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Economic Growth Requires Social Welfare | Here’s Why
A topic for debate is the social welfare system.
On the one hand, we have people who say giving unemployment benefits (and other benefits) rewards somebody for doing no work. On the other hand, we have people who say if they’re unable to live at a decent standard, they will not be fit for work.
Do we have to be cruel to be kind?
Economic theory suggests that social welfare is vital for economic growth.
Just take a look at labour markets. Countries which provide lots of help for the unemployed have more dynamic economies than those who limit support.
The reason for this is because when a country provides little assistance for the unemployed, people are terrified of losing their jobs. Some of you may think this is a good thing, but actually, it is one of the worst cases imaginable. The result is people look towards the industries where they feel safest. So the necessity industries seem to get an influx of labour. What happens next is we get depressed wages due to oversaturated markets (and depressed workers!). Professions like healthcare and law might see increased activity. That’s good because these are socially important; however, these industries do little for economic growth.
Growth in the economy is achieved when businesses invest in order to expand current levels of output. We need more entrepreneurial spirit, so risky behaviour has to be rewarded. An entrepreneur shouldn’t be faced with poverty if their business idea doesn’t work out. A lack of support for entrepreneurs just leads to less domestic growth, and more reliance on foreign direct investment which can also be damaging to the economy in some ways.
What about trickle-down theory?
The ‘trickle down’ effect is the free market’s way of providing more income for the poor. The idea is, if we get more and more rich people, then their spending trickles down throughout the economy in the form of more jobs and higher wages.
Free market economists argue that if the government spends less on welfare, it wouldn’t need to tax as much. With lower taxes, rich people earn more money without being taxed, and they’re also free to invest their money directly into the economy. Investments should create more growth and jobs.
Does the trickle-down effect produce the results?
There is limited evidence to suggest that it has. Countries which adopted free market policies in the 1980s, such as the USA and the UK, actually experienced slowed growth as a result. When growth stutters, money stops trickling down and stayed at the top. To evidence this, between 1979 and 2006 the top one percent of earners in the USA more than doubled their share of national income – from 10% to 22.9%.
It just goes to show - rich people are probably very good at saving. They’re also very good at getting richer!
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