Philip Booth: Why does the poverty lobby wage war on markets instead of on poverty?

Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs and Professor of Insurance and Risk Management at Cass Business School.

If the Child Poverty Action Group (CPAG) were to issue a press release this holiday period, which of the following do you think would be the most likely headline?

• CPAG claims that the government is hammering the poor through its one per cent benefit cap.
• CPAG demands action to liberalise planning, reduce costly green measures and reduce taxes on alcohol and cigarettes.

A press release with the second headline would, indeed, be a great Christmas present. But, as a groundbreaking new monograph by Kristian Niemietz (Redefining the Poverty Debate: Why a War on Markets in No Substitute for a War on Poverty) shows, the poverty industry is wedded to socialism.

Our current anti-poverty strategy, based on ever-higher benefits, is a failure and feeds the problem it is meant to solve. Increases in income transfers require increases in taxes. The combined effect of high benefits and high taxes leads to huge financial penalties when families earn more money. The vast majority of families with three children are now in a situation where they lose nearly 75 pence in every pound that they earn because of taxes and withdrawn benefits. This leads to strong disincentives to work, train and form families with more than one adult.

The UK already has Scandinavian levels of welfare transfers and redistribution. You do not have to go to Scandinavia to see the Scandinavian model in operation. People in the bottom 20 per cent of the earnings distribution receive 55 per cent of their income from the state: for them, the government is the main breadwinner. Even people in the fourth quintile receive over 40 per of their income from the state. At least 68 per cent of all children now live in households that receive a major means-tested benefit.

The one solution that the poverty industry will not countenance as a way of dealing with the problem they purport to care about is work. In 2011, Oxfam claimed: “For the past 30 years, the political consensus has held that work is the best route out of poverty. And yet more than four million of the 13.5 million people who live in poverty in the UK are working. […] although work has been advocated as a route out of poverty, for many it does not provide economic independence and may actually damage their health and well-being.” In 2009, CPAG said: “Paid work has been lauded as the route out of poverty, but for the more than one in two poor children with a working parent, that promise has been false.”

The reality is that only two per cent of couple families with one adult in full-time work and one per cent of families with two adults in full-time work were in poverty in 2009. In order to make their case; in order to give the impression that we need a poverty industry rather than a thriving economy to help the poor, the campaign groups focus in their public statements on children in families with parents who do any work at all – even just a few hours a week.

But, perhaps, the real complaint that should be made against the poverty industry is that they miss the “elephant in the room” – the cost of living. If people are poor, their real incomes are insufficient. Real incomes are determined by both income and prices. It is probably no exaggeration to say that the number of statements that the poverty industry makes about government regulation increasing the cost of living is negligible – it would not be surprising if no poverty group had ever made such a statement. Yet, it is here that the UK is an outlier. Our welfare state is of Scandinavian size, but no similar country matches the UK for its cost of housing, childcare and food. Furthermore, energy, tobacco and alcohol prices are increased hugely by government policy.

House prices have gone up 40 times since 1971 whereas prices in general have “only” increased tenfold. Housing without subsidy is now out of reach of much of the workforce, never mind the poorest. Pouring subsidies into the market just increases prices more rapidly. In other similarly densely populated countries, housing costs are much lower. The reason is simply that they have different planning policies. Food is 20-30 per cent more expensive in the UK than in comparable EU countries – again planning restraints are partly culpable because they reduce competition and restrict the use of modern logistics (abolition of the Common Agricultural Policy would help here too). We also have some of the most expensive childcare in the OECD. Furthermore, government policy increases the cost of energy directly by about 15 per cent and, in addition to all this, taxes on alcohol and tobacco cost the less-well-off between 5 and 10 per cent of their income.

The poor spend a particularly high proportion of their income on food, energy, housing, childcare, tobacco and alcohol. Government policy currently makes these things more expensive and then finances a huge benefits bill through high tax rates. This, in turn, makes it less likely that jobs will be created and the poor loose out from this too.

Kristian Niemietz argues that those who believe in a market economy should take on the poverty lobby. They should attack it head on, with reasoned argument. We should make the case that only a free economy can reduce absolute poverty (whether one is talking about Britain or the poorest countries in the world). We should point out that the government needs to liberalise the economy and that the poor will benefit from this the most. We should reinforce the message that income transfers are no solution and can, indeed, compound the problem of poverty.

Just like the Anti-Corn-Law League, believers in free markets should champion the cause of the poor, campaign to win and hope that, like the anti-tariff campaigners, they can disband after victory. The poor are, indeed, our cause: the left has failed them!