Tuesday, August 23, 2011

Rot at the centre of New Zealand economic commentary

Matt Nolan over at TVHE takes issue with Gareth Morgan's latest NZ Herald column.

Matt hits some of the problems in that piece. But he's probably pulling his punches out of professional courtesy. As I'm in the academic world instead of the consultancy world, mostly, I don't have to. And so I'm going to smack Morgan around a bit on his history of economic thought.

In particular, Morgan name-drops J.S. Mill in favour of redistributive spending. Morgan writes:
It was during the industrial revolution that grotesque disparities in wealth and intensified impoverishment of the workhouse poor led the economist philosophers of the "enlightenment period" to conclude the purpose of taxation was, as John Stuart Mill put it, to "favour the diffusion rather than the concentration of wealth".
Ok, let's go back and have a look at what Mill advocated then. Mill definitely supported redistribution for the alleviation of absolute poverty and starvation. But he also worried that if the provision of relief made relief more attractive than work, "the system strikes at the root of all individual industry and self-government." Let's go back to source:
In so far as the subject admits of any general doctrine or maxim, it would appear to be this—that if assistance is given in such a manner that the condition of the person helped is as desirable as that of the person who succeeds in doing the same thing without help, the assistance, if capable of being previously calculated on, is mischievous: but if, while available to everybody, it leaves to every one a strong motive to do without it if he can, it is then for the most part beneficial. This principle, applied to a system of public charity, is that of the Poor Law of 1834. If the condition of a person receiving relief is made as eligible as that of the labourer who supports himself by his own exertions, the system strikes at the root of all individual industry and self-government; and, if fully acted up to, would require as its supplement an organized system of compulsion, for governing and setting to work like cattle, those who had been removed from the influence of the motives that act on human beings. But if, consistently with guaranteeing all persons against absolute want, the condition of those who are supported by legal charity can be kept considerably less desirable than the condition of those who find support for themselves, none but beneficial consequences can arise from a law which renders it impossible for any person, except by his own choice, to die from insufficiency of food.
What did Mill favour? Indoor relief in workhouses that was always less desirable than working for wages but preferable to starvation. So far from favouring heavily redistributive income taxation to alleviate the problems of the workhouse poor, Mill favoured the workhouse.

So it isn't just the modern amoral mathematization of economics that leads to opposition to Morgan's preferred policies.

Further, as West points out, Mill opposed progressive taxation. Here's West:

The fact moreover that Mill made it quite clear to the Select Committee on income Tax that he was not in favor of a progressive income tax, separates him from most modern advocates of a negative income tax plan. Mill's objection to the progressive income tax was based partly on his demand for "social justice," and partly upon his concern for incentive effects, not at the lower end of the income scale but, again, at the upper. He objected that "to tax the larger incomes at a higher percentage than the smaller is to lay a tax on industry and economy; to impose a penalty on people for having worked harder than their neighbours."
And what do we find when we go back to source? The line immediately prior to the one West quotes reads:
Both in England and on the Continent a graduated property tax (l'impĂ´t progressif) has been advocated, on the avowed ground that the state should use the instrument of taxation as a means of mitigating the inequalities of wealth. I am as desirous as any one that means should be taken to diminish those inequalities, but not so as to relieve the prodigal at the expense of the prudent.

So Mill favoured using taxes to mitigate inequality but not if it punished the prudent in favour of the prodigal. So all of this hints that maybe, just maybe, Morgan does violence to the Mill quote he initially presented. Let's check. Here's the source, in a fuller context. The initial italicized portion forms the question posed Mill in his testimony before Parliament:
I quite understand the force of your argument as between one portion of the upper classes, and the other portion, that is to say, the distinction that you have so clearly and admirably stated between the owners of permanent and terminable incomes, and the owners of precarious and certain incomes; but then I wish to draw your attention to quite another division, the next division of society, not according to the source of income, nor according to the tenure of income, but according to the quantity of income relatively to the wants of human nature for subsistence and for comfort, and to ask whether it did not appear, that upon the whole, the adoption of this principle, that savings are not to be taxed (setting aside the degree in which you may be able to give it a precise application), and the attempt to frame a law upon that principle, would not be a change in our law favourable to the condition of the poorer classes of society as compared with the wealthier? 
I think it would be favourable to the saving classes, whether poor or rich, compared with the spending classes; and that consideration I think is even paramount to the other. If the rich are to be subject to a greater proportionate amount of taxation than the poor, I think it ought to be done in some other way. A succession duty is the most unobjectionable mode of doing it, because in that way it is confined to hereditary wealth. I think you must allow people to retain the full advantage for their lives of what they have acquired; but the State may deal with it on the occasion of succession. I certainly do think it fair and reasonable that the general policy of the State should favour the diffusion rather than the concentration of wealth, but not, I think, by taxing people twice on the same portion of their income, or by taxing people for the fact of their saving. Taxing people on what they save, and not taxing them on what they spend, or taxing people on a larger proportion of their income, because they are better off, does not hold the balance fairly between saving and spending; it is contrary to the canon of equity, and contrary to it in the worst way, because it makes that mode of employing income which it is public policy to encourage, a subject of discouragement. [emphasis added]
So the line after the one Morgan cites specifically cuts against capital gains taxes and progressive income taxes in favour of progressive estate taxes. In other work, Mill argues in favour of a proportional tax on expenditure above a minimal threshold. Sure, this generates average progressivity, but it's hardly a progressive marginal tax schedule. Morgan can go read Kurer in HOPE.

I'm not a history of thought scholar. But I took enough history of thought in grad school to know that Mill favoured indoor relief. In other words, he worried like hell about "welfare bludging". The debates we're having today over welfare aren't all that different from the ones had a century and a half ago over the British Poor Laws. We can read arguments today about whether women have an incentive to have kids out of wedlock so as to get on the DBP. A hundred and fifty years ago, Mill advocated that the poor in workhouses observe strict separation of the sexes to avoid the Malthusian problem. There is nothing new in current welfare debates. And yet Morgan calls today's debates about incentives facing the poor in the face of relief "dumbed-down".

Like Matt, I'm really frustrated by the article. I'm really sympathetic towards arguments for a guaranteed minimum income in place of the current welfare system. But I sure would know better than to cite Mill as support.

1 comment:

  1. I notice Morgan is against the idea of a land tax whereas
    J. S Mill is pro:[quoting http://www.interest.co.nz/rural-news/53668/opinion-land-crisis]:

    "When the sacredness of property is talked of, it should always be remembered that any such sacredness does not belong in the same degree to landed property. No man made the land: it is the inheritance of the whole species."

    “The land of Ireland, the land of every country, belongs to the people of that country."


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