Hazardous Welfare-State Dynamics

Abstract

The achievements and costs of the modern welfare state are both usually analyzed in static terms. Some consequences of welfare-state arrangements, however, could rather be characterized as dynamic, in the sense of reflecting the interacting adjustments over time of basic behavior patterns of households, firms, interest-group organizations, politicians and public-sector administrators. Many of these dynamic adjustments are no doubt regarded by most observers as positive, or virtuous. For instance, it is easy to visualize how welfarestate policies, under favorable circumstances, may generate virtuous circles of reduced poverty, better neighborhoods, less street crime, improved health among lowincome groups, the accumulation of widely distributed human capital, increased labor productivity, and higher labor-force participation rates for women and various ethnic minorities; and all this contributes to expand the tax base, which facilitates the financing of the welfare-state programs in the first place. We may also speculate that welfare-state policies contribute to improved social coherence, and perhaps even to greater tolerance in the population for the continual reallocation of resources that characterizes dynamic market economy, and that this reinforces the legitimacy and hence the support of the welfare state among those who do not perceive much direct benefit to themselves. Other dynamic adjustments are more problematic, or hazardous. Due to limited space, this paper is confined to such adjustments. This does not mean that I regard positive, or virtuous, adjustments as less important than hazardous ones; indeed, it is largely because of various positive long-term consequences of welfare-state arrangements that I have often described the modern welfare state as a triumph of western civilization. But if we do not watch out for hazardous dynamics, there is risk that the welfare state will destroy its own economic foundations. That risk is today reality in several countries. The following discussion is confined to four types of hazardous dynamic adjustments to welfare-state policies: (i) delayed adjustments by private agents to the disincentive effects of welfare-state policies; (ii) problematic consequences for short-term macroeconomic stability; (iii) induced changes over time in the behavior patterns of politicians and public-sector administrators; and (iv) the gradual replacement of market risks by political risk. As these dynamic adjustments strongly interact, it seems useful to discuss them together.

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