The welfare state is hailed by many as one of the great advances of modern society, and is often seen as the victory of good and order over evil and chaos despite the fact that the welfare state has a fundamental flaw that inevitably leads to moral decay and financial ruin, both for individuals and society as a whole. But so strong is the moral appeal of the welfare state that most people are unaware of or unwilling to accept the plain facts of history that shows how destructive and futile the system is. The idea of the common good, and the state taking care of the weak is so appealing that the sinister consequences of the welfare state is brushed off as technicalities that can be solved by legislative tweaking. However, no amount of legislative tweaking will ever make the welfare system work according to intention because the system itself is flawed, and will never work.
This may seem like a rather silly clam, since the western world are full of countries with welfare systems, and they all seem to be doing rather well. Not brilliantly well, but well enough. And the benefits of the welfare state seem at first glance to be a great advantage to everyone. No one needs to worry about health care, sick leave, old age, or unemployment. What could possibly be wrong with that?
Well, first of all, if something does not work, it cannot be right. Saying that a system is right despite the fact that it does not work, is like saying that a machine is right even though it does not work. The welfare state is a socio-economic machine, and can only be judged by what it produces. To judge it by its moral qualities is a silly, but surprising common mistake.
Secondly, in economy things can seem to work for a very long time before they suddenly stop working, and the welfare state is an example of this. Many countries in Western Europe have had a welfare state for close to a century, and there are few signs of anything being seriously wrong. However, there are two interesting features common to virtually all countries with a large welfare state that indicate something is not quite as it should. That is the relatively low rate of economic growth, and large national deficits.
The connection between national dept, and the welfare state, is quite straight forward to understand. Welfare costs money, and so the state has to either tax its citizens to pay for this, or borrow money to cover the cost. In countries with low tolerance towards taxes, such as the USA, England and South Europe, building up a deficit is the only way for politicians to get the money and still win the next election.
In Germany, Holland and Scandinavia, where people are more tolerant of taxes, the problem of national dept is smaller, or nonexistent. So coercing people into paying more taxes solves the problem of national dept, and this lends weight to the idea that legislative tweaking is sufficient to keep the welfare state working.
However, increasing the tax burden lowers productivity, since the incentive to work is eroded when the economic difference between being on welfare and being at work is reduced. Norway, which through objective measures such as infant mortality and life expectancy, has one of the healthiest populations on the planet, has close to 8% of the working population on short time sick leave at any given time, and an additional 17% of its working population is permanently on welfare. The tax burden is such that every penny paid into the state as income tax is spent on welfare. Hardly a penny is spent on infrastructure, and Norway, although one of the richest countries in the world has as a consequence the worst roads in Europe, has trains that are notoriously unreliable and increasingly dangerous, and sewage and water systems in great need of repair. The productivity in the Norwegian economy is clearly not at all what one would expect from such a wealthy country.
The above example may again be brushed off as insignificant, and no proof of any fundamental problem with the welfare state. Norway is after all a rich and prosperous country, with a very healthy population, and a proof in itself that the system works. Clearly, the decaying infrastructure in Norway, is no proof that the welfare system does not work?
True enough, however, what is happening in Norway today is suspiciously similar to what happened in the Soviet Union during its final decades before its collapse, and contrary to popular belief, it was not Communism that brought the Soviet Union to its end, but the welfare system that lay at the heart of Soviet society.
Communism exists today in China, and China has a thriving economy. Communist China runs a healthy surplus, while the USA is running up an enormous deficit. China’s infrastructure is improving day by day, while the infrastructure in Norway is slowly decaying. The Soviet Union collapsed because its economic engine grew to a halt, while China has grown into a major economic power. Lack of democracy and personal freedom does not explain why two Communist countries should fare so differently. Being equally oppressive, the difference lies in their fundamentally different economic model. China has virtually no welfare state, while the welfare state of the Soviet Union was highly developed.
The collapse of the Soviet Union was an economic and social disaster of enormous proportions, and was entirely due to the welfare state. The arms race with the US speeded up the process of collapse, but it did not cause the collapse. It was caused by a catastrophic collapse of productivity. People in the Soviet Union virtually stopped producing products and services of any value, for the simple reason that it did not pay to work.
At the heart of the welfare state, lies the idea of wealth and income re-distribution. Wealth and income is taken from productive individuals and given to individuals with special needs. The healthy take care of the sick and old. The strong take care of the weak. It seems fair enough. However, the system relies entirely on an assumption that we all want to work and contribute, and this is its fundamental flaw. People do not in general want to work. Very few jobs are truly inspiring. Who wouldn’t rather spend the day at the beach on a summer day, than fixing the sewage drains in downtown Oslo?
With less economic incentive to go to work, the sense of moral obligation becomes more important for the system to function, and welfare states often do rather well for at least a generation or so merely by appealing to the moral conviction of their people. However, the system’s reliance on moral obligation erodes this quality in people when they see that others take advantage of their hard work. This leads to a more cynical attitude towards work, where the benefits of the welfare state are taken into account as part of the pay for work. Staying at home every now and then becomes a part of the salary calculation when considering a job. The bigger the welfare system is, the more important will be the perks, and less important will be the pay. In a system where there is no economic difference between work and unemployment, no one will work unless forced to.
The moral decay that follows from reduced economic incentive to work, leads a welfare state two choices in order to preserve itself. It must either force people to work, or run a deficit to pay for all the people who do not work. The Soviet Union chose to enslave a large part of its population. When this slavery was abandoned, the inevitable consequence was decay and collapse of the economy.
In democratic countries, slavery and coercion is less accepted, although more common than many people may think. Some individuals in democratic welfare states pay more than 100% of their income in taxes, which means that they are in fact slaves to the state. These people are forced to work under the threat of having their estate confiscated by the state in the form of wealth tax. In Norway, there are numerous individuals who pay more in taxes than they earn, and the only way for them to escape this slavery is to sell everything, and permanently move out of the country. And Norway is far from the only democratic country that has or has had such a system in order to support its welfare state. England, France and Holland have all had periods with taxes on income reaching more than 100% for wealthy individuals.
Slavery is commonly accepted by a majority of the people in a democracy for the simple reason that it benefits this majority. Having wealthy individuals pay for the welfare of others through coercion and force is regularly promoted as virtuous and good. Taking money from the rich and giving it to the poor has a romantic ring to it that gives it its legitimacy. Wealth tax and other taxes on property are therefore quite acceptable and often promoted as a fair and just. However, welfare states are too large to rely on slavery alone, and running a deficit is inevitably the only way to support the demands of its clients.
Characteristic of welfare states is that consumption increases while investments decrease. People stop building and maintaining the infrastructure of the country, and are paid by the state to do nothing in the way of productive work, and simply consume the products produced by others. Welfare states eventually end up with large trade imbalances to cover up for the imbalance between consumption and production in the country. This is not true for Germany or Norway at the moment, but with a decreasing incentive to work, and erosion of work ethics, these countries too, will eventually be forced to run a deficit.
There is, as everyone knows, no limit to the potential demand for a free service. The welfare state provides a generous array of free services, and the demand for these will never diminish. Technology and scientific advances provide the potential for ever better health service. Social progress increase the level of welfare that is considered acceptable, and the definition of poverty becomes more relative to what others have, and less a definition in absolute terms. With free welfare, there’s no limit to the demand, and strict regulation is required to avoid abuse.
The bureaucracy required to run such a welfare state, produces in itself nothing, but simply serves to redirect money, either borrowed from or taxed from others. The bureaucracy in turn drains an already depleted workforce from the job market, speeding up the decay of infrastructure, and growing imbalance in the foreign trade.
The bureaucracy of the welfare state has the perverse effect of demanding energy and ingenuity from its clients in order to draw full advantage of the services that it provides. People who are truly down and out, and in desperate need of help, are not reached. Oslo has a disturbingly high rate of drug related deaths, and the number of beggars and homeless people is much higher than one would expect in a country with an extremely generous welfare state. The truly poor and homeless are left to charity, but charity finds it hard to find volunteers and donations, because the assumption is that a large welfare state takes care of everyone, and no further help is needed.
The welfare state does not only damage the work ethics of its people, but also the people’s compassion for others. High taxes going into the welfare state, makes people both assume that all are taken care of, and reluctant to spend what money they have left after taxes on additional welfare to others through voluntary contributions to charity. A notable change in Norwegian society over the past decades is a rise in violent crimes. Compassion, it seems, is a diminishing resource under the welfare state. The cynicism and extreme selfishness often seen in the Soviet Union before, and after its collapse is further evidence that the welfare state is morally destructive, and that the effect of this destruction can take generations to mend.
When a welfare state reaches a certain critical mass, the implosion of the system becomes inevitable because the people moving from the productive part of the economy into the welfare system, either as client or as redistributors, increases the burden on the remaining producers, which in turn sucks more people into welfare, drawing even more heavily on the producers, until the whole system collapses when production grinds to a complete halt, and the deficit balloons into unsupportable proportions.
When productivity is depleted from the economy the inevitable result is inflation. Money is, as we all know, only valuable when tied to products and services, but with virtually all services being free and, few if any domestic products to buy, the money/product balance becomes skewed, and the price of products and services increase. Importing more products may stem the price rise in the short run, but this must be financed with a growing deficit, and by now, potential creditors start to realize what is going on and demand higher interest, and better security on the national bonds, which in turn forces the welfare state to either print more money, or sell assets, often on behalf of their citizens; public buildings, infrastructure, hospitals, national parks, national resources, and so on.
Printing money will not work for very long, because the creditors will refuse to buy bonds in the domestic currency, and the demand for security to back up the bonds will increase. Printing money will make people switch to other currencies, but this will not necessarily stop the inflation, because the welfare state has removed so much productivity from the economy, that even foreign money looses its value in competition for the limited number of products and services for sale.
Inflation runs rampant until the final collapse of the welfare state, when the national dept defaults, the national currency becomes worthless, and every one who is part of the welfare state come back into the productive economy because the money they receive from the welfare state has ceased to have any value.
With a huge number of people suddenly desperate to provide products and services in order to earn enough to stay alive, hard currency becomes extremely valuable. Inflation turns to deflation and prices drop sharply. Such a situation would normally have been counteracted by printing more money, but with the national currency gone, the bankrupt welfare state is powerless as it sees it citizens desperately accepting almost any condition demanded by those possessing the hard and attractive currency.
However, few welfare states come to the point where they collapse completely. Constraint is normally imposed on the welfare state before it reaches its critical mass from which it cannot return. England pulled away from disaster in the past, and so did Holland. And both supports a welfare state today, so it seems that legislative tinkering does work and welfare states do not necessarily come at the cost of social disorder.
That may be so, but they do come with a high risk of becoming unstable, and they always reduce the productivity of a country by reducing the incentive to work. With national dept growing in the western world, and productivity being dampened by the welfare state, things may well already be getting out of control for several countries.
The alternative to a welfare state is a system without a central organizing body to provide welfare services, and no income and wealth redistribution. Social security and health care in such a system is a matter left to each individual. This comes with the risk of some people not being able to afford basic welfare services, but in practice this risk is much smaller than it first appears. Very few people have no social or economic resources to help them in times of need, and those that do are usually taken care of by charity, which can be expected to be quite generous when people are left with more money on their hands.
In a liberal and decentralized society, incentive to work remains high, and productivity which lies at the heart of all wealth, including welfare, is generally high. With less waste, there is more wealth to share, and very few run the risk of falling completely outside the system. Fewer, certainly than is the case of welfare states where finding your way through the maze of bureaucracy is vital in order to draw the full benefit of the system, and the truly destitute are left with no support at all.
Economy will sooner or later catch up with the welfare state. Competing with countries that take care of their welfare without the economic cost of a welfare state, old fashioned welfare states will have to reform, or face the consequence of being outcompeted by other nations. Central bureaucracies will have to be reduced, prompting the dismantling of the welfare state, and we are likely to see this happening over the next decade or two. Those welfare states that resist change will collapse, while those that dismantle will shed their welfare obligations more gracefully. Either way, the welfare state will be left to history as a curious and failed experiment of the 20th century that completely vanished during the first half of the 21st century.
