Posted by: Brad | June 26, 2008

The Welfare State- Good or Bad?

Since the end of the Second World War, most western nations have adopted an economic policy known as the welfare state. Frequently criticized by fiscal conservatives, the welfare state endeavors to create a strong safety net that provides for all of its citizen’s basic needs. Welfare states also attempt at some leveling of society, with the end result being a lower rate of income disparity. Conservatives argue that welfare states are decadent monstrosities that lead to stunted productivity and large budget deficits. But what’s the truth about the welfare state?

I must confess that this is an issue that I am divided on. On the one hand, I can see the logic of fiscal conservatives and libertarians- let people keep the money they make. On the other hand, tremendous gaps exist in the opportunities of poor and rich people. To understand this gap and how to solve it, we must first understand two terms: equality of opportunity and equality of outcome. They are fairly self-explanatory; equality of opportunity means that the government provides its citizens with equal opportunities. Equality of outcome means that the government ensures that all people have the same amount of money or material goods (ie the same outcome) no matter what. The fall of communism demonstrated that equality of outcome doesn’t work. The best form of government is one which is able to guarantee equality of opportunity.

So the question remains; does the welfare state do a better job at providing equality of opportunity to its citizens? The simple answer is yes. In the welfare states of western Europe, universal healthcare is the norm. In the United States, the quality of healthcare that a child receives still depends upon the income of his parents. Access to higher education in the US is denied to most poor individuals. Our nation’s top colleges are so prohibitively expensive that only the upper class can afford to pay tuition. Contrast that to many other western nations, where college is free. It is reasonable to conclude that the system we have in the US does not provide equality of opportunity as well as welfare states.

It’s definitely true that taxes are higher in welfare states. In Denmark, the lowest income tax bracket is 42%. In Finland, the average income tax rate is about 50%. Still, citizens of these countries consistently report being happier than Americans. Yes, I know that happiness is a subjective term. Still, a study performed by Leicester University in Britain has the US being outpaced by most western European nations in terms of happiness. This could be due to a number of factors, but prevalent among them is surely the issue of income disparity. In western Europe, income disparity between the rich and the poor is quite a bit lower than in the US. If my psychology textbook is accurate, then income disparity is a good predictor of how happy a particular country or region is. Therefore, it is in the interest of the state to reduce income inequality as much as it reasonably can without stifling economic growth.

So what about the high taxes found in all welfare states? Don’t they inhibit economic growth? Not necessarily; economic growth in Denmark is comparable to growth in America. Sweden’s economic growth is roughly a percent or two higher than America’s. It is true that welfare states are particularly susceptible to deficit spending. However, this is largely because Europe (where most welfare states are located) has an aging population. Immigration, as well as technological advances, have the ability to generate enough wealth to support any modern welfare state.

The last issue I will address regarding the welfare state is that of income redistribution. Is it right to punish those who work hard and become wealthy by redistributing a large share of their wealth by giving it to those who are poor? The truth is that there are millions of people in America who work hard but are unable to fully support themselves and their families. When we ignore these people (as laissez faire would), then we deny them and their children equality of opportunity. All welfare states have to be careful that they do not overtax their wealthiest citizens; doing so would have profoundly negative consequences on economic growth. Again, the welfare state should not strive to ensure equality of outcome. But it should provide for the most basic needs of its citizens (ex. education, healthcare, adequate food). Failure to do so will lead to an inability to exploit the valuable human resources that are our nation’s poor. Plus, as studies have shown, we’d all be happier in a welfare state. And that’s the bottom line.

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