The Welfare State And Its Consequences

6 December 2012
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This article from the December 2012 edition of the IPA Review is by Research Fellow at the IPA, Julie Novak.

The welfare state in its existing form, dominated by government financing and provision of payments and services from cradle to grave, is irretrievably broken.

The blossoming of welfare state programs deters private savings and reduces labour supply, and requires increasing taxes to finance them, all of which inhibits economic growth and prosperity.

Societies characterised by strong family ties and community cohesion increasingly become a feature of the past as growing numbers of welfare recipients lean on the state, rather than their relatives or neighbours, for assistance.

Even in spite of strong tax growth, the welfare state still manages to crowd out the basic protective functions of government, eroding fiscal integrity to such an extent that nation-states are lumbered with budget deficits and public sector debts that cannot be managed.

To rub salt into the wounds, democratic political systems are undermined as people vote in favour of extra welfare benefits to come their way, or, as seen in major European cities, fight tooth and nail to keep whatever largesse the state currently provides.

These are the confronting features of the welfare state presented in After the Welfare State, a new collection of essays published by Students for Liberty, a fast-growing student liberty movement in the United States and Europe, and the Atlas Network.

After the Welfare State makes three distinct contributions to the already voluminous body of literature on the welfare state and the need for fundamental reform in this area.

First, the book convincingly illustrates how accumulating welfare state subsidies and benefits in the name of caring for the poor contributed to the global financial crisis and the European sovereign debt crisis, hurting the poor the most.

It may surprise some readers to learn that the European peripheral states of Greece and Italy were once healthy, if not bustling, economies especially during the first half of the twentieth century.

The relative prosperity experienced by these two countries was, however, whittled away from the 1960s by a concoction of strong social expenditure growth, rising taxes and regulatory barriers against entrepreneurial activity.

In an interesting account of the contribution of US economic policies to the GFC, Johan Norberg showed how the elevation of housing as a ‘social right’ led to disastrous policies such as the securitisation of mortgages through Freddie Mae and Fannie Mac, government-sponsored ‘creative financing’ for home loans, and artificially low interest rates by the Federal Reserve.

The second notable contribution of After the Welfare State is its efforts in chronicling the history of spontaneously ordered arrangements that emerged to care for the sick, elderly and unemployed prior to the advent of the governmental welfare state.

One element of the rich array of non-governmental welfare institutions that sprang up during the eighteenth and nineteenth centuries were the so-called ‘mutual aid societies,’ whose members would voluntarily pool monies that would be accessed when one of their own fell on hard times.

Until their virtual extinguishment by government welfare, the mutual aid societies were subscribed to by sizeable proportions of the population in the United Kingdom, United States and Australia, thus demonstrating that it is not necessary for government to finance or provide welfare.

Finally the book’s editor, American free market think tank activist Tom G. Palmer, provides a sweeping and devastating coverage of the numerous economic and social problems attributable to the modern welfare state.

For example, in the opening stanza of the book Palmer exposes the untenable inter-generational fractions created by Ponzi-style modern welfare states:

‘Young people are being robbed. Of their rights. Of their freedom. Of their dignity. Of their futures. The culprits? My generation and our predecessors, who either created or failed to stop the world-straddling engine of theft, degradation, manipulation, and social control we call the welfare state.’

Palmer also contributes chapters concerning the fiscal common pool problems exacerbated by the welfare state, and broader linkages between issues of poverty, morality and liberty.

In each of these, Palmer displays a masterful command of the intellectual history of thought on charity and welfare, in the classical liberal tradition, of the likes rarely seen in such literature.

As enlightening as these features of the book are, the big question that remains is: how will vulnerable people in need be cared for if the welfare state in its existing configuration becomes relegated to the dustbin of history?

The answer suggested in the book is that if it was not beyond the ability of individuals and communities in the past to create intricate, multi-faceted welfare systems without government involvement, then it should not be beyond the capacity of those living today to do the same.

The idea behind government progressively withdrawing from welfare financing and provision is to give room for not-for-profit and for-profit organisations to re-enter the welfare field.

In other words ‘yes’ to families, churches, charities and philanthropists and ‘no’ to Centrelink!

In any case the sheer scale of profligacy characteristic of the welfare state should provide sufficient motivation for such reforms.

Spending by all levels of Australian governments on social security alone amounted to $121 billion in 2009-10, and that’s excluding public spending on education, health and housing.

Even if we accept at face value the overblown estimates of the welfare lobby that 2.2 million Australians live in poverty, these people could each receive a tidy stipend to the tune of $55,120 per person.

That the government refuses to make poor people instantly wealthy suggests that too much taxpayers’ money is being siphoned off through unnecessary fiscal churn, which would continue if the government welfare state is left intact.

This book is unapologetically directed toward young people, who as future workers will suffer the burden of rising taxes to fund growing numbers of typically older recipients of government welfare insofar as the welfare state is left unreformed.

This is not unreasonable but, that said, people of all ages should read After the Welfare State.

After all, the need to downsize government’s involvement in welfare will be the greatest and most challenging reform agenda the West confronts, and everyone has a stake in ensuring its success.

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