Hungarian Conservative

The Flawed Concept of a Welfare State – Part II: The Critique of the Welfare State

The issue of fiscal sustainability will determine both the economic and geopolitical future of the Western civilization. The status quo of welfare states might be a huge impediment to that.

The post-Second World War years saw the greatest expansion in the size and scope of state activity and government intervention in human history. The advanced economies of the West took up huge financial liabilities on the way of creating the so-called ‘entitlement state’. The increase in government spending brought along record levels of taxation and made advanced economies prone to external shocks that eventually lead to a temporary setback for the proponents of expansion in the 1970s. In the previous part of this series, we gave a detailed history of the three stages of welfare expansion throughout the twentieth century. In this article, I will cast light on both the conservative, social critique of the welfare state and the liberal, economic reasoning.

The Conservative Critique

To understand the conservative critique of the welfare state, it is essential to summarize the three main tenets of (liberal-)conservative political thinking in the tradition of Michael Oakeshott and Friedrich August von Hayek. The first is the belief that incremental change is always preferable to radical transformation. Contrary to the common belief, conservatism is not an anti-change attitude. Conservatives definitely reject change that happens for its own sake and also condemn radical action that aims to disturb an existing social order. However, that does not mean that conservatives are against progress or development, given that it is conducted in an incremental, organic way.  

Conservatism is highly skeptical of centrally enforced change that goes against the basic instincts of the community and society itself

The second main tenet of conservatism is a belief in an organic social order. This notion is quite opposed to a centralized, autocratic system that enforces the will of a few policy makers and makes society prone to the arbitrary action of those who intend to “design” the social order. Briefly, conservatism is highly skeptical of centrally enforced change that goes against the basic instincts of the community and society itself. Conservatives believe that people (though definitely fallible) create an organic community that acts according to its own instincts and traditions without the need of deliberate design on part of the state.

The third main tenet holds that the struggle to create a perfect world is pointless at best and harmful at worst. Revolutionary action that aims at reorganizing societal conditions in order to create a utopic, flawless society can be fatally dangerous and only serves the interests of the revolutionary elite. It is important to emphasize that revolutionary action does not necessarily happen through the use of violence and terror, but it is also possible in democratic systems in which institutions do not protect the citizens from what we may call the ‘tyranny of the majority’.

Based on the three main tenets listed above, it is quite clear that the very concept of the welfare state is inherently antithetical to conservative political thinking. The architects of the welfare state, mostly left-leaning post-war intelligentsia and influenced policy makers believed that the utopic vision of an egalitarian society justified a radical transformation of the economic and social order. This idea dominated the two decades that followed the Second World War.

This rapid transformation resulted in grave consequences. Such consequences included the increase in the financial burden of states imposed by entitlement expansion, the erosion of civil society and civil initiatives, the inhibition on the operation of the market economy, the increasing dependence of the poor on the government, the ever-increasing corruption and the appearance of the distorted system of crony capitalism. All these consequences were attributable (at least in part) to the creation and expansion of the welfare state. Besides, these consequences formed the cornerstone of the above-mentioned conservative critique.

The Liberal-Economic Critique

While the conservative critique of the welfare state is centred around the flawed aims of an egalitarian society, the liberal-economic critique is centred around the inability of a welfare state to achieve such aims. The economic reasoning is laid on the arguments of inefficiency, information problems, fiscal burdens and economic costs. Whereas the liberal critique shares several common points with the liberal-conservative critique, it has a primary economic focus and usually comes from a pro free market perspective.

The main liberal criticism of the welfare state is based on the argument of governmental inefficiency

The main liberal criticism of the welfare state is based on the argument of governmental inefficiency. On an economic basis, a strong argument can be made against never-ending expansion in the size of the state. Some problems might require better, not more government, and in many cases, less government. Even the egalitarian aims of the welfare state are not necessarily conditional on higher income redistribution. If we look at the correlation between the level of redistribution (measured by the difference between post-tax and pre-tax Gini indices) and the level of redistribution (measured by government spending to GDP) in advanced economies we might discover only a weak positive correlation between the two variables. This means that more government redistribution does not necessarily mean a more egalitarian society. A huge proportion of state redistribution is horizontal, instead of the declared goal of vertical redistribution between different income classes in a welfare state model. This highlights a basic efficiency problem related to how governments operate.

Besides inefficiency, governments also lack information necessary to make decisions on behalf of those who provide the state with tax revenues (laid the ‘dispersed information’ argument of Friedrich August von Hayek). Without the revealed preferences of citizens, the government necessarily does a worse job in utilizing tax dollars than what the citizens would have been capable of before taxation happened. This does not mean that governments should not engage in providing certain public goods, but it is definitely an argument against such high levels of income redistribution we might experience in the welfare state models.

Finally, the economic critique often highlights the economic costs and future liabilities of welfare state expansion. The adoption of the pay-as-you-go pension system in most advanced economies (a system in which current tax income covers pension payments) accompanied by an expansion in public healthcare provision originates very high levels of uncovered financial liabilities given the dramatic aging Western societies experience. These liabilities are going to require a much higher level of taxation that might lead to an even bigger expansion in the size of the state. The expansion leads to smaller economic growth that results in smaller tax revenues and this situation demands once again higher levels of taxation. In the end, the spiral goes on and on forever.

The overall point is, given the current demographic conditions, that the creation of the entitlement state put governments on a fiscally unsustainable path. Without proper tax revenues and a decrease in future entitlements, Western economies are doomed to step on the path of ever-increasing indebtedness or enter the world of monetary financing with highly elevated inflation that corrodes economies even further. Both scenarios dramatically reduce the financial leeway of governments, which might be catastrophic given an eventual need for financing in case of a war or another (natural) emergency. The future of the West highly depends on such questions of financial sustainability. Unfortunately, these issues have been increasingly sidelined in the ongoing culture wars of the twenty-first century. Asking these questions again is of paramount importance with regards to both the economic and the geopolitical future of the Western civilization.

The creation of the entitlement state put governments on a fiscally unsustainable path

All in all, the concept of the welfare state has been subject to criticism from both conservative and liberal thinkers since its inception in the post-war years. While conservatives mostly emphasized the social criticism, including the erosion of civil society, the intrusion into societal order and making the poor even more dependent on government welfare, liberals provided an economic critique highlighting the fiscal and economic burden a welfare state imposes alongside with the inherent inefficiency of government intervention. Although both reasoning found its own following, the critique of the welfare state has been increasingly sidelined in the political discourse of Western countries in the past two decades. Hopefully, political actors and public intellectuals will rediscover these questions in the not so far future as they will determine to a great extent what the future of Western civilization and mankind will be.  

The issue of fiscal sustainability will determine both the economic and geopolitical future of the Western civilization. The status quo of welfare states might be a huge impediment to that.