Proving the Hills Report on wealth inequality entirely wrong

Do you remember the Hills Report? That\’s the one that said that the 90th percentile family had £850,000 of wealth while the 10% percetile one had £8,000?

And thus that there was a 100:1 wealth ratio in this country?

And do you remember me spluttering that this was entirely insane, that they were measuring the market allocation of wealth (and doing so in a very dubious manner, ignoring the State pension for example, but including private pensions) rather than the allocation of wealth after whatever it is that we do to change that allocation of wealth through State action?

Here\’s yet another little proof that that report isn\’t even worth toilet paper:

More than 90,000 people have “inherited” taxpayer-subsidised council houses from their parents or family members, official figures have disclosed.

Note that this does not include those who have inherited and sold, only those still actually holding such inheritances. And what is the value of such an inheritance?

Official figures indicate that the average council house tenant pays £280 a month in rent, compared with £565 in the private sector. In London, the gap is even larger.

OK, so, the subsidy is £285 a month. £3,420. Over a lifetime (say, you get the council house when you\’re 30, just to be fair, keep it until you\’re 80) is £171,000* without using any discounting to give us a net present value. This is, as above, inheritable, meaning that the next generation can be getting exactly that same wealth for them to enjoy.

From the Hills Report we also know that most of those in that bottom 10% either get council housing (which has that average capital value to the tenants) or housing benefit (which for the ease of calculation we\’ll call the same value). And we\’re not even including the value of housing benefit to pay council rents, a lot of which we\’d expect to see in that bottom 10%.

OK, let\’s discount it, can\’t be bothered to do the sums but call it an NPV of £80,000, why not?

Excellent, we\’ve just cut the wealth ratio from 100:1 to 10:1. This is without even straining ourselves, looking only at one small part of what the welfare state provides.

And we\’ve reached an interesting conclusion. There is absolutely no way that anyone at all has only £8,000 of capital in this society. For there\’s something of much greater value than that, the welfare state.

We might even extend this to a very troubling thought. I can imagine (although am certainly not going to try and work it out) that those in the bottom decile, perhaps the bottom two deciles, have more such capital, more such weatlh, that the third and fourth deciles. The value of that council tenancy (plus HB) is so large that it completely dwarfs those just above the allocation point\’s ability to generate capital for themselves. How\’s about that then? The poor in income are actually richer in wealth than those who have higher incomes?

*Interestingly, given the much higher London subsidy (the Westminster gap for a three bed house is more like £20,000 a year), we have the insane probability that there are those who should be paying inheritance tax on their tenancy in a council house. Not that they get charged it but perhaps they should, eh?

8 thoughts on “Proving the Hills Report on wealth inequality entirely wrong”

  1. Two obvious points – 1) do those rents apply to the same standard of property between public and private sector? ii) it doesn’t pass a smell test that someone with £1m of assets are only 10 times as wealthy as someoe with a lifetime tenancy of a council house and nothing else. Don’t you have to capitalise other advantages the millionaire has – such as future projected earnings?

  2. These figures for the capitalised value of a Welfare State rather blow up the comparisons you are making over at the ASI between incomes in socialist countries and the higher ones in capitalist set-ups. If you are getting a dirt cheap place to live and near free public transport you are better off than getting a huge salary then shelling out for the inflated cost of accommodation etc.The recent child benefit furore over households earning over 40k subsisting on Value beans because the mortgage is so extortionate rather proves this, I would have thought.

  3. Can the value of the council house tenancy be liquidated? That strikes me as an important difference.

    DBC Reed – the cost of the “dirt cheap place to live” and “free public transport” is paid for by society overall. Someone pays for that “free public transport”, typically the taxpayer, and someone pays the opportunity cost of the council housing, again the taxpayer. The households earning over 40k subsisting on value beans are also paying a lot in tax for the poor to receive the benefits of council housing and free public transport. So the comparison between societies should include those costs.

  4. We used to know a family where a council house tenancy was “inherited” without any uncomfortable need for a death. They were a secondary school headmaster and his wife. When they retired they moved to a house they’d bought in Cornwall, and the younger daughter and her boyfriend carried on with the council house. Naturally, they were a keen Labour family renting from a Labour council.

  5. Tracet W
    I was joshing Timmy on his figures for how much better off we are under capitalism over on ASI.The socialist/ communist societies he refers to for comparison,did n’t subsidise rents and fares out of tax-payer revenue which you misguidely dragged into the argument.In a society with nationalised land the housing would be relatively cheap ,built by labourers who did not have to have high wages to pay for house price inflation as in the “free” UK where it is considered normal to make young people pay 100k for the land underneath houses,a fee for the right of residence.Some freedom!Likewise they would have nationalised banks so infrastucture projects like transport could be paid for out of the newly created credit that in the UK is in created by the banks which the British State has to borrow ,pay interest on and stagger under when the deficit gets too great.

  6. The socialist/ communist societies he refers to for comparison,did n’t subsidise rents and fares out of tax-payer revenue which you misguidely dragged into the argument.

    Then the socialist/communist countries subsidised the rents and fares by paying their workers less. For the argument it doesn’t matter whether you divert resources from the workers to poor people (or anyone else you want to subsidise), by taxing their wages, or by employing the workers directly and paying the workers lower wages. (In a mixed economy, a state that tried to finance itself that way would wind up losing all its workers to the private sector, but in a communist economy that’s not an option as the state employs everyone). I’m sorry I didn’t spell out this for you, I hope that you now understand why this is a relevant consideration when comparing between countries. Please let me know if you still have any questions on this topic.

    In a society with nationalised land the housing would be relatively cheap ,built by labourers who did not have to have high wages to pay for house price inflation as in the “free” UK where it is considered normal to make young people pay 100k for the land underneath houses,a fee for the right of residence.

    You’re conflating two concepts here. The value of land and the cost of building housing.
    The value of land in society is dependent on the balance between supply and demand for that land. To that extent, land in the UK is expensive because lots of people want to live here, relative to the alternatives available to them, and lots of people in the UK want to have lots of green open space and not many ultra-high apartment buildings. So demand is high, and land supply is limited. If the same factors applied in a society with nationalised land, the opportunity cost of land would also be high.

    Building housing is expensive if you want things like protection of old historic buildings and insulation and the like. If building labourers are being paid a competitive wage, overall their labour costs are a wash, the higher competitive wages are, the more the labour to build a house costs, but the more said labourers can afford of their own labour, and vice-versa (obviously the more efficiently builders’ labours can be used, the cheaper houses are). So builders’ wages are a red herring, unless we’re talking about a society that artificially limits or increases the supply of builders compared with other activities.

    Likewise they would have nationalised banks so infrastucture projects like transport could be paid for out of the newly created credit

    Ah, no. Infrastructure projects are paid for by diverting labour and raw materials to build the infrastructure. The cost of infrastructure projects is the cost of what else we could do with that labour and raw materials. That’s as true in a socialist country as in a capitalist country. Creating new credit does not create new labour and raw materials directly.
    There are some gains to be had from more efficient availability of credit, banks do serve a roll as financial intermediaries, eg if someone can take out a £100,000 mortgage on their house, from a bank to invest in a new business, rather than having to round up a bunch of private individuals who will in total loan them all that money, and negotiate all the individual deals, then quite possibly that person has more time available for their new business, and that’s a gain in economic wealth. But if countries just create credit with no regard for the available level of resources and labour they just create inflation.

  7. @TW
    Having hastily abandoned the idea that workers’ flats were paid for by the tax-payers (apparently somehow different from the workers in a workers’ state), you are now saying the workers took a pay cut to pay for them.It is in fact in the free world where the workers take a cut in what they have to spend by forking out for the expensive plot of land underneath their houses.So ,to all the other benefits council tenants are able to monetize in a welfare state, should be added the up-front 100k for the land they live on. If you went back further to when this country had nationalised industries ,you could also aggregate the people’s shares in them as well. Does n’t look good for Timmy’s oh how lucky we are comparison.

  8. DBC Reed, can you please tell me what I wrote that gave you the impression that I had abandoned the idea that public housing in the UK, and in many other countries, is paid for by the taxpayers? I have re-read what I wrote, and I can’t see anything that implied that. If I said such a thing, I would like to know it so as to hopefully avoid that false implication in the future.

    What you did say was that socialist/communist countries didn’t pay for their public housing from taxes. You did not provide any cite for that source, my observation in response was that if so, then they paid for the public housing they provided by in some other way taking resource away from the workers.

    To repeat myself, if a government provides public-housing below market cost for its citizens, or some of its citizens, or if it provides then either the cost of doing so is paid for by taxpayers, or it’s paid for by workers in being paid less than they would otherwise get for their labour. It’s either one or the other.

    What I am doing here is saying that society has to pay for public housing, etc, one way or another. Being socialist or capitalist doesn’t change that fundamental fact.

    Please let me know if you still are having any trouble understanding this.

    It is in fact in the free world where the workers take a cut in what they have to spend by forking out for the expensive plot of land underneath their houses.

    And equally in a Communist state, people pay the opportunity cost of land devoted to housing rather than to other purposes (be those other purposes a factory, green farmland, biodiverse forest, or a public school). Be your economic system socialist or capitalist, society must still pay the opportunity cost of the land.

    So ,to all the other benefits council tenants are able to monetize in a welfare state, should be added the up-front 100k for the land they live on.

    Can council tenants monetize their housing benefits, and in which welfare states can they do that? I thought that they couldn’t in the UK.

    It occurs to me that when you say monetize, you might only mean that the wealth council tenants have as a result of their tenancy should be included in the wealth calculations. Then you’re agreeing with Timmy.

    If you went back further to when this country had nationalised industries ,you could also aggregate the people’s shares in them as well.

    And you should aggregate the people’s liabilities to those nationalised industries as well.

    Doesn’t look good for Timmy’s oh how lucky we are comparison.

    Actually it makes no difference. Providing public housing or free public transport simply shifts wealth from some people to other people. (As a second-order effect, this sort of wealth transfer might reduce work effort, and/or efficiency, so the higher the provision of public services the less productive societies are, but Timmy’s figures already capture that.)

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