The Captain Kirk approach to rethinking the welfare state

The holidays over, members of the Government's multifarious taskforces are opening their notebooks and sharpening their pencils in preparation for redrawing the welfare state. Their brief: reduce unemployment; diminish inequality; increase security and social cohesion; and improve the quality and efficiency of public services, without adding one iota to government spending plans. Shame on anybody who has ever accused New Labour of a poverty of ambition in its policies.

The literature on welfare reform and all the ills it needs to tackle is immense. The taskforces could spend years simply reading up on the evidence if they wanted to. Luckily, there are some attempts to cut through the undergrowth.

As far as welfare goes, the fundamental problem seems to be the deteriorating trade-off between economic efficiency - boosting jobs and growth - and fairness. Whatever the cause - whether globalisation or the breakdown of traditional family morality - the policy choices seem to be increasingly unpalatable.

Star Trek fans will recall that in the third film featuring the crew of the Starship Enterprise, we flashback to the young Captain Kirk's brilliant solution to a test faced by all trainee Star Fleet commanders. The trainees are put through a disaster simulation in which, unknown to them, any course of action they choose will result in death and dishonour. For it is designed as a test of character rather than a test of their problem- solving skills.

Kirk, aided by the intelligence of Mr Spock, becomes the first person to avoid the disaster.

He does it by reprogramming the computer software running the simulation in order to create the possibility of a solution - by stepping outside the apparent boundaries of the problem.

Two recent analyses of the welfare problem attempt to alter its forbidding architecture in an equally dramatic way, casting, I suppose, Gordon Brown as Kirk and Frank Field as his Spock. One, a research paper by two economists at Birkbeck College*, London, argues that the fundamental welfare dilemma - economic efficiency versus equality - is actually the result of the welfare system we have. For example, when an unemployed person gets a job, she loses benefits and pays taxes.

The dilemma is that if unemployment benefits were lower, there would be less disincentive for the unemployed to find work - but people without jobs would be poorer and society more unequal and unfair. However, the two authors, Michael Orszag and Dennis Snower, suggest that the dilemma arises because of the institutional structure of the welfare state.

They propose a radically different welfare system which separates the provision of services needed by individuals at various stages in their lives, whether unemployment support, education or a pension, from the welfare state's redistribution of income from rich to poor. Welfare services can be provided by public, voluntary or private sector. With enough regulation, private insurance could meet most of our needs. But the state plays an essential part in income redistribution.

What the paper proposes is a series of four individual accounts, covering education, health, unemployment and retirement. Everybody would be required to pay in a minimum to each and draw out a maximum. Their accounts would be a tax-advantageous and fully portable form of saving. Eventually the four types of account would form a fully funded social security system which did not require any subsidy from the general government budget.

Economic efficiency would be improved because of individuals' ownership of their funds: the more health care they "bought", the lower their balance would be. The unemployed would face no disincentive to finding work - quite the contrary. In addition, private providers would pep up the public services by offering them competition.

The proposed income redistribution would involve some inefficiency, but less than at present. Required contributions into each account would rise in line with income. Suppose somebody was jobless for long enough that they ran down the balance in their unemployment account. The government would pay into their account a transfer financed by the unused balances of the employed. When they found work, the transfer would continue just as long as their account remained below a minimum level. Only after that point would they pay in contributions themselves.

A second radical reprogramming of the welfare system is contained in a book published in the US earlier this year.** Michael Mandel, the author, sees an injection of market principles as the way to reconcile efficiency and fairness. He proposes establishing futures markets in incomes, like the financial futures that trade on the level of the stock market in years to come, so that people are able to diversify their risk from investing in particular forms of "human capital", or in other words, developing the skills and experience to do one particular kind of job.

The thinking is that people need ways of diversifying their risk of unemployment and loss of income in just the same way as investors need to diversify in order not to have all their eggs in one basket. Therefore what's needed is a type of investment based on the earnings from different sorts of jobs. There would be doctor futures, teacher futures, footballer futures and so on, which would deliver a return based on the earnings of those different categories of people. So if I work in a well-paid but insecure job, I could buy an asset that would give me income linked to a lower- paid but steadier job. Likewise, somebody else could invest in a higher but riskier stream of income.

The thing about radical proposals is that they always sound rather fanciful. Both of these interesting ideas would have a hard time making it to the serious policy agenda facing the Chancellor's taskforces. But, although they differ enormously in detail, they share the notion that welfare reformers do not have to opt for one horn or another of an inescapable dilemma. Erase the horns and draw something different, is their message.

* `Expanding the Welfare System' by Michael Orszag and Dennis Snower, Centre for Economic Policy Research working paper 1674, July 1997.

** `The High Risk Society' by Michael Mandel, Times Books, New York.