Food stamps are just capital controls for poor people

If you want to introduce higher prices for poor people, at least do it openly.

The Guardian's Patrick Butler reports that food stamps are to replace the cash payments currently received by vulnerable people in short-term financial crisis. He writes:

Rather than, as now, offering a cash loan, most councils will from April offer new applicants who qualify for emergency assistance a one-off voucher redeemable for goods such as food and nappies.

Many of the 150 local authorities in England running welfare schemes have confirmed that they will issue the vouchers in the form of payment cards, which will be blocked or monitored to prevent the holder using them for alcohol, cigarettes or gambling.

In classic economics-blogging style, here's another news story. Cyprus is to impose capital controls, for a seven-day trial period. The FT's Joshua Chaffin reports:

Capital controls will be deployed to prevent a stampede of withdrawals by panicked depositors when the banks reopen, possibly on Thursday, after a closure that has dragged on for nearly two weeks.

In broad terms, they will limit the ability to withdraw money, or shift it between accounts or across borders, according to officials. The measures might also delay the processing of cheques.

The link is that both measures won't have the absolute effect that their promotors might hope; rather, they impose a huge, uncontrollable and grey-market tariff on attempts to do what people are used to being able to do freely.

The Cypriot capital controls are the more obvious example of this. For the next week, a euro in Cyprus is worth less than a euro elsewhere. How much less, we don't know, and there will probably never be a clear market rate – especially if the controls are lifted in early April, which the people of Cyprus will surely be hoping will happen.

Nonetheless, if a Cypriot finds themselves urgently needing to get a large number of euros out of the country – say, to close a purchase on a house in the French Riviera – it's relatively obvious what they have to do. Offer someone in the "real" eurozone a quantity of euros in Cyprus to spend the money for them. The premium offered depends on the risk that the capital controls will not be lifted, as well as the value our outsider places on euros which can only be spent in Cyprus, but it's fairly doable from a technical point of view.

Of course, if the premium is too high – if you'd need to promise €5m (Cypriot) to get someone to spend €1m (non-Cypriot) – then you'll likely see movement from the grey market to the black market. In other words, suitcases full of money crossing the Adriatic.

Those effects are basically the same as what we will see if food stamps become widespread. It's best to think of food stamps as a separate currency; one which can only be used buy a certain list of items. Just like the Cypriot euro, it has "capital controls" – you can't just walk up to a bureau d'exchange and hand food stamps in and get pound sterling in return. But just like the Cypriot euro, there are ways – easy ways – of getting around them.

The legal way – analogous to the complicated deal to hand over money in two nations – is as simple here as offering someone a £20 food stamp for a £12 bottle of gin. Given most people buy food, that's a relatively good deal for the person who ends up with £8 profit; they essentially get a portion of their groceries paid for by someone in crippling financial need.

Since food stamps are useful for most people, the premium is unlikely to be very high. But if it is, we get to the suitcase-full-of-money option: find someone who'll take food stamps in exchange for "contraband". Given the ease with which 15-year-olds get drunk in this country, it's a fairly good bet that there are a few shops happy to sell booze to people they aren't allowed to. They might charge rip-off prices, knowing that the buyer's hardly going to complain, but they'll do it.

In the end, then, what is the outcome of food stamps? All things considered, they don't force people in financial difficulty to spend their money on "necessities" rather than "luxuries" (with the two categories odiously defined by government, rather than the individuals themselves). Instead, they impose a tariff on purchases of "luxuries" for those people.

The same economic effect could be had more directly by requiring shops to display two prices for booze and fags: a regular price, and a higher price for "poor people". Given the bizarre crossover between those in favour of welfare cards yet against minimum pricing because it hits the poor hardest – a peculiarly Tory type of libertarianism (fauxbertarianism? libertoryanism?) – perhaps making the doublethink explicit might change their minds one way or another.

US style food stamps. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty Images
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A simple U-Turn may not be enough to get the Conservatives out of their tax credit mess

The Tories are in a mess over cuts to tax credits. But a mere U-Turn may not be enough to fix the problem. 

A spectre is haunting the Conservative party - the spectre of tax credit cuts. £4.4bn worth of cuts to the in-work benefits - which act as a top-up for lower-paid workers - will come into force in April 2016, the start of the next tax year - meaning around three million families will be £1,000 worse off. For most dual-earner families affected, that will be the equivalent of a one partner going without pay for an entire month.

The politics are obviously fairly toxic: as one Conservative MP remarked to me before the election, "show me 1,000 people in my constituency who would happily take a £1,000 pay cut, then we'll cut welfare". Small wonder that Boris Johnson is already making loud noises about the coming cuts, making his opposition to them a central plank of his 

Tory nerves were already jittery enough when the cuts were passed through the Commons - George Osborne had to personally reassure Conservative MPs that the cuts wouldn't result in the nightmarish picture being painted by Labour and the trades unions. Now that Johnson - and the Sun - have joined in the chorus of complaints.

There are a variety of ways the government could reverse or soften the cuts. The first is a straightforward U-Turn: but that would be politically embarrassing for Osborne, so it's highly unlikely. They could push back the implementation date - as one Conservative remarked - "whole industries have arranged their operations around tax credits now - we should give the care and hospitality sectors more time to prepare". Or they could adjust the taper rates - the point in your income  at which you start losing tax credits, taking away less from families. But the real problem for the Conservatives is that a mere U-Turn won't be enough to get them out of the mire. 

Why? Well, to offset the loss, Osborne announced the creation of a "national living wage", to be introduced at the same time as the cuts - of £7.20 an hour, up 70p from the current minimum wage.  In doing so, he effectively disbanded the Low Pay Commission -  the independent body that has been responsible for setting the national minimum wage since it was introduced by Tony Blair's government in 1998.  The LPC's board is made up of academics, trade unionists and employers - and their remit is to set a minimum wage that provides both a reasonable floor for workers without costing too many jobs.

Osborne's "living wage" fails at both counts. It is some way short of a genuine living wage - it is 70p short of where the living wage is today, and will likely be further off the pace by April 2016. But, as both business-owners and trade unionists increasingly fear, it is too high to operate as a legal minimum. (Remember that the campaign for a real Living Wage itself doesn't believe that the living wage should be the legal wage.) Trade union organisers from Usdaw - the shopworkers' union - and the GMB - which has a sizable presence in the hospitality sector -  both fear that the consequence of the wage hike will be reductions in jobs and hours as employers struggle to meet the new cost. Large shops and hotel chains will simply take the hit to their profit margins or raise prices a little. But smaller hotels and shops will cut back on hours and jobs. That will hit particularly hard in places like Cornwall, Devon, and Britain's coastal areas - all of which are, at the moment, overwhelmingly represented by Conservative MPs. 

The problem for the Conservatives is this: it's easy to work out a way of reversing the cuts to tax credits It's easy to see how Osborne could find a non-embarrassing way out of his erzatz living wage, which fails both as a market-friendly minimum and as a genuine living wage. A mere U-Turn may not be enough. 


Stephen Bush is editor of the Staggers, the New Statesman’s political blog.