The Logic of the Welfare State

There are three major economic rationales for the creation of the welfare state. We’ll turn now to a discussion of each.

1. Alleviating Income Inequality Suppose that the Taylor family, which has an income of only $15,000 a year, were to receive a government check for $1,500. This check might allow the Taylors to afford a better place to live, eat a more nutritious diet, or in other ways significantly improve their quality of life. Also suppose that the Fisher family, which has an income of $300,000 a year, were to face an extra tax of $1,500. This probably wouldn’t make much difference to their quality of life: at worst, they might have to give up a few minor luxuries.

A poverty program is a government program designed to aid the poor.

This hypothetical exchange illustrates the first major rationale for the welfare state: alleviating income inequality. Because a marginal dollar is worth more to a poor person than a rich one, modest transfers from the rich to the poor will do the rich little harm but benefit the poor a lot. So, according to this argument, a government that plays Robin Hood, taking from the rich to give to the poor, does more good than harm. Programs that are designed to aid the poor are known as poverty programs.

2. Alleviating Economic Insecurity The second major rationale for the welfare state is alleviating economic insecurity. Imagine ten families, each of which can expect an income next year of $50,000 if nothing goes wrong. But suppose the odds are that something will go wrong for one of the families, although nobody knows which one. For example, suppose each of the families has a one in ten chance of experiencing a sharp drop in income because one family member is laid off or incurs large medical bills. And assume that this event will produce severe hardship for the family—a family member will have to drop out of school or the family will lose its home.

A social insurance program is a government program designed to provide protection against unpredictable financial distress.

Now suppose there’s a government program that provides aid to families in distress, paying for that aid by taxing families that are having a good year. Arguably, this program will make all the families better off, because even families that don’t currently receive aid from the program might need it at some point in the future. Each family will therefore feel safer knowing that the government stands ready to help when disaster strikes. Programs designed to provide protection against unpredictable financial distress are known as social insurance programs.

These two rationales for the welfare state, alleviating income inequality and alleviating economic insecurity, are closely related to the ability-to-pay principle we learned about in Chapter 7. Recall how the ability-to-pay principle is used to justify progressive taxation: it says that people with low incomes, for whom an additional dollar makes a big difference to economic well-being, should pay a smaller fraction of their income in taxes than people with higher incomes, for whom an additional dollar makes much less difference. The same principle suggests that those with very low incomes should actually get money back from the tax system.

FOR INQUIRING MINDS: JUSTICE AND THE WELFARE STATE

In 1971 the philosopher John Rawls published A Theory of Justice, the most famous attempt to date to develop a theory of economic fairness. He asked readers to imagine deciding economic and social policies behind a “veil of ignorance” about their own identity. That is, suppose you knew you would be a human being but did not know whether you would be rich or poor, healthy or sick, and so on. Rawls argued that the policies that would emerge if people had to make decisions behind the veil of ignorance define what we mean by economic justice. It’s sort of a generalized version of the Golden Rule: do unto others as you would have them do unto you if you were in their place.

Rawls further argued that people behind the veil of ignorance would choose policies that placed a high value on the well-being of the worst-off members of society: after all, each of us might be one of those unlucky individuals. As a result, Rawlsian theory is often used as an argument for a generous welfare state.

Three years after Rawls published his book, another philosopher, Robert Nozick, published Anarchy, State, and Utopia, which is often considered the libertarian response. Nozick argued that justice is a matter of rights, not results, and that the government has no right to force people with high incomes to support others with lower incomes. He argued for a minimal government that enforces the law and provides security—the “night watchman state”—and against the welfare state programs that account for so much government spending.

Philosophers, of course, don’t run the world. But real-world political debate often contains arguments that are clearly based upon either a Rawls-type or a Nozick-type position.

3. Reducing Poverty and Providing Access to Health Care The third and final major rationale for the welfare state involves the social benefits of poverty reduction and access to health care, especially when applied to children of poor households. Researchers have documented that such children, on average, suffer lifelong disadvantage. Even after adjusting for ability, children from economically disadvantaged backgrounds are more likely to be underemployed or unemployed, engage in crime, and to suffer chronic health problems—all of which impose significant social costs. So, according to the evidence, programs that help to alleviate poverty and provide access to health care generate external benefits to society.

More broadly, as the following For Inquiring Minds explains, some political philosophers argue that principles of social justice demand that society take care of the poor and unlucky. Others disagree, arguing that welfare state programs go beyond the proper role of government. To an important extent, the difference between those two philosophical positions defines what we mean in politics by “liberalism” and “conservatism.”

But before we get carried away, it’s important to realize that things aren’t quite that cut and dried. Even conservatives who believe in limited government typically support some welfare state programs. And even economists who support the goals of the welfare state are concerned about the effects of large-scale aid to the poor and unlucky on their incentives to work and save. Like taxes, welfare state programs can create substantial deadweight losses, so their true economic costs can be considerably larger than the direct monetary cost.

We’ll turn to the costs and benefits of the welfare state later in this chapter. First, however, let’s examine the problems the welfare state is supposed to address.