3 - 1997
Social justice and free market
Economic policy suggestions and the limits of moral authority
The churches misjudge market-driven premises
by Herbert Hax
The more closely economic experts analyse the joint statement of the churches, the less they approve. This is where Herbert Hax questions the limits of moral authority of the churches. In his opinion demands for a wealth report and confusion of poverty with financial inequality impair the credibility of the joint statement. Herbert Hax is professor of business administration at Cologne University and chairman of the Council of Experts for the Evaluation of Overall Economic Development.
This February, the Council of the Evangelical Church in Germany and the German Bishops’ Conference presented their long prepared statement on the economic and social situation in Germany. The statement is titled "For a Future Founded on Solidarity and Justice". The churches’ aim - as stressed in the preface - is to contribute to the necessary reorientation of society and renewal of the social market economy "guided and encouraged by the Christian understanding of humankind, the message of the bible and Christian social ethics." The publication of the churches’ missive was preceded by a lengthy consultation process, which already kicked off in November 1994 with the publication of a draft version. A comparison of the draft version with the final text shows that the consultation process has come to fruition. As for the stringency and clarity of its reasoning, the final church statement differs very favourably from the draft version. The church statement meets with approval on many counts. This goes for the observation that individual and political activity should not be confined to short-term crisis management, and that those who delay or neglect necessary reforms, will endanger their future survival (1; the figures in brackets refer to text numbers used in the church statement). Against non-impairment of vested rights and structural conservatism, which are rampant on all sides, it advises willingness to embrace reforms (10). It emphasises that there is no economic system in sight that could better organise the complex task of providing financial and social security for humankind than the social market economy (145). Simultaneously, the churches oppose the expectation that the state could mastermind social development (140).
Another favourable thing one should single out is that economic findings are to be found in important issues addressed by the text. Industrial globalisation is adequately characterised in its causes and effects. The text points out that it entails not only risks but also opportunities, and that German industry has long taken ample advantage of the opportunity to participate in fast growing international markets. But above all: For many countries in the south and east the eradication of protectionist barriers to market access is more important than development subsidies (87). Thus, the statement clearly rejects all attempts to solve the economic problems of industrialised countries by reinforcing protectionism, while welcoming technological innovation (in the microelectronics and biotechnology among other fields) as a means of creating new jobs (170).
Wealth seen as aberration
Opinions differ in the economic and social policy discussion on the question of what is more at stake and needs more bolstering, the efficiency of our economy or the quality of our social welfare system? The church statement is aware of this problem: "The quality and financial stability of our social welfare system and the efficiency of our economy precondition each other." Moreover, it adds, "If a surge in state redistribution puts too much strain on our economic efficiency, this will erode the financial cornerstones of our social welfare system" (6). But then it says on the current situation: "Today there is a great danger of boosting competitiveness to the detriment of social welfare" (9). This is a fundamental decision, which is formative for the tenor of the entire statement, in particular where specific political conclusions are drawn.
The statement does not dispute that the German economy needs to boost its efficiency and competitiveness, but it discusses this rather casually and without specific conclusions. The focus is on defending the allegedly endangered social welfare system. The title of the paper already lays emphasis on the values of solidarity and justice. This assigns a lot of importance to distribution policy issues. Therefore, it is important to clarify which distribution policy model is decisive for the church statement. In this context, their chosen term of "income poverty" is particularly insightful. The fact that the churches stand up for the poor is based on well-justified ethical principles (105ff). Nobody can dispute that eradicating poverty is a social goal of great significance. But the term income poverty used in the church statement and based on a poverty line set at fifty per cent of average net earnings per household of the population (69) is rather problematic. According to this definition, there won’t be fewer poor people, if everyone earns twice as much, neither will there be more, if everyone’s earnings are cut in half. So, the statement has realised the relativity of the "poverty line". Poverty in Germany - the text says - differs fundamentally from poverty in Third World countries (68). But we don’t have to look that far. In Germany’s neighbour countries you can already see that a large part of the population fall below the poverty line defined for Germany. And if you apply the 1997 poverty line to the distribution of real earnings in Germany in 1960, you will find that the number of poor was alarmingly high then: But in 1960 Germany wasn’t seen as a country with widespread poverty. Such arguments won’t impress those who primarily see poverty as an expression of inequality.
According to this definition, being poor doesn’t mean not having enough to cover one’s basic needs, but rather having much less than others. If you define poverty in this sense, you really mean inequality, in particular inequality on the lower rungs of the earnings ladder. Such a poverty discussion really focuses on how much inequality a society can take. And the question arises whether more inequality can be tolerated, if the general prosperity level is high rather than if it is low.
Another thing we must consider is that a certain degree of inequality (not regarding opportunities but rather results) is necessary to maintain performance motivation. What importance the churches attach to distribution can be seen from the fact that they call for regular reports on income and wealth distribution and, in addition, a regular poverty report and, likewise, a wealth report (219). It remains open what information the wealth report should contain beyond statistics on income and wealth distribution. Lists of names perhaps? It is typical of the underlying distribution policy model that both poverty and wealth are seen as aberrations that need to be eschewed. On this basis, the statement demands taxation not only of earnings but also of property, with the aim of reducing inequality, without considering what impact this will have on the economic behaviour of those affected.
When children are a burden
Social policy is a topic on which the church statement provides both general reflections and comments on specific political issues. Here we find some contradictions. The general reflections emphasise subsidiarity as a complimentary principle to solidarity: "Taking the principle of subsidiarity seriously means relinquishing the desire for a welfare state which paternalistically makes provisions for all citizens." (121) And we find more specific comments on the welfare state elsewhere in the statement: "We can’t take it for granted that, under changed circumstances, all achievements of the past can be sustained as they are now." (18) However when the authors discuss individual social policy issues, they no longer mention abandoning achievements of the past, but rather call for expanding state welfare benefits.
In addition, social welfare systems are to be made "poverty-proof", which entails creating basic unemployment benefits and pensions, while providing tax-financed compensation to the national insurance system (179). The authors emphatically call for supporting the families. With some amazement we read the following justification for this: "Especially for the unemployed, the poor, families, foreigners and adolescents, as well as those with multiple disadvantages, it is more difficult than for others to assert their rights in the context of an ever more complicated legal system." (134) So living in a family is equated with poverty and unemployment, prospects that will hardly encourage young people to start a family. The authors also mention that parents experience living with their children as a big personal gain (70), but primarily cite the disadvantages faced by those who embark on starting a family. Of course, we cannot dispute that families with children have to accept economic disadvantages and great constraints to their personal lifestyle. That’s the way it has always been; and today it goes especially for marriages where both partners go out to work and raising the children compels one or both partners to give up or cut back on his or her career. But aren’t these disadvantages outweighed by the happiness of a more fulfilled life?
The church statement does not mention this very often. The notion predominates that the economic disadvantages are unacceptable for families and need to be offset by state benefits. And the authors raise corresponding demands such as counting child-raising periods towards pension insurance via the tax system, providing child allowance, creìches and day care for children. And there’s no mention of the fact that certain benefits such as child allowance should be geared to earnings and therefore to need. One shouldn’t reject all the suggestions in the church statement on expanding social benefits and sharing the family burden. But the inconsistency remains that the authors point out the theoretical necessity of cutbacks, while all their suggestions amount to providing more benefits.
Mass unemployment or competition
The church statement rightly recognises long-term mass unemployment as the most urgent political, economic and social challenge (49). Hence, it expects a successful, efficient and competitive economy to provide new jobs on the traditional labour market (169). However, the upshot is that distribution and social policies cannot provide suitable approaches for reducing unemployment. This is where the authors of the church statement had to address the issue whether state benefits impede the eradication of unemployment. They have taken the easy way out, "Social justice and welfare benefits are not the cause of our long-term high unemployment" (190). In their reflections on eliminating unemployment, they do not mention that welfare benefits could diminish willingness to accept low-paid jobs and that the insurance burden caused by social benefits could impair the initiative to create new jobs. At first, the church statement is rather tentative about naming the causes of unemployment. It quotes, as a "widely held opinion", that one of the main reasons of Germany’s high unemployment rate is its weakness as a competitive location (63). And this is juxtaposed with a neutral "However, others see this differently."
Germany is attested great competitive power on an international scale mirrored by the large export quota of its production (64). Then the authors veer away from this neutral position, claiming that Germany has a modern, well-developed infrastructure and balanced economic structure with powerful big, medium-sized and small businesses. Its workforce is seen as highly qualified and motivated, with a functioning social partnership and social peace, stable prices and low interest rates. So, they see no cause to put down Germany as an industrial location (167).
As everything is in apple pie order in Germany, the main reason of its unemployment rate must be that people "put down" its locational qualities; so economic policy should obviously try to "put them up". Such remarks are always very convenient. You do not need to address the problems of locational competition and its possible unpopular consequences. The church statement does not ignore the fact that there is a correlation between employment and labour costs. But in seeking a solution, it follows the current political trend of advocating a reduction of indirect labour costs by shifting the contribution burden of the national insurance system to the federal budget. Well, there are good reasons for relieving the national insurance system of non-insurance-related benefits. But for this we would need a clear-cut concept that tells us which benefits are insurance-related and which are not. This is by no means self-evident.
Earnings and productivity growth
In their debate on ancillary wage costs, politicians tend to be vague on what benefits are insurance-related, which paves the way for shifting more and more of the burden from contributors to tax-payers. For the social politician who does not care about the consequences for the general budget this is a convenient way to reduce labour costs. The churches advocate a "gradual elimination of non-insurance-related benefits from social insurance" (20) without distinguishing them more precisely from social insurance benefits. However, this would be the first and foremost step towards providing a convincing solution to the problem of financing non-insurance-related benefits. The greatest danger the current focus on ancillary wage costs entails, is that it distracts from the responsibility of employers and trade unions for wage levels and thus for the decisive regulator of wage costs.
The church statement does not completely ignore this aspect, but it does not realise its true significance. For example, it reads, "In years of long-term mass unemployment and extremely fierce international competition, it is economically imperative and socially acceptable to advocate wage and salary levels that are orientated on growing productivity and do not raise unit wage costs." (169) Unfortunately, it is not that simple. A productivity-orientated wage policy is appropriate to sustain an already high level of employment. But if the goal is to create more jobs in times of high unemployment, wage increases must lag behind productivity growth. On no account should one justify raising wage levels with productivity increases that have just been achieved by cutting jobs. The church statement side-steps such uncomfortable truths. Due to the correct insight that unemployment has to be reduced by creating competitive jobs, the churches support encouraging self-employment and business start-ups. The aim should be to spur a new "culture of self-employment". Young people should be encouraged and enabled to set up their own business (171).
Limits of moral authority
Not bad that, but, on the whole, the church statement is not very convincing in its encouragement of self-employment and new business start-ups. Young would-be entrepreneurs are promised "tougher tax audits" (191), they are told to grant their employees opportunities of personal development and involvement through co-determination measures and humane working conditions (151), to meet their social obligations, their returns are to be "used appropriately to finance public measures" (220), ancillary wage costs are to go down but energy costs are to go up (227). If an entrepreneur should still happen to be very successful, this deplorable state of affairs will be decried in the "wealth report" (219).
It is a decisive shortcoming of the church statement that, due to its distribution-orientated way of thinking, it does not realise the significance of motivation for performance and entrepreneurial initiative. The argument that many citizens are struggling with the burden of social insurance contributions is declared insignificant in view of the social obligation of property and the priority of the common good (23). The authors hasten to add that lowering taxes and social insurance contributions is right and necessary where it helps improve opportunities for creating new jobs, but they do not draw any specific conclusions from this. They obviously don’t realise the major role taxation plays for labour, performance, and investment behaviour. The church statement, the authors assure us, is not intended as an alternative expert opinion or a further annual economic report (4). In fact, the significance of the statement lies in the section on the prospects and influence of the Christian faith, which provides important food for thought. The churches do not see their task in prescribing detailed goals and measures for necessary changes but only want to point out the right direction (266). This is a good intention but unfortunately the authors do not abide by it. In a series of questions, which are controversially discussed by politicians and scientists at present, the churches make very specific recommendations, for example on wealth taxation, on ancillary wage costs, and on job-creation measures in eastern Germany. And we cannot but wonder if such utterances also fall under the churches’ moral authority, like the statements on basic ethical aspects.
The answer is no, because specific political recommendations do not automatically ensue from socio-ethical principles. They always precondition a basic assessment of interaction between economic and social impacts. However, the particular strengths of the churches are to be found in other fields, not in this one.
Thus, the question arises of the church statement’s commitment value. What conclusions should a Christian draw from the fact that the churches back a uniform European currency (235), that they advocate maintaining the basic concept and basic elements of the existing social welfare system (14), that they want to achieve a reduction of ancillary wage costs and tax energy and carbon-dioxide output (227)? What does this mean for those who have reservations against the monetary union, who want to change the pension system, to turn it into a claims recovery system or a tax-financed basic pension, say, or for those who believe that combining a reduction of ancillary wage costs with increasing taxes is completely out of the question? Will they have to face reproaches that they violate the principles of Christian social ethics? The church statement definitely isn’t meant that way. But it is predictable that people will resort to the authority of the churches in everyday political discussion. We can only hope that this will not damage their credibility.
Reprinted from Frankfurter Allgemeine Zeitung FAZ, no. 113, of 17 May 1997, slightly abridged and translatet for publication in this magazine.