Unintended rewards


Screenshot 2015-03-03 05.09.28NICK CATER

The Australian, March 3, 2015


HOW sheepish must Scott Morrison feel when he compares notes with his ministerial colleagues about cutting spending?

Christopher Pyne, bless him, is valiantly trying to keep the rise in education spending to a modest 0.9 per cent in the next four years. Sussan Ley is charged, against all odds, with preventing health spending growing by more than 2.6 per cent.

Even Kevin Andrews in Defence is tightening his belt to keep to a 1.5 per cent increase in real terms.

And Morrison? 11.6 per cent. That’s the budgeted rise in real spending in social security and welfare between last year and 2018, and the minister will have to crack the whip night and day just to keep to it.

As Morrison told the National Press Club last week, unless there is structural change “our social services expenditure will swallow the budget”. And it will. More than $650 billion will be spent as welfare in the next four years, more than one-third of all government spending and one-tenth of gross domestic product.

It would be a small sacrifice if we could be certain that the money was allocated according to need, that it relieved hardship rather than encouraged it, that it built resilience instead of eroding it and helped people bounce back.

Yet Patrick McClure’s report for the government says the current system fails those basic tests, as government-run systems usually do.

In a level-headed book published last year, Why Government Fails So Often: And How It Can Do Better, Yale University emeritus law professor Peter H. Schuck concludes that most government programs are preloaded with a degree of failure.

Since state welfare provision is, in essence, the socialisation of risk, moral hazard is unavoidable. Put bluntly, any means-tested welfare payment provides an incentive to be poor. Charles Murray called it the law of unintended rewards: “Any social transfer increases the net value of being in the condition that prompted the transfer.”

The first point to make about welfare reform is that it will never produce a perfect system. It is hard to strike a balance between assisting victims of brute bad luck and making victimhood a career choice. The best that can be hoped of any program is its benefits outweigh its perverse consequences.

Yet welfare providers are disinclined to own their mistakes. Those who make a living from conspicuous altruism are usually proud of their work; they prefer to attribute failure to inadequate funding rather than flawed programs.

The electoral cycle also plays a part, writes Schuck. “Officials have powerful incentives to provide voters and interest groups with short-term benefits and hide the long-term costs of paying for those benefits.”

Welfare, like all government services, is prone to “non-market failure”, a term coined by economist Charles Wolf. In a non-market, the “product” is hard to define and difficult to measure; quality control is lacking; services are usually provided by a single agency, depriving them of the benefits of competition.

Non-markets are compromised by “internalities”, the conflict between administrators’ private goals and the agency’s public purpose, sometimes diagnosed as provider capture.

The iron law of government intervention — that the first, and sometimes only, beneficiaries of programs are the people who administer them — applies to the caring professions as much as the tax office. In the abstruse world of modern welfare the needs of clients frequently come last.

If the welfare industry were doing what it should — building self-reliance — it would be steadily putting itself out of business. Its customer base would be shrinking every year as the defenceless learned to defend themselves and the vulnerable became resilient.

Instead, the cohort of destitute, stricken and forlorn individuals grows bigger every year. The system services their problems rather than solves them. Welfare has come to be seen as a virtue rather than the second-best solution it invariably is.

In his review, published last week, McClure describes a system riddled with “unintended complexities, inconsistencies and incoherencies”.

“They have created disincentives for some people to work,” the report concludes. “Without reform, the fiscal, economic and social sustainability of the system will be compromised.”

As McClure told Sky News’s Australian Agenda on Sunday, there is no reason reform should be a partisan exercise. “There is recognition on both sides of the house that there’s a need for a simpler system,” he said.

McClure’s call for reform that removes obstacles in the path from welfare to work received tepid support last week from the welfare industry, which risks being left behind in this debate.

In principle the Australian Council of Social Service agrees getting people back into work is a good thing but cannot allow that a simplified system of payments may mean future claimants (existing claims are grandfathered) may actually get less.

In one breath ACOSS congratulates McClure for addressing “disincentives to work” but then says “payments to people who are unemployed need to be increased as an urgent priority”.

It demands “increased support” to help people find work, by which ACOSS presumably means cash. Where is it going to come from? ACOSS delivered some advice on that front in a report in January that predictably blamed the deficit on a shortage of revenue rather than a surfeit of spending.

The report calls for “tax reform” — a discreet way of saying tax increases — “to meet the community’s reasonable needs for benefits, services and public infrastructure”.

Sooner or later the welfare industry must realise the game is up. The days of throwing money at problems are over, so long as a fiscally responsible government occupies the Treasury benches.

It behoves the welfare industry to work with the government to develop practical ways of doing more with less. It should be a partner in ending the culture of victimhood and entitlement, and instead foster capability.

Why Government Fails So Often: And How It Can Do Better, by Peter H. Schuck, is published by Princetown University Press. Nick Cater is executive director of the Menzies Research Centre.