April 12, 2016

Scrapping Welfare, Hugh Segal

By Hugh Segal

From Literary Review of Canada

The case for guaranteeing all Canadians an income above the poverty line.

This article was originally published by the Literary Review of Canada in 2012. It is a classic presentation of the rationale for a guaranteed basic income and we decided with permission of the author to reprint it here. Posted by Terrance Hunsley

Imagine that you are a recently trained trauma nurse working in an emergency ward. A severely injured patient is wheeled in. You see the bleeding and want to stop it as colleagues do an assessment of the patient’s vital signs. However, you are prevented from proceeding. “Don’t you think we should find out what the patient’s nutrition standard has been over the years—and the kind of housing that person has?” one team member asks. “And what about the patient’s parents, work/life balance? How did the patient do in school?” says another. You are dumbfounded because you just want to stop the bleeding. What if there were 800 rules that defined whether you could or could not treat the bleeding first? And what if, when you asked why, the response was “Because you are spending public funds and that is the policy set by the government!” This would strike any thinking Canadian as absurd. Yet this is exactly how our governments address poverty.

Federal and provincial governments have argued for decades that poverty is a complex problem. “Complex” is a code word for a problem no one wants to face directly. Poverty is a complex issue, but in the end it is about one thing—a person not having enough money to meet basic needs of food, shelter, clothing and transportation for self or family.
The poverty level in Canada has changed little over the past 35 years. It was 12.9 percent in the mid 1970s and 12 percent in the late 2000s. According to numbers published by the Organisation for Economic Co-operation and Development in 2009, Canada ranks 18th behind France, Norway, Austria, Finland, Sweden, Germany, Ireland, Switzerland, Belgium, Denmark, Hungary and the Czech Republic, which all have poverty rates in the single digits. The “complexity argument” is the one most often used by all status quo champions. “Poverty is inter-generational”; “it is impossible to address all the root causes of poverty.” It is easier to agree to spend money on programs that will help the problem, “help” being one of those weasel words that makes it clear that governments would rather help reduce poverty than actually erase it.
We spend billions on programs that address dropouts, reduce substance abuse, assist young people in trouble with the law, encourage nutrition, subsidize housing, provide safe houses for the victims of family violence, run the Children’s Aid, realign incentives in the tax system for the working poor, support First Nations education and fund micro-managing welfare systems that do not bring anyone above the poverty line. And yet the core number at 10 percent or above, depending on the province or region, has not changed in decades. It is time to look seriously at a guaranteed annual income.
In the opinion of some on the far right, topping up the incomes of citizens who are of working age but poor, thus guaranteeing them an income floor, violates some primordial work ethic, even though the majority of poor people work and often hold down more than one underpaid job.
On the far left, the bias favours the design, operation and implementation of programs for special needs by well-paid and unionized civil servants. Any automatic tax-based top-up, such as we have for seniors—introduced in Ontario decades ago and known as the Guaranteed Annual Income Supplement—would not require thousands of employees now working in the “many helping sectors” of the social service systems. I believe in paying public servants fairly and that they and government do important and vital work. I do not believe that they and the programs they run are the only instrument by which we can erase poverty.
If the federal tax system topped up everyone who was beneath the poverty line to above it, there would be no Canadians eligible for provincial welfare, liberating millions of provincial dollars for other investments such as chronic care, early childhood education, retraining or health promotion.
How we deal with the lowest income Canadians among us would be different.
They would not be “case load burdens”; they would be citizens.
They would not have to apply through Plexiglas for enough money to feed their kids.
They would not be trapped in the rules and constraints of welfare and the excessive state involvement in their lives, such as “spouse in the house” rules, or be prohibited from applying for post-secondary education support.
They would not be treated as dim creatures, incapable of making decisions; they would be treated as human beings trusted to make life choices.
They would not occupy homeless shelters, prisons, court rooms and mental hospitals disproportionately to their percentage of the population, because they would be liberated from poverty-caused pathologies by having a basic income guarantee.
They would file tax returns because they would have an incentive to do so, as now occurs with the HST/GST tax credit. Their confidentiality and privacy would be protected by law, as it is for all tax filers.
In other words, being poor would become a problem we all buffered in the same way as we buffer all Canadians relative to health care. Only a small portion of Canadians needs expensive health care at any one time. But we are there to help as members of a competitive, free market and coherent society—not by embarrassing them with governments asking why they are sick, but by letting their universal health coverage, financed from general revenue, see them through. Since poverty is the most reliable predictor of bad health outcomes, not acting to eradicate it is senseless.
In Dauphin, Manitoba, in the mid 1970s, the governments of Manitoba and Canada undertook an experiment called MINCOME, where residents in this farming community were guaranteed that, if the crop prices collapsed, any resident family could be topped up in the fall. In other words, between 1974 and 1978 every resident family in Dauphin was guaranteed an annual income should their own income fall below the poverty line. This guarantee was similar to welfare but there were no clawbacks if a person was employed, and the rules were not onerous. The amount received was theirs—no strings attached. For the most part, this project assisted the working poor. The entire cost for the five-year experiment, including all researchers and staff, was $17 million.
The concerns then are the same as today—if you give someone something for nothing, is he or she going to quit a job, stay home and become a burden? The answer, to the surprise of some then and probably the captains of inertia today, was no. We are only discovering the results of this 40-year-old experiment now because, as often happens with government research, elections occur, priorities change and evaluations are shelved. Indeed, 1,800 boxes of paper—the results of MINCOME—were moved to a warehouse and ignored for decades.
But recently, a very determined, inspired and rigorous academic, Evelyn Forget of the University of Manitoba Health Sciences Centre, sorted through those 1,800 boxes of anonymized documents to find out what happened in the MINCOME experiment. Her research, funded in part by the Canadian Institutes of Health Research, has so far underlined how cost-efficient MINCOME was and how the income guarantee reduced, in measurable ways, the negative social determinants of health. She found that while MINCOME was administered, hospital visits including work-related injuries, domestic abuse and mental health visits dropped by about 8.5 percent. By her calculations, an 8.5 percent drop in hospital visits alone would save taxpayers $4 billion annually. If this were extrapolated to all healthcare spending ($200 billion), the savings could amount to over $17 billion. As well, Forget found that teenagers stayed in school and education enrolment surged. Young people no longer dropped out in order to contribute to the family finances. And from many other proven studies, we know that more education is the foundation for economic success—individually and collectively.
As Forget’s initial report states: “The GAI is conceived as an insurance policy. In the same way that people who buy fire insurance on their houses perceive the policy to be beneficial even if they never collect, the GAI benefited everyone in the saturation site, including families that never collected payments under the scheme. The benefit to those who did collect payments is obvious, but those whose incomes exceeded the threshold and therefore did not qualify still benefited from the reduction of risk. Because this is an agricultural community … few people knew in advance whether they would qualify or not.”
Also, it was noted in her research, there was almost no reduction in hours worked except for women who chose to stay home with young children, elderly parents or disabled family members, thereby unburdening the state of health or daycare costs.
Today, the annual cost per person of such a base income floor would be less than $10,000. The cost of confining someone in prison starts at about $60,000 per year and can double depending on the level of security. I do not believe that poverty always causes crime or that those who are poor are more likely to be criminals. But the fact is that most criminals are poor. Less than 10 percent of our population fills 90 percent of our jails.
The cost to our Canadian economy of poor Canadians dropping out of school, getting sick faster, staying in hospital longer and living shorter lives than the rest of us is in the billions. Of course, the most important of these costs—the life costs to poor Canadians in every aspect of their difficult and discouraging life journeys—cannot be formally tallied.
But in the ways we can count, poverty is desperately expensive—well beyond welfare expenditures, as was reported in “The Cost of Poverty: An Analysis of the Economic Cost of Poverty in Ontario,” the 2008 study by Food Banks Ontario to which the TD Bank chief economist Don Drummond was an advisor. The efficient and humane thing to do is to take the example of Dauphin and learn from it. Take the example of the GIS for seniors and apply it. Take the current billions of dollars in welfare, social services and support costs and use them to eradicate poverty, not perpetuate it.
We have tried every manner of incremental solutions. Why not try treating poverty as a problem we can fix, rather than the result of a thousand problems we cannot?
I have said and written before that it would be hard in any area of public policy to find an approach to ending poverty whose elements were supported by Sir Winston Churchill, Richard Nixon, Donald Macdonald and his Royal Commission on our economic prospects, Bill Davis, Milton Friedman, Robert Stanfield and Senator Patrick Moynihan, but a basic income floor (or a negative income tax) would meet that test. Friedman, the right-wing Nobel Prize–winning economist, had a view of the American government that can be summarized with one of his more famous quotations: “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.” That is why he proposed a negative income tax. His intention was to create a system that cost less than the welfare system, while avoiding the degrading nature of welfare. He argued that a negative income tax would be administratively cheaper and more effective, and would remove the intrusive and offensive nanny-state overregulation of the lives of the poor. He was right then, and, although he is now gone, he is still right today.
Education is a core defining factor in determining future prospects. Yet our welfare systems often marginalize those with the will and desire to better themselves through education. Not only do we dampen their desires, but we also punish their ambitions by clawing back any earnings above a prescribed limit, or we cut off welfare if they apply for student loans, or we suspend dental or drug care benefits for both mother and children if she finds employment at minimum wage, or we demand a DNA test (paid for by the state) in order to prove paternity and claw back any child support received. Our present system does not fight poverty. It institutionalizes it.
And just so we do not ignore the most glaring of challenges, let’s look at young people, First Nations and immigrants in terms of how they are doing on the poverty/unemployment spectrum.
According to Statistics Canada research published in May 2012, 13.9 percent of Canadian youth between the ages of 15 and 24 are unemployed. That is just under double the national rate of unemployment. First Nations people on reserves face an unemployment rate of nearly 25 percent, while the off-reserve rate is almost 14 percent. For new immigrants to Canada, those with university degrees face an unemployment rate of 14.3 percent and those with the equivalent of a high school diploma are unemployed at a 17 percent rate. We need to be frank about what high unemployment rates for these groups do in terms of stability, incentive and opportunity.
Let’s look at costs here in a realistic way. If the average top-up per person below the poverty line was $10,000 annually and if all of the three million lowest income people in Canada received the full amount—that would be an upfront cost of $30 billion—roughly 10 percent of the present Canadian federal budget. But that up-front cost would be reduced by savings elsewhere.
In a December 2011 article, Glen Hodgson, vice-president and chief economist of the Conference Board of Canada, pointed out critical gains from a GAI in terms of simplicity, flexibility, improved social determinants of health and incentives to work. “First, it would address poverty directly, and in a neutral fashion, via transfers provided through a single existing administrative system—the income tax system. A GAI would streamline existing social welfare programs into one universal system, reducing public administration and intervention with related savings.” He addressed directly the anomaly faced by present welfare recipients who, when they find work and between clawbacks on benefits and welfare, face an almost 100 percent practical tax rate on their new earnings: “Second, a properly-designed GAI could reduce the ‘welfare wall’ of high marginal tax rates on earned income for the working poor. Earned income could be taxed at low marginal rates, providing a strong incentive for GAI recipients to work and earn more. As they work more, GAI recipients would essentially pay for a growing portion of their own GAI, through income taxes on their employment earnings.” Hodgson’s third point is that a GAI would reduce healthcare spending on low-income persons. “The link between poverty and poor health is widely documented,” he writes, “so if a GAI reduced the prevalence of poverty, it could create better health outcomes and help to slow the rising costs of publicly-funded health care.”
Employment insurance could go back to being employment insurance and not a mix of employment insurance and income security. We should also take the figures from Forget’s MINCOME study and see what happens when health expenditures are reduced by 8 percent and the costs of prisons, the criminal court system and aspects of child welfare and early dropout problems fall by a conservative estimate of 5 percent.
As for the $30 billion? During the 2008–09 financial collapse led by the failure of the Lehman Brothers in the United States, Central Mortgage and Housing, a Canadian Crown corporation dependant on the taxpayer, found several hundred billion dollars to buy solid mortgages from our banks to prudently guarantee them the liquidity to keep credit, business and personal lending moving—between banks, for Bay Street and for auto and mortgage loans as global credit was drying up. This worthwhile, one-time liquidity measure, combined with annual and constructive capital cost write-offs for industry or mining and energy tax concessions dwarf the annual cost of a basic income floor for Canadians through the tax system.
So if we can generate liquidity for our biggest and most profitable financial institutions and other important industrial and productive investments, surely some operating liquidity for our poorest citizens makes as much sense. Living in poverty does not make focused savings programs possible. Income received by low-income Canadians is spent on food, clothing, heat, shelter and transportation. It recirculates in the community quickly.
When Newfoundland and Labrador lifted the welfare support level for single recipients to the low-income cut-off, Premier Danny Williams made it clear that if higher resource revenues were a structural part of the province’s fiscal base, deploying them for the neediest residents was the right thing to do. What an interesting idea: doing the right thing.
I think Williams’s progressive conservative response to new sources of wealth in his province should encourage us to ask ourselves about the purpose of wealth and its generation in a free and mixed market democracy. If poverty were like an untreatable terminal cancer, you could make a case for the evasive and non-productive palliative programs we finance through costly bureaucracies and programs that never confront the problem head on. But we know what poverty is: it is not having enough money to meet modest requirements; it is the marginalizing of kids who claim to have forgotten their lunch at home, when there was no lunch packed; it is abusive and soul-destroying marriages staying together because there is no financial way for the abused partner to leave; it is high school kids drawn to substance abuse and local gangs because they cannot make it to college or to the end of high school.
When Don Drummond released his report on Ontario’s public spending in February of this year, he made recommendations in many areas of public policy and public spending. He noted that more than one quarter of recent immigrants (28.8 percent) in Ontario lived in poverty five years after arrival and 19.1 percent continued to live in poverty after ten years, while about 22 percent of severely disabled Canadians receive social assistance and have no ties to the labour force. The report states that these people “would be better served by a national basic income program instead of social assistance.” Drummond also questioned the unacceptable nature of the Ontario Works cap on a recipient’s liquid assets, and points out that this deprives “recipients of the most basic means of climbing the welfare wall.” Moreover, he noted that recipients of social assistance receive Ontario Drug Benefit coverage but lose this and other benefits after finding employment and that this “represents a strong disincentive to work.”
Governments do not do everything well. Anyone who thinks so has never worked within government. But one thing governments do well is collect taxes. And because they have done so for years, they have the confidential records of how much we earn and the legitimate costs we have. This means we have a delivery system in place tied to every taxpayer, or tax credit recipient, including those who receive GST/HST and other refundable tax credits. So there is no need to build or design a new bureaucracy. We have the system in place.
There are two aspects to national security in this country. One is the ability to defend the rule of law, democracy, human rights and freedom as part of a citizen’s legitimate expectation. The other relates to the economic security of all our fellow Canadians, which is sustained by different Canadian traditions—universal health insurance, universal primary and secondary education and a basic income floor for our seniors. But that economic security base is deeply flawed if an income floor that wipes out poverty for working-age Canadians is not part of it. Letting poverty fester when we have the capacity to address it is more than an abdication of opportunity. It is a politically, economically and socially incompetent evasion of our collective responsibility. It is one thing to be unable to broaden the economic mainstream because of financial or productivity problems. It is quite another to leave people behind for whom an affordable and structural hand-up is possible that obviates less than effective perpetual hand-outs.
Dealing with poverty, reducing its occurrence to almost incidental single digits should be the key domestic social project of our time for Canada in this new century. Energy superpower? Super. Strong global voice for rule of law, democracy, gender equity, freer trade, international security? Great. Supporter of law and order at home? Excellent. But if we do not engage on poverty in a direct way, none of these other pursuits and goals will matter as the gap between the richest and poorest expands.
Who are the poor? They usually work, some are young, many have disabilities and most have grown up in a poverty not of their making. Too many are from First Nations and increasingly disadvantaged lawful immigrants. They are in every large city and small community and all the Canadian spaces in between. They are our brothers and sisters, neighbours and fellow citizens. And for many Canadians, the barrier between their present lives and poverty is as little as one event: a car accident, a failed employer or a lost job.
A basic income floor, or refundable income tax credit, or basic annual income credit, or guaranteed annual income—call it what you like—would put a floor under all Canadians beneath which they could not fall, one that would see them through to working and earning again. Putting limits on what one can achieve is not what the state should do. We can agree that is excessive overreach. But putting a floor below which no one can fall is both achievable and necessary.
In a mixed free market Canadian economy where enterprise, risk, diligence and hard work matter, equality of opportunity is essential if fairness about access to the economic mainstream is to be real for all. A guaranteed annual income would be a serious pillar of that opportunity, as important to us as universal education, safe communities and health insurance.

Hugh Segal is a former senator, former President of the Institute for Research on Public Policy, former senior public servant, and current Master of Massey College