Creating a Marketplace for Social Welfare Services

The full text of this essay is available here in Adobe Acrobat PDF format.

Since the 1960s, government social welfare programs have taken on increasingly important roles in advanced industrial nations. In countries of the Organization for Economic Cooperation and Development (OECD), rising social expenditures are largely responsible for the almost 60 percent increase in the percentage of GDP allocated to government spending between 1960 and 1998, from 27.3 percent to 44.3 percent of GDP. In the United States, between 1965 and 1995, federal, state and local government spending on social welfare programs increased over 300 percent (in 2002 dollars), from $440 billion to $1.777 trillion. As a percentage of GDP, social welfare expenditures increased 90 percent, from 11 percent to 20.9 percent of GDP.

Social welfare expenditures are sure to climb in response to various demographic changes and technological advances. Aging populations and increasing levels of family breakdown, for example, will require higher levels of public support. And new medical procedures as well as longer life spans will raise medical costs, while the demand for a more highly skilled workforce will raise postsecondary education costs.

Around the world, however, unease is growing about the quality of government-supported social welfare programs. Too often, government programs seem ineffectual and unresponsive to the needs of their clients, even as program costs and total spending spiral. Various administrative procedures and regulations have been imposed in an attempt to correct such problems, but results have been uneven, at best.

This monograph argues that many (but certainly not all) government social welfare programs would improve if market-based systems were used to put “purchasing power” directly in the hands of consumers, that is, clients. Such systems are “bottom-up” as opposed to “top-down” in operation. This monograph also outlines the situations in which particular “bottom-up” market mechanisms–lower taxes, cash assistance, reimbursed fee-for-service regimes, or vouchers–are programmatically more appropriate.

This monograph purposely avoids specific programmatic prescriptions, however. A wise policy in one program area might be foolhardy in another. An approach that might work in one country, state, or community might be catastrophic in another. Instead, this monograph presents the general factors that should be considered in deciding whether to create or encourage a market for a particular social welfare service.