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Friday, September 1, 2000

The Economic Consequences of Rolling Back the Welfare State

Government Largess Creates Moral Hazards

It took America’s professional politicians little more than three decades to spend more than $5.5 trillion on welfare programs for their constituents. Looking back, we know the results have not been pretty: work incentives were stood on their head by moral hazards created by government largess. Millions of able-bodied people have been trapped in poverty and dependency despite our record-setting economic expansion.

Now along comes A. B. Atkinson, warden of Nuffield College, Oxford, with his book, The Economic Consequences of Rolling Back the Welfare State, warning advocates of welfare reform and rollback of the untoward outcome of such policy reversals. The book, a compilation of the author’s lectures, revisits supposedly “settled issues” in an effort to convince us that it’s economically beneficial to have a welfare system. Really.

Atkinson clearly has a soft spot for the totality of the welfare state, but he concentrates on two pillars of welfarism: state pensions (Social Security) and unemployment insurance. “Weakening” those pillars could, he worries, have regrettable economic consequences. It is a position worth contemplating. In any objective inquiry it is useful to analyze the economic effects associated with policy changes, especially those programs carrying immense entitlement dollars.

The author devotes much of his book to warning readers and fellow economists of the unintended consequences that might accrue from policies that remove worker security or incentives to remain idle. That discussion is a curiosity unto itself: How complete is an analysis that concentrates on the supposed costs of eliminating our “social safety nets” while ignoring the costs of maintaining them? That is Atkinson’s blind spot.

He argues that Social Security and unemployment insurance provide “universal reduction in the uncertainty faced by individuals.” The trouble with that view is that there are alternative means for individuals to reduce risk that provide greater security than reliance on government. Transfer payments, he says, tend to “even out differences in life’s chances” and promote “equity between generations and to redress inequality by race, gender, or health status.” Yes, we know that egalitarian programs make people like Atkinson feel good, but that is not the same as showing that they produce net economic benefits.

Atkinson also relies on the old warhorse that welfare payments (especially unemployment insurance) are “automatic stabilizers” that will give us “economic stimulus” in times of recession. Of course, the notion that government spending—shifting money from one set of pockets to another—ever stimulates the economy is one that has been severely criticized, but the author accepts it as an article of faith. Finally, in his biggest argument, Atkinson says that doing away with welfare might make workers “demotivated” because they would feel less secure. Insecurity, to the contrary, is a strong motivator, as evidenced by the tremendous work ethic of Americans of a century ago, when we had no government “safety net.”

At least Atkinson causes one to think about welfare. Many welfare state programs have institutionalized paternalism. Human beings will behave like children if treated like children. After a generation or two of such treatment, do we really expect recipients or purveyors of such benefits to enthusiastically embrace change? All changes have their adjustment costs, but we ought not adopt a myopic time horizon when judging the worth of policy reform. Atkinson’s analysis has this proclivity. A more complete study would incorporate the long-run employment, income, and financial consequences of not removing the moral hazards associated with the welfare state.

Another difficulty is present throughout the text. Atkinson equates “trade union” wages with “good jobs” and generally ignores jobs invisibly destroyed in the process of union efforts to promote protectionist legislation.

Concluding his rather one-sided survey of the arguments for and against welfare programs, Atkinson writes that “There are still grounds for agnosticism.” One is tempted to reply, “Welfare states have guaranteed the impoverishment of spirit and pocketbook alike; get over it!”

David Littmann is senior vice president and chief economist with Comerica Bank in Detroit, Michigan.

  • David L. Littmann is senior economist with the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich., and the largest state-based free-market think tank in the country.