The Interaction of Social and Economic Policies

The first questions we had to answer when we began to analyse social policy was: What is social policy? How is it defined in Lithuania and what is it aimed at?
Let me quote the definition afforded by the Ministry of Social Security and Labour: social policy is “the co-ordination of labour market policy, the creation of favourable conditions for safe work and adequate remuneration for work as well as extensive care of people who are unable to take care of themselves due to a loss of income or health.”
This suggests that social policy should be treated in quite a broad sense, because people’s abilities to work and to earn depend on a whole range of factors, such as the economic environment, the tax system and competitiveness. So the first conclusion we arrived at was that social policy in Lithuania is viewed too narrowly. It is common to think that social policy should be carried out solely by the Ministry of Social Security and Labour. In reality, however, all functions performed by the state are social policy. The main goal of any government policy should be to secure people’s well-being, both material and spiritual. This, of course, is related to the objectives pursued by the Ministry of Social Security and Labour.
People’s welfare depends first of all on business conditions. As the days of public businesses have already passed, well-being is determined by the conditions in which people start businesses, get employed and create wealth.
It is very important for people to feel secure. They want their property, health and life to be protected. Therefore even those policies which are rarely assigned to the social domain – for example, monetary policy – are instrumental. I recall when the currency board model was being introduced in Lithuania, some social experts feared lest it should exacerbate social conditions in the country. However, this anti-inflationary policy has benefited most ordinary people living on fixed income, as it has protected them against losses.
Of course, it is also necessary to deal with the problems of those who for some reasons are unable to start a business of their own, to get employed and thus participate in the process of wealth creation. I will later illustrate that such problems can be tackled both within and outside the market, and that this area falls within the domain of the ministry today.
I will now digress a little to the basics of market economy. Today we have mentioned inequality as a positive phenomenon. Indeed, inequality, which some people may sincerely dislike, is the vehicle of civilisation. The absence of inequality or its artificial prevention impede progress. In some cases the existence of rich people is justified solely by their luxury consumption as it brings income to others. But things which today are considered as luxuries of the rich become necessities of tomorrow. While an indoor bath was considered a luxury at the beginning of the century, today it is common even for needy families. So the desire to consume stimulates the whole economy and is indispensable if we want society to progress and not regress.
What makes a free market provide the best conditions for people to work and to earn? This proposition has been proved both theoretically and practically. Research suggests that in those countries where economic freedoms are the largest, people’s income is the biggest too. Countries like Hong Kong have in two decades surpassed the US in terms of income per capita, and this progress has been inseparably linked to the creation of economic liberties.
Moreover, countries with extensive economic freedoms boast low unemployment. If we look around, we will see that there are myriad potential goods and services we are willing to buy on the market but there is no one to offer them for us. The question is why so many people complain about not being able to find jobs while there is inexhaustible abundance of work which could be done. The main reason is that people encounter enormous barriers as they attempt to enter the market and apply their skills.
Today, starting an elementary business activity requires that people be experts in bookkeeping, law, and many other subjects. People are barred from entering the market and serving others with their modest experience. In a free market, unemployment would be virtually non-existent, as people’s desires, and therefore opportunities for work, are limitless.
Another question revolves around what remuneration these opportunities would offer. They would probably earn less than the minimum wage guaranteed by the government. Yet, they would be the first step to acquire experience and to earn a lot more in the future.
Admittedly, opportunities to earn depend on the competitiveness of the whole economy, or enterprises’ abilities to produce goods that would be sold in Lithuania and beyond. The press abounds in headlines saying that world prices are too low for Lithuanians. This suggests that our labour and other costs are so high that we are unable to compete. Undoubtedly, companies do find niches wherein their competitive abilities fare quite well. However, government regulations and heavy taxes undermine the competitiveness by directly influencing costs and prices. Unemployment is therefore proliferating, and the only way to enhance competitiveness is by giving people an opportunity to produce at the lowest possible costs. The costs of maintaining the state and bureaucracy should be the prime target as they are the most damaging and the easiest to give up.
If the state has made it its goal to secure the greatest possible welfare for people, it should shape all its policies so as to best reflect free market principles. As I mentioned, these are not barely theoretical considerations. Practice suggests the same.
What keeps us from choosing this path today? We do admit that supply engenders demand. Likewise, benefits offered by the government create increased demand for them. Let me give you a classic example. Several decades ago benefits for underage mothers were introduced in the United States of America. They were meant to solve the problems of a very narrow segment of society. However, soon people figured out that this was a convenient way to make a living. This gave rise to a whole new layer of young ladies who pinned their hopes of a better life not on a successful marriage nor work but on having an illegitimate child while they are under age. It is recognised today that this thoughtless policy has caused not only a dramatic increase in government outlays but also a huge moral problem.
Such signals from the government work on a much wider scale than this. When politicians proclaim that they assume responsibility for people’s health, income and life, their paternalist signals reach people and make them think that the state is indeed the first respondent in trouble. As opinion polls show, although people do not get support from the state, they still count on it to meet their expectations. The sooner such signals cease to be sent to people, both as ideas and policies, the sooner individual responsibility will gain ground.
One solution is private insurance, which should be implemented in its pure form and delegated to private companies. Delightfully, opinion polls show that quite a number of people would rely on themselves if they knew that the government was not responsible for their material hardships in the event of some accident or another.
Equally important are family and community values. If a family is struck by a misfortune, few think that they should feel responsible, at least morally. Most probably, if there were no state institution to resort to in trouble, people would recapture those values. After all, they have never been abandoned by so many of us.
As far as people whose problems cannot be solved on the market are concerned, our position is clear. They should receive support from the state but only on a means-tested basis, with a lack of income and property being the only criterion to determine eligibility. All aid programmes are invariably aimed at providing people with some income. So the assumption is that people have insufficient income in one situation or other. This should be at the core of social aid. If any other categories or criteria are added, the system becomes expensive and hard to administer.
Obviously, social benefits should be paid in cash. People with disabilities should be entitled to higher allowances as their expenditures are higher due to objective reasons. The separation of the state social insurance fund from the state budget is unjustified, given that the state is forced to intervene and pay out social benefits when the state social insurance fund is faced with a deficit.
It is evident that the pension system will have to increasingly be integrated with the social aid scheme as fewer and fewer people qualify for state pensions over time. The unification of the budgets would help distribute the tax burden more evenly because, despite the tax incidence, every employer calculates the cost of his work force, which is taxed most heavily today.
To summarise, social policy is carried out by all government institutions but under different names. The outcomes of these policies are often contrary to the goals of achieving the greatest possible welfare. The solution is very simple: all policies should seek to establish free market principles so that people would have the best possible conditions to work and to earn a decent living. The state should stop sending people paternalistic signals and thus make room for alternative measures – private insurance and family solidarity. Social policy as we know it today needs sweeping change, not tinkering. I believe the principles we have presented today will help identify proper solutions to many concerns.