The curious case of Child Benefit

6th October 2010

When the Chancellor announced, shortly before the Conservative party conference, that Child Benefit would be withdrawn to families with high earners, it was clear that no-one expected the storm of protest. Iain Duncan Smith had called the idea of paying benefits to richer people “bonkers”, and up to that point the newspapers had seemed to agree.

The government’s reasoning made some sense. Child Benefit is effective because it is simple, takeup is virtually universal and it has no discincentive implications. Means-testing Child Benefit would be self-defeating, and pointless – there is already a means-tested benefit for families with children, in the shape of Child Tax Credit. The government was looking, then, for a simple administrative trigger that could make a practical distinction, and they thought they had found it. The central argument for keeping Child Benefit, however, its its universality – a point the press have not, to this point, seemed to understand. We don’t means-test people using schools, hospitals or roads for many reasons, but the most obvious one is that it would be nightmarishly complicated if we tried to do it. Child Benefit is built on the same logic. Every alternative is more difficult, more complicated, and more burdensome.

Many of the complaints have focused on the unfairness of the proposal – the implication that two earners might retain the benefit when a single high earner cannot. There are two problems. One is that Child Benefit is still mainly received by women, and stopping benefits to women because of men’s earnings is not popular. The other is that every attempt to respond to changes in people’s circumstances comes with complications. People with fluctuating earnings will not know whether or not they are entitled; people who become unemployed will be entitled at some points and not at others. Some people will only know that they are in the higher tax bracket and the end of the tax year, and adjustments will have to be made. These issues have blighted the Tax Credits scheme and inevitably they will blight this change.

Welfare reform

The new Green Paper, No-one written off, looks depressingly familiar; nearly all the major measures have been announced already. There are three key elements. The first is the development of individualised labour market support for people who have been out of the labour market for a year or more. Most of the comment on this has focused on the private sector firms who are engaged in the process. The profit motive means they have a strong incentive to show themselves in the best light, but that apart, I do not have a problem with the principle. It is rather more important that the performance of such schemes to date has been exceptionally poor. Pathways to Work, the programme on which the current policy is based, was also based on private sector firms. It proved to be very expensive. The rate of engagement in the labour market was lower than might have been expected without the programme, and notably worse than the DWP’s own New Deal; there is some suggestion that the programme may actually have delayed people’s return to work, rather than speeding it. To evaluate whether a scheme is working or not, we need to ask what value it adds. The big problems of individualised support are deadweight – where people are included in the programme who were going to improve without it – and spillovers – where people receive support after they no longer need it. Most of the current arguments about effectiveness simply ignore these elements. It is hard to see why it is now being rolled out as a national programme – except for the lobbying by the firms who stand to gain by it.

The second element is the introduction of “conditionality”, mainly understood as the obligation to work or enter training as a condition of receiving benefits. The Freud review was delivered under the misapprehension that active labour market policies began in the 1980s. In fact, there is a long history of conditional rules and work requirements, and it’s not encouraging. Conditionality adds greatly to the complexity of benefit rules. It penalises people for the prevailing labour market conditions. And there is surprisingly little evidence to show that it has a positive effect on labour market participation, even if it has a clear effect on benefit receipt – cutting people off benefits is not the same thing as putting them into work. The figures for the US are heavily distorted by a prison population that is equivalent proportionately in size to Britain’s problem of long-term unemployment.

The third element is the revision of Incapacity Benefit, which is being changed into a new “Employment and Support Allowance”. I wrote about this reform last year in the Scotsman. Suffice it to say here that most of what you will have read or heard about IB through the news media is gibberish. IB is not given through sick-notes, and the numbers of claimants are falling not increasing. I do not think the reforms will work altogether, because the government is not addressing the use of IB as a route to early retirement through ill health.

Taken in all, this is a minor reform, not a major one. There ought to be a fine for politicians, like a swear-box, for claiming that the latest reform is the most important one since Beveridge. This is an incremental change based on a series of badly thought out measures which have been tried, tested and failed. There’ll be further reforms when the next minister comes along.

The assault on the public services

Several entries on this blog refer to cuts, austerity measures and pressure to transfer public services to the private sector. The rationale for doing this is very weak.

  • Reducing public spending during a recession is a certain way to turn it into a slump. Everyone – including the private sector – depends on demand generated by public subvention. The main effect of cutting services across Europe is to ensure that there will be no-one to sell things to.
  • Public expenditure in a slump is counter-cyclical. Keynes argued that wars or building pyramids would be better than parsimoniousness in such circumstances. Deficit financing is not intrinsically a problem – most countries in the OECD incurred debts during the second world war, and it took a long time to pay them off. Like Keynes, I tend to think that neither is the best use of public money. Now is the time to build roads, railways, water treatment plants, housing and energy production facilities. There will never be a better time.
  • Cuts will cost jobs. I do not understand the argument that projects not undertaken or “natural wastage” do not imply the loss of jobs; of course they do. Often the loss will be felt most keenly in the wider economy.
  • The main source of the current deficit is not the public sector; it is the private sector. That does not mean that the public sector does not have to pay, but it does raise questions as to how far the cuts can legitimately be represented as the management of a structural deficit.

Ultimately, the only way out of a slump is through growth, not through retrenchment.

Population and resources

Thomas Malthus, at the end of the eighteenth century, argued that increasing population must inevitably lead to disaster. We were going to run out of food. Malthus was wrong, but that has not stopped generations of neo-Malthusians from claiming that it was going to be true next time. In the 1970s, The limits to growth claimed that the world was going to run out of energy. It isn’t. What happens in an economic market is that as an item grows scarce, it becomes more expensive. As some sources of energy will become more expensive, we will be forced to switch to other sources. There is no point at which the last drop of petrol will ever be poured into the last car, while other drivers look on in fury. This is just not the way that the economy works.

The other side of the Malthusian argument is about population. Population does not grow exponentially: the birth rate falls as the economy develops. The reasons are complex. Part of the explanation is the changing role of women, who delay childbearing when they have options for education and employment. Some reduction may be attributed to contraception; some, perhaps, to the effect of urbanisation on the costs of raising a child. But a significant element must be the fall that most countries have seen in infant mortality over the course of the last forty years. The association is clear and strong (try this link, which opens a new window): once parents see that children have a realistic chance of surviving to adulthood, the number of children they have drops markedly. As an Indian minister once commented, “The best contraceptive is development”.

The age of austerity

Now that cuts in public spending are on the agenda, a parade of experts has been in evidence, arguing for a new kind of welfare regime. However, what they are arguing for looks a great deal like the policies the same people have been pushing for over twenty years – a programme of privatisation, individualised services, diversity and a withdrawal of the state from direct provision.(1)

Precisely because these arguments have been running for more than twenty years, we can form a pretty clear picture of what happens when services are based on these principles. The policies may seem in principle take expenditure off the books of the public services, but that is largely illusory: the most expensive services are nearly always paid for ultimately by government, and the costs are still largely held within the accounts. The central argument is that the private sector is supposed to be more efficient than the public sector. That efficiency is largely achieved, however, by adverse selection – refusing to do things that the public services are bound to do; and the main way that private services have reduced cost is simply by reducing labour costs. Partial provision by the private sector still leaves the public services to provide residual services. The appropriate comparison to make is not between public and private services, but between the total cost of services where there are different patterns of service provision and delivery. Taken in the round, the combined effect of expenditure in the private sector, the development of regulatory mechanisms in the public sector and the maintenance of residual public services has been generally more expensive than services were when services were planned, delivered and strictly rationed by a sole provider.

Personalisation, diversity and consumer choice are not cheap options. There are no good grounds for believing that such policies save money.

(1) e.g. R Hewit, Public service reform is the only way to avoid cuts, Scotsman 1.3.2010

Rationing and road pricing

The Times tells us: “there are only two ways to ration the space on the roads: by queue or by price” (Editorial, 31st October 2009). Rationing is about how resources are allocated. There are many other ways to ration besides queues or pricing. The standard approaches include service restriction, dilution, filtering and reallocation. This might mean e.g. restricting the class of vehicles or drivers able to use certain roads; redefining the use of the road space through line markings; reserving space for certain purposes (e.g. breakdown lanes, bus lanes, car sharing lanes); changing traffic flows (in the US they use gates to open or close road sections at different times for traffic moving in different directions); changing the rules of the road (should there be fast and slow lanes, instead of all outside lanes being for overtaking?); and redefining the use of existing roads (freight-only roads, motorways and ring roads are examples). I’m a specialist in social administration rather than transport, and I cannot tell which of the options is better; that needs evidence. Pricing may or may not be better than the alternatives, but we should never assume it is the only option.

Why cut?

All the main political parties in the UK seem to have reached a consensus, that the economic situation must mean cuts in public spending. This is alarming. Governments must understand that they cannot cut their way out of an economic depression; they have to grow out of it. The way to bring in higher revenues is for people to earn more, not less. If they cut, the reduction in demand will lead to lower tax revenues, and increasing costs through higher unemployment.

The government finances are certainly bad. It is not because of high spending on public services; it is because the government has bailed out the banks. The main way to recover that money is going to be from the banks, as they repay their loans. The idea that this has to be paid from tax or public spending cuts is a false choice. Either might be true in time, but this is not the time.

Financial socialism

There may not be much to chuckle about in the current financial crisis, but complaints in the US about “financial socialism” (e.g. in Forbes magazine) offer Europeans some wry amusement. The US has never really understood what socialism is about; it seems to be some kind of infection, where exposure to a mild but toxic measure, like a publicly funded library or a school, turns people into brainwashed automata. Socialism, in most of Europe, refers to forms of social organisation for collective benefit. Socialists like Robert Owen, R H Tawney or Richard Titmuss stood for principled, moral intervention in social and economic organisation. (I have been puzzled by the number of commentators – like Matthew Paris in the Times – who seem to think that this has something to do with Marxism. Marxism had no time for principled idealism, or for collective groups working together to improve things, or for the idea that governments should intervene to make economies work better. The socialist parties in most European countries had very little to do with Marx – marxist parties in Europe were “communist”, not “socialist”.) The Parti Socialiste Europeen, the largest bloc in the European Parliament, is committed to “principles of freedom, equality, solidarity, democracy, respect of Human Rights and Fundamental Freedoms, and respect for the Rule of Law.” In respect of financial markets, equality, solidarity and social justice implies much more than regulation for greater stability. Whatever one makes of the Paulson plan, “socialist” is not a word that springs to mind.

There is a different word for pragmatic intervention intended to achieve order and stability: that word is “conservatism”. The standard view in conservative thought was powerfully expressed by Edmund Burke (incidentally, as much a supporter of the American revolution as he was a critic of the French one). “Government”, Burke wrote, “is a contrivance of human wisdom to provide for human wants.” The idea that government should take action as needed to regulate, balance and protect people is fundamentally conservative, and it has been a cornerstone of the “christian democracy” of central Europe for sixty years.

Private information?

Another day sees another panic about the loss of “private” data. Today’s problem comes from the sale of a second-hand laptop containing data for a million banking customers; yesterday’s concerned the details of 33,000 people in prison. The personal details of millions of people can be copied to a hand-held device in less than ten minutes. The usual response in these cases is to cluck concernedly and say, “we have to keep personal data much more secure.” Every attempt to make things more complex – requiring more data, drawing on a range of data – can be compromised by error, omission or duplication. For example, biometric data may be difficult to reproduce; but the digital information which is used to represent them is not. There are no procedures which can guarantee the privacy of the data or protect data from loss.

It seems obvious that we can’t stop this kind of data from escaping. What is less obvious is the argument that we shouldn’t. What is so private about our personal data? Identities are not private: they are public. That is part of what having an identity means. Our names, addresses and ages are generally speaking a matter of public record. Birthdates are hardly confidential information: they are publicly celebrated, people advertise major ceremonies, and celebrities have them posted in newspapers). Criminal records are public, in their very nature; no democratic regime conducts its justice in camera. Our identities announce who we are to the world; that is what they are there for.

Something rather strange has happened. Because, in a cashless society, some people are able to defraud the banks, the banks have been attempting to shift the responsibility to their customers – telling them that their identity has been stolen. And increasingly, it seems, people have come to accept that this is true – that somehow, if they admit publicly to their name, their birthday or the details of their bank account, the subsequent confusion of financial institutions are their fault. We have all been told, for example, not to share details of our bank account, because it can be used fraudulently. But anyone who has ever issued a cheque has given at least as much information – the name of the account holder, the number of the account, the bank’s sort code, a copy of the signature and in all probability, because it was common practice until about five years ago, a personal address. The banks routinely use the mother’s maiden name: in many communities, this is a matter of public knowledge, and many public announcements of births, marriages and deaths include them.

For members of the public, there is an argument for ending the presumption of confidentiality on many details. Telephone numbers, addresses and dates of birth are widely available; some details (like credit card numbers and bank details) have traditionally been fully accessible to traders, though that practice has recently been circumscribed with the introduction of chip and pin technology; and there is an argument for saying that some issues, like criminal convictions and tax records, should also be fully public (as they are in some countries). The question that remains is how far there should be a presumption of confidentiality relating to collective data – the compilations of millions of names on electoral registers, benefit and pensions records or lists of customers. The problems that arise here are not so much about the existence of the data, as the uses to which people put them – mass mailings, farming names for marketing, or fraud. Those are the issues that really upset people, and those are the issues we should really be trying to deal with.

Rural Scotland?

Is “rural Scotland” the right focus for policy? The OECD report on rural Scotland  lumps three different parts of Scotland together. Part is the urban hinterland, described as “accessible” rural space. Part – the smallest part, in terms of the population – is the kind of area that is most often represented as “rural”, rooted in agriculture and the activities associated with the countryside. But in terms of the distribution of population and communities, the largest part of what the OECD is treating as “rural” is not agricultural, but coastal. Scotland’s coastal areas face a complex set of economic and environmental issues, that have little to do with conventional understandings of the rural environment. They take in issues like energy, mineral extraction, tourism, cultural activity, military activity and the ports. The largest single industry is the distribution network.

The key problems relate to isolation. The services and facilities in many coastal areas are often desperately inadequate. Communities need enough population to support basic services. People want access to shops, banks, post offices, schools and medical facilities; these facilities can only survive if there are enough people to keep them going.

However, development, which is difficult enough in isolated areas for practical reasons, is locked by a combination of opposition from landowners, exclusionary communities and planners. Much of Scotland is radically underdeveloped. The high cost of housing reflects a market in scarce supply – and where supply will always be scarce unless we take the fetters off. Where there is not enough housing, there are not enough people. We all want sustainable communities, but no community is sustainable if it is not also viable. If the coast is not built up, the communities will die.