The real consequences of welfare

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The real consequences of welfare

Welfare is born from politics. The tradition originates from conservative roots rather than liberal. German Chancellor Otto von Bismarck created the modern welfare state as early as the 1880s. He introduced old-age pensions and medical care insurance programs primarily for political purposes. He exploited the working class’ longing for security through pensions because it was easier to deal with people on pension programs than those who were not.

To the German leader, welfare was a way to strengthen his power. He believed whoever understood the concept of welfare could gain power. The British quickly adopted his welfare-state theory, introducing the Old Age Pension Act in 1908. The welfare reforms were led by David Lloyd George, chancellor of the exchequer, who had been leader of the Liberal Party. From German conservative to British liberal governments, European states no longer differed in ideology in upholding welfare programs.

From this historical trajectory, the belated welfare race on our home turf is understandable. The ruling conservative Saenuri Party pledged 89 trillion won ($79 billion) in welfare spending for the next five years ahead of the April legislative election. The liberal opposition Democratic United Party topped it with a staggering figure of 164.8 trillion won. The ruling and opposition parties are issuing blank checks in welfare in exchange for votes. The stakes will likely go higher in the presidential election in December. With the ballot contest entirely centered on welfare, other state categories like peace, justice and growth are pushed aside to the periphery. We can hardly draw a big picture on post-election governance.

The way each contestant addresses the math of the welfare problem is also bizarre. The equation works simply in division without any application of adding or multiplication. They talk of distribution and leave out the growth factor. We have seen the same equation work during the end of the Roh Moo-hyun administration. At the time, the campaign focused on doing everything to contradict President Roh. Because the liberal president had been an advocate of distribution, the opposition delivered pledges on growth. The opposition now calls out distribution because the conservative government worked for growth. But wealth distribution cannot work simply from division.

To meet the pledges on distribution, we need action — or to be precise, funding. Campaign pledges are easy to make. Both ruling and opposition parties assure that they can meet the challenge without raising taxes and debt or increase the deficit by spending less and rationalizing tax revenue. But if that is so simple, why haven’t they done it before when they were in power?

Secondly, the programs must be sustainable. It is easy to spend for a certain amount of time. But funding cannot last. Commenting on the relay of welfare promises, the second finance vice minister warned that the state could confront a budget catastrophe if their promises are fulfilled. The Ministry of Strategy and Finance estimated that welfare campaign pledges could demand as much as 55 trillion won a year, amounting to half of total welfare budget for this year. In 2050, the state debt would be massive.

Fairness is the key to welfare programs. The term of fairness in welfare does not mean equal division for all. The state must decide whether the benefits should be the same for all or more for the people with less. Offering school lunches or child care for free should be addressed differently because it can lead to widespread confusion. It is easy to break bread for two, but tricky to give it out to a hundred.

We need to enlarge our income pie in the first place. The conservative Lee Myung-bak government attempted to apply the trickle-down economic theory of encouraging the rich to spend in order to pass down wealth and profit to the working class and smaller businesses with little success. The economy cannot get bigger and vibrant with just distribution. It must be driven with growth engine as well.

To navigate welfare policies well, we need big politics so that redistribution is possible from new wealth. Humans naturally cannot tolerate when they lose something they are used to. It is confirmed through empirical study of the endowment effect where people are willing to work for or value an object more if their ownership is clearly established.

Late last year, the legislature decided to up the maximum tax rate for the high-income class that earns more than 300 million won by 3 percent from 35 percent. The ruling and opposition lawmakers met secretly to agree on the hike and hastily passed it in fear of protest from the conservative wealthy class. But revenue from the hike stopped at 770 billion won a year, which can hardly help politicians’ envisioning of a welfare state these days. An excess is always hazardous. Politicians will have to be able to answer and meet these conditions before being set on building a welfare state.
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