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12 October 05
Why
Subsidise Dependency?
Incentives
are a driving force of human behaviour. Because people respond
to incentives in a relatively predictable manner, the study of
incentives is at the heart of economic theory. Their
manipulation is also at the heart of politics.
Incentives
influence almost everything we do: how hard we work hard,
where we shop, what sort of car we drive, even who we vote
for! When given a choice, if one option leads towards an
increase in benefits, while the other leads to an increase in
costs, then we are more likely to choose the option leading to
increased benefits.
It’s
that reasoning that drives our political choices: most people
support parties that they believe will deliver an increase in
benefits to them and their family. In other words, people vote
with their back pocket.
An
example of this occurred during the election campaign when
Labour announced that it would abolish interest on student
loans. While most people acknowledge that this is bad policy -
since it will create a massive incentive for greater
borrowing, leading to bigger loans and a more indebted nation
- it certainly helped Labour to win the election. Now people
all over the country who had even a remote interest in
studying are starting to check out courses and student loan
requirements.
Incentives
in public policy come in a variety of sizes and shapes. The
level of taxation - the major form of income for governments -
influences the nation’s attitude to work and investment: if
tax on income is kept low, then the incentive to work hard to
gain extra income is strong. Similarly, a low company tax rate
creates a compelling incentive for investment in the business
sector through the promise of increasing returns. That’s
why, if governments become too greedy and hike up taxes too
much, they risk undermining a nation’s enthusiasm for work
and business investment.
A
key incentive that has been long favoured by politicians is
the use of subsidies.
New
Zealand’s experience of these is long and painful, with some
of the most infamous subsidies being those that were provided
to farmers by the National government in the seventies when
Britain joined the Common Market.
As
a result of these subsidies it was estimated that some 40
percent of farmers’ incomes came from subsidies. They broke
in marginal land that was unsuitable for farming creating
ecological disaster zones in many parts of the country. They
produced mountains of butter that had to be given away. Some
$100 million in sheep carcasses had to be rendered down. And
stockpiles of wool sat around for decades.
The
problem is that when politicians agree to the demand from
pressure groups to introduce subsidies, it is usually in
return for votes at the next election. With their focus on the
three-year electoral cycle, politicians usually ignore both
the impact of the incentives on the wider community, and the
longer-term consequences.
Economist
Henry Hazlitt in his classic bestseller Economics in One
Lesson, puts it this way: “the art of economics consists
in looking not merely at the immediate but at the longer
effects of any act or policy; it consists in tracing the
consequences of that policy not merely for one group but for
all groups”. He goes on to state that nine-tenths of the
economic policies that cause dreadful harm around the world
occur as a result of that basic principle being ignored.
That
is certainly the case here in New Zealand with our welfare
system. For over thirty years, successive governments have
subsidised a system that creates dependency, breeds
dysfunction, and damages children. Unsurprisingly, as a result
of these subsidies, there has been a tenfold increase in
welfare benefits over that period from around 30,000 to over
300,000, as well as a dramatic escalation in child abuse.
Whereas
back in the early seventies there were 28 full time workers
for every full benefit paid, there are now only four. And with
growing pressure for the expansion of the present welfare
system from special interest groups and advocates, the number
of beneficiaries in the future is expected to grow faster than
the number of workers.
By
incentivising unemployment, sickness, family breakdown, and
illegitimacy, both Labour and National governments have been
responsible for creating human misery. People who have had
their dignity and confidence taken away from them are rarely
proud or happy. Children growing up without a dad to guide and
protect them, and without a working role model in the family,
not only face greater risks and difficulties, but all too
often lead lives of limited opportunity.
Taxpayers,
meanwhile, are forced to subsidise people who could and should
be working, to be state wards. That means that taxes remain
too high, and hospitals, schools and communities are
increasingly overwhelmed as they try to cope with people who
are being subsidised to be dysfunctional: drinking too much,
getting too violent, doing drugs, abusing or neglecting their
children, committing crime and generally failing to take
responsibility for their behaviour and their future.
The
answer is clear: as a society we must stop subsidizing what we
don’t want more of. If people are unemployed we should not
be paying them to do nothing; instead we should require them
to undertake 40 hours a week of work experience. If people are
incapacitated but capable of working when they get well, we
should be proactively helping them into the speediest possible
recovery, rather than paying them to languish on welfare.
We
should stop subsidizing family breakdown not only by providing
support for single parents to get jobs, but also by
introducing shared parenting so that both parents can share in
the responsibility of caring for the children. Also, we should
acknowledge that children do best with a mum and dad who are
committed in a stable relationship, and stop subsidising
unmarried women to have children on their own.
Have
your say on this matter (the results will be updated on a
regular basis).
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Such a change
of policy attitude could begin by denying any extra welfare
entitlement to the parent/mother of any child conceived and
born while the mother was already on the DPB.
The shame of
this dependency system is it has become inbedded and therefore
a norm. A hand up is better than a hand out and 2 parents
caring is better than 1.
Australia
have apparently just introduced the need for mothers to work
if they are on the DPB when their children are at school. The
wages amount is deducted from the welfare payment - very
sensible!
I would like
to see political leadership in reducing welfare dependency.
Drink driving is actively discouraged but welfarism harms
children. Where are those public warnings?
There are
times when a female gets caught and ends up pregnant, however
when one hears and knows of someone having several children
all by diferent fathers and thinking it is their right that
welfare will look after them all, then it is wrong. We should
ony under cetain circumstances provide welfare for one (the
mistake) after that, it is their own responsibility - though
this would possibly need looking into too as we already have
children without care who cause trouble, be it burglary, home
invasion etc.
I have also heard of a person who already has a 10 year old
child who is divorced who is now looking at IV to have another
child. How is it possible for someone on a benefit to be able
to get IV? All because she wants to have another baby.
New
Zealanders have been encouraged to know their rights, whereas
knowing what their responsibilities are is even more
important.
I manage a
training centre aimed at preparing people for employment.
Currently working with one gentleman who informed me that he
would not accept a job unless it paid him $16 per hour; and
WINZ have to pay for him to get his licences back... complete
lack of personal responsibility that has been encouraged for
too long!
People must
stand up and tell the truth, as you do Muriel, about the
insidious destruction of the family unit and values. This
country will self destruct, both socially and economically, if
we don't turn away from the ever burgeoning socialist welfare
state. Self reliance and personal responsibility are critical
traits within a healthy society. Have we as a nation learned
nothing from history?
Absolutely
agree with your comments and insights into this dysfunctional
component of our society. I believe that after a stand down
period of say 3 - 6 months, those on the dole should be
required to undertake work for the common good. Some may say
this is demeaning, I say why should my taxes support some one
elses lifestyle choice? Having that component of earned income
also keeps those unemployed in the working frame of mind, and
avoids the pitfall of losing experience that impacts
detrimentally on their employability. Employers don't like to
see gaps in the employment record of potential candidates.
My husband
earns $60,000 p/y as a school teacher. It is demoralising to
us to realise that having 5 (I think) kids on welfare is equal
to what he is paid a year plus he is being taxed of course!.
That people can get this sort of money for sitting around and
being paid for the priviledge of having children, is just
amazing to us.
NZ is in a
downward spiral with a large part of Helen Clarke's support
base being those who are dependent on the State. Which keeps
the taxes high, which leads to those who are fed up of
supporting beneficiaries leaving for Australia, which then
increases her support. Hence the spiral.
In my opinion
a single mother under a certain age (e.g. 20) should not
receive a benefit. Her parents should be responsible for the
upkeep of the child or it should be given up for adoption. If
the single mother only has a welfare dependent parent then the
baby should be given up for adoption. No mother on welfare
should have an increase in her benefit if she has another
child/children. While this may seem radical I'm sure that
within a short period of time the numbers of illegitimate
children would drop dramatically.
I live in a
rural community. I work in the health arena. I sit on the PHO
Services committee. They sit and formulate strategies as to
how to make the limited dollar go many extra miles - in effect
another form of subsidy to those already on many other
benefits. The committee struggles to come to grips with the
social issues of long term dependency - teenage suacide among
them. The answer - more benefits and subsidies. There is no
education given to teach people to be self sufficient and
manage their own conditions in a pro-active manner. I sit on
the committee and watch as we set ourselves up to fail in the
worst possible manner. There are no incentives for the young
people to improve their lot - they have no goals and are
directionless - partly due to there being no encouragement
from family/whanau, and mostly from the lack of positive male
role models in their communities and families. We are now
reaping the rewards of many years of welfare culture that has
been bred into our society. It will take many years to grow
out of the dependency culture. We MUST START NOW.
I agree that
those people capable of work should work for an income. If
they are out of work and receive the benefit we should get
them to do work on community project and I believe that many
of them could be employed cleaning up the country site. If
they do not like that then they can stay home but they do not
get paid either.
Welfare
dependancy
On welfare, incentives and disincentives is the key as you
state. I propose something radical but I believe sensible as a
solution. Everything connects to everything else. So welfare
connects to employment and tax.
Income Tax is in practice a penalty on productivity even
though it is meant simply to be a way of raising funds.
Evolution allowed income tax to change from being a voluntary
levy to pay for roads in colonial NZ to the beast it is today.
Income tax is efficient but has become a weapon of mass wealth
destruction.
Welfare recipients of forced charitable donations are locked
into a system that allows them to earn $80 per week extra and
they are docked for all earnings above that. That is the
disincentive trap from which many of the disadvantaged are
unable to break.
Debt
For most people, if their income is suddenly lowered for a
short time or they choose to pursue some goal which lowers
their income, they either resort to spending savings or they
may borrow against assets. That is how businesses start. So
borrowing is the normal method of making up a shortfall in
income. The Reserve Bank Governor reminds us that NZers are
very good borrowers.
The same principle should be applied to welfare recipients.
Without assets, they borrow from the bank of last resort being
the government. Most NZers [say 90%] support the principle
that people in need should be supported. But no-one has ever
said it has to be an immediate gift. So the debt would grow
month by month. I do not think that is radical. It is obvious.
Some will never pay it off. They will go to their grave
knowing that other NZers supported them to the tune of say
half a million dollars. That must be good news to a person
that their fellow human beings value them that highly. Let us
measure it so they know. Clearly a proportion of sickness
beneficiaries are not capable of work. E.g. if someone is
dying of cancer then they would continue to receive a sickness
benefit. However many should be reassesed for fitness to work.
Making welfare a debt sends the right signals and accords with
normal daily life for most of the population. Like student
debt, it should carry interest. Students use debt to pay for
living essentials. It is exactly the same for welfare
recipients.
Debt write-off
Now here is the first radical idea. The above debt structure
assumes that a system is in place for them to obtain work. See
below for that. When the welfare recipient obtains income
there will be no income tax on their earnings. They keep all
of what they earn. That will be more than what they received
on welfare. As they pay off debt, the first payment will be
accompanied by additional debt write-off. So every repayment
will get an equal amount written off dollar for dollar. If
they earn more, they repay more, then the rate of debt
foregiveness increases. That creates a huge incentive to earn
more. It could get to say five for one. Repay five hundred
dollars to get two thousand five hundred dollars paid off.
They will also have the pleasure of standing up as human being
to know they can provide for themselves.
That creates a huge incentive to earn more. So instead of
income being penalised, former welfare recipients get a bonus
for higher earnings. [Wouldn't it be nice if the banks wrote
off extra dollars for higher pay back]. The incentives are all
in the right place and set the scene for savings.
Managing employment
The second factor relates to how to provide the jobs for the
unemployed. Every employer company currently pays profit
taxes. What a stupid evolutionary counter productive method.
Why would anyone in their right mind want to penalise profit.
That is the incentive which makes the economic world go round.
[Let us not side-track on to excessive profit or other
excessive wealth which is a different question].
It is fundamental that the whole economy depends on the
economic activity of all employers to provide the wealth of
the nation. Everyone depends on that economic activity. So
employers currently carry the cost of the unemployed anyway
although indirectly. Profit taxes currently pay a lot of
welfare money but the employers get no benefit from that
non-deductible expense. Most employers belong to the Employers
and manufacturers association.
This second proposal takes that situation and is a little more
radical. Every company will be given the option to switch [no
return] from Income Tax on profits to a NZ INC expense which
represents their share of the welfare burden. In return every
employer, having paid for extra employees can draw from that
source as required.
So a specially legislated NZ EMA special trust can buy WINZ
for One Dollar.[ I am sure Richard Prebble would have been
pleased to arrange that sale.] There will be a huge incentive
for the employers NZ EMA WINZ trust to find productive work
for those in the EMA WINZ scheme members. They are paying
their wages anyway. If anyone can find them work, it is the
employers. Some will say that many are unemployable. I am not
prepared to so easily write people off. Maybe their harsh
background caused a problem which needs other remedial
treatment eg personal development, motivation etc. That is
another story probably relating to parenting skills.
If someone does not turn up for work, then no pay as for
everyone else. We had the ridiculous example recently of
orchardists unable to find employees while thousands enjoyed
the summer on the dole. Currently the building industry is in
great need of plasterers to for homes. They are being imported
from Portugal. Many stay on illegally still working and
filling the job which should have been given to the guy on the
dole.
Bottom line: privatise the dole. The incentives are then in
the right place. NZ Inc gets full employment. Very few will be
incurring debt of last resort.
Could it become real? Or is it all too radical to pass muster
in this conservative lttle corner of the world?
I
have now sold my Motel. For 9 years I made it my goal to get
the DPB ladies back into the workforce - ideal hours 9am to
1pm. Key reasons were to assist with self esteem and show them
how to clean and take pride in their homes. Plus ultimately
encourage them to use the FREE continuing education available
to them. Success? NO! Only four over the 9 years took
advantage of my assistance and moved into fulltime employment.
Still I guess that is better than none. In my final year I
gave up because it was too hard to carry the poor attendance
rate and so I employed Chinese students whose performance and
attitude was 100% compared to the Kiwi counterparts.
Well
said! I'm currently doing a Masters degree part time, and the
Labour election bribe of interest-free student loans is
certainly attractive, especially when papers are nearly $1000
each. I think this offer is economically stupid, but when
there is free money around, why pay out of your own pocket for
education? I didn't, and would never vote Labour - I reckon
we've all had enough of their PC and social engineering stuff
that is actually harming the whole social fabric of this
country.
Adam
Smith made a similar argument in his work " The Wealth of
Nations". He made the point by stating that it must be
"enlightened" self interests not simply
"self" interests that should be the driving force
that will enable an economic system to prosper. Most subsidies
are an expression of "self" only, there is nothing
"enlightened " about them at all. You make this very
clear in your comments.
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