We’re all Fabians now: The long debate over conditional welfare

While she admired Winston Churchill, his resistance to conditional welfare was exasperating. For years Beatrice Webb had been arguing with Churchill and other Liberals about social insurance and she was getting nowhere. She insisted that: "Doling out weekly allowances, and with no kind of treatment attached, is a most unscientific state aid". But in 1911 the government ignored her advice and set up an insurance system that made relatively few demands on recipients.

Webb wanted to prevent problems like sickness and unemployment by making income support conditional on responsible behaviour. Together with her husband Sidney she argued for a system based on the "doctrine of mutual obligation between the individual and the community." Under this system:

… new and enlarged obligations, unknown in a state of laisser faire, are placed upon the individual — such as the obligation of the parent to keep his children in health, and to send them to school at the time and in the condition insisted upon ; the obligation of the young person to be well-conducted and to learn ; the obligation of the adult not to infect his environment and to submit when required to hospital treatment. To enforce these obligations — all new since 1834 — upon the individual citizen, experience shows that some other pressure on his volition is required than that which results from merely leading him alone (p 270-271).

The Liberal government compulsory insurance scheme posed a threat to the Webb’s vision of conditional welfare. The payment of contributions created an entitlement to assistance. If the authorities were satisfied that a worker was genuinely unemployed, the worker got their benefit. As Winston Churchill wrote in 1909:

I do not feel convinced that we are entitled to refuse benefits to a qualified man who loses his employment through drunkenness. He has paid his contributions; he has insured himself against unemployment, and I think it arguable that his foresight should be rewarded irrespective of the cause of his dismissal, whether he has lost his situation through his own habits of intemperance or through his employer’s habits of intemperance. I do not like mixing up moralities and mathematics.

A disposition to overindulgence in alcohol, a hot temper, a bad manner, a capricious employer, a financially unsound employer, a new process in manufacturing, a contraction in trade, are all alike factors in the risk. Our concern is with the evil, not with the causes. With the fact of unemployment, not with the character of the unemployed.

In a meeting at with Liberal ministers at Number 11, the Webbs had a heated discussion about unconditional invalidity insurance. As Beatrice Webb recalled:

I tried to impress on them that any grant from the community to the individual, beyond what it does for all, ought to be conditional on better conduct and that any insurance scheme had the fatal defect that the state got nothing for its money–that the persons felt they had a right to the allowance whatever their conduct (p 417).

No doubt if Webb found herself arguing about conditional welfare in today’s Australia, she’d feel right at home. Before long she’d be citing papers by James Heckman and stressing the importance of investing in human capital. No doubt she’d be heartened to see that her doctrine of mutual obligation enjoyed bipartisan support. It seems we’re all Fabians now.

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derrida derider
derrida derider
10 years ago

A fascinating find, Don – as I think I’ve noted elsewhere the policy debates within the Liberal Party leading up to the 1911 “People’s Budget” canvassed pretty much the full range of issues in designing a welfare state. They can be read with profit by anyone interested in welfare policy today.

Put me firmly in the Churchill camp on this one – my view of the role of payments is much closer to his than to that of those future Stalinists, or that of the political mainstream in Australia today. And “I do not like mixing up moralities and mathematics” is a good line too. Churchill had some surprisingly small-l liberal views prior to WW1, as some of his actions as Home Secretary attest.

Victor Trumper
Victor Trumper
10 years ago

DD,

I do believe the 1909 budget was the ‘Peoples budget’ on which an election was fought over and successfully won and the House of Lords lost their veto.

Churchill was an expansionist in nwanting to overcome the depression in the mid 1900s and clearly not enamoured with classical economics which managed to reduce GDP/capita in the UK until the onset of the Great Depression.

My guess is Lloyd George was introducing legislation which he hoped would lead to a dissipation in the Labour vote and increase in the Liberal.

Victor Trumper
Victor Trumper
10 years ago

Don,

I think if you wish to look hard enough that revenues were shaken by the minor depression that was happening when they took power. Given there was little automatic stabilisers on the spending side the budget was hit therefore on the revenue side. Treasury was dominated unfortunately by fans of classical economics and so urged measures on the spending side to balance the budget.

Lloyd George believed and convinced cabinet it would be better to broaden the revenue side.The political benefits were first seen by Churchill and then of course LLoyd George. By 1911 revenues were looking much healthier and thus he could introduce said social insurance policies.

Lloyd George was canny enough to realise one could attempt to balance the budget to appease Treasury officials but change the spending to get some expansion occurring from fiscal policy.

This was copied somewhat by Snowden in 1931 although the economy didn’t ‘improve’ until interest rates were cut and the pound was devalued.

john
john
10 years ago

Victor there was the small matter of the very expensive dreadnought arms race happening at the time. By 1914 the UK had built about 40 of the things, they were not cheap.

Victor Trumper
Victor Trumper
10 years ago

John,

Spending as a % of GDP in the UK is as thus:

1900 14.06
1901 17.25
1902 18.34
1903 18.41
1904 16.43
1905 17.82
1906 15.18
1907 14.44
1908 14.78
1909 14.73
1910 15.95
1911 14.97
1912 14.78
1913 14.97
1914 15.61

Lloyd George made allowance for this spending at the expense of other programs.

This made for internal rumblings about Liberals aping Conservatives in policy.

john
john
10 years ago

Victor from memory wasn’t it a serious internal crisis in the liberals in about
1911?
It was diverting a lot of capital and facilities from more productive uses.

Victor Trumper
Victor Trumper
10 years ago

Sorry I am by no means an expert however my understanding is that the two champions of assisting the less well off in the Liberal party were DLG and Churchill. One was Chancellor of the Exchequer and the other Lord of the Admiralty.

If these two were championing the building of dreadnoughts then those opposing had nowhere else to go.To be fair DLG made noises about the amount of expenditure on Dreadnoughts however he never really did anything.

There were internal arguments and the Liberals were reliant on Labour and the Irish Nationalists for a majority.
Hence my speculation about why DLG introduced this in 1911.

john
john
10 years ago

No expert either .
1909 the House of Lords rejected “the People’s Budget” introduced by David Lloyd George. The Budget had proposed an increase in taxes on the rich to pay for welfare measures and dreadnoughts

Victor Trumper
Victor Trumper
10 years ago

see earlier comment

derrida derider
derrida derider
10 years ago

Whoops, 1909 it was – age makes my memory to fail. No specific references, Don, except a history of British social policy I read about 20 years ago and a long biography of Lloyd George I read a few years ago. Given I work in this sort of field the currency of those debates really struck me, hence my remembering them.

john@9 is right. IIRC what led the Lords to reject the Budget was that the new tax was a tax on the unearned increment in land value – a direct assault on the Tory landed class. And it was sold with rabble rousing class warfare rhetoric by Ll-G too, notably in his famous Limehouse speech. He was actually trying to keep the working class part of his base from drifting to Labour rather than trying to permanently dish the Tories.

On those figures of tax as a % of GDP, are you sure they don’t include the new compulsory social security levies in that Budget? Hypothecated levies such as those are often left out of tax calculations by those who only look at Consolidated Revenue or its equivalent.

Labor Outsider
Labor Outsider
10 years ago

It isn’t just Australia or the other anglosphere countries that impose obligations on the unemployed. Most European countries do as well, especially for those that are long-term unemployed. They just aren’t quite so Orwellian in their naming conventions for the restrictions that are used. The shift in a lot of European countries in the 1990s was quite pronounced (and mostly ignored here) amidst the realisation that the design of welfare systems and the interaction between tax and transfer systems were contributing to high structural rates of unemployment. Where Australia most stands out is the meagre level of support we dish out in the first two years or so of unemployment (a lot of insurance based systems only have high replacement ratios in the first year or two). There is a lot more we could be doing in the active labour market program space as well.

derrida derider
derrida derider
10 years ago

Yep, agree with what you say there LO. Though note that the actual case for the link between design of welfare systems and structural rates of unemployment was always far weaker than policy orthodoxy at the time held. In particular, the extremely influential 1994 OECD Jobs Study is best described as a piece of ideological shit. And technically it is a disgrace that should have permanently diminished its econometricians’ career prospects.

Nevertheless. rightly or wrongly most of the Europeans imposed more conditionality on their payments in its wake, as well as spending a lot more on labour market programs.

Labor Outsider
Labor Outsider
10 years ago

The OECD jobs study is not the only empirical basis to the link between conditionality and unemployment though – to be fair. It is more that the relative importance has been toned down, with more emphasis on other factors, including labor supply incentives generated through the tax-transfer system. As a rule, I tend not to focus on empirical evidence generated through cross-country regressions, and instead focus on country specific natural or quasi-natural experiments that take fuller account of the complexities of the variation in institutions and circumstances across countries.

KB Keynes
KB Keynes
10 years ago

Interesting to read in Richard Toye’s book on Lloyd George and Churchill that Webb wrote to Betty Balfour that Neither party has really tackled the problem of poverty until Lloyd George-winston schemes of expenditure.

derrida derider
derrida derider
10 years ago

You’re right about the OECD Jobs Study not being the only study, LO – it was just the worst of them. But pretty well all the literature at that time drew its results from simple bivariate pooled regression of unemployment rates on benefit replacement rates. This was a stupid approach in trying to determine the effect of payments on unemployment rates, and would have been seen to be stupid if the conclusions had not been so congenial to Finance departments and neoclassical economists alike.

For instance, virtually all the variation in payment rates occurred in a short period of time – the 70s and early 80s – when unemployment was exogenously soaring. Exclude that period and the parameter estimates and their significance both shrink dramatically. There were no tests for reverse causality – that is, rising unemployment creating political pressures for more generous payments. And benefit levels are only one aspect of payment generosity – conditionality and scheme coverage were both changing at that time.

Note I’m not saying that payment levels can never affect unemployment rates, just that their likely European influence was greatly exaggerated in the 1990s.