Investing In Children

June 1996


In April, an interdisciplinary conference on "The Multiple Effects of Poverty on Children and Young People: Issues and Answers" was held at Massey University's Albany Campus. While many aspects of the issue were addressed by speakers and in workshops, there was general agreement that child poverty is a critically important and growing socio-economic problem, that failure to provide publicly funded support for our children is tantamount to not investing in our future, and that therefore a political failure to address child poverty will lead to social and economic chaos in Aotearoa / New Zealand. Although the finer points of the 'targeting vs. universal' debate (central to a number of addresses, including those of keynote speaker Arden Miller and Susan St. John) 1 were not always appreciated, there was agreement on the usefulness of exploring and developing a universalist 'social wage' concept as a vehicle for addressing family poverty.



Implicit welfare contracts between generations have been ignored almost from the outset. No languages or theories of generational obligation evolved. ... The individual comes to learn that personal advantage lies with the person who is first to throw off a concern for the future health of the shared resource. Personal profits are to be made by imposing upon the common. ... Having children is now to give tens of thousands of private dollars to the collective pool, since children become an economic asset for the whole community but not for their parents. Those who spend effort and personal income in raising children have no better claim to their future production than the neighbour who made no such investment. The attraction must grow of avoiding this unnecessary personal contribution, to 'freeload' off the children of others and so maximise one's own lifetime income.

While the well-being of children is not a purely economic matter, there is an important underlying economic issue relating to investment in children that is missing from the debate on child poverty. The issue is that of the public "commons", and should be a part of any discussion about intergenerational economic support. While I cannot agree with many of his conclusions, to his credit, David Thomson, more than anyone else, has attempted to generate debate on the issue.

The issue of common land and common natural resources is central to environmental economics. The matter of children as a common resource is less adequately addressed by economists. This imbalance leads us to think of human fertility as a social problem; children come to be seen as a private good and a public burden. In fact, in modern economies, the opposite is true.

In traditional western economies, private land was the finite resource of a family and common land was available to the whole community. 'Economically rational' family members would carefully husband their own land while exploiting the common land. By having more children than other families, a family would become a competitive user - an exploiter - of the common. Such abuse is called the "Tragedy of the Commons" by economists. Deforestation is a classic example.

In such traditional economies, the family is the central welfare institution. The elderly, the disabled and the unemployed depend on their own kin for support. Kin-based welfare systems have an inherent bias to overpopulation; we see the problem most clearly today in Asia. This bias becomes more pronounced once populations become landless. Parents on the margin depend on income from older children. Success in cottage industry depends on families having children do much of the work. Children are a critical private investment to such parents.

The British population grew in what was regarded as an unsustainable rate in the century to 1850. The classical economists were unsympathetic to the growing numbers of poor families. Not understanding why population growth was accelerating, they thought that helping the poor would encourage them to breed even more. They were dead wrong. The construction of a compassionate welfare state over the next 100 years removed the private economic incentive for having children, establishing a social contract between the employed workforce and the remainder of the population. A generation in retirement is sustained by a generation of working age; their children collectively, rather than their own children, and regardless of whether they have a public or a private pension. The workforce is a common resource, used by all, acting in concert with other resources to sustain us all.

The main throwback to traditional society is our way of supporting children, whom we still expect to be sustained by parental kin rather than by a generation-and-a-half of parents and childless adults. Children are treated as a common resource to their parents' generation, but parents are treated as a private resource to their children's generation. This combination promotes low fertility - perhaps too low. Children are a public asset and a private burden. For our reproduction, we rely on our adults being irrational from the bean-counters' point of view.

The whole population - including those who have made private provision for their retirement - will be in trouble if tomorrow's labour force, is tragically degraded through child poverty. It is the quality more than the quantity of next century's labour force that will be most important in maintaining the baby boom generation in retirement. Child poverty is a fouling of the public nest, literally. It is a recipe for social and economic chaos.

Economists call exploitation of a public resource 'free riding'. A government which heavily taxes families is a free rider. Affluent people seeking endless tax cuts and a tightly targeted welfare system are free riders, not strivers as Fran O'Sullivan of the National Business Review claims (TVNZ, Meet the Press, 26 May). Childless adults who do not contribute adequately to the raising of the children they will eventually depend on are free riders. The tax-benefit 'reforms' of the last 10 years have hit parents hardest, while the childless middle class have been amongst the major winners. It is parents struggling against the odds who are the real strivers. Not surprisingly, some fail. Against of the odds, many more do not fail.

With the availability of contraception, abortion and adoption in modern western societies, the historical problem of the unwanted child has been largely resolved. Children are a 'private consumption good' to their parents; and they are a private gift to the public domain. Parents are willing to invest in their children, as a bequest to the future of their communities, their nation, and to humankind. While the process is costly to parents, it is also a source of much parental enjoyment. Giving to the public domain and sharing in the happiness of children are enjoyable. Pleasurable work - diametrically distinct from exploitative work - is often the most productive work; productive from the point of view of the worker, the employer and the public. Like mountain climbing, parenting is hard but potentially rewarding.

Although today's parents should not expect an economic return on their reproductive endeavours, many adults now believe that there will be no public retirement income next century. Political talk about the superiority of 'Asian Values' - meaning kin-based welfare - may be encouraging Britons and Kiwis to have children as a form of private insurance against future destitution. Ironically traditional Asian values are breaking down in the face of modernity. Working age Asians are attracted to western values. Singaporean parents of the old school are having to file for maintenance from their adult children (Newstalk ZB news, midnight 2-3 June).

In a modern welfare society, parents have children in accordance with an implicit 'gift exchange' social contract: we (the public) accept all children as gifts, and in return for the children you (parents) give us, we will provide you with a social wage which will include public health, education and benefits to cover misfortunes such as accident, unemployment, disability, parental separation. Thus the prime responsibility for any additional costs incurred in the gift exchange should be borne, out of self-interest, by the beneficiary of the gift, on a no-fault basis.

It is the role of public institutions to support families so as to minimise the risk of family misfortune, and to minimise the damage when misfortune strikes. Otherwise the gift exchange fails, at a loss to the public. Children raised in a culture of poverty are, on average, a public debit, an asset of negative value. The problem is the culture of public poverty, not the parents.

Because of the globalisation, the world's most competitive exploiters - the elites of all countries - may yet be able to live well for several generations, free riding the international commons, just as the affluent British population a century ago was easily supported by workers and resources from across the globe. Meanwhile, in the Third World with its traditional family welfare systems, the land is being exploited due to overpopulation. The children of the world constitute a vast common resource, substantial in quantity but deteriorating in quality as governments retreat from their role as managers of the commons and ally themselves with their nations' private elites.

Should there be an imbalance in New Zealand's population structure next century, it will be resolved through immigration. Any rich country with many old people and few young people - excluding the major creditor nations which will be able to buy much more from the rest of the world than they will need to sell to it - will have liberal immigration policies. It is likely that New Zealanders will, to an increasing extent, free ride on the education and health systems of countries poorer than ourselves.



The children of the working poor form the fastest growing segment of child poverty in the United States ... only 14% of all children in working-poor families were born to teenage mothers. Most were born to mothers older than 25. And about half of the working poor families were married, two-parent households in which at least one of the parents, usually the father, worked all year.

Social Wage Tax Credits and Benefits

The major single cause of child poverty is the failure to pay caregivers their due social wage, thereby forcing parents to work long hours, often for very low rates of pay.

By combining the principles of social wage accounting (ref. "So Little Relief" April/May 1996) with those of the intergenerational social contract, we can establish that everyone is entitled to equal tax credits, that supplementary benefits should favour those who are not of working age (or who are providing direct care for those not of working age or unable to work through disability), and that there should be no income-tested barriers to public services such as health care. The issue is not one of affordability; it is an issue of economic principles, and of acknowledgement. It is public recognition that caregivers need before all else. The size of tax credits and benefits is of course a matter of affordability - and for political debate.

The issue of a social wage entitlement for children arises; ie an income for children in addition to payments to caregivers. It is important to acknowledge the social wage of children in the public accounts, even if the money is not actually paid to children or their caregivers. While at present children's social wages can be seen as a contribution to their education, future economic growth should be able to provide additional investment funds for children. Such funds could be held in trust for each child, with the possibility of funding such things as early childhood parental leave, or being capitalised to help fund a family home.

Child Support

The Review of the 1991 Child Support Act is proving an intractable political problem. The topic of 'Child Support' was barely raised at the plenary sessions of the Albany conference; a conference in which the central theme was child support. This shows how irrelevant the 1991 Child Support Act is to the support of New Zealand's children.

Child Support is a touchy subject because many women hoped that it would act as a means of redressing real and alleged economic imbalances between men and women. The reality is that many women and children are victims of the Child Support Act (CSA), and the principal beneficiaries, once the gross cash flows generated by the Act are fully netted out, are the government and employed step-fathers. An understanding of the contractual issues involved, recognising that it is the public not the parents who gain economic benefits from children, can resolve the problem; indeed can show that the CSA is one means through which the public reneges on the social contract.

Parental separation is just one form of family misfortune that children face; albeit an important form. The modern social contract requires automatic support from the public - the benefiting party - for all children so affected. The Domestic Purposes Benefit (DPB) is part of that support, and is entirely separate from the secondary issue of private maintenance. The public can save money on the DPB, not by using non-custodial parents for benefit recovery purposes, but by properly managing the common resource; ie by addressing the financial causes of parental separations, through paying all adults the tax credits to which they are entitled as co-owners of the public domain, and by providing unconditional backup support to all families under stress.

In addition to the social contract is the implicit contract between the parents. In a modern society, sexual activity occurs in a variety of voluntary, coercive and commercial contexts. We cannot say that sexual activity in itself constitutes a parental contract (notwithstanding the views of the Business Roundtable, expressed with much recent media fanfare through David Green 2). Furthermore, parental contracts take place without sexual activity on the part of the contracting parents; eg adoption and artificial insemination. We can probably say without too much controversy that children conceived, for example, through prostitution or to single women through artificial insemination are conceived without a parental contract between two parties. On the other hand, children of a marriage can be regarded as the result of a parental contract; a contract which provides for an equal sharing of the private burden regardless of the lack of private benefits.

Where there is a contract between two parents, both parents automatically become guardians. As such, genuine guardianship should be seen as the contractual basis for child support. In a modern society, a guardian should be someone who is able to derive consumption benefits - 'enjoyment' - from parenthood. Thus someone who for good reason renounces guardianship - for example a mother who has her child adopted - should not be liable for child maintenance. Parents deprived of access to their children are not effective guardians, and should not be liable for child support.

Child maintenance, therefore, is a payment from a non-custodial guardian to a custodial guardian, reflecting a breech of the contract between the parents; it is entirely separate from the social contract between the parents and the public. In a complex, pluralistic modern world - a multicultural world of sole-custody, nuclear, reconstituted and extended families - broken parental contracts cannot be redressed by a crude income-tested formula. Maintenance is thus just one part of a unique settlement between separated parents (in addition to custody, access and the division of property) and should be resolved through the mediation of a child advocate, allowing for review when the circumstances of either parent change. The Child Support Agency does have a role in enforcing maintenance contracts; that is the problem that Parliament did have a mandate to address.

Child Support is another surtax on families. 3 Custodial parents and children being supported by a benefit receive less financial and non-financial support from the non-custodial parent than they would otherwise receive, on account of the additional liability of the non-custodial parent to the Inland Revenue. In addition, the resident families of liable parents are directly taxed by the Child Support Agency. These are probably the most disadvantaged group of working poor that are now so prevalent, and not only in the United States.

Child Support / Income Support Anomalies

The Child Support Act was introduced during the trough of an economic recession. It is retrospective law - unlike the equivalent Australian law - that assesses non-custodial parents (NCPs) on their income two years in arrears. Most people have experienced rises in their annual incomes since then (ignoring inflation) so some of the major anomalies have yet to surface in a big way. The next downturn will highlight the anomalies that arise from falling liable parent incomes and the unemployment of step-parents.

Where the income of an NCP has fallen by more than 15 percent, an estimate of current income can be used to assess his Child Support liability. Thus when an NCP loses his job and takes on another at a lower rate of pay, he will switch to the lower assessment. His current income will be used for two assessments, the current year and two years hence. The result is that, for two years, his effective tax rate on additional gross earnings will be in the range 60% to 150%. 4 Furthermore, in a recession, custodial parents receiving child support are likely to find their payments going down just when the incomes of themselves or their partners are falling.

The matter of step-parents is interesting. In all areas of income support, except Child Support, step parents are regarded as financially responsible for the children in their households. A mother receiving Child Support will be relieving the step-father of a potentially large chunk of his burden. What happens if such a step-father loses his job? The family loses its main source of income. By going onto the unemployment benefit, the family also loses its Child Support payments and its new Independent Family Tax Credit (IFTC) and its July 1 tax cut. There is no incentive for either party to take on a substantial part-time job, given the huge abatement rate faced by unemployment beneficiaries. If the mother was a student she would also lose her student allowance. The couple would be entitled to family support, but probably no accommodation supplement on account of the step-father's assets. If the youngest child is over 14, from 1997 the mother will be required to seek full-time work, even if she is in the middle of a university degree.

If the mother can persuade the step-father to leave, however, her situation improves. She becomes 'deserving poor', where she had been 'undeserving poor'. She will be entitled to a DPB. 5 She will avoid the full-time work test. She will be able to keep almost all of her DPB. She will get an accommodation supplement. If she chooses not to accept the DPB, she will regain her Child Support payments.

The above anomalies represent the kinds of head-banging situations that New Zealand families are having to put up with from a public expecting to be supported in old age by today's children yet refusing to abide by a rational social contract. We urgently need to think through the theory of the social wage and the intergenerational social contract. We urgently need to recognise that we create horrendous problems for ourselves if we do not manage the future workforce as a common national resource. Immigrants may be able to support us, and their parents, at some cost to their children. But, next century, we will still have to support the many New Zealand raised young adults who will not be able contribute much to the support of their grandparents generation, because they will have become victims of the culture of the poverty trap. 6



As it becomes clear that the common is being depleted, and that future benefits drawn from it must shrink, then a switch towards an individualistic ideology becomes attractive. That means that we can each justify the personal gains already made at the expense of the pool, and yet cut future obligations to contribute.

The trend in modern western societies is increasingly to make unresourced parents fully accountable for such societal failures. An American middle-class couple, judged responsible for the activities of their delinquent son, were heavily fined recently (news 10 May). The "New Social Contract" is a "journey from welfare state to police state", 7 to giving priority to the requirements of the criminal/justice system rather than the raising of our future workforce.
    Author and defence lawyer, Scott Turow, observes of Chicago 8:

A kind of barbarity seems to blow in with the defendants from the bad neighbourhoods and mean streets; a grim devastated air that recognises that here will be told the secrets no-one wants to hear. At one point last month we had four different trials going on involving mothers or fathers who had murdered their children; the tales of astounding cruelty, of streetside beatings and gang members in a project stairwell who surround some 12 year old and beat him with a pipe until the brain matter is literally oozing from his head. That is routine, routine, routine. And this meanness is matched, and in ways surpassed, only by that system of which I am standard bearer and emblem, whose task day in and day out too often seems to be to capture, judge and warehouse the very poor.

Does New Zealand have to follow Chicago? Of course not. There are two ways to address the tragedy of the commons. One is to treat the common itself as the problem, and seek to privatise it; the so-called 'Asian' solution. This solution, by raising the private incentive to have children while lowering the public value of each child, places extreme pressure on the physical environment. The alternative is to recognise that pooling resources is only a problem if the common is not managed properly, is not nurtured, is not invested in. The solution to the welfare problem is to take collective responsibility for the human resources we will all depend on, to invest in our children and their caregivers. This is 'collective user-pays'; we should pay our taxes willingly, while making the government accountable in terms of the social contract.



1 See Social Work Review (June 1996) for Susan St. John's paper. My revised paper will be available from the University of Auckland Economics Department as a Policy Discussion Paper. [return]
2 See From Welfare State to Civil Society; towards Welfare that Works in New Zealand. [return]
3 See "So Little Relief" - NZPR April/May 1996 - for a discussion of low income surtaxes. [return]
4 60% is the marginal tax rate of 24%, plus this years Child Support liability (18%), plus the standard liability (another 18%). 150% represents the case where the parent is liable for 4 children (two lots of 30%), has children in his care (30% family support), an accommodation supplement (25%) and is repaying a student loan (10%); he is worse off by $500 if he gets a wage rise of $1,000! It would be more efficient to use the same surtax mechanism for Child Support as for student loan repayments. But then effective marginal tax rates would become obvious, and liable parents would seek to cut their incomes. [return]
5 If she can earn $180 per week part-time, the value of her single DPB will be more than double the value of her married unemployment benefit, thanks to the new abatement rates. [return]
6 TVNZ's Assignment broadcast on 13 June a chilling BBC Public Eye documentary about the youth crime wave in Britain. [return]
7 The New Social Contract, America's Journey from Welfare State to Police State; Joseph Dillon Davey (1995), Praeger, Connecticut. [return]
8 "Chicago Getting Real" God Bless America (Granada 1995; TV1 [ETV], 15/3/96). [return]


© 1996 New Zealand Political Review

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