The welfare state is more like a vast overlay of interventions on the market and economy than the displacement of it. They burden the economy, distort it, disrupt it, but they do not replace it. The interventions produce episodic disorders as well as crises. Some of these have been called by such varied names as recessions, inflation, economic stagnation, even stagflation, in recent decades. They are usually popularly described as if they were economic in origin. Actually, they are the products of government intervention. Each intervention, whether it be increasing of the money supply, raising of the minimum wage, price controls, production controls, redistributionist programs of a more direct kind, or what not, produces its own bitter fruit of price rises, unemployment, surpluses, shortages, and so on.
On the surface, at least, the welfare state appeared to be working fairly well for much of the 1950s and 1960s. It was generally conceded that prosperity was widespread, and some commentators even became publicly concerned about the dangers of affluence. The prosperity, however, was despite the welfare- state intervention, not because of it. There were special conditions which help to explain the prosperity.
First and foremost, capital investment and technological innovation overcame much of the drag of the welfare state. Increased productivity kept prices from rising nearly as much as might have been expected from the increases in the money supply. That is not to say that capital investment and technological innovation could have done the job alone. While the federal government had deficits, they were not nearly so large then as they have become since. Interest rates generally were low during most of the period.
The United States had acquired vast holdings of gold in the 1930s, and this was being used, and nearly used up, in defending the dollar around the world. This was so effective in supporting the dollar that it was only in the late 1960s that the pressure shifted to silver, which was legal tender domestically, in the flight from the dollar. At that point, the issuance of silver certificates was discontinued, and silver coins ceased to be used as a medium of exchange. But the dollar had been reinforced by precious metals to that point.
Nor should the role of human adaptation in overcoming the disruptions, distortions, and drag of the welfare state be discounted. Man is marvelously adaptive in finding ways to survive, and even prosper, in the face of otherwise debilitating government interventions. Americans were somewhat aided in making these adaptations from the late 1940s through the mid 1960s by the removal or reduction of some of the more burdensome restraints and interventions of the New Deal and wartime years. For example, production and price controls were either removed or reduced in both agriculture and industry. The drag of the welfare state was there during these years, but much of it was overridden by favorable developments.
Since the early 1970s, at the latest, the United States has been in a crisis. It is similar in many respects to those crises which used to be called depressions. It is as severe as most of the depressions in past American history and has lasted longer than the generality of them. But the word has gone out of style since the beginning of the New Deal, out of deference, it may be, to the claims that the legislation of the early New Deal had banished depressions once and for all. (Of course, the Federal Reserve system, which was passed much earlier, was supposed to prevent depressions, but it didn’t.) At any rate, we only have recessions nowadays, according to fashionable terminology. But this is not a call for the revival of the word “depression” nor a brief for the use of such words as “recession.” At best, they describe symptoms, not causes.
To call the present condition a crisis would be no better, if the word were left to stand alone. It becomes much more precise, however, when it is labeled the crisis of the welfare state. Moreover, the cause is identified and named. It is the welfare state. More specifically, the cause of the crisis is those government interventions by which the welfare state is established and grows and expands. The crisis is reached when the interventions so unbalance and disrupt the economy that it is, in effect, at least extensively paralyzed. To put it another way, the crisis of the welfare state occurs when the social-justice modes of something-for-every-class and something-for-nothing go so far in displacing the market’s something-for-something principle that the market can no longer function effectively and the economy is debilitated.
The premise
Let me not suggest, however, even by implication, that a crisis of the welfare state occurs at some precise identifiable point which could be pinpointed and be expected to recur again and again at that point. The crisis of the welfare state is ultimately qualitative, not quantitative. The welfare state establishes a vast network of dependencies of the people upon it, assumes responsibility for their well-being, and arouses expectations that it will deliver. In consequence, many people are unaccustomed to taking the initiative and making the adaptations which might enable them to survive and prosper. For example, they may not move to new locations to find work or enter new fields of endeavor when old ones promise little for the future. Also, interventions tend to mix up such signals as the market can send, and many people become frustrated with the continual fluctuations which accompany government interference. These are qualitative matters depending upon the wills of people, are not measurable, and hence are unpredictable. In any case, the symptomatic character of indices deduced from statistics makes them unreliable predictors of anything….
Administered prices and wages, whether it be minimum-wage laws, union-prescribed wage scales, price controls on goods and services, or what not, produce inflexibilities that make changes to meet changing conditions exceedingly difficult, if not impossible. Deficit spending must be made up either by borrowing in the market or increasing the money supply. High taxes take money away from productive purposes to be applied to nonproductive ones. Redistribution disturbs and distorts the market mechanism for distribution.
Long-term commitments, such as Social Security, produce crises as they come due. Indeed, the United States government has a large assortment of long-term commitments in its various “insurance” programs which could only be met, if at all, by so flooding the market with paper money that the dollar would be destroyed.
But let us not be drawn away from the main point by an elaboration of intermediate causes of the present crisis. To be aware of the economic consequences of political intervention is no doubt desirable, but to focus on these is to leave the root cause untouched. The root cause is not to be found in any one or combination of intermediate causes. Those who believe this way are still open to the view that by better-conceived political manipulations, based on better understandings of economics, the crisis can be averted and things set right. But so long as the root cause continues to produce its effects, the crisis will remain, either potentially or actually.
The root cause is a premise. It is the premise of the welfare state. It is the belief that government can and should intervene in the economy so as to achieve social justice. It is this belief which prompts those in power to alter or supplant the quid pro quo of the market — a system of equity for voluntary traders — with a class system of distribution. It is this that burdens the market and economy with every sort of exaction, extraction, regulation, control, distortion, and disruption.
The cause of the present crisis is political, not economic. That means that the cure is political. The cure is for government to confine itself to establishing justice and reducing force, leaving equity to the market in economic matters. That will not solve all problems. Nothing will. But it will restore the responsibility for wrestling with them to the individuals and voluntary groups who are best qualified to deal with them. When that is done, the economy will function as well or as poorly as the people who operate within it.