UK Poverty Post

Whose welfare state is it anyway?

As the American presidential primary season gets underway, Ron Paul has received a great deal of attention for his libertarian approach to economics.  In short, libertarian capitalism argues that any form of state intervention in economic matters distorts market forces and thus reduces efficiency, making everyone poorer than they should be.  In the libertarian utopia, the wealthy are freed from governmental regulation, taxes and interest rates, thus enabling them to make wholly rational decisions about investments, thus maximising the growth potential of their capital.  Meanwhile, the ordinary worker is freed from the burden of taxation, thus enabling her to retain the money she has earned to spend as she sees fit instead of having it swallowed up by inefficient central bureaucracies.  Corporations will be freed from governmental red tape, allowing them to negotiate their own terms with the communities in which they plan to work, so all those directly affected by the planned works can have direct input into the planning process.

To many, all this sounds like a very attractive proposition.  Efficiency always sounds like a great idea.  We’ve all heard far too many stories of extravagance and waste and even outright fraud in the public sector.  No doubt most of us think we could do a better job of spending our money than our political masters.  And I’ve yet to meet anyone who enjoys paying tax.

To the libertarian, the welfare state is fundamentally immoral and inefficient.  Not only does it remove the incentive to work for some, but it also unfairly forces all workers to contribute to their support.  The libertarian capitalist argument says that everyone is responsible for their own wellbeing and, without the “something for nothing” approach of the welfare state, people will work harder to find and retain the best job they can.  Those who are unable to work will be recipients of the noblesse oblige of the rich, whose philanthropic instincts will be encouraged by the absence of a state-sponsored welfare system.

The approach starts to fall down when you consider some of the practicalities, though.  If a corporation wishes to start an industrial process with significant environmental impact then how wide does its negotiating circle have to go, especially if it expects to produce a high level of carbon emissions that may affect the whole world?  How strong are the relative bargaining positions of the wealthy business-owner and the unskilled worker she wishes to employ on very low wages, or the powerful corporation and the area of very high unemployment to which it relocates?  And what happens if the wealthy (and even the not-so-wealthy) don’t keep up their end of the implicit bargain with those who are unable to work?  After all, a safety net is never needed until someone actually falls down.

That’s not to say that we can’t learn some useful lessons from this kind of philosophy.  Above all, I think it helps us ask some serious questions about “corporate welfare” and corporate responsibility.  We often hear politicians arguing that people must take personal responsibility for their circumstances and do whatever is required to improve their lives.  Libertarians hold strongly to this view, but they also insist that corporations must stand on their own two feet as well.

In Britain recently, not only have we seen major companies receive massive government subsidies, but also the ongoing effects of a system that effectively allows them to abdicate their responsibility, in order to pay their own way. Our “corporate welfare state” distorts the market drastically and, as the libertarian model predicts, this leads to inefficiency, excessive state intervention and worse outcomes for low-paid workers.

For example, I pay taxes that go into a central pot, some of which goes back out to other workers as child or working tax credits – a complicated arrangement that sees workers on low pay, who pay tax, claiming credits from the government to top up their income.  While this has been a fairly effective way of lifting children out of poverty, it doesn’t seem like the simplest solution. Given that the tax credit system is one of the most notoriously unreliable bureaucracies we have, wouldn’t it also be easier – and much more efficient –to cut out the middle-man by increasing the basic tax allowance to the living wage, and, as a result, not have those people paying tax in the first place?  It just doesn’t seem fair to have low earners paying taxes before they’ve made enough to feed their families. The losses to the Exchequer could even be offset by a slight increase in the tax rate for those earning above the new threshold, if that was deemed necessary.

People working in poverty reduction often talk about the importance of increasing government-sponsored childcare so that people, especially women, with children can enter (or re-enter) the workforce more easily.  But why should this – a direct cost of employing someone with a family – come out of the taxes of other workers who are already financially stretched? Why not reduce everyone’s taxes by the amount the country spends on such initiatives, and instead demand that employers come up with decent childcare provision themselves?  Better yet, we could insist that companies just pay their workers at a level that lets those workers choose the childcare provider that bests suits their needs, whether that’s a nursery close to home or paying grandma appropriately for the caring work she takes on.

And why in the world should anyone who has a full-time job need to claim any kind of benefits just to survive? Shouldn’t we be asking why wages are so low in some jobs that people can’t afford a decent life without a state subsidy? Government ministers insist that welfare reform is vital if people are to escape a “culture of dependency” and if they are to “make work pay”. But if a company is only profitable because other people’s taxes are enabling it to keep wages low, who is really “dependent” and who is really responsible for work not paying?

All these questions would be answered if the welfare state was, indeed, only providing ordinary people with a measure of protection from the vagaries of a sometimes cruel economic system. But some benefits given to ordinary people ultimately “subsidise” the low wages of many jobs.  In the end, that’s welfare for companies at the expense of everyone else.  I don’t think many of us believe that’s a healthy way for our economy to operate.

My taxes (and yours) should go towards insuring the nation against an economic downturn that forces many of us out of work, or against the existence of people who are simply unable to work.  My taxes (and yours) shouldn’t go to fund systems that, whether by accident or design, keep other people at or near the poverty line.  I’m happy enough to contribute to the welfare of people who are struggling to make ends meet on their own. I’m not at all comfortable paying for profitable corporations to keep them that way.

Kenny McBride works for Oxfam’s UK Poverty Programme in Scotland.  He wouldn’t know who to vote for in an American election.