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Tuesday, 7 February 2012

Trading On Greed and Fear In The Middle-Class

The ebbing financial tide is leaving many weird schemes high and dry - Madoff's ponzi, Icelandic savings accounts, Irish real estate, Greece, Californian municipalities, Royal Bank of Scotland... So we should expect to see at least a little of the same weirdness among the UK public accounts. 

Actually there's quite a lot, as you've probably guessed from the title of "Sharper Axes, Lower Taxes" and its cover design. And you can rely on the Institute of Economic Affairs to point it out in this fashion. The IEA is a research and educational charity whose "mission is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markts in solving economic and social problems." Street: "We give it to ya raw." Don't look for a juicy political manifesto from these guys. The Tea Party they are not. Look for pragmatic next steps and the odd yelp. The choice is yours to make.

But the thought that struck me most often while reading this book was not how the carpet at HM Treasury will cope with all the blood. It's that the font of all weirdness in the public accounts is the lethal cocktail of fear and greed whipped up for the middle class. 

This is perhaps best explained by Kristian Niemietz in the introduction to his chapter on welfare spending. Basically, a spending decision is more likely to be driven by the range of people who appear to benefit than the reality of who pays. This seems merely obvious at first, though not planned. But this is textbook stuff for politicians and public officials. First, they create a 'fiscal illusion' by simultaneously highlighting the benefits of a spending programme to the recipients - including as many (undeserving and greedy) middle class people as possible - and shrouding the costs in mystic runes of Whitehall jargon and indirect taxes (but Whitehall can't even count, so it's likely to get this wrong). This is why politicians are accused of having no apparent means of funding their promises. And it's why we have VAT, and taxes on alcohol, tobacco, gambling and driving around, and employer contributions and public sector borrowing. These costs are designed to be forgotten. Then, because "there is no direct link between any particular benefit and any particular tax", the middle class (most voters) will not only welcome the policy behind the spending, but later resist the abolition of the unduly expensive benefit, fearing that it will not translate into lower middle class taxes. "The benefit is certain; the tax reduction that could correspond with its abolution is not."

To emphasis the fact that this is a genuine play on greed and fear in the middle class and not some kind of whacky conspiracy theory, Kristian points out that those who advocate "a drastic expansion of the British welfare state" call this effect "middle-class buy-in":
"while narrowly targeted policies will fail to draw on the strength of middle-class political pressure to defend welfare, policies with wider coverage actively recruit the sharp elbows of the middle class." The Solidarity Society: why we can afford to end poverty, and how to do it with public support. Fabian Society, 2009
This is why Richard Murphy recommends universal social benefits and comprehensive pensions for all, and national pay deals for local workers. The comfy middle class soak up the benefit but don't see the cost, leaving those on lower incomes to bear the reality of stagnating growth, fewer jobs and the lost chance to use their lower local living costs to compete in, say, manufacturing.

These tactics are a particularly insidious form of disease the only cure for which is the rapidly growing and seemingly unquenchable thirst for sunlight that is the subect of this blog. There is no substitute for obtaining people's informed consent to public expenditure. So it was certainly worth wading through "Sharper Axes, Lower Taxes" and I'll be featuring more from it. That's not to say I agree with every suggested chop, but I'll be doing my best to hunt out the fiscal illusions and suggest the pragmatic choice.

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