WWII’s Impact: The Birth of Europe’s Extensive Welfare System

WWII's Impact: The Birth of Europe's Extensive Welfare System

[T]he European nations' larger welfare states are the product of the transformative effect of the Second World War […] Total war suspended constraints on the expansions of entitlements beyond a needy minority: it hobbled private financing of health insurance and retirement, excused the broad‐​based tax increases necessary to fill the gap with public funds, and weakened the political capacity of those losing out to resist.-Chris Pope, "War and European Welfare Exceptionalism"

The United States is often considered an anomaly when it comes to social welfare provision among industrialized nation‐​states, with critical observers suggesting that US benefit provision is unusually low in size and scope (see Figure 1). As Chris Pope, a senior fellow with the Manhattan Institute, argues in his recent paper, "War and European Welfare Exceptionalism," published by The Independent Review, it is the expansive nature of European welfare states that begs for an explanation.

According to Pope, the modern European welfare state is a byproduct of the disruptive nature of the Second World War and features policies that originated in Nazi Germany.

Drawing inspiration from Robert Higgs's Crisis and Leviathan, which traces the growth in the size of the US government to expansive policies that emerged during crises, particularly the two world wars, Pope argues that "the Second World War imposed an even more dramatic upheaval on Western Europe, and the continent's supersize welfare states remain as a legacy of the even greater disruption that they suffered." What follows is a summary of Pope's article, which I had the pleasure of reviewing during drafting.

Before the Second World War, European welfare programs were targeted to low‐​income families. Old‐​age pensions and state‐​provided health care were means‐​tested, as wealthier citizens were expected to provide for their own needs. In Great Britain, national health insurance covered low‐​income individuals, with free municipal hospitals designated to exclusively serve the working class. Prewar Germany's welfare system, established by Otto von Bismarck, was more extensive than Britain's and operated on a compulsory, earnings‐​related model funded by payroll taxes. Still, participation was limited to industrial workers. In both Britain and Germany, as well as in other European nations, individuals with higher incomes relied on private insurance.

The war provided European governments with the opportunity to expand the role of government in benefit provision across the social classes and raise taxes with minimal resistance. As Pope points out, "the suspension of democratic politics (with all its contestation and controversy) permitted the revolutionization of the welfare state, with lasting effect."

With more resources and broadened responsibilities, governments switched from targeted to universalized entitlements, expanding social programs to include not just the poor but also the wealthier citizens. This expansion of welfare programs led to subsequent crowding out of market‐​based alternatives.

In Britain, wartime expenses justified massive tax hikes, raising the top marginal income tax rate from 65 percent in 1936 to 97.5 percent by 1941 and tripling the income tax base to include lower‐​income individuals. Initially driven by wartime needs, the broader tax base was maintained after the war ended. Additionally, the war disrupted private markets and the funding structure of the health care system, prompting the government to extend national health insurance coverage to wealthier individuals. Furthermore, from 1938, nonprofit hospitals were repurposed for wartime needs, leading to their heavy reliance on central government funds.

Importantly, William Beveridge, an academic tasked with recommending reforms to British entitlement programs, published a report in 1942 advocating for eliminating means tests from state pensions and switching from a targeted approach to universal flat‐​rate benefits.

Similar developments, influenced by the policies of National Socialist (Nazi) Germany, took place elsewhere in Europe. As Pope argues,

"The Nazis […] saw comprehensive social benefits and principles of national solidarity as distinguishing National Socialism from the practice of liberal capitalist nations of targeting assistance at the poor."

That is why the Nazis sought to replace the Bismarckian model of earnings‐​related, targeted pensions with a system of universal flat‐​rate benefits. In a 1939 speech, Hitler claimed that Britain opposed his regime due to their aversion to "[T]he Germany which sets a dangerous example to them … the Germany of social welfare, of social equality, of the elimination of class differences-this is what they hate!" However, despite Hitler's claims, the Beveridge report developed in Britain outlined a system similar in many respects, differing primarily in its funding strategy-where the Nazis favored income taxes, Beveridge opted for uniform premiums.

While the Nazis failed to fully implement their national‐​socialist programs in Germany because of their defeat, Nazi policies contributed to the transformation of entitlement programs in occupied countries. Austria adopted new entitlement policies, such as unemployment benefits and broad child allowances post‐​Anschluss. France, where the collaborationist government, like the Nazis, considered the limitation of benefits to the poor as a liberal concept, expanded health care benefits and universalized child allowances.

Similarly, under the 1941 Nazi decree, the occupied Netherlands saw its top marginal tax rate increase from 4.8 percent to 65 percent, fueling significant growth in the Dutch entitlement programs.

The wartime transformation of European welfare programs provided an ideal foundation for the mostly left‐​leaning postwar governments to maintain or even enhance expanded entitlement programs.

• Recognizing the opportunity, the postwar Labour government in Britain passed the 1946 National Health Service Act (NHS), which nationalized municipal and non‐​profit hospitals, establishing free health care for all British citizens. As Pope puts it, "The political hard work required to socialize health care […] was all done by the war." In addition, inspired by the Beveridge report, the government eliminated income caps for entitlement eligibility and established flat‐​rate old‐​age, unemployment, and sickness benefits.

• In Austria, the benefit structure established by the Nazis has remained after the war.

• Following the liberation from the Nazi occupation, the French provisional government eliminated eligibility caps entirely and established a universal entitlement program known as "sécurité sociale."

• The 1941 Nazi decree, which made state health care insurance compulsory for the working and the middle class in the Netherlands, remained in force until 2006, continuing to shape the Dutch health care system to this day.

• The Nazi attempts to overhaul the Belgian welfare system, similar to their efforts in the Netherlands, faced resistance and were ultimately abandoned. Nevertheless, in 1944, the provisional Belgian government, exploiting the tumultuous circumstances, expanded entitlement programs without consulting other parties and direct stakeholders.

Table 1 below summarizes the impact of the Second World War on welfare programs across Europe.

These examples illustrate how the Second World War shaped modern European welfare systems. As a result, modern European governments generally spend more on welfare programs than the US (see Figure 1 above). This also means that the modern European welfare state is involved in more aspects of individuals' lives, replacing private alternatives and levying higher taxes that leave its people with fewer resources to design their own lives.

Pope's article serves as a timely warning for the US where the unchecked growth of the major entitlement programs combines with calls for entitlement expansions, following a massive expansion in social spending during the COVID-19 pandemic. As Cato's Adam Michel has demonstrated, large European welfare states require high taxation across the income spectrum "[with] countries that have larger governments than the U.S. [using] high taxes on low‐​income and middle‐​class workers to foot the bill."

Had it not been for the extraordinary devastation brought on by the war, the modern European welfare state might look very different today. The US would be wise not to go down a similar path.

Read "War and European Welfare Exceptionalism," by Chris Pope., published in The Independent Review, v. 28, n. 3 (Winter 2023/24) here.