Welfare statism - oligopolists' best friend

Welfare states increase social mobility and break deadlocked class structures. That's what we often hear. But is it true?

If this view is correct, then countries with a high degree of redistribution activity such as Sweden should by now have reached a status with very few signs of class structuring left. A good way to measure this is the Gini coefficient. Wikipedia informs us that "The Gini coefficient is a measure of statistical dispersion most prominently used as a measure of inequality of income distribution or inequality of wealth distribution." Wealth distribution is much more interesting than income distribution because it reflects more accurately the dispersion of economic power. To illustrate that, you can have an allegedly socialist paradise with everyone earning exactly the same wage, but a very tiny minority of oligopolists owning all the means of production. Is everyone equal in this society? Of course not. Gini-income wouldn't show that, Gini-wealth does.

It so happens that while Gini-income for Sweden is conspicuously low (meaning that wage differences are not that prominent), Gini-wealth lists Sweden in the top bracket, even surpassing countries like Brazil or Mexico (sorry that my sources on this stuff are in German, I couldn't find any accurate English ones, but you should be able to understand the important bits). Why could that be? We have to understand the incentive structure behind the welfare state. The welfare state basically tells its clients: you do not need to worry about tough times, I'll care for you. Just pay me. As a consequence, people tend to save less and spend more, hoping that all the money they already paid into the welfare state will eventually work like a savings accout, helping them in bad times. If a welfare state grows so big that any conceivable extra-expense is covered for everyone, there is little to no incentive left to save. In other words, the accumulation of capital comes to a halt for those who rely on the welfare state, that is poor and middle class individuals. Those who already own vast amounts of capital will eventually be the only wealthy ones left. Plus, since they do not have to worry about competition from poor and middle class capitalists, they can easily expand their wealth thanks to a welfare state-incentivized oligopoly of capital, making them the only incontestable economic power group.

This should also have an impact on the household savings rate of affected countries. And indeed, in the heyday of the Swedish welfare state, the 1980s, household savings rates actually turned negative, took a sharp turn upwards in the days of welfare reform in the mid 90s (when it became apparent that their model was unsustainable), but declined after that for it seemed that the welfare problem had been solved satisfactorily.

But does that matter at all? If the state provides for you, why do you need personal wealth? The thing is, somebody needs to create wealth before it can be distributed. If nobody but a select few have enough capital to start a venture, then not only your employment, but also your provision of "basic services" depends on the good will of a few capital oligopolists. That makes countries prone to blackmail - "either you allow me to pursue reckless business policies or I'll move out of country, taking one fifth of all jobs and the capital structure with me". With a more dispersed distribution of wealth, such claims are much less powerful since the macro-economic damage one can do tends to be comparatively small.

In conclusion, we might say that the welfare state, unwillingly perhaps, considerably widens the gap between "haves" and "have-nots" and increases social mobility only to the extent that you can now better compete with others for jobs offered by the remaining oligopolists - X, Y or the state. Globalization improves this situation to some extent because foreign capital investors can now compete with domestic big shots, but domestic big shots still have their "home advantages". The situation needs be cured from within, not without.

The welfare state's tipping point

Libertarians have never grown tired to criticize the welfare state, and rightly so. Instead of helping the poor to get out of poverty, the incentive structure behind the welfare state tends to lock them in a state of poverty to create additional needs for all kinds of welfare programs that will, in turn, generate funding for those presiding them. It's not that the welfare state is some enlightened institution designed to eliminate poverty - it's just another government scheme to keep its subjects pacified while at the same time creating a pretext for massive increases in taxation, obscure redistribution practices (keep in mind, most redistribution happens from bottom to top, not the other way round) and lots of tenured employment down the road.

The good news is: this cannot go on forever. Since there is no material incentive to actually decrease poverty for those who are "working against it" (if there was no more poverty, they'd all lose their jobs) and governments tend to be expanding, the amount of money spent on welfare programs tends to increase. This makes honest work increasingly unattractive due to punitive taxation and non-wage labor costs. The ranks of net welfare beneficiaries tend to increase, thus creating a vicious circle.

Government ponzi schemes such as Social Security or Medicare are even more sinister - since an individual is forced to pay money into the system for those who currently receive benefits out of it, there is an expectation for future reimbursement; however, this expectation rests on the willingness of future generations to also participate in the system, in other words, today's confidence in Social Security rests on the firm belief that there will be enough willing payers in the future. If you need 1+x persons to finance 1 retiree - and make no mistake, you need much more than one payer per retiree -, every family needs to raise at least 2+x children. Looking at world fertility rates, quite a leap of faith is required to hold on to this belief in the western hemisphere - starting with 2,05 children per woman in the United States, it goes all downhill from there to 1,23 kids in Poland.

Which means that while western countries are struggling to hold population levels, their inhabitants cling to a retirement system that is based on rabbit-style fertility rates. Combine that with the many disincentives the general welfare state creates when it comes to honest work, and you'll hear the demographic time bomb tick. Tick-tack.

Western politicians are naturally hostile to accepting these facts. Their incentive is to keep the system going until their term is over so they can benefit from generous Congressional pensions. Besides, talking about abolishing the welfare state is fiercely unpopular; "welfare reform", the desperate gluing-together of an inherently broken system that's falling apart everywhere until the respective politician is able to retire, is the politically correct choice.

However, this will not change reality. Reality is that at some point in time, redistribution, government ponzi schemes and high taxes/inflation/deficit spending will destroy western civilization. Literally. If there is noone left to produce and nobody willing to trade, society falls back to primitive living standards. It's likely that before total destruction occurs, the welfare system will break apart - however, this will cause unimaginable suffering among those who are really dependent on it and disillusioned hatred among the many free riders. Not a pleasant prospect.

It may be too late already to ensure a smooth abolition of the welfare state, but the only chance for preventing absolute mayhem is to start the gradual end of the welfare state now. First, all citizens need to be able to opt out of the system with a clear warning that if they stay in, they will probably lose everything they pay into it. Those who are dependent on the system (e.g., the elderly and the sick) need to be taken care of by diverting tax funds away from less useful projects. At the same time, welfare bureaucracy needs to be cut drastically so there is no influential group left to lobby for budget increases. That's what can theoretically be done within the state framework.

Should this process not be enacted - and that's the most probable scenario -, our best option is to find a safe spot to watch the welfare time bomb go off. It won't be pretty, but all we could do was warn ahead of time.