Is there a case for asset-based welfare?

Most of the tax recommendations in the Resolution Foundation’s epic Intergenerational Commission report published this week will bring a smile to the face of public finance experts.

Scrap council tax and replace it with a progressive property value levy? Get rid of inheritance tax and replace it with a lifetime gift tax? Eliminate the loophole which means over-65s don’t pay national insurance on their wages?

The politics of these policy proposals are, of course, a head-exploding nightmare. Property taxes are the third rail of British politics – touch it and it’s liable to kill you. Levies on pensioners are scarcely any less dangerous. And given inheritance tax is already the most reviled of all taxes imagine trying to sell the public a beefed up version… 

But the public finance economics is uncontroversial. The community of credible researchers in this area have been urging such moves for a long time now. Yet the most eye-catching of the foundation’s recommendations, the proposal to give everyone access to a lump sum of £10,000 on their 25th birthday, will divide opinion among experts.

The theory of asset-based egalitarianism goes back to Thomas Paine. In his 1797 pamphlet Agrarian Justice Paine proposed that everyone should receive a sum of £15 at the age of 21 (equivalent to around 65 per cent of a labourer’s annual income at that time) funded by a tax on the estates of the wealthy.

“To the numerous class dispossessed of their natural inheritance by the system of landed property it will be an act of national justice,” he wrote.

The idea of tackling wealth inequality directly bubbled around in the following centuries, but it was given new impetus in 1991 by the US economist Michael Sherraden, who argued in favour of establishing statefunded savings accounts for the less well-off as an alternative to traditional income redistribution and public spending.

And in 2005 the UK got a policy motivated by the theory of asset-based welfare. This was when Gordon Brown rolled out his “Child Trust Funds” – £250 paid into a fund for every child at birth (more for those from poorer families), which they could access at age 18. CTFs were scrapped by the coalition in 2011. But Resolution thinks the concept should be resurrected.

Should it? Resolution proposes that the uses to which the £10,000 “citizen’s inheritance” could be put should be limited to funding additional education and training, paying off tuition fees, putting down a deposit for a home, investing in a business or saving in a pension. So no Caribbean holidays or smashed avocado binges.

But if the government wants to help out hard-pressed millennials, why is it better to give them a lump sum rather than simply a higher income through the tax and benefits system, or specific support? The case for favouring asset-based welfare over more traditional redistribution will depend in large part on the counterfactual – what good things will the policy facilitate that could not have been facilitated more efficiently in other ways?

There might be other advantages though. Advocates cite indirect benefits, such as helping people cope with risk better, encouraging the habit of saving, and reducing wealth inequality. More broadly, the theory is that it will give people a greater degree of power over their lives than traditional redistribution.

“Income only maintains consumption, but assets change the way people interact with the world,” said Sherraden. “With assets, people begin to think for the long term and pursue long-term goals. In other words, while income feeds peoples’ stomachs, assets change their minds.”

The evidence on this has been inconclusive. But, to be fair, this is because asset-based welfare hasn’t been widely implemented. And, where it has, it has not been sustained for long enough to give clear results.

Perhaps, after suffering the introduction of tuition fees, this is one UK public policy experiment in which millennials deserve to be the guinea pigs.

#assetbasedwelfare #childtrustfund #MichaelSherraden #millennials

Would Jamie Oliver’s junk food advertising ban actually work?

The latest target of Jamie Oliver’s epic anti-obesity campaign is junk food advertising. The celebrity chef wants the government to impose a pre-9pm ban on broadcast advertising for fast food restaurants and unhealthy snacks, as well as tightening restrictions on their promotion on the streets, public transport and online.

Celebrities are flocking to endorse the cause (although not, so far, Lineker, Walkers crisps’ brand ambassador of almost three decades standing). And Oliver, along with fellow TV cook Hugh Fearnley-Whittingstall, took his demands to the House of Commons last week.

The campaign has provoked some predictable “nanny state” objections from libertarians. Yet underlying Oliver’s campaign is the assumption that restricting advertising will actually work in curbing consumption of junk food.

Would it? It’s an old joke among company executives that they know half the money they spend on advertising is wasted, they just don’t know which half.

Some argue that more than half of advertising spending actually goes down the drain. This raises the awkward question: what if advertising that Oliver wants to ban actually has a negligible impact on behaviour? That would imply a junk food advertising ban wouldn’t do much good in curbing consumption – a prospect presumably as distressing for advertisers as it would be for Oliver.

Happily we have some evidence. Researchers from the Institute for Fiscal Studies (IFS) looked into the potato crisps advertising market last year. They managed to match up the TV viewing habits of a large sample of people, the adverts they were exposed to and their subsequent junk food spending decisions.

Their conclusion was that a ban on crisp advertising would actually work in reducing demand, cutting crisp sales by around 10 to 15 per cent.

One can presumably read across from this that a ban on all junk food TV advertising would be similarly effective in suppressing overall demand.

Yet that’s not the end of the matter. The IFS researchers stress that the question of whether bans enhance total social welfare hinges on what economic purpose the advertising is performing.

Is it there to persuade us to buy something, by changing our tastes and stimulating consumption desires which we otherwise wouldn’t have had? Fearnley-Whittingstall made it clear he thinks junk food advertising serves this particular function last week when complained that we are all being “manipulated to eat a much less healthy diet than we did 50 years ago”.

But might advertising not instead be informative, giving us useful information about a product to help us make our choices? Think of an advert for a bank which is launching a new higher-interest savings account.

Some have argued, in a related way, that much advertising is a signal of brand quality. The fact that the manufacturer has invested money to produce and broadcast an expensive advert sends a useful message to the consumer that they are unlikely to produce a substandard product and to then disappear when the complaints roll in.

Or is advertising complementary, perhaps not having a direct influence on our decisions, but making us feel good about our existing purchase preferences, and cementing brand loyalty? Think of those glossy adverts for luxury Swiss watches.

These are the three standard theories. So which might apply to UK junk food advertising, on which companies are estimated to spend around £ 140m a year? If it performs the persuasive function, a ban is likely to be effective. Ditto with the complementary function. But if the advertising is informative, perhaps not so much.

Even if we could say with confidence, there would remain tough philosophical questions about how to judge peoples’ “true” preferences and how to weigh the freedom of adults against the welfare of children, who might be watching TV alongside them.

Economic analysis can only take us so far on such issues. In the end, it’s a question of what sort of society we want to live in.

#advertising #JamieOliver

Could this clash among Facebook’s billionaires end up changing the entire digital economy?

If Hollywood producers are hunting for dramatic subject matter to make a sequel to The Social Network – David Fincher’s brilliant 2010 film about Mark Zuckerberg’s founding of Facebook – they will find plenty of promising material in the social media giant’s real life boardroom battles of the past few months.

It would seem Menlo Park has been the arena not only for a titanic clash of billionaire personalities but also a profound philosophical disagreement over privacy. And the fallout of this row could help shape the future of the internet and the entire global digital economy. Any screenwriter worth their salt should be able to make something out of that.

This week’s resignation of the WhatsApp founder Jan Koum from Facebook’s board was plainly a long time in the making. Indeed, one could argue that it was inevitable from the moment Facebook snapped up Koum’s messaging app phenomenon for $ 19bn in 2014, netting Koum personally around $ 7bn.

Facebook’s business model is essentially monetising the personal data of its 2.2 billion strong active user base. The site scrapes your data off your page in order to serve you up with targeted advertising. It’s hard to overstate Facebook’s reliance on selling adverts. Of the firm’s $12bn of revenues in the first quarter of 2018, more than 98 per cent came from this source.

WhatsApp’s business model was historically very different. There has never been any advertising on the ubiquitous app. Indeed, Koum once described online ads as an “insult to your intelligence” and “the interruption of your train of thought”. When it was founded, WhatsApp’s revenues came from a $1 a year subscription price. And, unlike Facebook, WhatsApp has always refused to gather any data on users except their phone number.

The app has also, unlike Facebook, traditionally put a high premium on users’ privacy, with Koum claiming this was motivated by his upbringing in the repressive Soviet Union. In 2016 WhatsApp even introduced “end-to-end encryption” of messaging, something that once irritated our former home secretary Amber Rudd. But when WhatsApp was folded into the Facebook empire it also surrendered ultimate control. And in 2016 the WhatsApp subscription charge was scrapped.

So: no advertising, no subscription price, no personal data. Where was the profit from WhatsApp’s 1.5 billion users, which Facebook needed to justify that lofty acquisition price, to come from? The answer came two years ago when Facebook updated WhatsApp’s terms of service and privacy policy to include data sharing across the social network. And there seems to have been pressure from Zuckerberg for more.

We don’t know precisely what – there are reports about a weakening of encryption – but it was plainly enough for Koum to walk.

WhatsApp’s other founder, Brian Acton, left Facebook last November. And he seems to be even more disaffected than Koum. Acton recently suggested on Twitter that the Cambridge Analytica scandal – which has seen some 87 million Facebook users’ data transferred to a political consulting firm – meant it was time for people to “delete Facebook”. Pretty remarkable from someone who earned an estimated $3.8bn from Zuckerberg’s buyout of his company.

Acton is investing some of that Facebook cash in something called the Signal Foundation whose mission is “to develop open source privacy technology that protects free expression and enables secure global communication”. That sounds rather like a potential rival to WhatsApp, perhaps even to Facebook. Koum has said he now wants to spend more time playing “ultimate Frisbee”. But perhaps he might be persuaded to lend a hand to his old partner.

We seem to be at a crossroads in the development of the digital economy. Privacy breaches, tax dodging, fake news and a host of other scandals mean the golden aura of media and political favour in which the technology leviathans once basked has faded. The age of indulgence for Silicon Valley is over. But now comes the money question. How much do users truly value their personal data, or even understand it? Has the penny dropped among the public that Facebook is not – and never was – a “free” service? Do enough people care to make a viable market for privacy-focused rivals? 

Perhaps the answer is no, in which case Facebook can, having done its penance and tightened up its data rules, return to delivering Zuckerberg’s project of global digital domination. But if the answer is yes, then we might, just, be living through the beginning of the end for one of the fastest-growing and most highly valued companies the world has ever seen.

#data #Facebook #MarkZuckerberg #WhatsApp