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crikey15

May 12, 2015

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The negative income tax has the odd distinction of being a measure supported by both libertarians and the progressive left, and it’s time we took it seriously.

Closely tied to the idea of a universal income, a negative income tax is a measure by which citizens get a low but guaranteed basic income that tapers off as their income rises. Not tied to virtue or misfortune, it is given freely and with no questions asked to those between jobs, without jobs, or who contribute to society in myriad ways that do not lead to well-paying employment.

Negative income taxes have most famously been championed by Milton Friedman, but the idea of addressing poverty directly by giving people money has attracted support in all sorts of corners. Martin Luther King was another fan. Broadly speaking, libertarians tend to like negative income taxes because they’re a welfare measure that nonetheless preserves small, unobtrusive government, while progressives like that it assures the poor are given a living wage without casting judgement or causing them undue hardship to access payments.

Large sections of the population would not be materially affected by a move to negative income tax, as they earn enough through their jobs that they wouldn’t qualify. But those who currently receive a complex of Centrelink payments and benefits would be aided by a simpler, less bureaucratic form of welfare.

Aside from making life easier for those receiving government assistance, negative income taxes also help reduce welfare churn, allowing the Australian government to dramatically scale back the functions and costs of bodies like Centrelink.

Aside, perhaps, from Saudi Arabia, where all citizens receive yearly dividends from the state-owned patrol company, no country in the world has a full negative income tax regime. But the idea sticks around because it makes theoretical sense. As a way of structuring a welfare system, it’s had its advocates for decades, particularly in the 1960s and 1970s. That era also begot the introduction of four major trials in the United States, which found negative income taxes tended to reduce hours worked. But perhaps this isn’t a bad thing — many advocates of negative income taxes in recent years have cited such tax schemes as a way to deal with the mechanisation and automation of menial work. In a few years time, it’s possible we’ll have our first whole-of-country experiment to go on. In Switzerland, voters in 2016 will vote on a referendum to give everyone in the country a basic income of 2500 Swiss francs a month.

In Australia, negative income taxes have not been a major feature of recent welfare and tax reviews, which have advocated simplifying the tax and welfare system through far less radical means. But one body that has looked closely at the impact of a negative income tax in Australia is the Centre for Independent Studies, which 10 years ago released a paper by economist John Humphreys looking at a range of radical welfare and taxation measures in Australia. It suggested a negative income tax calculated by paying the recipient 30% of the difference between their income and a tax-free threshold of $30,000. Someone with no income would receive $9000 a year. Someone earning $5000 a year would then receive a negative income credit of $7500, taking their total income to $12,500, and so on. This scheme, which sets benefits very low (nearly a third lower than the maximum singles Newstart allowance), preserves a flat 30% marginal tax rate on every extra dollar earned (by withdrawing 30 cents for every $1 earned), minimising the disincentives to take on more work and avoiding poverty traps, where welfare recipients see their total income decline when they take on work and lose more in benefits than they earn.

Writing a decade ago, Humphreys expected the scheme could actually result in a budget saving of $15 billion a year — but he was assuming it would lead to higher workforce participation and thus fewer people on welfare (perhaps a fair assumption if the benefit is set so low). Major critics of negative income tax point to the cost as the major impediment — to be self-sustaining, it’s argued such a welfare system would need far higher taxes to ensure no current welfare recipients are worse off. But other, less pure versions of negative income tax schemes have been found to pose fewer threats to the bottom line.

Of course, the scheme could be tinkered with in all sorts of ways — to give those with disabilities a higher base income, or to adjust for family size — but the basic premise would remain the same. Jumping through hoops to get on Newstart is a full-time job in itself at the moment. This is a huge waste of everyone’s time and effort. A negative income tax could help fix that.

Australia

May 30, 2014

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The government’s plan to cut welfare payments, as outlined in the federal budget, has attracted much gnashing of teeth from the Left. News Corp, on the other hand, says our welfare system is overrun by rorting and the cuts don’t run deep enough. But how does Australia’s social expenditure stack up against overseas examples?

News Corp columnist Simon Benson calls the current system “overly generous, and in need of dramatic reform” in this morning’s Daily Telegraph. In much the same light, Tim Blair also pointed the finger at the record number of Australians on the disability pension, who he says are “sending Australia broke”.

Complex our welfare system may be, but the claims that we are overly generous with our expenditure are a little murkier.

Australia spends 19.5% of our GDP on social welfare, whereas some European countries like France and Belgium spend upwards of 30% of their GDP on the welfare system.

This contrasts with Social Services Minister Kevin Andrews’ claim that Australia’s welfare system is “not sustainable” when he demanded a review of our expenditure in February this year.

The unemployed have come in for a particular shellacking, but Australia ranks 25th of 30 countries in the Organisation for Economic Co-operation and Development with data available in terms of expenditure for unemployment.

bunch of slackers

Jan Libich, senior lecturer at La Trobe University’s School of Economics, says the Australian welfare system does not seem to be overly generous in comparison with that of other countries. “In international comparisons, Australia is doing well, better than most other countries. Our pension and healthcare systems are in a much better financial position than those of other nations.”

But Libich says the real problem with Australia’s welfare spending is the rate of increase. “It’s not so much where we are compared to other countries, it’s more about the trend we have seen over the past three decades,” he said.

If you look at social expenditure as a percentage of our GDP, our 19.5% figure compares favourably, but this is almost double our 1980 figure. And looking at the per person figure, social expenditure (at constant prices and purchasing power parity) has tripled in Australia between 1980 and 2013.

The largest slice of our welfare payments goes towards the age pension. According to OECD Pensions at a Glance 2013, Australia’s public spending on the age pension is much lower than pension spending in Europe.

Australia spends 3.5% of GDP on the age pension, while Italy spends 15%, France spends 14% and the United Kingdom spends 6%. While our figures look good on a global perspective, the nations we are comparing ourselves against are in a pretty bad shape themselves.

ageing generosity

“Yes, we are better off than other countries, mainly because our superannuation system takes the pressure of the public purse, but given past trends, we should not be complacent about for the future. These long-term trends require long-term reforms to be able to ensure the sustainability of the system,” Libich said.

In addition to the reforms, saving could be achieved by eliminating so-called tax-churning, whereby the taxes collected fund the welfare given back to the same individuals. The government is essentially taking money with one hand and giving it back with the other.

“Tax-churning is inefficient, as a non-negligible portion of the collected money is wasted on administration,” Libich said. “There seems to be a lot more redistributive mentality in politics these days — this is something that needs to be looked at if we are to raise the efficiency of the Australian welfare system.”

The rapid rate of increase in the welfare system is something Australian politicians will need to address in the future, but quick cuts and short-term fixes like we’ve seen in Europe are not the answer, says Libich.

“They tend to be counter-productive as they reduce economic growth. Conceptual reforms that take into account the demographic trend towards an ageing population are the way forward.”

Australia

Apr 2, 2013

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Two years ago, David Cameron’s UK government began the slow process of rolling out a series of changes to what remained of British social democracy. Someone had to pick a date when a lot of the major reforms would come on stream. Quick quiz: did the government nominate April 1 because it was 1) so confident in its political rule it thought it could have a bit of a larf; 2) so confident in Labour’s political ineptitude it didn’t think it mattered; or 3) so disconnected or incompetent that no one actually noticed?

When you work it out, tell me. I honestly have no idea. It is very difficult to believe any government is as politically incompetent as this one. But if there’s a cunning plan there, it’s escaping me. Nevertheless, on this issue, the Tories could be confident with good reason. It’s Labour that’s in a bit of a jam over benefit reform, and it hasn’t got a good answer to it yet.

“The Day Britain Changes,” The Guardian said, giving an overview of the changes. The most visible mass changes are a 1% cap on benefit rises over three years and a “ceiling” on benefits for any one household. The “ceiling” of 26,000 pounds per year — the average wage — will hit large families where everyone is on benefits and those who were hitherto claiming the housing benefit (i.e. the direct payment of rent) in high-rent areas. Legal aid for civil cases will be harshly cut, multiple benefits will be rolled into a single one-size-fits-all universal credit, and a “bedroom tax” will be introduced, whereby public housing tenants with more bedrooms than they need will either lose part of their benefit or have to move to a smaller public housing unit.

Paradoxically, by far the biggest change will be the least visible — the National Health Service will move to a fuller internal market model, whereby health services will be organised by local “commissioning boards”, which can purchase them from private suppliers. This is by far the biggest change to the NHS since 1948, but since free-at-point-of-care service remains, many people will not be aware of it initially. On the revenue front, council tax will be extended to lower incomes, costing many poor people an extra 150 pounds a week. At the other end, the 50p income tax rate on higher incomes will be busted back to 40p.

The proposed cuts have garnered howls of outrage from those on the Left, who argue that it represents the end of the social state as we know it. By contrast, the Right has attacked the proposals for not going far enough. Both are correct, on their own terms. Many of these cuts seem needlessly, witlessly sadistic — forcing people to move out of a flat they’ve had for 40 years because their kids have grown up and moved out, bullying a few big welfare families for relatively little gain.

For that pain, the gains are meagre. The UK’s non-pension social welfare bill is around 250 billion pounds. Its current budget deficit is around 150 billion pounds. These measures are projected to save 7-8 billion pounds a year. Some of the savings are piddling — 50 million pounds from a welfare ceiling, a move purely designed to prove to The Daily Mail the state is cracking down on welfare types.

In reality, this is the sort of “savage” cutting you do instead of a real dismantling of the social state. I’m not diminishing the suffering involved, and I’m not advocating breaking up the social state, but it’s worth looking at some of the things the government hasn’t even vaguely mused about doing. The NHS remains a free service. Unemployment and benefits continue indefinitely. Had the Tories done a real slash-and-burn, charging an NHS co-pay for consultations and time limiting benefits, they could have taken another 20 billion pounds or so. Those are the sorts of things the Right wants them to do. It is impossible, of course — the Liberal-Democrats won’t let them, and the Tory centre knows attacks on the core identity of the NHS, or the creation of a full US-style system, would have the Tories turfed pretty smartly.

But they also know many of the general public support a roll-back of benefit payments, due to a widespread perception that there are large numbers of “scroungers” and permanently unemployed, while at the same time there are areas with thousands of unfilled job vacancies. That is unquestionably true, although every time the right-wing papers find a pocket of both unemployment and unfilled vacancies it becomes pretty clear one big problem is lack of training. Two thousand jobs go unfilled in unemployment blackspot, fulminated The Sun, before noting the vacancies were for, erm, mechanical engineers, nurses and care workers, all requiring training and certification. Many people also feel “disability” payments became regularly scammed through the 2000s — especially non-physical claims like stress and depression. But such conditions have a “some of my best friends …” quality; stress or depression are a scam until someone close to you has a flat-chat nervous breakdown.

“In Britain, somebody’s the April fool today, but it will be 2015 before we find out who.”

Addressing those issues is a more complex process of connecting training to unemployment — and applying a training levy to large companies — which would involve more investment, not less, with a touch of compulsion attached. But while the open labour market of the EU remains, there’s little chance of that happening because there’ll be no urgency for social reinvestment. The Tories have managed to convince the general public — helped along by a right-wing media — that any form of increased corporate or financial taxation would have every UK business packing up and moving to Bratislava.

They wouldn’t, of course — London is one place such groups would stay under almost any circumstances. But it’s also true that the whole set-up of the EU, as it stands, makes taxing corporations a very difficult exercise.

Labour’s message has been that this combination of tax breaks and benefit cuts means the Tories’ message of “we’re all in this together” has now been superseded. But the trouble is no one ever believed it, and many don’t want to be together with those they feel took Labour for a ride for years. Part of the process by which a large working class has been splintered has resulted in the language of rights and of class society moving from an active to a passive basis. Thus the Beveridge welfare state, forged in the depths of World War II, had the notion that an active, mobilised and unified working class would seize what was theirs by right. But it also expressed that in fairly settled and collective terms.

Life, in Britain, was, and is, seen in very rigid terms — this is where you live, this is what you do, etc. Thatcherism replaced that with a more mobile ideal, but only for the people who could actually go anywhere. What powered welfare reform in the US — a widespread notion of Protestant individual guilt — is absent in a class society, where fatalism and acceptance are survival strategies to make meaningful whatever is on offer. It’s not for nothing that the best British show about a certain range of life is called Shameless. But the title has a double reference — not only the Brueghelesque exuberance of the welfare class, but of a society that allowed a situation to develop in which worlds of no-work are passed down from one generation to the next.

Meanwhile, the Left has been trying to develop a response that draws on those collective notions, and the post-WWII inheritance — with the new Ken Loach film Spirit of 45 about the creation of the post-war welfare state, and two new groups, Left Unity and the Peoples Assembly, promising campaigns against the cuts. Both form at an interesting time, when the first wave of post-2010 protest groups such as UK Uncut appeared. They have now faded, as did Occupy, and the new groups may have the same problem — without a positive vision to advance, without even a set of proposals for a different tax-spending mix, they are in a sense one or two steps behind much of the general public.

It has to be worrying that such groups are so dominated by a powerful sense of nostalgia and by grandees such as Polly Toynbee, associated with the old world, or by proletkultish young writers such as Owen Jones and Laurie Penny, who have been taken up almost instantly by what remains of a Left media establishment — and who have developed their own interests in perpetuating rather than questioning some received truths. Just as with much of the Australian Labor Left, there is no set of responses that addresses the broad middle of the population, and does not seek to make a politics out of a patchwork of minorities, no matter how legitimate their claims to a better shake.

In Britain, somebody’s the April fool today, but it will be 2015 before we find out who.

Australia

Dec 9, 2010

5 comments

Can we retrieve and renew the idea that we live in a society, and it’s the qualities of how we live with each other than makes life good? Of course the material resources to pay for what we want and need is part of the process, but we seem to have policies and politics that overly focus on economic goals and analysis — not the social ends these should serve.

There are three major distribution systems for the material and non-material resources that make our lives worthwhile: family/community relationships, the formal legalities that make up the state and markets that formalise exchanges and costs. The dominance of any one threatens the balance we need and the critiques of the others. A shorthand critique is too much state means Stalinist over-regulation and control, too much market makes the Mafia and too much community Bosnia or Rwanda.

We have had excessive reliance on corporatism and markets as the major model for too long and society is in trouble. The well-funded part of the community sector is silenced because members have become servants of the state. There is increasing evidence that inequalities, within and between populations, can be toxic when they represent institutional unfairness and there are rising populist and extremist tendencies. Extreme political views. There is increasing disillusion with politics and entrenched disadvantage and despair such as within Aboriginal communities. Those who gain from unfairness feel anxious that others will seek to punish them, the losers will feel passive resentment that they are denied their fair shares.

If people feel risks and rewards are shared fairly, they are open to levels of trust and optimism needed to solve the undoubted problems we face. Our political agenda should reclaim the importance of communality and put economics back in its place. Political debates are now limited to whether our economy is healthy and flourishing and assume that this translates into the common good.

There are multiple failures of the current system, such as the GFC. These should allow us re-assert the importance of policy making for good collective social relationships based on fairness, ethics, hope and trust, and making these the markers of the good society. Politics and public policy discussion need to prioritise and include social goals and the means by which we get there. The focus on us all as customers of society should be over so the state must reframe us as citizens who can care about the common good.

The PM often explains government policy. The poor miss out because they lack access to services that would allow them to compete in the labour market. Were they to be appropriately informed and active consumers of information from My School, and presumably My Hospital, they would be able to consume good education and health care. Then, by working hard and obeying the rules, they would succeed in the competitive market.

This odd mix of Hayek and Samuel Smiles ignores the inequities of laws and institutions, the unfairness of prejudices and the needs we have for belonging and caring for others is a common viewpoint in both major political parties and assumes that societies are made up of competing, self-interested individuals. This atomistic view of human beings denies our social origins and interdependence, and ignores the long histories we inherit that make us who we are and determines what we can do.

The paradigm shift in the eighties removed much of what the earlier part of the century had realised was important to social cohesion: providing collective risk sharing and social security in its widest sense as part of responsibilities of state. The role of government should be much more than as handmaiden of the market, by using its power to make markets work and maybe occasionally intervening to open access to those excluded.

The current paternalistic market-driven view of the growth economy is that the ultimate sinners are those who could, but do not, contribute to productivity and growth that makes welfare increasingly punitive and controlling; ergo income management. There is increase spending on social control mechanisms of prisons to control the anti-social tendencies and creeping social and emotional outbursts such as the constant pleasure seeking of drugs, binge drinkers and obesity.

It is time for discussions on making society better: the basic idea of a fair go and the building social bonds. The politics of education that goes beyond human capital, to learning as pleasurable ways of exploring who we are and what we can do and give to others, as better members of society. Arts and making things should again be there for sharing of pleasures not just investment driven. Relating, rearing, caring and sharing needs to be prioritised as part of being communally supported, and not be seen as financial burdens or unskilled exploitation. The role of the public sphere of government should be to assist the good life by fairly rules, so there is order and respect and collective responsibilities through pooling risks and sharing resources.

To deal with the mixture of threats we face e.g. financial failures, climate, reducing resources and increasing pollutions, we need trust and goodwill towards others so we willingly co-operate for the common good. This involves shifting from macho individualism to more collective mutuality that re-allocates fairly material resources and decision making and control.

Are these not the core of what most of us care about and how we want to live?

This essay is part of Crikey‘s Big Ideas series. We’ve had enough of sound bites set on repeat, glib slogans and half-baked committees  –  we’re looking for the vision thing. One Crikey subscriber will also get the chance to share their Big Idea with our readers: send us a three-line pitch, on an issue of national importance that gets you fired up, to boss@crikey.com.au with “Big Ideas” in the subject line.

United States

May 7, 2009

5 comments

Politics

Jul 31, 2007

5 comments

“Risk” may be a central idea of the early 21st century, just as “globalisation” was the dominant idea of the 1990s. The fact that individuals and families are vulnerable to a wide range of social, economic and other risks — and that collective action is needed to help reduce and manage these risks — has long been an important theme in social-democratic thinking.

In the fourth part of a serialised paper first published by the Centre for Policy Development, University of Queensland economist John Quiggin writes that an improved understanding of risk can contribute to the development of a modernised social democratic model.

The great risk shift

In the last quarter of the 20th century, there was a strong reaction against the welfare state, associated with the movements variously known as ‘Thatcherism’ in the United Kingdom, ‘Reaganism’ in the United States, ‘economic rationalism’ in Australian and neoliberalism more generally. The neoliberal movement criticised the welfare state as a costly, inefficient and ultimately inequitable drag on economic performance.

One influential way of framing this critique was the claim that by socialising the risks faced by individuals and households, the welfare state necessarily reduced incentives to pursue risky opportunities. Hence, it was argued that reductions in welfare benefits would reduce welfare dependence and create a more enterprising society. This is far from obvious, particularly once we look beyond the sphere of for-profit business enterprise. Social innovations of all kinds flourished in the 1960s, a time of full employment and a strong welfare state. Fear of poverty tends to encourage conformity to existing social norms and established career paths rather than a willingness to experiment.

During the 1990s, it was widely argued that the transformations of economic and social structures associated with the increased importance of risk rendered social democracy obsolete. It would inevitably be replaced, it was argued, by the emergence of a new global turbo-capitalism. But in the 21st century, it seems that social democracy has proved more resilient than its critics expected, and than some of its supporters feared. In the English-speaking world, where the neoliberal push has been most vigorous, the main institutions of the welfare state, including public health, education and social security systems, remain intact – despite continuous pressure.

The persistence of the welfare state has surprised many observers, given the decline of many of the mass institutions that supported it (most obviously trade unions) and the emergence of an increasingly diverse and individualistic society. A focus on shared risk may help to explain this resilience. Many discussions of social democracy focus on notions of community that derive ultimately from membership of some specific group, and therefore appear vulnerable to social change that breaks down the boundaries between groups.

By contrast, consideration of the risks we all face, and a view of society as a set of institutions through which we jointly manage those risks, may have less immediate emotional appeal than specific claims about community. But it can be supported by reasoned ethical judgements that are consistent with diversity and individualism. Neoliberalism affected not only the explicit institutions of the welfare state like social welfare benefits, but also the implicit contracts between workers and employers, under which employers would seek to preserve jobs, except in circumstances where the viability of their business was threatened, and to reward the loyalty of long-term employees through the maintenance of career paths. From the 1980s onwards, businesses routinely dismissed employees in large numbers, not as a last resort, but as a preferred method of making already substantial profits even larger.

With the advantage of hindsight, it is evident that the transfer of risk from government and business to households has been one of the most significant outcomes of the neoliberal era, referred to by Jacob Hacker as The Great Risk Shift.

A particularly striking feature of this transfer has been the extent to which business and political leaders have been insulated from it. Top managers are protected by increasingly generous ‘golden parachutes’, ensuring that even if they lose their jobs for poor performance they are still entitled to large payouts. Although this has been accompanied by the expanded use of devices like payment in share options, which appear to expose senior managers to risk, these are largely shams. Options that fail to deliver the expected benefits, because the price of the company concerned falls below expectations, are routinely repriced or reissued by company boards. Likewise politicians, so long as they have not offended business interests, can expect to enhance their generous superannuation with lucrative jobs in the private sector, many of which appear so undemanding as to be virtual sinecures.

Meanwhile, households are exposed to increasing levels of financial risk. The results are most evident in the United States, where bankruptcy has become more and more common. By 2005, more Americans experienced bankruptcy than divorce. A ‘reform’ introduced in that year made bankruptcy much harder, but this merely shifted the form of financial distress. Because the new laws made it harder to refinance housing debt in bankruptcy, they contributed to a wave of foreclosures on ‘sub-prime’ loans made to high-risk borrowers. Rapid growth of household debt means that Australians are vulnerable to similar risks in the event of an economic downturn.

The transfer of risk has been symbolised in Australia by the misleadingly named WorkChoices laws, likely to be experienced by the average Australian worker in the form of a take-it-or-leave-it individual contract. Not surprisingly, there has been a resurgence of support for the traditional role of the state in protecting individuals and families from the risks of a market economy, particularly in relation to employment.

Moreover, the claims made on behalf of unfettered capitalism in the 1990s have increasingly come under question. The dot-com boom, ending in the crash of 2000, cast doubt on the idea that the growth of an information-based economy was best directed by speculative investors. And it has become increasingly apparent that the main effect of neoliberal reform has been to shift risk from business and governments to workers and consumers.

As a result, voters seem disinclined to abandon social democracy in practice. Even John Howard observed in the lead up to the 2004 Federal election that “There is a desire on the part of the community for an investment in infrastructure and human resources and I think there has been a shift in attitude in the community on this, even among the most ardent economic rationalists.” More recently, Howard has conceded the need for action on other risks such as climate change.

Tomorrow: A new case for social democracy

Politics

Jul 24, 2007

5 comments

“Risk” may be a central idea of the early 21st century, just as “globalisation” was the dominant idea of the 1990s. The fact that individuals and families are vulnerable to a wide range of social, economic and other risks — and that collective action is needed to help reduce and manage these risks — has long been an important theme in social-democratic thinking.

In the second part of a serialised paper first published by the Centre for Policy Development, University of Queensland economist John Quiggin writes that an improved understanding of risk can contribute to the development of a modernised social democratic model.

Risk and the functions of the welfare state

The interpretation of the welfare state in terms of risk and uncertainty may be illustrated by considering some of its core functions. For some of these functions, such as various forms of social insurance, the risk management function has always been emphasised.

However, concern with risk has traditionally been a subsidiary theme. For instance, the public provision of retirement income and of services like health or education have commonly been justified with reference to notions of redistribution, public goods and the provision of basic needs. However, none of these arguments yields an immediate response to neoliberal criticisms that it would be better to redistribute money incomes, and then allow households or individuals to allocate their expenditure between health, education and other things as they see fit.

But when the argument is flipped over and examined on the basis of risk, a much stronger case for intervention emerges. We can see this by looking at the health and education sectors, where the risks associated with health care and investment in education are compelling.

Health

The problems with market provision of health care are well-known. In the absence of public intervention or insurance, health care expenses for even moderately serious illnesses and injuries are so large and uncertain as to be beyond the capacity of most individuals and households to manage through ordinary methods such as drawing on savings. In the United States, for example, an average day in hospital can cost $US1,500 (around $AUD2,000). Even a short stay in hospital can exhaust the liquid financial resources of the average household.

The usual private market response in cases of this kind is insurance. However, health insurance faces severe problems arising from the fact that some people are more likely to suffer poor health than others. If insurers have information on the health status of their clients, they will charge higher rates for those known to be at high risk – or even refuse to cover them at all. If clients can keep this information private, those at high risk will naturally be more willing to seek coverage, and this will push up rates across the board (the problem known as ‘adverse selection’).

Despite strenuous attempts, no private market solution to this problem has been found. The US has maintained higher levels of reliance on private insurance than most other countries, but even so, almost 50 million people are uninsured. Many more are covered by the public residual insurance schemes Medicare and Medicaid, which are hugely expensive. In fact, despite offering coverage to only limited groups such as the elderly, military veterans and the very poor, the US government sector actually spends more on healthcare relative to GDP than its Australian counterpart.

The Howard government has similarly engaged in massive public expenditure combined with coercive measures applied to high income earners to maintain the private health insurance sector, without achieving much more than a partial reversal of its decline.

In other words, public financing is the only feasible response to the problems of health care.

The necessity of public financing may be traced to the risks associated with health in both the short term and long term. In the short term, we can’t know for sure if or when we will get sick. In the long term, markets cannot manage the risk associated with the fact that some people will have chronically worse health than others.

Although there are good grounds for a substantial element of direct public provision, public financing can also support private provision including both private medical services and community run primary health care centres. These issues are discussed further in the Centre for Policy Development’s ‘A Health Policy for Australia: reclaiming universal care’.

Education

Similar lifetime risks arise in education. On the one hand, as children start school, or as teenagers enter university, there is a lot of uncertainty about the outcomes. Some will do well and go on to high-paying jobs, while others will do poorly and face the prospect of insecure, badly-paid work. But this uncertainty is not uniform. Students from wealthy backgrounds with highly-educated parents face much better odds than those whose parents have low incomes and less education.

As a result, any system relying primarily on private financing and provision of education is likely to be inefficient and inequitable. Students from poor backgrounds will have limited access to loans to support education, and will face less favourable terms and more limited opportunities. This can be seen quite clearly when we look at the make up of student populations in the top US universities. A 2004 study showed that, of the 146 most competitive and selective institutions, just 3 percent of students come from families whose incomes are in the lowest 25 percent. In comparison, 74 percent came from families in the top quarter. Although the situation in Australia is not as bad as this, students from working class background are less than half as likely to attend university as students from professional and managerial backgrounds. These unequal opportunities are partly due to problems at the school level, but they also reflect inadequate responses to the risks associated with education.

A related problem is that external assessment of the quality of education is quite difficult. If a school or university reduces the quality of the education it provides, for example by offering less demanding content, it will be many years before this becomes apparent. As a result, competitive market mechanisms do not work well in the education sector – if indeed they work at all.

Tomorrow: Reframing inequality in the context of risk

Politics

Jul 23, 2007

5 comments

John Quiggin: The risk society, part one

"Risk" may be a central idea of the early 21st century, just as "globalisation" was the dominant idea of the 1990s. The fact that individuals and families are vulnerable to a wide range of social, economic and other risks - and that collective action is needed to help reduce and manage these risks - has long been an important theme in social-democratic thinking.

“Risk” may be a central idea of the early 21st century, just as “globalisation” was the dominant idea of the 1990s. The fact that individuals and families are vulnerable to a wide range of social, economic and other risks — and that collective action is needed to help reduce and manage these risks — has long been an important theme in social-democratic thinking. In the first part of a serialised paper first published by the Centre for Policy Development, University of Queensland economist John Quiggin writes that an improved understanding of risk can contribute to the development of a modernised social democratic model.

Social democracy is built on the idea that as members of a society, we have an obligation to look out for each other. We also have a legitimate expectation of help from society when we are in need of it. In an increasingly diverse society, this kind of social solidarity cannot be assumed to exist automatically. Instead, it must be asserted through political choices, by which governments help reduce, share and manage the risks we face.

By contrast, the neoliberal alternative is based on the idea that individuals, households and businesses should manage all risks by themselves through market transactions. In practice, this means that most risk is borne by those least able to manage it.

Risk and the welfare state

The growing social salience of risk and uncertainty suggests the possibility of a more general reorientation of views about the welfare state, its role and significance. One way of approaching this reorientation is in terms of Nicholas Barr’s distinction between the ‘Piggy Bank’ and ‘Robin Hood’ functions of the welfare state.1 In Barr’s terminology, the Robin Hood function refers to the redistribution of wealth (either in lump sums or as flows of transfer payments) from the ‘lifetime rich’ to the ‘lifetime poor’. In a society where endowments of physical wealth and earning capacity were equal, the Robin Hood function would be unnecessary.

By contrast, the ‘Piggy Bank’ function of the state involves the smoothing of individual consumption over time and over a range of risky outcomes. This function would be relevant even in a society where lifetime incomes were equal. It is just as relevant, (perhaps more so) for those on middle incomes as for those lower down the scale.

In traditional presentations of the case for social democracy, these ‘smoothing’ functions were commonly seen as peripheral. Advocates of a targeted welfare system saw the provision of services to households that could afford to provide for themselves as an undesirable side-effect of provision for the poor – in other words, ‘middle class welfare’. On the other hand, advocates of universal provision saw it as politically necessary to build support for redistribution.

The welfare state as Piggy Bank

Traditionally, more attention has been focused on the Robin Hood function of the welfare state than its role as a Piggy Bank. Opponents of universalism have argued that ‘middle-class welfare’ constitutes wasteful churning and leads to an excessively large state that nevertheless does a poor job in equalising income. Supporters argue that universal programs build social solidarity and cement support for the Robin Hood function, even among those who are net contributors.

But Nicholas Barr persuasively argues that both sides miss the point. Consumption smoothing and risk-pooling are valuable in themselves, and the role of the state in these activities needs to be assessed independently of distributional issues.

In fact, there is a strong case that redistribution plays a vital role because it pools risks that arise within individual lifetimes. In other words, redistribution deals with the risk of being born into a poor family instead of a rich one, possessing the wrong type of job skills for a particular labour market, or living through a sustained economic downturn. On this analysis, the primary role of the welfare state is managing risk, not redistributing income.

Given the central role of risk, we need to ask why the government should be involved in risk management. Barr argues that information-related market failures provide a more robust case for government intervention than do the traditional categories of market failure under certainty (imperfect competition, externality, natural monopoly and so on).

Barr focuses on adverse selection, moral hazard and unquantifiable uncertainty as the key issues. Embarking on a systematic treatment of the main functions of the modern welfare state, assessed in terms of risk management, he examines unemployment insurance, pensions, health care and education, in each case considering the option of private provision against a range of government interventions.

Tomorrow: Risk and the functions of the welfare state