Sunday, 25 June 2017

The Skeletons In The Welfare State's Closet

Let me tell you something fascinating about the welfare state. As a society almost every single individual in the UK is in favour of it, but yet each individual, if asked to pay some kind of hypothetical pre-birth Rawlsian insurance to act as a safety net in case they required it themselves, wouldn't actually pay it (this is based on research in America, so one can assume it would likely apply here too). This would suggest that, in actual fact, society's collective preference for a welfare state is more akin to an Abilene paradox, where every individual feels everyone else is in favour of a fairly large welfare state, so feels they ought to be too.

A generally good rule of thumb in life is that you can see how much people value things by how they behave. From what I remember, your chance of dying on the road in a car is something like 5,000 to 1. Would you pay an extra £10 a day to increase those odds to 6,000 to 1? I highly doubt it, and neither would I. Would you pay an additional £5 per year to reduce those odds to 500,000 to 1? You possibly would, and so would I. This signals how much we value a reduced probability of dying against a certain financial cost such as insurance. Personally I don't value insurance very highly generally - so for example, I would not insure white goods or a bicycle I'd purchased., but many people would.

Now suppose you got to make a pre-birth insurance decision before you know anything about what kind of person you're going to be, the indication is that you wouldn't pay anything. For all you know you're going to be born in the shallow end of the talent pool, yet research shows you’re prepared to take the risk and not pay the insurance premium. I think the central reason for this is the disincentive effects – that is, the main problem with a safety net is that it is open to being (at worst) abused and (at best) something upon which people can become overly dependent. The study showed that individual preference, in a pre-birth decision scenario (there are parallels of Harsanyi’s amnesia principle here), favoured a welfare state that contained a population of just 0.6% (that’s six tenths of a percent) of the population.
Obviously I’m taking this as precluding pensioner welfare and people who’ve paid a lot into the system but need to claim a bit back due to short-term unemployment. This is really about long-term dependents, people struggling to find work, people abusing the system and people using welfare as a lifestyle choice. I should imagine the general feeling is that this ‘0.6% of the population on welfare’ ideal, which in terms of UK population would be approximately 390,000 people, is largely confined to people with disabilities and barriers to work (although apparently that number far exceeds 390,000, it’s more like 11 million).

It would seem that when we are being most candid with no public pressure to conform to a certain viewpoint, the UK as a population is glad to have a small welfare state for society's most needy, but is furtively quite narked about the proportion of the welfare state that enables otherwise work-fit and able people to enjoy a life of taxpayer-subsidised leisure.

There are obvious reasons why this is the case, and they are nearly all underpinned by one governing principle: that people feel it is unfair when they have to pay for benefits for others that they cannot enjoy themselves. A good example is leisure. People who work a 40 hour week have less leisure time than people who have a 40 hour leisure week and claim jobseeker's allowance. An even bigger example, and one that is far less obvious, is parenthood. People who cannot afford to have 3 or 4 children are subsidising people who can, because according to Aviva it costs upwards of £270,000 to raise a child up to the age of 21.  

Or to put it another way, if it costs £810,000 to raise 3 children, and £1,080,000 to raise 4 children, it stands to reason that for most people you have to be on benefits to afford to support families of that size and larger. Working people cannot afford to have as many children as people on benefits, and the most expensive thing working people have to pay for is the state. Moreover, state-mandated reallocations from middle earners to benefit claimants incentivises benefit claimants to have more children (and equally more people to become benefit claimants) and this increases the cost of the state further, while at the same time reducing the opportunity for more middle earners to have children.

There is no easy solution to this problem - we cannot put a cap on the number of children people can have, and we cannot live in a society where children go hungry. But I have three principal must-haves for a well-functioning welfare system, and it would appear that in the deepest recesses of their honesty, people agree with me. They are:

1) The idea of a redistributive system whereby those who are best off do their bit to help those who are least able.

2) The redistribution system must guard heavily against incentives to abuse it or become overly-dependent on it.

3) In terms of taxing those most able to help those least able, it is best to tax in ways that do not discourage work, innovation or productivity.

Pretty much everyone already openly agrees with number 1, and pretty much everyone agrees with number 2, although they are more cautious about admitting it. But judging by the current state system of redistributive taxation, an awful lot of people have not got to grips with number 3 yet, which is a shame because getting number 3 right is the most effective way of helping people on benefits.  

Finally, the 2016 release of the much lauded movie I, Daniel Blake by Ken Loach, and the rise of Jeremy Corbyn in the same year, has prompted thousands of people to take to the streets and declare war on a capitalist system that has left benefit claimants maltreated and disregarded by heartless bureaucrats. While I'm sure there are plenty of people for whom this has been the case, when it comes to the overall picture, nothing could be further from the truth.

The stats are far too numerous and lengthy for this blog post, but go and research just how much the welfare state has expanded and proliferated as a proportion of GDP since Ken Loach first began his film career, and you'll see it is gigantic compared with 50 years ago. Consequently, Loach and Corbyn - the self-proclaimed defenders of the poor - are picking the wrong enemy in capitalism, because it is only thanks to the kind of economic growth that comes from trade and competition that we can afford such a large and costly welfare state.