When it comes to public discourse the term “welfare state” is most often used in a derogatory way. For many people who hear the term welfare state, it means money being handed to people in poverty who don’t deserve it because they aren’t working to earn their income. The prevailing logic is that everyone knows hard workers are rewarded with higher income.
However, that term means something different to actual economists who have dedicated their lives to studying economic systems and their impacts on broader society. In fact, the welfare state doesn’t only apply to allocating resources to those living in poverty. It also means allocating resources to corporations. Any time the government allocates resources to any recipient in society, it is considered part of the welfare state.
Capitalism lends itself naturally to economic cycles. The economy tends to swing severely between booms and busts. Without any kind of social insurance though, a capitalist economy may not recover from the bust end of a cycle. Even if it does, it would take much longer to recover than it would with social insurances in place. It is not in the best interest of the economy or society for a bust to last too long. The health of the economy is dependent on the economic health of the members of society.
Those who favor a capitalist system do so because the economic gains and growth are higher than in other economic systems, despite its drastic boom-and-bust cycles. Capitalism also encourages innovation and efficiency. With socialist economies, the cycles aren’t nearly as dramatic, but they still exist.
Any type of government intervention is viewed as against a pure capitalist system. However, capitalism on paper has not worked out as well in practice without some government intervention on behalf of the greater good of society. Sometimes this has looked like a low level of resource distribution to those less fortunate and sometimes it has taken the form of resource distribution to corporations. Even an example such as farmers getting subsidies is a form of the welfare state. The guiding principle of welfare economics should be bringing all shareholders of the economy to a state of equilibrium where all groups share in the feeling of economic well-being.
However, the equilibrium doesn’t happen all by itself. It requires public policy through government regulation and intervention to guide the economy in the direction of widespread well-being without sacrificing growth. Welfare economics can’t end the bust end of the capitalist economic cycle. What it is meant to do, though, is mitigate the negative impacts of economic recessions. Welfare economics is meant to ensure that the bust end of the cycle isn’t too severe and doesn't last too long. We should not be looking to cause undue economic suffering for any members of society.
Types Of Welfare
There are two major types of welfare in the welfare state: social welfare and corporate welfare. While there are people in both types of welfare that do take advantage of the system, both are important tactics for stabilizing the economy.
Social welfare encompasses programs such as social security, Medicare/Medicaid, food stamps, unemployment, the Affordable Care Act and other similar programs. The idea of these programs is to help safeguard people from poverty. The vast majority of the people who need to use these programs are either children, or they’ve worked their entire lives in our economic system. Fraud is extremely rare in these programs.
Many people incorrectly assume that this type of welfare state is a drain on the economy. In fact, the opposite is true. As an example, SNAP is the current food stamp program. According to many studies, including one by the Center on Budget and Policy Priorities, not only does SNAP pay for itself, it actually grows the economy. According to research published in 2018, for every dollar spent in SNAP money, $1.70 is injected into the local economy. Any social welfare program that puts money into the hands of people who will spend it will help the economy grow.
Corporate welfare comes in a few different forms as well and is very much a type of welfare state. It is tax money that is given to corporations. It can also come in the form of tax cuts to corporations and it can also look like subsidies in certain industries. The purposes of using corporate welfare are usually to help grow a certain industry, to help stabilize a certain industry, or to help a certain industry avoid financial ruin.
An example of corporate welfare is the auto-industry bailout. It is believed that corporate welfare actions such as these prevent an even worse economic disaster. Sometimes though, it seems corporate welfare moves make little sense. An example is the most recent Trump tax cuts. The economy has been growing for the past 8 years and is still doing well. Injecting government funds to booming industries through a corporate welfare action like the Trump tax cuts does not seem to fit any of the usual categories for stimulating the economy or preventing a downturn. It is unclear what the effects will be, but the move has been widely controversial among economists.
How The Welfare State Affects The Economy
The corporate welfare side of the welfare state can have some benefits. For instance, the automobile industry bailout saved jobs and a possible worse recession. By the government investing in budding renewable energy programs, it can generate economic growth in areas with innovative solutions to head off an energy crisis.
However, corporate welfare overall mainly helps big businesses. For instance, according to John White of INC dot com, small businesses account for 54% of all sales in the US. However, the Small Business Administration (SBA) only receives just over a billion dollars per year to support all small businesses (White, 2017). They SBA provides guidelines to small businesses on how to obtain loans, and they provide some grants to colleges and nonprofits. But there is not much they are able to do to help small businesses succeed. White also points out that between 2000 and 2015, 66% of welfare state corporate subsidies went to less than 600 large businesses (White, 2017).
Additionally, unchecked corporate welfare could lead to corruption. One might believe this isn’t much different from the people who choose to fraud SNAP or social security benefits. However, the cost of corporate corruption is far greater than the few individuals collecting SNAP money they’re not entitled to. Remember, the SNAP money spent grows the economy. Corporate welfare money doesn’t always have that same effect on the economy. There should be greater scrutiny over how corporate welfare is used and whether it contributes significantly to economic growth. All corporate welfare programs should provide benefits to the whole economy.
On the other side, countries such as Norway have found that social welfare boosts their economies and capitalism. Economics professors in Norway have discovered that despite the short-term sacrifice of providing higher wages for their upper-class citizens, in the long term their social welfare programs have resulted in better equality, smaller gender wage gaps, and improved education across the nation—just to name a few examples given by Science Nordic.
Social welfare programs may remain unattractive for some people, but all of these benefits inject more money into the economy by providing consumers with more spending power. Social welfare programs have undoubtedly grown the economy in ways that were unexpected when the social welfare programs were initially implemented.
No country is perfect at managing economic growth and deciding whether to inject economic stimulus into either corporate welfare programs or social welfare programs. However, regardless of the particular economic model any country uses, some type of welfare state is needed by the government. It will probably be debated for many more decades whether a regulated capitalism is best suited for today’s global needs, or whether a more socialist-tailored economy is best. However this debate plays out, it seems we will never escape all forms of a welfare state.
It is important to understand the difference between the political rhetoric surrounding economic ideology and the meaningful language economists use to discuss the theories and realities of our economy. It's necessary for the public to have knowledge of prevailing economic theories and policies so that they can put pressure on politicians to implement the most beneficial economic policies for all of society. We are all stakeholders in the health and well-being of today’s economy. It is well past due for those who receive the most benefits at the top to consider the needs of everyone else in the economy.
Average Americans do not want to see another economic recession. The boom-and-bust cycles of capitalism may not be completely avoidable, but the bust end of the cycles do not have to be total disasters either. The welfare state does not have to be a scary phase associated with the picture of lazy citizens who do not contribute to the economy. On the contrary, it is social welfare programs that seem to inject the most economic growth, even during recessions. It is time to work past our fears and do what is needed for the benefit of all.