The Welfare State Revisited

José Antonio Ocampo, Joseph E. Stiglitz

• Publisher: Columbia University Press
• Year: 2018
• ISBN:
  9780231546164
• Topic: Economics
• Subtopic: Political Economy
• Index: Economics

The welfare state has been under attack for decades, but now more than ever there is a need for strong social protection systems—the best tools we have to combat inequality, support social justice, and even improve economic performance. In this book, José Antonio Ocampo and Joseph E. Stiglitz bring together distinguished contributors to examine the global variations of social programs and make the case for a redesigned twenty-first-century welfare state.

The Welfare State Revisited takes on major debates about social well-being, considering the merits of universal versus targeted policies; responses to market failures; integrating welfare and economic development; and how welfare states around the world have changed since the neoliberal turn. Contributors offer prescriptions for how to respond to the demands generated by demographic changes, the changing role of the family, new features of labor markets, the challenges of aging societies, and technological change. They consider how strengthening or weakening social protection programs affects inequality, suggesting ways to facilitate the spread of effective welfare states throughout the world, especially in developing countries. Presenting new insights into the functions the welfare state can fulfill and how to design a more efficient and more equitable system, The Welfare State Revisited is essential reading on the most discussed issues in social welfare today.

PART I

CHAPTER 1

The Welfare State in the Twenty-First Century

Joseph E. Stiglitz

Designing the twenty-first-century welfare state is part of a broader debate redefining the role of the market, the state, and “civil society”—non-state forms of collective action.

One of the tenets of the Reagan-Thatcher revolution was questioning the welfare state. Some worried that the financial burdens of the welfare state would drag down growth. Some worried about the effect of the welfare state on the sense of individual responsibility, others that the welfare state provides an opportunity for the lazy and profligate to take advantage of hardworking citizens. A sense of social solidarity had united citizens around the world during World War II. Some thirty years after that global conflict, that solidarity was eroding, and economic arguments quickened its disintegration. Even two decades after the doctrines of the Reagan-Thatcher revolution of the 1980s had taken root—and long after its shortcomings had become obvious—others argued that the welfare state had contributed to the euro crisis.¹

This chapter argues that these arguments criticizing the welfare state are for the most part fallacious and that changes in the global economy have even increased the importance of the system. It then describes some of the key elements of a twenty-first-century welfare state.

1. BASIC PRECEPTS OF THE WELFARE STATE

To understand the principles and philosophy of the welfare state, it is useful to contrast it with the “neoliberal” or market-oriented state.²

The central economic doctrine of neoliberalism is that markets are efficient. (There are limited exceptions to this belief; for example, many who believe that markets are normally efficient still believe that the government should intervene in certain cases, for example, to ensure macroeconomic stability or to prevent pollution.) Moreover, market advocates believe that every (Pareto-) efficient outcome can be supported by a free-market economy, with the appropriate (lump-sum) redistributions.³ This implies that one can separate issues of efficiency and distribution, and that the task of economics is to maximize output (as reflected, say, in GDP), leaving the distribution to the political process. When the conditions required for these results to hold are not satisfied, the job of the economist is to advise governments on how to ensure that they are. For example, markets must be made competitive through effective enforcement of antitrust laws.

Of course, politicians who have argued against the welfare state typically do not frame their critique in the formal language of economics. Rather, they talk about how the provision of social insurance attenuates incentives, for example, through the taxes that are used to finance it. Many politicians go further, saying that the welfare state creates a culture of dependency, implicitly arguing that it changes the nature of the individual. This argument moves beyond standard welfare economics, which takes preferences as fixed and given. This is an important argument, to which I return shortly.

By contrast, the advocates of the welfare state believe that markets are not, in general, efficient; that market failures are pervasive and not easily correctable; and that as a result, government needs to take a more active role. Of course, government should do what it can to ensure that markets work well, more in accord with how they are described in standard textbooks—for example, making sure that there is strong competition and that firms do not exploit ordinary individuals through questionable practices.

Later in this chapter, I will briefly recount the theoretical research done over the past forty years that helped us understand that pervasive market failures indicate that markets are often not efficient and that there is an important role for government, including those roles typically associated with the welfare state. The political debate was framed differently: the demand for the welfare state was driven by hard-to-ignore imperfections in markets that sometimes had a devastating effect on people’s lives and well-being. It was obvious that markets were not providing insurance against many of the important risks that individuals faced, such as unemployment and inadequately financed retirement. The annuities that were available were expensive, and none had provisions against important risks, like the risk of inflation. The absence of these insurance markets had profound effects both on efficiency and individual well-being. Indeed, it can be shown that the provision of well-designed unemployment benefit programs can not only increase well-being but even increase GDP (Stiglitz and Yun 2017).

So too, many individuals had substandard housing, suffered from hunger, and had inadequate access to medicine. Access to these necessities was declared a basic human right under the UN’s 1948 Universal Declaration of Human Rights. Whether one framed these deprivations in terms of basic economic human rights or in other ways, there was a call for specific equalitarianism, focusing not just on income but on specific goods (Tobin 1970). Economists might debate why individuals faced these specific deprivations—whether it was a result of market failures or individuals’ poor decisions or the failure of the political process to make the necessary redistributions—but the fact of the matter is that the deprivations were deep and pervasive.

Of especial concern were those deprivations confronting children, which were in no way a result of their own choices or behavior. Here again it was clear that such deprivations represented a social injustice but also led to lower GDP—these individuals would not be able to live up to their potential.

Thus, the creation of the welfare state was motivated by observed failures in the economy and society, outcomes that seemed socially unacceptable. Developments in economic theory only helped explain why these failures should have been expected.

Twenty-first-century advocates of the welfare state begin with the premise that something is not working when large sections of society face such deprivations and that government can and should do something about these failures. Moreover, ordinary individuals are having difficulty coping with unanticipated financial stresses. In the United States, what was once viewed as a basic middle-class life is no longer attainable for large swaths of society. Matters are so bad that life expectancy across important parts of the population is actually in decline (see Case and Deaton 2015; 2017). The welfare state cannot remedy all of the ills facing our society, but the advocates of the welfare state believe it can make a difference. The traditional welfare state focuses on a particular set of “market failures” associated with the markets’ ability to help individuals confront important risks that they face,⁴ such as providing for social protection, through, for instance, retirement insurance (annuities) and health insurance.⁵ Markets have also failed to provide insurance against unemployment and disability, and again the welfare state stepped in.

In some ways, there is a parallel between the welfare state and the developmental state. In the latter, it was recognized that markets on their own often did not succeed in the structural transformations that were required if countries were to achieve their developmental ambitions. As in the case of the welfare state, the rationale for state intervention was partly pervasive market failures of both the static and dynamic varieties. The developmental state corrected these market failures and had a catalytic role in promoting structural transformation. It helped change mind-sets—to understand that change was possible and to understand the scientific and technological bases of change.

Advocates of the twenty-first-century welfare state argue that it should go beyond the traditional welfare state model in six critical ways:

1. Risk and innovation. They argue that imperfections of risk markets may dampen the ability and willingness of individuals to undertake risky investments, including in innovation. Thus, the welfare state leads not only to better outcomes within a conventional static...

Table of contents

• Cover 
• Series Page
• Title Page
• Copyright
• Contents 
• Acronyms
• Preface
• Part I
• Part II
• Contributors
• Index