Monday, September 20, 2010
Take the federal government's spending on grants to private schools, under which more than half the schools receive more than they're entitled to under John Howard's funding formula based on socio-economic status.
This waste continued throughout the Howard government's time in office and the Rudd government's first term. During the campaign Julia Gillard promised to continue it at least until 2013 - the year of the next federal election - and Tony Abbott promised to retain it forever. Abbott also said he would widen Labor's dubious tax rebate for education expenses to include school fees.
When it comes to welfare for the genuinely poor - the unemployed and sole parents - both sides promise ever-greater vigilance in ensuring the undeserving wretches get not a cent more than they're entitled to. The standard case against middle-class welfare is simply that it's our heavily means-tested system that does most to make Australia a low-tax country compared with the rest of the developed world and we should take care not to weaken it.
The more government spending is means-tested, the more redistributive the budget is without requiring high levels of taxation, and the less ''churning'' occurs - taking money from the same people you give it back to. Middle-class welfare increases the dreaded churning.
The Hawke-Keating government put a lot of effort into tightening up means-testing, but Howard was heavily into avoiding it, using unmeans-tested benefits to gratify the Liberal heartland as well as buy the allegiance of ''aspirational'' voters in the outer suburbs. He greatly increased taxpayer subsidies for private schooling and private health insurance, as well as adding to the means-tested childcare benefit an unmeans-tested 30 per cent childcare tax rebate (which Rudd later increased to 50 per cent). You exclude better-off parents with one hand and include them with the other.
What economists call middle-class welfare I prefer to call subsidising ''positional goods'' - goods that are intended to demonstrate to others our superior position in the pecking order.
When, rather than buying a perfectly satisfactory locally made Toyota for $30,000, for instance, we prefer to buy an imported BMW for $100,000, we're spending $30,000 on a car and $70,000 on positional goods.
We tell ourselves how much we value the Beemer's superior qualities, but in truth we want to demonstrate to neighbours and relatives we're doing as well as they are - if not better.
When you remember that most people in rich countries such as Australia long ago passed the point of being able to afford the necessities of life, you realise an ever-increasing proportion of our ever-rising real incomes is devoted to buying positional goods to impress other people.
(The main qualification to this is that as our real incomes rise we also devote more of them to buying ''superior goods'', such as healthcare and education, without that involving a search for greater prestige. For instance, the richer you are the more money you can afford to devote to one of our most evolutionary urges: to postpone death and disability.)
I suspect the pressure on governments to keep taxes low is motivated by our desire to spend more on positional goods. We need more and more disposable income just to keep up with the Joneses, let alone get ahead of them.
It's a free country and if people want to devote their ever-growing affluence to playing such games, that's their choice. But there are some important points to note.
First, such status competitions are socially wasteful. They're a zero-sum game: those who win do so at the expense of those who lose.
What's more, it's a competition that's never resolved: if you get ahead of me in this round, I stretch to overtake you in the next.
Second, if all the angst we go through to achieve greater efficiency and faster economic growth is doing little more than supplying more fuel to a never-ending status competition, it's hardly a noble enterprise. This is making the world a better place?
Third, it makes no sense for governments to be compelling taxpayers to subsidise those who want to play these status games. It's likely a fair bit of the subsidy ends up in the hands of the suppliers rather than the purchasers of the private schooling or whatever.
But get this: even to the extent the subsidy achieves its obvious (but never stated) goal of assisting those who would otherwise be unable to afford the positional good to attain it, it's actually self-defeating.
Why? Because, by definition, positional goods signal your superior standing only if they're something most people can't afford. So subsidising positional goods is a politicians' con: the aspirational punters are deluded into thinking they're being helped to achieve something that's actually unattainable.
When you consider how many demands there are on government revenue - particularly the looming growth in spending on health and aged care - it makes no sense for governments to be subsidising status seeking. Especially not when they're neglecting the provision of non-positional, public goods that would deliver greater benefit, such as reducing commuting times and improving the natural environment.
Economists need to embrace a new principle of budgeting: governments should devote whatever funds they have to delivering good quality public services in such areas as education and health, leaving those who'd prefer to buy those services privately free to do so if they can afford it.