The welfare commons

Whenever the left wish to make an argument for their favourite form of government intervention they always use – normally dressed up in more comprehensible language – some form of elementary A-level economics market failure argument. When they want to impose a ‘fat tax’ it is because of the costs of obesity to the NHS (an externality in A-level economics). When they want to interfere in energy markets it is because ‘global warming represents the biggest market failure’ in history because we can all pump CO2 into the atmosphere and impose the costs on others. The reason the left use these arguments is that, by and large, the British public do not like paternalistic arguments. ‘We must tax chips because eating chips is bad for the people who eat chips’ is not an argument that goes down well in British political discourse.

So, is it not strange that the left create, promote and wish to extend the welfare state which is subject to, on an altogether bigger scale, the sort of problems that the left wish to solve with their other policies?

The welfare state systematically discriminates against family formation and, in doing so, creates huge ‘externalities’. When we have children, there is a natural – and often substantial – drop in income of the parents taken together. This is normally resolved in families with more than one adult by some form of division of labour whereby one parent suffers a larger drop in income and spends more time bringing up children and the other parent supports the family to a greater degree financially. Alternatively, the family may pay for childcare so that there is a huge rise in costs instead. What does state do? It promotes a system of welfare – when combined with the tax system – that systematically discriminates against families with two adults (whether married or not) because it effectively says that, if one of the adults is not there it will either provide the childcare or replace a large proportion of the income of that parent. The state will also provide housing, of course.

Indeed, wherever you look in the tax and welfare system, one gets the impression that the state does not like families – if one were conspiratorial, perhaps one would speculate that this is because the state wishes to take over the role of families in bringing up children from an ever-younger age. The method which George Osborne chose to remove child benefit from higher earners is pure and straightforward discrimination against family formation.

The next problem is the way in which our tax and welfare systems create disincentives for work. As a result of taxes and loss of benefits, the vast majority of families with children lose over 70 pence from every pound they earn. This is quite astonishing. You have to be earning nearly £40,000 if you have three children to avoid this trap. Why become better educated? Why work more hours? Why take promotion? Why become more productive? The state is taxing heavily activities that, arguably, have positive externalities.

The poverty lobby likes to argue that work is not a way out of poverty. They distort the figures to make their case. In fact, nearly 30 per cent of children are brought up in households with nobody in full-time work. Despite the welfare state, 54 per cent of all children in single-parent families where nobody is working are in poverty. However, only 14 per cent of children in couple families where just one parent works full time are in poverty. An amazingly low figure of only 2 per cent of children in couple families where one parent works full time and the other part time are in poverty.

Finally, just as the left argues with carbon emissions, the welfare state is a kind of ‘commons’ where we all graze at the expense of everybody else (see Richard Wagner’s work). In particular, we all graze at the expense of future generations. Pension and healthcare costs – probably the biggest two items of the welfare state – involve huge inter-generational transfers. Today’s workers vote for pension benefits to be paid by people who are not yet born. The same applies to health as health spending is mainly incurred at the end of life. Instead of saving for health costs, we expect future voters to pay for it. Of course, as populations age, this leads to bigger obligations on proportionately smaller workforces. Economists have worked out the rough order of magnitude of the debts that we are passing on to the next generation. In the UK, the explicit national debt is of the order of 80 per cent of national income. But, the implicit welfare debts are about 400-500 per cent of national income. We are facing huge increases in taxes to finance these costs. Some countries may not survive the demographic transition. So, the government is in debt – the debt we all know about – because it cannot finance current welfare commitments. But, this is nothing compared with the future commitments which it has made.

The actions of the state in these areas give rise to exactly the same problems – but on an altogether bigger scale – than the ‘market failures’ identified by left-leaning economists and political commentators. Why are they so silent?

This article is based on a talk given to the Spiked event, ‘Time for a serious debate about the welfare state’, on 3 June 2013.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

3 thoughts on “The welfare commons”

  1. Posted 11/06/2013 at 22:10 | Permalink

    “However, only 14 per cent of children in couple families where just one parent works full time are in poverty. An amazingly low figure of only 2 per cent of children in couple families where one parent works full time and the other part time are in poverty.”

    This makes the usual mistake of assuming that families who are workless would have just the same poverty risk as full-working families if they got jobs. Looking at longitudinal data shows that this is not the case.

    Only 56% of families in poverty escape poverty when someone gets a new job.


  2. Posted 12/06/2013 at 07:48 | Permalink

    Chris Goulden – you may be correct, but it is also arguable that the reason why ‘only’ 56% of families in poverty escape poverty when someone gets a new job is because of the combined effects of tax and benefit withdrawal. I wonder what the effect of the raising of personal allowances is having on the 56% figure?

  3. Posted 12/06/2013 at 10:35 | Permalink

    @Chris – it is not a mistake, because I was not making the assertion you suggested I was (i.e. that somehow you can go from 54% to 2% by somebody getting a job). But, nevertheless, your point is a valid argument that needs thought. However, I don’t understand your interpretation of the JRF figures. What is relevant to my argument is getting a partner and getting a full-time job (one full-time job in the household and one partner with a part-time job is required for the 2% figure to hold). Getting a full-time job alone seems from the figures you quote to take 68% out of poverty: that is a pretty impressive figure and I am not sure why you think that is not important. If I could reduce (say) lung cancer rates by two-thirds, i would be a national hero – if jobs reduce poverty by two-thirds, people start trying to pick holes in the argument. Adding a full-time worker to the household seems to take about 75% out of poverty. Also not bad. Presumably getting a part-time job and adding a full-time worker to the household would take a huge number of people out of poverty – you don’t show figures for combinations. Even the 56% figure is not bad but it is completely the wrong figure to use in the context of my argument.

    It is interesting, though, that getting a full-time job seems to pull about two-thirds out of poverty and that would suggest that the 54% and the 14% are not radically different people – if the 54% got jobs then the JRF research suggests that two-thirds would be pulled out of poverty leaving the poverty rate at about 20% (not quite 14% in that group) – though I realise (before you point it out!) that you cannot just extrapolate figures in that way. Nevertheless, it seems indicative. But the bottom line seems to be confirmed by the JRF research – adults in a household and at least one full-time job are good for reducing poverty even if some of those without jobs and in poverty may not be those who can gain most from taking a job. The other advantage of adding an adult to a household is that there are more opportunities for deciding how paid work and childcare can be divided to the benefit of the children and maximising income (the father might have a higher wage potential than the mother or the other way round).

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