WELFARE STATE IN THE MARKET TRAP

By Friedhelm Hengsbach

[This essay published in December 2007 is translated abridged from the German on the World Wide Web www.sankt-georgen.de/nbi/publ/beitrag.html.]

"Globalization forces us to scrutinize all social benefits.” “To preserve the welfare state, we must reorganize it.” “The reorganization of the welfare state is not its dismantling.” With such declarations, the welfare state was dismantled through reorganization. Under the magic word “reform,” the system was broken apart and deformed. With the promise that temporary inequalities had to be accepted so everyone’s situation would improve at the end, the downward spiral intensified for the lowest fifth of the population. The social fracture, division and exclusion of part of the population have increased even though the gross domestic product rose annually from 1990 to 2004 with two exceptions.

According to the 2nd Poverty and Wealth report of the German government, the poverty risk rate increased in 1998-2003 from 12.1% to 13.5%. Income distribution has worsened. The top tenth of German households had a 3% increase in their share of the total income from 1973 to 1998 while the lowest tenth’s share fell 13%. The concentration of assets has become greater. While the top tenth of households had 47% of total assets in 2003, the lower half of households had 4%. The erosion of working conditions, namely the income of part-time, marginal, short-term and precarious employment, has worsened the personal income positions at the lower edge of distribution. On the labor market, the negotiating power of dependent employees has deteriorated… The erosion of normal working conditions has accelerated; the low wage sector has expanded. In 1997 more than two million German employees had low incomes despite full time work. The tax burden has shifted considerably… The contribution of businesses and independent persons in financing public works fell from 31% to 15% from 1970 to 2003.

In view of the growing disparity in the distribution of life chances especially for the lower income sectors, I formulate these hypotheses:
(1) The crisis of the welfare state is a crisis in the heads of the economic and political elites;
(2) The welfare state is a political barrier against the marketing of human labor;
(3) The welfare state can be regained through a greater value creation and democratic solidarity.

1. THE CRISIS OF THE WELFARE STATE IS A CRISIS IN THE HEADS OF THE ELITES

In the political public, the welfare state is criticized as too expensive, impossible to finance in the long run and misguided.

1.1 “THE WELFARE STATE IS TOO EXPENSIVE”

After criticism of excessively high wages wore out, the debate concentrates on excessively high non-wage labor costs, social fees and indirectly the costs of the welfare state. These costs are a strain for the German economy that will weaken its international competitive position. Nation-states are in an international competition over the social systems they finance, it is said. These nation-states try to entice international corporations or mobile capital with low taxes, wages and social fees. Developing- and threshold countries will ruthlessly exploit their advantages in low wage- and non-wage labor costs and subject the German economy to an unprecedented competitive pressure. If labor becomes “cheap as dirt” (Horst Afheldt), there will be no alternative to downward adjustment of wages and non-wage labor costs.

The German economy is not currently under unparalleled competitive pressure. If it were, the notorious German export- and balance of payments surplus would not exist. German businesses can maintain themselves very well in border-crossing competition. More than two-thirds of German foreign trade is transacted with other Western European countries… A distribution problem arises for those immediately involved in the increased affluence from the international division of labor…

Who are the actors and addressants in the border-crossing stream of goods and capital? What are the instruments and markets? They are not states but global companies that compete for the solvent purchasing power of consumers mainly in developed industrial countries. These global owners of capital require owners of capital and trained workers and offer goods, wages and capital profits. According to all experience, their location decisions are mostly determined by market conditions and profit expectations and secondarily by taxes, fees, interest rate fluctuations and differences in interest rates… Germany and France do not compete like VW and Peugeot… Every society decides autonomously what share of economic wealth they leave to private or public budgets, the rules for distributing income and assets between dependent employees and independent workers or owners of capital and how far the market-determined primary distribution is corrected by taxes and social fees.

1.2 “THE WELFARE STATE CANNOT BE FINANCED IN THE LONG RUN”

The German welfare state and its solidarity security systems are financed by contributions of dependent employees. Demographic development predetermined by the rising life expectancy of the population and a birth rate stagnant at a low level, will change considerably and double the old age portion. While two employed persons currently pay for two pensioners, only one person will pay for two pensioners in 2040. The decreasing share of employed persons in the whole population will put a contribution burden on the economically active population who will refuse to pay, it is said. Given such prospects, the transfer procedures of the solidarity security systems cannot be maintained. These procedures must be supplemented or replaced by capital-covered procedures of private old age provisions. This is also more profitable, certain and cheaper for individuals.

The discussion about the higher life expectancy and the decreasing birth rate in Germany focuses public attention on a secondary plane. Firstly, life expectancy has risen and the birth rate has fallen for more than a hundred years. Secondly, both trends were neutralized in the past through the trend of considerably higher productivity. Growth expectations, degree of employment and labor productivity decide over the economic power of a country, not the biological composition of the population.

A hundred years ago, 8 farmers were needed to feel one non-farmer. Nowadays one farmer can feed 88 non-farmers. Even those who point to dramatic demographic development admit that a one or two-point increase in the growth rate could solve the financing problems of the solidarity security systems…

The explosive rise of stock prices at the end of the 1990s turned out to be a speculative bubble. The missionaries of the capital-covering procedure are right that transfer-financed solidarity old age security functions as long as a dynamic value creation and adequate social fees are guaranteed. A capital-covered security is advantageous at least for owners of financial assets when the interest level is relatively high, stock prices climb and capital markets are very receptive.

2. “THE WELFARE STATE IS MISGUIDED”

The civil campaigns (New Social Market Initiative, You are Germany, Redefine the Social) have triggered a polemic against the allegedly deficient reform capacity of the population for more than a quarter century with media encouragement and financial support by the economy. The focal point is criticism of the welfare state. The welfare state and its agencies, the welfare associations and the self-governments of the legal health-, unemployment- and pension insurance are firstly bureaucratically encrusted and overgrown, it is said. Addressants are led by the nose and robbed of their independence, personal initiative and personal responsibility. Civil society solidarity is pushed back and the will to give birth to a child is undermined in the family. Secondly, the welfare state is politically overstrained. The welfare state cannot offer what distressed persons need, namely personal love and affection, sympathy and selfless existence. The offer of financial assistance strikes at tight limits given the necessary consolidation of public budgets. Thirdly, the welfare state is normatively misguided. It is fixated on distribution justice and distorts poverty, discrimination and exclusion as purely financial problems although they should be identified as cultural phenomena. Equality of outcomes should be sought. Such a normative concept of justice is not equal to challenges of the 21st century.

The 2006 Mainz declaration of the CDU discovered a “new justice through more freedom” in which the terms freedom and justice remained rather vague. Six years before, the justice question returned in society. A “new” “contemporary” and “adjusted”
Idea of justice was desired. The people should bid farewell to distribution justice. Equal opportunity is the new name for justice. The state should provide better access to education instead of distributing financial resources. Faster and improved access to competitive jobs is preferred to paying out decent unemployment benefits… Since individuals have different talents and desires, they should be paid with differentiated incomes and assets. The more limited the income and assets distribution, the higher the performance incentives and the more advantageous this will be for higher growth and more jobs.

Thus performance- and market-justice have precedence before needs justice and solidarity. Finally, the intensified conflict between younger and older proves that generation justice is violated. In the latest EKD memorandum on poverty in Germany, “just sharing” was proclaimed as the magical synthesis of distribution- and participatory justice. Cardinal Lehmann enriched the ecumenical competition with the formula “balanced sharing” – relying on the concept of “justice as exchange.”

In view of the intensifying exclusion of personally and socially disadvantaged persons, many things urge formulating social justice as a normative counter-design to the global, national and regional mega-trend of social division. As this counter-design, justice is an equality assumption. Equality means proportional equality. In antiquity and the middle Ages, the reference point of equality was the well-balanced society. Since modern times, the self-confident and self-determined individual has been the focus of society. Consequently the human person is the reference point for equality. Moral equality means: every human person has the right to be treated and acknowledged as equal. Social conditions stand under this moral standpoint. Social norms for everyone should be justified according to a standpoint of impartiality and generality. This right is also in force for those living at the lower edge of society. Real equal opportunity consists in balancing the continuing results of the national lottery and social discrimination, not only providing equal starting chances. Inequalities of incomes, assets, rights of economic control and social power are justified when they are anchored in personal achievements like mobilization of natural talents or interests, established functionally by special competence or responsible profiles. These are regarded as more advantageous than a totally even distribution.

3. THE WELFARE STATE IS A POLITICAL BARRIER AGAINST THE MARKETING OF LABOR

Whoever wants to trace the architecture of the German welfare state should not limit attention to the solidarity security systems even though they have considerable weight. The principle of distribution justice rated by some as the “queen of justice” and medical care are vital. The welfare state that has a constitutional rank (art.20 in the German constitution) is an ensemble erecting a political barrier against the marketing of human labor.

2.1 DEPENDENT LABOR

The great promise of the modern work society began with the liberation of farmers. The top and bottom of the feudal society in which some worked and others lived from foreign labor should be removed once and for all. The classification of persons whether they work with their heads or their hands should be ended like the rule of men over women. Open and hidden slavery, serfdom and the existential form of the day-laborer should be abolished. Free choice of residence, partnership and free labor contract should replace these dependencies. Everyone able and willing to work should be able to work on the market in a self-confident and self-determined way as an equal exchange partner – under conditions to which he or she agrees and for an income as a return favor that assures his or her livelihood.

However loss of the basis of existence was bound with liberation from the yoke of serfdom. A large part of the population released in so-called freedom had no other assets than personal work capacity. Unlike those with land or property, whoever had nothing but his or her labor power could not wait. His or her labor power had to be offered at the conditions set by the exchange partner to secure the livelihood. The institution of the free labor contract respects the free consent of both parties. Still the justice of the contract is not guaranteed with free consent when the contract occurs under extremely unequal initial- and negotiating positions. Free labor contracts under unequal negotiating conditions are structural unequal and thus unjust contracts.

The welfare state represents an institutional and normative counter-weight against the disparity of economic power on the labor market. Regulations of labor law like protection from unlawful termination are formulated to protect dependent employees. These regulations include the right of association and the system of collective bargaining. An approximately equal negotiating position of dependent employees in relation to their employer is produced through their solidarity union… Co-workers emphasize they should not surrender their democratic civil rights at the office door or factory gate. Conversely civil enterprises are interested in the independent judgment, civil courage and communicative competence of co-workers.

The right of care plays a subordinate role in a society centered on paid labor – on the assumption that its members are able and willing to gain their living through their own labor. The high value of labor and personal initiative is normatively established. Labor is not a commodity like any other. Market radical economists insist that the same laws are in effect for labor in a market economy as for commodities. Labor is only purchased when its value for the employer is higher than its price. This is not a degradation of the person. Why shouldn’t what is true for tulips, bananas or aluminum scrap be true for labor? No moral objectives are raised against natural laws. When a person leaps from a window, he falls with the same velocity as a tulip. No one could denounce this as degrading.

Labor is something basically personal and necessary, personal because it is bound to the person and necessary because it is usually the only precedent source of well-being. In their work, people see a medium of identity, social acknowledgment and security of living standards. The value of labor is first established in the dignity of the human person performing work. Human dignity does not fall from the sky or fall into one’s lap. No one procures it himself. We gain dignity when other persons see us and say: You should be and have a name that we do not forget. Christians are convinced they gain their own dignity through God’s love. According to the testimony of the Bible, God assured the people of Israel: “I have created and liberated you. I have delivered you from the house of bondage of labor so you can walk upright. If your father and mother forget you, I will not forget you. I call you by your name and inscribe your name on my hand. You are mine!” Other groups of society are oriented in personal dignity which – as Immanuel Kant explained – has no price. A person should be respected as an end-in-himself and never used or exploited as a mere means. In a democratic-egalitarian society, we gain dignity by granting one another the right to be treated and recognized as an equal. In solidarity with one another, respect of the equal dignity of everyone arises In addition, we gain dignity by defending the rights of the oppressed, exploited, political refugees and illegals.

The dignity of dependent working persons is now violated in Germany. The paid work society breaks its promise of offering a work opportunity to every member who can work and wants to work to make a living by activating his or her talents and energies. The fortified mass unemployment is not a natural phenomenon or fate but is caused by a policy fixated on the labor market. The explicit political goals of the Black-Red coalition are consolidation of budgets, increased financial and mental pressure on the unemployed and secondarily increased public and private investments to revive the demand for goods. A coordinated monetary-, financial- and wage policy is still rejected even though the monetarist and supply-oriented experiments have hardly proven successful. Instead the victims of the crisis are denounced as culprits who are not ready or able to work.

The admonition in the Letter to the Thessalonians that the one who does not work should not eat is applied so that those who work should eat appropriately. In this formula, a rhetoric of responsibility resonates that signals a redistribution of the burdens and obligations between the welfare state and citizens. The individual first of all is the architect of his happiness. The individual has to perform a preliminary work that is honored by the activating welfare state.

However personal responsibility can only be assumed in the scope of the given possibilities of action. Whoever demands personal responsibility from those with trifling possibilities, the long-term unemployed, single women and persons needing care, directs the appeal to the wrong address. He carelessly reverses the distribution of burdens and obligations. In that the welfare state takes away the citizen’s right to refuse a work opportunity that seems unreasonable to him, it runs the risk of defining the dignity of the person by his work output and degrading the democratic society to a horde of work animals.

The dignity of working persons is already violated in the factories and businesses, not only regarding social benefits and the lower edge of the labor market. Around the core of employees paying in to social security with unlimited work contracts and appropriate income are the pseudo-independent, employed persons in part-time and contract work, in trifling and precarious employment and mini- and 1-euro jobs. The principle “equal pay for equal work” has long been annulled. Such tears, fractures and divisions among dependent employees are reinforced by growing pathologies of paid labor: forced overtime, unpaid additional work, increased work and time pressure on some and continuous inactivity of others as well as a loss of the balance of work and life. Those able and entitled to sovereignly organize the time and substance of their labor are massively overstrained up to self-exploitation while the follow-up costs of their work rage are dumped on relatives and friends. As soon as the welfare state mutates to a competition state or a “territorial entrepreneur,” the governing orient themselves in the interests of transnational conglomerates and international finance markets and no longer in the life designs of citizens. As the people assert themselves as winners on the global markets, they are subjected to the conditions of location-competition. When concrete people refuse, other people must be formed through eugenic, therapeutic and pedagogical efforts.

2.2 CORRESPONDENCE OF SOCIAL RISKS AND SOLIDARITY SECURITY

Ulrich Beck describes our present society as a risk society. He focuses on the risks of environmental destruction, individualization and political deregulation that are produced by modern developed societies. These risks are caused by social conditions and cannot be charged to actions of individuals as their immediate and direct cause. Social, not individual risks are connected with the life of dependent labor – separation from the means of production that could contribute to the security of livelihoods, coercion to paid work, dependence on labor contracts and subordination under foreign control. In addition, there are risks of unemployment and old age poverty as well as sicknesses that spread because of miserable working conditions.

In patriarchal societies, membership in the female gender is a social risk that impairs the choice of professional training, participation in paid work, the height and duration of gainful income and the level of old age security. These risks cannot be assigned to individual women as a weekly newspaper suggested with the title “More Ambition, Sisters! – Why German Women Have Problems in Getting Head.” While individual risks can be left to private provisions, insuring against social risks in a solidarity way is sensible.

Solidarity is a form of social control comparable to love in partnership, money in the economy or power in the political sphere. In contrast to market control, a defined group of people acknowledge a common foundation of their actions – perhaps class, gender, language, culture or history – that binds them. Despite this common bond, individual group members are affected very differently by the great life risks. Still these differences are less important than the common foundation. A legally binding contractual agreement is based on an asymmetrical mutuality. Solidarity contributions are paid according to individual output while the solidarity claims are dispersed according to the individual predicaments. The contributions are defined according to the principles of performance justice. Regarding the predicaments, the legal claims correspond to the principle of need justice.

When this solidarity is compared with market control, it is clear where the two forms of control agree and where they disagree. Both market control and solidarity regulate conflicts of interests. The market controls anonymously and solidarity in surveyable or clearly defined ways. The market is not exclusive as long as the exchange partners are appropriately outfitted with purchasing power. The control form of solidarity works within clearly identifiable and sharply drawn limits. Only those who understand themselves as essentially equal on the basis of a common characteristic recognize a solidarity obligation. Such characteristics are a social working model and are not pure objective facts. Only when people feel bound to one another can solidarity arise as a form of social control.

On the market, a strict mutuality prevails at the same time or for a clearly defined time. With solidarity, mutuality is created by an expectation extending far into the future. This is colored very subjectively with expectations that the distress and syndromes that I see with my neighbors will also strike me in the future. The “asymmetrical” mutuality typical of solidarity that solidarity contributions will be paid according to output (incomes or assets) and the solidarity claim according to need in case of risk (the concrete plight and not purchasing power) results from this assessment). The “mystery” of solidarity lies there. A market control is incapable of this.

The solidarity security against social risks joined with the situation of dependent labor was deformed in the past decades by social changes, the propaganda of middle class elites and political carelessness. The Red-Green coalition carried out a systematic breach by lowering the level of security against life risks gained through paid work and cancelled the solidarity of the economically active with the inactive, the healthy with the sick and the well-to-do with poorer groups in the population. The political class individualizes social risks. Solidarity security assigned to private provisions easily succeeds for the well-to do and rich but not for other groups of the population whose income does not allow a reasonable capital formation or private or health provisions. Basic rights claims are transferred to work, existence-assuring livelihood and general access to health services in free enterprise exchange relations.

3. THE WELFARE STATE CAN BE GAINED THROUGH HIGHER VALUE CREATIONAND DEMOCRATIC SOLIDARITY

3.1 THE MAJORITY OF THE POPUALTION LIVE BELOW THEIR MEANS

The majority of the German population and the world population live below their means, not above their means. Countless vital needs that are not satisfied coexist with material needs like the desires for an independent life, successful partnerships with children and autonomous control over working hours and life time. There are a multitude of unfinished public tasks beside the private unsatisfied vital needs. Public institutions are now falling in disrepair because the necessary financial means are allegedly lacking. Libraries, swimming pools, streets, and the infrastructure of the sewage system decay. Cities suitable for children are still a pipe-dream of architects and city planners. The German society wears down labor capacity, the most precious resource, instead of cultivating and ennobling it. An annual sum of 200-250 billion euros is destroyed.

3.2 HIGHER VALUE CREATION THROUGH PERSONAL SERVICES

Future prophets who announce the “end of work” claim a “capitalism without work is at hand. Labor is “cheap as dirt.” Full employment is a “social romantic utopia.” In contrast, politicians promise to drastically reduce the number of unemployed in the foreseeable future notwithstanding the fortified mass unemployment. Large parts of the population no longer take seriously these promises, abstain from voting and distance themselves from democracy.

For the foreseeable future, the economic value creation through socially organized labor for all who can and want to be gainfully employed remains the key to their social acknowledgment, personal identity and economic prosperity. How modern societies will renounce on the productivity- and prosperity gains of gainful employment cannot be anticipated. Nevertheless industry, the export-economy and corporations in the developed German industrial society cannot produce full employment as experienced in the post-war time. The technology-motivated productivity gains in agriculture and industry allowed a continuous discharge of workers without reducing the quantity of offered goods.

The chances for new markets and additional work fields lie beyond the industrial-, export- and conglomerate-economy. Many think of the tertiary sector, that is banks, insurances, railway, postal service and top flight industrial products that are “packaged” for design and marketing. Others think of simple services in the home or business – like packaging, shining shoes at the train station, mowing lawns, pressing shirts, washing cars or shipping. The French economist Daniel Cohen regards work for people as the future of work.

Personal services have unmistakable features. They cannot be stored like cars in a garage or refrigerators in a warehouse. Those who utilize them and those offering them must cooperate at the same moment and learn from each other. Efforts of teachers or physicians evaporate in thin air when students and patients do not participate. The result of personal service is honest conduct and an independent life despite impairments or changes of lifestyles. The value creation of personal services is dependent on the purchasing power of those seeking services, on socially identified needs and on the competence of those offering services. This competence must be developed. While the competence of “weighing, counting and measuring” is sought in the industrial consumer society, the competence of helping, healing, counseling and playing is primary in the personal realm.

Personal services are mainly classified as “trust goods.” An equal relation of competence exists between suppliers and customers. Clients trust those offering these services. They need a negotiating position that does not hand them over to the market power of the suppliers. Thus there are already good economic reasons to provide these goods publically. In addition, access to these goods is regarded as a basic constitutional right. The cushioning of personal impairments and social discrimination, medically necessary provisions and a basic education that safeguards real equal opportunity should be accessible to everyone irrespective of their purchasing power.

3.3 BEYOND PAID WORK: GENERATIONAL DEMOCRACY

Participation in socially organized work or paid work is the main key but not the only key to social integration. This participation is not the only goal of employment policy. In modern societies, only a fragment of socially necessary work is organized as paid work. The equally important private relational work and civil society engagement exist alongside paid work. In the past, these three forms of work were divided in a sexist way. Paid work was assigned to men and private relational work to woman – house work, children’s education and care of seniors. Since women claim equal and autonomous life- and gainful work chances more and more, men should relativize their paid work and accept their share in responsibility for private relational projects. They could discover increased quality of life.

Just and effective reforms could annul the splitting of husbands and wives that favors single breadwinner-marriages and housewife marriages. Parents should be granted a right to full-time care of their children who reach their first year of life. They should have the right to part-time work with full wage compensation…

3.4 DEMOCRATIC SOLIDARITY

Traditional solidarity security is coupled almost exclusively to dependent paid work and social contributions levied on income from dependent work. The social foundations of this coupling have become shaky. An uninterrupted gainful biography over 45 years of the so-called basic pensioner is no longer the norm. The sexist division of labor that assigned paid work to men and private family work to women has rightly been cancelled. That German households have two to three children is no longer self-evident.

How should we react to this solidarity that has become fragile? The Red-Green coalition relies on more market and more competition. However market and competition cannot replace solidarity for the unemployed and recipients of low- or poverty wages and also for the well-to-do and the rich. Consequently an expanded foundation of solidarity is necessary. One obvious answer is that the constitution could be this expanded basis of solidarity.

A democratic solidarity should include all persons in the solidarity community – irrespective of whether they are officials, employees, laborers, bishops, delegates, judges, soldiers, farmers or independent persons. All incomes should be obligated to make contributions. The limits to income liability and insurance obligation should be abolished. Private insurances are mere additional arrangements. That the well-to-do and rich can evade the solidarity obligation is not consistent with the principle of a democratic solidarity… All persons living in the scope of the constitution, even those with no income, are included in the solidarity community. Additional private insurance is possible for the well-to-do and rich if their standard benefits do not meet their needs,

With a temporary compromise, the partners of the great coalition ended the controversial debate over the concrete organization of a democratic solidarity. Social life risks are regulated separated from the income risks. In the concept of citizen insurance, the solidarity of those with a strong state of health with those with a weak state of health and the solidarity of the well-to-do with the poor should be regulated in a single self-governing system. In the concept of the health care premium originally favored by the CDU/CSU, the solidarity of those with a strong state of health and those with a weak state of health and the solidarity of the well-to-do with the poor was regulated through the tax system. Two arguments speak against this system. Firstly, certain syndromes are strictly correlated with individuals’ income situation and social position. Secondly, the German income tax system is only a solidarity system in a restricted way since the principle of taxation according to output was averted and top incomes were relieved while middle and lower incomes bear the main tax burden of direct and indirect taxes.

Middle class elites, economic leaders and the political class have promised again and again not to dismantle but to reorganize and preserve the welfare state. In reality, they dismantled it by shattering the system. They cancelled the distribution compromise of the post-war era when the social market economy rested on the two pillars of an efficient economy and a social balance. To the question raised by the Allensbacher Institute to a representative sample of the German population at the beginning of 2005, whether social justice in Germany decreased in the last three or four years, 80% of the respondents answered “Yes.” The distance between those privileged with purchasing power and assets and those disadvantaged on the market becomes greater when market, competition and performance justice replace solidarity and distribution justice. The preferred alternative consists in a normative upgrading and political strengthening of a robust welfare state that defends the dignity and rights of dependent employees and insures them against social risks in a solidarity way. This welfare state is both the cause and effect of a higher quality of life for all.