Can the Welfare State Survive? - Andrew Gamble (2016)

Chapter 1. The Life and Times of the Welfare State

For more than one hundred years the welfare state has been an integral part of the most successful and advanced capitalist economies. It has commanded support from all parts of the political spectrum, and although in the twentieth century it became particularly identified with parties of the labour movement and the democratic Left, it was at first principally associated with politicians of the Right and Centre-Right, including Conservative aristocrats like Otto von Bismarck in Germany and Liberal industrialists like Joseph Chamberlain in England. Many representatives of the propertied classes in the nineteenth century backed the development of state-funded welfare programmes to provide greater security to the urban working class and shield them from some of the uncertainties of the market, principally through the provision of unemployment pay and pensions. Most working people had no property or assets, and were therefore always at risk of being plunged into dire poverty by losing their job, falling ill, growing old, or losing the main breadwinner in the family through death or desertion. Misfortunes could strike without warning, creating great uncertainty even during good times.

There was a steadily growing acceptance that something needed to be done for the working poor, particularly the deserving poor, those who worked hard and did the right thing, but suffered hardship and misfortune through no fault of their own. The Christian Churches played an important role in changing opinion. But if compassion played a role, fear was also a powerful motivation. Bismarck was concerned to stop the rise of the socialist movement in Germany by seeking to divide it and make workers dependent on the German state for their welfare. Chamberlain declared bluntly that property must pay a ransom if it wanted to keep its privileges. This view was widely shared across Europe. The dazzling display of Edwardian England and La Belle Époque in France reflected both the vast wealth which nineteenth-century capitalism had created and its very unequal distribution. Wealth was more concentrated than it has been at any time since, and the sharp contrast between the wealth of the propertied and the poverty and insecurity of the great majority of working people helped fuel radical anti-capitalist movements of the Left.

Providing welfare through the state was conceived as a means of protecting property and deflecting popular protest by giving the poor a greater stake in the political system, proving that the state could act for them and not only for the wealthy. Helping the poor in this way was deeply controversial, but it was justified both on grounds of paternalism – the poor deserved the help of the community – and on grounds of expediency – guaranteeing a minimum level of income and security, countering catastrophic declines in income for households, was a small cost if it helped avert social disorder and social revolution. Critics warned, as they have been warning ever since, that it was a slippery slope. Once the state took responsibility for providing economic security to the poor, it would remove the incentives to work and create an ever-growing number of dependants. Herbert Spencer spoke for many Liberals across Europe. If someone ended up in the gutter, it was their own fault, and the state should not step in to protect them from the consequences of their folly.

This view was widely held, but it did not ultimately prevail. The gaps in private and voluntary provision of welfare were too large, and using the fiscal and organizational power of the state to remedy them had many advantages. Coverage could be made comprehensive, and a set of common rules applied to all. Most of the early schemes were not particularly generous and were closely tied to an insurance principle. Workers paid in to the scheme and then were guaranteed payouts when they needed them. In this way, individual responsibility and self-reliance were preserved. And there was minimal interference with the market order. What the state ensured was that the funds would always be there when they were required, which helped reduce insecurity.

The first welfare states therefore emerged as a moral response to the plight of the working poor in the new industrial capitalism, as well as a pragmatic response to the political danger of the state turning its back on the working class, which was beginning to organize in its own self-defence. But there were also other powerful reasons for the rise of welfare states, apart from morality and expediency. Modern industrial economies needed healthier, better-educated, and better-paid workers if they were to reach their full potential. Markets were seen as too slow, too uncertain, too wasteful, too selective, to provide what was needed, and the gaps could only be partly filled by families. Expanding the state became the solution. The new collectivism on both right and left regarded the modern state as an enterprise, a command economy, a military operation, which could cut through the waste and inefficiency of laissez-faire capitalism and mobilize the full potential of each nation.

Welfare states were also about nation-building, the creation of a common citizenship. Modern citizens were all members of the same nation and as such had certain entitlements and expectations as well as obligations and responsibilities. Each nation was a community of fate. Citizens depended upon one another; their fate was inextricably bound up with that of all other citizens in the national community. This meant that the state, too, had both an obligation to maximize the potential of every citizen and an interest in doing so. Providing the best possible education, the best health care, the best opportunities for creativity and training – all these became both what modern citizens expected and modern governments strove to deliver. Nations were competing with other nations, so governments could not afford to neglect their most valuable resource, their own people.

The new nationalism in Europe and the pressure for the state to extend its role and its capacities were closely linked to the spread of democracy. At the end of the nineteenth century, political power in Europe was still in the hands of a narrow political class, its position protected by a restricted franchise. The labour movements of European social democracy were anti-state movements because the state was the monopoly of the propertied classes, both aristocratic and capitalist. Many of these movements established their own institutions outside the state to pool risk and protect their members. There were important strands of cooperative and labour movements which were both anti-capitalist and anti-state. They sought to create a protected sphere outside both the existing state and the market to provide for needs which the state would not recognize and to protect against the uncertainties and risks of a market economy. This was a form of collective self-reliance, to mitigate some of the effects of the capitalist market, but the power of those institutions was limited.

All this was to change as the vote was extended to all citizens, both men and women, across Europe following the end of the First World War. Parties of the democratic Left developed a new strategy to achieve their aims, which involved gaining political power through the institutions of representative democracy, by winning parliamentary majorities and taking control of the existing apparatus of the state bureaucracy to implement their programmes. After some intense struggles, agreement gradually emerged across the political spectrum not only that welfare programmes were desirable, but also that they should be either provided through the state or underpinned by it. Parties of the Centre-Right, influenced by Catholic social teaching, also emerged as champions of particular kinds of welfare state. The argument between parties of right and left was increasingly over how generous state welfare provision should be, and how much redistribution should be involved, not over the principle itself. Progress was still slow, however, in part because the fiscal base of the nineteenth-century tax state was geared to the interests of the propertied class and was far too narrow to provide the kind of funds necessary to support universal welfare programmes. But during the first half of the twentieth century, collectivist remedies and approaches were gradually adopted, and ways were found to enlarge the capacity of the state to impose and collect taxes. War was a great catalyst in this respect. The need to enlarge the state to secure national survival in an era of total war obliged governments to find new sources of revenue for weapons and armies. They simultaneously acquired new powers to control and plan many different aspects of modern society. Once the state had expanded, it was hard to shrink it back to its former size. The old liberal political economy, with its doctrines of individualism and laissez-faire and its suspicion of the state and the centralization and concentration of power, fell under a cloud for a time, even in its Anglo-American heartlands.

One of the reasons for this was the spectacular crash on Wall Street in 1929, which was followed by the fragmentation of the international economic order, the collapse of the gold standard, economic stagnation and depression in many countries, and the emergence of economic and military blocs. These events strengthened the argument that the reforms already achieved had not gone far enough. Capitalism had to be fundamentally reorganized to provide a basic minimum of income and security for every citizen. How this was to be done was at first unclear. Piecemeal incremental reform was the pattern in the 1930s. What transformed the situation and provided the opportunity for a much more general reconstruction of the domestic and international political economy was the outbreak once again of world war, this time on a new and terrifying scale. The intensity of the struggle for national survival brought with it the demand for a new domestic order as well as a new world order. If nations could organize themselves so effectively for war, they could also deliver a lasting and prosperous peace, based on welfare and security for all.

The new mood and purpose found expression in the Beveridge Report, published in the United Kingdom in December 1942, which characterized the problem facing Western societies in terms of the five giants of Want, Idleness, Disease, Ignorance, and Squalor.1 The remedies proposed and adopted in more and more countries after 1945 were universal programmes of social security, health, education, and housing, funded through much higher levels of taxation. The insurance principle still lay at the heart of these welfare states. Redistribution was primarily between different generations and between people at different stages of their lives. But there was also much greater taxation of property, both income and wealth, as a result of the war and its dislocations, and so after the war the propertied classes throughout the Western economies were generally paying more towards state programmes than they had ever done in the past, and more than they were ever to do again.

All the European economies had a painful period of reconstruction after 1945, to overcome the huge destruction of physical and human capital during the war. But once this period of often dire poverty and hardship had been navigated, the Western economies, far from lapsing back into stagnation and slow growth, as many had feared, instead embarked on the most successful period of growth and prosperity in the history of capitalism. The new expanded welfare states played their part in this, although they were not the only cause. Defence and rearmament and the expansion of new technologies were also important. The economic success meant that welfare states were accepted as never before as a crucial component of a legitimate market order. Competition with the Soviet Union played a part too. Western states were determined to resist internal subversion and to show that their model of political economy was superior. Generous welfare states and high and rising living standards were crucial components of the Western model. Over time this model outperformed its rival. But it did more than that. The remarkable success of Western capitalist economies in the 1950s and 1960s led many to assume that the secret of stable and prosperous democratic capitalism had been discovered. There was a class compromise and social peace unimaginable to those who had experienced the deeply divided class societies of the past. The essence of the compromise was described by Seymour Martin Lipset.2 Conservatives accepted that there should be a generous welfare state for all citizens, while socialists accepted that not all economic power should be concentrated in the hands of the state.

This period in which the welfare state was relatively uncontested was short-lived. It was a time of falling inequality, rising social mobility, and high levels of political participation, as well as high employment, low inflation, and rapid rises in productivity, output, and wages. For many on the democratic Left, the period appeared to show that democracy and capitalism could co-exist, and that if social democracy was strong and vigilant enough, capitalism could be tamed, and its energies channelled in ways which aided rather than undermined social cohesion. The expanded welfare programmes paid for by high and progressive taxes were one of the main signs of this. The Right, too, accepted the new dispensation as a reasonable compromise. Many of the welfare regimes which emerged across Europe were shaped by the parties of Christian Democracy. There were some who were not reconciled to the compromise, fearing the long-term erosion of liberty, and worrying with Friedrich Hayek that Western societies had embarked on a road to serfdom.3 But more agreed with Karl Polanyi that nineteenth-century capitalism had been unsustainable. It was so destructive of the conditions for stable societies that it had provoked a strong reaction from both right and left, and the imposing of new rules and restrictions on how capitalism operated so as to protect the interests of the majority.4 What was surprising to many observers was that a much larger state, greatly expanded welfare provision, and the strengthening of the position of organized labour proved compatible with an expanding and reinvigorated private sector.

What undermined this settlement was the end of the boom and the emergence of a new set of economic problems which produced higher inflation and low growth, the stagflation of the 1970s. The United States was no longer willing to sustain the international monetary order under the same conditions as had existed since the 1940s and set about restructuring it. Domestic political conflict intensified and opinion polarized over how best to deal with rising inflation and the trade union militancy which was one of its effects. The impact of this crisis was uneven, but in those countries hit hardest, one of the central issues of dispute came to be the welfare state. Had it grown too big, and become too expensive? Was it now too much of a burden on the wealth-producing sectors of the economy, inhibiting rather than facilitating growth? One influential text produced at this time by two Oxford economists, Roger Bacon and Walter Eltis, argued that most of the public sector, including the welfare state, did not produce any wealth in itself, but instead was parasitical upon the private sector. The solution to the problems of the British economy in the 1970s, and by extension those of all the advanced economies, was to cut back sharply on both employment and output in the public sector to make room for private investment and private profits.5 This argument was a new statement of the old Treasury view from the 1920s and 1930s which had so vexed John Maynard Keynes. It stated simply that any expansion in public spending would always be at the expense of private spending and investment.6 Since the latter was assumed to be more economically efficient, the effect would be to impoverish the economy. The modern jargon is ‘crowding out’. Public sector spending and investment crowd out investment and spending by the private sector. It followed that in a period of slow growth and inflationary pressure, the correct policy response is to scale back public spending, including welfare spending.

The political struggle over taxes and spending in the 1970s changed the terms of the debate about the welfare state in the liberal political economies of Anglo-America, and marked the beginning of a major divergence between these welfare regimes and those elsewhere in Europe. In Anglo-America, the welfare state came to be seen as no longer a condition for growth and prosperity but a potential barrier and obstacle to it. Welfare spending was only affordable when the economy was growing strongly and should be cut back if the economy stalled. Following the upheavals of the 1970s, a new set of policy priorities came to be established in both the United States and the United Kingdom in the following decade. In the much more open world economy which ensued after the dismantling of the Bretton Woods fixed exchange rate regime, national economies had much less protection from the international financial markets, and a series of neo-liberal reforms were introduced in many countries: the ending of capital controls, deregulation and privatization, lowering of taxes on income and wealth, and the weakening of employment rights and trade unions to create flexible labour markets.

Even in those states which went furthest in experimenting with neo-liberal arrangements, the welfare state did not disappear. Indeed, in important respects it continued to expand, although in different ways and to a different extent depending on local political circumstances. In some countries, there were political attempts to dismantle parts of the welfare state, and there was strong pressure to contain it and shrink it. In other countries, the pressure to cut back welfare was much less marked, and some even continued to expand their welfare provision. There had always been differences among the Western economies in the size and scope of their welfare states, reflecting the different political coalitions which had created and sustained them, but in the 1980s and 1990s this became more marked. This divergence in the character of welfare states was termed by Gøsta Esping-Andersen ‘the three worlds of welfare capitalism’. He distinguished between the generous Nordic social democratic welfare states in Scandinavia, the hierarchical corporatist welfare states found particularly in the German-speaking world, and the residual liberal welfare states found in the states of Anglo-America.7 The divergence between these three models had become significant, although Esping-Andersen noted that even the residual welfare states were still recognizably welfare states in providing collective programmes to combat insecurity arising from the life-cycle or the labour market, and there were still important universal programmes, like the British National Health Service, which remained free at the point of use. All three models delivered welfare through a combination of markets, households, and states, but differed in the relative emphasis they placed on each. Liberal welfare states relied more heavily on markets, conservative welfare state on households, especially traditional forms of the family, and social democratic welfare states on the state.

Esping-Andersen’s work was important also for the new clarity he brought to defining the welfare state. He criticized models which defined this by how much governments spent on welfare, arguing that welfare state regimes needed to be grasped as coherent wholes, created through the interaction of states, markets, and households, and reflecting particular class coalitions of interests, which led to different rules, institutions and policies, and outcomes. For Esping-Andersen, the most important way of differentiating welfare state programmes and welfare state regimes was whether they allowed individuals to escape from dependence on the market or whether they confirmed that dependence. The promise of the welfare state as it has unfolded is that all citizens gain social rights which are inviolable, granted on the basis of citizenship rather than performance in the market. This means that citizens are no longer forced to meet all their needs and those of their dependants through the market wage they can command, or to deal individually with all the uncertainties of unemployment, sickness, injury, and old age. Instead, their basic human needs for security are met by the collective provision of services and support outside the market. ‘Decommodification’ of labour means that workers are freed from market disciplines through the collective pooling of risks and the recognition of their social rights. Esping-Andersen identifies the trend to decommodify labour as the fundamental logic of the welfare state, and what makes it not subordinate but complementary to the market.

Welfare state regimes diverged more sharply in the neo-liberal era than they did before it, but even in those countries where the reaction against ‘welfarism’ was strongest, the United States and the United Kingdom, there was still strong political resistance to welfare cuts. Radical right governments like the Reagan administration in the United States and the Thatcher government in the United Kingdom made much less progress in ‘rolling back the state’ than their rhetoric suggested.8 Electoral politics was one constraint – many of the universal programmes were popular and governments were wary of meddling with them. There were also powerful vested interests which defended existing levels of provision, not least the large numbers of private companies which were dependent on public contracts to supply services and equipment for the main welfare programmes. Retrenchment proved to have definite political limits.

Neo-liberalism was not a single doctrine. There were several significant strands, including a laissez-faire strand, which emphasized market freedom, a social investment strand, which emphasized investment in human capital, and an ordo-liberal strand, which emphasized fiscal balance and rule-based policy-making. The international framework within which all governments had to work was neo-liberal, reflecting the reshaping of the rules governing the international market order in the 1970s and 1980s. But within this framework there were many different possibilities, and there was certainly no uniformity or pressure to converge. Some governments experimented with Third Way policies of social investment combining economic efficiency and social justice.9 They accepted many of the domestic neo-liberal reforms undertaken in the 1980s, but were still able to increase significantly the proportion of national income spent collectively on welfare. Critics of the Third Way argued that it continued the erosion of the non-market sphere and made welfare states dependent once again on markets and market criteria. But it also demonstrated that it was perfectly possible even within the liberal market economies of Anglo-America to give a high priority to the welfare state, and to find ways to expand it again, in terms of both spending and employment.

The 1970s was a period of crisis for the welfare state, the first time the momentum of its development had been slowed, and the first time since its inception that serious questions had been raised as to whether its continued expansion was still desirable. There were numerous radical right and market libertarian analyses of why the welfare state was so flawed. At the other end of the political spectrum, many on the Marxist Left also became strong critics of welfare developed through the state. But as Claus Offe argued, the problem for capitalism was that it could no longer live with the welfare state, but it could also no longer live without it.10 This has remained the problem up to the present. Many of the more ambitious attempts to dismantle the post-war welfare states had only limited success in the neo-liberal era, and the staying power of the welfare state and even its ‘irreversibility’ seemed to be confirmed by empirical studies. It had become embedded in both the politics and the political economy of all the Western economies. There were many different welfare state regimes, and researchers added several more to the three core clusters identified by Esping-Andersen, but all recognizably belonged to the process which had so transformed the laissez-faire capitalism of the nineteenth century and laid the foundations of the organized capitalism of the twentieth. Welfare capitalism had become the norm for all the advanced capitalist economies. The scope and scale of the state had been transformed to help sustain and reproduce the capitalist order.

This conclusion seemed confirmed by the impetus which developed in the 1990s and early 2000s to reform existing welfare states rather than merely retrench them, adapting them to take account of the rise of new social risks and changes in employment patterns and in the composition of households. The social investment welfare state was most evident in the social democratic welfare regimes of the Nordic countries, but it also strongly influenced the Neue Mitte in Germany and the Third Way in the United Kingdom. The emphasis was placed on the need for the welfare state to be active rather than passive, and to engage in continuous reform in order to ensure that it remained both affordable and capable of delivering the kind of services and the quality of services which citizens demanded.

In the twenty-first century, however, the future of the welfare state has again been questioned. The neo-liberal order, like the Keynesian order before it, developed its own pathologies which combined to deliver the financial crash in 2008. The meltdown of the financial system was narrowly averted, but at the cost of a severe recession in 2009, followed by a long-drawn-out recovery, the slowest since 1945. Even in 2015, some countries had not regained their pre-crash level of output, interest rates remained at rock bottom, quantitative easing had been employed on a massive scale by central banks to improve banks’ balance sheets and keep asset prices high, and growth and productivity remained subdued in most economies and the prospects uncertain.11 Against this background, a new political conflict over distribution and growth developed, both within national political economies and between them, as, for example, in the case of the eurozone. A politics of austerity became established, especially in Europe, which advocated fiscal consolidation as the correct policy response to the financial crisis and the recession, cutting back public spending, and welfare spending in particular, in order to eliminate budget deficits and bring down spiralling national debts.12

This crisis, for which there is as yet no end in sight, has posed a great challenge once more to the welfare state. If the neo-liberal growth model cannot be restored, the Western economies may be condemned to a long period of secular stagnation: slow growth, stagnant living standards for the majority, rising inequality, and persistent pressure towards deflation. Such a situation would be extremely testing for the survival of welfare states, and already there has been a revival of calls for radical surgery to existing welfare states, dismantling much of the structure of collective welfare provision built up over the last century. Radical right ideas have made big inroads into the Republican Party in the United States. Rand Paul, one of the contenders for the Republican presidential nomination in 2016, and Paul Ryan, who was the Republican nominee for Vice President in 2012, have put forward ambitious plans for returning the size of the federal state to nineteenth-century levels. The current crisis has revived many of the critiques of the welfare state which were first formed in the 1970s. The buoyancy of the international economy in the 1990s and early 2000s, in part supported by the strong performance of the rising powers, China, India, and Brazil, had blunted the edge of these critiques. But the financial crash has revived them. The questions are posed once again with special urgency whether the welfare state should and will survive, and whether it retains the moral legitimacy or practical capacity to do so.

Notes

1. Nicholas Timmins, The Five Giants: A Biography of the Welfare State (London: HarperCollins, 2001).2. Seymour Martin Lipset, Political Man (London: Heinemann, 1960).3. F.A. Hayek, The Road to Serfdom (London: Routledge, 1944).4. Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Boston: Beacon Books, 2001).5. Roger Bacon and Walter Eltis, Britain’s Economic Problem: Too Few Producers (London: Macmillan, 1976).6. Robert Skidelsky, Politicians and the Slump (London: Macmillan, 1967).7. Gøsta Esping-Andersen, The Three Worlds of Welfare Capitalism (Cambridge: Polity, 1990).8. Paul Pierson, Dismantling the Welfare State? Reagan, Thatcher and the Politics of Retrenchment (Cambridge: Cambridge University Press, 1994).9. Anthony Giddens, The Third Way: The Renewal of Social Democracy (Cambridge: Polity, 1998); Anthony Giddens, Patrick Diamond, and Roger Liddle (eds), Global Europe: Social Europe (Cambridge: Polity, 2006).10. Claus Offe, ‘Some contradictions of the modern welfare state’, Critical Social Policy 2:2 (1982), 7–14.11. Andrew Gamble, Crisis without End? The Unravelling of Western Prosperity (London: Palgrave-Macmillan, 2014).12. Mark Blyth, Austerity: The History of a Dangerous Idea (Oxford: Oxford University Press, 2013).