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.

What’s in it for the Neoliberals?

This post came from a question asked of me on a below-the-line thread on The Guardian:

I am not an expert in monetary theory (I have a PhD in something else), so my question might sound a bit simplistic, but I hope it’s not.
If government surplus = private deficit, and higher private deficit impacts populations hard, why are the neoliberals running the economy this way? Is it done to further impoverish the poorer actors in society (because the wealthy can obviously deal with debt a lot better than the poor)? Who benefits, if not the rich?
IMHO, I think they are too conniving to be doing this by accident, ie because it’s what the IMF tells them. I think it is to punish people according to some law-of-the-jungle doctrine. For evidence of nastiness, just look at what they are doing with welfare overpayments and refugees.
Don’t they owe us a duty to run government for the benefit of the mostest? And surely they are the trustees of our country and institutions? – Mary

Mary, as I said in another comment, yes exactly. The purpose of government is to maximise the prosperity of the society, by providing the common public goods we require to reach the standard of living we expect, and arrange use of resources in a manner that achieves this public purpose sustainably. In these days of individualism, user-pays and privatisation, that probably sounds like socialism. It isn’t, of course.

The rot set in with the abandonment of full employment as a core government policy goal in the mid-70s. George Monbiot wrote a good piece here on the history of neoliberalism a couple of months ago that’s worth a read. Monetarist Trickle-down theory is an utter failure, it’s just taken a long time for this to really manifest itself, so long that no other school of economic is considered “mainstream” any more. Like the Ministry of Truth, anything else is heresy. All three major parties today ascribe to neoliberal theory, only the depth varies.

Money’s mobility is inexorably upwards: those with very little spend all they have, and each person’s spending is another’s income, until that money comes to rest somewhere in the hands of someone who has no need to spend it, or returns to the government through tax. You certainly don’t need a PhD in economics to see the irrefutability of that. In fact you’re almost certainly better off without one.

You need only look at the relative size of the FIRE (Finance, Insurance, Real Estate) sector today compared to 30 years ago to appreciate the power they wield, which is completely untethered from any production of real output: derivatives, speculative financial gambling and real estate bubbles, rather than investment in capital in the classic sense. They are the sworn enemy of deficit spending, since their profits come from private debt, and their ability to parlay debts into ownership of real resources.

We’ve been hoodwinked into accepting that “the market” is perfect and omnipotent, yet simultaneously so fragile that anything a government might want to do will damage it. It’s bullshit, of course. The market exists because the government allows it to, and has the means to set the rules under which it operates. The neoliberals would have those roles reversed.

Sorry, this answer has meandered a bit, hope it’s helpful.

Christian Porter is a Numpty

In this rather depressing story, a 21 year old kid on the autism spectrum was chased by debt collectors from Dun & Bradstreet, having been caught in the dragnet of Centrelink’s controversial Tax Office data mining process.

Luckily for him, he (a) mentioned it to his mum, who (b) just happens to be the head of Autism Awareness Australia. So his folks could intervene. But this post is not about the story of Jack Roberson’s treatment, appalling as it is.

No, I’m worked up about this:

The government continues to defend the system. The social services minister, Christian Porter, said on Tuesday it was working “incredibly well” and gave individuals a fair chance to respond when discrepancies were detected.

‘What you’re saying to me is that if people over-respond, or if people find it inconvenient, then the response to that from a government should be to not do it,’ Porter said.

‘Now, if we don’t do it, that is $4bn worth of taxpayers’ money that got wrongfully paid that can never be recouped.’

Wow. That’s some industrial-strength stupid. Where does Mr Porter think the money goes? After the welfare recipient gets it, what happens next? Think!, Mr Porter.

Here’s a tip: the recipients spend it, so most of it becomes someone else’s income, and the rest returns to the government as GST. And then that person spends it (again, GST), saves it or pays their taxes with it. And so it goes around and around, until it’s all drained away either as GST or payment of taxes.

The idea that it must be clawed back from the most vulnerable – who don’t have it any more anyway – shows such paucity of vision and lack of understanding of the economy you really have to wonder where the coalition get these numpties from.