THE FAIRNESS TEST

Just out from the Reform thinktank in the United Kingdom is a report The Fairness Test.  The author is Dr Patrick Nolan, formerly of the New Zealand Institute of Economic Research.

The current UK government has defined fairness as one of its three core values (together with freedom and responsibility).  The report argues that the current debate on fairness is flawed and in danger of leading policy astray:

  • It is dominated by measures that emphasise existing spending through the tax and benefit system.
  • It assumes that more government spending is synonymous with fairness.
  • Many arguments around progressivity and inequality are based on little more than assertion.
  • The role of economic growth in providing resources for redistribution is often ignored.
  • The actual nature of tax avoidance and evasion (the tax gap) is poorly understood.

It concludes that:

To avoid these problems clearer thinking on fairness is needed. While there is no one single agreed view on fairness most people would accept that the extent to which government actions combat disadvantage should be central to any definition. This supports a focus on education and welfare reform. This does not support encouraging high-earners’ migration, maintaining the middle class money-go-round, increasing personal tax allowances or postponing difficult decisions.

Some specific points in the report resonate with debates on fairness and social policy in New Zealand.

On the book The Spirit Level, the report states:

There is no proven connection between the claims in The Spirit Level and the implied policy responses. The theory on equality could, for example, be used to justify a flat tax (which would equalise proportionate sacrifice).

It notes Okun’s “leaky bucket” trade-off:

Spending on welfare not only comes at a financial cost to the taxpayer but also creates other economic and social costs. This can be illustrated by the famous trade-off between equality and efficiency, which Arthur Okun described as the “leaky bucket.” Money transferred to the poor to alleviate poverty must be, as he wrote, “carried from the rich to the poor in a leaky bucket. Some of it will simply disappear in transit, so the poor will not receive all the money that is taken from the rich.” The losses are due to administration costs and incentive effects. These incentive effects are due to people who are receiving welfare having less incentive to work as they are able to reach a desired standard of living with a lower level of work effort and they may face clawback of assistance as their incomes increase.

The report rightly stresses “the dynamics of income distribution (that people will move up and down in the income distribution over their lifetime” rather than static analysis, and the importance of facilitating social mobility, eg through education.

It criticises the use of personal tax allowances, noting that they benefit primarily higher income earners and damage work incentives because they require higher marginal tax rates to replace lost revenue.  A tax-free threshold, as proposed for New Zealand by the Labour Party, would have similar effects.

Interesting points are made about welfare reform in the United Kingdom, echoing material in the recent Welfare Working Group report in New Zealand:

  • The flipside to having a welfare system which provides an important social safety net is that most people can reasonably be expected to take up work if it is available and adequate.
  • The welfare system is too complex. The Department of Work and Pensions’ Decision Makers’ Guide is no less than 8,370 pages long.
  • One of the first initiatives the Government announced was the Work Programme, which will outsource all welfare to work services. The new commissioning framework will give providers longer and larger contracts, greater freedom and will fund welfare to work services through the savings made in reductions in benefit expenditure. Following reforms begun under the previous Labour administration, a number of benefits for people out of work (such as the incapacity benefits) have been reformed to be more active. These are the right changes.

On education, the report endorses the moves by the UK government to adopt a Swedish-type education voucher programme, saying:

The greater use of choice and competition in the education system can support fairness. Competition is not a zero-sum game where the profits made by private sector companies deprive public services of funds. This zero-sum view ignores productivity. Profits (especially when they attract new entrants into markets) can encourage competition and drive up standards and productivity. These productivity improvements can mean, for example, that the supply of services can expand even when costs are falling. Indeed, as Tony Blair has argued:

“Choice mechanisms enhance equity by exerting pressure on low quality or incompetent providers. Competitive pressures and incentives drive up quality, efficiency and responsiveness in the public sector. Choice leads to higher standards. The over-riding principle is clear. We should give poorer patients or parents the same range of choices the rich have always enjoyed. In a heterogeneous society where there is enormous variation in needs and preferences, public services must be equipped to respond.”

The Business Roundtable has discussed issues of fairness in social policy in a number of reports.  They include the books Equity as a Social Goal by Cathy Buchanan and Peter Hartley, and Middle Class Welfare by James Cox.  Both are cited in the Reform report.

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2 thoughts on “THE FAIRNESS TEST

  1. Pingback: What’s fair? « Homepaddock

  2. I think the followings are relevant to this blog post on fairness.

    “Econophysics : Points Way to Fair Salaries in Free Market”
    http://www.sciencedaily.com/releases/2010/07/100713111732.htm

    The original peer reviewed paper that the article above covered is freely available in the link below:

    “Fairness Is an Emergent Self-Organized Property of the Free Market for Labor” (appeared in the journal of Entropy 2010, 12, 1514-1531)
    http://www.mdpi.com/1099-4300/12/6/1514/pdf

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