Welfare spending is the most important infrastructure investment we can make


2:15 pm - December 7th 2012

by Adam Ramsay    


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At the Autumn Statement we were told that the Chancellor is increasing spending on infrastructure whilst cutting spending on welfare. Such statements are confusing “infrastructure” for “lumps of rock”.

There are two reasons that you would increase spending on infrastructure. The first is that you believe that the spending itself will be good for the economy: the money will create jobs, the newly employed people will buy new things, shops will employ more people, etc.

The second reason might be that you believe that the underlying framework of your system could be more efficient. The classic example would be that late trains cost people time working, so you invest in better train lines.

However, in practice, I see very little notable difference between what Osborne sees as ‘welfare’ and what he sees as ‘infrastructure’ – other than who it is for. What the Chancellor calls infrastructure, I could call corporate welfare.

Let’s take a specific example: the Treasury is going to pay to upgrade our broadband network. They are doing it so that businesses can have access to faster internet. If the state didn’t pay for this, then these companies, if they really need it, would eventually arrange it themselves. So this is just a whacking great subsidy to them.

And you say “welfare”, I say “social infrastructure”.

The basic underlying framework of our society is not just roads, railways and wires. More important than any of these are the institutions which make our civilisation. And the welfare state is key to this.

If the public sector spends less time caring for old people, then this often means that relatives (almost always female relatives) end up taking on those caring responsibilities. Now, what costs the economy more hours of labour – a late train, or the need to care for a sick elderly relative? Social care is as much a piece of economic infrastructure as are train lines or high speed broadband.

Likewise, if we cut social services for young people, then we see a huge financial cost to society – both in the short term in increased crime rates, and in the long term in a less well educated, less well adjusted generation growing up.

There is no particular economic reason to cut spending on social infrastructure and increase it on physical infrastructure – other than an ideological opposition to the welfare state.

——
A longer version is at Bright Green Scotland.

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About the author
Adam is a regular contributor. He also writes more frequently at: Bright Green Scotland.
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Reader comments


1. Luis Enrique

one of the things a government is supposed to do is make investments in infrastructure that compliment private sector activity. These are known as productive public goods and are a good thing. Although these things benefit companies, roughly speaking, I don’t think it’s helpful to characterise it as corporate welfare. It benefits us all (again, roughly speaking).

what you might call corporate welfare is: public sector over paying private sector firms to do things, public sector spending with few benefits other than for the contractor involving in building it.

if you aren’t a free market nutter, you agree that the public sector is sometimes good at doing things that the private sector isn’t, often because competing private sector firms find it hard to coordinate investments in things where the benefits are diffuse. I don’t know about the specifics of this proposed investment, but broadband infrastructure, of some varieties, might be one such thing. That is to say, if the government wasn’t doing it, perhaps the private sector would not.

[I've no beef with the idea that investment in social services and welfare might be a better investment than investment in infrastructure]

2. Teddy Groves

Luis would you say that social welfare doesn’t benefit us all?

If I were a newsagent or convenience store owner providing a local retail service in an area where job opportunities are scarce I would shudder at the deliberate 1pc benefit rise.

That’s my future earnings under assault by this government as my customers are targeted yet again by a flailing chancellor in hoc to the kind of idiotic rightwing nonsense that forgets that spending of welfare claimants is my income – and yes, I’d consider that I damn well am trying to do the right thing, but am hamstrung by The sheer incompetence of this Tory chancellor.

4. Derek Hattons Tailor

The point about infrastructure spending as commonly understood is that it increases economic capacity and economic efficiency. Take power stations as an example. If you build more of them that facilitates economic growth by ensuring the lights stay on, factories can be built/expand and allows for cheaper power, reducing input costs, all of which stimulate growth and in theory create employment, meaning fewer people need welfare. It is “corporate welfare” in the sense that the private sector benefit from government spending, but if you use that argument virtually everything is corporate welfare as virtually all money spent by government will eventually find itself in private hands.

It’s an interesting argument but if it’s an argument that if Sunny and Lib Con wish to embrace then they’ll have to junk all the previous articles on these pages supporting the arguments of Blanchflower, Krugman, Portes et al that stated quite clearly that the UK shouldn’t necessarily borrow more but that it was essential that money that was borrowed was spent on areas that had the highest multiplier.

Unfortunately for the author’s argument investment in high speed broadband is supported by “left wing” Nobel laureates so claiming it as a corporate subsidy is pushing it somewhat.

6. So Much for Subtlety

If the public sector spends less time caring for old people, then this often means that relatives (almost always female relatives) end up taking on those caring responsibilities. Now, what costs the economy more hours of labour – a late train, or the need to care for a sick elderly relative? Social care is as much a piece of economic infrastructure as are train lines or high speed broadband.

Sorry but what point do you think you are making? Those old people need to be cared for either way. They will be no matter who pays for it. Which makes that different from a late train. Society pays the costs anyway. So the question you have to ask is who provides better care – a female relative or some minimum wage nurse from the Third World? Well, to ask is to know the answer. We are better off if relatives care for the old and nurses do something else.

Likewise, if we cut social services for young people, then we see a huge financial cost to society – both in the short term in increased crime rates, and in the long term in a less well educated, less well adjusted generation growing up.

The problem with this is the insanely simplistic assumptions behind it all. First of all, there is no link between welfare spending and crime except the more we spend, the more crime we have. Criminals are criminals because they are criminals. Not because they are poor. Second, we spend vast more on education now than we have ever done in the past and yet the results are dire. Cutting spending won’t do much to improve the situation, but it won’t make it worse either.

There is no particular economic reason to cut spending on social infrastructure and increase it on physical infrastructure – other than an ideological opposition to the welfare state.

Yes there is. The Egyptian Pharoahs spent a fortune building pyramids. They are still there. Still Egypt’s biggest export earner. Their Muslim successors spent a fortune on charity – creating a permanent class of beggars and a sense of entitlement. That is still there. We need more railways, more monuments to last generations, and less people feeling entitled to other people’s money. Welfare spending is bad from every possible angle and should be an absolutely last resort. It isn’t.

Welfare spending is most important? Astonishing.

For example, I would rate education much higher.

If there was full employment, for a full week, on the living wage, and landlords were not profiteering from a febrile renting economy there would be no need for welfare. It’s not about value for money in society, but about common humanity.

If we had full employment we not have welfare interesting idea. When labour brought in the idea that the sick and the disabled could and should work, I was told I could have a carer with me to do everything needed for me to work.

Then Labour and Blair said that companies needed to have a social conscientious in as much they should be shouldering the welfare of the sick and the disabled not the government, when this was rejected labour started to tell the sick and the disabled your a load of scroungers and work shy, but still the employers did not employ us.

Full employment does not mean companies are willing to shoulder the costs of employing people who cannot do the work.

“I see very little notable difference between what Osborne sees as ‘welfare’ and what he sees as ‘infrastructure’ ”

You’re quite astonishingly obtuse then. Or you’re simply using the vocabulary of economics – a vocabulary pretty much (+/-) common to everybody from Keynes to Friedman to Hayek – in an entirely arbitrary way.

11. mike cobley

@BenM – “If I were a newsagent or convenience store owner providing a local retail service in an area where job opportunities are scarce I would shudder at the deliberate 1pc benefit rise.”

Exactly. The central point about benefits is that claimants spend all their money, all of it, which goes directly into the economy at large, with all the multiplier effects. Osborne either doesnt realise this or he doesnt give a monkeys. In fact, you could make a case for increasing growth by an across-the-board increase in benefits of say 15% – I can think of no other method by which a government could quickly and directly get the economy off its back.

so here is the deal,cameron and osbourne have launched a economic jihad against the poor and the sick all in the name of balancing the books,so i ask this question my noble lords,where are the socalists i ask in defending the victims of the tory economic jihadists,what exactly is milliband and balls doing to row back the tide in this onslaught against the poor and disabled,what are you doing new labour,yes,nothing,thanks.

13. So Much for Subtlety

11. mike cobley

Exactly. The central point about benefits is that claimants spend all their money, all of it, which goes directly into the economy at large, with all the multiplier effects. Osborne either doesnt realise this or he doesnt give a monkeys. In fact, you could make a case for increasing growth by an across-the-board increase in benefits of say 15% – I can think of no other method by which a government could quickly and directly get the economy off its back.

That may have been possible when the government was a little more solvent. The fact it is, it isn’t any more. People have seen through this trick. They know that loans have to be paid. They have to be paid by people with jobs and businesses. Eventually. So if the nice Mr Osborn increases taxes or debt any more, businesses will close. We are on the wrong side of the Laffer curve as it is. There is no substitute for genuine confidence in the long term health of the economy. Which is lacking.

12. stuart

so here is the deal,cameron and osbourne have launched a economic jihad against the poor and the sick all in the name of balancing the books,so i ask this question my noble lords,where are the socalists i ask in defending the victims of the tory economic jihadists,what exactly is milliband and balls doing to row back the tide in this onslaught against the poor and disabled,what are you doing new labour,yes,nothing,thanks.

Meanwhile back in the real world, Cameron et al have not cut spending one little bit. They are continuing to spend like drunken sailors. They have merely cut back the rate of growth in spending. Which is not sustainable in the long run because Britain will go the way of Greece and Argentina.

What are the socialists doing? The Left is intellectually bankrupt. They have no alternative. All they can do is make a fuss. They have nothing else to offer but the same policies. Because there is no choice.

14. Shinsei1967

@Mike Cobbley

“Exactly. The central point about benefits is that claimants spend all their money, all of it, which goes directly into the economy at large, with all the multiplier effects. Osborne either doesn’t realise this or he doesn’t give a monkeys.”

Unfortunately in this case Osborne knows more economics than you.

You are absolutely correct that all benefits get spent in the economy and that this has multiplier effects.

However it doesn’t create enough TAX REVENUE to pay for itself and so the deficit and national debt keep increasing. It doesn’t pay for itself, as you seem to claim.

Assume the government gives someone £10,000 in benefits and they spend it all on food, housing, heating, petrol and stuff. The multiplier effect for this type of spending is 2x at very best (and probably nearer 1.5x)

So that creates £20,000 of economic activity.

UK tax take as a percentage of GDP is approx 37%.

So that’s £7,400 in tax revenues.

The government deficit rises by £2,600.

14 Shinsei

If multipliers are 2x as you say (no one has a true empirical figure) then actually ALL of that 20k comes back to the government at some point, unless you assume the rest seeps out in exports or just gets saved – very unlikely at these levels.

14. SMFS

Meanwhile back in the real world, Cameron et al have not cut spending one little bit

As was pointed out to the Right on so many occasions – attempting to cut spending in these conditions will lead to higher than planned unemployment which will paradoxically raise overall spending levels.

This is not a surprise to anyone who knows anything about economics (which eliminates a lot of rightwingers and all libertarians).

Ben M

“attempting to cut spending in these conditions will lead to higher than planned unemployment”

But unemployment is about 400,000 lower than was “planned” (or rather forecast by the OBR) and substantially lower than many on the left forecast.

It all depends on how you cut spending. Cutting public sector jobs obviously increases unemployment however freezing salaries or cutting salaries for the richest one-third doesn’t have an impact on unemployment yet does reduce spending.

Eh? Welfare is a payment that results in a net loss because it costs more in terms of money given (A) + administrative costs (B) than it can produce in the economy, which is at most value A. So no it is completely different to infrastructure which is a capital investment in C which increases productivity of D, E, and F. The idea being that investment in C will bring greater than capital cost gains in D, E, and F.


Reactions: Twitter, blogs
  1. SyzygySyzygysue

    'Welfare spending is the most important infrastructure investment we can make' – excellent argument by @AdamRamsay – http://t.co/eTs1QQ3u

  2. Aoife O'C

    'Welfare spending is the most important infrastructure investment we can make' – excellent argument by @AdamRamsay – http://t.co/eTs1QQ3u

  3. Pauline Roche

    'Welfare spending is the most important infrastructure investment we can make' – excellent argument by @AdamRamsay – http://t.co/eTs1QQ3u

  4. Tony Dyer

    'Welfare spending is the most important infrastructure investment we can make' – excellent argument by @AdamRamsay – http://t.co/eTs1QQ3u

  5. Gary Shaw

    'Welfare spending is the most important infrastructure investment we can make' – excellent argument by @AdamRamsay – http://t.co/eTs1QQ3u

  6. Ken Rice

    Welfare spending is the most important infrastructure investment we can make | Liberal Conspiracy http://t.co/BUKg4ZRI via @libcon

  7. Fair welfare

    'Welfare spending is the most important infrastructure investment we can make' – excellent argument by @AdamRamsay – http://t.co/eTs1QQ3u

  8. David

    'Welfare spending is the most important infrastructure investment we can make' – excellent argument by @AdamRamsay – http://t.co/eTs1QQ3u

  9. jackimacca

    'Welfare spending is the most important infrastructure investment we can make' – excellent argument by @AdamRamsay – http://t.co/eTs1QQ3u

  10. Catherine Fieschi

    'Welfare spending is the most important infrastructure investment we can make' – excellent argument by @AdamRamsay – http://t.co/eTs1QQ3u

  11. Rebecca Devitt

    Welfare spending is the most important infrastructure investment we can make | Liberal Conspiracy http://t.co/jtwxpF8Z by @AdamRamsay

  12. Matt Barker

    http://t.co/qNV4zEFG #fb

  13. Chris Coltrane

    Really great piece by @AdamRamsay, making the case for welfare spending as "social infrastructure". http://t.co/GFVueFLX

  14. Josephine Whitaker

    Excellent piece fm @AdamRamsay about why cutting 'welfare' spending is actually a value jdgmt about who is important http://t.co/MJ1ThieR

  15. Sophia Ireland

    Excellent piece fm @AdamRamsay about why cutting 'welfare' spending is actually a value jdgmt about who is important http://t.co/MJ1ThieR

  16. Morgan Dalton

    Really great piece by @AdamRamsay, making the case for welfare spending as "social infrastructure". http://t.co/GFVueFLX

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