jobs.

The general view here is a case of taking from one group simply because they have more. Is this what they also say in the classroom? I hope not! Don Boudreaux has an excellent piece in The Pittsburg Herald Tribune from 2005 contrasting our attitudes to property in how we deal with children and how we deal with each other. The piece is Simple rules for a complex world.

Take, for example, the rules to avoid envy and not take other people's stuff. In political discourse envy is stoked to encourage the taking of other people's stuff. Politicians proudly exhort audiences to covet wealth possessed by others. In stentorian tones they promise to take from the never-precisely-identified "rich" and give to the rest of us. We're told that we deserve this wealth simply because others have more of it than we do.

Would you ever tell your child, "Junior, if any of your classmates have nicer toys or more candy money than you have, you should envy those classmates. Stew in anger and resentment that some children have more material things than you have!"

Of course, no parent would even think of feeding his child such dysfunctional advice. So why do so many adults tolerate -- and even applaud -- identical sentiments when expressed by politicians? When candidates stump for income "redistribution" on the grounds that some people have more money than other people, they're playing upon and fueling envy -- an especially ugly and anti-social sentiment.

Speaking of thievery, what parent wouldn't severely punish a child who actually took a classmate's money or toys? What parent would excuse this offense if the child says, "I took it because my classmate is richer than me"? Or if the child says, "I took it because I can use those things better than my classmate can"? I've yet to meet the parent who would tolerate such behavior or such self-serving excuse-making in his children.

Yes, yes, I know that ours is a republic in which we allegedly consent to taxation through the political process, by majority rule. But I remain uneasy. If Thomas informs me that he and several of his friends took another playmate's money after voting to do so, I'll be furious with him. And my fury will only grow if he tries to excuse his gangster thievery by telling me that the election was a fair one in which even the victim cast a ballot.

Our world indeed is complex. But because the rules we teach our children unambiguously promote their well-being and the well-being of our society, we should apply these rules with much greater consistency and not excuse voters and officeholders from these rules just because they're acting politically.

If it's good enough for our kids it should be good enough for the rest of us.