Wealth and Welfare
To the Editor:
Given the importance and timeliness of the topic, it is hardly remarkable that the theme of the short and insightful article by Christopher C. DeMuth, “The New Wealth of Nations” [October 1997], was repeated at greater length in the Economist (“The World Economy,” September 20, 1997). Nor is it surprising that both articles argue that the market system is in every respect far more efficient than a state-controlled economy.
Where the two differ, and quite significantly, is in whether it is the case, in Mr. DeMuth’s words, that “our very wealth and equality are the undoing of the welfare state.” Indeed, the Clintons’ mammoth health-care plan was defeated, but after it Bill Clinton—the counterpart of leftist leaders in Britain, France, and (if knowledgeable journalists are correct in their predictions) soon in Germany—was reelected. More pointedly, the trend toward greater control by the state has continued, both in the United States and in other industrial countries.
The portion of America’s gross domestic product absorbed by government spending rose from 3.9 percent in 1870 to 17 percent in 1920, to 27 percent in 1970, to 33.3 percent in 1990 and again in 1996. These figures are lower than in Britain, not to say Sweden, but they hardly suggest that the end of the welfare state is at hand in this country, or even very close. In all the countries that the Economist included in its worldwide survey, the portion of the gross domestic product that went to transfers and subsidies (that is, to the core of welfare) rose from just over 15 percent in 1960 to just over 22 percent in 1990.
The contrast between the two views suggests that market supporters may have won the abstract argument, but that those who favor a continuing or even growing welfare state are the victors in the political arena. The future is far less rosy than Mr. DeMuth would have us believe.
Christopher C. Demuth writes:
My essay was part description and part prophecy. The descriptive part argued that the welfare state was in serious financial trouble (no one doubts this), not because the people of the economically advanced nations are hard up and unequal but because they are very rich and very equal, much more so than when the policies in question were established. This argument is verifiable today: it is either a true or a false account of our present circumstances, regardless of where those circumstances may lead.
The prophetic part—certainly the more debatable part of the essay—argued that government programs of social insurance and economic regulation are going to be substantially “privatized” and reduced in size. Among the reasons I offered were (1) that issues of economic status and income distribution are losing their political resonance in wealthy middle-class societies, giving way to “amenity” and “cultural” issues, and (2) that in the area of social policy, government is losing its ability to perform two functions in concert, essential to maintaining political support for the programs in question: the provision of adequate social-welfare services, in terms of both quality and cost, and the redistribution of income among those who pay for and those who receive such services.
Mr. Petersen offers two straws in the wind for doubting that the welfare state is going to shrink (Clinton’s reelection and the large share of U.S. economic product consumed by government); I offered several straws in the wind for thinking that it will. Conflicting examples are easy to come up with in arguments about where we are heading, but they are always inconclusive when standing alone. A swirl of competing tendencies exists on almost every matter at any given time, but the interesting question is which tendencies are likely to prevail. I remain convinced that the underlying economic and social developments I identified, although little recognized today, are powerful and durable and provide a truer portrait of our likely future than can be gotten from example-mongering of either the markettriumphalist or cultural-pessimist variety.