Adam Smith Institute

Jason Turner is an interesting person. He was in charge of welfare reform in New York under mayor Rudi Guiliani, and before that he designed Wisconsin's history changing welfare reforms. He has a chapter in the new report Paying for Success from Policy Exchange,  and was speaking to a few of us at the Institute of Economic Affairs. The fact that I was there as well indicates the degree of cross-think-tank interest there is in the Wisconsin experience.

Wisconsin, Turner told us, cut its welfare rolls dramatically – and reduced poverty and increased employment at the same time. That's because they started from a set of clear principles about what welfare should be for, rather than trying to fiddle with the existing system. The key principle, which struck a chord with taxpayers, legislators, and the working poor, was that everyone who is able to work should be expected to work, and get paid for it, either in the private or the public sector. It's what Turner called the 'time commitment' – sitting idle while drawing benefits is not an option. That appeals, he said, to everyone's sense of fairness – particularly that of the working poor, who do not enjoy the luxury of being able to sit at home while getting paid for it.

The other innovation in Wisconsin was to get private agencies, charities and companies, to handle the task of supporting and training welfare recipients and helping them get back into work. These independent intermediaries did very well out of the plan – but then they were saving taxpayers huge amounts of money. That, of course, led to some criticism, and Turner believes there are important lessons from how that criticism was handled. Well-motivated private agencies can work wonders – the important thing is to keep them working wonders, and not rush to prune back your contracts at the first hint of disquiet.

Another key point learnt from Wisconsin is to keep your targets and your benefits simple. The target in Wisconsin was to reduce the number of people dependent on welfare – a simple target. And complicated benefits were scrapped in favour of simple, flat-rate ones – like a wage. Otherwise, as Frank Field MP sorely noted, you tend to get people worsening their circumstances in order to qualify for the particular benefits. Not what you want at all.

Sweden is often depicted as a Social Democratic paradise. However, her welfare state has achieved less and cost more than most believed. The point is that wealth distribution and flat income have not significantly changed after Sweden expanded her welfare programmes during the 1950s and 1960s, when workers enjoyed lower taxes and worked more hours. Yet what has changed dramatically is the effect of social engineering on immigration, basically creating welfare dependency and preventing integration.

Integration worked well in the first decades after the war with immigrant employment rates 20 percent above the Swedish average. By contrast it is now 30 percent below that average with only half of non-EU immigrants holding jobs. The combination of a highly regulated labour market and lavish welfare payments is keeping immigrants out of jobs. The comparison with the US with much less welfare arrangements is striking:

Given the high barriers to entry, many immigrants in Europe no longer start accumulating essential language and labour market skills. This is in stark contrast with the situation across the Atlantic. For example, in 2000, Iranians in the U.S. had a family income that was 42 percent above the U.S. average. The income of Iranian immigrants in Sweden, however, was 39 percent below the country’s average.

Wednesday's Times carried the news that Ilja Gort, a Dutch wine producer, had managed to insure his nose and sense of smell for £4 million with Lloyd's of London. The article revealed that Ken Dodd's teeth are insured for the same amount, while Bruce Springsteen's voice is valued at £3.5 million, and Heidi Klum's legs go for the bargain price of £1.15 million.

The serious point here is that there are very few risks that we cannot insure ourselves against, which rather undermines the argument that only the state (and not the market) can provide 'welfare'. In reality we could take out health insurance, long-term care and incapacity insurance, unemployment insurance, and so on. We could save into private pension accounts, and we could put money aside to cover minor healthcare expenses. And for majority of us, doing this would be less costly than the taxes we currently pay to fund the state alternatives. Needless to say, with government removed from the equation, we would get a better return on our investment too.

Of course, that isn't to say that there would be no role at all for the state in such an ideal, free-market system. Most of us would surely be happy to see government tax revenues fund the truly disadvantaged so that they too could take advantage of this 'welfare market'. But that's a radically different vision of government from the one that prevails at the moment.

42. "A truly compassionate society would devote a much larger share of its wealth to the less fortunate."

Individuals show compassion, not societies. If individuals wish to give away a larger share of their wealth to the poor, this might be compassionate. It is not compassionate, however, to force others to do this.

Giving them a larger share of wealth is not necessarily the best way of improving the lot of the poor, because that wealth is not a fixed amount. Poor people might do better if the rich are permitted to get even richer, thereby increasing the total wealth available. It might be that a growing economy is a surer way of giving the poor access to betterment than any attempt to give them a larger share of a smaller pie. This would not please the poverty lobby, who try to define 'poverty' in terms of incomes below 60 percent of the average. This is inequality, not poverty, and can mean describing as 'poor' people who have cars and take holidays.

Many of us do not want to live in a society which tolerates deprivation, or is complacent about those who don't get adequate nutrition, healthcare, or education for their children. But having a sufficiency of such things is not about equality; it is about removing the causes of suffering and trying to redress the circumstances of inadequate provision.

The less fortunate might do better if society provides chances and opportunities for them to improve their lot, rather than turning poverty into pauperism by making them depend permanently on state handouts. A safety net to guarantee a minimum living standard is one thing. To redistribute more wealth from the successful to the less fortunate is another. It might not be the best way of helping them, and it might, in the process of trying, undermine the incentives by which people better themselves and their society.

36. "Welfare stigmatizes the poor. We should all be paid a citizen's income."

Welfare represents our decision as a society to help those on hard times. If people become unable to fend for themselves because of sickness or unemployment, society has decided to help them overcome their difficulties and put them back on their feet. For most who need it, it is seen as a temporary support to aid people through difficulties. There are some, permanently incapacitated, who will always need society's support, but these are a small minority.

Welfare is not conceived of as a permanent alternative to employment for those who simply prefer leisure. The healthy young male who prefers to sit at home and spend the day on his computer while he draws job-seeker's allowance is not a legitimate or deserving recipient of other people's support. Others have to pay higher taxes to support his leisurely lifestyle. The single young female who thinks it would be pleasant to have a child should not expect to do so and to live at home with that child, having all her living costs paid for by others.

In such cases the claimant is capable of taking paid employment and of engaging in more responsible behaviour. The presence of a welfare income gives an option for them to choose a dependent lifestyle, and an incentive to prefer it. The problem with welfare has always been how to target it to those who merit society's generosity, without making it available to those who would abuse it.

A citizen's income gives welfare a permanence and universality it was never intended to have. It makes it too easy for people to choose leisure at the taxpayer's expense, rather than becoming a productive part of society. It also involves taking money from most of us in taxation, and giving it back less the huge and wasteful administrative costs such programmes always entail.

At the beginning of the week the Family, Drug and Alcohol Court opened. It is a £1.3 million pilot scheme being run jointly by three London Boroughs, Westminster, Camden and Islington (part-funded by both the Ministry of Justice and Department for Children, School and Families) that has been set up to attempt to ensure that children remain with their parents despite any addictions the parent might have.

Yet to accomplish anything judicially it has, however, allowed another true cost of the welfare state to be exposed. There are obvious costs to the taxpayer, such as the set up costs shared unevenly between central and local government, but this court has revealed some unwelcome negative externalities created by the welfare state.

Specialist court judge Nick Crichton said, "We are routinely taking into care the fourth, fifth or sixth child from the same birth family" (this in relation to the removal of 14 children into care from one mother). It is not hard to see the perverse logic that the welfare state has created in the minds of these drug users. Despite the drug use, they have recognized a secure income stream that can feed their habit: children. The blame for this culture lies squarely at the doors of government (both shades) for the implementation of child benefit to its current high levels.

The welfare state as the abuser is no surprise. It has distorted incentives since its inception and will continue to do so via its warped perception of 'caring'. The socialist state has turned children into nothing more than inanimate objects, their value being no more than a hit to a drug addict.

If only the politicians were forced to live with the unintended consequences of their actions, they might rethink some of their most damaging policies.

David Cameron has been getting some flak for suggesting that those who are on benefits and who refuse to take jobs or training when offered might lose some of their benefits. That, disaster, there might be time limits on how long they can continue to claim even. What puzzles me is not the idea, but the flak, the horror that the idea has engendered in some quarters.

For what he's actually done is exactly what everyone claims they want to happen, he's embraced bipartisanship. A few years back (in 2000 to be precise) Richard Layard and others presented a report* with a foreword by Tony Blair, who fully endorsed it. Here's one of their two crucial recommendations:

It should not be possible for a person to continue in unemployment year after year, living on benefit. Instead there should be a system of mutual obligation. The state should have the duty to secure offers of work or training for everybody within one year of becoming unemployed. And in return the individual should have the obligation to take advantage of these offers.

So, that's sorted then, this isn't some nasty right wing idea to bash the proles, it's the considered opinion of one who is both a Labour Peer and one of the leading labour market economists in the country.

Oh, and the second major recommendation?

The other key requirement is greater flexibility of wages, especially as between regions. (...) So there have to be mechanisms which allow wages to grow less fast in the high unemployment regions. In most cases the mechanism will involve a greater decentralisation of wage-setting.

* To be boringly accurate, they were talking about the EU as a whole but there's nothing in their analysis which excludes the same conclusions from being applied to the UK. 

Earlier in the year a prominent leftie journalist told me that something like this would happen. I'm afraid I rather choked on my pint and jeered at him at the time, for I didn't believe that something quite so simple and obvious would ever gain traction in Governmental circles.

Elderly people are to be given money to pay for their own care in a move being hailed as one of the most radical welfare reforms in a generation. They will have the right to decide how and where they spend the cash, instead of social workers dictating what help they need to live in their own homes. Personal budgets will also be set up for younger disabled people frustrated by their lack of choice.

Now I know, there are those who think there shouldn't be any form of Welfare State at all but let's look at political reality here shall we? Clearly, people shopping for the help that they need (yes! we've introduced markets to the monolith!) are going to get more of what they want than if they are the passive recipients of whatever the bureaucracy would like to offer them.

'When I was able to control their budget, I shopped around for their care, and interviewed different carers until I found the right person. Her carer now comes at 9am on the dot, but is also happy to take her to the GP, take them shopping and do other jobs that the previous person wasn't allowed to do.'

Now that we've got our foot in that door, when do we start seeing the same happening with the NHS, with education...  

Denmark is often looked at as a society that is somewhat fairer and more equal than ours. This view is mainly due to an economic system fundamentally based on very high levels of taxation and generous welfare payments. However, the Danish system is sometimes referred to as "flexicurity" since it has a uniquely liberal approach to hiring and firing which has allowed the country to produce growth figures of some 3.5 percent in 2006 whilst approaching full employment. Nonetheless, this approach still isn't without its problems. There seems now to be a brain drain occurring, with Denmark having to face up to European (as well as global) tax competition.

In key areas such as the highly skilled they are suffering from a shortage. This is highlighted by The Confederation of Danish Industries' estimation that through the end of 2005, the workforce had shrunk by around 19,000 Danes, mainly through them leaving the country. This outflow is not being matched by the inflow of foreign workers, which tends to lower levels of skill. One of the key reasons for this brain drain is the high taxation that highly skilled workers have to pay to keep the lavish welfare system going. Faced with paying 63 percent of their own income to the government, many understandably decide to leave and take advantage of the lower rates around Europe.

Unless something changes, the Danes may be facing growth figures of only around 1 percent for the 5 years from 2009 onwards. The obvious approach to this problem is to lower the tax rates to more competitive levels, attracting Danes back and enticing in others as well. The Danish only need to look to London to see how lower taxation on high earners can promote growth. Alternatively though, we could always ship over those on the left who love the Scandinavian model of taxation and welfare. Then they can pay the tax bills.

In his speech to the CBI yesterday, Gordon Brown signalled that he was planning to put welfare reform at the heart of political fightback, announcing an overhaul of the system to "move claimants from passive recipients of welfare benefit to active job and skill seekers." JobCentre Plus functions look set to be contracted out to the private sector and claimants may be compelled to take jobs that are offered to them or face losing their benefits.

Good. The Conservatives have already seized on this topic, and I am glad to see the government following suit. As our recent report Working Welfare makes clear , this is one of the key challenges facing the country. Aside from being a drain on the economy, worklessness breeds inter-generational dependency, health problems and crime and among other social ills. By actively deterring people from entering work, the welfare state is hurting the very people it was designed to help. Radical change is long overdue.

My worry, however, is that the government may not be willing to think radically enough, given their historic ties to the welfare state and their attachment to redistribution and 'social justice'. After all, Frank Field MP was once asked by Tony Blair to 'think the unthinkable' on welfare reform and was subsequently fought by Brown every step of the way.

Has the Prime Minister undergone a Damascene conversion? Is he prepared to cut taxes for low-income workers, simplify the tax credits scheme and make work absolutely central to the benefits system? Well, perhaps... but I won't be holding my breath.

Through a lethal cocktail of tax-grabbing and overregulating, the government has destroyed faith in private schemes yet tried to wash its hands of all responsibility.