Martin Wolf: Time to Reevaluate the European Social Model

Has the time come?:

Decay and the welfare state, by Martin Wolf, Commentary, Financial Times: The time has come for Europeans to ask themselves the unthinkable: can their vaunted social model endure? ... Symptoms are not hard to find:  this is a continent of high and persistent unemployment, declining productivity growth, rapid ageing and growing fiscal strains; it is also one whose once-proud role in knowledge-creation is in decline. But in one respect, western Europe remains pre-eminent: its states are the tax-and-spend champions of the world (see chart). ...

European social democracy looks increasingly unworkable in the long run. ... If one is to assess this possibility one must look not at where the model works least well but where it works best. The maternal state is most fully developed in the Nordic countries and particularly in Sweden. In a forceful new polemic, Johnny Munkhammar of Timbro, a free-market Swedish think- tank, convinces me that trouble abounds even in Sweden’s social democratic paradise. Indeed, its long-run performance shows this (see chart).

What, then, are the failings of the big state? The answers include: fiscal unsustainability; mediocrity of provision; slackening work effort; slowing productivity growth; resistance to economic adjustment; flight of valuable economic resources; difficulties in absorbing immigrants; and even the undermining of the family. A social system that protects people from the consequences of their own decisions is rife with moral hazard: in the long run, it changes not just behaviour but even values in a less productive direction.

Consider each of these points in turn.

First, the services the state provides – particularly education and health – are ones on which people wish to spend more money as they become richer. ... For these reasons, the ratio of public spending in gross domestic product must rise progressively if state-funded services are to meet the demands of the population. But such increases are politically impossible and, in practice, largely ceased two decades ago.

Second, financial stringency, combined with the difficulties in running public sector monopolies, generates rising dissatisfaction with the quality of what is provided. Waiting lists are endemic in Swedish health, for example. State-run schools provide a deteriorating quality of education..., while state-run universities are rapidly-growing but under-funded behemoths.

Third, output per hour in the European Union was 91 per cent  of US levels in 2005 (at purchasing power parity), ... while GDP per head was 73 per cent. Lower work effort is the cause: fewer hours worked and lower employment. Taxes, regulations and benefits at least partly explain this.

Fourth, since 2005, productivity in the EU has been losing ground to the US after a long-period of catching up. ...

Fifth, the job security provided in many countries lowers willingness to hire. This makes it more important for workers to hang on to existing employment. That, in turn, makes rapid economic change, including imports, more threatening. This is why countries with rigorous job protection are increasingly inclined towards protectionism.

Sixth, high taxes and the burden of regulations encourage the outflow of resources. ...

Seventh, high minimum wages, whether set by law, trade unions or welfare benefits, combined with heavy taxes on work, generate high levels of unemployment of relatively unskilled people. In Europe today many of these people are immigrants. ... The results are seen in criminality, rioting and social disorder.

Finally, for many mothers the welfare state is a substitute for a committed father. For fathers it is an excuse for abandoning their responsibilities. For both, it is a reason not to produce the children who might help look after them in old age. The result is lower overall investment – quantitatively and, in some respects, even qualitatively – in the posterity on which the sustainability of the welfare state itself depends.

The welfare state brings significant benefits. But it can also go too far. In much of western Europe, it now has. If present trends do not reverse, growing economic, social and even political difficulties threaten. No taboo can remain inviolate, including the most sacred one of all: that of the all-providing state.

As the welfare state pedulum begins swinging back in the other direction, and it does seem to have reached its apex, let's hope its momentum doesn't carry it too far.