Clawback of welfare debt is bad policy and bad economics

In Helen Hodgson’s article for The Conversation (reprinted by The Guardian), she writes:

The tax and social security systems can be seen as two sides of the same process – income support payments are a safety net funded through taxation.

Except they’re not, and so much of this “budget repair” bollocks we are forced to endure is predicated on this falsehood.

Tax dollars are not recycled. There’s no warehouse full of dollars that the government needs to keep stocked to support social security. Tax dollars go to the same place that Frequent Flyer points go when you redeem them: they simply cease to exist. Money issued into the bank accounts of welfare recipients comes from the same place that Frequent Flyers come from: they’re issued into existence, from nothing.

So why tax at all? Because unchecked, that new money creation will reach a point where it becomes inflationary, so some money has to be drained away to make room for more spending. (It’s done for other reasons as well.) And wherever possible, you take it from the top, because money naturally rises. Those with very little spend it all, and that spending is someone else’s income, and so it goes around until those dollars come to rest in the bank account of someone who doesn’t need to spend them.

Once you appreciate the fundamental truth of all that, the idea of clawing back money from people who no longer have it anyway as some form of economic repair is clearly preposterous. By all means have a targeted welfare scheme, but fining the poorest in the community as a revenue-raising gesture has the exact opposite effect of what’s required: it limits their purchasing power which hurts the economy.

Instead of worrying about balancing the budget to address non-existent inflation, the government would be far better served focusing on policies to address the causes of the need for welfare. Solve unemployment, and most of the other problems just solve themselves.