Welfare

European Welfare Systems Impeding Economic Growth

Evidence suggests that generous welfare benefits in Western Europe are a drag on prosperity and growth.

  • Between 1964 and 1994, government spending as a share of gross domestic product (GDP) among industrialized European countries grew from an average of 33.4 percent to 51 percent -- compared to an increase from 28.4 percent to 33.5 percent in the United States.

  • Since 1992, average real growth in the European Union's GDP has been 1.5 percent a year -- half that of the U.S.

  • Between 1990 and 1994, EU industrial production fell 0.5 percent -- but rose 11.4 percent in the U.S.

Economists identify two ways in which rising welfare benefits are causing economic stagnation:

  • They have prompted higher taxes, especially value-added taxes on producers.

  • And higher benefits reduce the penalties of not working, particularly for women heads of single families.

Bruce Bartlett, senior fellow at the National Center for Policy Analysis, contends that public spending to reward nonwork crowds out private capital, since the government "buys" labor -- thus reducing the ability of businesses to expand or even stay in business without a subsidy for workers.

In Sweden, Austria, Denmark, the Netherlands, France and Germany, average jobless benefits in 1991 replaced more than 40 percent of the salaries of workers who became unemployed -- compared to benefits that replaced 14.3 percent of a worker's pay in the U.S.

Source: Carl Horowitz, "The Perils of Government Compassion," Investor's Business Daily, March 20, 1996.

Work Versus the Welfare State

Job security in Europe has always gone hand-in-hand with the welfare state, which many American liberals still look to for inspiration. Yet in recent months, unemployment rates in both Germany and France have hit postwar highs.

  • In Germany the rate reached 10.3 percent in December and 12.7 percent in France in November.

  • By contrast the unemployment rate in the U.S. is just 5.3 percent.

  • In the 1960s through the 1970s, both Germany and France had unemployment rates in the 1 to 2 percent range, while those in the U.S. were often several times higher.

One reason unemployment used to be lower in Germany and France than here is because those countries make it very difficult to lay off workers. Thus labor turnover there is much lower than here, with workers still tending to spend their working lives with one firm. American workers, on the other hand, are accustomed to working for several employers.

Ironically, this greater labor flexibility in the U.S. compared to Germany and France is exactly the reason that unemployment has risen there and declined here. As international competition and the increasing pace of technological change demand greater flexibility, American firms have prospered at the expense of those in Europe. American firms can adapt to changing market conditions more quickly and gain market share, while European firms are left flat-footed.

For example, early last year AT&T announced plans to cut thousands of workers from its payroll, but by the end of the year it actually had about the same number of workers. Although 7,700 jobs were eliminated, they were offset by increased employment elsewhere in the company. Firms in Germany and France would have great difficulty making a similar adjustment in their labor forces.

A new study from the Professors Paul Gregg and Jonathan Wadsworth of the London School of Economics illustrates the heavy price Europeans are paying for their welfare states: a growing number of non-retired households now have no employed adults in them (see figure).

  • In Germany over 15 percent of all non-retired households have no workers, while in France the portion has risen from 12.5 percent a decade ago to over 16 percent.

  • However, in the U.S. the percentage has fallen from 13 percent to just over 11 percent.

In virtually every European country unemployment benefits run far longer than in the U.S., in some cases indefinitely. Combined with higher welfare benefits, the cost of not working in Europe is very low compared to here. The result is that as European companies are forced to adjust their operations to remain competitive, a growing number of workers have become virtually unemployable.

Source: Bruce R. Bartlett, senior fellow, National Center for Policy Analysis, January 20, 1997.

The Role of Microbanking

Microbanking is a new phenomenon in the U. S., although it has been around in poorer countries throughout the world for some years. It is the process of lending poor people a little money to start their own tiny businesses -- so as to move them off welfare rolls.

Some think it's a particularly good idea, others are cautious.

  • Critics contend that microbanks might become just another way to pump government money into the hands of the poor -- a return to welfare under another name.

  • They worry that microbanking might creep further into the commercial banking sector -- in effect leading to bank socialism.

  • Economist Thomas DiLorenzo of Loyola College says that when under government sponsorship, microlending is "veiled socialism."

  • However, even its critics concede that there have been some promising results.

Almost two-thirds of the nearly 200 microenterprise programs in the U. S. work with welfare recipients.

The microbanking concept was originated in Bangladesh by economist Muhammad Yunus.

  • A key concept in microbanking is "peer lending" -- a practice also pioneered in Bangladesh.

  • People, usually women, are gathered into small borrowing groups which must take responsibility for any individuals loans -- with members taking a series of vows in exchange for the loans.

  • The Grameen Bank of Bangladesh has lent some $500 million a year to two million borrowers worldwide -- experiencing an on-time repayment rate of nearly 100 percent.

In the U. S., some 56,000 firms had received loans and/or technical assistance through 1994. The average group loan was $1,983. Loans to individuals who had business experience averaged $8,692. Loans amounted to a combined $44 million.

Source: Carl Horowitz, "Another Way Off Welfare Rolls?" Investor's Business Daily, January 31, 1997.

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