The Protean Welfare State: A Response to David Conway

It’s always nice to read a review of one’s work and it’s usually a good idea to steel oneself for the criticisms that any work ought to invite.  Everything I’ve ever written or edited could have been better.  Criticism is a good thing.  And so are responses.  So here goes.

I was a bit puzzled by David Conway’s review of my modest book After the Welfare State, because he seems to have read different essays from those I wrote.  He claims that I have discredited classical liberalism by making several statements that I am rather confident he has misunderstood and thus mischaracterized.

First, one man’s “hyperbole” is another man’s urgency.  The crisis of unfunded liabilities is a rather serious matter.  The Greek situation, which brought to parliament both communist and fascist parties, not to mention rioters to the streets, should wake us all up.  At least, so I would think.  But even if we set aside the situation in Greece and focus on the US or Northern Europe, the fiscal imbalances (i.e., the present value of the unfunded liabilities of the state, which represents the difference between anticipated taxes and anticipated expenditures under current law), amount to a whopping 500% or more of GDP in a number of wealthy countries, such as the Netherlands and the US, and up to 1,550% in Poland. Those are rather conservative estimates of the amount governments would have to have invested in real assets today earning at least the interest being paid by the state on its debt, just to pay the differences between tax revenues and expenditures under current law.

The welfare state will not be able to make good on its current promises.  There will be defaults of various kinds.  The funding mechanisms of state pension systems are parallel to those of Ponzi schemes or pyramid schemes.  Like a pyramid scheme, they require an ever-expanding base of contributors, because the money coming in now is used to finance current beneficiaries; the US Social Security System for Old Age and Survivor’s Insurance has already gone cash-negative (the tax collections are less than the expenditures, the rest being made up from general revenues).  That happened in 2010.  And it will get worse.  Every day that those imbalances are not addressed is a day that, because of the positive rate of interest (long-term, at least), the situation worsens.

Second, of course there is nothing “integral” to the welfare state that necessitates this or that particular policy.  Conway seems to have an oddly essentialist approach to the welfare state.  One could have a welfare state with state-owned housing and one without, one with state owned hospitals and one without, and one with state policies to make home ownership “more affordable” and one without.  Conway is confused about the use of quantifiers.  To say that “the welfare state is responsible for the financial crisis” is not to say that “all conceivable welfare states are responsible for financial crises.”  Of course not.  It just so happens that the actually existing welfare state, in the history that we observe, is responsible.  In the book I wrote (pp. 9-10):

The financial crisis emerged at the intersection of human motivations and bad incentives. Those incentives were created by foolish policies, all of them traceable to the philosophy that it’s government’s purpose to control our behavior, to take from Peter to give to Paul, and to usurp responsibility for our lives.  The seeds of the current crisis were planted in 1994 when the US administration announced a grandiose plan to raise homeownership rates in the US from 64 percent to 70 percent of the population, through the ‘National Partnership in Homeownership,’ a partnership between the federal government and banks, home builders, financiers, realtors, and others with a special interest. As Gretchen Morgenson and Joshua  Rosner document in Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon, ‘The partnership would achieve  its goals by “making homeownership more affordable, expanding creative financing, simplifying the home buying process, reducing transaction costs, changing conventional methods of design and building less expensive houses, among other means.”’ That extension to the welfare state seemed to sound so reasonable to many. Why should people not own their own homes just because they haven’t saved for a down payment? Or don’t have good credit records? Or don’t have jobs?

Why not make homeownership ‘more affordable’ through ‘creative financing’? Government agencies, such as the Federal Housing Administration, and ‘government-sponsored enterprises,’ such as the Federal National Mortgage Association (‘Fannie Mae’), were directed to convert renters into owners by lowering down-payment rates, drastically lowering lending standards among banks, increasing the amounts of money going into the home market by buying and ‘securitizing’ more mortgages, and a host of other measures. It was a bipartisan effort at social engineering. The Federal Housing Administration under the Bush administration offered loan guarantees on mortgages with zero percent down payment rates. As Alphonso Jackson, acting secretary of the Department of Housing and Urban Development, gushed in 2004, “Offering FHA mortgages with no down payment will unlock the door to homeownership for hundreds of thousands of American families, particularly minorities.” He added, “We do not anticipate any costs to taxpayers.”

Conway suggests that it is not “integral” to a welfare state that it do that.   And so what?  That’s like saying that there is nothing “integral” to an interventionist state that it impose minimum wage laws, so when one notes that minimum wage laws increase unemployment, that should not be attributed to the policies of the interventionist state.  A systematic state policy to make “housing more affordable” is a welfare state policy.

On pp. 33-34 of the book, after distinguishing welfare states from socialist states, I write:

A welfare state need not attempt to manage all productive activity, but it does undertake to be responsible for the welfare, or well-being, of the population. It is more extensive than a limited government that provides justice, defense against aggression, the rule of law, and perhaps a limited list of ‘public goods,’ as classical liberals propose.

I then proceed to give various examples.  The policies I describe as bearing substantial responsibility for the housing bubble and the resulting financial crisis emerge from the exercise of state power to “make housing more affordable.”  It may not be essential (or “necessary to its completeness,” which is what “integral” seems to mean) to the welfare state to securitize mortgages and create incentives for banks to lower lending standards in order to push up home ownership rates, but those were in fact coherent policies of a welfare state.  Just as providing housing or medical care through the state may not be “integral” to a welfare state, they are things that are often done by welfare states, and it is reasonable to criticize the long waiting lists at the National Health Service in the UK, for example, as a result of the welfare state, although the NHS is not “integral” to a welfare state.  I am truly puzzled by Conway’s approach to identification of the welfare state.

Third, I do not “attribute xenophobia to the welfare state.”  I argue that the welfare state contributes to xenophobia, which is hard to rebut if one has ever seen skinheads attacking asylum homes and shouting that the foreigners are here to get our benefits.  (A visit to Germany or Greece might come in handy, or even to the Southwest US, where illegal immigrants often crowd emergency rooms and greatly irk locals who pay taxes.)  Thus, I write on p. 8,

Immigrants are systematically demonized as ‘here to get our welfare benefits.’ Rather than welcoming people to come and produce wealth, subjects of welfare states act to protect ‘their welfare benefits’ by excluding would-be immigrants and demonizing them as locusts and looters.

When immigrants are seen as being after welfare benefits, they are treated in a far more hostile manner than when they are seen as seeking honest work.  That hardly seems controversial.

Conway’s form of argumentation seems divorced from both history and an understanding of the dynamics of social interaction and incentives.  Thus, he writes, “The welfare state no more necessarily causes, or is born from, aversion and hostility to foreigners than its absence is an invariable sign or productive of universal amity. Think of present-day Somalia, for example.”  (The invocation of Somalia seems to be that one can have fear of foreigners without a welfare state.  Of course.  I never argued anything else.  Conway’s exclusive focus on essentialism, or what is “integral” to something, leads him to mistake sufficient for necessary causes.)

I did not argue that the welfare state “necessarily” causes aversion to foreigners, and certainly not that a necessary condition of hostility to foreigners is a welfare state, just that welfare states do create incentives for locals to fear foreigners.  Nor did I argue that the welfare state was born from aversion and hostility to foreigners. I am truly puzzled by Conway’s mischaracterizations, which seem rooted in a confusion of necessary and sufficient causes.

I did present some historical background on the intellectual and political pushback against liberalism from the 19th and 20th centuries, but the historical accounts are not all that controversial.  I quote Sheri Berman’s very important work The Primacy of Politics: Social Democracy and the Making of Europe’s Twentieth Century:

The forward march of markets had caused immense unease in European societies. Critics bemoaned the glorification of self-interest and rampant individualism, the erosion of traditional values and communities, and the rise of social dislocation, atomization, and fragmentation that capitalism brought in its wake. As a result, the fin-de-siècle witnessed a surge in communitarian thought and nationalist movements that argued that only a revival of national communities could provide the sense of solidarity, belonging, and collective purpose that Europe’s divided and disoriented societies so desperately needed.

The rise of “communitarian thought and nationalist movements” was clearly connected to the rise of illiberal states, among them welfare states.  Perhaps Conway thinks that we should substitute “integral” analysis for actual history, but I think the price too high.  The actual historical record should suffice.

Regarding the attitude of classical liberalism to restrictions on immigration, I argue that freedom of movement is a fundamental human right, just as is freedom of trade.  Restrictions on freedom of movement, when justified by classical liberals, typically emerge from the incentives created by welfare states.  That’s my point.  Without those externalities created by welfare benefits, there would be little reason to restrict movement.  (I did not address the question of citizenship, which is a separate and quite important issue, but not relevant to the issue of poverty and migration.)  Welfare benefits tend to make people fear foreigners, who they fear will flood in to apply for benefits at the expense of the natives.  In the absence of such fears, i.e., in the absence of welfare state policies, foreigners who arrive do so to work and to contribute to the production of wealth.  A major reason for fearing them is the welfare state and cutting it back reduces the reasons to fear foreigners.

I concede that my footnote that references Philip Legrain’s arguments for freedom of movement, which are strongly classical liberal, might lead one to think that he is more liberal on all other issues than he is.  Mea culpa.  His website states, “My outlook is broadly liberal, socially and economically. I am passionate about individual freedom, think markets (outside finance) generally work well and believe that competition is usually a powerful force for good. But I am also convinced that governments need to intervene vigorously to make a reality of equality of opportunity and help the less fortunate.”  That would still make him, by Conway’s definition, a classical liberal, so I am not sure what Conway’s complaint is, other than that I should have appended an essay on Philip Legrain to a footnote citation of his rather good book.

Finally, I suggest that Conway ask himself what “least preferred” might mean before rather rashly claiming that my essay will create “an unfavorably wrong impression of classical liberalism in those who need to be won over to its cause” because I argue that classical liberals agree that “the least preferred option” is state compulsion.  I discuss in the essay a variety of classical liberal approaches and make it quite clear that a number of liberals, prominent among them Röpke, Friedman, and Hayek, accepted state welfare safety nets. As I write,

In listing the order of preferences among classical liberals, Wilhelm Röpke stated that ‘our rule and norm and our cheerfully accepted ideal should be security through individual effort and responsibility, supplemented by mutual aid.’ Röpke differed from some classical liberals in accepting state provision of a minimum of assistance: ‘We cannot, nowadays, do without a certain minimum of compulsory state institutions for social security. Public old age pensions, health insurance, accident insurance, widows’ benefits, unemployment relief—there must naturally be room for all these in our concept of a sound social security system in a free society, however little enthusiasm we may feel for them. It is not their principle which is in question, but their extent, organization, and spirit.

I took the phrase “however little enthusiasm we may feel for them,” following his “rule and norm and cheerfully accepted ideal” of “security through individual effort and responsibility, supplemented by mutual aid” to be rather clear statement that “compulsory state institutions for social security” was his least preferred option.  Perhaps there is some more subtle reading of Röpke that would make him into an enthusiast for compulsory state institutions.  Similar statements or orderings can be found in other classical liberal thinkers.  When welfare can be produced without compulsion, liberals favor that.  It is called the presumption of liberty.

The very idea of a “safety net” is that it is the “last thing” before you hit the ground.  It’s not the first thing, or even the second thing that keeps one from hitting the bottom.  That’s what “least preferred” means.  A prosperous and wealth creating society offers other means of flourishing than relying on the state, and state compulsion should be the “least preferred” option when people seek to flourish or to help those who are suffering.

Conway states, without argument, that “So long as the poor remain with us, there will be need for some form of public provision to meet their needs, over and above charity and mutual-aid.”  Note that he concedes my point about “least preferred” by stating “over and above charity and mutual-aid,” that is, after charity and mutual-aid have done what they can.  Moreover, “so long as the poor remain with us” might suggest that a prosperous society would not have any in poverty.  I hope he doesn’t discredit classical liberalism with such a statement.   Conway may be right that state compulsion is needed as a safety net after self-help, mutual aid, and charity, but his mere assertion is not a substitute for an argument for it.  I did not, in any case, argue the contrary; I merely stated that some agreed, and some did not.   Perhaps I should apologize for the hyperbole.

Those who wish to consult the book for themselves may order or down (as a PDF) the book here: