The poverty of welfare

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The Campaign to End Child Poverty has released a report stating, "174 constituencies in Britain have 50 per cent or more children living in or on the brink of poverty". This is nonsense. A cursory glance at the statistics used, shows that the study defines poverty as "children whose families receive the maximum Child Tax Credit". Therefore, this is not a measure of children in poverty, but families in welfare.

Campaign chairman, Martin Narey is right that "These figures show us that there are millions more children than originally thought being failed by the system", but Campaign director Hilary Fisher is wrong in "pushing the Government harder than ever to do more to end child poverty in our country" and "demanding Gordon Brown does something about it, before it is too late." The 'system' that they decry is in truth the benefits system; the Campaign to End Child Poverty wants an extra £3bn to help the poorest families. Thus, to solve the poverty of welfarism, they are calling for more welfare.

These statistics show how reliant many families and communities have become on the state for survival. This inter-generational welfarism certainly needs combating. Although welfare reform is on the agenda across the political parties, the policies do not go far enough at addressing all the root causes. James Bartholomew, in the excellent The Welfare State We’re In, shows how the welfare state envelops much of this country including health and education. Without wide-ranging radical reform – cutting back the aberrant state to its role prior to WWII – the poverty of welfare will continue.

Quote of the day

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Our 1991 report Why Not Work? is now available online. Here's a small sample of its wisdom:

To offer people the chance to work and contribute their bit to the community must be better than trapping them in a depressing state of enforced idleness that leaves them less and less able to get back to work.

First he came for the wealth creators...

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Barak Obama's social security (pensions) plan looks a mess. Last month, he called for a new social security payroll tax on incomes above $250,000 a year. Currently, the tax is levied only on the first $102,000 of income. That's easily more than the wages of most Americans, but to avoid antagonizing the middle-class millions who do earn more, Obama's plan is to leave incomes between $102,000 and $250,000 untouched. So it's only the 'millionaires and billionaires' – about 3% of the taxpaying population – who will pay it.

Whoever said that politics is two wolves and a sheep deciding what to have for dinner? The argument is that the tax would be just small change for the likes of Warren Buffett. But does that make it just? Where do we end up when politicians forget the principle of equal treatment and are willing exploit minority groups one by one?

Actually, we need more millionaires and billionaries, and we need to encourage people to make themselves millionaires and billionaires. They days have gone when rich people owed their wealth to inheritance so that an extra tax really was small change for an unproductive class. But today, wealth comes principally through building up a business. You take a huge risk, but you reap a huge reward. Like the National Lottery, it's the size of the star prize that induces millions of people to take the gamble. Lower the reward and the number of players tails off remarkably quickly. Taxing 'the rich' is a counterproductive policy.

And, of course, moves like this further complicate the tax code.

The US social security system, like the UK's National Insurance, is already corrupted by this sort of expediency. In the US, the payroll tax is 6.2% – but as in the UK, employers pay a lot more (indeed twice as much, in the US, at 12.4%). That's designed to disguise the tax: employers notice it but employees don't. Until businesses find their costs rising so much that they have to lay people off, of course.

The system's rotten. The quicker we move to a compulsory, privately funded pension system the better.

Such stuff as dreams are made of

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Following the government’s broadly popular welfare reforms, there has been much discussion on welfare. Debate has been centred on how deserving those in receipt of welfare are. Interestingly though, there seem so be growing consensus that people are abusing the system and few have come out in defence of the current welfare system. The status quo has become indefensible, so those in favour of welfare are now calling for the government to spend our (and their) money in “better" ways.

A good example of this supernanny argument is Deborah Orr writing in The Independent. She argues that:

The children who are really at risk of becoming professional system-milkers, on drugs, working in the black economy, causing local havoc, need to be helped while they are still at primary school. It is often easy to spot children who are likely to go off the rails very early on in their education. But the things that will help them – boarding schools, special schools geared to their needs – are invariably dismissed as too expensive or out of step with the idiocy of under-resourced, lip-service "inclusion".

It is indeed often easy to spot children who are likely to go off the rails…their parents have been in receipt of welfare for years. They are the children who grow up in areas that are wholly sufficient on government largesse. These areas have had their societal structures fractured by the downward pressures of government interference. Orr’s idea of removing them further via their inclusion in special schools is something of a perverse incentive. After all it was government interference that created these children, more government is not the solution.

Despite claims that we are all middle class now, there is a clear underclass in Britain whose lives are distorted reflections of the twisted dreams of socially conscious politicians. The need for the special education that Orr is demanding is a by-product of a state controlled life.

She is right about one thing though. The government’s welfare proposals are not radical enough. However, instead of special schools, a good place to start would be a flat tax that incentivizes hard work while taking the poorest out of the income tax net. If this was coupled with the introduction of competition and choice in education, it would go a long way to empowering those downtrodden by government.

Welfare reform

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Influencing policy is rarely straightforward. Sometimes it takes a while for it to sink in. This week James Purnell, the Work and Pensions Secretary, has decided it was time to cut incapacity benefit, making it a “temporary benefit, not a permanent snare" and introduce the private sector into back-to-work programmes. Policies we have been advocating for quite a while.

When the Adam Smith Institute released Why Unemployment and Why Not Work? A Radical Solution to Unemployment - published in 1985 and 1991 respectfully - welfare needed to be changed dramatically. Alas, despite tinkering with the system, the boat continued to head in the wrong direction, disincentivizing people to work. In 1979 there were 700,000 people on Incapacity Benefits, now the number is in excess of 2.5 million.

Last year we released a paper entitled Working Welfare. This called for all working age people not meeting national disability criteria to face immediate work requirements and the delivery of welfare to be devolved to local agencies, which would be paid according to results. Agencies would be rewarded for getting people into work for a set period of time, ensuring an ongoing and personalised service for jobseekers.

Decentralizing the system was essential to the policy proposals in Working Welfare and is key to its success. Yesterday, Frank Fields MP in The Times echoed this point. Let us hope that this government, or the next, heeds this message and that we don’t have to wait another twenty years this time.

See you in the workhouse

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I never thought I would get interested in pensions. But in fact the pensions crisis that the UK now faces is something that has to concern everyone, me included – and not just out of personal interest, but in interest of the county.

We're all living longer, and drawing our state pensions for many more years. Meanwhile, a falling proportion of the population is in work and able to contribute towards those pensions. Growing numbers of older people mean a smaller proportion in work: and at the same time, people are spending longer in education (the government is about to make kids stay in school until 17), kicking about the world on gap years, doing MBAs and the like. So everyone in work has to carry more dependents.

But it gets worse. We used to have a good that laid golden pension eggs – the so-called occupational pension system, work-based savings schemes run by employers. Sadly, over-regulation by Gordon Brown has killed that goose. The UK used to have pension savings larger than all the rest of Europe's. But in the last few years, thousands of employer schemes have closed down. Thanks, Gordon.

What do we have instead? Daft schemes and lots of them – like Stakeholder Pensions, the Personal Account, and the Savings Gateway. All trying to get lower-income people to save for their retirement. Nobody bothers to mention that when they do, they will just lose their means-tested benefits, of course. They might as well spend it on beer now than lose it to the benefits office when they retire.

What we need to do, as expert Alan Pickering said in an ASI report years ago, is raise the pension age and index it to life expectancy – and use the money saved to raise the basic state pension so that nobody in retirement needs to rely on means-tested benefits. So when people do save something of their own, they get to keep it, instead of simply losing state benefits.

All that's needed is a bit of political vision and boldness. Oh well, see you in the workhouse.

Maternity leave... for men?

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Nicola Brewer, the head of the Equalities And Human Rights Commission, is proposing new legislation that will give men up to twelve weeks paternity leave at 90% of pay. She hopes the measure will give men the "same parental rights and responsibilities women have."

In reality, the proposal is meant to correct the problems caused by maternity rights legislation. According to the Telegraph:

Many employers are happier to simply bin job applications from women of child-bearing age. They can afford neither the maternity benefit - soon to be extended by the EU from nine to 12 months - nor the potential law suits.

Giving men maternity leave would supposedly allow women to work, allowing men to stay home. Brewer and her populist colleagues, however, fail to grasp the most basic principles of economics. Economic growth is a factor of production, and production a factor of incentive.

If both a husband and wife can get time off to mind their children and still get paid, why wouldn't they? Meanwhile, companies will be stuck with the deadweight of temporarily unproductive employees. This is not to say--for the record--that there should be no maternity leave whatsoever for women.

Biologically, women need some time off to recover from childbirth and to care for the child (men don't lactate yet--although we could see legislation soon requiring it so men and women are equal). The current nine month leave, soon to be extended to one year, is simply too much and ultimately hurts women who want to work. If men want an extended break, they should quit or negotiate a deal with their employer.
 

Bad google!

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Google has caused quite a stir by drastically raising the price it charges for on-site childcare.  No matter that the childcare provided will be state-of-the-art, or even that they will fully subsidize the service for families who show that their income is below a certain threshold; the decision has raised charges that Google is a "corrupt company that does not care about people" and should spend "less time creating elitist daycare centers and more time figuring out how to "scale" day care for everyone, no matter what their salaries."

Google stocks have been falling or the last few months, and someone recently noticed that Google was effectively subsidizing the childcare of each child up to $37,000 per year, well over than the industry average of $12,000.  They still wanted state-of-the-art care and needed to expand their capacity in order to deal with growing waiting lists, and have realized that it is unfair for them to allow their stocks – held by many of their employees, with or without children – to go down while spending excessively.  The solution was simple; they have raised the out-of-pocket cost for parents.

Google pays enviable salaries and provides perks that have made it the stuff of legend. And let’s be honest – is it really "fair" for Google to spend $370,000 on top of salary for one employee with 10 children, while paying his equally ranked but childless coworker the same salary? 

Moreover, the assumption that companies should have on-site childcare misses almost every lesson taught in introductory economics, particularly those about specialization of labour and the advantages of competition. Google is not a childcare company; it is a search-engine company.  The employees don’t have to accept Google’s childcare, and Google does not have to provide it. If businesses do offer on-site childcare, there is no reason to believe that it will be particularly good or cost-effective thanks to its privileged position in the market.  But the fact that companies do provide it, and that they subsidize it for those who really cannot afford it, is a great perk, and likely a useful recruitment tool.

The suggestion that Google is an immoral company for fully subsidizing state-of-the-art child-care only for employees who actually can’t afford it is absurd.

The skills revolution undermines egalitarianism

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Chicago economist and Nobel Laureate Gary Becker has specialized in human capital and claims that three quarters of America’s wealth is now represented in its people - meaning that human capital is now more important than physical capital. Today’s wealth of the nation lies in people’s skills, knowledge and health. It’s less the fertility of the soil but that of the population that counts.

In his Treatise on the Family, Becker argues that the quality of children also matters because investment in education results in an ability to command a high price on the labour market. His definition of quality comes very close to that of Thomas Hobbes:

The value or worth of a man is, as of all other things, his price; that is to say, so much as would be given for the use of his power, and therefore is not absolute, but a thing dependent on the need and judgment of another.

The surging role of human capital in Western economies increasingly undermines the politics of the welfare state based on egalitarianism. It is not possible redistribute wealth if it isn’t something people have but is rather what they are. But it goes much further than this with science and health issues. The belief on the left in egalitarianism as an instrument for social justice is increasingly challenged by modern science:

Science measures our material and animal qualities, and it finds them to be patently unequal…We are born physically and mentally unequal, and always remain so…inequality is the human condition.

A sensible welfare proposal

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The Conservative Party plans to harden the line for welfare recipients if it wins the next election by requiring any able-bodied person on welfare who is under 21 and unemployed for three months to attend an intense work-training program. It is hoped that the proposed course would improve their work discipline and teach the skills necessary to obtain work.

Even better, they plan to "ask private sector companies and voluntary organisations to run the… centres." But what if they still don’t find a job? After a year of unemployment, they’ll be required to work full-time in community programme.

This proposal should increase productivity and decrease government spending on a deadweight program. By using private companies and charities, the worker-incentive program has a much better chance of being both effective and efficient.

As the party’s welfare spokesman Chris Grayling said, "Staying at home doing nothing will be a thing of the past."

It all fits in nicely with our line on welfare reform, which you can read more about in our 2007 report, Working Welfare.