SKWalker 1964 and the welfare state

I have been pointed to this piece of blithering idiocy about the construction of the welfare state

Sigh.

I do wish people would think before making grandiose statements about political and economic matters.

On Newsnight last Wednesday, a very sharp old lady nailed Conservative minister David Willetts during a discussion on pension reforms by challenging the idea that we can’t afford to maintain the welfare state today when we could afford to construct it from scratch in the immediate, crushingly-indebted aftermath of World War II. It’s a question I’ve heard before – and one I’ve raised on many occasions. But hearing this game old woman raise it with such fire set me thinking even harder about it. Being weird that way – no, being OUTRAGED enough – I’ve spent most of the day and evening into the early hours researching, considering and assessing that challenge and the facts that lie behind it, and behind the counter-argument.

You needed to do rather more I\’m afraid.

The nub of the argument is that we cannot say that the welfare state is unaffordable because we used to be able to afford it so therefore we can now. Parts of this statement are true: the statement as a whole is not.

With reference to the founding of the welfare state, that post 1945 period for example. That great \”building of the NHS\”. Actually, that was the nationalisation of the extant health care system. Something which is actually fairly cheap. Take lots of stuff that already exists, say the government now runs it but hasn\’t had to pay for it….you can see how this might be cheap, eh? And the NHS didn\’t actually build any new hospitals until 1963.

But there\’s another much more important point. The early years of a welfare state are cash flow positive for the government. Think through what happens with, say, pensions. Everyone pays their higher national insurance charges in return for a pension that they\’re going to get some years in the future. This means that taxes are flowing in now but debt, if properly measured, is rising. For those taxes flowing in lead to a right to a pension in the future. The thing is of course, at some point those debts become repayable, people get to take those pensions they have paid for.

You may have noticed that we have reached this point now.

So I\’m afraid that the argument that we used to be able to afford the welfare state so therefore we can afford it now doesn\’t stand. For we can always afford the early years of one, when the taxes to pay for it are flowing in but the benefits earned under it have not yet been earned. The problem will come at some future date, when we need to pay those benefits earned.

It\’s entirely possible that the taxes will have been sufficient to pay those benefits. That money will have been put aside to pay them. That the money flowing in will have been invested to produce assets which will pay the pensions say.

But that isn\’t the system that the UK built.

Now, to be fair and honest, maybe the current welfare state is sustainable. Maybe it isn\’t. But the specific argument being used here is not a valid one, sorry but it isn\’t.

The second part, where there is a look at corporate profits and the labour share of income etc. One graph comes from Ritchie so we know that\’s wrong. But more than that, there\’s an assumption that the labour share and the profit share of income are mirror images of each other.

Which, as we know, they are not. There are four parts in the income method of calculating GDP. Mixed income (sole proprietorships and self employed income), taxes minus subsidies, labour income and profit share. Something that should be apparent from the fact that profit and labour shares do not add up to 100%. The changes in all four can be found here.

The story just ain\’t the same as what\’s being said I\’m afraid.

For example, the rise in the taxes less subsidies share: that includes VAT. Which was imposed in the mid 1970s, recall? That, in itself, is some percentage points of GDP which isn\’t in profits or labour share.

More research needed I feel.

29 thoughts on “SKWalker 1964 and the welfare state”

  1. He should of course have told the old biddie not to be so fucking stupid: the welfare state was not created in 1945.

  2. Thanks for your ‘kind’ comments lol. Unfortunately, as so often the case when we call someone an idiot, as we point one finger 3 point back at us.

    The government is not having to rebuild the NHS from scratch now – it arrived & took over what existed. But instead of maintaining it, they’re dismantling it. That’s idiocy of the highest order, especially when changing it is costing a fortune, and adding a profit margin for private providers must either make it more expensive or drive down wages, either of which is bad for the economy.

    As for pensions, even Hutton who recommended changing them forecast the cost to come DOWN for the next 40 years – WITHOUT his changes!

    Re tax share of GDP – tax rates have come down massively since the Thatcher government, both top private rate and the corporate rate. And that’s the problem – a much bigger share of our national income now goes to people/entities who pay little or no tax on it. Correct that and everything is easily affordable. But a neoliberal worldview doesn’t want a fair system. It would rather penalise the vulnerable an make the rich richer.

    Besides, you denigrated my point without addressing it. I don’t know you, so I can’t say whether that’s a tactic or an oversight. VAT isn’t relevant to my point. Has corporate profit gone up as a share of GDP or not? Have wages come down as a share of GDP or not? If they have, then my point still stands. And VAT disproportionately affects low earners, so it does anything but nullify my argument.

    Don’t have a lot of time to get into an ongoing debate with you, but right of rebuttal to your comment and all that. Let’s see whether you’re brave enough to approve this comment lol

    Have a nice life! 🙂

  3. There’s also the point that when we could (allegedly) afford the welfare state, it was paying for people who were unable to find work, or who were actually ill, not for people who couldn’t be bothered to work, or who wanted fertility treatment.

  4. Pingback: The ‘blithering idiot’ responds | skwalker1964

  5. The old age pension and national insurance were introduced by Asquith and Lloyd George before the first world war. Initially the pension was available to everyone over 70, subject to a means test.

    However, the chart on Steve W’s blog plots the “welfare” series from this source as a percentage of GDP. That excludes pensions, health care, and education, and so is not representative of the cost of the welfare state. The interested reader can readily use the chart tools there to look at the cost of the rest of the provision, here‘s what I got.

    It’s noteworthy that the pensions numbers there are zero before 1993: I suspect that the cost was included in the welfare calculation. Perhaps Steve W has checked this and can advise us.

  6. @SteveW: Did you actually read what TW wrote above? Or just skim over it in your hurry to produce another ream of progressive groupthink?

    The points were two: Firstly the fact that the NHS/Welfare State was created post WW2 at a time of high Public debt does not have any bearing on our current ability (or not) to afford what we currently have. Because as TW correctly points out what they did post war was very cheap, to start with, possibly even cash positive. Nationalise the current assets for little compensation, offer pensions to people who won’t need them for decades, charge taxes in order to pay for the benefits. You might even make aprofit in the early years as the taxes roll in (rather like a Ponzi scheme). We have to decide whether what we have now is sustainable with our current (and projected future) resources. How we got here is not relevant.

    Imagine if the State decided it wanted to create a Nation Food Service and nationalised all land/food production, offered all people free food, and imposed a special food tax to pay for it. Initially it wouldn’t cost very much because all the assets exist. You just have to pay the people to do what they were doing from the new food tax and everything is lovely. Until the combine harvesters start needing replacing, and the distribution warehouses need upgrading, and the stores start looking like NHS hospitals, you are golden. But then the extra bills start coming in, the wages rise every year, the combine harvester manufacturer sees you coming and puts his prices up by 50% etc etc. Suddenly its not so cheap. And you have to queue to buy bread and milk, and meat is only available on Tuesdays and Fridays.

    Secondly that you cannot just compare labour share of income of GDP with profit share of income without including the other components as well. From the graph linked it is obvious that yes labour share of income has declined over the years from roughly 58-60% of GDP to around 52-55% more recently. Whereas profit share started at just over 20% in 1955, and is currently at 20% in 2011, having meandered higher in the mid 80s and 90s, and lower in the mid 70s and early 80s. The difference being made up by taxes having steadily risen from 10% in 1955 to about 12-13% now, and self employment share having gone on a similar path. It hardly adds up to a ‘rapacious capitalists screwing the common man’ scenario really does it? Its more a ‘taxes have risen and more people are self employed than they used to be’ one to be honest.

    But then that wouldn’t fit your internal narrative so the facts are irrelevant I suspect.

  7. We could quite easily afford today the level of Welfare provided by the Attlee government (although it soon found it could not and introduced charges on spectacles and teeth, so the old lady and SKWalker are starting from a false assumption). What we cannot afford is the combination of the levels of state spending and transfer payments that Brown bequeathed to the new government.
    All the graphs ignore the trillions of unfunded liabilities, the cost of civil service pensions and state pensions, the PFI contracts that have bankrupted NHS Trusts, the solar feed-in tariffs set at ten times the price paid to power stations (yes, that is paid by consumers directly not via the exchequer but it still has to be paid), the burgeoning bill for care for the elderly, the stupid, utterly stupid commitment to reach a 20% renewable energy target before developing the technology, …

  8. So Much For Subtlety

    I doubt we could afford even the welfare state created under Atlee. Because they not only took over the buildings of the old pre-welfare state, they took over the values. Most British people at the time grew up under the old system of insurance and looking after each other. It took roughly one generation for the welfare state to change the values of British people. By the 1970s, British people took welfare as a right. Whether they needed it or not. Unemployment has been high ever since.

    We are no longer the people we were back then. It is absurd to think we can behave the same way.

  9. Yes of course I looked at it. If you think unemployment was high in 1970 then it was high also, and often much higher, for half of the previous 70 years. Which discredits the implication that high unemployment is caused by post-war welfare provisions.

  10. OK – I think the chart actually supports @SMFS quite nicely, I had not realised how unemployment had been low from the end of WWII until this ‘second welfare generation’ of the 1970s and onwards. You can drag in the great depression to bring down the average over a longer period, but I’m not sure that’s too helpful.

  11. Blimey, that must be some new meaning of the word “think”. What the chart shows is that world wars reduce unemployment to near zero, that if you want high unemployment immediately after such a war you should elect a conservative-liberal coalition, and if you want three decades of low unemployment you should elect a labour government to create a welfare state. Oh, and if you then want to switch back to high unemployment, you should elect Thatcher.

    ok, that’s a partisan analysis. But it fits the data a lot better than ascribing unemployment to the welfare state.

  12. thomas jones

    The chart may show that unemployment has been higher since the 1970s, but neither you nor SMFS are justified in asserting that that is because “values” have changed. One of the major factors is the fact that Western economic policy changed from targeting full employment to targeting price stability. We can argue endlessly about exactly what the NAIRU should be , but the fact that unemployment has been persistently higher in Western economies since governments adopted inflation targeting does suggest that the NAIRU is naturally higher than the level of unemployment when price stability is not targeted. “Values” don’t come into that.

  13. @ PaulB 16
    Nice try but some of us can read.
    The chart shows a jump in unemployment after the first world war, true, but followed by a fall under the Conservative government, an upturn under the Labour goverrnment, then a zig-zag with a net decrease until the next Labour government under which it more than doubled. A fall under the National and Conservative governments, then WWII. A rise, unsurprisingly, under the post-war Labour government until the Korean war (net nmore than doubling from ultra-low base), following the end of which there was no significant rise under a Conservative government – the 1951-64 conservative government had 13 years of prolonged low unemployment – followed by a 50% rise under Wilson’s Labour government, a useful but lesser fall under Heath’s Conservative government, followed by another more-than-doubling under Wilson & Callaghan’s Labour government. Two bad periods and two recoveries under Thatcher & Major left it about one-third higher than where they started.
    We have had six Labour governments, each of which has increased unemployment and six Conservative governments, five of which have decreased unemployment, the other increasing by less than four of the six Labour ones.
    That, I think, comprehensively refutes PaulB’s partisan, but also totally inaccurate, analysis.

  14. John77: I thought I was being partisan, but you’ve shown me how to do it properly. I admire particularly the way you dismiss as a failure the Attlee government’s brilliant performance in maintaining employment after the end of the second world war.

    However, the data continue to show that unemployment shot up after the first world war, rose very little after the second world war, and reached very high levels again only in response to Thatcher’s experiment with monetarist dogma.

  15. @ SMFS # 10 and thomas jones # 14
    Frances is right. There are two simple economic reasons why unemployment has been higher since the 1970s. The first (in time) was the well-meaning introduction of redundancy pay by the first Wilson government which penalised employers in cyclical industries, so in the next cyclical upturn a number of employers bought machines to increase productivity instead of hiring more manual workers – it was cheaper in the medium-, let alone long run to buy a machine and switch it off during downturns that hire half-a-dozen guys and have to make redundancy payments when they laid them off. The second was privatisation which in most cases led to massive reductions in over-manning – the management of some newly-privatised firms in the 80s said that they had three men doing one man’s job.
    I personally think that there has been a culture shift since I grew up but I should not attribute any significant part of the rise in unemployment to that. Kids who send off a hundred or more job applications aren’t unemployed because they are lazy and feckless. Some people are unemployed because they can’t afford to take a job, but if they did someone else would be on the dole. There just aren’t enough jobs for which we have to thank Blair’s National Minimum Wage and Brown’s economic mismanagement.

  16. @ PaulB
    Doing it properly involves using honest numbers, so that one cannot be promptly refuted! I like to be right not wrong, rather than just Right not Left. Sadly the likes of Murphy and Sunny Hundal would rather be wrong than Right.
    I did NOT dismiss the Attlee government as a failure – except when compared to Churchill and MacMillan it had a pretty good record on unemployment. Far better than the second Wilson government and only slightly worse than Wilson’s first government which inherited a low unemployment, low inflation, high growth economy. I said “A rise, unsurprisingly, …” which is hardly dismissing it as a failure
    Including those receiving Incapacity Benefit because they are not working, unemployment under New Labour was higher than under Thatcher. Thatcher made a big mistake in letting the exchange rate shoot up – which, rather than monetary dogma, contributed to a rise in unemployment – but the main reason for the rise in unemployment was getting rid of ridiculous over-manning when nationalised industries were privatised. BT got rid of *five* levels of management while vastly improving the service, others shed a million while increasing production. I do think Thatcher made some mistakes, but she left office with unemployment significantly lower than New Labour despite all their make-work schemes and dragooning school-leavers to take pointless courses at so-called universities to defer signing on the dole.

  17. john77: ok, we can leave it there, I don’t actually believe any of the partisan explanations. My view is that unemployment has gone up because unskilled and semi-skilled jobs have been progressively eliminated by technological developments, whereas that there will always be a proportion of the population incapable of doing skilled jobs. Either we have to accept mass unemployment (and cherish the unemployed instead of blaming them) or we need well thought-out government subsidies for unskilled work.

    I share your desire to use honest numbers – see my #6

  18. Just dropped in to see what had followed. I’ll group a few answers here, as I have other things to be doing.

    – I did of course read the post, and it didn’t refute the key points of mine. Some of the comments people have posted on my blog from here have been interesting food for thought, and others not.

    – We can easily afford to pay for what we have now – IF we have the needed paradigm shift to see that we don’t need to perpetuate the current unequal system. Many lack the imagination for that, it seems, but a couple of the solutions were mentioned by people above, albeit dismissively. Tax properly – on state-audited profit figures, not company-tweaked ones, nationalise some key industries – and return the NHS to full non-profit status. Use these and other measures to return welfare to a cash-positive state – and companies who want to exploit the opportunities of a major economy will have to accept them as the ‘cost of doing business’. They will, if they realise they can’t bribe, sponsor, threaten or propagandise their way out of it.

    – It wasn’t a ‘see ya’. I have a demanding job, and plenty of other things to do than get into an ongoing debate with someone whose mind is clearly made up.

    – Values are changing back. People are beginning to see corporate and neoliberal greed for what it is. If they’re not too dulled by reality TV, or too lulled by compliant media, they’ll continue to wake up. Especially when other countries start showing that other ways are even more viable – and when they see what’s already clear: austerity doesn’t work. It kills what it’s meant to cure – and only a few benefit from that, just as they’d be the ones to benefit from any kind of recovery that takes place under the mis-constructed system we have now.

    Night all…

  19. Oh, and I use WordPress, and am a relatively new blogger. So I assumed that – like WordPress – you’d have to approve comments before they appear.

    On principle I approve any comment on mine unless it’s obscene or simply abusive, as I value free speech but have no wish to subject anyone reading my blog to sewer-talk.

  20. @ PaulB #22
    I actually agree with you (please don’t faint) on most of that and noted with admiration your spotting why the welfare cost graph was wrong. I know that it isn’t*just* technology that has eliminated unskilled and semi-skilled jobs but we can agree to differ on that.

  21. So Much For Subtlety

    Frances Coppola – “The chart may show that unemployment has been higher since the 1970s, but neither you nor SMFS are justified in asserting that that is because “values” have changed. One of the major factors is the fact that Western economic policy changed from targeting full employment to targeting price stability.”

    But what is that but a value change? There is no objective reason to target either – except that it turns out fixating on full employment is really difficult because unemployment does not respond in the way it should. It is a choice.

    “the fact that unemployment has been persistently higher in Western economies since governments adopted inflation targeting does suggest that the NAIRU is naturally higher than the level of unemployment when price stability is not targeted. “Values” don’t come into that.”

    Of course values do. Choosing inflation is a moral choice, not an objective scientific one. Nor am I convinced of your argument. Unemployment was rising in the 1970s despite the government trying to reduce it through a loose monetary policy. At some point they simply gave up and accepted the relationship between inflation and unemployment was by no means clear. That is to say, we had people who were disinclined to come off benefits no matter what the government did. That too is a moral choice.

  22. So Much For Subtlety

    PaulB – “Rubbish. There’s a chart of unemployment rates during the 20th century on page 24 here.”

    How does that not show what I said? When the full blown welfare state was introduced it worked remarkably well for unemployment – ignoring the fact that governments sacrificed almost everything else to that end. But after roughly a generation, it had stopped working. Unemployment was rising and was stubbornly resistant to increased spending. Peak inflation was in 1974 or so while unemployment was rising. It has remained stubbornly high ever since. As have benefits.

    16PaulB – “What the chart shows is that world wars reduce unemployment to near zero”

    For some definition of employment.

    “that if you want high unemployment immediately after such a war you should elect a conservative-liberal coalition, and if you want three decades of low unemployment you should elect a labour government to create a welfare state.”

    Ignoring everything else that was going on in the world like the largest expansion of wealth in human history up to that point in the post-1945 American-led period of economic stability. Which you cannot do.

    “Oh, and if you then want to switch back to high unemployment, you should elect Thatcher.”

    Again ignoring everything else that was going on.

    “ok, that’s a partisan analysis. But it fits the data a lot better than ascribing unemployment to the welfare state.”

    I don’t think it does myself. After all the one constant has been the welfare state. Thatcher did not change that much.

  23. @Steve W: so in other words you still haven’t really read the OP from TW or addressed his points.

    TW specifically never commented on whether the NHS is affordable at the moment, he merely pointed out that saying ‘The Attlee govt managed to create the NHS and Welfare at a time of high State debt’ is not an argument in favour of us being able to afford either now (or not as the case may be). The two are not comparable.

    You have studiously avoided his other point on whether the fall in Labour compensation as % of GDP is down to a rise in the Capital share, or perhaps more due to increases in tax and self employment. The data is quite clear, perhaps you should study it.

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