Crisis-Mongering

The last decade has quite obviously been a painful one economically. The persistent stagflation of the Seventies reversed the favourable terms of the post-war expansion of welfare states. Instead of growing economies and dampened inflation, we have grown to live with slowing economies and heightened inflation. And although during the Eighties we have largely tamed inflation, citizens have almost come to expect comparatively high rates of unemployment, modest rates of economic growth, large government deficits, and straitened circumstances for many of the poor who depend on governmental programmes. It has been a bracing time for the welfare state: and one which has occasioned wide-ranging intellectual arguments as to the contemporary circumstances, historical causes and likely future of welfare states.

The claim of crisis has become a major, if not dominant motif of this debate. First widely voiced in the early Seventies, the allegation of crisis is a staple of political discussion in the Eighties. It is associated with calls for a radical restructuring of social-welfare programmes that everywhere expanded greatly in the post-war period. In the American political context, this critical interpretation is very much identified with the election of Ronald Reagan in 1980 and the subsequent attacks on Federal social spending. In Europe, it is associated with the triumph and continued victories of Margaret Thatcher and with shifts away from social-democratic control in a number of other regimes.1

That claim of ‘crisis’ is, however, a very ambiguous one. Contemporary discussions, relying on unclear and often misunderstood terms and data, show that the ambiguity arises from confusion as to exactly what is meant by ‘the troubles of the welfare state’. Are the social policies of the modern state in crisis? Or is the state in crisis because desirable welfare commitments overwhelm diminished fiscal capacity? Are we referring to the major spending programmes of contemporary governments – pensions, medical care, education and housing in different mixes in different countries? The major spending programmes in health and pensions are cross-nationally popular. Is the crisis then to do with finding the means to finance crucial – and popular – commitments? Or does the problem include the extension of government authority into such disputed policy areas as abortion and busing in the United States, redistribution towards French-speakers in Canada, guest-workers in Germany and Sweden, and so on?

The impulse to sort out the disagreements is understandable. Much of the contentiousness can be avoided if one changes the question from an analytical one to a historical one. Six years ago, Peter Flora and Arnold Heidenheimer’s The Development of Welfare States in Europe and America shifted attention away from the conditions of the Seventies to the possible origins of those conditions over the course of the 20th century.2 Douglas Ashford’s The Emergence of the Welfare States pushes the historical focus further back and asks what the growth of welfare states reveals about the institutional capacities of particular states, especially Britain and France. In both instances, the historical development of welfare states, rather than the character, causes and implications of contemporary disputes, is the main subject. It may well be that the historical understanding thus arrived at will illuminate contemporary disputes, but there can be no assurance of this.

Another approach is to assume that we know what the ‘crisis’ is and proceed to ask about its causes and prospects. This was the approach taken by the OECD in the late Seventies and early Eighties. Two years’ work went into preparing for a conference on social policies in the Eighties. But the book that emerged from the conference – The Welfare State in Crisis – showed how little consensus there was. The conference took place in Paris in October 1980. Although the book is based on the assumption that its contributors all have a similar understanding of the worrying state of affairs whose prospects for improvement they are addressing, some contributors ask why protest emerged in such a mix of welfare states, others focus on the trade-offs between investment and consumption policies in the modern state, still others concentrate on the values of citizens in modern states with extensive social programmes. Neither the developmental approach nor the one which (prematurely) assumes agreement promises an adequate understanding of the contemporary problems of the welfare state, however. To understand the ‘crisis’ debate, other starting-points are called for.

The literature concerning the welfare state falls into three broad categories. Some analysts regard the welfare state’s growth as the main cause of many contemporary political troubles. Most often associated with the apocalyptic Right, those who espouse this belief focus on ways of restraining the overreaching state and redeveloping the institutions of the market and the hegemony of individual choice. Others see the modern state’s experience with slowed economic growth as the source of strain for social-welfare programmes. In the middle politically, these incrementalists of the centre are preoccupied with the way in which fiscal strain and stagflation have required cutbacks. They attribute the current crisis to fiscal strains on welfare-state programmes rather than to any inherent feature of welfare-state institutions. They assume that if and when economic growth resumes, the crisis will abate. A third group stresses the controversies that have arisen over particular social programmes (usually not fiscally important ones) which raise issues of legitimate governmental purpose. Proponents of this view see the strains on the welfare state as evidence of the contradictions of modern capitalism and the crisis in the modern welfare state as a portent of future troubles. There are, of course, overlaps among these three approaches and the first two can, without heroic effort, be tightly linked. But there are differences, and they make a difference in mapping the subject.

The first approach assumes that social-welfare programmes played a major role in the poor economic performance of the Seventies. At its simplest, the argument here is that social programmes compete with other budget outlays, preventing a proper balance between investment and consumption. Some critics, such as Richard Rose and Guy Peters in Can governments go bankrupt? (1978), insist that this imbalance is ‘bankrupting’ the state. The second form of this argument stresses that many social programmes indirectly impede the mobility of capital and labour. It is important, however, to note that the two arguments offer very different interpretations of the undeniable growth of spending in this sector during the Sixties and early Seventies. In the first case, the argument treats spending as the problem. In the second, the rigidities are not centrally involved with the largest spending programmes, though unemployment insurance is certainly important in budgetary terms.

The striking thing about these criticisms is their familiarity. They represent the oldest basic objection to the redevelopment of welfare programmes. Fiscally, the most substantial expansion of public social welfare took place in the Sixties and early Seventies (see Table One). This body of criticism became more widely noted only after the strains of stagflation spread in the wake of the 1973-74 oil shock.

It is worth noting that the worst scenario – the bankruptcy view – was discredited almost as it was generated. The major spending programmes did not continue to grow as if uncontrolled by political authorities. Expansion did not continue automatically in the midst of fiscal strain; everywhere review and restraint took place, though often – as Jens Albers makes clear in ‘The West German Welfare State in Transition’, a paper prepared for the meeting of the International Study Group on Trends in the Welfare State at the University of Massachusetts in Boston in September 1986 – without clarification. It is also worth noting that big spenders in the welfare state did not necessarily have the most serious growth problems in the Seventies. The simple connection between the size of the public (or social-welfare) sector and problems of economic growth does not hold up under comparative scrutiny.3

The second approach sees the world-wide recession of the mid-Seventies as critically threatening the welfare state. The combination of lower rates of economic growth, increasing levels of unemployment and worrying levels of investment placed under strain the programmes which had experienced rapid growth in the earlier decade. In the short run, welfare-state programmes cushioned the effects of recent recession, but because inflation and unemployment increased government outlay when recession reduced government revenues, the fiscal strain quickly became apparent.4 In the longer term, the prospect of pressure on medical care and pensions is unavoidable; and it is sometimes used to prod immediate action through panic-mongering, as in Peter Peterson’s ‘Social Security: The Coming Crash’ in the New York Review of Books (2 December 1982). But it is important to keep in mind the difference between the short-term effects of stagflation and the structural-demographic prospects for major spending programmes over time.

The relation between welfare-state growth and present fiscal strain has another dimension. During the Sixties, when programme expansion took place under exceedingly favourable economic circumstances, policy-makers gave little thought to what would happen under adverse economic conditions. The central ideas of the welfare state were canonised rather than analysed. There was little consideration of alternate means to settled ends. And, in the United States, where there was less consensus than anywhere else about the original purpose of a welfare state, rapid growth in social programmes and uncertain philosophical commitment coincided. It is therefore not surprising that welfare-state laggards like the United States and Canada have suffered the most diffuse fearfulness about the future.5 The rate of growth of social spending in the Seventies could not, in any case, have been sustained for ever, but since it rested on optimistic economic assumptions, the reversal in economic fortunes was all the more startling.

Neither of the two ways of thinking I have just outlined need to be seen as attacks on the fundamental purposes of major social-welfare programmes. The elimination of want, ignorance, squalor, disease and idleness: these aims are compatible both with the view that remedial programmes have grown too costly for economic health and with the view that, with less means, more efficient ways to established ends are required. There is a third way of looking at the social-policy strains of the Seventies and the Eighties that is, in some sense, more fundamental. It is the view that welfare-state programmes include some efforts that are wrong, and on which public means should not be employed, even if funds are available or the effects on economic vitality are not troubling. This is what I mean by criticisms of legitimacy. The specific items of principled objection vary somewhat from one OECD nation to another. But, typically, they do not centre on the major domestic spending programmes we have mentioned. In the United States, AFDC (state aid to poor families), abortion, bilingualism, affirmative action and school busing have all been the subject of the most vitriolic debate.6 The British counterparts to these controversial but fiscally modest programmes are the dole and issues of immigration. Not all critics agree on what the state should forswear. But, in general, the claim is that family, custom and local community, rather than governments, should regulate social need. The striking fact about AFDC, for example, has been the modesty of its role in the overall growth of American social-welfare expenditures (see Table Two). AFDC’s prominence in our debate arises from racial and moral concerns far more than fiscal ones.7 And despite frustrating efforts to reform AFDC over the past fifteen years, sweeping legislative change has not been achieved: instead, a series of legal and political challenges has, in practice, changed some of the ways in which assistance is given, by whom and to whom.

What we see here is not so much a retreat from a widely-accepted aim as a challenge to the legitimacy of that aim. Analogous challenges to legitimacy have arisen in other countries, but they do not involve the same mix of programmes. In Sweden and West Germany, both the treatment of ‘guest workers’ and the structure of public education have given rise to fundamental questioning.8 In Canada, the policies towards French Canadians have prompted widespread objections to government involvement in the redistribution of opportunities to different language groups. My claim is simply that these charges, coinciding with the fiscal strains in all OECD welfare states, have further confused the sense of crisis. The addition of legitimacy concerns to fiscal fears has made more familiar methods of problem-solving seem less appropriate to the state’s contemporary troubles.

The different points of view I have just described all charge that one way or another the critical flaws of welfare-state programmes, and thus of the welfare state itself, were part of a general dissatisfaction with modern institutions of government. This assumption rests on a lot of factual mistakes. Cross-national evidence on the Seventies, in the period when government revenue was restrained by stagflation and the burdens on the welfare state increased, supports the notion that the major social spending programmes remained broadly popular. In the United States the main programmes – pensions, medical care and education – never lacked public or political support. Both public opinion polls and the public reaction to attempted cutbacks by the Reagan Administration testify to the popularity of these programmes.9 The most vicious criticism of the American welfare state has largely concentrated on its more fiscally trivial programmes.

It is clear that the future of the welfare state in countries with large, settled programmes cannot possibly replicate the extraordinary growth that marked the post-war experience. It is equally clear that the reduced growth of social spending in the Seventies and Eighties is due not simply to slower economic growth but also the overwhelming fact that large, mature programmes simply cannot continue to expand rapidly without imposing steadily increasing opportunity costs.10 Sharp increases in already large government programmes would have imposed tax burdens on those already at the bottom of the income distribution. The argument for selectivity in programme growth and spending therefore derives, not from ideological rejection of their purpose, but from the reality that these very large, settled programmes in pensions, health care and education reduce the margins for continued growth in the future.

The recently published (1985) OECD data on trends in social expenditure from 1960 to 1981 reveal both overall patterns and country-by-country and programme-by-programme variations.11 First, from 1975 to 1981, all OECD countries reduced the rate of increase in social spending, but none reduced total social expenditures in real terms. They all held down spending increases in response to the adverse economic environment. Second, the reactions of different countries varied both in the extent to which they reduced spending growth and in the priorities accorded different spending programmes.

Over the OECD as a whole, the average annual growth rate of real social spending fell, between the periods from 1960 to 1975 and 1975 to 1981, from 8.4 per cent to 4.8 per cent. Economic growth during the same time periods fell from 4.6 to 2.6 per cent. National reductions, however, varied by a factor of eight – from 1.1 per cent in France to 8.8 per cent in the Netherlands. The cross-sectional data show that the higher a country’s level of social spending in 1975, the lower the rate of increase from 1975 to 1981. Conversely, the countries with the highest economic growth rates from 1975 to 1981 experienced the highest rate of growth in social spending.12

The deviations from this general pattern which some countries exhibit are also of interest. Table Three uses the measure of income elasticity in social spending to illustrate national differences in the relationship between change in the rate of growth in social spending and degree of general economic strain.13 Three countries – Norway, Canada and the United States – show substantial decline in their elasticity between the two periods. In other words, these countries experienced significantly less growth in social spending compared with their overall economic growth during the years from 1975 to 1981 than they did during the period 1960 to 1975. The United States and Norway are particularly interesting in this respect because, despite their very different political traditions, they are two of the strongest over-reactors. In each case, decline in economic growth was less than the OECD average (0.2 for both countries as against the OECD average of 2.0), and the decline in social spending growth greater (4.6 and 5.5 points respectively, against an average of 3.6). These data suggest that national perceptions and definitions of fiscal crisis are as important as economic performance in understanding welfare state policy-making. They also make it clear that one should be sceptical of the proposition that there is ‘some systematic affliction common to all the advanced capitalist countries, independent of national political ideology or institutions’.14

For all the talk of ‘crisis’ in the welfare state, there is, as I hope I have shown, precious little evidence to bolster that claim. The institutions of the welfare state have not reflected – either in the adjustments they have made to their welfare programmes or by virtue of an inability to adjust – the sense of critical disjuncture which hostile intellectuals have managed, with the help of politicians, to foster. An intellectual counter-revolution is now under way, directed against the popularisers of crisis, and aimed at discrediting their factual contentions and at showing how misleading it is to measure the performance of the welfare state against idealised conceptions of the market alternative. Two different versions of this intellectual reaction are now visible: one whose purpose is to substitute a more realistic set of concerns about the future for the discredited crisis-mongering and another concerned to arrive at a historical understanding of how this misleading notion of welfare-state malaise arose in different societies.

Table One

Social Expenditures in Selected OECD Countries: Average Annual Growth Rate of Deflated Social Expenditures[*] (%) 1960–1981

[*] Defined as education, health care, pensions and unemployment compensation; deflated expenditure is public expenditure measured at constant GDP prices.

[†] Excluding education.

Source: Social Expenditure: 1960-1990, Problems of Growth and Control (OECD, 1985). Table One, page 21.

Table Two

Total Federal Expenditures for Selected Social Programmes 1970–1985 (in billions of constant 1985 dollars)

[*] Includes aid to needy aged, blind, and disabled adults which became SSI in 1974.

[†] Since 1974, most outlays in the ‘assistance payments’ category have been for Aid to Families with Dependent Children (AFDC).

Source: Congressional Research Service, 1986 Budget Perspective: Federal Spending for the Human Resource Programmes, February 1986, pages 55 and 81.

Table Three

The Income Elasticity[*] of Social Expenditures in Selected OECD Countries 1960–1975 and 1975–1981[†]

[*] The ratio of the growth rate of nominal social expenditures to the growth rate of nominal GDP.

[†] Or latest year available.

Source: Social Expenditure: 1960-1990, Problems of Growth and Control, Table Two, page 22.

The realistic futurologists dismiss the crisis-mongers with one hand and urge prudent flexibility with the other.15 They call our attention to the inevitable increase in the demands that will accrue upon the state from the ageing of modern societies, demands that will increase disproportionately as the population of the elderly and frail continues to grow. They insist, rightly, that the engine of economic growth will not, in all likelihood, remove this fiscal strain and, consequently, that the call for more effective and efficient use of public funds will continue. And they urge us to consider forms of targeting – technically possible but not socially stigmatising – which will address the circumstances of the worst-off without jettisoning our commitment to social security in the broad sense.

The growth of interest in the history of welfare states is a very different matter. While sharing the widespread concern about the part played by the welfare state in recent economic troubles, historians have not contributed to policy debates. Their argument is that no sense can be made of the present without an adequate account of when and how the institutions of the welfare state came into being. So it is with Douglas Ashford’s magisterial The Development of Welfare States. Ashford reports his dissatisfaction with the literature we have reviewed. His response is to change the questions about the welfare state. Instead of asking so single-mindedly what the performance has been and why, we should broaden our inquiry by looking into how it is that these major institutions of all modern states came into operation and why they developed as they did. Were we to do that, he insists, our understanding of the welfare state would differ greatly from the conventional wisdom. We would see behind the superficial similarity of programmes – for the old, the sick, the disabled, the unemployed and so on – a rich tapestry of individual polities wrestling with the competing claims of individualistic, liberal political theory and both right and left-wing notions of community, solidarity and family protection.

Ashford proceeds to these conclusions through a set of complicated historical steps, reaching back into the 19th century and taking us through the Industrial Revolution. At the turn of the 20th century, as he shows us, there were already far-reaching debates about the role of the state in preventing or ameliorating the devastations of industrial capitalism. The story he tells is fascinating, complicated, indeed ambiguous, dealing both with the history of ideas and with the transmission of ideas into political practice. But it is not a story of how welfare states have performed and in this sense the title is misleading. Rather, Ashford has attempted to describe and explain the nature of the controversies over welfare state expansion. He has set himself the task of explicating what became controversial and why. Further, he has set those controversies in the context of competing notions of what the role of the state and of the individual should be in dealing with the risks and ravages of industrial capitalism.

The result is a quite different interpretation of the history of the British and the French welfare states. For Ashford, Britain, so long considered by Americans as the paradigm of the fully-elaborated welfare state, is anomalous: a state with broad social programmes whose development did little to change its polity. The significant factor, as he sees it, is the ready transmission belt between the élite universities of Oxford and Cambridge and the top of the British administrative and political class. As he puts it, the British welfare state in the 20th century has done lots of new things, but not in new ways. Instead of changing the institutions of British politics, British politics has assimilated new programmes as an offshoot of the struggles of the early 20th century. France, by contrast, linked new welfare programmes with the transformation of the French state. As a result, the introduction of social insurance involved deeper changes in French politics. Philosophically more elaborated, the development of the French welfare state has seen a more profound transformation of the role of the citizen, incorporating unions, management and government in the administration of programmes whose impact is fundamental.

Ashford’s approach cannot inform the debate about how the welfare state should respond to the difficulties that now lie in wait for it. What he does is to remind us that in debating the policy options of the future, the behaviour of governments will be sharply constrained by the capacities of their political institutions. Instead of a social-welfare machine producing policies driven by socio-economic forces in the environment, he offers us the more realistic world of national polities selecting among the available options in an environment in which institutional capacity and national understanding are crucial for what takes place. In that sense, Ashford’s book is an elaborate historical confirmation of the fact that, in the words of Rudolf Klein and Michael O’Higgins, the welfare state does not change ‘independently of national political ideology or institutions’.