The Welfare State, and the Inevitability of Welfare Spending

Anthony B. Atkinson has produced a number of proposals for actions that might be taken to reduce the economic inequality that has settled into many of our most developed nations.  These are discussed in his recent book Inequality: What Can Be Done?  As an economist, Atkinson felt it was necessary to justify his suggestions against the inevitable criticism that will come from his colleagues.  His book might have been a lighter read if he had just said “To hell with the old fools, this is what needs to be done.”  Nevertheless, the points made to justify his proposals provided some interesting insights.

Atkinson was particularly sensitive to the knee-jerk reaction that would say anything that could be construed as affecting productivity or the expense of conducting business in the “current business environment” was ridiculous and old-fashioned.  What exactly is it about the current business environment that makes actions that might reduce inequality ridiculous?  The most common response would include some claim about the increased competition that comes with globalization.  Atkinson is not convinced by such assertions, given that the modern welfare state had its origins in the first wave of globalization prior to World War I.  And at that time, social provisions provided workers were thought to be necessary for the economic and social health of the modern nation.

“….one of the main elements of the proposed measures—the welfare state—had its European origins in the nineteenth-century period of globalization.  It is therefore puzzling that the present period of globalization should elicit the opposite response—that we are compelled to dismantle the welfare state rather than, as I have argued here, strengthen it….”

The result of the Industrial revolution was to put a worker in a more precarious situation.  Prior to that, a worker and his family had more flexible options available.  One could earn a living by learning a craft, or hire oneself out as a common laborer, or produce goods for sale that could be made in the home, or all of the above if necessary.  With mass production methods, workers were presented with all-or-nothing jobs.  One worked full time if lucky, or not at all if business dropped or a factory went broke, or an injury was incurred while employed.

The increased competition that came with globalization put workers at greater risk.  Since workers were a necessary resource, it was deemed economically sound to protect them from economic risks.

“In Germany, which led the way, there were several motives for the introduction of the Bismarckian system of social insurance.  These included the need to preserve political and social stability in the face of the rise of workers’ organizations and the spread of socialist ideas.  But a significant factor was the need for social protection that arose from the precariousness of employment when Europe was exposed to greater competition in the 1870-1914 period of globalization.”

People in the US tend to consider social policies as having their origin in the Great Depression and the postwar years, but in Europe much of what would define the modern welfare state had already been put in place.  This was viewed as economically and socially sound—and being the Christian thing to do.

“This led towards the end of the nineteenth century, or in the early years of the twentieth century, to the establishment of unemployment insurance, industrial injury benefits, sickness insurance, and old-age pensions.”

“….the introduction of welfare-state programs in Europe should be seen as complimentary with, rather than in competition with, the achievement of economic goals.  In the early days of the European welfare state, social and economic policies were seen as working in the same direction.  This view persisted for several decades.  When in the United Kingdom, Beveridge drew up his 1942 plan for postwar social security, he collaborated with Keynes to ensure that macroeconomic and social policy worked together, notably via the role of social transfers in providing automatic stabilisers.  In the United States, Moses Abramovitz argued that ‘the support of income minima, health care, social insurance and other elements of the welfare state, was….a part of the productivity growth process itself.”

Eventually, this enlightened view would be subverted into its exact opposite.  One might interpret the timing of this transformation as being caused by the growth of the second great globalization era.  One might also attribute it to the cancer that is neoliberal economics taking root and being imposed throughout the world.

“Only later, in the 1980s and 1990s did the predominant view shift and come to see social protection as an impediment, rather than as a complement, to economic performance.”

Atkinson provides a chart indicating the percentage of GDP spent on social expenditures by each OECD country in 2011.  The data includes specification of both public and private spending. 

“Social expenditures are defined as benefits in cash or kind by public and private institutions provided to individuals or families during circumstances that adversely affect their welfare.  They include social security, health benefits, housing benefits, and active labour-market programmes.”

Let us compare three countries with the reputation for actively pursuing generous and effective social welfare policies using high tax rates to fund implementation.  Public spending by Denmark, Norway, and Sweden as a percentage of GDP comes in at 23%, 18% and 22.5% respectively.  What about the notoriously stingy United States?  Its rate of public spending comes in at 20% of GDP.  From just these numbers, one might assume that these are four similar nations.  Now add in the public contributions to social spending.  Denmark goes from 23 to 26.1%; Norway from 18 to 19.3; Sweden from 22.5 to 24.6%; the United States goes from 20 to 28.8 %.  When private spending is included, the United States spends more on social assistance than any country in the OECD except for France.

Several conclusions are suggested by this comparison. 

First: providing generous social assistance is not economically harmful in itself.  The Scandinavian countries are all economically healthy and need spend no more than the less-generous United States.

Second: the fact that the less-generous United States must contribute so much more from private sources suggests that trying to skimp on social spending is not only cruel, it is ineffective and probably wasteful.  Atkinson interprets the data as supporting the notion that social needs will be met—one way or another.  People will not be allowed to die of hunger; the sick will get treatment; the homeless will be helped.  If the state doesn’t provide for needs, then assistance will have to come from employers, families, or charity.  In any event, private funds will be removed from the economy in much the same way that taxation removes funds from the economy and reallocates them.  If so, then the state might as well do its duty and save some money by doing it more efficiently.

The way to minimize spending on social needs is not by cutting budgets.  Rather, we should seek a set of consistent economic and social policies that minimize the need for social assistance.  That seems to be the lesson to be learned from the three Scandinavian countries.