Liberal leadership in ideas: the welfare state

I have never liked the term "welfare state" with is paternalist tone, preferring "social state" derived from the German Sozialstaat  and fitting with the concept of the social market as a regulated, fair and free economy. It was interesting to read today in The Economist (Repairing the safety net - The welfare state needs updating) that the founding spirit of the UK welfare state, the Liberal William Beveridge, didn't like the term either. However, and more importantly, in that article  and the introductory leader -  Reforming the welfare state: Back to basic liberalism - the point is made that it was the liberal philosophy of Beveridge that informed the identification of the need, scope and form of the UK welfare reforms of the  late 1940's. The main thrust of these articles in The Economist is that we must return to liberal values and creative thought on the mutually supporting nature of effective welfare with effective wealth creation to redesign the welfare state.

As chance would have it, this is a topic I addressed in a recent post, Hayek and the welfare state, in which the argument was made that a principled and human approach to welfare was not only compatible with but should be an essential complement to the market economy. This is  very much the tone of the pieces in The Economist too.

Years of tinkering and short term politically motivated meddling from left and right have led to the UK social protections becoming a bureaucratic entanglement that is costly and provide at best a second rate service. In addition the weakening of the liberal tradition, Liberal Party and the consequent decrease in influence have contributed to this state of affairs.This is not the time to roll back to 1945 in terms of detail and implementation but just as the market has evolved to become more diverse and international, social protection must also be thought through again. Neither is it a mere matter of picking up The Orange Book, but it does provide a valuable starting point. What should be returned to is the core liberal philosophy with its humane side personified by Beveridge dealing with the “Five Giants”: disease, idleness, ignorance, squalor and want, and it competitive market foundation for the creation of wealth. We can look to the rounded enlightened figures such as Adam Smith and John Stuart Mill as well as the more austere Friedrich Hayek. Nor should the still very pertinent thinking of the German social market economists such as Walter Eucken be neglected, as well as others across the world. One of most recent champions of liberal enlightenment values, Steven Pinker in Enlightenment  Now, was a pains to stress that it is the combination of social care and wealth creation that has given us the progress in global well-being that he documents in such detail.

Reform is needed to deal with affordability and fairness of a social provision system that is designed to provide the safeguards that foster wealth creation rather than undermine it. The social safety measures must provide quality services that people are proud to use and are proud of the society that provides them. Services such as the NHS do not provide this quality and are currently condemned not to be  capable of delivering it, as outlined in a recent opinion piece by Matthew Parris.

To repeat the essential points from my earlier post; four principles can be proposed to help design social insurance that can enhance market dynamism and economic freedom in a Free-Market Welfare State:

• Risk and Entrepreneurship.  As the term “safety net” suggests, social insurance can enhance risk-taking and entrepreneurship by ensuring failure is not catastrophic.
• Search and Adjustment Costs. Workers who are laid off in periods of market restructuring should be ensured a smooth transition through appropriate wage replacements and active labour-market policies. While your job may not be secure, your employment is. 
• Benefit Portability. Markets work best when social benefits follow the individual and are detached from any particular firm or market structure. (In the UK many people are often trapped in a firm due to penalties imposed to their pension entitlement. In contrast the German system decouples this, as recommended.)
• Migration Robustness. Welfare benefits should be payments or services resulting from insurance funds to which people have contributed while working in the host country, migrants who claim such benefits should not therefore be perceived to be a great problem. There needs to be further humanitarian safeguards for refugees and others in dire need; as opposed to economic migrants.