ECONOMYJanuary 9, 2025

Welfare states and majority rule

Reading time: 10 min

In democracies, citizens increasingly seek greater welfare benefits, creating challenges in balancing political majorities with fiscal responsibility.

A young man holds up a demand written on cardboard — “Retirement at 60,” proclaims the placard of a young man among the 20,000 to 30,000 demonstrators – trade unionists, yellow vests, anarchists and political party members – who flooded the streets of Toulouse on May 1, 2023, a labor holiday. © Getty Images

In a nutshell

Welfare states require increasing access to “other people’s money”
The tyranny of the majority poses a threat to public finances
The spending on “social rights” has become unsustainable already

While democracy is an established modern political standard in the developed world, the recent trends toward populism (both from the right and left) have caused concerns. Populism usually comes with demands for increasing various protection from the government supposedly desired by the people. Populism has gained so much traction that these days it wins, in aggregate, a majority of citizens’ votes in various places. Meanwhile, the welfare state, while appearing as an amplification of democracy – especially because of its egalitarian dimension – started off on its financially unsustainable path at least as far back as the 1980s.

The two processes are interconnected. Democratic procedures facilitate expanding demands for the welfare state. However, the arithmetic limits to welfare provisions create frustrations that translate into populism. This raises the crucial question of how to restrain popular majorities from causing financial chaos while maintaining freedom, the rule of law and fiscal responsibility.

A very old debate

The debate surrounding democracy and its potential pitfalls has deep historical roots. The Greek philosopher Aristotle expressed concerns that pure democracy, or “ochlocracy,” could lead to chaos, fueled by demagogues who promote relativism and undermine the rule of law and fundamental values. In response to these fears, the framers of the United States Constitution established a republic designed to safeguard liberty and equality of rights through limited government. This structure aimed to protect against the tyranny of the majority (a concept articulated by James Madison), as well as against mob rule.

Alexis de Tocqueville cautioned against the “despotism of the majority,” a warning echoed by thinkers like Herbert Spencer and John Stuart Mill, who highlighted the dangers posed by prioritizing the will of the greatest number of people.

Not only would the majority hurt the minority, but also itself – through shortsighted policies that would undermine society as a whole. Indeed, while trying to tame these populist forces to protect society, the opposite danger emerges: a republican dictatorship. After its revolution, France quickly experienced the Terror of 1793, carried out by its new republic. This episode thus reminds us of another classic problem: that of the tyranny of a minority in power. It is a serious challenge when containing majorities.

Meeting these social rights is significantly more costly than maintaining civil and political rights.

Constitutional safeguards, including checks and balances, have been developed to prevent oppressive majoritarian and minority rule. Excessive centralism and majority rule – rather than rational governance – can lead to an illiberal spiraling of democracy. These elements only strengthen as the nation-state and the welfare state reinforce one another.

The challenge of the welfare state

The welfare state has led to a shift away from fundamental civil rights, which safeguard the rule of law, and political rights, which ensure representation and fair elections, toward welfare or social rights. Meeting these social rights is significantly more costly than maintaining civil and political rights. Additionally, the economic complexity of societies and the management of welfare rights have necessitated more regulation, resulting in expanded government bureaucracies – whose employees also participate in voting. Consequently, regulatory-welfare states require substantial public spending.

This escalation in government expenditure has led to increased taxation levels and a proliferation of taxes, raising concerns about the Laffer effect. This effect suggests that excessive taxation can disincentivize work, investment and production, ultimately resulting in lower tax revenues and fiscal imbalances. As welfare states navigate these challenges, they must balance the demands for social rights with the financial realities of sustaining such systems.

To raise fiscal incomes, governments have increasingly relied on fiscal illusion, employing strategies to conceal the true costs of public spending from the public. This includes hidden, small or indirect taxes and accumulating public debt to lessen the immediate pain of taxation. Such tactics aim to avert the risk of tax avoidance and thus financial unsustainability. However, fiscal illusion creates a moral hazard by encouraging citizens to demand more rights and seemingly free privileges, services and goods. This amplifies what the economist James Buchanan termed “parentalism,” a growing public demand of dependency on the state.

Facts & figures

Majorities are demanding more social protection

The Yellow Vest movement in France and Belgium, which emerged in 2018, was driven by a central demand for a Citizens’ Initiative Referendum, so that the “people” could vote directly on new laws. Initially sparked by a tax revolt against rising fuel taxes, the movement quickly evolved into a broader protest for increased access to “other people’s money” and referendums to legislate these demands. The costs of public spending became secondary to the call for more government benefits. As the movement gained momentum, it required containment by the adult in the room – the elite who sought to manage its pressures.

Demographics, welfare rights and majorities

Demographics matter in shaping new majorities in democratic welfare states. In a world with porous borders, migration significantly impacts politics, particularly regarding the presence of immigrants. In the context of welfare states, welfare rights and regulations can create dependency and economic exclusion while paradoxically aiming for solidarity and integration. When migrants successfully integrate, they are often accused of stealing jobs. Conversely, when they fail to integrate, they are blamed for stealing welfare money.

In older demographics, fiscally conservative citizens resist reforming the welfare system that promises their pensions and healthcare.

In Europe’s Nordic welfare states, France and the U.S., there has been a growing conflict between long-time inhabitants and recent immigrants, leading to social anger and resentment. This tension is reflected in rising far-right votes, particularly among the youth, who demand protection for local welfare systems. These sentiments represent a shift toward new majorities that prioritize the interests of native populations over the newcomers.

Migrations have increasingly polarized the political landscape in the developed world. A significant portion of immigrants in Europe come from Islamic backgrounds, leading to strong popular resentment towards perceived alien habits, such as Muslim attire and public prayers. As blue-collar voters shift from left to far-right groups, left parties are now seeking support from second-generation migrants and abandon their traditional secular and anti-religious stances. This strategy promises more welfare rights to capture electoral support from groups with dynamic demographics, potentially helping the left build a new majority.

Populations in developed countries are aging, particularly in Europe. The median age is over 47 years in Germany and 49 years in Italy. The share of individuals aged 65 and over has surged above 20 percent in most European countries. In older demographics, fiscally conservative citizens resist reforming the welfare system that promises their pensions and healthcare. Baby boomers, born from 1946 to 1964, who have not reformed an unsustainable system, have voted for increasing social and public debt to be paid by their future children and grandchildren, who do not have a voice in these decisions. As a result, most of the electorate prefer the status quo.

Type of welfare state and institutional lock-in

While the composition of majorities evolves, a form of Buchanan’s parentalism prevails across the board. In this context, the tyranny of the majority poses a threat to the sustainability of societal finances. However, certain types of welfare states can exacerbate this trend. Surprisingly, when welfare states are corporatist – featuring numerous separate social benefit systems tied to professions – and simultaneously centralized, minorities taken together can end up forming a majority for the status quo.

Firewalls against the masses

The fear surrounding fringe populist movements stems from the painful lesson that, if left unchecked, they may expand and eventually gain majorities. In various developed countries, the rise of right-wing populism was temporarily contained by traditional elites using “firewall” strategies.

In the electoral arena, strategies to counter the rise of the far right often include ostracizing these parties in speeches, media and meetings by labeling them as anti-democratic while recalling the darkest episodes of rightist movements in 20th-century Europe. Additionally, other political contenders form alliances to block far-right candidates, leading to the concept of a cordon sanitaire, such as that used against the National Front in France. However, these strategies can silence democratic expressions branded as “populist” and often result in increased electoral support for populist parties and candidates.

While the elite is more aware than the masses of the country’s alarming financial state, it is not behaving responsibly either.

Here are two notable examples from France of the elite’s reaction to channel populism. First, in an attempt to address the Yellow Vest crisis, President Emmanuel Macron launched a citizens convention in 2019 to debate issues raised by the movement. However, the citizens and topics for discussion were reportedly selected in advance.

Secondly, after the recent French legislative elections in June 2024, which resulted in a victory for the New Popular Front (a coalition of leftist parties including the Socialist Party, France Unbowed and the Greens), President Macron took over two months to appoint a prime minister. His choice came from the losing Republicans party, which won only 46 seats compared to 182 for the left. Although this appointment aimed to create a balance between left and right, many perceived it as a denial of democracy by the entrenched elite.

It can be argued that firewalls are used by the powers that be to protect republican and democratic values against populism. However, the classic dilemma remains: who will guard the guardians? What if the elite use such devices to maintain their position rather than to protect the democratic system? Beyond constitutional safeguards, the republic’s elite must be accountable. The elite, by definition “positioned above,” cannot be held accountable to the citizens below, hence the risk of a despotism of once democratically elected elites – especially in a context of large fiscal illusion that insulates them from accountability. While the elite is more aware than the masses of the country’s alarming financial state, it is not behaving responsibly either. The financial crunch remains largely the elite’s fault.

Scenarios

Likely: Reform proves impossible to many, leading to hard landings

Under a pessimistic scenario, the combination of the welfare state and majority rule creates a perfect recipe for massive fiscal imbalances. The elite-preferred solution of increasing centralization and imposing restrictions on market mechanisms fails to achieve success, only deepening social frustrations. As the disconnect between the elite and the masses grows, the government’s inability to implement meaningful reforms can lead to severe consequences, including economic instability and social unrest.

The issues of deindustrialization are already weakening the economic and political resilience of several European nations, particularly given their bloated debt levels. This situation is likely to lead to significant economic woes, in turn triggering political turmoil. Many societies in developed nations have become increasingly vulnerable to that outcome, given their inflexibility regarding entitlements, corporatism and oversized bureaucracies. If such bleak scenarios unfold, the rigidity will likely lead to social unrest, with entrenched elites clinging to power while frustrated voters turn to new demagogues calling for revolts amid economic decline.

Likely: Crisis brings corrections

An optimistic scenario is all about some countries not letting a good crisis go to waste. Democratic institutions can still be strengthened against the excesses of both populism and elitism. However, the emergence of a more balanced governance, characterized by a responsible citizenry and an accountable elite, depends significantly on local political culture.

The outcome hinges on factors such as mutual trust, civic engagement, the quality of education, acceptance of transparency and a willingness to confront fiscal illusions regarding the actual costs of social rights and economic benefits that people demand. Countries with centralized, corporatist welfare systems that resist introducing flexibility may ultimately have less chance to enter reform paths and avoid hard landings during crises.

As societies navigate these challenges, the potential for reform and renewal exists, provided there is a commitment to uphold democratic norms and practices.

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