Fatal Attraction: Democracy and the Welfare State

 
 

Expansive and expensive welfare programs have brought European social democracies to the verge of catastrophe. Now the dynamics of democracy may be an impediment to economic reform.

A week, it is often said, is a long time in politics. Much, however, can change in a year. Only a short while ago some European politicians were touting the European social model’s superiority over what many continental Europeans deride as “Anglo-Saxon capitalism.” Now, however, governments across Europe are scrambling to avoid the fate of Greece. Moreover, they are doing so by contemplating—and, in some cases, implementing—the hitherto unthinkable: reducing their budget deficits by diminishing the expansive welfare states to which many Europeans have long been accustomed.

In doing so, these governments are finally acknowledging a truth initially obscured by the crisis of the euro: that for all the disarray generated by the euro’s recent tribulations, Europe’s economic woes have more systematic causes.

One cause is several decades of low economic growth. As the Czech president Václav Klaus recently observed, “average annual economic growth in the eurozone countries was 3.4 percent in the 1970s, 2.4 percent in the 1980s, 2.2 percent in the 1990s and only 1.1 percent from 2001 to 2009.” “A similar slowdown,” Klaus added, “has not occurred anywhere else in the world.”

A second problem is Europe’s profound demographic decline. On current projections, for example, Spain’s over-65 population is set to increase from its present level of 17 percent to 25 percent by 2030. That means fewer people working to support growing numbers of pensioners.

When low economic growth and declining demography are combined with European welfare states—generous state-provided health and unemployment insurance; early retirement and liberal state pensions; large public sector employment; legislation that emphasizes job security over labor market flexibility—something eventually has to give. Greece has reached that point. The rest of Europe is struggling to avoid following Greece into the abyss.

Even so, many European governments are proceeding down the reform path with barely disguised reluctance. In France, for example, President Sarkozy’s government wants to raise the official retirement age from 60 to 62. That will not strike many as a radical reform. By contrast, Spain’s Prime Minister Zapatero is already cutting pensions, civil servants’ wages, and social programs. He has also promised labor market reform, something the IMF has identified as desperately needed in Spain. Yet, as the Economist correctly notes, Zapatero “shows no willingness to force reforms past the unions. He will do what he has to do, but always the minimum and without enthusiasm.”

No doubt, this reflects a disinclination of many European politicians—on the left and right—to concede that the post-war European effort to use the state to provide as much economic security as possible has encountered an immovable obstacle in the form of economic reality. Yet it is arguable—albeit highly politically incorrect to suggest—that it also reflects the workings of a potentially deadly nexus between democracy (or a certain culture of democracy) and the welfare state.

One justification for democracy is that it provides us with ways of aligning government policies with the citizenry’s requirements and of holding governments accountable when their decisions do not accord with the majority’s wishes. But what happens when some citizens begin viewing these mechanisms as a means for encouraging elected officials to use the state to provide them with whatever they want, such as apparently limitless economic security? And what happens when many elected officials believe it is their responsibility to provide the demanded security, or, more cynically, regard welfare programs as a useful tool to create constituencies that can be relied upon to vote for them?

The end result should surprise no one: a spiral of expanding welfare that neither politicians nor the expanding number of welfare beneficiaries have any real desire to stop until things become so unmanageable that there is no alternative.

The problem, as Alexis de Tocqueville noted in Democracy in America, is that public opinion, especially what he called “common opinion,” is “the dominant power” in democracies. The contemporary French philosopher Pierre Manent goes even further to claim that in democracies “it is not dogma that comprises shared opinion; it is shared opinion that is dogma.” It follows that if enough people want expansive welfare programs in a democracy, the capacity for politicians to oppose, for example, the desire of 51 percent of the population to progressively loot the other 49 percent, is limited. To resist is to court electoral rejection or, as we have seen, rioters running amok in the streets of Athens.

A number of twentieth-century scholars have sought to address this problem of democracy and ever-expanding state welfare. In the third volume of his book Law, Legislation and Liberty (1979), for example, the Nobel Prize-winning economist Friedrich von Hayek outlined a series of constitutional rules that he thought might limit the democratic state’s tendency to drift in this direction. Several decades earlier, German market-orientated economists such as Walter Eucken, Franz Böhm, and Wilhelm Röpke elaborated a whole system of constitutional principles they believed would render democratic states strong enough to resist capture by interest groups, but also limited enough to prevent governments from expanding their economic powers beyond a number of core functions.

But if the twentieth century has taught us anything, it is that even the most robust of constitutional arrangements have not been able to achieve such ends in democracies that lack politicians and citizens who grasp the essential wrongness of using the state to support themselves at the perpetual expense of others. Moreover, implementing such policies does not even require solid majority support from the population. In most democracies, people can only gain political power by cobbling together large enough coalitions of support based on a range of often incompatible promises made to sometimes very different interest groups. After being elected, democratic governments are under enormous pressure to use their political power to favor their various supporters if they want to avoid having their erstwhile followers turn against them.

The bartering of privileges and grants to different groups is thus almost inevitable in a democracy if a government wants to retain its coalition of support. In these circumstances, expanding the welfare state to reward particular adherents is a difficult temptation to resist. As Röpke commented: “To expand the welfare state is not only easy but it is also one of the surest means for the demagogue to win votes and political influence, and it is for all of us the most ordinary temptation to gain, at no cost to ourselves, a reputation for generosity and kindness.”

Likewise, democratic governments attempting to reduce the welfare state run the risk of alienating particular groups within their supporting coalition. This may be enough to ensure a government’s defeat at the next election. This is precisely what happened to Gerhard Schröder’s Social-Democrat-Green government in Germany after it implemented welfare reforms between 2003 and 2005. Not surprisingly many governments opt instead to retain the status quo, despite often being aware of the long-term economic consequences. Unfortunately for Europe, that status quo is no longer fiscally sustainable.

Does this mean that shrinking the welfare state requires a diminishment of democracy? The answer is no. Most authoritarian regimes ranging from Hitler’s Germany to Chavez’s Venezuela have proved more than willing to use generous welfare schemes to mollify large segments of the population. In other words, it is not as if democracy is unique in being coupled with welfare states, and so the cure need not lie in reducing democratic norms or institutions.

The beginning of a proper response is to recognize that a democracy’s ability to resist the long slouch towards the soft despotism of the welfare state requires two things. The first is to shift the incentives for economic mobility and security so that they lie in the private sector rather than in becoming a recipient of state largesse. This task is very difficult when much of the population already enjoys some measure of state income. Yet it is dwarfed by the immensity of the second challenge: developing a moral and political culture which underscores the undesirability of politicians and citizens using the state to live at others’ expense.

If opinion polls are correct, it may well be that, culturally speaking, it is too late for much of Europe. The modern European welfare state goes back to the late nineteenth century when Otto von Bismarck, Imperial Germany’s ruthless “Iron Chancellor,” introduced state social insurance in an undisguised attempt to placate the growing German industrial working class and the ever-increasing number of Social Democrats they elected to the German legislature. Far too many Europeans now simply assume a munificent welfare state as part of the economic landscape. Indeed the increasing number of older West Europeans today has no incentive to change. Their attitude might be described as “Après moi, le déluge.”

America, however, is a different story. The sheer intensity of resistance to the Obama Administration’s healthcare legislation was about many things. But it surely reflected the fact that millions of Americans are simply unwilling to go the way of Western Europe. Successful long-term resistance, however, is going to depend upon Americans understanding that the link between democracy and the welfare state has to be broken, and that the only way to achieve this objective over the long term is through recommitting the United States to some of the very best aspirations of its Founding—a love of liberty, an embrace of the virtues needed to sustain freedom, and an unwillingness to delegate to the state the responsibilities that free men and women owe each other.

Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, the prize-winning The Commercial Society, and Wilhelm Röpke’s Political Economy.

 

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