Saving the Greek Welfare State

The welfare state crisis in Europe puts two acute problems on full display:

1. Big, redistributive government is killing prosperity in the developed world – it is high time to terminate it; and

2. That same big, redistributive government has trapped large segments of Europe’s population in a destructive dependency on government.

These two problems point to the same long-term solution, namely an end to the welfare state. At the same time, the wrong kind of termination will cause enormous harm to the hundreds of millions of Europeans who depend on government for their daily lives. The only way out is therefore to end the welfare state along a path to limited government that does not leave the poor behind.

Not everyone agrees on the need to follow that path. The idea that we should “just cut spending damn it” still has a large following, both among European economists of an Austrian slant and among American libertarians. This is surprising, especially since their slash-and-burn approach to the welfare state has already been tried in Europe. A couple of days ago the medical journal The Lancet reported on what this has meant to the Greek health care system:

Two main strategies can reduce [budget] deficits in the short term: cutting of spending and raising of revenue. The Greek Government used both at the behest of the Troika, albeit with an emphasis on reduction of public expenditure. … Cuts to public health spending Greece has been an outlier in the scale of cutbacks to the health sector across Europe. In health, the key objective of the reforms was to reduce, rapidly and drastically, public expenditure by capping it at 6% of GDP. To meet this threshold, stipulated in Greece’s bailout agreement, public spending for health is now less than any of the other pre-2004 European Union members.

The writers for The Lancet do not possess the expertise to realize that austerity as applied in Greece actually aims at saving the welfare state. The spending cuts and the tax increases are displays of a concerted – and very destructive – effort to slim-fit the welfare state into a smaller economy.

Nor do they seem to understand that in the short run it does not matter much whether austerity emphasizes tax hikes or spending cuts. (In the long run the balance between the two can make a notable difference. I elaborate on this point in my upcoming book Industrial Poverty.) At the massive scale that austerity has been put to work in Greece, a tax-hike laden policy strategy would have done at least as much damage to the Greek economy – and thereby to the government-run health care system – as the policies actually implemented.

But be that as it may. Let’s go back and listen to their story:

In 2012, in an effort to achieve specific targets, the Greek Government surpassed the Troika’s demands for cuts in hospital operating costs and pharmaceutical spending. The former Minister of Health, Andreas Loverdos, admitted that “the Greek public administration…uses butcher’s knives [to achieve the cuts].” The negative effects of these cuts are already beginning to manifest. Prevention and treatment programmes for illicit drug use faced large cuts, at a time of increasing need associated with economic hardship. In 2009–10, the first year of austerity, a third of the street work programmes were cut because of scarcity of funding, despite a documented rise in the prevalence of heroin use. At the same time, the number of syringes and condoms distributed to drug users fell by 10% and 24%, respectively. These events had the expected eff ects on the health of this vulnerable population; the number of new HIV infections among injecting drug users rose from 15 in 2009 to 484 in 2012 and preliminary data for 2013 suggest that the incidence of tuberculosis among this population has more than doubled compared with 2012.

This is an excellent example of why government should not be involved in the health care business in the first place. Legislators have taken over the responsibility for caring for drug addicts – and done so based on one particular ideology, namely that it is the right thing to do to give them free drug paraphernalia. By taking over the provision of said paraphernalia, government crowds out any initiative in the private sector to either provide the same products or to care for the drug addicts in some other way.

Then, when government runs into serious fiscal trouble and has to cut or terminate the programs it has put in place, there is nobody there to catch those who have become critically dependent on government.

Fortunately, there is a way out of this. We’ll get back to it in a minute. Now, more from The Lancet:

Additionally, drastic reductions to municipality budgets have led to a scaling back of several activities (eg, mosquito-spraying programmes), which, in combination with other factors, has allowed the re-emergence of locally transmitted malaria for the first time in 40 years. Through a series of austerity measures, the public hospital budget was reduced by 26% between 2009 and 2011, a substantial drop in view of the fact that expenditure should have increased through automatic stabilisers. … Rural areas have particular difficulties, with shortages of medicines and medical equipment. Another key cost targeted by the Troika was publicly funded pharmaceutical expenditure … The stated aim was to reduce spending from €4·37 billion in 2010 to €2·88 billion in 2012 (this target was met), and to €2 billion by 2014. However, there have been many unintended results and some medicines have become unobtainable because of delays in reimbursement for pharmacies, which are building up unsustainable debts. Many patients must now pay up front and wait for subsequent reimbursement by the insurance fund.

It is very important to understand how the welfare state works. By providing entitlements such as the subsidies in Greece for prescription drugs, it makes people adjust their lives, their spending habits, their entire private finances, to the existence of these entitlements. Furthermore, the taxes needed to pay for these entitlements severely restrict their opportunities to set aside money for alternatives in the event the entitlements are terminated.

The more entitlements government offers, the more people adjust their lives to those entitlements – and to the taxes that pay for them. There comes a critical point where government, by means of its welfare state, essentially monopolizes the way of life people can have. This makes the damage done by austerity all the more widespread through the economy.

When people lose access to the entitlements they relied on, they have to cut spending elsewhere to get what government once provided for free or at a heavy subsidy. This reduces spending in the private sector, forcing small businesses in, e.g., retail to slash employees.

The key problem here is not the spending cut, but the fact that it is paired with either constant or higher taxes. In Greece, government raised taxes while slashing spending – the same recipe applied all over Europe as far back as Sweden in the early ‘90s and Denmark in the ‘80s – which effectively creates a big drainage of resources from the private sector into government coffers. However, since government is not spending more, but less, the net effect is a decline both in government spending and in private-sector activity.

If on the other hand spending cuts are combined with tax cuts, and if those tax cuts are targeted to maximize the benefit to those losing the most from entitlement cuts, then the private sector has a fighting chance to step in and replace government. Once they are out of government dependency, obviously people will be able to handle health care costs with the ups and downs in their private finances in the same way as they today handle the costs of housing, feeding, clothing and transporting themselves around.

But that is not what the Europeans have in mind. This kind of government rollback is nowhere on their horizon. For this reason, we are going to hear more stories out of Europe, like the one we are listening to from The Lancet:

Findings from a study in Achaia province showed that 70% of respondents said they had insufficient income to purchase the drugs prescribed by their doctors. Pharmaceutical companies have reduced supplies because of unpaid bills and low profits. Despite the rhetoric of “maintaining universal access and improving the quality of care delivery” in Greece’s bailout agreement, several policies shifted costs to patients, leading to reductions in health-care access. In 2011, user fees were increased from €3 to €5 for outpatient visits (with some exemptions for vulnerable groups), and co-payments for certain medicines have increased by 10% or more dependent on the disease. New fees for prescriptions (€1 per prescription) came into effect in 2014. An additional fee of €25 for inpatient admission was introduced in January 2014, but was rolled back within a week after mounting public and parliamentary pressure. Additional hidden costs—eg, increases in the price of telephone calls to schedule appointments with doctors—have also created barriers to access.

These fees may not sound like much, but we have to remember that they are imposed on an economy where people have lost 25 percent of their total gross incomes in five short years, where unemployment is three times the U.S. level and where other costs of living, primarily taxes, have gone up. Government is still claiming a monopoly on providing health care, trapping people in an ever more austere system with no way to get to the alternatives.

Then The Lancet makes an observation that, so far, this blog has been almost entirely the only voice for:

If the policies adopted had actually improved the economy, then the consequences for health might be a price worth paying. However, the deep cuts have actually had negative economic eff ects, as acknowledged by the International Monetary Fund. GDP fell sharply and unemployment skyrocketed as a result of the economic austerity measures, which posed additional health risks to the population through deterioration of socioeconomic factors.

In other words, if austerity was a good idea, the Greek economy should be rip-roaring by now instead of, as The Lancet notes in conclusion, having to suffer through yet more of the same policies:

At the time of writing, the Troika was in Athens to assess the implementation of the bailout conditions, and €2·66 billion in cuts were announced to the health and social security budget for the following year.

Austerity is nothing more than an attempt at saving the welfare state from a crisis it caused. Nothing short of a real government rollback – a structural phase-out of the welfare state – is going to work. That holds true for Europe as well as the United States.