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Economics, Non Recipes, Politics

The welfare paradox

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One of the most common claims you not only hear from communists but also from many educated young people nowadays is that we need more welfare in this world. The gap between poor and rich people is getting larger every year. Thus many think that we need to redistribute money.

How do you redistribute money? Well, you need to steal it from someone. May it be through income taxes, inheritance taxes, wealth taxes, or estate taxes. Take a look at the chart below: In Germany, almost 45 % of a worker’s income gets redistributed nowadays.

Countries with different income redistribution
Germany redistributes money on a much larger scale than the US, Switzerland, and Australia. Source: American Sociological Review.

Assuming that large income redistribution and redistributive budget would lead to less poverty, we would expect to see much more poverty in Switzerland, Australia, and the United States than in Germany, the UK, and Sweden. But this is not the case.

In Germany, 15.5 percent of the population is considered to be poor. In the Southern parts of Germany, the economy is going strong. Thus the poverty rate of Baden-Württemberg and Bavaria is at 11.8 percent. The North has poverty rates of up to 20 percent. Double that of the South. In Germany, this gets compensated by massive transfers of welfare money from the South to the North.

Let’s look at the United States, a nation that has comparatively little welfare compared to Germany. In 2019, the poverty rate in the US was down to just 10.5 percent. US poverty rates have been declining in recent years whereas in Germany they have continuously grown.

If we look at Australia, we see that the poverty rate is 13.6 percent. In Switzerland, only 7.9 % of the population live in poverty. That’s almost half the number of Germany.

But let’s look at two countries with higher welfare spending than Germany: Sweden and the Netherlands. Sweden has a poverty rate of less than 1 percent. In the Netherlands, we have a poverty rate of 8.8 percent.

Homeless person
Despite significant welfare spending, poverty levels are still high in many industrialized countries.

As you can see, almost any country has a lower poverty rate than Germany. Our current welfare system doesn’t eliminate poverty even though almost half of the income of German workers gets taxed. It’s a very inefficient system of redistribution.

The history of Germany’s welfare system

The German welfare system was established after World War II in a time called the “Golden Age” of welfare. This was a time with quasi full employment. Unemployment was seen as a consequence of an imperfect labor market rather than an individual problem of employability. It was unimaginable that people would be too lazy to work or simply be unemployable.

Thus the German welfare system was very generous. The German state believed that all people wanted and will find work. It’s easy to see that this isn’t true for today’s society. We don’t have full employment in Germany anymore.

In the early 2000s, the German government noticed the problem and cut down on welfare services. This has helped to reduce the unemployment rates in Germany massively. In 2005, almost 5.2 million Germans were unemployed. In 2019, this number was cut down to just 2.7 million people. Economically, the welfare reforms were a huge success.

Germany's welfare reforms (hartz 4)
Germany’s welfare cuts in 2005 helped to reduce unemployment massively.

But even though the unemployment rate has been decreasing for years, the child poverty rate in Germany keeps growing. The biggest risk factors for child poverty are:

  • single parenting
  • having more than 3 kids

The population groups where child poverty is most prevalent are:

  • unemployed people
  • immigrants
  • people with a low education level

A shocking 14.7 percent of German children under 18 years of age live in families where both parents are unemployed and rely solely on welfare. Germany has an unemployment rate of about 5 percent. This shows us that unemployed people have, on average, more kids than people who work a job.

Germany’s failed migration policy

About half of the people that are unemployed in Germany are immigrants. This number has grown significantly since 2013, where only 1/3 of the unemployed people in Germany were immigrants. We have imported unemployment with the refugee crisis. This is in part because only about 10 percent of the refugees have finished an academic education. Many of them are analphabets and can hardly read or write.

It’s impossible to integrate many of the refugees into the German labor force. Germany’s economy requires a highly skilled labor force. We still have manufacturing jobs left here but they become increasingly rare. So what do we do with all these immigrants that have a low-education level? They are predestined to become dependent on welfare.

In 2018, 180 000 people left Germany. Most of these were highly skilled workers. This phenomenon is called “Braindrain”. Highly skilled young professionals leave Germany. Since 2001, it has been more than 1 million people. The great majority of them leave Germany because they find a better job with a much higher salary in a foreign country. The second and third most important reasons to leave Germany are the crazy high tax rates and the overwhelming bureaucracy.

Professionals leaving Germany
Highly-skilled workers leave Germany en masse.

No other country in this world loses as many highly-skilled professionals as Germany. Germany has a disastrous migration policy. We have an influx of uneducated people that have a high risk to fall into poverty whereas the elites keep leaving Germany. The most popular destinations for Germans to emigrate to are Switzerland and the US.

There are good reasons to leave Germany

This is obviously because of the higher wages and lower tax rates in these countries. In Switzerland, the average worker earns 68 820 US-Dollars yearly. In the US, it’s 63 690 US-Dollars. Germans only earn about 54 560 US-Dollars on average while paying the most taxes among these three countries.

It’s ridiculous. Germany is the fourth-largest economy in the world and yet the wages are no more than average for an industrialized country. Labour is too cheap in Germany. Adding to that, workers are expected to pay a lot of taxes to support people who are unemployable.

If you have a low education level it is often better to live off welfare than to search for a job. Germany is a master at redistributing money and massively undervalues human work. It’s not worth it to work in Germany. Qualified people can find jobs anywhere. That’s called globalization. So obviously, they will go where the money is.

On the other hand, if you have a low education level and are unemployable, it’s a dream to come to Germany. Nowhere else in this world will the state take care of you as well. So obviously, if you don’t want to work, you should migrate to Germany. This is where the money is.

Workers at a construction site
Germany’s super generous welfare system was established under the premise that anyone is willing to and can find work.

It’s crazy that people want more welfare in a country that already redistributes money on a large scale. You cannot lift people out of poverty by giving them welfare money. You lift people out of poverty by providing jobs. We know that in Germany. We have done that before in 2005. We have cut welfare and suddenly the unemployment rate dropped drastically.

The next obvious step would be to increase wages, especially for low-paying jobs so that work is worth it. People need to have an incentive to work. The income tax needs to be drastically cut. Yet that is not happening. Tax rates are climbing and they will increase drastically over the next years thanks to all the Covid welfare money that gets spent now.

Germany’s elites flee the country

We pay for the education of young and talented people at our universities just to let them leave Germany and earn money and pay taxes elsewhere. Is that what we want? Germany needs to retain its skilled workers.

And it needs to attract highly-skilled workers from foreign countries. Yet these foreign specialists don’t migrate to Germany because of the low wages and high tax rates. Germany has a system in place that attracts welfare migrants.

You don’t have to be an expert to see in which direction Germany is heading. The elites leave the country and the ones who stay only have few children. On the other hand, unemployed people with a lower education level have more children than the average German. Adding to that, these are often single parents so that the children often have to suffer from the disturbed relationship of the parents.

I guess I don’t have to tell you that children of unemployed parents often stay unemployed as well. It’s crucial for children to grow up in a supportive household that cares for their education and future. Parents need to be a positive role model for their children. Yet that is often not the case with uneducated parents.

The problem of poverty can only be solved with long-term solutions

Counterintuitively, welfare doesn’t reduce poverty. Instead, it might come with a higher risk of poverty. Many people were worried that the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 might increase poverty levels in the US.

Especially immigrant households were severely affected by welfare cuts. However, the welfare cutbacks did not increase the poverty rates of the US immigrant population. Instead, many more immigrants took up jobs and raised their family income. As a result, poverty rates decreased among the affected immigrants.

In general, there are three basic truths to the problem of poverty:

  • Poverty is only overcome when people are self-supporting. Dependency on state money does not cure the disease.
  • Production ensures prosperity. Without physical goods for consumption, there can be no prosperity. We all need clothes, lightbulbs, and medicine. If there is a shortage of essential goods, poverty becomes inevitable.
  • Long-term effects are more important than short-term relief. Food stamps and welfare money are important to relieve poverty over the short term. Yet, the most important goal of any welfare program must be to create jobs for people and to increase wages.

From these three truths, it becomes apparent that the way to reduce poverty over the long-term is to strengthen the economy and to create positive incentives to join the workforce. Throwing money at unemployed people reduces the need for self-sufficiency. Over the long-term, this money would be much better spent to either strengthen the economy or to reduce tax rates, especially for low-wage employees.

Worker working on a ship
A strong economy that provides jobs is the most efficient way to counteract poverty.

The stronger and more efficient our economy is, the more physical goods can be produced and sold for a cheaper price. This reduces poverty because everyone has access to essential goods.

In the end, the only proven way to reduce poverty in industrialized countries is to provide jobs for people. These jobs need to pay a sufficient salary. Unemployed people that have been dependent on welfare money for years will, with a high probability, not return to the workforce. Instead, they and their children will remain trapped in poverty and hopelessness.

Resources:

Does welfare reduce poverty?

Does Welfare Diminish Poverty?

The Paradox of Redistribution and Strategies of Equality: Welfare State Institutions, Inequality, and Poverty in the Western Countries

Income and Poverty in the United States: 2019

Poverty in Australia 2020 – part 1: overview

Armut in der Schweiz

Sweden Poverty Rate 1967-2020

10 Facts About the Poverty Rate in the Netherlands

Kinder und Armut: Was macht Familien arm?

Die Elite sieht rot

Viele Kinder, keine Arbeit – MPG.PuRe

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