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VIEWPOINTS : Welfare State Keeps Capitalism Working

December 20, 1987|LESTER C. THUROW | LESTER C. THUROW is Gordon Y Billard Professor of Management and Economics and dean of the Sloan School of Management at Massachusetts Institute of Technology in Cambridge

With talk of budget cutting in the air, the programs of the welfare state are coming under increased scrutiny. Before making cutbacks, however, it is well to recognize what is at stake.

An understanding of the welfare state begins with the vision of the 19th-Century economists. The most famous, Marx, thought that capitalism would produce such sharply rising income inequalities that it would ultimately end up destroying itself in a revolution.

Marx was not alone in his prediction; almost all 19th-Century economists had a similar vision of rising inequality. Where Marx predicted revolution, Malthus predicted mass starvation. Spencer invented the phrase "survival of the fittest" that was later borrowed by Darwin to describe evolution.

Those visions were, of course, wrong. Why? Two factors stand out. Because skills seemed as though they were being destroyed in their time, the 19th-Century economists didn't recognize capitalism's demand for mass skills. Along with it, they missed the invention of mass compulsory free education.

The 19th-Century economists also misidentified the role of the state. Instead of being an instrument of oppression, it would transform itself into the welfare state to prevent inequality from forever rising.

The welfare state was initially an invention of the right, Bismarck in Germany; and later an invention of the left, the Swedish and English socialists. In America, it was the invention of the man who saved capitalism from the crisis earlier predicted by Marx--Franklin D. Roosevelt in the Great Depression.

Gap Is Widening

But those early economists were not wrong about the inherent tendency of unfettered capitalism to move toward inequality.

Observe what has happened to the distribution of income in the United States in the last few years in the presence of slow growth, idle capacity, high unemployment, the smallest welfare system in the industrial world and a government publicly pledged to the proposition that government should not intervene to alter the distribution of income produced by the market.

In 1985, the American Census Bureau announced that the top 20% of the population had the largest share and the bottom 60% the smallest share of total income ever recorded. Then, in 1986, it announced that the share of the top 20% had risen further and the share of the bottom 60% had yet again fallen.

Among men, the proportion earning from 75% to 125% of the median wage (middle-income workers) had fallen 17% in the 10 years ended in 1986 and the proportion of full-time women workers who earned less than half of the median wage had doubled.

Without the active intervention of the welfare state, what Marx had predicted a century earlier was under way. One can note that a fall in the income share of the bottom 60% of the population from 36% to 32% of all income does not produce a revolution of starvation.

But it is equally true that there has to be a limit somewhere. At some point, the share of the bottom 60% of the population reaches a level where there are social consequences.

The welfare state is an essential ingredient in capitalism. Without it, capitalism cannot long survive. This does not mean that the welfare state doesn't need reforms or that it cannot grow too large. But it does mean that the welfare state hardly is a foreign virus in the body of capitalism.

Quite the opposite, the welfare state is the immune system of capitalism that prevents it from becoming infected with the germs of too much inequality.

Don't Know When to Stop

One of the problems of the welfare state is that we have no agreed-upon stopping points. Consider pensions and health care for elderly--an activity that accounts for most of welfare spending in most industrial countries.

In the 1960s, the American elderly had a per-capita income just 60% of that of the non-elderly. Between then and 1982 that income rose to 100% of that of the non-elderly. A great social success had been achieved. To become elderly was no longer to become poor.

But we did not know how to stop. By 1986, elderly incomes were up to 110% of that of the non-elderly, even though no one had it as a social goal to make the elderly rich and the young poor. The system doesn't need to be abolished but to be restructured to keep the income of the elderly in line with, but not ahead of, the rest of society.

Or think of medical disability--another area of great expenditure. In most countries the problem is not fraud--perfectly healthy individuals who persuade a doctor to certify that they are incapable of working--but to determine who is too ill to be expected to work. Precisely where the line is drawn makes an enormous difference in costs.

All welfare systems are too dependent on payroll taxes for revenue, especially in countries with high unemployment. High payroll taxes tell potential employers to replace people with machines wherever possible. If high enough, the taxes can make the achievement of full employment practically impossible, so new ways of financing the system need to be found.

The key goal is to make the welfare state more efficient. This is a task that capitalists should willingly undertake since a wise capitalist knows that, without the welfare state, there will, in the long run, be no capitalism.

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