Welfare in a Bad Way
Raised in an individualistic culture, Americans dislike the concept of the "welfare state" and do not use the term. But make no mistake, the United States has a welfare state, and its future is precarious. The true significance of General Motors' bankruptcy lies more with this welfare state than with the battered condition of American capitalism.
Broadly speaking, the U.S. welfare system divides into two parts -- the private, run by firms; and the public, provided by government. Both are besieged: private companies by competitive pressures; government by rising debt and taxes. GM exemplified the large corporation as private welfare state. In contracts with the United Auto Workers, GM promised high wages, lifetime employment, generous pensions and comprehensive health insurance. All this is ancient history: New workers get skimpier benefits.
As metaphor, GM's bankruptcy marks the passage of this model. Companies still provide welfare benefits to attract and retain skilled workers. But these shelters against insecurity are growing flimsier. Career jobs remain, but lifetime job guarantees -- whether formal or informal -- are gone. Last year, about 50 percent of male workers ages 50 to 54 had been with the same employer at least 10 years; in 1983, that was 62 percent.
Health insurance and pensions tell similar stories. In 2007, employer-provided insurance covered 177 million Americans, 59.3 percent of the population; in 1999, coverage was 63.9 percent. Since 1980, companies have gradually moved from "defined benefit" to "defined contribution" pensions, notably 401(k)s. Defined benefit plans provided guaranteed monthly payments; defined contribution plans -- just putting money into a pot -- make workers responsible for managing retirement savings.
What most Americans identify as government "welfare" are payments to single mothers, food stamps and (perhaps) Medicaid, the federal-state health insurance program for the poor.
But that's not the half of it. Since 1960, government has changed radically. Then, 52 percent of federal spending went for defense, 26 percent for "payments for individuals" -- the welfare state. By 2008, 61 percent consisted of "payments for individuals," 21 percent for defense.
Social Security and Medicare -- programs for the elderly -- represented the biggest share: $1 trillion in 2008. Most Americans don't consider these programs "welfare," but they are. Benefits are paid mainly by present taxes; there's little "saving" for future benefits; Congress can alter benefits whenever it wants. If that's not welfare, what would be?
Pressures on private and public welfare won't abate. The economic conditions that encouraged corporate welfare have long since vanished. In 1955, GM, Ford and Chrysler accounted for 95 percent of U.S. light vehicle sales, reports economist Thomas Klier of the Chicago Federal Reserve. With market dominance and technological leadership, the Big Three assumed they could pass along to customers the costs of job guarantees, high wages and fringe benefits.
Eager to defuse the class warfare of the 1930s -- and to avoid unionization -- many U.S. companies imitated the model. They, too, believed that competition would be limited and technological change could be controlled. These conceits are gone (in 2008, the Big Three's market share was 48 percent and dropping). Now, companies are hypersensitive to competitive and economic threats. A survey of 141 companies by Watson Wyatt consultants found that 72 percent recently cut jobs, 21 percent reduced salaries and 22 percent curtailed matching 401(k) contributions.
In theory, expanding public welfare could offset eroding private welfare. President Obama's health-care proposal reflects that logic. The trouble is that the public sector also faces enormous cost pressures, driven by an aging population and rising health costs. The Congressional Budget Office projects the federal debt will double as a share of the economy (gross domestic product) to 82 percent of GDP by 2019.
Any sober examination of figures like these suggests that the system has promised more than it can realistically deliver. We are borrowing not to finance investment in the future but to pay for today's welfare -- present consumption. Sooner or later, the huge debt will weaken the economy. Nor would paying for all promised benefits with higher taxes be desirable. Big increases in either debt or taxes risk depressing economic growth, making it harder yet to pay promised benefits.
The U.S. welfare state is weakening; insecurity is rising. The sensible thing would be to decide which forms of public welfare are needed to protect the vulnerable and to begin paring others. Our inaction poses another dreary parallel with GM. It was obvious a quarter-century ago that GM the auto company could not support GM the welfare state. But the union wouldn't surrender benefits, and the company acquiesced. Inertia prevailed, and the reckoning came.
The same cycle, repeated on a national scale with sums many multiples higher, would be correspondingly more fearsome.