Who Pays for the “Welfare” in the Welfare State?: A Multicountry Study

I. Introduction THERE was a time, not so long ago, when the welfare state was viewed as a proud social accomplishment. But recently it has been under considerable attack. At the heart of this attack has been the claim that during its heyday, from the 1950s to the 1970s, the social benefit expenditures of the welfare state led to subsequent economic stagnation and persistent unemployment throughout the advanced world. This paper brings to bear the empirical evidence from a multicountry set of studies. I outline the issues involved, discuss the methodology behind the empirical studies of six major Organization for Economic Cooperation and Development (OECD) countries (Australia, Canada, Germany, Sweden, the United Kingdom, and the United States), and present the main findings. My central finding is that social benefit expenditures were financed out of the taxes paid by recipients of these very expenditures: in other words, by and large, social welfare expenditures were self-financed, and could not have been a source of fiscal deficits or a drag on growth. 1. The Rise and Fall of the Welfare State The growth of welfare states is one of the characteristic features of modern capitalist democracies. European welfare SOCIAL RESEARCH, Vol. 70, No. 2 (Summer 2003) Who Pays for the “Welfare” in the Welfare State? A Multicountry Study ANWAR SHAIKH states began with pension and social insurance programs in the late nineteenth and early twentieth centuries and then grew into comprehensive systems of social support between the 1930s and the 1950s. In the United States, it took the Great Depression to spark similar initiatives in the form of New Deal programs on social security, state-based unemployment insurance , and limited federally subsidized public assistance (which Americans call “welfare”) for the elderly poor, dependent children , and the blind. After World War II, the role of the state expanded rapidly. From 1960 to 1988, in the OECD countries the average government share in gross domestic product (GDP) rose by over onehalf (from 27 percent to 42 percent), while the average government share in total employment rose by about two-thirds (from 11 percent to 18 percent). Alongside this came a shift in the types of government spending, away from traditional expenditures on defense, public administration, and general economic services and toward social welfare expenditures on health, education , and transfer payments (social security and social assistance payments, business subsidies, and interest on government debt). By the 1980s, transfer payments had become the single largest category of economic expenditure in most countries (OECD, 1985: 16). But the rise in government expenditure was only one side of the story. Taxes also rose sharply, and their composition shifted from traditional sources, such as indirect business taxes, to social security and personal income taxes (OECD, 1985: 16-17). Thus on the whole, both government expenditures and the tax structure changed in very similar ways. The early part of the postwar period was the zenith of the welfare state as the industrialized world grew at a rate of almost 5 percent annually. However, by the mid-1970s the long underlying expansion had peaked and by the late-1970s the average growth rate of the industrialized world had fallen to half its previous level. By 1983, the OECD countries as a whole were barely grow532 SOCIAL RESEARCH ing (OECD, 1991). In this period of growth slowdown and eventual stagnation came rising unemployment and poverty, which led to greater demands on social expenditures. In the United States, the postwar boom peaked in 1968-1969. The economy moved into a phase of (initially inflationary) stagnation . A major change took place in all major economic patterns at this point. In the boom decades from 1947 to 1968, growth was strong, unemployment averaged 4.8 percent, real wages grew almost 50 percent, and the average annual federal budget deficit was a mere $1.7 billion.1 In the subsequent two decades between 1969 and 1989, unemployment rose to an average of 6.6 percent, real wages declined by 14 percent, and the average budget deficit rose almost fiftyfold to $82.4 billion (ERP, 1996). By 1980, eligibility for public assistance had been restricted, and for those who did receive aid, real benefits were 20 percent...