Over the last year I have read two excellent histories that are related to my interest in freedom and flourishing. The first is Jerry Muller’s account of the evolution of ideas about markets in European thought since 1700 (“The mind and the market”, 2002). The second is Darrin McMahon’s account of the evolution of ideas about happiness (“Happiness, a history”, 2006).
A theme of Muller’s account is the concern that many people have had over the last few centuries that the new choices that the market provides would be unsatisfying if they did not fit into some larger scheme linked to institutional attachments. Some were concerned that modes of thought and action characteristic of the market would permeate all human relations, including family relationships.
A theme of McMahon’s account is the tension over the same period between the view that pursuit of happiness amounts to the same thing as pursuit of pleasure and various other views including the idea that happiness comes from a life well lived.
It seem to me that the themes of the two books intersect in the recognition of their authors that it is important that individuals should develop the capacity to make reflective choices and to stick to them. Muller writes:
“The challenge for the individual is to choose among the possibilities offered by the market in a reflective manner, so that they form part of some larger plan of life. The alternative is to become ... a reactive slave to the manipulation of one’s desires by those without an interest in one’s well-being” (p398).
McMahon quotes Aristotle that it would be absurd for the purpose of life to be pleasant distractions and amusements. He then adds: “Yet in order to act otherwise, to undertake ‘serious’ endeavours, living life according to virtue or virtues, we must first decide what those endeavours should be. And that is precisely the problem for many in the contemporary world who find it hard to set long-term goals other than good feeling, to chart meaningful narratives that give hope, conviction and purpose to their lives” (p 474-5).
The market order provides people with an expanded array of choices but it is not responsible for the choices that they make.
Wednesday, April 23, 2008
Tuesday, April 22, 2008
Why not let people opt out of the welfare state?
Many people who are quite capable of supporting themselves and their families are heavily entangled in Australia’s welfare system. Vast sums of money are collected in taxation only to be recycled back to the same taxpayers. A recent analysis by Peter Saunders of the Centre for Independent Studies suggests that this churning is most in evidence in middle and upper-middle income households (The Government Giveth and the Government Taketh Away, 2007, Table 2.4b, p24). On average people in the 3rd and 4th income quintiles pay about 32 percent of their income in tax (direct and indirect) and receive back the equivalent of about 28 percent of their income in benefits (including health and education services as well as cash benefits e.g. family support payments).
This churning is not innocuous because incentives are distorted along the way. Taxes on income and spending reduce incentives to earn additional income. Collective funding arrangements force some people who would prefer to use private providers of education and health services to accept the services that governments provide.
Churning is also inequitable because the taxes that people are required to pay in support of public education and health systems are not reduced correspondingly if they use private systems.
I believe that opting out has potential to be a major reform initiative. A few years ago I wrote:
The introduction of arrangements to enable people to opt out of collective funding of services may be an appropriate way to bring to an end the battle over the role of government that characterised the twentieth century. On the one hand, those people who see collective funding as having special merit would be able to continue to have a government agency pay for education, health and other services on their behalf, from the proceeds of the tax they pay. On the other hand, those who prefer to pay directly for the services they use would be able to avoid the deadweight costs associated with collective funding. (See: How Much Government?, New Zealand Business Roundtable, 2001, p 71-2).
I think it would be desirable for opting out arrangements to be consistent with the following objectives:
- Those who opt to take responsibility for costs of family education, heath care etc should be fully compensated for costs no longer incurred by governments in providing those services.
- Those opting out should not be subject to more than the minimum coercion necessary to ensure that they will not become a burden on the public purse in future e.g. requirements for minimum contributions to health insurance and superannuation.
- Those opting out should continue to contribute through tax payments to the cost of supporting people who are unable to provide for themselves.
Those who want to continue to obtain the services provided by the welfare state and to continue to pay for those services through their taxes should be able to do so with minimal change in current arrangements.
It is possible that a variety of different opting out arrangements could be consistent with those objectives, but the proposals put forward by Peter Saunders (see reference above) seem to me to deserve serious consideration.
Does a welfare state strengthen the social fabric?
There is a view that income redistribution through the welfare system strengthens the social fabric because it involves citizens in combining together with a common purpose. I once held that view myself.
I changed my mind during the 1970s when rising unemployment made it apparent that the security that many people had come to expect the welfare system to provide was not affordable. In the early 1970s I thought that the policy game was all about sharing the fruits of economic growth. Within a few years, however, it was apparent that unrealistic expectations of what governments could provide had resulted in a squabble over distributional shares that was harming economic growth.
The point that should be recognised is that if sharing the fruits of economic growth means taking from people who produce wealth and giving it to people who do not produce wealth, then there must inevitably be less incentive to produce wealth. This results in less wealth produced and more conflict over the distribution of wealth.
The argument that the welfare state strengthens the social fabric also overlooks the corrupting effects of income redistribution on ethical standards. In order to consider this I have compared attitudes toward tax and benefit fraud and corruption in countries with different levels of redistribution of incomes by governments.
The indicator of income redistribution used in this exercise is ‘transfers and subsidies as a share of GDP’. This information was obtained from the 2007 Dataset used by the Fraser Institute in constructing its index of economic freedom. (It is publicly available here.) Attitudes toward tax and benefit fraud are taken from surveys which ask respondents to indicate whether the following actions “can always be justified, never be justified, or something in between:
· Cheating on taxes if you have a chance
· Claiming government benefits to which you have no right
· Someone accepting a bribe in the course of his / her duties”.
(This information was obtained from: Ronald Inglehart et al, Human Beliefs and Values, 2004, F114, F116, F117.)
After matching the two data sets, information was available for 55 countries for the year 2000.
The analysis involved ranking countries by transfers and subsidies as a percentage of GDP and calculating averages for each quintile of the percentages who say that tax cheating, welfare cheating and accepting a bribe are never justified.
The results, presented below, indicate that public attitudes are less opposed to tax and benefit fraud and corruption in countries with large welfare states.
I changed my mind during the 1970s when rising unemployment made it apparent that the security that many people had come to expect the welfare system to provide was not affordable. In the early 1970s I thought that the policy game was all about sharing the fruits of economic growth. Within a few years, however, it was apparent that unrealistic expectations of what governments could provide had resulted in a squabble over distributional shares that was harming economic growth.
The point that should be recognised is that if sharing the fruits of economic growth means taking from people who produce wealth and giving it to people who do not produce wealth, then there must inevitably be less incentive to produce wealth. This results in less wealth produced and more conflict over the distribution of wealth.
The argument that the welfare state strengthens the social fabric also overlooks the corrupting effects of income redistribution on ethical standards. In order to consider this I have compared attitudes toward tax and benefit fraud and corruption in countries with different levels of redistribution of incomes by governments.
The indicator of income redistribution used in this exercise is ‘transfers and subsidies as a share of GDP’. This information was obtained from the 2007 Dataset used by the Fraser Institute in constructing its index of economic freedom. (It is publicly available here.) Attitudes toward tax and benefit fraud are taken from surveys which ask respondents to indicate whether the following actions “can always be justified, never be justified, or something in between:
· Cheating on taxes if you have a chance
· Claiming government benefits to which you have no right
· Someone accepting a bribe in the course of his / her duties”.
(This information was obtained from: Ronald Inglehart et al, Human Beliefs and Values, 2004, F114, F116, F117.)
After matching the two data sets, information was available for 55 countries for the year 2000.
The analysis involved ranking countries by transfers and subsidies as a percentage of GDP and calculating averages for each quintile of the percentages who say that tax cheating, welfare cheating and accepting a bribe are never justified.
The results, presented below, indicate that public attitudes are less opposed to tax and benefit fraud and corruption in countries with large welfare states.
Australia is in the second quintile (with levels of transfers and subsidies as a percentage of GDP lower than the average for the 55 countries in the data set). The relevant attitudes of Australians are as follows: tax cheating never justified (62%), welfare cheating never justified (73%) and accepting a bribe never justified (86%).
Some might wonder whether the results presented above are just a result of the fact that welfare states tend to be larger in relatively high income countries in which people might be more inclined to have open minds about the possibility that there could be some circumstances in which they might be able to justify tax and welfare cheating and even accepting bribes. The countries in the first quintile are indeed low-income countries and those in the fifth quintile are predominantly high-income counties in northern Europe. However, in regression analyses in which both income and ‘transfers and subsidies as a percentage of GDP’ are included as explanatory variables, the transfers variable is significant but the income variable is not significant. This suggests that the observed difference in ethical standards can be attributed to the size of the welfare state. (Anyone who would like to see these regression results is welcome to contact me.)
Are people desperate for security?
Richard Layard, an economist and member of the British House of Lords suggests that one of the “key facts about human nature” that emerges from happiness research is:
“People desperately want security – at work, in the family and in their neighbourhoods. They hate unemployment, family break-up and crime in the streets”(Happiness, Lessons from a new science, 2005, p7).
Layard goes on to ask: “So how can the community promote a way of life that is more secure?” The answer he provides is a defence of social security systems:
“It is precisely because people hate loss that we have a social safety net, and in Europe a welfare state. People want the security that these entities provide”.
Layard’s bottom line is: “if security is what most of us desperately want, it should be a major goal for society”(p168).
Layard seems to base his assertion that people desperately want security mainly on his interpretation of the results of research undertaken by Daniel Kahneman, a psychologist who was awarded the Nobel Prize in economics for his work on behavioural economics. Kahneman has found that most people have an aversion to loss, even when this involves relatively small sums of money. In one experiment Kahneman offers participants a bet on the toss of a coin:
“ they can either lose $10 or win $X. The factor by which X must exceed $10 provides an approximate measure of loss aversion. The median value in classroom demonstration is rarely far from $25 (‘Objective Happiness’, in Daniel Kahneman, Ed Diener and Norbert Schwartz (eds.), Well-being, The foundations of Hedonic Psychology, 2003.
Layard infers from such demonstrations that losses hurt much more than an equal gain helps. However, Kahneman has cautioned against such an interpretation. He cites some experimental evidence in favour of an alternative interpretation, namely that loss aversion could represent “a deeply ingrained conservative tendency in decision-making”(p 18).
Layard also cites some studies involving analysis of survey results to determine how subjective well-being changes in response to income changes. The results of these studies support the view that losses hurt more than gains. However, such studies do not establish that people are desperate for security. (The studies are cited on Layard’s web site.)
If welfare states make a big contribution to happiness this could be expected to show up in international comparisons. In his review of happiness research, Will Wilkinson reviewed several studies which have examined the link between the size of the welfare state and the level of welfare within it. The conclusion he draws from that review is that:
“if the redistributive openhandedness of the state has any effect on happiness at all, it is a surprisingly small one. When slightly different econometric techniques using slightly different databases generate weak correlations in opposite directions, the correct lesson to draw is that the variable barely matters at all” (In pursuit of happiness research, p 19).
If people are desperate for security it is reasonable to expect that very few people would be satisfied with life as a whole if they felt insecure about their futures. I have examined the relationship between assessments of future security and life satisfaction using the Australian data base compiled by the Australian Centre on Quality of Life, at Deakin University, in constructing the Australian Unity Wellbeing Index.
The data set used relates to information collected in 2005 and is publicly available. For the sample as a whole, the percentages with ratings of satisfaction with life as a whole were distributed as follows: 18% (ratings 1-6); 49% (ratings of 7,8); and 33% (ratings of 9,10).
The data set also contains responses relating to seven aspects of personal life – health, personal relationships, safety, standard of living, achieving in life, community connectedness, and future security (all rated on a 10 point scale). Using this data I have calculated the percentage of people who have high satisfaction with life as a whole (ratings of 9 and 10) among those who have low ratings on particular aspects (ratings from one to six). These percentages can be used as indicators of the extent to which each aspect is necessary for a high level of satisfaction with life as a whole. For example, if no-one with a low rating on a particular aspect of life had high satisfaction with life as a whole, this would indicate that the aspect concerned was essential for high life satisfaction. At the other extreme, if the incidence of high life satisfaction within this category was the same as for the sample as whole (33%) this would suggest that the particular aspect had no influence on satisfaction with life as a whole.
The percentages with high satisfaction with life as a whole among those with low ratings on particular aspects is as follows (ranked in order of priority): personal relationships 10.8%, achieving in life 11.8%, standard of living 12.8%, future security 15.6%, health 15.9%, community connectedness 19.0% and safety 20.3%. The results suggest that future security is less essential to subjective well-being than is standard of living. (The relative unimportance of safety is difficult to understand, but is consistent with the results of other research using this data base. See: Robert Cummins et al, Australian Unity Wellbeing Index, Report 16.1, 2007, p 7.)
The results seem to me to help in understanding why international studies have not shown average well-being to be considerably higher in countries with large welfare states. The efforts of governments to provide greater security would tend to displace the efforts of individuals and possibly detract from their assessments of what they are achieving in life. In addition, since welfare spending must be paid for by citizens, any perceptions of improvement in security might be offset by perceptions of a lower standard of living with little net effect on satisfaction with life as a whole. After all, most citizens are quite capable of providing for their own future security without having to pay additional taxes to the government so that it can do it for them.
“People desperately want security – at work, in the family and in their neighbourhoods. They hate unemployment, family break-up and crime in the streets”(Happiness, Lessons from a new science, 2005, p7).
Layard goes on to ask: “So how can the community promote a way of life that is more secure?” The answer he provides is a defence of social security systems:
“It is precisely because people hate loss that we have a social safety net, and in Europe a welfare state. People want the security that these entities provide”.
Layard’s bottom line is: “if security is what most of us desperately want, it should be a major goal for society”(p168).
Layard seems to base his assertion that people desperately want security mainly on his interpretation of the results of research undertaken by Daniel Kahneman, a psychologist who was awarded the Nobel Prize in economics for his work on behavioural economics. Kahneman has found that most people have an aversion to loss, even when this involves relatively small sums of money. In one experiment Kahneman offers participants a bet on the toss of a coin:
“ they can either lose $10 or win $X. The factor by which X must exceed $10 provides an approximate measure of loss aversion. The median value in classroom demonstration is rarely far from $25 (‘Objective Happiness’, in Daniel Kahneman, Ed Diener and Norbert Schwartz (eds.), Well-being, The foundations of Hedonic Psychology, 2003.
Layard infers from such demonstrations that losses hurt much more than an equal gain helps. However, Kahneman has cautioned against such an interpretation. He cites some experimental evidence in favour of an alternative interpretation, namely that loss aversion could represent “a deeply ingrained conservative tendency in decision-making”(p 18).
Layard also cites some studies involving analysis of survey results to determine how subjective well-being changes in response to income changes. The results of these studies support the view that losses hurt more than gains. However, such studies do not establish that people are desperate for security. (The studies are cited on Layard’s web site.)
If welfare states make a big contribution to happiness this could be expected to show up in international comparisons. In his review of happiness research, Will Wilkinson reviewed several studies which have examined the link between the size of the welfare state and the level of welfare within it. The conclusion he draws from that review is that:
“if the redistributive openhandedness of the state has any effect on happiness at all, it is a surprisingly small one. When slightly different econometric techniques using slightly different databases generate weak correlations in opposite directions, the correct lesson to draw is that the variable barely matters at all” (In pursuit of happiness research, p 19).
If people are desperate for security it is reasonable to expect that very few people would be satisfied with life as a whole if they felt insecure about their futures. I have examined the relationship between assessments of future security and life satisfaction using the Australian data base compiled by the Australian Centre on Quality of Life, at Deakin University, in constructing the Australian Unity Wellbeing Index.
The data set used relates to information collected in 2005 and is publicly available. For the sample as a whole, the percentages with ratings of satisfaction with life as a whole were distributed as follows: 18% (ratings 1-6); 49% (ratings of 7,8); and 33% (ratings of 9,10).
The data set also contains responses relating to seven aspects of personal life – health, personal relationships, safety, standard of living, achieving in life, community connectedness, and future security (all rated on a 10 point scale). Using this data I have calculated the percentage of people who have high satisfaction with life as a whole (ratings of 9 and 10) among those who have low ratings on particular aspects (ratings from one to six). These percentages can be used as indicators of the extent to which each aspect is necessary for a high level of satisfaction with life as a whole. For example, if no-one with a low rating on a particular aspect of life had high satisfaction with life as a whole, this would indicate that the aspect concerned was essential for high life satisfaction. At the other extreme, if the incidence of high life satisfaction within this category was the same as for the sample as whole (33%) this would suggest that the particular aspect had no influence on satisfaction with life as a whole.
The percentages with high satisfaction with life as a whole among those with low ratings on particular aspects is as follows (ranked in order of priority): personal relationships 10.8%, achieving in life 11.8%, standard of living 12.8%, future security 15.6%, health 15.9%, community connectedness 19.0% and safety 20.3%. The results suggest that future security is less essential to subjective well-being than is standard of living. (The relative unimportance of safety is difficult to understand, but is consistent with the results of other research using this data base. See: Robert Cummins et al, Australian Unity Wellbeing Index, Report 16.1, 2007, p 7.)
The results seem to me to help in understanding why international studies have not shown average well-being to be considerably higher in countries with large welfare states. The efforts of governments to provide greater security would tend to displace the efforts of individuals and possibly detract from their assessments of what they are achieving in life. In addition, since welfare spending must be paid for by citizens, any perceptions of improvement in security might be offset by perceptions of a lower standard of living with little net effect on satisfaction with life as a whole. After all, most citizens are quite capable of providing for their own future security without having to pay additional taxes to the government so that it can do it for them.
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