Martians paid my welfare

The Economic Consequences of Rolling Back the Welfare State

January 21, 2000

A B. (Tony) Atkinson is such a well-established participant in British economic debates that it is all too easy to forget what a rare combination of qualities he brings to them. An accomplished academic who is willing - eager, even - to question the assumptions of his time is unusual enough; Atkinson's long experience of the practicalities of high-level policy-making has produced someone as close to the ideal intellectual as we are likely to see in Britain.

The Economic Consequences of Rolling Back the Welfare State is not easy going for non-technical readers. The graphs and equations, furthermore, are central to the development of some of the key themes of the book, and cannot easily be dispensed with. Nonetheless, it will be a real shame if Atkinson's arguments do not reach a wider audience.

As he notes in his opening sentence, "the welfare state has in recent years come under attack from economists", an attack that has undermined the self-confidence of its defenders. This loss of faith is bleakest in the European Union, and the recent history of social security in Sweden, Italy, Germany and the Netherlands suggests an acceptance by the European political class of the imperative necessity of cutting back the welfare state.

Atkinson shows that the empirical evidence about the impact of the welfare state is far more mixed than the air of certainty assumed by welfare's critics might lead one to expect. This perhaps offers a hint of the nature of the assault on the welfare state: it is the product of a seemingly coherent theoretical narrative, rather than of evidence from the outside world. This is why the omissions that Atkinson identifies in that narrative are so important.

The first is the fact that "much of the economic analysis concentrates on the impact of the welfare state on economic performance to the virtual neglect of the functions the welfare state is intended to perform". Many readers will raise a silent cheer at this point - how often one reads page after page on the negative effects of social transfers, and then, at best, a perfunctory discussion of whether they have actually succeeded in reducing poverty or insecurity.

A second gap in the arguments for welfare cuts is the fact that the critics often cannot agree on just what is the problem. Are we concerned about the welfare state's impact on economic welfare or on GDP? If the latter, are we worried about welfare's impact on the level of output or its rate of growth? Perhaps most fundamentally, is it the tax needed to finance welfare that is the problem or the impact of the transfers themselves? As Atkinson puts it: "If a Martian offered to fund the unemployment insurance scheme, should we refuse?"

Atkinson's Martian hypothesis needs to be put to welfare critics more often. All too frequently one hears the welfare state criticised for the behaviour it encourages in the same breath as proposals for rolling it back are defended on the grounds that alternative provision will take its place. But if benefits for unemployment are a bad thing because they increase joblessness, they will still be a bad thing if provided by charities or private insurers. Using both types of critique at the same time is dishonest, and it is time it stopped.

Critiques of the welfare state also usually ignore its institutional structure. If you believe that the devil is in the detail, then Atkinson is certainly your man, and his explanation of the significance of the details of unemployment insurance is superb. Too many studies assume that unemployment benefits are, as in the textbooks, simply a wage paid for being unemployed. In fact nearly all unemployment benefit schemes also involve contribution conditions, are of limited duration and are subject to rules about job seeking while unemployed and behaviour before becoming unemployed that significantly change their coverage and economic effects.

This analysis comes into its own when Atkinson looks at the ways in which the welfare state can play a positive economic role. By insuring against catastrophic losses of income, benefits can encourage people to enter formal employment, to be more willing to take risks, to invest time in being trained and to change jobs. This means that while it is true that the existence of unemployment insurance may make people more likely to queue for good jobs, it could also increase the labour supply and therefore reduce their wage premium.

Finally, Atkinson's consideration of "public choice" critiques of welfare spending has a sting in the tail. He sets out the assumptions and simplifications involved and points out that the assumption that civil servants are motivated by the reputation and power they gain when their corner of the welfare state grows can hardly explain the current fashion for pruning social security.

They are far more likely to have been influenced "by seminars given by prominent economists that social transfers have adverse consequences". Beliefs and ideologies may be just as important as utility maximisation in explaining policies, and "calls by economists for rolling back the welfare state are themselves part of the political process; we have not just endogenous politicians but also endogenous economists, whose behaviour has to be explained".

Atkinson has not rebutted all the economic criticisms of the welfare state. Indeed, one of the strengths of The Economic Consequences of Rolling Back the Welfare State is the fact that some criticisms are clearer as a result of Atkinson's attention. But Atkinson has established that critics must recognise welfare's strengths as well as its weaknesses, and the importance of clarifying the grounds on which the welfare state is being criticised.

The best tribute that could be paid to this book would be for every proponent of welfare cuts to have to face Atkinson's Martian hypothesis: would the government have pressed ahead with the recent disability benefit reforms if a Martian had offered to pay the bill?

Now there's an interesting question.

John Monks is general secretary, Trades Union Congress.

The Economic Consequences of Rolling Back the Welfare State

Author - A. B. Atkinson
ISBN - 0 262 01171 9
Publisher - MIT Press
Price - £15.50
Pages - 216

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