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.