In defence of welfare

The Guardian says Harriet Harman is worried that Labour "will be viewed as the party of welfare, not work". This is unfortunate, because someone must stand up for welfare.

First, let's remember that working-age welfare recipients are, to some extent, not a fixed group so much as people who are temporarily out-of-work through illness or unemployment. ONS statistics show that in Q1, 886,000 people of working age moved out employment into either unemployment or inactivity whilst 509,000 moved from unemployment into work (27% of all unemployed) and 573,000 moved from inactivity to employment. For these reasons, only 326,000 of the 1.8 million people out of work have been unemployed for more than two years.

Except for the ill and disabled, there is not so much a bunch of claimants and bunch of workers, but rather people who shift from one category to another.

Welfare is, therefore, a form of insurance; we pay in in good times and get a payout in bad.

In fact, this is true in two other senses.

For one thing, welfare acts as a form of automatic stabilizer; higher welfare spending in bad times helps to support aggregate demand and so moderates recessions.

This matters. Recessions are unpredictable. Neither monetary nor fiscal policy can prevent them, therefore, simply because they cannot be loosened sufficiently before the recession becomes obvious. We need, therefore, a timelier and more automatic protection against downturns. Welfare spending is that protection.

And it protects us all. Benefits aren't so much a payment to claimants as a payment through claimants. They are spent at Primark and Lidl, and so support employment there. The distinction between welfare and work is therefore a false one; welfare helps to create jobs.

There is, though, a third way in which welfare is a form of insurance.

Imagine we were behind a Rawlsian-type veil of ignorance in which we did not know what type of employability we would be born into. Reasonably risk-averse types would, surely, agree upon some type of insurance whereby less employable types would get an income, paid for by the more employable. We can think of the tax and benefit system as replicating the sort of transfers that we would freely agree to behind the veil of ignorance. In this way, the benefit system corrects a market failure - our inability to buy insurance before we are born.

Given all this, what's remarkable is how small is the welfare state. Spending on benefits for children and working people, even including tax credits, amounts to just over five per cent of GDP.

Herein lies a paradox. Developments since the 1970s have actually strengthened these arguments for a strong welfare state. The collapse of demand for unskilled workers has increased the case for transfers to the less employable, because these have suffered the bad luck of being alive at a time when being unskilled carries a greater penalty relative to being more employable. And one reasonable inference from the Great Recession is that we need a bigger welfare state precisely because - given the failure of timely monetary and fiscal policy - we need more automatic stabilizers. And yet politicians seem to have drawn the opposite inference.

Of course, there is much wrong with the welfare system - I'd prefer a citizens basic income - but let's remember that there is a strong case for welfare. If or when the Labour party finds either a brain or a backbone, it might make this case. 

Comments

[Oakchair]

I'm in America so things might be different in the UK, but here there are not enough jobs for those without them to get them. So until magic produces millions more jobs anyone arguing that its "welfare vrs. work" is either clueless about economic conditions are being dishonest.

[Neil Wilson]

There is a strong case for 'social security'. Less strong case for 'welfare'.

Because framing matters.

[brian t]

This is one situation where an extreme thought experiment helped to clarify my thinking. An extreme "Social Darwinist" would think "survival of the fittest" as in nature: the "losers" fail absolutely and go away i.e. die.

What would happen if this model was applicable to humans too - if people who lost their jobs simply curled up in a corner and died? It would be incredibly wasteful, for starters, and would lead to booms and busts (as predicted by the Lotka-Volterra "rabbits & foxes" model). For example, a temporary surplus of a skill would inevitably lead to a later shortage of said skill, then over-training in said skill, and the cycle would repeat again. Boom & Bust would be "baked in".

That's one economic reason to avoid "Social Darwinism". Another is the fact that people have a long lifespan, and a temporary failure is not, and should not be, treated as a permanent failure. We are natural-born survivors, and we do not simply curl up in a corner and die when faced with adversity.

That's the reality, unlike the simplistic view of people as interchangeable economic units that can be used and discarded at will, and that's why we need a sensible welfare policy - to smooth out the bumps in the road and get the best from people as they actually are, not as some model calculates them to be.

[Luke]

There is also another (rarely made AFAIK) case for welfare. Speaking as a moderately wealthy and moderately weedy 50 year old with glasses, I reckon I probably get my money's worth out of whatever taxes I pay for it. Or like house insurance - I'd be reluctant to try the experiment of not paying. Middle class Brazilians decided paying for the Bolsa was better value than security guards and kidnap insurance.

When the Roman Emperors provided bread and circuses, it wasn't out of generosity.

[Bob]

"there is much wrong with the welfare system - I'd prefer a citizens basic income -"
But then it does not act as an automatic stabiliser. You get the same income regardless of whether in or out of work. CI is a crazy, inflationary idea.
"When the Roman Emperors provided bread and circuses, it wasn't out of generosity."
Right, welfare is essentially conservative unlike direct job creation policies.

[An Alien Visitor]

It would be interesting to see the study of what we paid in and what value we got back!

What is happening is a transfer of the tax money being used for welfare insurance (i.e. for he masses) to a spending taxes on welfare for the rich, hence a raft of government announcements on how the government is going to invest in any old spiv with half an idea, selling shit we don't need (glowing plastic ducks anyone?).

So we are literally being ripped off before our very eyes and everyone is celebrating it as an attack on the idle!

Such is the power of the media, such is the general level of idiocy and cruelty!

[Bob]

"Welfare is, therefore, a form of insurance; we pay in in good times and get a payout in bad."
National Insurance is just another tax, a regressive one in fact.
No it isn't. In no sense does it make sense to "pay in." It makes no sense for the government to "save" money that it is the issuer of. And what about people who never get a job, e.g. long term unemployed? Do you hold them in contempt?

[Bob]

"but let's remember that there is a strong case for welfare. If or when the Labour party finds either a brain or a backbone, it might make this case. "
No it isn't. Labour will likely lose the next election if they follow your advice.

[BCFG]

"And what about people who never get a job, e.g. long term unemployed? Do you hold them in contempt?"

If you re-read this article again, but perhaps more slowly, you will find this issue has been addressed. If you are still confused then there are many adult education courses still available, I don't think they have all been cut yet, so if you get your skates on you may get a place.

[Postkey]

"Recessions are unpredictable. Neither monetary nor fiscal policy can prevent them, . . . "

"Credit and growth
Werner (1992, 1997, 2005, 2011b), using Japanese data, shows that credit for GDP
transactions explains nominal GDP well over several decades, . . . ."

http://eprints.soton.ac.uk/339271/1/Werner_IRFA_QTC_2012.pdf

[Bob]

BCFG, the article defends welfare because it is insurance. This will likely lead to time limits, etc. The issue is not "addressed" they are essentially unemployable and if not, discriminated against. Paying them a citizens income means they just survive on that is not a solution and is a "throw them some crumbs" option. It doesn't fix anything.
The Job Guarantee deals with this by giving them a job and employers will hire from the JG pool. You don't want to hire people who won't turn up to work on time. "If you are still confused then there are many adult education courses still available, I don't think they have all been cut yet, so if you get your skates on you may get a place."
If that's the attitude of the left to critique of policies I can't help them I'm afraid. You will lose election after election.

[Bob]

I assume you will end unlimited immigration from the austerity zone and limit it to countries with a similar scheme, yes? It's almost like you would have to exit the EU for it.

[Bob]

See for example in France:
"In accordance with long-standing Socialist Party policy, Hollande has announced that the retirement age will revert to 60, for those who have contributed for more than 41 years."

[Igor Belanov]

"But then it does not act as an automatic stabiliser. You get the same income regardless of whether in or out of work. CI is a crazy, inflationary idea."

Nonsense. If you are in work you get the basic income plus your wage. If you are out of work you just get the basic income. I would have thought that was obvious.

[Boursin]

@ Neil Wilson - In my mother tongue, as well as several other European languages, "welfare" and "well-being" are conceptually indistinguishable. A welfare state is a well-being state, and the criterion for its being one is that people, you know, fare well. (Welfare economics, and all that.)

So from my vantage point, Harriet Harman is worried that Labour will be "viewed as the party of well-being, not work". Reminds me of Bill Clinton's famous 1992 electoral promise to "end well-being as we know it".

[Sue Jones]

It needs to be said that it's the tories that are dismantling the welfare state, and have been doing so since Thatcher, with increasing public support - https://kittysjones.wordpress.com/2015/07/14/the-welfare-state-from-hung-drawn-and-quartered-to-tory-privatisation/comment-page-1/#comment-18484

[Dave Timoney]

Your emphasis on cyclicality, collective insurance and social resilience reminds us that welfare and work were once joined at the hip: the one an essential adjunct of the other.

Structural changes in the economy have been driving a wedge between them for decades; a situation exacerbated by workfare and similar brute-force solutions.

Labour's recent talk of rebooting the contributory principle of NI, like IDS's foray in Schillerian insurance markets, is clearly aimed at reattaching a socially-acceptable form of welfare for "hardworking families".

In other words, Harman's stance is not so much anti-welfare as anti-poor.

[Bob]

It's not nonsense Igor you are just being wilfully ignorant. You would get the same effect with no form of welfare at all. CI does not serve as an auto-stabiliser.

[Bob]

"Labour's recent talk of rebooting the contributory principle of NI,"
The "contributory principle of NI" is a load of nonsense as taxes don't fund spending. NI is just another regressive tax. It also means those who don't "contribute" like the young are screwed. Stupid move by Labour. They should support a Job Guarantee.

[Bob]

"If you are in work you get the basic income plus your wage. If you are out of work you just get the basic income. I would have thought that was obvious."
Well, duh that is what CI is.

[aragon]

It should and is, easy to defend, the welfare state, after all the same principles apply as the NHS, which is close to a National religion.

But Labour have drunk the Tony Blair, Neoliberal - Kool Aid and it is killing them, along with the media trained empty suits at the top (Critical Thinking not required at Oxbridge?).

Neil Wilson is right framing is important, but not just the words but the ideas, or premise. While Labour accepts the Tories Weltanschauung (world view), they will fail. Scottish Labour is the ghost of Christmas future.

Which is why Rafael Bher is wrong. More managerialsism, really!

http://www.theguardian.com/commentisfree/2015/jul/15/tories-labour-state-labout-2020

[Dave Timoney]

@Bob, a citizens' income (CI) does serve as an automatic stabiliser in three ways:

1. The subtraction from aggregate demand of the spending of those suddenly thrown out of work is less than it would otherwise be.

2. If implemented in a distributive fashion (i.e. shifting societal income from rich to poor), aggregate demand becomes less dependent on the spending power of those in work. In the same way that a growing pensioner population acts as a muffle on demand shifts, so a CI would be a stabiliser.

3. By providing income protection, a CI encourages workers to jump ship during a downturn, thus accelerating "creative destruction". In other words, it acts as a disincentive to labour-hoarding and an incentive to entrepreneurship, thus hastening recovery from recession.

[ted]

Bob. Re CI as a stabiliser - As I understand it CI would be added to any other income before tax is deducted. A CI of £200 a week is worth £120 to someone in work. When they lose their job it is then worth £200 a week, so it does act as a stabiliser in that way.

[Dave Timoney]

If should have added to #1 above, "Additionally, the quantum increase in welfare payments caused by a rise in unemployment would be reduced, as it would be limited to means-tested benefits such as housing".

@Ted, an alternative is for the CI to replace the tax-free allowance - i.e. only income above the CI level (from investments as well as work) would be taxed, though at a more steeply progressive rate (e.g. rising in multiple bands from say 5% to 65%)

[Dave Timoney]

Dang. That opening "If" should be an "I".

One final point: a CI can also provide a stimulus through a temporary increase in its level. Rather than boosting the economy via QE that operates through share and security purchases, the government can use a CI to distribute "helicopter money".

[Bob]

Ted, not in the CI proposals I have seen.

[nick ford]

Chris may be broadly correct in his analysis of welfare spending.
However, Harriet Harman is probably also correct in her analysis that Labour will find it significantly more difficult to get elected if it is perceived as fighting harder for the recipients of 'welfare' than it is those who are working and receiving few 'benefits'.
However, electorally, Labour needs to identify which benefits and benefit recipients are resented by the electorate and why.
I have never heard anyone complain about the government spending money on pensions or benefits for the old. Neither have I heard complaints about benefits for people who are short term unemployed. Nor about people who are acutely sick. In my experience, the most common complaints are about 3 groups:
1. People who are not working long term and have a lot of children, and appear to be living off the benefits paid for these children.
2. Those people who are claiming invalidity benefits long term, who are perceived by their neighbours and acquaintance as not being truly unable to work in some capacity.(Or if they are disabled by being too fat!!!)
3. Those people who are perceived as exploiting the system, for example, people working 16 hours to get in the zone of tax credits, who may have substantial and increasing wealth in the form of their house but have a mortgage and have children at school. (They may have an income very similar to their co-worker who does 40 hrs per week, and a nicer lifestyle).
Electors who resent these benefit recipients do so because they live along side them and the perceived unfairness is in their face. By contrast, it may far more unfair that Roman Abramovich pays little tax in the UK. However, Roman is not turning up at the same Pizza Hutt with his kids in the afternoon, or going to the same pub in the evening as these benefit recipients are with other electors.

[Dave Timoney]

Don't forget ... 4. Unicorns

The most common complaints are about people none of us actually know, though we're sure our mates know them; or maybe mates of our mates do; or we saw them on the telly, so they must be real.

[nick ford]

Hello Arse,
If like unicorns none of these people actually exist, then there would be no harm in changing the benefit system so these non existent people can no longer claim.
Are you suggesting Labour should sacrifice its electoral prospects defending the benefits of non existant claimants?

[gastro george]

More likely there are a few of these people, and we may actually know one or two. But the real problem is exactly that - there are only one or two - or rather, say, 1% of those receiving benefits. But the strategy is to use the 1% to bear down on the benefits of the other 99% - who are, to quote the cliche, hard-working.

You would think that a sensible opposition would try to create a different narrative. Something like, each week, finding a person who's struggling through the minefield of marginal employment, and publicising the difficulties of doing so. You might hope that sympathetic media might pick up on this ... on the other hand, who does journalism these days?

[Keith]

Labour should defend the welfare state and oppose the tory policy with respect to it. Why? Because the Tory approach is based on the idea that production should be based on profit rather than need. The attack on the welfare state is an ideological attack based on an inhumane philosophy the Labour movement was created to oppose. In the same way the other aspects of Tory policy and propaganda are based on encouraging a spiv economy of exploitation via privatisation. An economy for a class of rentiers deliberately created by thatcher and her children. It may not be popular today but if you do not believe in a different kind of society you are redundant. Winning elections is only the means to a socialist society not an end in itself.

[Dave Timoney]

Hello Nick,

There would be harm in changing the benefits system to stop a non-existent (or relatively trivial) problem. We don't have an infinite number of civil servants or parliamentary time, so using resources for this means not doing something else. In other words, it's an opportunity cost.

GG estimates the scale of the problem as 1% of welfare costs. According the the DWP, fraud amounted to 0.7% (£1.1bn) in 2014/15. There was a further 1.2% (£2.0bn) paid in error. Less monies recovered, the net loss was £2.3bn, or 1.4%. Unclaimed benefits are difficult to accurately estimate, because of means-testing, but are thought to be about £10bn.

In comparison, the government reckon we lose £4.1bn in tax evasion. Including avoidance, they estimate the total "tax gap" at £32bn. It's reasonable to assume that some fraud goes undetected (your anecdata suggests as much), but it is unlikely to be anywhere near as big as tax evasion. A rational response would be to devote 80% of our resources to tax evasion and 20% to benefit fraud. We actually do the opposite.

[Laban Tall]

"The collapse of demand for unskilled workers"

I've not noticed any such collapse of demand. I've noticed a huge increase in supply of unskilled workers, which has had very similar effects on their wages.

[Sasson Hann]

The last time the conservatives were in power they cut housing benefit completely to anyone in work, and along with poll tax and the new water charges, working people along with benefit claimants were thrown into abject poverty.

My family was working and over time we had holes in our shoes, couldn't afford heating so we all had chilblains and our clothes smelt of mildew. We could barely afford one meal a day, and that was made mostly of offal of one sort or another (if we were lucky!). It was the most dark and desperate time for us. We had to get into massive debt just to basically survive.

Due to the national outcry, the tories first introduced 'transitional payments' to help soften the blow to those who were in work. Then in the 90s they reintroduced housing benefit for the low paid, along with 'Family Credit' to top up low wages. Our lives were transformed due to this.

One can only hope that this is what eventually happen again in the light of the expected massive increase in poverty. The only problem is that the propaganda in the media has caused lack public empathy towards the poor.