Larry Elliott reports on the cynical attempt to blame economic failings on the poor and unemployed
ONE of the things we have had to learn over the past 17 years is that nothing is ever the British government’s fault. The Arabs and the unions were to blame for the first Thatcher recession. The Germans and George Soros were responsible for Black Wednesday. The Labour party caused the mad cow disease scare. Anybody but Michael Howard carries the can when another jailbird escapes from prison.
Indeed, a student of Conservative rule might be interested in working up a thesis on how an administration that extols the virtues of individual responsibility has proved pathologically incapable of saying: “Yes, we got it wrong. Sorry.”
The latest example of this tendency — although it has been evident throughout the Tories’ four terms — is to blame Britain’s economic underperformance on the poor. Even when measured by the right’s own debased coinage, this is a monumental piece of cynicism.
Put simply, the thesis is this: the generosity of the welfare state has nurtured a culture in which the poor have little incentive to work, and so we have armies of work-shy delinquents, benefit scroungers and single mothers putting an intolerable burden on ordinary taxpayers.
The result is that Britain has to pay higher taxes than the dynamic economies of south-east Asia, where welfare provision is minimal and growth rates much higher. So all we have to do is cut benefits, prod the poor out of their self-imposed ghetto and, bingo, growth rates will soar. This will be good, not just for those of us who pay taxes but for the poor themselves. Any resistance to this scheme on the part of those dependent on benefits would be an act of grotesque selfishness.
Thirty years ago, politicians would have dismissed this as dangerous hokum, arguing that welfare bills were linked to broad macro-economic conditions; that is, the chances of the less-fortunate finding a job, and the distribution of income between rich and poor.
Back in the early Sixties, when unemployment was well under 500 000, social security transfers amounted to around 6% of gross domestic product (GDP). By the time the jobless total peaked in the recession of the early 1990s they accounted for more than 12% of GDP.
In addition, it would have been pointed out that benefits have become less, not more, generous under the Conservatives. To suggest that people would rather live on benefits, which are bound to fall in value, rather than take a job which might lead to higher real rewards is to deny we are the rational economic agents the new right insists we are.
But these are now deeply unfashionable notions. It is far more convenient to assert that if the poor are either too stupid or too lazy to find a job, that’s their problem.
Once, the poor could rely on the parties of the left to defend them. No longer. Across the political spectrum the stick has replaced the carrot, as President Bill Clinton proved in the United States this month when he turned the clock back more than 60 years and removed the New Deal safety net.
Clinton’s fear was that he would be branded as “soft” on welfare by Bob Dole, thereby pushing the swing voters — the so-called Reagan Democrats — back into the arms of the Republicans. The president has read Galbraith’s Culture Of Contentment; he knows there are two Americas out there, an affluent majority that votes and an impoverished (yet sizeable) minority that doesn’t.
Britain is also being softened up for the “end of welfare as we know it”. The language of political discourse has already subtly changed, so that even supposedly unbiased reports on radio and television talk not of the welfare state but of the welfare state “burden”.
Before going further, it is worth asking what motivated the pioneers of welfare provision and what evidence there is that high spending on welfare has a deleterious impact on economic performance.
The first question could easily have been answered by the social reformers of the 19th century. By today’s standards, they would scarcely be called bleeding-heart liberals — yet they realised that disease, malnutrition, poor sanitation, illiteracy and slums were having a damaging effect on industrial efficiency and productivity. The final flowering of this idea came after the World War II, when William Beveridge’s social security system was seen as being inextricably bound up with John Maynard Keynes’s ideas for full employment. The West now appears to be suffering from a form of collective, historical amnesia.
The second point — that there is an inverse relationship between welfare spending and growth — is now accepted as a truism. Like other such truisms, it deserves scrutiny.
In absolute terms, it is entirely groundless. Even at the height of its mid- Victorian splendour, Britain’s growth rate was 1 to 2% per annum, compared with an average of 3% a year during the golden age of welfarism in the fifties and sixties.
Only by looking at Britain’s growth rates relative to other countries can the argument be made that burgeoning social security costs are acting as a brake on expansion and prosperity. Even so, the evidence is less than conclusive, as an article by Tony Atkinson in the latest edition of New Economy shows.
According to Organisation for Economic Co- operation and Development data, the Netherlands spends around 14 percentage points more of its GDP on social security than the US — and if the welfare slashers are right this should be reflected in a much higher trend rate of growth in the US. But growth rates in the two countries over the last complete economic cycle (1982-91) were almost identical — 2,9% in the US against 2,7% in the Netherlands.
Trawling through 10 recent studies linking welfare to growth, Atkinson says that two found that the impact of higher social transfers was insignificant, four that they led to lower growth, and four that they caused higher growth.
So, while one piece of research shows that a reduction of five percentage points in welfare spending would increase the annual growth rate by one percentage point, another says that it would decrease it by 0,9%. Atkinson concludes, rightly, that it is hard to see how this welter of evidence is conclusive one way or another.
In addition, he questions whether the new fad for private pension provision is all that it is cracked up to be. While accepting that pay-as-you-go pensions may reduce the rate of savings, and hence capital accumulation and growth, Atkinson says that targeting pensions for the needy may lead to a savings trap, in which people have an incentive to dis-save in order to qualify for the state safety net.
In the end, it has been the rapid growth of the Asian tigers that has given impetus to the attack on welfare. But these are catch-up economies in the way that Japan was in the fifties and sixties. Their growth rates will moderate as they reach maturity, just as Japan’s did. Slower rates of growth will automatically add to the pressure for increased welfare spending.
If in the future this pressure is less strong than in the UK, that will be because the Asian states are increasing expenditure on education now, recognising that such spending adds to the productive capacity of a modern, knowledge-driven economy.
Little of this, however, will cut ice with those intent on ending “the welfare state as we know it” … because the real point is not to help the poor, but to help themselves.
Robert Solow, a US economist, put it neatly when he said that he found the debate about sustainability puzzling because “those who are so urgent about not inflicting poverty on the future have to explain why they do not attach even higher priority to reducing poverty today”.
In other words, they say that sacrifices may have to be made to help the poor. But not today. And certainly not by us.