Welfare, Production and Work

There is at the moment an interesting discussion going on in Norway regarding the welfare state, and how to keep the system from becoming overly burdened by current and future entitlements. With the welfare state viewed as an undividedly good thing by just about everybody, the discussion is centered on how to preserve it, and make sure that it stays with us into the future, rather than how this costly and inefficient system can best be dismantled.

The current estimates show that the number of old people claiming state pensions will double, and the number of people older than 80 years of age, and therefore likely to be in need of extra medical attention, will triple over the next four or five decades. The number of young working age people claiming welfare is sharply increasing, and unemployable immigrants claiming welfare is also on the rise. There are in other words an increasing number of people entitled to welfare benefits while the relative number of people in the work force is falling, and this projected mismatch between contributions and claims to the welfare state is of great concern to both economists and politicians.

The popular rhetorical solution to this problem is that the politicians and employers must encourage people to work more through the creation of a more flexible and dynamic work environment that caters for the various needs of the employees. The idea is that young disabled people and pensioners can work part time, and contribute to the welfare state through a flexible work environment. If everybody works at their maximum potential, goes the thinking, the welfare state will be able to persist, and keep providing the services and payments to its clients.

The unstated assumption in this thinking is that work automatically creates wealth that can be shared by everyone through the welfare state. The thinking conjures up the idea of the factory where every new hand at the factory floor adds to the output of the factory, an idea that work is synonymous with production. However, this is not true, and has never been true. Work is not always productive. In fact, work can often be counter productive.

What matters in an economy is not the number of people working, but the products and services that are produced. A product or service that no one demands does not contribute to the total wealth of the economy, and even useful products and services may not contribute anything if their production demands more effort, and hence cost to the economy, than the value of the output.

Making a workplace flexible and dynamic so that it can include part time employees with special needs is not something that comes for free, and the only way to compensate for this cost is increased production. If the individuals with special needs do not cover this cost themselves with the productivity that they can provide, the overall economy will have to cover the extra cost. Getting a person partially off welfare may look good on the balance sheet of the welfare state, but if the cost of giving this person work is greater than his or her contribution, then the overall economy suffers.

The true challenge for the welfare state of the future is not to keep people employed as long and as much as possible, but to make sure the productive part of the economy produces a surplus large enough to cover the costs of the welfare state. If the health sector will require twice as many beds in the future, the production of health related products and services will have to double. If the number of people on welfare increases, the economy has to produce a surplus large enough to cover this. However, it does not necessarily follow that more people will have to work. The only thing that counts is that the overall economy manages to produce the required products and services, either directly or through commerce and exchange.

The sensible thing that the government has to do in order to preserve the welfare state is therefore to encourage production, and let employment be a secondary issue, and that can best be done by the removal of taxes and fees that discourage investments. However, the deficit that will arise from the removal of such taxes will have to be covered by taxes that hit more broadly, and it will take a very special politician to convince the Norwegian electorate of the fairness of this, even if the overall tax burden can be expected to fall over time when the benefits of the newly encouraged investments take effect.

The net effect of such a change to the tax rules will be that people have to pay more directly for the services they receive from the state, which in effect means a partial dismantling of the welfare state. And the irony of the situation is that the more the welfare state is dismantled, the larger will be the production in the overall economy, and hence more wealth and welfare for the people. Dismantling the welfare state completely will free enormous resources for production and provide the surest solution to the welfare crisis by closing down costly bureaucracy and encouraging investments through lower taxes, but with the welfare state almost universally viewed as an undivided good, no politician will be able to propose such a radical idea and expect to remain in politics.