22 October 2015

Welfare reform: Why susbsidising other people’s kids must have limits


The West has been leading the global economy for the last two centuries. How Europe and the US managed to overtake the East after millennia of playing second fiddle to the great civilisations of Mesopotamia, India, Pakistan and China, is a question thathas attracted a huge volume of literature. Fortunately, you don’t have to spend hours thumbing through books in your local library to find the answer. All you have to do is take a look at the reverse side of the British twenty pound note, which is home to Adam Smith, the champion of the free market. However, there is more to this than meets the eye. Western success was not purely based on market activity, it was also founded upon life outside of the market, in the more intimate domain of people’s love lives. These two domains – the market (our public life) and our private life– were not separate. They were intimately connected, and it was this connection that was the real crucial player in the story of Western prosperity.

Tough love ruled. Unless your own individual economic circumstances permitted, starting a family was simply off the cards. Marriage and reproduction were not to be entered into lightly. Couples were precluded from reproducing until they were financially able to deal with the consequences. This preclusion was not through any legal means but, instead, through the fear of destitution. Whilst this might seem to have been a rather cruel state of affairs, it succeeded in keeping population in line with the economy’s ability to produce, supporting a higher standard of living for everyone. Sacrifice and restraint yields rewards and, as the saying goes, there is little gain without pain.

The market and the home worked in harmony. The market provided wage-earning opportunities which enabled marriage and reproduction. But this marriage and reproduction was in rhythm with the economy, meaning that population did not get out of control. If economic conditions deteriorated, people delayed marriage and child-bearing, which helped to provide a floor below which living standards did not drop. When they improved, fertility would expand, but not to the point that it would drive wages and living standards down to subsistence. The economy and society were mutually supportive, as opposed to working in opposing directions.

The nuclear family was central. When a couple began a life together, they established their own independent household, rather than living with their wider family. This norm, established early on in parts of Europe, encouraged young people to enter into the labour market, work hard and develop skills. There was no better push to do so than the fact that marriage would be off the cards until you could afford it. Unless you wanted to condemn your offspring to a life of poverty, you would have little choice but to postpone marriage and sexual activity until you and your partner had saved enough or achieved the kinds of regular earnings required to support a family. Age of marriage was high, families were more manageable in size and population was in balance with the economy.

With reproduction tied to economic circumstances, excessive population growth was avoided and a “high wage economy”– as well as a highly skilled one – was the result. According to the historian Robert C. Allen, it was these high wages that encouraged mechanisation, investment and economic growth, culminating in the British Industrial Revolution and the advent of modern prosperity. And the benefits of the public-private nexus did not end there. “I do it for my kids” became our driving force, a force which is near-impossible to beat. The ethic of hard work and of personal responsibility was born.

There are, of course, alternatives to the “nuclear” prosperity-boosting way of life. The most obvious is the “traditional” family, where multiple generations live together and where the extended family support one another. Here, what is good for the family comes first and the individual comes second. Whilst this might have benefits, it also has costs, both in terms of the potential denial of individual freedom, such as for young women, and by reducing young people’s incentive and ability to take charge of their own life. In this system, your ability to marry and reproduce is determined as much, if not more, by your parents efforts as opposed to your own. Without the need to set up your own self-supporting independent household, age of marriage is relatively low and fertility relatively high. The result is larger families that undermine the standard of living of the poor.

Where this traditional family system has in recent years started to disappear, such as in South Korea, the engine of prosperity creation has been able to operate closer to full steam. Society has moved in line with the economy, ensuring that wealth creation is not diluted by a growing population. Despite already witnessing rapid economic growth, India has the potential to unleash even more growth potential through the modernisation of family life. In fact, not only will it help economic growth, it will also help poverty reduction, by resulting in greater freedom for young women and so a higher age of marriage and smaller families. However, just as countries outside of the West are moving their societies forwards, we are ourselves at risk of moving backwards.

Having made the successful transition from a traditional to a nuclear family system centuries ago, we are now moving into reverse gear. The bloated welfare state represents the same kind of threat to individual drive and prosperity as the traditional family once did. If the state excessively tops up your earnings and subsides the costs of your children, it risks destroying the inbuilt drive we should all have to provide for our children, a drive which not only gives a sense of personal achievement but which creates a rich and prosperous economy, one in which people are motivated to pay attention at school, to acquire skills, to work hard, and to save and invest for their future. After all, if you can have a full private life without all of this, why would you put in the effort? Put simply, an ability to reproduce without limit without also needing to work hard and push yourself as far as you can go is not something we should be encouraging through the tax and benefit system. Doing so means that you breed the very poverty you aim to tackle. Being generous might help the individual family at a particular point in time, but it will bring scores more to your door and will undermine the wider basis of our economic prosperity.

In fact, in terms of its consequences, the bloated welfare state is even more of a threat to our prosperity than would be a return to the traditional family way of life. At least with a family, there is pressure from those around you to achieve your full potential. There is a limit to how much you can “free ride” on the efforts of your extended family unit without spending your life in a continual argument. You may even feel driven to succeed in order to earn the respect of the relatives who once supported you. With the welfare state, by contrast, the person footing the bill (the tax payer) is not looking over your shoulder at every turn, and you may feel little need to “give back” or to earn its respect.

This does not mean that the welfare state should be ditched. We can all agree that it fulfils an important role, reducing the risks associated with ill health, unemployment and old age. It is like buying insurance, but through the government rather than through an insurance company. You pay in and you get something back when needed. When operated in the right way, the welfare state is far from being a “something for nothing” system. It does, however, become a problem if it overextends itself – if it goes too far in terms of breaking the connection between what we contribute and what we receive. It is then that our individual drive is put at risk. In the words of William Beveridge, the welfare state: “should not stifle incentive, opportunity, responsibility; in establishing a national minimum, it should leave room and encouragement for voluntary action by each individual”. Even he would surely agree that we have gone too far. We are damaging the very thing that made the West best in the first place.

We are sitting on a knife edge. If the West is to maintain its position in the world economy, it needs to hold on to what made it great to begin with. It needs to take a lesson from history, to stop pursuing policies that undermine that intimate connection between our “public” and our private lives. Pulling back welfare support, such as by limiting payments to two children or implementing a welfare cap, might seem ruthless, but it is the only way of making sure that we do not dispose of the foundations that have helped us to build economic success: the drive to work hard for the sake of our kids. The alternative to welfare reform is simply unthinkable. It would move us backwards at precisely the time that the rest of the world is moving forwards. We cannot afford for that to happen, financially or otherwise.

Being nice is all very well, but, if money doesn’t grow on trees, tough love is even better.

Dr Victoria Bateman is an Economic Historian and Fellow in Economics, Gonville& Caius College, Cambridge, and Fellow of the Legatum Institute, London.