In light of the ongoing crisis, and the rise of emerging economies, certain commentators have

seen fit to question the sustainability of the European welfare state. The implicit assumption in
these suppositions is that a welfare state saps economic growth. This isn’t strictly true.

Indeed, a casual look at history shows that the welfare state might have helped
contribute to growth, by preserving social stability. For example, in late nineteenth century
Imperial Germany, Chancellor von Bismarck introduced accident and social insurance, as well
as a form of socialised medicine. However, his motivation for doing so was not out of
endearment for socialistic ideals, which he detested; rather, he wanted to bolster support for the
conservative status-quo, and to sway workers away from political radicalism.

Thus, one could say that Bismarck's actions were growth-enhancing in consequence if not in
intention, for by combating the socially corrosive effects of real poverty and perceived
unfairness, they helped preserve the set of arrangements that permitted Germany to
industrialise rapidly.

A similar utilitarian outlook was prevalent around the time of the publishing of the Beveridge
Report, in 1942. Here, the intention was to help individuals manage their affairs better; benefits
in return for contributions, and a subsistence income, as opposed to concerns over equalising
income.

However, as John Kay highlighted in a recent Financial Times article, discourse around welfare
came to be heavily influenced by ideas of human rights. For example, Article 25 of the UN
Declaration on Human Rights states that "e​veryone has the right to a standard of living adequate for
the health and well-being of himself and of his family.​"

Over time, rights have become something of a heuristic in policy-making; instead of justifying
why a particular benefit contributes to the common good, it is not rare for one to simply claim a
right to the benefit, as if that should end the question. More formally, it is best to analyse the
issue welfare through the concepts of equality of opportunity and equality of outcome.

The distinction is not concrete. Recent academic research, such as by Miles Corak at the
University of Ottowa, finds strong empirical evidence for the 'Great Gatsby Curve', which posits
that greater inequality is associated with less generational mobility over time. Implicit here is a
sort of diabolic loop, where high inequality today may reinforce higher inequality tomorrow, if
wealth accumulates over time. Thus, wishing to equalise equality of opportunity, insofar as it is
possible, warrants a certain degree of equality of outcome.

Of course, choosing between the two warrants choosing between generations. For example,
should we focus on providing pre-primary school education and childcare support, which would
require lower pensions and higher retirement ages? As research by Nobel Laureate James
Heckman finds, the former provides much higher social returns than the latter, though the
benefits accrue distantly in the future, when such children enter the workforce. Thus, there may
be a conflict between the elderly, who claim a right to a decent retirement, and the young, who
would claim a right to a decent education. However, the young don’t vote, so there will be a
skew in electoral preferences towards providing for the old.

Such issues of social justice relate not only to what kind of welfare is bestowed, but also how.
For example, those in favour of equality of outcome would argue for mean-testing of benefits
such as child benefit. However, as Chicago economist Casey Mulligan explains in a recent
book, such benefits may disincentivise individuals from seeking a higher wage, as such benefits
would be withdrawn. In this manner, a welfare system that uses means-testing may be be
perceived as fairer, but at the expense of growth.

Policymakers in the future face two certain difficulties. Firstly, how to design welfare in such a
way that we move toward the twin aims of equality of opportunity and outcome, while not putting
the interests of one generation over another. However, a complicating factor is to maintain the
current harmonious state of society. Bismarck had an easy task in comparison.