With typical boorishness, the UK Government chose Good Friday to bring into force the cuts to family tax benefits that will drive even more British families into poverty (according to the Institute of Fiscal Studies, households with children can expect to lose £511 a year on average, with total losses of £1,335 since the Coalition took office in 2010). This will no doubt add to the numbers of children going hungry, described by the London Evening Standard yesterday in a shocking article that speaks of households that run out of food halfway through the week and children whose teeth fall out from lack of nourishment. It quotes the Royal College of General Practitioners on the rise in rickets and reports a survey of Inner London schools in which 82% reported that poor nutrition was affecting pupils’ ability to concentrate and 42% said that a majority of their children were malnourished.
I was never a big fan of family tax credits, for reasons I will explain in a moment, but their introduction was undoubtedly the most genuinely redistributive initiative taken by the New Labour government that really did seem to improve the quality of life for poor households with children – or at least prevent it deteriorating further in the increasing polarisation of wealth that has been taking place over recent years.
The Labour government was elected in 1997 with a clear mandate to do something about low wages and child poverty. The British trade union movement had historically been split on the issue of statutory minimum wages, with the unions representing better-organised workers arguing that it would hinder their ability to raise wages by collective bargaining at company or sector level (ignoring the pleas from feminists, as well as representatives of low-paid and unorganised workers who insisted that ‘a floor is not a ceiling’). But in the long bitter Tory years, when Labour was in opposition and they saw the steady erosion of trade union rights, as well as the steady fall in the real value of wages, they came round to the idea. At this point, the Labour government was faced with a choice: it could set a high minimum wage (which, once set, would have been very difficult to remove), or it could set a low one, in the realisation that this would not be enough to keep households out of poverty if the adults in them were working part-time or on low wages, and buttress this low wage with additional means-tested forms of financial support.
It chose the latter option, and in 1999 introduced a minimum wage that was low by European standards along with the family tax credit system. This system was intended to avoid the various ‘poverty traps’ and ‘unemployment traps’ that existed under the previous system whereby poor adults with children to support actually lost money if they came off benefit to work in low-paid or precarious jobs, so there was no incentive for them to enter the labour market. The tax credit was, in other words, part of a stick-and-carrot scheme designed to get people into work and off benefits (and several of the benefits they would previously have been entitled to were dismantled in the process of introducing the tax credits).
At the time, this low minimum wage/tax credit combo was greeted by most people on the left as a sign that the government was moving in a progressive direction. In fact, it seems that it was doing the very least it could get away with, desperate to find a solution that would not upset big business.
How do I know this? I have in front of me a book called ‘The Power of Productivity: Wealth, Poverty and the Threat to Global Stability’ published in 2004 by one William W. Lewis. Lewis has an interesting cv. According to the blurb, he ‘held several policy-making positions in the US Departments of Defense and Energy and also served in the World Bank’ before going on to become a partner at McKinsey and Company and then found the McKinsey Global Institute. I first became interested in the McKinsey Global Institute in the early 2000s when I was doing research on offshore outsourcing, and the Institute was putting out reports claiming that offshore outsourcing was not only good for globalisation and good for the American economy but also good for American workers (because it helped bring down the cost of consumer goods and also helped US businesses thrive). I decided to buy the book to find out more but as I read it realised that the McKinsey Global Institute has a finger in a lot of other pies too.
Lewis is nothing if not a name-dropper and in the introduction (‘prologue’, as he puts it) to the book he describes how shortly after the Labour government was elected in 1997 ‘Gordon Brown, the new chancellor of the exchequer, contacted me through Adair Turner, a former partner of mine who was then head of the Confederation of British Industries … He said that during the UK election, our study of France and Germany was the best economic analysis he had read … and offered to pay something for a UK study’.
The book goes on to address a number of issues which might at first seem quite disparate: the cost of land in various countries and the ease with which it is possible to get planning permission to change its use, productivity in a range of industries, including a curiously detailed comparison of a small shop in a favela in Brazil with a supermarket … Oh, and family tax credits! The connection between these diverse issues was not immediately obvious and it took me a while before things clicked into place. But once I saw the connection it all became clear. The key question to ask was where the Institute got its money from; and the answer made it obvious: its three biggest contributors were Wal-Mart, Tesco and Carrefour, the three biggest retailers in the world.
Each of the policies Lewis advocates so strenuously (and for which, by his own admission, he has gained the ear of political leaders in many developing countries – including India – as well as the leading G7 economies) is a policy that directly benefits the global supermarket chains that are his paymasters.
What US company stood to benefit more than almost any other from offshore outsourcing to China in the 2000s? Wal-Mart. Offshoring made it possible to bring in shiploads of cheap consumer goods from China and sell them by the million to poor US families for whom these rock-bottom prices concealed the real fall in the value of their incomes. Meanwhile the deindustrialisation of huge swathes of America added to the numbers of desperate people prepared to come and work for the company for equally rock-bottom wages. Interestingly, opinion poll after opinion poll has shown that most US workers would prefer to forego some of the cheapness of goods in favour of decent jobs with decent wages but workers are always an electoral minority and under both Clinton and Bush it was a safe bet that the larger electorate (including the elderly and the economically inactive as well as workers) would be more likely to vote for those who could deliver cheap goods rather than fair wages.
What about the obsession with planning laws? Lewis rants at some length about how difficult it is to get planning permission for new developments in many parts of the world and complains bitterly that Europeans tend to over-value their historic buildings. Why does this annoy him so much? because planning restrictions make it difficult for Carrefour and Tesco to build huge out-of-town hypermarkets.
What about small firms in developing countries? The favela shops in Brazil, it seems, are inefficient. According to Lewis, retail productivity would be much higher if everybody shopped in a supermarket. He concedes that the favela shop his team observed was providing employment for the woman who ran it, and that she could take care of her children while she worked there, but comments snappishly that she would be much better off working in a supermarket where she could always work part-time if she had a childcare problem, and that the Brazilian exchequer would be better off too if she did this because, unlike the favela shop, the supermarket would be paying tax.
When he gets to the subject of India he really loses his temper (and shows his hand in the process). ‘Prohibitions on foreign direct investment in retailing in India prevent Carrefour, Tesco and Wal-Mart from competing with Indian retailers in India’ he splutters indignantly on page 284. Now how unfair is THAT! (since the book was published, of course, things in India have gone a lot further in his desired direction. I read recently in the Economist that there has been a huge growth in supermarket shopping there).
And what about family tax credits? Lewis’s view is that, along with the restrictive planning laws, the factor that is holding back European productivity more than any other is the high minimum wage. Over and over again he attacks it, and each time he attacks it, he repeats the mantra that ‘the Earned Income Tax Credit is a better way of achieving after-tax income distribution objectives than the high minimum wage’, the mantra that had such a receptive hearing from New Labour. Why? well, put very very simply, the tax credit is a way for stingy employers (like Carrefour, Tesco and Wal-Mart) to pay very very low wages in the knowledge that these will be topped up by a direct subsidy from the state. In other words, while they may seem on the face of it to be a subsidy from richer taxpayers to the poorest and neediest in our society, they are mainly a subsidy from the taxpayer to the employers (employers who frequently, to add insult to injury, are also major evaders when it comes to paying their own taxes).
The New Labour years were sweet for supermarkets in Brtain. Not only was the position of the dominant few massively consolidated, but they managed to spread their power across new sectors of the economy, for instance taking on the roles of filling stations, pharmacies, financial services companies and post offices. This is not the place to detail the many scandals that there have been, for instance, about their land-hoarding, their misuse of their monopsonistic power to drive down farmers’ earnings, the way they lean on planning committees or, most recently, their exploitation of unemployed young workers, forced to work for nothing or lose their benefits. But there can be few people who are not aware of their growing power, power which has grown still further under the Coalition government, whether it is to lobby for changes in Sunday opening hours, to redirect bus routes to their doors or to open new supermarkets in areas where the vast majority of local people and local small businesses do not want them. Even the new minimum price for alcohol will directly benefit them: the extra money that poor people will have to pay for low-quality alcohol will NOT go to the government in extra tax; it will simply be kept by the supermarkets as extra profit.
In the parts of London I visit, every new housing development seems to have a big-chain supermarket on the ground floor with flats upstairs, a proportion of which are supposed to be earmarked for social housing. This must be mightily convenient for the supermarkets. Not only do they have captive customers in the same building; if some of the residents of the social housing are also desperate for work, they also have access to a cheap and very flexible workforce that can be summoned at short notice to put in extra hours stacking shelves or at the checkout on the ‘just-in-time’ principle. Even if the public outcry about the ‘work experience’ schemes means that they can’t actually get these workers for free, they can still be sure that the minimum wage will be kept low.
And if some of these low-paid workers will no longer get their wages supplemented by family tax credit to bring them up to a level a family can actually subsist on, what do they care? With unemployment growing the way it is, there are plenty more where they came from.