What is our objective in dealing with poverty. Clearly it is to remove the excesses of human suffering in our society. We need to keep this in mind as we proceed for several reasons. Firstly, in many cases welfare programs give people much more than is needed to prevent suffering, indeed enough to make it worthwhile not to work, which leads to lower growth in income for everyone in society, including the poor. Secondly, we need to ask ourselves in what way we should help people when money is not the best way and when it might in fact be doing considerable damage.
WELFARE AND GROWTH
The problem with welfare is that there is a tradeoff between the short and long term benefits to the lowest decile Giving them welfare is a short term benefit but there are considerable long term benefits lost to them through this system. Financially the growth in income of the poorest decile (and everyone else) has grown much quicker in countries without extensive welfare systems- Hong Kong and Singapore being the clearest examples. Forty years ago some countries in Africa had a higher income than the Far East but went down the redistributionist route. Singapore did not. Now Singapore has overtaken most countries in the west in standard of living as Africa could have done too if it had adopted the same policies, difficult to imagine though that may be. We need to consider whether it is right to give welfare to people when we are taking away their future income by so doing.
There are a number of reasons why this is the case:
Firstly we must ask ourselves where the money comes from to finance the Welfare State. The answer is from productive citizens and corporations. Where would that money be going if it wasn't taxed away? What would IBM or Shell or Marks & Spencer's or Dixons do with income that currently is used in welfare benefits? The answer for the most part is that they would use it to expand their operations and this creates jobs. So the money taxed from corporations and given out in welfare payments is creating unemployment in the nation. Furthermore these unemployed people if they were employed would be adding to the growth of the nation, i.e. to everyone's income as they do in Singapore and other nations without welfare.
Additionally ,welfare is also very wasteful. It is taken from productive uses and put to unproductive uses. In between it pays the salaries of thousands of government employees, nice offices and expensive computer systems. Much of the taxed money does not even get to the people who need it.
Only some of each £100 taken in taxes is actually paid out. The rest goes on administration, employing DSS officials etc. For someone earning £10,000 a year with taxes at about 50% including income tax, VAT and poll tax,. With 25% of the government budget currently going on welfare this person spend over £800 a year on maintaining the administration system before a single penny gets spent on the poor. Is it really worth spending £1,200 of your money in order to make wages lower, prices higher and unemployment more?
NO WELFARE SIMPLY MEANS THE POOR WORKING
In the West we sometimes imagine that countries with no welfare have people starving on the streets. In reality what happens is that the poor take low paying jobs that it would be stupid to take if welfare was available. Because they are thus being productive and not using the productivity of others to support them, the economy grows quicker and soon the incomes of everyone are higher than before. This is clear from the evidence from around the world. Singapore had little welfare so everyone works, Mexico has no welfare so if there is a down turn in the economy people sell (often useful) things in the streets- newspapers, sweets, paper, combs, thus helping the economy to turn up once more without the strangling costs of welfare. Unemployment is mostly a function of welfare benefits, more welfare, more unemployment. Countries with hardly any social security , have no unemployment, countries with short term benefits like America only have short term unemployment and countries with high and long term benefits have high and long term unemployment. In British history we see the same effects before the welfare system in the 50s there were plenty of jobs, people could walk out of school into jobs of their choice.. The welfare state through the taxes it requires and the incentives it provides results in unemployment, low wages and high prices.
In countries with lots of welfare there are industries that cannot exist as a result. Europe does not have many of the low wage jobs that America has so a lot of people don't get a chance to get started in the workforce. And even America doesn't have the (very professional) shoe shiner and windscreen cleaner jobs that provide worthwhile services to the Mexicans. INCENTIVES FOR THE LOWEST DECILE
Someone who gets £40 per week in Unemployment Benefit, £45 in housing benefit, family benefit, council tax rebate etc. are not going to take a job at £90 per week. They would be working 40 hours a week for less than they are getting for doing nothing. People in this position make rational decisions like everyone else . Welfare benefits keep sensible people out of the employment market. This means labour is scarce thus its price rises to attract more. This means businesses that would have been viable before are not viable with this new higher price of labour. So less new businesses start and that means less jobs. It also means less competition for existing businesses which means higher prices for the goods that everybody buys. Thus welfare payments create higher prices for rich and poor and middle thus making the poor poorer.
What's more the welfare state doesn't solve any problems in the long term. It only alleviates short-term needs. In the long run they get worse. The more people get for unemployment benefit the less incentive there is to get a job and the more people lose confidence in their ability to work as time goes on. The problem is the WELFARE STATE REWARDS PEOPLE FOR HAVING PROBLEMS so people find out it pays to get into difficult situations. What is the incentive for a couple to stay together if they get more money as single parents? We are paying people to split up. I personally know people that can't afford to get married, not because of the car and the honeymoon, but because of the benefits they loose.
THE DISHONESTY INHERENT IN THE SYSTEM
We wish to help the genuinely needy, but do we want to subsidise people who work in the black-market and then claim welfare as well. As somebody who has run a charity in such an area for six years I can confidently estimate more than 80% of welfare recipients are in this category at one time or another. This is why the American welfare to work scheme is such a good way to deal with the problem since it stops the people working and claiming benefit as well. This system is inevitably easily exploited , unfamiliar as the officials are with the lives of the individual they deal with, the vast majority of whom are using the social security system in some way. The most deserving aren't favoured, it's often the most dishonest that benefit most. That doesn't mean that everyone who gets a lot from the welfare system is dishonest, some just know how to get what they're entitled to. This creates another inequality. Those who know more get more than those who don't. Sometimes the needy are those who know more, sometimes not! The money doesn't flow to those who are poorest. Most of it is very unequally distributed.
WHO EXACTLY ARE NEEDY AND WHO WOULD JUST PREFER TO HAVE MORE MONEY?
In many ways the poor today are the rich of yesterday .Absolute poverty is almost non-existent in the west and this is not a triumph of the welfare state that impeded the wealth creation process but a feature of the economic growth that has raised the standard of living of every man and woman in our countries.
When Jesus talked about the poor, 2000 years ago, he was talking about the beggars of the day and the widows and orphans. People who had nothing to eat and drink, who wore rags and had very little in the way of possessions if any. Most were in that position because they were crippled, or left without provider and unable to find work for this reason. They were unable to affect their plight.
Today there are almost no people in the West who do not have enough to eat and drink or wear. Most of those who are labeled poor in this country ( because they are receiving social security) have enough to eat, enough to wear, have a washing machine , a phone in 60% of cases, electricity, a stereo, hot and cold running water, carpets, windows, TV, etc. A medieval king, to have the equivalent message power as a phone would have to have dozens of heralds, for a fraction of the variety of the average tape collection he'd need many minstrels, hot and cold running water would take a few servants as would washing machines and he'd be lucky to have wall to wall carpets and windows in most castles.
Clearly the average person in the lower decile of society is not poor by absolute standards. By historical standards he is very rich. The people Jesus referred to as poor would have laughed at the thought of modern lower income people being in the same class as them. Furthermore the poor aren't getting poorer and never really do ( although there are times when the rich get richer quicker) On the contrary the disposable incomes of the poorest 25% rose .28% between 1972 and 1992 (Social Trends). Furthermore whereas in 71 households had spent 20% on food, now on average people only needed to spend 11% on food., 88% now have a washing machine as opposed to 66% in 72 , 73% had a video and 62% a microwave. The number of cars per 1000 has risen from 224 to 380 and the cars are of a far better quality. Infant mortality is less than a third of what is was in 71 and people live 5 years longer. Clearly poverty is on the decline. Monetarily-challenged people are far better off than they were even 20 years ago never mind by the yardstick of history
The state is not permitted in a free economy to transfer money from the (relatively ) richer section to the (relatively) poorer section. This is especially so as the second group are absolutely rich compared to the real poor of history. Just because the first group is richer still does not justify the theft of their resources by coercive means ( taxation). This is particularly true because the removal of resources from the rich section destroys the very jobs the other section needs to move out of their (relatively) poorer condition
It is most important to understand the process by which the impoverished peasants of yesterday have become the comfortable urbanites of today. The secret is productivity growth. The total amount of wealth in a society rises every time someone finds a better way of doing something and applies it. Thus as people worked out how to do agriculture with less people that released more people to do make clothes in factories . Now instead of just being well fed people could have more clothes because factories made them cheaper. This is the way the total wealth of society increases and how everyone over the years becomes better off.
Some people are better at producing products people will buy ( i.e. cheaper or better). They have thus created wealth for the whole of society and since they have that skill will continue to do so. In a socialist system however this wealth will be taken away from them and given to the (relatively poorer but still rich) welfare recipient who has no ability to use the wealth to increase the wealth of society. As a result society gets richer less fast and the incomes of the poorer part stay low for longer. So the distribution of wealth by the state seriously disadvantages the (relatively) poor and everyone else in the long term. Many of those in the lowest decile now have more than our grandparents had 60 years ago ( and at the time our grandparents felt themselves to be well off !). While as individuals we may wish to help people who have less than us if we think they deserve some help, there is no case for taking productive capacity from one end of the economy to give to people who in the context of history can only be considered rich. There has got to come a time when absolute levels of income are more important than relative incomes and at which redistribution becomes undesirable. That time has come.
PRIVATE INSURANCE
In this age where governments everywhere are at last realising that maintaining a massive social security program is not the best way to look after the poor, it is useful to consider and declare what the alternatives are. As an independent financial advisor I have been meaning for a long time to look at what it would cost to provide the same quantities as social security benefits through the insurance companies. Having now done do I am surprised at how much of a difference there is. There are 20 million households in the UK , the annual social security budget is £90 billion, that means a cost of £4500 per household. The total cost of providing the same services through insurance for a family of two starting at 25 and payable throughout life would be around £800 per annum.
This is not unrealistically low because the family is young as the premium would be set for life at that point and would still be the same when they were 87.
That premium could provide:
A pension at 65 for both the man and the woman of the what the pension is today (around about £58pw )( i.e. £116 for both per week)
A payment of £160 per month if either become unemployed( paid for up to a year)( unemployment benefit/income support)
A payment of £240 per month to cover housing costs if the person becomes unemployed (housing benefit)( this could be less in some areas , more in the south east)
A payment of £200 per month to the widow or widower if the other person dies (paid throughout life and with a lump sum left to the children of about £25000)
A payment of £160 per month if anyone becomes sick paid after the person has been unable to work for 3 months ( paid right to age 65 if the person is unable to work till then)- Invalidity/ Incapacity benefit.
A payment of £240 per month if anyone becomes sick , paid to retirement , to cover housing costs.( Housing Benefit)
A payment of £30,000 paid on the second of the partners to die, paid to the children in case the families assets have been liquidated to pay for long term care or medical bills, to give them an inheritance.
A payment of £50,000 if either of the partners die in an accident
The whole policy is covered against sickness i.e. if the wife is sick then the whole policy will be paid until she gets better- pension benefits continue to accrue etc.
Some of these benefits exceed the level of social security benefits and some are slightly different in the form that they take but it is clear that this represents a far more cost effective alternative than tax and spend.(1)
To phase this in, what I would suggest is a tax allowance against national insurance tax . This is 10% for employees and 10% for employers. So on an average wage of £15000 per annum it accounts for about £1500 off his gross pay and a further £1500 the employer could pay him if he didn't have to pay it to the Inland Revenue. If the government even gave him exemption just from employee national insurance he would save £700 per year. If both people worked then that would be £1400 saving. That would be a huge incentive for people to opt out of social security. In fact £500 a year for a couple would probably be enough to make them change.
In return the government would get an increasing number of people who had opted out of the social security system and would never be a liability on the state. To ensure this even further it might be advisable to build a savings element into the policy so that if the policy holders were unable to pay for a while ( but not due to sickness or unemployment) then there would be a savings fund to pay the premiums until they were able to start paying again).
There is a more cunning way to design the policy however that would deal more effectively with what would be the governments main concern. The main concern is that the people who would opt out would not be the people who are likely to be the people who are going to use the social security net. Those paying who would most likely end up using it would be those who are working but on low incomes. The way to organise this would be to give increasing incentives as income decreases. Thus you could give a huge incentive of £2000 pa to those on incomes below 10,000 ( both lots of NI refunded, and income tax allowance increased) then decrease the incentive to those who will opt out anyway because the chance of them using the social security net is so small. This makes it worthwhile for the government in the short term as well as the long.
THE COUNTERPRODUCTIVENESS OF "SOAK THE RICH"
The fact that high earners are taxed higher hurts the poor too. This is because promotion involves greater responsibility, harder work and greater accountability. To try and get people to accept such positions a company has to offer increased pay. Let's image for some particular post an extra £3000 were needed to encourage people to apply. Now, if that amount is going to be taxed at 40% then the company must offer £5000 extra before tax since the state will take £2000 in tax partly to pay in welfare benefits. Thus when taxes are high, businesses have to pay higher before-tax wages to their highest-paid executives. This means less pay for the ordinary working man, other things being equal. So the welfare system involves lower wages for poorer people who have got jobs. Alternatively it can be transferred to the customer in higher prices which again hits poorest people worst of all. Strange though it may seem to modern ears there is a harmony of interests between the rich and the poor. When the rich gain there is more money available for new businesses which is new or better jobs for the poor.
As if that wasn't reason enough higher tax rates designed to soak the rich actually produce very little extra taxes after a certain point. Friedman in Capitalism and Freedom says as early as 1962 "If the yield from the current highly graduated rates is so low, so must be its redistributive effects. That doesn't mean they do no harm. On the contrary. The yield is so low because some of the most competent men in the country devote their energies to keeping it low, and because many other men shape their activities with one eye on the tax effects. All this is sheer waste and what do we get for it except a feeling of satisfaction that the state is redistributing income. All this is founded on ignorance of the actual effects of the graduated tax structure and would surely evaporate if the facts became know"
Furthermore any money taken from the rich can do little good to the poor because its simply not enough The wealth of the 1000 richest people in the United States wouldn't cover the capital needs of one US industry for more than a few months.
Furthermore, real income per capita is 4.5 times what it was in 1900 (over the long term , the free market lifts all boats- the poor don't get poorer). At the same time hours dropped.
Real incomes are also 2.5 times what it was in 1947 . By the current definition of poverty 56% of US was poor in 1900, by 1947 27% , by 1967 only 13%
. So we can see that most of the decrease in poverty came before the welfare state
(Chalcedon Report : June 97 Professor Don Mathews
WHATEVER TAXES WE USE THERE IS A NEGATIVE EFFECT ON THE POOR
Inheritance taxes , another means of supporting the welfare system have a detrimental effect on society as a whole. Generally speaking, people want the best for their children. As a result they want to save up for their children. Inheritance taxes discourage this, people will be less inclined to save up if the state's going to take most of it. This means there is less money in the banks for the banks to lend out. This means the banks would lend at a higher rate. This has two consequences:
IS WELFARE GOOD FOR PEOPLE
Welfare kills self-respect, it makes people feel that they are dependent and worthless. People don't really want handouts in the long term. They want a chance to earn a living but not if they are making more on social security. For many of the most needy in our society what they need most of all are incentives to change behaviour.
In many ways, the constitution of the welfare state relies on the naiveté of those who support it and particularly on the distancing of those who pay for it from the reality of those who receive it. Ten years ago as a firm supporter of the welfare state I began doing charity work in a poor area of our city and over the years our organisation was able to help a number of people, but their main need was not what the state was supplying , in fact in many ways extra money made things worse. .
What we found was that most of the people we were helping were in problems of their own making ( I'd previously thought they were victims of society) and what they generally needed was to be sympathetically helped to change their behaviour. By advising and befriending we helped some people to do so and become independent self supporting people. .
One lady ,M, was continually depressed, she was receiving invalidity support ,although there was really nothing wrong with her, and had no incentive to work. As a result she had become bored and listless with nothing really to do and no real social stimulation. We got her helping us help some other people and she became a lot better, but if she had not been receiving benefits but had had to work for her money then the problem would never have arisen.
Jake was an alcoholic and so was his wife, he did do some training schemes and help out with things but he often stole things to indulge his passion for alcohol. If he had not received benefits he would have had to work which would have led him to form the habit of being disciplined and would have helped him break out of his habit of indiscipline. Also if the penalties for crime had involved greater discipline creating penalties then this would have given his an incentive strong enough to break his dependency. In our current society it is difficult to see how he will ever change his pattern , a pattern that is hurting him and those around him in a very life-dominating way. .
Jeana was brought up in a good home but at a certain point in her life decided that the allure of drugs was more attractive than the good life. She gradually got more and more serious until she was taking heroine. She was depressed from time to time and had tried to commit suicide a few times. Even before she became addicted she stole things from other people when she didn't have money., having conned her family in various ways who stuck by her none the less for a long time. Yet she separated herself from them and lived in other cities. Many people and organisation who had been good to her and tried to help her eventually separated from her when they had been used to the limit of their endurance Being fairly friendly and intelligent she initially had no problems getting jobs but had difficulty sticking with them not having the discipline or long term orientation to stick in. Since her behaviour leads her to be depressed and ultimately friendless apart from other street people in the same situation ,she may end up committing suicide successfully at one point or will end up being attacked by some person she tries to use. Despite this she is an intelligent person from a good home that should really not be in this kind of situation. The reason she is there is that the incentive structure of our society allows her to be there. In a better order she would not be receiving the welfare that allows her not to work so she would have to work to eat and this would give her discipline, allow her to mix with better people and start to become more like them. In the event of her being caught for theft she would again be forced to work which would have the same positive effect and restore her to normal life. It is the softness of our current policy that is so cruel to people like Jeana who need discipline imposed upon them until they develop some of their own. .
I have met dozens of people with the kinds of problems discussed above who need greater discipline before their lives will improve. Giving such people money is the worst kind of abnegation of responsibility towards them and towards the rest of society. .
NO WAY TO HELP THE GENUINELY NEEDY
The welfare state is impersonal. There's no feeling of warmth at receiving a gift. It's cold and unfriendly. Money is coerced from those who don't necessarily want to give it away and delivered by harassed beauraucrats. It's not a friendly way to be helped out.
And here is perhaps the greatest irony :welfare is destructive of voluntary organisations. There used to be thousands of voluntary organisations who used to help people, they have now largely disappeared. because of unfair competition from the welfare industry. The type of welfare that is personal, that genuinely cares, that knows who are the genuinely needy and gets along side them and helps them out, these groups have been driven out of the helping business by a system that is cold, unfriendly and has to give to the 90% of undeserving in order to help the 10% or less that are genuinely unable to help their circumstances.
THE EFFECTS OF REMOVAL
Welfare to work is a great way to continue to help the needy without subsidizing the immoral and this is why in some US states the welfare rolls have dropped 60%. Those that are working and claiming can no longer do so because they have to be at their welfare to work job all the time. Those who stay of the dole because they like the leisure time can no longer continue to do so. Yet those who are genuinely needy are still receiving benefit ,they just have to work for it now which is no bad thing since they are gaining valuable skills and disciplines. So it gets rid of the fraud without hurting the needy. All that is then required is for the welfare to work jobs to become progressively longer and longer hours and for the benefits to be progressively reduced so that the people gradually have more and more incentive to come off the dole. The savings should be passed back to them in a way that compensates them somewhat for shrinking benefits and creates more jobs. In America people are required to be in some form of work , implemented gradually by 1999 for two parent families and less for one parent. In Wisconsin, governor Tommy Thompson is keen and numbers on Welfare have fallen 54%, Wyoming 68%., country as a whole 24% ! Wisconsin requires then to find work immediately Massachusetts gives them 60 days. So in other words the states that have been toughest initially have had most success. Increasing the incentives will put more and more of the currently unproductive into work with all the psychological benefits that that brings.
This could be combined with opting out of the social security through policies as discussed above.
If the main way chosen was by opting out through policies then the taxation implications are discussed above, if welfare to work was more successful then the way to return the money to fund this would best be through indirect taxation.
This could be 10p of the price of petrol and diesel, 50p off the price of wine, £3 off a bottle of spirits, 20p off a pint of beer (7.2 billion) and bring VAT down to 10%.
The reason I think indirect tax reductions are the way to fund this is that lower income households are more likely to have parents or children who are unemployed , this means that they would have to pay more to help their kin. Indirect taxes make up the bulk of this sector's tax bill thus refunds in this area most closely match the group that are going to be making the extra payments.
PENSIONS PRIVATISATION
Pensions reform is not a new thing, Chile privatised theirs in 82 and it was a great success. The only problems come as usual from government regulation. By law the workers put in 10% of their monthly wages into one of 13 funds which are now managing $33 billion which is 40% of GDP. The very high marketing costs to induce switches have resulted from the fact that companies have to have the same fee structure for all of their clients which means that they can't compete on price with different employers. Returns are much the same from fund to fund because rules require them to keep reserves and draw from them if returns are below the average for all funds. Furthermore they are limited in where they can invest.
Mexico's privatisation of its social security in September 97 solves some of these problems (Economist Sep 13th 97) It allows them to switch only after a year and fees and risks can be varied) but both Mexico and Bolivia's schemes still require companies to invest in government bonds.
WHY EQUALITY IS NOT NECESARILY A WORTHWHILE GOAL.
There is a harmony of interests between the bottom decile and business. What's good for business is good for the poor. At the end of the day it is ineffective to transfer money from the rich to the poor. Not only does it destroy the jobs that the poor want but it takes away the incentives to work that the poor desperately need in order to succeed. It could be said that poverty was mostly caused by divesting creative individuals of the money to create jobs and growth through taxes and regulations.
Divisions of income seem static but between one year and another many people change groups, some poor people become richer and some poor become richer. Very few of the lowest decile today are the same people that were there 10 years ago. So is there then any justification for transferring money to people who were only there temporarily and can borrow to support themselves until they get another job if they have not taken our insurance to cover that eventuality. It may appear difficult for them to get credit but with debt service guarantees banks would be keener to lend than they are now. Only with the incentives of welfare states is there formed a permanent class of poor, in free market orders those who are in the lower decile are only there for a short time. Rising inequality can be some of the poor becoming a lot richer and some of the rich growing poor, and other going in the other direction ,the poor are not a static group. In any event the share of the bottom 10% compared with 10 years ago is irrelevant because they are different people. Anyway, capitalism is already a redistributive process, it redistributes from pleasure centred second generation inheritors to hard working poor people with faith in the future.
Many of the poor are old and have earned much more in the past or young and will earn much more in the future - it doesn't make the system bad that people earn most when they have most experience! Furthermore , even if equality was a legitimate goal socialism doesn't necessarily achieve it some socialist societies are the least equal : Russia and Mexico have the highest inequality in the world.(previously ) Socialist Latin America and Africa are most unequal, US ,Australia and free market SE Asia are better and then Europe most equal So there no real correlation between equality and socialism or inequality and the free market.
Furthermore, in the great depression incomes were very equal but there were no jobs ! (3)
The free market is not inherently unequal: capitalism sometimes distributes to the poor like the current trend to globalise production - distributing income away from the rich world to the poor ( far more effectively than aid) indeed Europe was a low wage area to the US in the 70s !
Equality happens in society when the majority of the people learn to do the most productive things. If they do so society will be equal, if only some people put in the required effort then it won't. Whatever happens equality isn't a desirable goal for government policy as redistribution lowers growth and hence the long term income of the poor. In other words the desire for equality hurts the long terms interests of the poor.
Pension funds grow at 12% (very realistic). Clients are both non-smokers in reasonable health at this point.
Based on premium rates for one company, not necessarily the most competitive, also if an individual product was designed to do all the above functions it might be cheaper than doing them all separately, especially since you wouldn't be paying the benefits simultaneously i.e. if you were paying sickness benefit you wouldn't be paying unemployment. If you paid out death benefits you wouldn't have to pay sickness later on. Note also that the companies can't cancel sickness benefit because of a bad claims record.
The premium is calculated for a couple, it would be cheaper for a single person.
(2) Figures : Social security is 92 billion in total of which 31.2 billion is pensions ,16 bill inc support,11 bil housing benefit,6 bil child benefit,1 bil unemployment ben,7 bil Invalidity,4 bil Dis Livin ,2.7 bil attendants allowance4 billion in admin (other bits and pieces) (3) FOFC p20