Reassessing the Welfare State

By Frederick Painton

A humanitarian dream becomes an economic nightmare

They are called welfare states, after the sense of collective compassion that inspired them in the wake of the Great Depression and World War II. Like Gothic cathedrals, they rose gradually across Western Europe, in dedication to a lofty goal: to create more humane societies, in which a solicitous state not only shielded the old and the sick but guaranteed a living wage and a cushion against the hardships of unemployment. The result--cradle-to-grave economic protection far beyond anything available in the U.S.--became European social democracy's proudest achievement. That accomplishment is now undergoing a painful reassessment. No one is proposing to dismantle the welfare state. But throughout Western Europe there is a growing realization that what once seemed a virtually limitless bounty has reached very real limits. Pressure is mounting to prune and reform the whole apparatus of welfare and redefine its purpose. The public mood behind it all is not unlike the surge of conservatism in the U.S. that helped sweep Ronald Reagan to the presidency.

At its present levels, the welfare apparatus has simply become too expensive for most governments--and their taxpayers. Across the Continent, social security systems are grappling with fiscal crisis, in part because ponderous, costly bureaucracies have mushroomed to administer a vast array of programs that sometimes neglect the essential to serve up what is merely desirable. In Britain and France, rent subsidies have done little to alleviate chronic housing shortages and overcrowding. In The Netherlands, disability plans have been abused by unemployed workers making false claims to receive higher benefits. Generous sick-leave payments in Sweden are blamed for a debilitating rise in worker absenteeism. One official West German pamphlet giving citizens a "simplified" version of their social rights, for example, runs to 300 pages.

Bloated beyond its architects' intent, welfarism is threatening bankruptcy in some countries. Attempts to curb its excesses are beginning to cause political disruption and even social unrest. In France and Britain, labor unions and other groups have demonstrated against cutbacks in medical and education benefits. In Belgium and The Netherlands, attempts to slash welfare spending have helped trigger Cabinet crises, along with protests involving workers, students, doctors and even pharmacists. In Sweden, long a model of social consensus, unions and employers paralyzed the country last spring with nine days of work stoppages over wage claims that eventually forced the government to grant tax relief and companies to hike wages 6.5%.

"We are at the limits of what we can pay," said Simone Veil, former French Health Minister before her election last year as President of the European Parliament. "European ministers know the problem full well, but they have not started to alert public opinion." The reluctance to bear such unpopular tidings is politically understandable. Among voters, the hunger for ever more social programs has become a virtual addiction. New generations of Western Europeans take for granted the benefits they have inherited--and demand more. It was easy enough for governments to comply during an era of rapid growth, when rising welfare costs were absorbed by expanding economies that each year churned out more tax revenues. No longer.

Says Emile van Lennep, secretary general of the Paris-based Organization for Economic Cooperation and Development: "In the industrialized democracies, we let the success of the 1960s go to our heads. In responding to the aspirations of our people, we allowed our economies to become overloaded, overregulated and insufficiently profitable. We overdid it." The stagflation engendered by the post-1973 oil price crisis eroded both tax revenues and purchasing power. Swelling unemployment added to relief rolls. Yet even as the resources to pay for them shrank, government outlays for social services kept growing. The squeeze on national budgets may require such NATO allies as West Germany, Belgium and The Netherlands to reduce planned defense spending in order to maintain welfare levels.

A look at the dilemma in the countries that have been most committed to the welfare idea:

THE NETHERLANDS. The bare maintenance of welfare outlays at present levels--30% of a national budget of $150 billion--demands a 2% annual increase in national production. But economic growth is expected to drop to zero this year. What to do? The government last winter froze wages, an act that provoked a rash of strikes and poisoned the social climate. The 1.4 million beneficiaries of state aid, a potent political force, have so far managed to blunt major attempts at social services reform in parliament. "Everyone agrees to the welfare state, but not on how to pay for it," concludes Wim Kok, head of the Dutch Labor Federation. "We are in the middle of a choice on how to divide a pie that is no longer getting bigger."

SWEDEN. With the highest tax level in the world, Swedes sensed four years ago that the feasible limits of their pioneering welfare state had been reached: after 44 years, they turned out the Social Democrats. To pay for Sweden's virtually risk-free society, tax rates have reached the point where hard work is actually discouraged. A man with a nonworking wife and two children who earns $19,000 a year from a full-time job has an after-tax income of $13,000. If he works half time, his net income is just $1,800 less because child benefits remain the same and rent subsidies actually increase. As a result, 25% of Sweden's 4.2 million laborers now work only part time, many of them on nondemanding public sector jobs. Says Nils Lundgren, former director of the National Institute of Economic Research: "The welfare state worked at first precisely as it was intended because we still shared a common Lutheran work ethic. But now a second generation of young people takes the soft option of a post in the state bureaucracy. We have a word for such people in Sweden, flum. It means easy, wet."

FRANCE. Although austerity-minded Premier Raymond Barre has tried to keep government spending in check, the rapidly rising use of medical benefits--doctors' fees, drug prescriptions, hospital and other expenses--threatens the stability of a welfare system that not long ago was considered relatively healthy. Unlike other Western European countries, which pay for social services largely from general tax revenues, France finances social benefits separately from employee (24%) and employer (59%) deductions. The government contributes only 8%. But social security and medical costs have grown so rapidly ($124 billion in 1980, vs. only $31 billion in 1970) that the government now faces a deficit of $5.3 billion this year.

BRITAIN. Embattled Conservative Prime Minister Margaret Thatcher has emerged as the boldest challenger to what she considers the destructive excesses of European welfarism. As a symbol of her determination to cut public spending, she charged government ministers $54 a head for the traditional Cabinet dinner before the opening of Parliament in November. Embarked on a "great experiment" to restore risk, incentive and reward to Western Europe's most sluggish economy (the growth rate is expected to drop this year by as much as 3%), Thatcher is trying to impose a change in national priorities that would put production ahead of welfare.

That drive, however, seems to be foundering. Many of her Cabinet ministers have been unwilling or unable to prune the overgrown bureaucracies they govern. Meanwhile, an inflation rate still above 15%, interest rates no lower than 16% for private borrowers and a strong pound sterling that inhibits exports have conspired to send British industry into a deeper recession. Unemployment, already above 2 million, is projected to be nearly 3 million a year from now; the payment of benefits to the jobless, if the rate continues, could easily wreck Thatcher's program. Threatened by revolt inside her own Cabinet and facing protests by Tory business leaders as well as by her Labor opposition, Thatcher was forced to reduce her demand for a $4.8 billion public spending cut by virtually half.

The problems raised by advanced welfarism reach beyond the immediate risk of insolvency. Crippling levels of taxation and ubiquitous state intervention, many observers believe, are expanding the so-called black economy, in which deals are made and work is done without reference to taxes or minimum wages. In France, an estimated 10% of the work force are engaged in moonlighting, despite stiff penalties that include prison sentences. Warns Ralf Dahrendorf, director of the London School of Economics: "The welfare state takes a large part of people's earnings and tells them what to spend them on while leaving them only pocket money for their own disposal."

A longer-term threat comes from aging populations. Because of a dramatic drop in the birth rate over the past 15 years, a dwindling working population will have to support a larger number of the retired. Francis Blanchard, director general of the International Labor Organization in Geneva, wonders whether a "clash of generations" may not erupt during this graying process. Sweden already offers a glimpse of that kind of future: roughly 4.2 million workers support 1.2 million pensioners. With minor variations, all of Western Europe faces the same demographic squeeze. Says Bernard Bruhnes, social security chief of France's Planning Commission: "The active population will just have to give up more."

Just what sectors of the population give up how much to the common welfare commitment is, of course, the fundamental political problem. But there is a vague public awareness of the issue, and it is beginning to affect the political process. Thatcher's perilous effort to tame Britain's bureaucracies amounts to the first groping attempt at a stricter definition of the aims of welfare.

At a conference on social policy this fall at the O.E.C.D., academics, business men, union leaders and government officials reached agreement on a central point: in the face of a world slump induced by rising energy prices, the era of openhanded social benefits has effectively ended. Said Victor Halberstadt, Dutch public finance expert: "We must have a reshuffling of our economies to provide more funds for investment and therefore less money for public consumption." As the great postwar experiment in social engineering undergoes an inevitable reassessment, that basic but hard message is gradually filtering into the West European consciousness.

--By Frederick Painton

Reported by Lawrence Malkin/Paris and European Bureaus

With reporting by Lawrence Malkin/Paris and European Bureaus

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