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Market Instead of Regulation (December 16, 1988)

Gert Dahlmann, the director of the Frankfurt Institute for Economic Research, criticizes the Kohl administration’s social policy reforms as insufficient insofar as they preserved the structure of the state-regulated welfare system and reinforced people’s sense of entitlement. He argues for structural change oriented towards the free market economy.

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Blüm Does Not Trust Solidarity
A feasible reorganization of the social security systems has yet to occur

“He who does not reform, ruins.” These are the words of Norbert Blüm, who did, in fact, plan to reform a lot and did “pull through.” The discussion of his changes to the statutory health insurance will be concluded on December 16 in the Bundesrat; [his changes] to the pension insurance will likely be passed in the spring. To have faced these two thankless emergency operations speaks well for the coalition and its responsible social minister. But is he really reforming these systems, and is he building them on a feasible foundation capable of withstanding the trials of the future? The answer is no, and the explanation lies in the reform approach itself.

If you put a lever in the wrong position, then all the effort in the world won’t help. The same is true for the starting point of thought processes. The present reform attempts cannot seem to find the Archimedean point because they once again misjudge people and their behavior. For regulatory systems that are meant to last, and which include almost the entire population, this error is deadlier than any arithmetic mistake. The fateful automatism of compulsory state insurances that are no longer forced to operate economically, in which costs are collectivized but benefits paid out individually, is sufficiently known: The costs for the collective explode, the effectiveness of the whole thing drops, the damage hits everyone.

The current reform attempts change virtually no part of this unsuccessful basic structure. They strive to achieve even their most modest goals – stability of insurance contributions and two decades of solvency – not through economic incentives, which encourage individual actions that, out of self-interest, would not burden the community, but through further bureaucratic curtailment of the individual’s sphere of action. In other words: They trust not in the power of the market, but in “solidarity.” Solidarity? A hundred years ago, when the issue was about giving “the needy classes in the population clearly delimited assistance in certain vicissitudes of life,” “the joint collection of means among the insured” created “solidarity” and “thus a moral impediment against the irresponsible exploitation of social insurance.” But since then, living conditions and values, patterns of orientation and the systems themselves have changed beyond recognition. Only the principle of “solidarity” has been preserved, although the extent and type of burdens can no longer justify it and it has become synonymous with the exploitation of the insured community through its own members. In reality, therefore, Blüm does not put his trust in solidarity, but in coercion.

Everyone in the know understands that the market, rather than coercion, would be a far more effective means of control, since it allows the people themselves to decide which priorities they want to set in their lives, what they want to pay for which benefits, and how they want to spend their money. On that basis, it would be possible to build up health and old age pension plans that are in keeping with our times – using a feasible combination of the idea of solidarity for the most basic securities and a true insurance principle for everything beyond that. Solid, competition-based suggestions from a broad spectrum of society were made to legislators. Why didn’t they pay attention to them?

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