A Hayekian solution to welfare reform
Here at the IEA, it is something of a rule that if Hayek endorsed an idea then it probably wasn’t all bad. Bearing that in mind, I’d like to bring up a policy that isn’t often heard of nowadays but that both Hayek and that other IEA luminary, Milton Friedman, thought was worthwhile. It’s called the guaranteed minimum income and if Iain Duncan Smith wanted to be really revolutionary, he could consider it as part of his reforms.
The idea is that instead of the mess of various welfare benefits we have now, the state would quite simply pay every single citizen enough to live on without any conditions attached. Everyone from the richest to the poorest would receive the payment, which would be funded through taxation, as welfare benefits are today. Regardless of what you were doing with your life, the government would simply hand you a cheque every year or every month.
It would be an expensive policy, but for the average taxpayer higher tax bills could be more or less cancelled out by the payment. Moreover, since every citizen would be guaranteed to have at least enough income to live on, the state could stop having to provide inefficient services to the very poor, who would be better off with the cash. The nannying tendency of the state would be reduced; since everyone would receive the payment, no-one would be a “scrounger”.
Those are side benefits though. The main appeal of such a system is that it offers a way to alleviate poverty without putting people into welfare traps. The welfare system as it is at the moment is grossly inefficient because means tested benefits severely blunt the incentives to go back to work. Depending on which benefits a person is eligible for, the effective marginal taxation rate faced is typically around 65% and can be as high as 90%. If the same benefits were paid to everyone, not only would the administrative costs of means testing be slashed, the poorest would finally have an incentive to work.
The big question in terms of whether a guaranteed minimum income would work is thus its effect on incentives. The number of people going into work should be more than the number of people who would take their payment and stop working. Whilst people who were previously on benefits might enter employment, everyone else would have to pay higher marginal tax rates – and some would probably choose not to.
Fortunately, the balance would probably be positive. Most recent econometric evidence suggests that marginal tax rates do not have much impact on peoples’ behaviour until they reach relatively high rates – income tax rates in the UK could rise a great deal before they began to deter very many people from working. Conversely, marginal tax rates for the very poor are so high that cutting them would almost certainly have a beneficial effect. Provided that the actual amount of benefit paid wasn’t too generous, then probably more people would move into work than out of it, and so the average taxpayer would end up better off.
Reforming the benefit rules is a pressing priority for the coalition government. Whilst cutting the deficit needs to the primary policy objective, creating a rational, liberal solution to poverty is a monumentally important task, and it is important that it is not sacrificed to political expediency. The battle between those who think of all benefit recipients as “scroungers” and those who think that government genuinely has a duty to actively reduce poverty is good political theatre, but it generally does not lead to good policy. Benefit entitlements create poverty traps, but scrapping them creates poverty – neither approach is ideal. A basic income scheme is an admirably Hayekian solution to both problems, and now would seem as good a time as ever to consider it.