9.6 - Contemporary Western Democracies

Western Democracies in the Post-War Era

• After World War II, Western Europe faced severe economic challenges.

• The Marshall Plan, initiated by the United States, provided $13 billion to Western Europe's reconstruction efforts.

• The Marshall Plan significantly contributed to the rapid economic recovery and prosperity of Western European states during the 1950s and 1960s.

• However, the economic boom was not solely due to the Marshall Plan; many European governments implemented strong policies to prioritize economic recovery and avoid the mistakes that led to the Great Depression.

• Why Governments Changed: Leaders remembered how the Great Depression had helped bring fascism to power, and voters who had sacrificed in the war expected something in return. In Britain, the 1942 Beveridge Report called for protecting everyone from "want, disease, ignorance, squalor, and idleness," and the Labour Party won a landslide in 1945 promising to carry it out. Generous social programs were also seen as a way to keep workers from turning to communism.

• Western European states embraced liberal democratic principles and Keynesian economics during the post-war years.

• Keynesian economics posits that it is the government's responsibility to stimulate the economy, primarily through increased government spending.

• During the 1950s and 1960s, Western democracies significantly increased government spending to drive economic growth.

• Many governments also took over key industries (nationalization). Britain nationalized coal, railways, electricity, and steel, and France nationalized Renault, the major banks, and gas and electricity. This created mixed economies, with private businesses alongside state-owned ones.

• West Germany's Christian Democrats preferred a social market economy: private businesses and free markets, but with strong unions, generous social insurance, and worker representatives on company boards.

• A key outcome of increased government involvement in the economy was the establishment of welfare states in many Western European nations.

• The concept of a welfare state, where the government provides extensive social programs to its citizens, became widespread in the post-war era.

• Although the welfare state had its roots in Bismarck’s Germany in the late 19th century, it became more prevalent and expansive after World War II.

• Great Britain led the way. Its programs included the National Health Service (1948), which gave free medical care to everyone, paid for by taxes; national insurance for unemployment, sickness, and old age; family allowances; and large public housing projects.

• These social programs were put in place by the Labour Party government of Prime Minister Clement Attlee (1945 to 1951), which aimed to create a "cradle to grave" social welfare system, providing support from birth to death. Other countries, like France and the Scandinavian states, built similar systems.

• The welfare programs were funded by higher taxes, which were generally accepted by the population as long as the economy remained strong.

• However, two significant recessions (1973-1975 and 1979-1983) led to decreased tax revenue in Britain and across Western Europe, making it difficult to sustain high levels of government spending.

• Both downturns were set off by oil shocks: the 1973 Arab oil embargo (after the Arab-Israeli war of that year) and the 1979 oil crisis (after Iran's revolution). Oil prices quadrupled in 1973 to 1974, and unemployment rose across Western Europe.

• This economic challenge was characterized by "stagflation," a term coined to describe the simultaneous occurrence of economic stagnation (no growth) and high inflation (rising prices).

• Despite these challenges, many Western governments continued to spend heavily on social welfare programs due to their popularity, often resulting in budget deficits instead of covering expenses through tax revenue.

• As deficits grew and populations aged, critics argued that high taxes, generous benefits, and state-owned industries slowed growth and made people too dependent on government. Free-market economists like Friedrich Hayek and Milton Friedman (whose ideas are often called neoliberalism) urged governments to cut spending, taxes, and regulation.

• Margaret Thatcher (British Prime Minister, 1979 to 1990) led the reaction. She sold state-owned companies like British Telecom (1984) and British Gas (1986) to private investors, cut income taxes, limited the power of labor unions after defeating the 1984 to 1985 coal miners' strike, and let tenants buy their council (public) houses. Inflation fell, but unemployment rose and inequality grew.

• Other governments trimmed their welfare states too. In West Germany, Helmut Kohl's government (from 1982) cut spending, and in France, Socialist president François Mitterrand nationalized more banks and industries in 1981 but turned to budget cuts (austerity) in 1983 when the economy struggled.

• Even so, most of the welfare state survived because voters valued it. Britain's National Health Service, for example, stayed free and publicly run. The debate returned after the 2008 financial crisis, when countries like Greece, Spain, and Britain cut public spending to deal with heavy debts (see 9.10).