Thu, Jan 23, 2014 - Page 9 News List

Dutch cure for the Dutch disease

The Netherlands is providing a valuable lesson to other nations by reforming its disability and welfare policies in an attempt to lower its dependency ratio

By Michael Boskin

Illustration: Mountain People

Far too few governments rein in their countries’ bloated welfare states before disaster strikes. As a result, some citizens eventually suffer the economic equivalent of a heart attack: wrenching declines in living standards as they are victimized by unsustainable programs’ endgame. Greece and the city of Detroit are only the most recent grim examples.

Many more suffer from the meager growth and barely rising incomes that result from the toxic combination of government overspending, burdensome regulations and corrosive taxation. Much of Europe fits into this category of economic stagnation.

However, governments occasionally stage successful retreats from welfare-state dysfunction. Canada reduced spending by over 8 percent of GDP in the 1990s, and the US reduced non-military spending by 5 percent of GDP beginning in the mid-1980s — a trend sustained by center-right and center-left governments alike.

So, when a European country reverses course to reduce welfare dependency and restore work incentives, it is worth noting — especially when that country is the Netherlands, which built one of the world’s most expansive welfare states in the 1960s and 1970s.

Recently, Dutch King Willem-Alexander, while delivering his first annual address to the Dutch Parliament, said: “Our labor market and system of public services no longer fully meet the demands of the twenty-first century… The classical welfare state is slowly but surely evolving into a participation society.”

That represents a genuinely remarkable shift.

From the 1960s and 1970s on, those writing about the Netherlands often lamented the “Dutch disease.”

There were so many generous subsidies, grants and transfer payments — aimed at everyone from the truly needy to artists unable to sell their work — that after-tax wages were often barely higher than benefits. People rarely returned to work after they lost or left a job, or did so in the underground economy, with its unreported cash payments.

Whether a person considered the Dutch welfare state humane and generous or bloated and foolhardy, its largesse took a heavy toll on the economy.

However, unlike the French, for example, the Dutch have responded to their past excesses with a series of policies designed to promote a return to work in the formal labor market. Indeed, they deserve an orange-hued salute for innovative reforms that governments worldwide might usefully emulate in the interest of maintaining a targeted, effective and affordable safety net.

For example, disability insurance has become a huge, rapidly growing problem in many countries, despite the dramatic decline in the percentage of workers in physically demanding and dangerous jobs like construction and manufacturing. To stem the dramatic rise in disability payments, the Dutch now require firms with high claim rates to pay more for disability insurance, thereby creating a strong incentive to ensure greater workplace safety.

However, reducing disability claims — and thus payments — is only half of the equation. The other half is returning those who can do so to gainful employment.

In the US, fewer than 1 percent of people who are disabled return to work. Early intervention and informational campaigns about return-to-work options are promising possibilities. Much economic research shows that job skills deteriorate the longer one is away from work, so retraining, information and re-entry programs are very important.

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