DPB stats

Lindsay Mitchell has a look through the Cabinet Papers for the proposed welfare policy changes.  She points to this bit (see p.2): 

12. A significant number of sole parent beneficiaries give birth to additional children while on a benefit. In 2010, 4,800 newborns (7.5 per cent of all live births) were included in the benefit of an existing Domestic Purposes Benefit client. The on-benefit birth rate has trended up since 1997, from under 35 births per 1,000 women receiving Domestic Purposes Benefit - Sole Parent in 1997 to over 50 per 1,000 women receiving DPB-SP in 2010.

13. As at November 2011, 26,000 women receiving DPB (29 per cent of clients) had included additional newborn children in their benefit at least once since 1993:

• 20 per cent who had a subsequent child included once (multiple births count as one event)

• six per cent who had a subsequent child included twice

• two per cent who had a subsequent child included three times

• one per cent who had a subsequent child included four or more times.

14.  Parents who have additional children on benefit are an at risk group:

• over 90 per cent are single (annual average - see Annex to Paper C for a more detailed breakdown)

• among DPB sole parents, those who have subsequent children on benefit are more likely to:

• have been on the DPB from a young age

• have started on the DPB with a newborn (rather than having exited a relationship with a child)

• have no record of having been employed before, after or during spells on benefit.

About 900 women, while on the DPB, had four or more additional children.

The full set of papers is here. Here's Lindsay's prior report for the NZBR, 2009, on welfare.

I'm not from here, but I'd be surprised if it ever were the intention of those who established the DPB that it be anything but a last rung of support for women and children abandoned by deadbeat husbands from whom payment orders were non-collectable. Nor would I expect strong current voter support for a system that yields these kinds of outcomes.

Lindsay has been pushing this file for ages; part of the impetus for fixing things is due to her efforts. Even getting the stats out seems like a victory.

Welfare reform

New Zealand moves towards welfare reform, with a greater emphasis on moving recipients, especially those on the DPB (our version of AFDC) into work. Those with children aged 14 and up will be expected to make serious efforts to find full time work; those with children over the age of 5 should be finding part-time work.

The change will, hopefully, lead to most income support for single mothers being handled through Working for Families, a wage subsidy scheme similar to the EITC, and indirect subsidies for childcare via both government subsidization of early childhood centres, tax credits for childcare expenses, and additional subsidies for childcare for low income families.

My usual worry on requiring parents on the DPB to seek work when their youngest child hits age X is that it provides reasonable incentive to have another child at that point: if MSD made data available, it would be awfully interesting to run probit on likelihood of an additional birth conditional on hitting that age threshold. Apparently 4,000 children were born last year to women who were already receiving the Domestic Purposes Benefit.

The latest changes have taken some account of this incentive. The birth of an additional child while on benefit provides one-year's respite, followed by a resumption of the status that existed ex ante. So if your youngest child was 5 when the next one came along, the expectation of part-time work would resume after the one-year hiatus. The Greens were worried the government might go farther and require long term contraception as condition of receiving a child-related support package; it looks like National's not going that way. It's not immediately obvious to me why such requirements are so objectionable, but neither is it obvious that the chosen policy alternative won't work. If we're going to worry about fiscal externalities imposed by those who choose to drink too much, or perhaps even ski without helmets, I can't see what logically keeps this off the table.

The changes also incorporate some targeted paternalism. Teen parents and young people on benefits will receive extra payments for completing budgeting and parenting courses; rather than receiving payments directly, their rent and utilities will be paid directly by the government with remaining funds under stricter monitoring through payment cards. Bill Kaye-Blake doesn't like the programme's paternalism:

The ‘managed system of payments’ just sounds awful. It message is, ‘You haven’t learned to take care of yourself, so we’ll just do it for you. Here’s your pocket money’.

I'm no particular fan of paternalism either. But if it's going to be anywhere, targeting it here isn't crazy. Scott Beaulier and Bryan Caplan make a pretty convincing argument that the behavioural anomalies that behavioural economists worry about hold especially strongly among the poor. Note: my post above-linked suffered linkrot; the original Beaulier & Caplan article is here. Beaulier and Caplan argue for reducing the size of the welfare state, but you can also take the article as implying that welfare payments ought to be combined with fairly prescriptive approaches to benefit use combined with directed training to help recipients learn the skills to help keep them off of benefits when time limits hit. Combining the paternalism with training to wean them off the paternalism doesn't sound nuts.

Bill worries too about consequences for existing children whose parents are on the benefit. I'd share some of those worries, but just look at the scope of support already available to working poor families. And payments aren't killed for failure to find a job given an honest attempt; they're killed by proving to a welfare case officer that you're utterly uninterested in trying to find work.

More broadly, the reforms are in keeping with a reasonable social contract for social support payments. Middle class support for welfare disintegrates when it becomes seen as a way of life for those who could work but choose not to. Charles Murray documented that in the US in the 1980s; Bill Clinton's welfare reform followed. Reforming welfare such that it provides temporary support for those falling on hard times, longer-term support for the disabled, and incentives keeping those getting a helping hand from becoming dependent on the system is a pretty good way of ensuring that the social compact over welfare doesn't break down over the longer term. The Greens' complaint that it's unfair  to require DPB mothers to look for work after a year rings pretty hollow for those of us whose kids have been in daycare since they were three months old so we could earn enough to pay the taxes to pay for the system.

Critics also ought to keep in mind that, the longer things are left before reform, the greater the likely support for tougher approaches. American welfare reform brought lifetime maximum welfare eligibility of 5 years for most folks.

Do follow Lindsay Mitchell for what's likely to be the best ongoing coverage of NZ welfare reform.

Stories need scarcity, and unrelated bits

Bill Kaye-Blake has migrated over to a new blog, Groping Towards Bethlehem. I'll comment on a few of his recent posts here; I'm sure his blog will be worth following in future for those watching Kiwi econ policy.

• Bill's bored by a SciFi story which effectively finds the end of scarcity - the protagonists do away with constraints on space, energy, time and mortality.
  
  I've not read The Number of the Beast, but Bill didn't mention whether knowledge remained limited - if the multiverse already has a thorough and completely accurate Encyclopaedia Gallacticus. Presumably the protagonists could find challenges in expanding the domain of knowledge. Or, finding ever more creative forms of hedonism. 



• Does welfare reform posit $20 bills lying around?
  
  My quick read of National's proposal was that it didn't seem to do a whole lot; the biggest change was that additional children had while on the DPB won't extend the duration of the benefit by as much as it would have ex ante [see also Lindsay Mitchell]. I'll agree with Bill about the multiple barriers to work issues, and he's very likely right on National's overselling the benefits.
  
  But most outrage about the proposals thus far seems centred on the immorality of forcing women back to work before their kids are 14. This falls entirely on deaf ears for me - both our kids have been in daycare since they were 3 months old, in part to keep our family net income sufficient for raising the two kids adequately; were we not paying to keep a few single mothers home with their 12 year olds, maybe we could afford to choose otherwise. I suspect that more than a few double income families with kids in daycare get just a bit angry when called on to solve the injustice of that folks might not be able to choose to stay at home with kids at others' expense. If I had a button to push, it would be for 1) more daycare funding; 2) making childcare benefits of limited duration; 3) requiring Norplant (or other equally-effective equivalents) as condition for receiving the childcare benefit. I can accept that there are cases where it's more efficient that the mother stay home with the kids rather than pay for daycare given the woman's earning potential; I'm happier eating the losses from subsidizing daycare than the losses from screwing up the incentives. 



• Externalities and risky buildings. Bill's thinking about things in the right way: buildings with unreinforced masonry impose a risk on passers-by in case of earthquake - a negative externality - while providing uncompensated amenity value - a positive externality.
  
  Optimal response, I think, will have to involve Councils' putting some budget [hopefully supplemented by private donation] into paying building owners for heritage amenities. Rather than listing thousands of buildings on heritage registers and making it hard to fix them up, list the couple hundred most important and pay their owners for the heritage amenity provided. Then either add into a building's property tax assessment a fee for risks imposed by unreinforced masonry or require holding adequate liability insurance for damage potentially done to passers by in an earthquake. Some older masonry buildings will be torn down, but if their heritage value isn't sufficient to make them worth the risk, that's optimal. But we won't know it until we start putting some real prices on heritage value and paying owners for it, and charging owners for risk imposed.

I'm pleased to see Bill striking out on his own! We now have a decent selection of economics blogs by NZ-based academic economists: Offsetting, Anti-Dismal, and Sam Richardson; we've also another economics blog by non-academics that capably tackles academic issues: the Visible Hand. If we're not careful, we'll soon have enough folks around for reasonable conversations.

Rot at the centre of New Zealand economic commentary

Matt Nolan over at TVHE takes issue with Gareth Morgan's latest NZ Herald column.

Matt hits some of the problems in that piece. But he's probably pulling his punches out of professional courtesy. As I'm in the academic world instead of the consultancy world, mostly, I don't have to. And so I'm going to smack Morgan around a bit on his history of economic thought.

In particular, Morgan name-drops J.S. Mill in favour of redistributive spending. Morgan writes:

It was during the industrial revolution that grotesque disparities in wealth and intensified impoverishment of the workhouse poor led the economist philosophers of the "enlightenment period" to conclude the purpose of taxation was, as John Stuart Mill put it, to "favour the diffusion rather than the concentration of wealth".

Ok, let's go back and have a look at what Mill advocated then. Mill definitely supported redistribution for the alleviation of absolute poverty and starvation. But he also worried that if the provision of relief made relief more attractive than work, "the system strikes at the root of all individual industry and self-government." Let's go back to source:

In so far as the subject admits of any general doctrine or maxim, it would appear to be this—that if assistance is given in such a manner that the condition of the person helped is as desirable as that of the person who succeeds in doing the same thing without help, the assistance, if capable of being previously calculated on, is mischievous: but if, while available to everybody, it leaves to every one a strong motive to do without it if he can, it is then for the most part beneficial. This principle, applied to a system of public charity, is that of the Poor Law of 1834. If the condition of a person receiving relief is made as eligible as that of the labourer who supports himself by his own exertions, the system strikes at the root of all individual industry and self-government; and, if fully acted up to, would require as its supplement an organized system of compulsion, for governing and setting to work like cattle, those who had been removed from the influence of the motives that act on human beings. But if, consistently with guaranteeing all persons against absolute want, the condition of those who are supported by legal charity can be kept considerably less desirable than the condition of those who find support for themselves, none but beneficial consequences can arise from a law which renders it impossible for any person, except by his own choice, to die from insufficiency of food.

What did Mill favour? Indoor relief in workhouses that was always less desirable than working for wages but preferable to starvation. So far from favouring heavily redistributive income taxation to alleviate the problems of the workhouse poor, Mill favoured the workhouse.

So it isn't just the modern amoral mathematization of economics that leads to opposition to Morgan's preferred policies.

Further, as West points out, Mill opposed progressive taxation. Here's West:

The fact moreover that Mill made it quite clear to the Select Committee on income Tax that he was not in favor of a progressive income tax, separates him from most modern advocates of a negative income tax plan. Mill's objection to the progressive income tax was based partly on his demand for "social justice," and partly upon his concern for incentive effects, not at the lower end of the income scale but, again, at the upper. He objected that "to tax the larger incomes at a higher percentage than the smaller is to lay a tax on industry and economy; to impose a penalty on people for having worked harder than their neighbours."

And what do we find when we go back to source? The line immediately prior to the one West quotes reads:

Both in England and on the Continent a graduated property tax (l'impôt progressif) has been advocated, on the avowed ground that the state should use the instrument of taxation as a means of mitigating the inequalities of wealth. I am as desirous as any one that means should be taken to diminish those inequalities, but not so as to relieve the prodigal at the expense of the prudent.

So Mill favoured using taxes to mitigate inequality but not if it punished the prudent in favour of the prodigal. So all of this hints that maybe, just maybe, Morgan does violence to the Mill quote he initially presented. Let's check. Here's the source, in a fuller context. The initial italicized portion forms the question posed Mill in his testimony before Parliament:

I quite understand the force of your argument as between one portion of the upper classes, and the other portion, that is to say, the distinction that you have so clearly and admirably stated between the owners of permanent and terminable incomes, and the owners of precarious and certain incomes; but then I wish to draw your attention to quite another division, the next division of society, not according to the source of income, nor according to the tenure of income, but according to the quantity of income relatively to the wants of human nature for subsistence and for comfort, and to ask whether it did not appear, that upon the whole, the adoption of this principle, that savings are not to be taxed (setting aside the degree in which you may be able to give it a precise application), and the attempt to frame a law upon that principle, would not be a change in our law favourable to the condition of the poorer classes of society as compared with the wealthier? 

I think it would be favourable to the saving classes, whether poor or rich, compared with the spending classes; and that consideration I think is even paramount to the other. If the rich are to be subject to a greater proportionate amount of taxation than the poor, I think it ought to be done in some other way. A succession duty is the most unobjectionable mode of doing it, because in that way it is confined to hereditary wealth. I think you must allow people to retain the full advantage for their lives of what they have acquired; but the State may deal with it on the occasion of succession. I certainly do think it fair and reasonable that the general policy of the State should favour the diffusion rather than the concentration of wealth, but not, I think, by taxing people twice on the same portion of their income, or by taxing people for the fact of their saving. Taxing people on what they save, and not taxing them on what they spend, or taxing people on a larger proportion of their income, because they are better off, does not hold the balance fairly between saving and spending; it is contrary to the canon of equity, and contrary to it in the worst way, because it makes that mode of employing income which it is public policy to encourage, a subject of discouragement. [emphasis added]

So the line after the one Morgan cites specifically cuts against capital gains taxes and progressive income taxes in favour of progressive estate taxes. In other work, Mill argues in favour of a proportional tax on expenditure above a minimal threshold. Sure, this generates average progressivity, but it's hardly a progressive marginal tax schedule. Morgan can go read Kurer in HOPE.

I'm not a history of thought scholar. But I took enough history of thought in grad school to know that Mill favoured indoor relief. In other words, he worried like hell about "welfare bludging". The debates we're having today over welfare aren't all that different from the ones had a century and a half ago over the British Poor Laws. We can read arguments today about whether women have an incentive to have kids out of wedlock so as to get on the DBP. A hundred and fifty years ago, Mill advocated that the poor in workhouses observe strict separation of the sexes to avoid the Malthusian problem. There is nothing new in current welfare debates. And yet Morgan calls today's debates about incentives facing the poor in the face of relief "dumbed-down".

Like Matt, I'm really frustrated by the article. I'm really sympathetic towards arguments for a guaranteed minimum income in place of the current welfare system. But I sure would know better than to cite Mill as support.

Welfare reform and drug use

The New Zealand Drug Foundation wrings its hands about potential changes to New Zealand's welfare rules:

The Drug Foundation says punitive measures being considered against drug users who are on benefits could exacerbate poverty, increase crime and harden substance dependency.

It is so concerned about the Welfare Working Group's "flawed populist assumptions" about substance abuse that it is urging the Government to work with mental health and addiction specialists when considering its recommendations.

The group wants strong rules and obligations for drug and alcohol use by beneficiaries, enforced by a graduated sanctions regime.

Drug and alcohol-dependent beneficiaries would be offered free treatment services and those who failed drug or alcohol tests would face cuts to their benefits and a 13-week stand-down for the third offence.

Hope Corman visited Canterbury's economics department a couple of years ago. She found pretty strong evidence that American welfare reform, which included sanctions for drug use, strongly reduced drug use. Here's her NBER working paper:

Exploiting changes in welfare policy across states and over time and comparing relevant population subgroups within an econometric difference-in-differences framework, we estimate the causal effects of welfare reform on adult women’s illicit drug use from 1992 to 2002, the period during which welfare reform unfolded in the U.S. The analyses are based on all available and appropriate national datasets, each offering unique strengths and measuring a different drug-related outcome. We investigate self-reported illicit drug use (from the National Surveys on Drug Use and Health), drug-related prison admissions (from the National Corrections Reporting Program), drug-related arrests (from the Uniform Crime Reports), drug-related treatment admissions (from the Treatment Episode Data Set), and drug-related emergency room episodes (from the Drug Abuse Warning Network). We find robust and compelling evidence that welfare reform led to declines in illicit drug use and increases in drug treatment among women at risk for relying on welfare, and some evidence that the effects operate, at least in part, through both TANF drug sanctions and work incentives.

The paper was also written up in the Wall Street Journal.

So I really hope that the government takes the Drug Foundation's recommendation and consults with specialists. In particular, they should fly Hope Corman back to New Zealand. It would be great to see her again.