The Future of the (Welfare) State

One way to think about the future of the state is to analyze the situation for some of the largest states that exist, namely the state in the Nordic countries.[1] In the discussion about the future of the state, there are many misunderstandings of these states, even by sympathetic commentators. The most common one is that the state is portrayed as a very costly undertaking that by its high level of taxation becomes a hindrance to economic growth. This reveals a misconception regarding what the welfare state is about. The largest part of this type of welfare state is not benefits to poor people but universal social insurances and social services (like health care, pensions, support to families with children and public education) that benefit the whole, or very large, segments of the population. These goods are in high demand by almost all citizens and research shows that having these demands covered by universal systems in many cases becomes more cost effective.

The economic theory about problems of asymmetric information in markets is well suited for understanding this. Although this theory is quite technical, the logic is very simple. For example, in private health insurance systems, the costs that such information problems lead to (overtreatment, overbilling, the administrative costs for insurance companies screening out bad risks, the costs for handling legal problems about coverage) can become astronomical as seems to be the case in the United States[2]. Universal systems are much more cost effective in handling these problems since risks are spread over the whole population and the incentives for providers to overbill or use costly but unnecessary treatments are minimal.

As stated by the British economist Nicholas Barr, problems of asymmetric information “provide both a theoretical justification of and an explanation for a welfare state which is much more than a safety net. Such a welfare state is justified not simply by redistributive aims one may (or may not) have, but because it does things which markets for technical reasons would either do inefficiently, or would not do at all”[3]. Simply put, if middle-class people in the Nordic welfare states were deprived of their universal systems for social protection and social services (not to speak of free college education for children), they would in all likelihood decide to buy these services on the market. The theory about problems of “asymmetric information” (which received the Nobel Prize in Economics in 2001) tells us that this would then become much more expensive.

From the standpoint of social equality, universal programs have the advantage of including the segments of the population that from their “market wage” would never have the chance to afford these services if they were offered only through markets. Since the middle class is within these systems, they will demand high quality services which prevents the well-known fact that services for poor people will become poor services. Another advantage of such universal systems is that they do not contribute to stigmatizing poor people by means-testing since everybody is included in the system.

The second misunderstanding is that such welfare states by necessity come with heavy handed bureaucratic intrusion and paternalism  (“the nanny state”) and that it cannot be combined with freedom of choice for various services. This is for the most part wrong. An example is the publicly financed school system in Denmark and Sweden that are full-fledged charter systems. Public schools compete with private charter schools that are run on public money and have to accept to work under the same national regulations and education plans. For example, they have to accept students without any discrimination concerning their learning abilities. This can be compared with the intrusive inquiries and testing used by many private schools in the US in their admission processes. The same choice systems have been developed when it comes to health care, elderly care and pre-schools in the Nordic countries. Simply put, public funding of social services can very well be combined with consumer choice and respect for personal integrity.

A third common misunderstanding about the universal welfare state system is the neo-liberal argument that high public expenditures is detrimental to market-based economic growth. As shown by the economic historian Peter Lindert, this is simply not the case. In a global perspective, rich states have a level of taxation that is almost twice as high compared to poor states. And when the rich western states are compared over time, the evidence that high public spending is negative for economic growth is simply not there. This is also shown when the leading international business organization, the World Economic Forum, ranks countries’ economic competitiveness. The Nordic countries come out at the very top, far ahead of most low tax/low spending countries. In addition these states have their public finances in good order, simply because people are willing to pay taxes for the services that are proven. And lastly, when it comes to measures of human well-being, the Nordic countries outperform all other known social models. Thus, the future of the state looks bright, provided it is modelled on the Nordic model.

[1] For an extension of this argument, see Bo Rothstein & Sven Steinmo: “Social Democracy in Crisis? What Crisis?”, in Micheal Keating and David McCrone (eds.): The Crisis of European Social Democracy. Edinburgh University Press (forthcominig)

[2] For a brilliant journalistic analysis of these problems, see Atul Gawande’s article “The Cost Condundrum“  in The New Yorker, July 1st 2009.

[3] Nicholas Barr. “Economic Theory and the Welfare State: A Survey and Interpretation.” Journal of Economic Literature (1992) 30, p 781.

This post is part of the ‘Basic Values Debate’ jointly organised by the Friedrich-Ebert-Stiftung and Social Europe Journal. Read more on the future of the state: ‘The Task of the State and its Responsibilities for the Future’.

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