THE CASE FOR A TARGETED CRITICISM OF THE WELFARE STATE.

• Author: Balcerowicz, Leszek
• Position: Essay

Criticism of the welfare state would be more effective if it were better targeted. That is why we begin by clarifying the meaning of the welfare state. We then distinguish three dimensions of the welfare state and use them to show the extent of differences between welfare states. Next, we identify countries that appear to face the greatest challenges regarding the sustainability of their welfare states. We conclude with some remarks on how to make criticism of the overgrown and badly structured welfare state more effective.

Some Clarifications

It is best to define the welfare state not through its noble goals but through its instruments.

Instruments of the Welfare State

At the minimum they include social transfers in cash (e.g., PAYGO pensions, unemployment benefits, family allowances, and programs for the poor) and social transfers in kind (especially publicly financed health and education but also some programs for the poor). To these components of social spending, one can add, as two additional instruments, tax subsidies (e.g., subsidies to the employer-financed health insurance in the United States, see Feldstein 2005) and' social regulations like the minimum wage, rent controls, and employment protection. In this article, we focus on social spending because it is by far the most important instrument of the welfare state and there is abundant data. However, occasionally we will also refer to the two other policies.

Welfare Arrangements

It is useful to regard the welfare state as a special kind of welfare system, which we define as arrangements to deal with various risks facing individuals--such as acute poverty, sickness, and accidents. A brief look at history reveals the existence of various welfare arrangements--for example, family (kin) based, religion based, civil based, corporate based, and market based (insurance through jobs, private savings, and commercial insurance). Countries have always had some type of welfare system combining all or some of the above arrangements. The Poor Laws in Europe, which constituted the early welfare states (Tocqueville [1835] 1997), revealed the incentive problems of government support and foreshadowed those of the modern welfare state.

The concept of a welfare system (as distinct from the welfare state) is a useful communication device:

* First, it highlights a basic fact that a lack of large welfare state does not need to mean the absence of the alternative welfare arrangements.

* Second, it draws the attention to the question of what happens to these arrangements when the welfare state expands and shrinks. There is a large body of empirical literature on the crowding-out effects of the growing welfare state (e.g., Morduch 1999, Kelley 1998) and, more interestingly, for the present situation of the unsustainable welfare state, there is some literature on the crowding-in effects of the shrinking welfare state (Heutel 2009).

* Third, distinguishing various welfare arrangements should lead to a more comparative analysis of the welfare state. There are many ideologically idealized descriptions of this system and not enough comparative research that would show how different the treatment of the welfare beneficiaries is by welfare officials and other suppliers of welfare services (e.g., family, churches, other voluntary organizations, and the employers of the commercial organizations).

Criticisms of the Welfare State

There are many criticisms of the welfare state. They can be grouped into economic, moral, philosophical, and political. The distinctions between these categories are to some extent arbitrary but still useful because different types of criticism lead to different proposed remedies. Any proposal for reform should start with a clarification of what its main goal is.

The economic criticism of the welfare state ultimately focuses on its negative impact on the long-run economic growth. The intermediate variables are the tax burden, reduced private savings, reduced employment, and chronic fiscal fragility or outright fiscal crises.

The moral criticism shows how the repeated deviant behavior (using or misusing various social benefits) erodes social norms such as honesty, a strong work ethic, and family values (Lindbeck, Nyberg, and Weibull 1999; Niskanen 1996). (1) Moral criticism also highlights how some social benefits undermine the family and lead to increased criminality, especially among young men brought up without fathers.

Philosophical and political criticism refers to the erosion of social norms that are especially important for conservative critics of the welfare state. The "liberal" (libertarian) critics focus on two related problems. First, the loss of individual freedom due to the increased taxes needed to fund the welfare state; people are "forced to contribute toward the costs of some activity which does not further his interests or may even be diametrically opposed to them" (Wicksell 1967: 89). Second, the rise of interest groups supporting the welfare state weakens civil society (Murray 1984).

As we mentioned, these criticisms differ in their focus. But they have a large common ground, which makes it easier to form coalitions for reforming the welfare state. For example, reducing tax burdens can be justified on both economic and liberal (libertarian) grounds. The elimination of the perverse incentives makes both economic and moral sense.

Dimensions of the Welfare State

In mobilizing people for reforming the welfare state, we have to go beyond a general notion of the welfare state so that people can see which of its features produce the worst excesses. An elementary step in this direction is to distinguish three dimensions of the welfare state: its size, design, and financing.

Size

The size of the welfare state is usually measured by the ratio of social spending to GDP (2) Size is a very important dimension because it is strongly linked to a country's tax burden and--to some extent--fiscal...