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European middle-class entitlements: R.I.P.

by Guy Sorman

PARIS — It is usually easier to see the beginning of something than the end of it. Born in 1945 in postwar Britain, the welfare state met its end in Britain last week when British Chancellor of the Exchequer George Osborne repudiated the concept of the “universal benefit,” the idea that everyone, not just the poor, should benefit from social protection.

The welfare state was described by its intellectual architect, Lord Beveridge, as a structure built to protect the individual “from the cradle to the grave.” This model came to dominate every West European country, with local traditions and local politics dictating the diversity of its application. By the 1960s, all of democratic Europe was social democratic, a combination of free markets and mass social protection.

This European model succeeded beyond anyone’s wildest dreams, and for decades was the envy of the world in a way that neither “Wild West” American capitalism, nor Soviet and Maoist state socialism, ever could be. Social democracy seemed to deliver the best of both worlds, economic efficiency and social justice.

True, there were always some nagging doubts about the European welfare state, mostly starting in the 1980s, when globalization arrived at Europe’s door. Hampered by the financial cost built into the welfare state — and perhaps by the psychological and financial disincentives built into it as well — European economies began to slow, with per capita income becoming stagnant and high unemployment a permanent fixture.

European advocates of the free market never proved sufficient to roll back the welfare state. Even Margaret Thatcher failed to touch the National Health Service. At best, like in Sweden or Denmark, the welfare state stopped expanding.

The welfare state resisted its critics and the pain of stagnating economies by making collaborators of the middle class. Indeed, the political genius of the men who built the welfare state was their insight that it would benefit the middle class even more than it would benefit the poor.

Consider health care benefits. In France, it has been demonstrated that the middle class spends more per capita on its health than the 20 percent of the poorest French do. As a consequence, the national health care scheme actually provides a net benefit for the average income earner.

Indeed, even America’s smaller welfare state seems aimed at the middle class more than at the poor, with the so-called Earned Income Tax Credit being the biggest handout. Every year, 24 million middle-class American families get a refund from the Internal Revenue Service. Those below the poverty line do not receive cash, but only in-kind support. So America’s welfare state means cash for the middle class and social programs for the poor. That discriminatory pattern can be found everywhere in Western Europe as well.

Osborne’s assault on the British welfare state began with the universal child subsidy, a broad-base entitlement distributed to all families with children, regardless of their incomes. This universal child benefit was introduced nearly everywhere in Western Europe to encourage childbearing in countries deeply damaged by World War II.

In the United Kingdom, 42 percent of child subsidies go to middle-class and wealthy families. The proportion is the same in France. Osborne has proposed ending payments to families with incomes in the highest tax bracket — the opening shot in a campaign that could end up transforming the entire welfare system by reducing benefits handed to the middle and upper class.

The savings (£1.6 billion) implied by Osborne’s proposal represent only a tiny fraction of Britain’s £310 billion annual bill for social welfare programs. But by targeting this entitlement, Prime Minister David Cameron’s government hopes to give the British people a better understanding of the unfairness of the current welfare state.

Every government in Europe will have to do the same: Target the weakest link in the social protection system, the one most easily understood by most people. The French government, in this same spirit, has gone after public-sector workers’ extravagant pension benefits, as well as the legal retirement age, trying to increase it from 62 to 65.

Anybody can grasp how child benefits for the wealthy or retirement at only 62 is unjustifiable. Yet popular resistance to these supposedly unfair entitlement reductions is stronger than expected. Intuitively, the middle class can see that this is the end of an era.

Will Cameron’s government — and any others that may go down this path — eventually retreat in the face of middle-class rage? To a certain extent, governments have no choice in going after middle-class entitlements. The 2008 financial crisis, aggravated by useless Keynesian public spending, has brought all European states to the edge of bankruptcy. Only the United States can indefinitely print its own currency and increase its debt.

So European states have no choice but to reduce their expenditures, and targeting welfare benefits that represent, on average, half of European public spending is the easiest way to bring immediate fiscal relief. The welfare state will not vanish from Europe, but it is set to be scaled back — and focused on those who actually need help.

If one takes unemployment as the ultimate criterion, the European welfare state has brought a safety net to the middle class, but has mired 10 percent of its most vulnerable people in permanent welfare dependency. Sixty-five years after Lord Beveridge trusted the state to hold our hand from cradle to grave, Cameron and Osborne have asked us to stand more or less alone on our own two feet.

Guy Sorman, a French philosopher and economist, is the author of “Economics Does Not Lie.” © 2010 Project Syndicate (www.project-syndicate.org)