Thursday, December 01, 2016

Welfare State

The Modern Welfare State - a mixture of Democracy, Welfare and Capitalism - rose in response to the Great Depression as a middle way between Communism and Laissez-faire Capitalism. The first Welfare State was the Rashidun Caliphate in the 7th century, with charity one of the Five Pillars of Islam. In Europe, historian Paxton says the Welfare State was introduced by Conservative and Fascist governments to make unions and socialism less attractive to workers. 'Modern twentieth century European dictatorships all provided medical care, pensions, affordable housing, and mass transport as a matter of course, in order to maintain productivity, national unity, and social peace.' In Britain, a National Insurance contribution was introduced, in return for 'benefits for those who sick, unemployed, retired, or widowed'.

When benefits are tied to income and savings, the recipient of benefits effectively has to prove they need help. Like the opposite of a job interview. You have to convince someone that you can't help yourself. That you can't afford to. That buzz you get when you get the endorsement of a job offer, must be analogous but opposite. Means-testing also requires bureaucrats to ask the questions, and make the decisions.  The more strings are attached, the less of the money is available to actually help. Individuals also need to understand they are eligible. As the system gets more complicated, just knowing which forms to fill out and where to go may be a step too far to get out of the rut.

Investors will often talk about maximising after-tax returns. I have always felt queasy about that. As tax laws get more and more complicated, you can stop spending your time on making sure your capital is doing the best job, and instead focus on working the system. Tax Law and Benefits are two tools government has to pull the strings of society. There is still a belief that decisions are best made centrally. A simplified tax code, without loopholes, and the end of means testing would reduce the ability of government to affect individual decisions.

Benefits which are only given if there is proof of need for help can lead to a poverty trap. Sharp cut-offs or change of circumstances can make taking on work, or getting out of the hole that led to the need, unattractive. Unconditional support takes a blind eye to circumstances. Universality reduces the cost of means testing, but also prevents the unintended consequences of trying to direct assistance to particular causes. There are stories of children being taken out of school so that the parents won't lose their illiteracy support.

The concept of 'Personal Responsibility' runs deep even amongst those who aren't religious. In the UK, those on benefits are often called 'Scroungers' - a person who borrows from or lives off others. A deep part of modern society is a belief in helping people who help themselves. A push back against hand-outs. This is tricky. We find it easier to see the help others have been given, and can forget about the support we have received. I have never met a self-made man.

I support the concept of an Unconditional Basic Income because it removes the wasted costs of means-testing, retains the incentives of a market system to participate in society, cuts out the moral hazard of strange behaviour in order to justify help, and loses the stigma of 'benefits'. A UBI is a dividend on the collective wealth of society. In the same way as we get hereditary support from our parents, this is hereditary support from humanity. It provides the security to lift your eyes from living hand to mouth, so that we can build the kind of community we would like to live in.

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