The 20th century was definitely one of the most tumultuous periods in human history. Despite the two world wars and the suffering imposed on mankind by several tyrannic regimes, humanity made previously unseen progress in the domain of technological development, medicine, democratisation, the alleviation of global poverty and human rights. The events of the 20th century radically transformed our thought on the functions and the roles of the state. Both the size and scope of government intervention have undergone serious transformation in the past hundred years. The democratisation of Western societies along with the long ongoing trial of central-planning in the economies of the Estern Bloc resulted in the naissance of what we may call the welfare state. The welfare state model was subject to criticism from the very beginning of its creation in the post-war era. In this series I present the origins of the welfare state, along with its temporary decline in the 70s. Finally, we look into its critique and the prospective crisis its expansion might bring along in the upcoming decades.
The Origins of the Welfare State
The expansion of government intervention took place in three phases throughout the 20th century. The first phase took place in the pre-World War II years in Europe and in the United States. This era may be characterised as a cautious experimentation with the expansion in the role of the state. These initiatives are fairly represented by the New (Social) Liberalism of the Asquith and Lloyd George cabinets in the United Kingdom, the New Deal of the Roosevelt administration in the United States and the guiding principle of “Solidarité” in the French Third Republic. At this initial phase, the aims of these programmes were minimal from today’s perspective, but the introduction of a minimum wage, the expansion of health insurance or the banning of child labour were huge steps in the context of the early stage of development in industrial societes.
The post-World War expansion was mainly fuelled by an expansion in social spending and the increasing public financing of healthcare and education
The second and most definitive phase of welfare state expansion took place between the second World War and the beginning of the 1980s. Government spending to GDP grew by more than 15 percentage points between 1950 and 1980 in every advanced economy. Government spending to GDP more than doubled in the United States and Japan during the stated period. In the United Kingdom, France and Germany, spending to GDP grew by 41 per cent, 88 per cent and 84 per cent respectively. The post-World War expansion was mainly fuelled by an expansion in social spending and the increasing public financing of healthcare and education. The “welfare state”, as termed by the British Labour Party, was born. This period is represented by the creation of the National Health Service (NHS) in Great Britain, the Great Society programme of the Johnson administration in the United States, the dirigisme of Président de Gaulle in the French Fifth Republic and the Soziale Marktwirtschaft (Social Market Economy) of the Adenauer-era in Germany.
The political economic justification of the welfare state expansion rested on three different arguments. The first was the positive perception about the operation of the centrally-planned wartime economy. Later on, it became clear that though central planning might be necessary in times of war, in peacetime it is inoperable, inhibits growth and at worst it could lead to tyranny and oppression (so laid the central argument of Friedrich August von Hayek’s magnum opus, The Road to Serfdom). The second argument was based on the perception of the “impressive” performance of the centrally planned Soviet economy. Western, left-leaning intelligentsia saw the Soviet results as a justification for socialist planning and used its influence to make a political case for the welfare state. Of course, it’s clear today that most Soviet economic results were highly exaggerated and more importantly, these results certainly did not translate to (economic) well-being for the Soviet population. The final argument laid on the positive perception of the Roosevelt administration’s New Deal programme. The New Deal expanded social security, started massive public work programmes and introduced wide ranging price and wage controls. Though the New Deal has had great marketing ever since, recent research has pointed out that the New Deal was quite unsuccessful in reducing unemployment and most likely prolonged the Great Depression in the United States.
Despite many counterarguments to government intervention, the welfare state expansion proved to be decisive following the war. As government spending increased, taxation increased along. Historically, income taxes covered most government expenditures. The massive postwar government expansion required a new source of tax revenue. Hence, the value added tax (VAT) was created. The introduction of VAT and rising income taxes covered the welfare state expansion in most advanced economies. High spending, high taxation, high regulation and lax monetary policy made most advanced welfare states prone to external shocks, which eventually came in the form of the first and second oil crisis of the 1970s. The supply side shock caused by increasing oil prices and the inflationary pressures inherent in the welfare state economies resulted in permanently high inflation throughout the 70s. Increasing inflation accompanied by increasing unemployment and economic stagnation lead to what economic literature calls “stagflation”. The obvious flaws of the welfare state lead to the pro-free market, supply side reforms in many advanced economies (most notably in the United Kingdom under Margaret Thatcher and the United States under Ronald Reagan). The economically liberal reforms of the 1980s halted the welfare state expansion for some time, but the financial crisis of 2008 resulted in a huge setback for the proponents of economic freedom and a small state.
The third, and most arguable phase of welfare state expansion came after the collapse of the Soviet Union in the countries of the Eastern bloc
The third, and most arguable phase of welfare state expansion came after the collapse of the Soviet Union in the countries of the Eastern bloc. The expansion is arguable as opposed to western advanced economies the countries of the Eastern bloc had to actually reduce government intervention and transform their economies to gain competitiveness in the global market economy. In their pursuit of economic well-being and due to the negative side-effects of the transformation crisis many post-socialist countries tried to adopt the Western welfare model from the very beginning. The problem with the adoption of the welfare state in premature emerging economies was that it did not enhance well-being but instead inhibited growth and contributed to the external indebtedness of these post-socialist countries. Besides that, the political mechanisms inherited from the Soviet era meant that the efficiency of bureaucracy was even less than in western advanced economies. Therefore the welfare state model was adopted in a highly distorted and harmful form in emerging, post-socialist economies which became a great source of economic malady in the past few decades.
All in all, the 20th century brought along a definitive transformation in the perceived roles of the government both in advanced western economies and the emerging countries of the post-socialist bloc. Through the adoption of the welfare state, or its more extreme form, the entitlement state, western economies took up huge financial liabilities which might hold serious questions for economic policy in the upcoming decades. Besides the economic problems welfare expansion might cause, considerable political philosophical arguments have been made against such welfare models. What are the main arguments for the conservative critique of the welfare state? What economic malaise might the welfare expansion bring along? In the next part of this series I will seek answers to these questions.
Esteban Ortiz-Ospina, Max Roser, ‘Government Spending’, https://ourworldindata.org/government-spending