11 July 2015

George Osborne was right to introduce a living wage


This is the weekly newsletter from Iain Martin, editor of CapX. To receive it by email every Friday, along with a short daily email of our top five stories, please subscribe here.

It must feel good to be pure. While others make messy compromises, the hardened ideologue, convinced he or she at all times has unique insight into a central universal truth, can sigh and shake their head at the supposed idiocy of those who think the world is a shade more complicated than that.

In this manner, a vigorous campaign is running in Britain on the centre-right against George Osborne’s introduction of a “living wage,” which is really a rebranding of the UK’s minimum wage. In his Budget this week the Chancellor hoped to mitigate his hacking back of an overly complex and expensive system of tax credits by forcing companies to pay workers a little more. While expanding tax credits began as a valid attempt by the former Chancellor Gordon Brown to incentivise work, they have turned into a £30bn labyrinth.

What Osborne announced was a trade off. The work of scaling back tax credits begins, and in return there will be an increase in the minimum wage.

This has horrified parts of the British centre-right, who have responded in a way that makes a pro-market person like me feel virtually like a Communist. Some of the free market economists and commentators involved are my dear friends and people worthy of great respect, but on this one, I fear, they are missing the human point.

Those who have welcomed the move are surely right, and that includes the Secretary of State for Work and Pension, Iain Duncan Smith, who is hardly a known Leninist. The reformers judge that after years of declining and then flatlining living standards being endured by many millions, even a Conservative government (especially a Conservative government) must apply a little common sense and proportionality in addressing a complex problem.

The rich in Britain have done very nicely out of the years since the financial crisis, thanks to cheap money and QE, which has created an asset bubble and aided the accumulation of capital for those who already had a lot of it. Meanwhile, Britons further down the economic spectrum have endured, and continue to endure, a tough time of it.

Ah, say the fundamentalists. You’re advocating capitulation. Don’t you know that wages will find their natural level, always, and here is a chart to prove it? The problem with that is that people are not stupid and they can work out that the fundamentalist will, if truth be told, be perfectly relaxed if the natural level of someone else’s wages ends up being £1 per hour. Those earning £1 an hour might not take quite as relaxed and theoretical a view of this possibility as the right-wing men shouting at them about market purity.

It is of course fine to say that thrusting young types will be happy to get paid miserable wages, because they are just passing through on their way to running exciting businesses and making bigger money later in life. I understand the theory, and it works for some, but those go-getters are outnumbered by the many Britons who are not going to become Sir Richard Branson (who is still in favour of the UK joining the Euro, he said this week, incidentally).

For millions of others – not idlers, but not massive strivers either – hard work is a necessary way to feed their families and to get some satisfaction, dignity and (sometimes) fun in the process. Say to them that you insist on the application of an abstract theory which could, in extreme circumstances, drive their pay down to £1 per hour for said work and in a democracy I bet they won’t vote for a party determined to be that “bold” or “radical.” They’ll think it is nuts.

Partly for this reason, partly out of concern for fellow citizens, the Conservatives in Britain have generally recognised since the expansion of the franchise in the 19th century that not everyone is a thruster. This is what Cameron was talking about in the election when he referred to most Britons wanting “a good life”.

There is a broader point, too, that applies beyond the Conservatives and beyond Britain. We are in the middle of a technological revolution that is rich with promise, but not without dangers. It may appear to have stalled right now, with an out of ideas Apple reduced to reinventing the watch and introducing a yawn of a music service that treats classical music, anything that isn’t Taylor Swift, as a fiddly annoyance that is not displayed properly by composer.

But in medicine, manufacturing and robotics, technology is on the cusp of causing epic amounts of disruption. Although much of it will be overwhelmingly positive – creating new opportunities and jobs – it will not be a one way street. Millions of non-thrusters won’t have the luxury of programming or designing the future; they will have to adapt in circumstances that many will find frightening. Politicians on the centre right who believe in markets are going to have to be alert to their concerns and offer reassurance and some security, as well as establishing the conditions in which business can create the jobs of the future. That is the balance Osborne was trying to strike this week, no matter how imperfectly, with the living wage. He realises that at a time of immense change, practical political reality and tone matters even more than usual, particularly in a democracy. And he’s right.

Iain Martin is Editor of CapX