After a week of political debate about the Governments benefits cap – and Labour’s support for it – at last Ha-Joon Chang, in an article in the Guardian today, takes us back to the economics. And, not entirely surprisingly, considering the economics takes us to a very different place from the political debate.
I take the following observations from Chang’s piece:
1) Social security spending in this country is not particularly high, is far from generous and is certainly not out of control.
2) Social security spending, far from being a drag on the economy, is actually an important factor in stabilising it in hard times: its is essentially a piece of counter-cyclical management. Cutting it reduces stability.
3) A “benefits cap” has nothing to do with anything recognisable as intelligent economics and is ALL about ideology and framing.
4) Crucially, cutting benefits doesn’t reduce welfare spending – it simply transfers it from the public to the private sector, where its effect is to destabilise rather than stablilise, because Governments are better placed than individuals to manage risk.
5) There is no empirical link between the size of social security spending and the performance of the economy, and decent social security actually encourages forward-thinking economies to change.
Above all, the fundamental point remains – as one economist after another has emphasised – the best way to reduce social security spending is to have more people in better-paid jobs, and to promote an economy in which the benefits of economic growth go to those who sell their labour rather than those who sweat assets and draw rent. Our economic crisis in not one in which benefits are too high, but one in which real pay continues to fall, especially for the lowest paid, prices soar, and millions of those in full-time work need to rely on social security to survive; an economy in which the benefits of growth in recent years have simply not been reflected in pay. And that effect has been exacerbated by a vastly complex benefits system whose basis in means-testing means eye-watering effective marginal tax rates for those whose income increases to the point where they move out of benefits. Those factors, rather than the myth of generous benefits or bogus claims about “scroungers”, are why work may not pay.
For the Labour Party, the messages are extremely clear. In so many ways, the worst possible thing we can do is get into an rhetorical auction about whether we can be “tougher” than the Tories on benefits. Not just because that means the Tories are framing the debate – as I fear we have let them do over the benefit cap – but because it’s just bad economics. We’ve already seen how we are best when we capture the framing of the debate in a positive way – over energy prices or the cost of living crisis – which matches the evidence. We don’t have to take part in the race to the bottom: generosity is both sound economics and, in my view, good politics too – it means we can set the agenda and speak out on behalf of people who have been increasingly disinclined to vote in recent years. I personally also believe that it’s the right thing to do – this chilling report from Real Life Reform on the effects of benefit cuts and a regime of aggressive sanction shows us what the easy rhetoric hides (and in many ways is designed to hide).
A situation in which we are economically literate, grounded, optimistic, generous and leading the debate seems like a pretty good scenario to me. Time we seized the initiative – as we did on energy prices and the cost of living. We can do better than this.