Welfare Cap Will Never Fit Green Head

The electoral timetable is more pronounced than ever since this government introduced fixed-term parliaments. So, two years out from the next general election, Labour have entered the phase of their political messaging chart that is labelled 'reinforce core messages', no longer feeling able to get away with keeping from us their darkest, inner thoughts.

If their approach to welfare is anything to judge by then it is no surprise that they have delayed revealing their true colours for as long as possible. In his speech last week Ed Miliband made clear that, not only is he going to abandon Labour's traditional commitment to the principle of universalism--which he himself has defended eloquently since becoming his party's leader--but they are also going to accept the draconian and illogical welfare cap, a concept introduced into policy-making by the arch-deacon of austerity George Osborne.

The concept itself is oppressive, as though people made choices about being ill or growing old, as if we could somehow make a decision not to become unemployed or to need help in supporting our children. Of course it is these implications that appeal most to Tory policy-makers who have no compassion for those in need, but that Labour should also support them is disgraceful. Most importantly the concept of a welfare cap forces the rationing of funds for the sorts of services that a civilised society demands and, given that the most needy are least able to fight for their rights, it ensures a miserable future for the most vulnerable of our citizens.

As discussed in a recent paper I co-wrote for the Green House thinktank, the most fundamental questions about social policy are about the ownership and distribution of resources. Traditional socialist parties would have accepted this and based their policy on it, but the ability to connect wealth accumulation and the need for redistribution appears to have deserted all but the Greens. Two policies that it draws immediately into the discussions are a land tax and a citizens' income scheme. Together these form a nexus which ensures that those who have acquired assets are forced to share the value of them with the population as a whole: assets are a social resource not a private benefit.

From conservative Switzerland comes hope that the Citizens' Income policy may soon be the subject of serious political debate in a leading democratic nation. Campaigners for a basic income have achieved the 100,000 signatures on their petition which triggers an automatic referendum on the issue within two years. And if Switzerland's particular approach to accumulating wealth is problematic for you, perhaps we could turn our attention to Norway, where oil wealth was not considered as private property, as it was in the UK. The government took a profitable stake in the industry on behalf of its citizens and also taxed private companies' earnings. The result is the largest sovereign wealth fund in the world, commonly known as the Oil Fund, which will pay for the pensions of Norway's citizens.

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Welfare as Fairness

The debate about changes to welfare payments is being held in a rationality vacuum. It rarely rises above the intellectual level of the Jeremy Kyle show, and such divisive rhetoric is used as window to confuse those who might otherwise be in a position to observe the totally reprehensible decision by MPs to effectively cut the payments to a whole range of the country's most vulnerable people.

The economics of this situation is simple and straightforward and revolves around the concept of the 'marginal propensity to consume', another concept due to Keynes. According a a paper relating inequality with the failure of demand and hence the Recession, Matthew Drennan of Cornell University writes the following:

'He [Keynes] inferred from his analysis of the average and marginal propensity to consume that as aggregate income rises, the average propensity to consume (APC) falls. Thus in the long-term the economy would face slower growth or stagnation. To postpone such a development, Keynes believed that a more equal distribution of income would make effectivedemand stronger than a less equal distribution of income.'

In other words, increasing inequality makes a return to growth more difficult to achieve - the first economic blunder of the Tories' decision to cut welfare payments.

But as readers of this blog will know, I do not share the general view that a return to growth should be the primary target of economic policy. We can draw a more interesting conclusion from this idea of the marginal propensity to consume, since what is not consumed is saved, suggesting it arises from 'spare' income. Hence the marginal propensity to consume is higher amongst those with lower incomes.

Now of course much of this 'consumption' is pointless, energy-intensive and probably adds little if anything to human well-being. None the less it is clear that if the share of income spent on consumption is higher amongst the poor, including those receiving welfare payments, then a reduction to their incomes that is equal in percentage terms to the reduction in the income of somebody higher up the income ladder, will hurt the poor proportionately more.

This is why talk of everybody facing an equal percentage reduction in their income is entirely misguided and invidious. When those in well-paid employment have their incomes reduced they simply save a bit less; their consumption patterns barely need to change. In contrast, exactly the same percentage reductions to those on low incomes will immediately cut into their spending, and often reduce their spending on essentials such as heating and food.

This is a small matter of applying our knowledge about income and spending habits to our policy-making. The much wider question of why we transfer money to the poorer members of society, how this relates to the strength of our society, our happiness and sustainability should be the real focus of debate about 'welfare'. My Green House colleague Brian Heatley and I undertook some ground-clearing to facilitate such a debate which you may find of interest.
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