Franklin D. Roosevelt became the architect of the US welfare state by launching the New Deal. But even Roosevelt himself was concerned that the long-time viability of the institution he had fostered was in jeopardy, due to the nature of societal norms. Two years into his presidency he had the following to say during a speech to Congress: ”The lessons of history, confirmed by the evidence immediately before me, show conclusively that continued dependence upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fibre. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit. It is inimical to the dictates of sound policy. It is in violation of the traditions of America.” When the welfare state was founded, the views of Roosevelt were not uncommon. Many were concerned that individuals would stop following the norm of paying their taxes and instead start over utilizing welfare programs.
With time, advocates of welfare policy grew more confident that generous government services and handouts could in fact be introduced, and funded by high tax rates, without the morale of society suffering in the process. One of the main arguments is that large welfare states successfully had been implemented in the Nordic countries, without the moral-hazards associated with welfare policy. The reality is however more complicated, since it is not only policy but also culture that sets this part of the world apart. Lutheran working ethics, a cold climate where farmers had to work hard in order to survive, and widespread property rights fostered a unique culture with strong emphasis on individual responsibility and working ethics. High levels of trust, a strong work ethic, high levels of trust and social cohesion are the perfect starting point for successful economies as well as the cornerstones of fruitful social democratic welfare policies.
A pre-existing high level of social cohesion allows welfare programs and high taxes to be implemented without the same impact on work habits as such policies might have in a different environment. Thus the Scandinavian countries and other parts of norther Europe have had optimal conditions for introduction of welfare state policies. The only problem is that norms do, slowly over time, adjust to policy. Daniel Arnold has shown this to be true by looking at the generosity of sick pay entitlements. Benefit morale is measured through the World Value Survey, a global attitude study where respondents are amongst others asked if they believe that it can sometimes be justified to claim government benefits to which they are not entitled. By examining 31 different developed economies between the period between 1981 and 2010, Arnold can show that high benefit morale reduces the incidence of absence. As shown in the picture below, this has certainly been the case for the Swedish welfare state – where a major shift in attitudes has occurred as the population has adjusted to generous welfare policy.
Jean-Baptiste Michau has shown that a link exists between government benefits and cultural transmissions of work ethics. Contrary to Roosevelts fears, this change does not materialize immediately, but rather over the course of generations. According to Michau parents make rational choices regarding “how much effort to exert to raise their children to work hard”, based on their “expectations on the policy that will be implemented by the next generation”. Therefore a significant lag should exist between the introduction of certain policies, or even a public debate regarding future policies, and changes in ethical views. Building a model with a lag between these two factors, Michau argues that generous unemployment insurance benefits can explain a substantial fraction of the history of unemployment in Europe after the Second World War.
As norms have shifted, governments on both the right and left in the Nordic countries have responded by reducing the generosity of the welfare system. In Sweden for example, additional gate-keeping functions have been introduced mainly in the sick leave system to limit overutilization. Interestingly, a recent paper suggests that the reforms may need to be quite far‑reaching to reverse the long-term effect that the welfare state has had. Economist Martin Ljunge suggests that politicians who wish to increase the generosity of the welfare state must take into account the long-term costs of such policies. The reason is that younger generations use sickness insurance more than older generations, after other individual circumstances have been adjusted for. According to Ljunge “The higher demand for sick leave pay amongst the younger generations can be seen as a measure of how rapidly the welfare state affects attitudes towards the use of public benefits. The results have implications for economic policy. The demand for social insurance increases, even if the rules do not become more generous. Policy evaluations based on behavioural changes shortly before and after a reform can strongly under-estimate the long-term changes that are relevant for the financial integrity of a welfare state.”
Similarly, the Danish researcher Casper Hunnerup Dahl has reached the conclusion: “The high degree of distribution in the Danish welfare state does not merely reduce the concrete incentives that some Danes have for taking a job or to work extra in the job that one already holds. Much evidence suggests that the welfare state also has a very costly and long-lasting effect on the working ethic of Danes.” There can be little doubt then that the erosion of norms due to long‑term adaptation to welfare policy is an observable phenomenon rather than just theory.
It turns out that Franklin D. Roosevelt was right in fearing that “continued dependence upon relief induces a spiritual and moral disintegration”. Welfare dependency is a major problem. As the Nordic experience teaches us, it takes time to break down norms formed over generations. But once this occurs, it might prove equally time-consuming and quite difficult to once again strengthen the norms that successful societies depend on.