Back on the welfare reform trendmill

Haven't we been here before? Didn't the previous Labour government promise benefit reform?

Yesterday, David Cameron was before the cameras promising yet another welfare reform Bill. The grand idea behind this latest initiative seemed strangely familiar. The complex network of welfare benefits will be replaced by a single universal credit. There will also be hard-hitting new sanctions to punish those who want to remain idle.

Cameron's main sound bite was that he was ''finally going to make work pay - especially for the poorest people in society." Sadly, that quote provoked a deluge of pedantry from me. "There is only two kinds of work" I said ” paid and unpaid work, the latter being better known as either slavery or housework".

Anyway, I have left the pedantry in the kitchen. I am now before a computer and back on the theme of benefits. There isn't the slightest possibility that Cameron's welfare bill will reduce the numbers receiving financial assistance from the state.

The benefits debate has always been framed around the conflict between providing incentives to work and poverty alleviation. If the state provides a minimum level of income to the poor, the incentive to work is reduced. If the state introduces sanctions against the work shy, poverty increases.

At the margin, changing the rules behind welfare payments will affect a small number of the unemployed. Tighten the rules and some will return to gainful employment. Weaken the rules and more people will stay at home and watch the atrocious yet strangely compelling Jeremy Kyle show.

Incentives isn't really the problem; the key problem is the appallingly low productivity levels of the urban poor. The vast majority of people on benefits do not possess the necessary aptitude or skills to acquire a job in the mainsteam economy.

This wasn't always true. Fifty years ago, the country was full of factories which could offer people with limited capacities a place where they could perform menial tasks for a modest yet reasonable income stream.

Unfortunately, all those jobs have relocated to the developing world, where people are willing to do those repetitive and menial tasks for a fraction of what low skilled British workers are prepared to accept.

The obvious riposte to this argument is that benefits keep UK wage rates high and therefore act as a disincentive to the unemployed in accepting lower wage rates. This is absolutely true but isn’t the point.

How far would UK wages have to fall in order to attract back to Britain all those factories that left over the last 40 years? The answer, obviously, is that wage rates would have to fall to close to those currently paid in the developing world.

If the UK benefit system were abolished tomorrow, there is a fair chance that unskilled wages could fall sufficiently far so that unskilled British workers are competitive with their developing world counterparts. The obvious implication would be that the living standards of these newly employed Britons would also be comparable with those in the developing world. In other words, many UK cities would be transformed into the kinds of slums that one sees in the developing world.

When this obvious point is made, it usually generates a lot of sanctimonious nonsense about education. If only more money was spent on tooling up the unskilled, then welfare reform might work.

Policy makers in the developing also know about the importance of education. Those same unskilled workers that took those factory jobs are also acquiring new skills. The bar is being raised. It would take an unacceptably high amount of public investment in education in order that British low skilled workers acquired sufficient levels of productivity to effectively compete against their counterparts in the developing world.

Therefore, welfare benefits are the cheaper option. In effect, we are paying for the pretence of living in a competitive modern and thriving economy. Some parts of the UK economy are doing brilliantly. At the same time, there are large sections of the potential workforce are woefully uncompetitive.

Deep down, most of us know this sad reality, which is why we are prepared to tolerate the outrageous amounts of money that is devoted to keeping the unskilled from starvation. We complain and moan about the work-shy, we angrily demand welfare reform. Politicians like Cameron respond to this clamour, and deliver us a feast of anti-benefit rhetoric. At time same time, we wink at the politicians, “Don’t take us too seriously” we hint. After all, “we don’t want to turn London into Shanghai”.