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Do welfare states boost economic growth, or stunt it?

By Tim Harford
BBC World Service, 50 Things That Made the Modern Economy

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Women in politics are sometimes accused of consciously exploiting their femininity to get ahead in a male-dominated world.

Frances Perkins did that, but in an unusual way: she tried to remind men of their mothers.

She dressed in a plain, three-cornered hat, and she refined the way she acted, based on careful observation of what seemed to be most effective in persuading men to accept her ideas.

Perhaps it's no coincidence that those ideas could reasonably be described as maternal or parental.

Any parent wants to shield their children from serious harm, and Perkins believed governments should do the same for their citizens.

She became President Franklin D Roosevelt's Secretary of Labour in 1933.

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image captionFrances Perkins pictured with the rest of Franklin D Roosevelt's cabinet in March 1933

The Great Depression was ravaging America. A third of workers were unemployed. Those with jobs saw wages plunge.

Perkins drove through the changes that became known as the New Deal, including a minimum wage, benefits for the unemployed and pensions for the elderly.

Historians will tell you it wasn't Frances Perkins who invented the welfare state. It was Otto von Bismarck, chancellor of the German Empire, half a century earlier.

Ultimate responsibility

But it was largely during Frances Perkins's era that various welfare states took their recognisably modern shape across the developed world.

Details differ, from place to place, measure to measure, and time to time.

But the same basic idea links every welfare state: that the ultimate responsibility for ensuring people don't starve on the street should lie not with family, or charity, or private insurers, but with government.

50 Things That Made the Modern Economy highlights the inventions, ideas and innovations that helped create the economic world.

It is broadcast on the BBC World Service. You can find more information about the programme's sources and listen online or subscribe to the programme podcast.

This idea is not without its enemies.

It is possible, after all, to mother too much. Every parent instinctively knows there's a balance: protect, but don't mollycoddle; nurture resilience, not dependence.

And if overprotective parenting stunts personal growth, might too-generous welfare states stunt economic growth?

Welfare trap?

It's a plausible worry. Imagine a single parent with two children. He or she might qualify for various payouts: housing benefit, child benefit, unemployment benefit.

Could he or she accumulate more from the welfare system than they could get by working at the minimum wage?

In 2013, according to research by the Cato Institute, in no fewer than nine European countries, the answer to that question was "Yes". In three of them - Austria, Croatia and Denmark - the marginal tax rate was nearly 100%.

That means, if the single parent took a part-time job to earn some extra cash, he or she would immediately lose it in reduced benefits. Such a "welfare trap" hardly seems sensible.

But it's also plausible to think that welfare states can improve economic productivity.

If you lose your job, unemployment benefit means you don't have to rush into another one: it gives you time to find a new position that makes best use of your skills.

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Entrepreneurs might take more risks when they know that a bankruptcy won't be catastrophic: they could still send their children to school, and get treatment when they're sick.

So, do welfare states boost economic growth, or stunt it?

It's not an easy question to answer - the systems have many moving parts, and each part could affect growth in many ways.

Demographic change

But the weight of evidence suggests that it's a wash - the positive and negative effects balance out. Welfare states don't make the pie bigger or smaller. But they do change the size of each individual slice. And that helps to keep a lid on inequality.

At least, it used to. In the past two decades, the data shows welfare states haven't been doing that so well. And that's not surprising - they're creaking under the weight of a rapidly changing world.

There's demographic change: people are living for longer after retirement.

image copyrightGetty Images
image captionMany countries have seen a large rise in working mothers in recent decades

There's social change: entitlements often date from an age when most women relied on male breadwinners, and most jobs were full-time and long-lasting.

In the UK, for example, most jobs created since the 2008 financial crisis are the result of people employing themselves.

Yet a builder who's employed will get "statutory sick pay" if there's an accident at work, a self-employed builder will not.

And there's globalisation: welfare states originated when employers were more geographically rooted than today's footloose multinationals.

Unlike today, they couldn't easily relocate to jurisdictions with less burdensome regulations and taxes.

Mobility of labour creates headaches, too - the thought of immigrants claiming benefits may have helped set Britain on the path to Brexit.

As we ponder how - or even whether - to fix the welfare state, we shouldn't forget that one of the biggest ways welfare states shaped the modern economy was to take the heat out of demands for much more radical change.

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image captionBismarck's welfare state reforms in the 1880s were designed to stop voters backing the rival socialist party

Otto von Bismarck was no social reformer in the Frances Perkins mould.

His motives were defensive. He feared that the public would turn to the revolutionary ideas of socialists Karl Marx and Friedrich Engels.

In America, the New Deal was attacked from the left and right.

image copyrightAlamy
image captionSome business organisations opposed Roosevelt's New Deal reforms as "un-American"

The populist Louisiana governor Huey Long complained that Frances Perkins hadn't gone far enough.

The next industrial revolution?

He prepared to run for president on the slogan "Share our wealth" and a promise to confiscate fortunes from the rich. But he was shot dead in 1935, so that policy was never tested.

Such political tumult feels long past, but perhaps that's complacent. Some say we're experiencing another industrial revolution now, as the robots come for our jobs.

More from Tim Harford:

Inequality, which in many countries widened sharply during the 1980s and 1990s, may widen further.

In the past, new and better jobs have come along to replace those that were lost, but perhaps artificial intelligence will be able to do those new jobs better, too.

Universal basic income?

If in the future human labour is less needed, keeping societies stitched together may require us to reinvent the welfare state.

Not all economists think that's worth worrying about just yet. But those who do are reviving an idea that dates back to Thomas More and his 1516 book, Utopia - a universal basic income.

It does seem utopian, in the sense of fantastically unrealistic. Could we really imagine a world in which everyone gets a regular cash handout, enough to meet their basic needs, no questions asked?

Some evidence suggests it's worth considering.

In the 1970s, the idea was trialled in a Canadian town called Dauphin.

image copyrightDauphin Tourism
image captionResults of the 1970s "mincome" experiment in Dauphin were surprising

For years, thousands of residents received cheques every month. And it turns out that guaranteeing people an income had interesting effects.

Fewer teenagers dropped out of school. Fewer people were admitted to hospital with mental health problems. Hardly anyone gave up work. New trials are under way, to see if the same thing happens elsewhere.

It would, of course, be enormously expensive. Suppose you gave every American adult, say $12,000 (£9,000) a year. That would cost 70% of the entire federal budget. It seems impossibly radical.

But then, impossibly radical things do sometimes happen, and quickly.

In the 1920s, not a single US state offered old-age pensions. By 1935, Frances Perkins had rolled them out across the nation.

Tim Harford writes the Financial Times's Undercover Economist column. 50 Things That Made the Modern Economy is broadcast on the BBC World Service. You can find more information about the programme's sources and listen online or subscribe to the programme podcast.

Related Topics

  • Economic growth
  • Economic inequality

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