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“The Captive Mind” – stop it! – an interview with Leszek Balcerowicz

Published on June 3, 2012 by: in: Economy

Liberte!: The state of public finances and the demographic situation in Western Europe suggest that authorities will have to spend less money on welfare services. States will not engage in social politics so much as a consequence. Has time for reforms already come?

Leszek Balcerowicz: It is common knowledge that states have to spend less money on welfare services since the beginning of the financial crisis in 2007. If not, economic growth may decrease. This is the reason why some capitalist countries started to introduce reforms before the crisis. If one analyzed data on the relation between the sums spent on social support and GDP, it would turn out that a peak was reached in 1980s and 1990s. Current slump is not sudden, but it may be noticeable in particular states. In the Netherlands, the abovementioned relation has been reduced much more than, for example, in France. The situation is similar in case of Switzerland or Israel. The crisis (which was caused by authorities who made wrong decisions) as well as its results, i.e. economic slowdown, recession or the increase of deficit and public debt, constitute additional factors. Ageing societies may also be mentioned here. Troubles occur in well-developed welfare states, such as Greece and Portugal. Such countries are usually problematic because they slow down economic growth. How is it possible? Firstly, citizens are unwilling to work because they can retire early. Secondly, people do not save money because they believe that authorities will take care of them. These two factors would slow down economic growth even if the financial crisis did not take place. There is one another issue, i.e. taxes. Well-developed welfare services cost a lot. High taxes are undoubtedly detrimental to economic growth. Nevertheless, it is obvious that taxes cannot be compared. Some taxes, such as indirect taxes (e.g. VAT), are less detrimental and others are more detrimental (e.g. equity tax or income tax).

There is a number of myths that must be exploded. Firstly, some people claim that budgetary expenditures contribute to the development of economy. But such a myth takes only demand into consideration. The factors that govern production do not count here. The followers of the theory assume that a great amount of expenditures is profitable. This is how Greek economy was developed. The results are obvious. Secondly, many citizens believe that people would die homeless, children would not receive education and nobody would care about health or relatives if authorities did not spend much money on welfare services. This way of thinking is typical of communists. It is based on an assumption that only state should take certain actions. The Polish start to realize that authorities do not have to care about citizens’ clothes, eating patterns and cars. The situation has changed since 1989. Nevertheless, Poles still believe in welfare transfers. The followers of the abovementioned theory do not know that problems may be solved in some other ways. What I mean are unexpected problems, such as illness, and inevitable processes, e.g. ageing. We can deal with them by means of various methods, i.e. ability to run business or self-help organizations, which are characteristic of liberalism. It is important to remember the accomplishments of the 19th century. British, German and Polish workers united in order to educate and secure themselves. Moreover, one cannot forget about charity, which was ridiculed by Marxists. When a welfare state develops, those who overuse social support have far more opportunities.

There is one more issue, which was discussed in 1835 by Alexis de Tocqueville in his essay on pauperism. He claimed that civil servants will never attempt to find out who really needs help. Volunteers, on the other hand, usually distinguish between crafty fellows and people in need.

L: I think that the reduction in spending on the welfare state should be accompanied by an educational program. The mentality of citizens is our greatest enemy.  What can we teach people?

picture: wikipedia.pl

LB: Education is something one often mentions. According to my personal experience, we should refer to the moral intuition of people. If you are able to work, you should not rely on others. In Poland, the proportion of employees to people who are able to work is lower than 60%. It is unprofitable with reference to economy and morality because one employee provides for almost one jobless person. Having taken this into account, we should promote work. Moreover, it is essential to emphasize here that people usually support freedom. One must admit, therefore, that we should take responsibility for freedom if we want to derive benefits from it. It means that we must face the consequences of own decisions rather than wait for the help of authorities or citizens who compensated for our mistakes or failures. Why others should finance the mistakes of those who avoid work? This encourages to overuse.

There are not many people who cannot make a living by their work. We should offer them widespread support. But when it comes to social issues, the majority of people that claim to be liberal have the mentality of a communist activist. Such mode of thinking has nothing in common with classical liberalism, which promotes freedom, responsibility, free market economy, civic societies as well as limited state. The so-called social liberalism may be defined as social democracy. One should remember about it so as not to mistake concepts.

We should also cope with scrounging. Social norms, which are enforced by certain people, evolve in systems based on statism. Scrounging happens on an everyday basis. Assar Lindberg, who may observe a lot because he comes from Sweden, has proved it. A specific kind of citizens live in a well-developed welfare state. But what kind? A number of citizens become the customers of a state. This influences their decisions. Such voters do not take an interest in the development of a country. They rather count how much money could be received from the ruling class. One may define this phenomenon as nationalized clientelism. In ancient Rome, people strived to have a patron. Now we have one great political patron and a number of customers. The abovementioned model of society is negative. In my opinion, someone who respects the dignity and freedom of others cannot support a well-developed welfare society.

L: Could you establish rules, philosophical and moral rather than economic, which should be observed by politicians that engage in social politics?

LB: I think that the majority of philosophical and practical problems result from the position of a state. Great experience shows that, disregarding of Marx and according to the expectations of genius scientists such as Adam Smith, a state cannot be a good owner. Political criteria are at variance with economy. This is the reason why socialism fell. It can be safely concluded that a state cannot become an owner.

Regulations are another important issue. We struggle with the restriction of freedom, especially economic one. Authorities take deregulatory actions and impose new laws after a while. It would be a challenge to cut down on the number of regulations imposed by a government. One would have to cope with a communist conviction, which states that the more laws enter into force, the better a government is. Unlike in case of the limit on public debt, there is no perfect solution to this problem. Civic societies must be more engaged in social activities.

Welfare states must also be mentioned here. Such kind of government was limited in 1920s and 1930s. The proportion of social expenditures to GDP was lower than 10-20%. But everything changed after World War II, when economy started to develop. It proves that welfare states developed because authorities were able to support people in need. Moreover, the ideology of a communist activist contributed to it. Poverty could not be a reason. The development used to slow down in times of crises. Governments used to introduce reforms in such cases. The problem of ageing societies is also important here. Some countries, such as Costa Rica or Uruguay, evolved into welfare states too soon. They are poorer. Welfare states were introduced too soon and reforms do not bring any positive results.

L: What is your opinion about the greatest problem of Poland and Europe, i.e. demography? What reforms should be introduced with reference to pension schemes?

LW: When it comes to practical issues, the reforms in question would be easy to introduce. People should retire later because they live longer. Methods depend on a pension scheme. Citizens decide themselves when to retire if capital pension schemes, which are based on an assumption that people save money, are dominant. If someone goes on a retirement early, savings must be better apportioned, but no other person supports a pensioner. Nevertheless, in countries where capital pensions schemes are dominant, citizens tend to save money longer, which means that they work longer. This is the reason why the reduction of premiums paid to the Open Pension Fund was so unprofitable. In pay-as-you-go schemes, where everyone pays a retirement tax that is usually called a premium, the abovementioned situation cannot happen. One may, however, introduce an alternative, i.e. a nominal pension account. We must remember that this is not a real account because money cannot be saved there. This kind of a pension scheme increases the influence of politicians, who usually favor pay-as-you-go schemes because they allow them to decide how funds will be divided. Nobody has returned to a capital pension scheme since the government of Vichy introduced pay-as-you-go scheme instead of capital one. Pay-as-you-go schemes are politically tempting. They are useful during election campaigns. The fact that we have the abovementioned pension scheme in Poland forces us to raise retirement age. It should not be understood as a restriction because people live longer. The reform would help to develop economy as supply would increase. Having into consideration that employees receive salary, demand would not decrease. It can be safely concluded that this is a win-win solution, which satisfies both sides. The Polish government has already narrowed down the group of workers who have the right to retire earlier. It is the most important reform of the current coalition. The German have raised retirement age. The Greek and the Spaniards do this in hurry. The Italian also have to introduce the reform.

It must be emphasized that the confusion of concepts is the most common mistake. Public goods and private goods have precise meanings in economy. Public goods may be defined as goods which cannot be financed by an individual, e.g. national defence. Education is not a public good because students pay fees on some universities. By the way, it is not true that studies are free of charge in Poland. We have a bad system. Bad and immoral. Students who pay for education attend the universities of lower rank, while all citizens support students who are admitted to the universities of high rank. This is the reason why education should not be free of charge. We should offer more profitable scholarships and student loans instead.

L: Could we establish rules which would regulate laws on social politics? Firstly, welfare services should help only the poorest citizens. The principle nothing for free should be respected. Authorities will offer help if people in need struggle to socialize and return to everyday life. A state will engage in social support only if other entities cannot do this. One must remember about the rule of efficiency, which includes the assessment of particular activities connected with social politics.

LB: In general, I agree with you. But what with practical issues? We should calculate whether the Polish earn enough or not. What is more, we should wonder if civil servants attempt to find out who really needs social support.

I would like to ask why Polish authorities take only remuneration into account? Why properties are not considered? Someone who lives alone in a spacious flat, but does not have a well-paid job, should not receive housing benefits. Such a person should sell this flat and buy a smaller one. Properties are taken into consideration in many richer countries. In Denmark, for example, such citizens do not receive benefits. Workers may be entitled to benefits, but we must remember about the problems with the organization of the so-called social work. We do not live in the world governed by simple techniques, where highways may be built with the use of shovels.

L: Another question concerns the rule of efficiency. Is there any point in the assessement of activities related to social politics? Costs might be greater than effects.

LB: Do you mean an assessement made after a particular reform has been already introduced? Having taken into consideration that we have great experience, the answer seems obvious. Examples prove that reasonable reforms may cause deviance. A number of scholars analyzed this problem. Some people claim that a well-developed welfare state supports deviance. I have already mentioned depravity. The number of illegitimate children increases if single mothers are strongly supported. The situation was characteristic of the USA until the reforms of the Republican Party and Bill Clinton were introduced. In Poland, the deviance in question has been studied by hardly anyone. The fact that various social reforms are not cost-effective enough seems problematic. Authorities invest money, but the results are negative. The French boast that the population growth in France is higher than in other European countries. But if you ask them which social group influences it the most, they answer that there are no data because French law does not allow to divide people into ethnic groups. I have recently been on a conference in France where someone described how the French government supports polygamy. How does it happen? Polygamy is undoubtedly prohibited, but it is hard to control such phenomena. It concerns people for whom polygamy is a part of culture, e.g. immigrants from Africa. They have a relationship with many women, but they are not married. Such women want to receive social help as single mothers. It popularizes polygamy. When it comes to deviance caused by a well-developed welfare state, the unemployment should be mentioned. The phenomenon results not only from social expenditures. High minimum wages are also important here. Why do protests break out in France from time to time? Because the unemployment rate is very high. And what causes this? High minimum wage. If such a minimum wage was introduced in the USA, the unemployment would increase twice. In the USA, people who are not well-educated find jobs because there is no such barrier. The decision to increase minimum wage in Poland may be defined as a French solution.

L: What do you think about the statement made by Angela Merkel, who claimed that the model of a multicultural country is no longer useful. This issue is somehow connected with a welfare state.

LB: I am sure that these matters have something in common. It Great Britain or Denmark, immigrants were treated as an enclave, which does not come under public law, until recently. People allowed them to exercise own laws, such as sharia law, because everyone believed that cultures are equal. But how can we reconcile polygamy with the prohibition on bigamy? This proves that the equality of cultures is controversial.

We must state what values we believe in. We cannot tolerate certain forms of a multicultural country if we condemn the discrimination of women. It means that people cannot connive at cultures which allow for such discrimination.

L: Now, I would like to ask you what has happened to Polish political class? Why did Polish politicians have different values in 1990s? There is nobody who would be able to focus on prospects rather than current problems. Is this the result of our party system, i.e. a dispute between PO and PiS? Does the problem concern every member of Polish political class?

LB: I avoid such terms as a political class. The problem in question is observable not only in Poland. It is not a consolation, but we may look at this matter in broader context. According to many analyses, the popularity of foreign politicians decreases. It is a tendency rather than a short-term phenomenon. Someone may admit that modern politicians are more immoral than those who lived in the 19th century. But this is the opinion of people who know nothing about history. There were more political scandals and brutality previously. It must be emphasized that the way citizens perceive politicians depends on the media. Modern electronic media are governed by different rules than print media. This is not an accusation. Electronic media just tend to present emotions and concise information. Such phenomena may make politics less complex. It is a challenge to make use of electronic media without making politics trivial. We must be aware that mainly journalists are responsible for this. The mass media development contributed to the decrease in the popularity of politics. I do not know how this situation looks like with reference to new media, i.e. the Internet. Moreover, we live in a country where politicians promise to do more than they really can. Such promises may cause a feeling of disappointment.

The situation in Poland is the reverberation of general tendencies, but some specific factors may also be observed. One may assume that Polish political parties should not be financed mainly by budget because it increases the authority of party leaders. I must admit, however, that I was the member of the government which introduced this reform. Democracy cannot be based on the general levy of political parties. But optimum may have been disregarded. This is the reason why the members of the Polish Parliament and the senators are treated like voting machines rather than individuals. The vote on the Open Pension Fund, when some people who were against voted in favor of the reform, proves that. May the reforms of Polish party system change anything? I think that authorities should impose amendments which would decrease dependence on a party leader and increase dependence upon a local voter. PiS constitutes another factor. The party began something that never happened on Polish political scene before, i.e. absence from debates on essential matters (apart from such issues as the reduction of access barrier to legal professions) accompanied by great aggression and hatred. Having taken into consideration that the majority of citizens do not accept such behavior, PiS is a convenient partner for the ruling class. If the competitor remains so weak, PO might achieve much without any political risk. I think that some decisions, e.g. the Open Pension Fund, were detrimental to economy and PO.

L: Could you list five recommendations for a new government?

LB: They are in the reports of international organizations. The most important aspect is goal. I think that our collective goal, which seems more important than any personal objective, is to have the same standards of living as Western countries. Within twenty rather than hundred years. We are aware that numerous issues depend on material conditions. In my opinion, a liberal should respect natural human desires. People just wish to lead more attractive life. Someone who does not have own flat wants to buy one. Someone who lives in a small flat struggles to have more spacious accommodation. A person without a car dreams of buying it. A person who drives a small car strives to have bigger vehicle. Citizens want their children to be well-educated. These are great desires, which might not come true. Everything depends on a political system. Systems based on statism do not allow people to meet human desires. Socialism was a radical form of the abovementioned political systems. Other systems tolerate creativity and entrepreneurs, which does not mean that they cannot become the source of frustration. If someone wants to make such desires come true, liberalism should be promoted. Moreover, one should promote entrepreneurs. It concerns both economy and non-governmental organizations. We must impose certain restrictions on a state in order to achieve this. People who think that human desires should be respected cannot encourage citizens to become ascetics just because it seems better than consumerism.

When it comes to Poland, we should have a political system which supports development more than the political systems of well-developed Western countries. What I mean is a simple system that would promote various forms of activity, enterprises and employment. In case of public finances, authorities should reduce social support, which encourages to cheat rather than save money and work. Moreover, the Polish government should not have direct influence on economy. State-owned companies, therefore, should be privatized. It must also be remembered that authorities cannot impose unfavorable laws. Please note that we should care about competition, which is often reduced by politicians. They tend to reduce open and direct competition, e.g. the decision to merge electrical companies in Poland, as well as secret competition, e.g. political business cycles in Russia or Ukraine. Free market economy hardly ever supports monopolization. The president of the Polish Office of Competition and Consumer Protection must be autonomous, such as the president of the National Bank of Poland. The president of the NBP serves a term, while the president of the Polish Office of Competition and Consumer Protection may be dismissed anytime.

L: Could you suggest how such information may be spread?

LB: We should establish various movements in order to make Poles more influential. The access to public information is also crucial. It should be treated as a foundation. The Polish president has made me realize that we must control authorities constantly, not only during elections. We should gain information on the activity of the ruling class. There is no point in voting without it. People should form coalitions because they help to promote particular liberal values. Civil organizations must form much more coalitions.

Interview by Błażej Lenkowski

Translation: Aleksandra Kozłowska

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About Leszek Balcerowicz

Economist, former President of the National Bank of Poland, Deputy Prime Minister and Minister of Finance in the first post-communist government of Poland after WW II; professor at the School of Economics of Warsaw, given numerous awards and honors by both national and international institutions.

Original Liberte.pl
Fredrich Naumann Foundation For The Freedom
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