The wel­fare state needs up­dat­ing

Its de­sign­ers did not fore­see age­ing pop­u­la­tions, mass im­mi­gra­tion or the gig econ­omy

The Ukrainian Week - - CONTENTS -

In june 1941 Wil­liam Bev­eridge left the of­fice of Arthur Greenwood, a Bri­tish cabi­net min­is­ter, with tears in his eyes. A well-known aca­demic and civil ser­vant, Bev­eridge had sought a big job in the war ef­fort. The 62-yearold was bril­liant, but also ob­ses­sive, vain­glo­ri­ous and prim. To side­line him, Greenwood pro­posed what seemed a thank­less task: re­view­ing Britain’s so­cial-in­sur­ance schemes.

What emerged was a blue­print for the mod­ern wel­fare state. In De­cem­ber 1942, hav­ing stretched his brief to the point of burst­ing, Bev­eridge pub­lished his ac­count of the “Five Gi­ants”: dis­ease, idle­ness, ig­no­rance, squalor and want. He pro­posed new ben­e­fits for the re­tired, dis­abled and un­em­ployed, a uni­ver­sal al­lowance for chil­dren and a na­tion­wide health ser­vice.

On the night be­fore pub­li­ca­tion a long queue formed out­side the pub­lish­ers. Polls found ma­jori­ties of all so­cial classes backed its pro­pos­als. It was trans­lated into 22 lan­guages and the Royal Air Force dropped sum­maries on Al­lied troops and be­hind en­emy lines. Two copies, heav­ily an­no­tated, were found in Hitler’s bunker.

Such zeal for the wel­fare state is rare these days. On the right, crit­ics ac­cuse it of suck­ing the dy­namism from cap­i­tal­ism and in­di­vid­u­als alike. For Paul Ryan, the out­go­ing Repub­li­can speaker of the House of Rep­re­sen­ta­tives, it is not a safety-net but “a ham­mock” that “lulls able-bod­ied peo­ple to lives of de­pen­dency and com­pla­cency”. Peter Slo­ter­dijk, a Ger­man philoso­pher, calls it a “fis­cal klep­toc­racy”.

The left, as seen in the grainy nos­tal­gia of politi­cians such as Jeremy Cor­byn, leader of Britain’s Labour Party, lays claim to the wel­fare state as a left-wing cre­ation, and thinks it is un­der un­ceas­ing threat. It does in­deed face pro­found chal­lenges: from age­ing pop­u­la­tions, im­mi­gra­tion and the more var­ied na­ture of work, none of which Bev­eridge had to worry about.

Pub­lic sup­port has flagged. Data from the Bri­tish So­cial At­ti­tudes sur­vey, for ex­am­ple, show suc­ces­sive gen­er­a­tions tak­ing less pride in the wel­fare state (see chart 1). In Amer­ica views are in­creas­ingly par­ti­san. In the late 1980s and early 1990s most Re­pub­li­cans agreed with the idea that gov­ern­ment should en­sure ci­ti­zens

have enough to eat and a place to sleep. To­day most dis­agree, ac­cord­ing to data from Pew, a poll­ster.

The name may be part of the prob­lem. In Swe­den it is known as Folkhem­met (peo­ple’s home), in Ger­many Sozial­staat (so­cial state), but in the An­glo­phone world “wel­fare state” has stuck. Bev­eridge hated it, for im­ply­ing a “Santa Claus” state at odds with his belief in per­sonal re­spon­si­bil­ity. “Wel­fare” his­tor­i­cally has a broad mean­ing, but is of­ten as­so­ci­ated with aid to the poor, es­pe­cially in Amer­ica. Yet this is only a small part of what a wel­fare state does.

In­deed its ori­gins and aims are widely mis­un­der­stood. It is not so much a left-wing cre­ation as a prod­uct of an in­tel­lec­tual coali­tion, in which the crit­i­cal strand was lib­er­al­ism. Lib­er­als such as Bev­eridge be­lieved that peo­ple should take more re­spon­si­bil­ity for their own lives, but that gov­ern­ment should sup­port them. They saw it not as in­dus­tri­alised char­ity, but as a com­ple­ment to free-mar­ket cap­i­tal­ism.

The wel­fare state pre­dates the mod­ern form that emerged in the late 19th cen­tury. An­cient Rome gave out “doles” of grain to the hun­gry. In Re­nais­sance Europe towns such as Ypres col­lected alms to pay for ways of putting pau­pers to work. Dur­ing the In­dus­trial Rev­o­lu­tion, Eng­land built work­houses where the des­ti­tute broke stones and un­tan­gled rope in re­turn for food and a bed.

HARD TIMES

By mid-cen­tury the rise of un­fet­tered mar­kets brought de­mands for pro­tec­tion against their ef­fects. Char­ity and churches were seen as fail­ing to cope with poverty, as mass ur­ban­i­sa­tion weakened tra­di­tional so­cial bonds. Pres­sure came from the left. But con­ser­va­tives re­sponded, too. Otto von Bis­marck in­tro­duced the first so­cial-in­sur­ance schemes in the 1880s. Wor­ried about the fit­ness of “de­gen­er­ate” masses to fight wars, Euro­pean lead­ers backed im­prove­ments in pub­lic health and ed­u­ca­tion. So the wel­fare state was also en­twined with ris­ing na­tion­al­ism.

But as Chris Ren­wick, a his­to­rian at York Univer­sity, ex­plains in “Bread for All”, the early wel­fare state “owes most to lib­er­al­ism”. “New lib­er­als” such as John Stuart Mill and Leonard Hob­house, ar­gued that free­dom meant en­sur­ing that peo­ple had the health, ed­u­ca­tion and se­cu­rity to lead the life they wanted. Some of these ideas un­der­pinned early state-pen­sion schemes and un­em­ploy­ment in­sur­ance in New Zealand, Aus­tralia and, in the first decade of the 20th cen­tury, Britain.

The devel­op­ment of wel­fare states was has­tened by the De­pres­sion and the se­cond world war. War brought peo­ple of dif­fer­ent back­grounds to­gether, fos­ter­ing a sense of unity against a com­mon en­emy. And as mid­dle classes shared these risks, their de­mands for sup­port meant the wel­fare state be­came about more than just look­ing af­ter the poor. Writ­ing his re­port in this at­mos­phere, Bev­eridge tack­led some of the ten­sions that still strain de­bate about the wel­fare state. When is a ben­e­fit a right and when is it con­di­tional on your be­hav­iour? When do ben­e­fits erode the in­cen­tive to work? How much can the state af­ford?

The balance Bev­eridge struck was a lib­eral one. He ar­gued there should be “bread for all…be­fore cake for any­body”. But peo­ple “should not be taught to re­gard the state as the dis­penser of gifts for which no one needs pay.”

The post-war gov­ern­ment im­ple­mented much of his plan, and re­forms soon fol­lowed else­where. By 1954 the core in­sti­tu­tions of the wel­fare state were in place across the rich world—so­cial-in­sur­ance schemes, means-tested sup­port for the poor­est, free or sub­sidised health care, so­cial work and em­ploy­ment rights. That year Pres­i­dent Dwight Eisen­hower said that if any politi­cian tried to dis­man­tle so­cial se­cu­rity, “you would not hear of that party again in our po­lit­i­cal his­tory.”

Wel­fare states have al­ways dif­fered from coun­try to coun­try. But from the 1970s, ap­proaches di­verged fur­ther. In 1990 Gøs­taEsp­ing-An­der­sen, a Dan­ish so­ci­ol­o­gist, de­scribed three va­ri­eties of “wel­fare cap­i­tal­ism”. First were the “so­cial demo­cratic” ver­sions in Scan­di­navia, with high pub­lic spend­ing, strong trade unions, uni­ver­sal ben­e­fits and sup­port for women to stay in the work­place. Se­cond, “con­ser­va­tive” wel­fare states, such as Ger­many’s, were built around the tra­di­tional fam­ily

“WEL­FARE” HIS­TOR­I­CALLY HAS A BROAD MEAN­ING, BUT IS OF­TEN AS­SO­CI­ATED WITH AID TO THE POOR, ES­PE­CIALLY IN AMER­ICA. YET THIS IS ONLY A SMALL PART OF WHAT A WEL­FARE STATE DOES

and had a strong con­trib­u­tory prin­ci­ple. Fi­nally, An­gloAmer­i­can wel­fare states put greater em­pha­sis on guar­an­teed min­i­mums than uni­ver­sal ben­e­fits.

Per­haps the com­mon­est charge against ma­ture wel­fare states is that they have cre­ated a cul­ture of de­pen­dency. So pol­i­cy­mak­ers have made pro­grammes more “con­di­tional”, forc­ing re­cip­i­ents to look for work, for ex­am­ple. To help them, many coun­tries ex­panded “ac­tive labour-mar­ket poli­cies” such as re­train­ing.

Yet the wel­fare state has not shrunk in re­cent decades. In a pa­per pub­lished in 2011 Paul Pier­son of the Univer­sity of Cal­i­for­nia, Berke­ley, de­scribed a “frozen land­scape”. For sev­eral sorts of ben­e­fit—un­em­ploy­ment, dis­abil­ity and state pen­sions—he showed that their gen-

eros­ity had risen un­til the 1980s, then barely changed since.

If the shrink­ing wel­fare state is a myth, so is the no­tion that it is mainly about re­dis­tri­bu­tion from rich to poor. Ni­cholas Barr of the London School of Eco­nom­ics points out that its role is more to al­low peo­ple to smooth con­sump­tion over their life­times, in ef­fect shift­ing money from their younger selves to their older selves.

An­other mis­un­der­stand­ing is about how wel­fare spend­ing re­lates to eco­nomic growth. As coun­tries be­come wealth­ier, pub­lic spend­ing in­creases as a share of GDP (see chart 2). Spend­ing on “so­cial pro­tec­tion” (pen­sions, ben­e­fits and the like) in the OECD club of coun­tries has in­creased from 5% in the 1960s to 15% in 1980 to 21% in 2016. In a pa­per pub­lished in 2011, two economists, An­dreas Bergh and Mag­nus Hen­rek­son, es­ti­mated that a ten-per­cent­age-point in­crease in the size of the state in rich coun­tries is as­so­ci­ated with a fall in the an­nual rate of GDP growth of 0.5 to one per­cent­age point.

Nev­er­the­less, since 2000, Canada and some Scan­di­na­vian coun­tries, for ex­am­ple, have com­bined high lev­els of pub­lic spend­ing with high rates of eco­nomic growth. Peter Lin­dert of Univer­sity of Cal­i­for­nia, Davis, de­scribes this phe­nom­e­non as the “free-lunch puz­zle”.

This is a mis­nomer. Tax­pay­ers still pay for those lunches. But MrLin­dert is cor­rect that the ef­fects of wel­fare de­pend not just on how much is spent but how. Sub­sidised child care, which helps (mostly) women stay in the labour mar­ket, is more growth-friendly than pen­sions, say. The in­tro­duc­tion of the Chil­dren’s Health In­sur­ance Pro­gramme in the United States in the late 1990s in­creased the rate of par­ents open­ing their own busi­nesses.

Growth also de­pends on other ar­eas of pol­icy. Since the 1990s Scan­di­na­vian coun­tries and Canada have lib­er­alised their economies, sell­ing pub­lic mo­nop­o­lies, cut­ting reg­u­la­tion and re­duc­ing trade bar­ri­ers, al­though most have main­tained high lev­els of pub­lic spend­ing. Ac­cord­ing to Will Wilkin­son of the Niska­nen Cen­tre, a think-tank in Wash­ing­ton, DC, (an oc­ca­sional con­trib­u­tor to The Econ­o­mist), “big wel­fare states needed to be­come bet­ter cap­i­tal­ists to af­ford their so­cial­ism.”

That may be too cute. But the dif­fi­cul­ties faced by wel­fare states in rich coun­tries are about more than just their size. The three main ones re­late to de­mog­ra­phy, mi­gra­tion and chang­ing labour mar­kets.

The first is the age­ing of the pop­u­la­tion. In the OECD longer life-ex­pectan­cies and, since 1990, stag­nant fer­til­ity rates, have raised the ra­tio of adults over 65 to those of work­ing age (see chart 3) from 19.5 in 100 in 1975 to 27.9 to­day. Wel­fare spend­ing is in­creas­ingly tilted to­wards the el­derly. On av­er­age, as the me­dian voter in OECD coun­tries ages by one year, the share of GDP spent on pen­sions in­creases by 0.25 per­cent­age points. The same ap­plies to health spend­ing. To­day the share of state spend­ing that goes on pub­lic pen­sions av­er­ages 8.2% of GDP across the OECD. InFran­ceitis 14%; in­I­taly, 16%.

This threat­ens the im­plicit con­tract be­tween gen­er­a­tions. In Britain baby-boomers can ex­pect to re­ceive in ben­e­fits and ser­vices over a fifth more than they paid in tax, reck­ons the Res­o­lu­tion Foun­da­tion, a Bri­tish think­tank. But to­day’s work­ers face ris­ing taxes. To main­tain cur­rent wel­fare pro­vi­sion, the Of­fice for Bud­get Re­spon­si­bil­ity, a fis­cal watch­dog, es­ti­mates that spend­ing as a share of GDP would need to in­crease by seven per­cent­age points by 2066, to over 45%, mean­ing higher taxes.

Den­mark and Fin­land, among oth­ers, have linked state re­tire­ment ages to life ex­pectancy. In 2022 so will the Nether­lands. In Ger­many, Ja­pan, Por­tu­gal and Swe­den pen­sion lev­els are ad­justed ac­cord­ing to the ra­tios of work­ers to non-work­ers. Yet else­where re­form has proved dif­fi­cult. Of the six coun­tries in the OECD that changed their re­tire­ment ages in the past two years, three can­celled pre­vi­ously planned rises.

Im­mi­gra­tion poses an­other chal­lenge to the wel­fare state. In 1978 Milton Fried­man ar­gued that you could have open bor­ders or gen­er­ous wel­fare states open to all, but not both, with­out swamp­ing the wel­fare sys­tem. More­over, tax­pay­ers are more tol­er­ant of ben­e­fits that are seen to look af­ter “peo­ple like them”.

Ex­per­i­men­tal ev­i­dence sug­gests that there is a ten­sion be­tween di­ver­sity and gen­eros­ity. Stud­ies have found, for ex­am­ple, that Swedes are more re­luc­tant to give to Bul­gar­i­ans than to Dutch mi­grants. An­other study pub­lished in 2017 us­ing sur­vey data from 114 Euro­pean re­gions found a cor­re­la­tion be­tween ar­eas with higher shares of mi­grants and a lack of sup­port for a gen­er­ous wel­fare state.

Or rather, a lack of sup­port for im­me­di­ate gen­eros­ity to “out­siders”. A sur­vey of chang­ing at­ti­tudes in Euro­pean coun­tries be­tween 2002 and 2012 found both ris­ing sup­port for re­dis­tri­bu­tion for “na­tives” and sharp op­po­si­tion to mi­gra­tion and au­to­matic ac­cess to ben­e­fits for new ar­rivals. Pan­der­ing to such views is a core part of the ap­peal of pop­ulists such as the Na­tional Rally in France, the Swe­den Democrats, and the Dan­ish Peo­ple’s Party, which has been in­stru­men­tal in Den­mark’s curb­ing of rights to ben­e­fits for non-EU mi­grants since 2002. But Den­mark is not alone in pur­su­ing “wel­fare chau­vin­ism”. Bill Clin­ton’s re­forms in the 1990s lim­ited il­le­gal im­mi­grants’ ac­cess to ben­e­fits. More re­cently, Swe­den has lim­ited paid parental leave for new im­mi­grants and cut sup­port pay­ments to some asy­lum-seek­ers.

Other re­search sug­gests that the na­ture of the ben­e­fit in­flu­ences at­ti­tudes. Chris­tian Larsen of Aal­borg Univer­sity found that a small ma­jor­ity of Danes thought im-

mi­grants should have im­me­di­ate ac­cess to health care and pub­lic ed­u­ca­tion; few thought that gen­eros­ity should ex­tend to un­em­ploy­ment or child ben­e­fit. More­over, at­ti­tudes to­wards im­mi­grants are volatile and swayed by the po­lit­i­cal cli­mate. In 2011, for ex­am­ple, 40% of Bri­tons said im­mi­grants “un­der­mined” the coun­try’s cul­tural life, and just 26% said they en­riched it. By last year, in the wake of the Brexit vote, only 23% went for un­der­mined, com­pared with 44% for “en­riched”.

And if im­mi­gra­tion is a se­cond chal­lenge to the wel­fare state, it may also of­fer a par­tial so­lu­tion to the first one: age­ing. Eco­nomic re­search from Britain and Den­mark, has found that since at least 2002, EU mi­grants have con­trib­uted much more in taxes than they have cost in pub­lic ser­vices.

The third is­sue is adapt­ing to chang­ing labour mar­kets. “The wel­fare state devel­oped in an era of big gov­ern­ment, big com­pa­nies and big unions,” writes An­drew Gam­ble of Cam­bridge Univer­sity in “Can the Wel­fare State Sur­vive?” In most coun­tries it was as­sumed that there would be full male em­ploy­ment. To­day this no longer holds. Re­cent re­search by the OECD in seven of its mem­bers es­ti­mated that 60% of the work­ing-age pop­u­la­tion had sta­ble full-time work. Of the other 40%, no more than a quar­ter met the typ­i­cal def­i­ni­tion of un­em­ployed: out of a job but look­ing for one. Most had dropped out of the labour mar­ket or worked volatile hours.

The causes are com­plex and over­lap­ping. But they in­clude the in­cen­tives and dis­in­cen­tives to work that com­plex ben­e­fits sys­tems pro­duce. In many coun­tries when the job­less do find work, their ben­e­fits are with­drawn in such a way as to cre­ate a high ef­fec­tive mar­ginal tax rate. Nearly 40% of the un­em­ployed in the OECD face a mar­ginal rate higher than 80% on tak­ing a job. Wel­fare re­cip­i­ents also of­ten suf­fer from bu­reau­cratic traps. For ex­am­ple, some have to wait weeks be­tween los­ing a job and re­ceiv­ing ben­e­fits. (Long enough to throw many on the mercy of loan sharks.)

Uni­ver­sal ba­sic in­come (UBI) may be one way to avoid such prob­lems. It takes many very dif­fer­ent forms, but at its heart it re­places a plethora of means-tested ben­e­fits with a sin­gle, un­con­di­tional one, paid to ev­ery­one. Scot­land and the Nether­lands are run­ning ex­per­i­ments in­volv­ing UBI and many oth­ers are set to fol­low. But in no coun­try is it yet the foun­da­tion of the ben­e­fits sys­tem for work­ing-age adults.

The OECD re­cently mod­elled two forms of ba­sic in­come. Un­der the first, coun­tries’ spend­ing on ben­e­fits was di­vided equally among ev­ery­one—a rev­enue-neu­tral re­form. Un­der the se­cond, ev­ery­one would re­ceive ben­e­fits equal to the cur­rent min­i­mum-in­come guar­an­tee, and taxes would rise to pay for it, if nec­es­sary.

ETERNAL TRIANGLES

The re­sults, as ever in wel­fare pol­icy, re­veal a “trilemma”: be­tween the over­all cost, how much it al­le­vi­ates poverty and its ef­fect on work in­cen­tives. They also show that the ef­fects of in­tro­duc­ing ba­sic in­come vary hugely based on what wel­fare sys­tem it would partly re­place. Coun­tries such as Italy, Greece, Spain, Aus­tria and Poland all spend more on wel­fare for the rich­est 20% than for the poor­est. For them, spread­ing ben­e­fits more evenly would ben­e­fit the poor, even un­der a rev­enue-neu­tral model. But in coun­tries that tar­get wel­fare spend­ing on the poor (such as Britain), UBI would ei­ther lead to large tax rises, to main­tain a min­i­mum in­come for ev­ery­one, or see ben­e­fits cut for the worst-off.

A more re­al­is­tic al­ter­na­tive for many coun­tries may be a neg­a­tive in­come tax (NIT). Championed by Fried­man, the NIT means that, be­low a cer­tain in­come thresh­old, the tax­man pays you. As you earn more, tax kicks in, ta­per­ing your in­come. The ef­fect is sim­i­lar to a ba­sic in­come, es­pe­cially since most UBI mod­els as­sume that rich peo­ple would have to pay more tax to af­ford them. A NIT, how­ever, is more ef­fi­cient in that it does not give the rich a stipend only to take most of it back in tax.

Ver­sions of a NIT have been part of wel­fare pol­icy in Britain and Amer­ica for decades, in the form of tax cred­its that are paid to those work­ing on low in­comes. Britain’s Uni­ver­sal Credit, a (sput­ter­ing) at­tempt to merge six work­ing-age ben­e­fits into one, takes the ap­proach fur­ther. A re­cent anal­y­sis by the OECD finds this a bet­ter way at tar­get­ing the poor than UBI.

A pa­per pub­lished in 2015 by Luke Shae­fer of the Univer­sity of Michi­gan, and col­leagues, sug­gested that money from cur­rent wel­fare pro­grammes such as food stamps and hous­ing sub­si­dies could be re­placed with a NIT that en­sured no Amer­i­can had an in­come be­low the fed­eral poverty line. The mar­ginal tax rate it as­sumed (50%) is high, but the work shows that a NIT may not be out of reach, at least in a coun­try with a weak safety net.

What would Bev­eridge have made of ideas such as ba­sic in­come? He be­lieved that “com­plete idle­ness, even on an in­come, de­mor­alises”, so would prob­a­bly have scoffed at some forms of UBI. But he also thought re­form had to take ac­count of “the mod­ern so­cial risks”. The wel­fare state should not get stuck in the past.

© 2018 The Econ­o­mist News­pa­per Lim­ited.All rights re­served

Source: Ip­sos MORI

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