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Wednesday 29 March 2017

The End of Welfare

The recent prominence given to rationalisations of xenophobia, such as David Goodhart's dichotomy of "somewheres" and "anywheres", looks like another regrettable byproduct of Brexit and Trump, but perhaps this has less to do with the new nationalism and more to do with the long-running neoliberal assault on the welfare state. In evidence, I offer a recent two-part essay by Branko Milanovic. In his first post, the former World Bank economist offers a fairly uncontroversial reading of the growth in income inequality since the 1970s, attributing it to the weakening of "four pillars" of social democracy: strong trade unions, mass education, high taxes and large government transfers. His solution is a combination of capital diffusion - to be achieved through tax policies favouring smaller shareholders, more employee share schemes and much steeper inheritance taxes - and the levelling of schools - through increased investment in the public sector and the removal of tax advantages for the private sector - in order to equalise the returns to education. In brief, a shareholder democracy plus education, education, education. Or, in other words, the messianic visions of Thatcher and Blair.

In his second post, Milanovic suggests that the welfare state may no longer be politically sustainable because it depends on two things: a "commonality of behavior or, differently put, cultural and often ethnic homogeneity" and "mass participation". Globalisation has led to income polarisation, which encourages the rich to opt-out of the welfare state, thereby undermining mass participation, while economic migration has increased the "people with actual or perceived differences in social norms or lifecycle experiences", thereby undermining cultural homogeneity. There are two problems with this history. First, the welfare state did not commence with mass participation. Early schemes, such as those of Bismarck and the British Liberals, were selective rather than universal. It took decades to achieve universal schemes and even then private provision still persisted. In other words, mass participation was a long-term goal rather than a precondition. Milanovic also fails to explain why states with restricted franchises before 1918 (which therefore disproportionately reflected the interests of the better-off) decided to introduce welfare systems that benefited the non-enfranchised. What he ignores is the possibility that the welfare state suited capital as much as labour.


The second problem is that if cultural or ethnic homogeneity were necessary to the development of welfare states we'd expect to see a correlation: countries with strong cultural and ethnic homogeneity would be more likely to have highly-developed welfare systems. But this isn't so. For example, Sweden in the 1930s had the most advanced welfare state of its time but the country was not noticeably more homogeneous than its near neighbours Finland and Norway. In contrast, Spain was a highly homogeneous society, particularly after the forced homogenisation of Franco, but it was not noted for the quality of its welfare state during the postwar era. The UK had relatively high cultural and ethnic heterogeneity, compared to other Western European nations, long before the Empire Windrush docked, thanks to historic Irish and Jewish immigration. Far from being a product of homogeneity, the welfare state helped create a British identity across the four nations of the UK. If Milanovic's argument were true, we'd have expected the NHS to have appeared in Spain before the UK. The evidence suggests that politics matters far more than cultural or ethnic homogeneity, and you could even flip the argument: welfare states promote solidarity and under-funding promotes division.

Milanovic presents a story, straight out of the neoclassical synthesis, that combines intertemporality, aggregate demand and rational choice: "the origin of social democracy and the welfare state is in the realization (and financial ability to deal with it) that all people in their lives go through periods where they are not earning anything, but have to consume: this applies to the young (hence children’s benefits), to the sick (health care and sick pay), to those who had a misfortune to get injured at work (worker’s accident insurance), to mothers when they give birth (parental leave), to people who lose jobs (unemployment benefits), and to the elderly (pensions). ... Trade globalization has led to the well-documented decline in the share of the middle class in most western countries and income polarization. With income polarization the rich realize that they are better off creating their own private systems because sharing the systems with those who are substantially poorer implies sizeable income transfers. This leads to 'social separatism' of the rich, reflected in the growing importance of private health plans, private pensions, and private education."


This doesn't tally with the history, at least not in the UK. The modern growth of private provision starts in the early 1980s, well before the major impact of globalisation in the late 1990s. The income polarisation that gave rise to "social separatism" began with tax cuts for the rich in 1979. It was first of all a conscious political choice rather than the irresistible consequence of technological advance or the opening up of developing economies. Though the major dynamic of globalisation and the erosion of welfare states has been the mobility of capital, Milanovic places far greater explanatory emphasis on the mobility of labour: "Economic migration to which most of the rich societies have been newly exposed in the past fifty years (especially so in Europe) also undercuts the support for the welfare state. This happens through inclusion of people with actual or perceived differences in social norms or lifecycle experiences. ... [for example,] the underlying fact that migrants are likely to have more children than the natives might lead to the curtailment of children’s benefits. In any case, the difference in expected lifetime experiences undermines the homogeneity necessary for a sustainable welfare state."

If people's "lifetime experiences" are notably varied today, compared to the social democratic era, this is surely a reflection of changes in the economy and wider society after 1980, such as deindustrialisation, the growth of portfolio careers and the gig economy, and increased social diversity in terms of household formation and female workforce participation. Immigration may also have played a part, but I doubt it is anywhere near the most significant factor. It's also worth noting that public attitudes have been pretty constant over time, despite these many changes in lifetime experiences: health, education and pensions remain popular while we've always been ambivalent about benefits for the unemployed. As if angling for a consultancy on the next series of Benefits Street, Milanovic then suggests that "in the era of globalization more developed welfare states might experience a perverse effect of attracting less skilled or less ambitious migrants". This "adverse selection" theory (for which he offers no supporting evidence) requires us to assume that potential welfare plays a more important role than potential earnings (or family ties) in a typical migrant's decision on where to go. This suggests that while natives value cultural homogeneity, migrants don't, which is close to Goodhart's crude dichotomy. Just as traditional anti-Semitism imagined Jews to be simultaneously refined and verminous, so modern xenophobia accuses immigrants of both an unwillingness to integrate and an instrumental disregard for community.


Milanovic ends oddly: "There is no easy solution to the vicious circle faced by developed welfare states in the era of globalization. This is why I argued in my previous blog for (1) policies that would lead toward equalization of endowments so that eventually taxation of current income can be reduced and the size of the welfare state be brought down, and (2) that the nature of migration be changed so that it be much more akin to temporary labor without automatic access to citizenship and the entire gamut of welfare benefits." I say oddly because his first post didn't mention changing the nature of migration, though he notes he did address the topic in his recent book, Global Inequality. It sounds like Milanovic is attempting to rehabilitate the Gastarbeiter system. This would implicitly bar immigrants not only from much welfare but from the "equalisation of endowments" that he proposes as the fruits of full citizenship. I think it is safe to assume that a basic income does not figure in his thinking, even as a restricted perk of full citizenship, given that the stated purpose of equalisation is to reduce tax on current income and shrink the welfare state. In other words, everyone should have enough capital to provide for their own periodic needs. Though this idea has a respectable pedigree in Tom Paine, it is wholly unrealistic in a modern economy geared to the concentration of capital.

It is at this point that we can clearly see Milanovic's neoliberal intent. While his concern for inequality is no doubt genuine, his solution is more and better capitalism. He does not consider the possibility that capital has played anything more than an incidental role in undermining cultural homogeneity or in promoting social separatism. Despite his attempts to cast the decline of the welfare state as historically inevitable, and thus a counterpart to the eclipse of social democracy, I suspect that if he were transported back to the late 1940s he would still be advocating a reduced role for the state and a larger role for markets. What is depressing is the way that such a pure and sincere neoliberal case (whatever you might think of its merits) is being justified by a grubby appeal to fashionable ethno-nationalism and the employment of bigoted tropes (over-breeding immigrants jeopardising child benefits, benefit tourism etc). Branko Milanovic may not be motivated by the reactionary hatred that seeps through the words of David Goodhart, but his attempt to rationalise what have come to be inaccurately termed "legitimate concerns" will have the same effect of coarsening public debate.

13 comments:

  1. Ben Philliskirk30 March 2017 at 12:29

    The clue is in the term: 'welfare STATE'. The expansion in welfare and public services in the post-war era created 'collective consumption' where state activities created united interests among sections of the population that used them. By the late 1960s/early 1970s not only were the users of these services expanding in number, but the 'collective consumer' had the cheek to start to demand a greater say in how they were provided!

    As such, by the 1970s there were already political moves to reduce the expectations created by the state in order to make society more 'governable'. This involved selected spending cuts, greater encouragement of individualised behaviour and the encouragement of private alternatives. This strategy was intensified by the Thatcher government and its counterparts abroad. They saw opportunities to gain politically by creating divisions between different users of public services, and economically by transferring functions to the private sector and guaranteeing profits for their business clientele. It was most successful where 'collective consumption' was partial, as in housing and public transport, compared to the NHS where extensive public use and public support have gone hand-in-hand.

    The main motive for this rolling back of welfare and the public sector was to depoliticise 'collective consumption' and reduce pressure on the state. Financially the effects have been minimal, as public spending is still very high and capital depends on it. The impact of ethnicity was close to zero, though I'll admit that xenophobia has been whipped up recently as a convenient prop to weaken and divert public concern.

    You're too kind on Milanovic. The man's a fool.

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  2. Herbie Destroys the Environment30 March 2017 at 18:26

    Don't agree with much Ben said.

    “What he ignores is the possibility that the welfare state suited capital as much as labour.”

    This reminds me of those 19th century struggles over the working day. It is funny how Marx became linked to a subsistence theory of capitalism, which the BBC recently repeated on one of their useless docs, when in fact he was making the point that Senior was wrong and if the working day were reduced everyone would be better off! The real subsistence theorists are the neo liberals!

    Possibly what you are ignoring is that often capital doesn’t know what is good for it. Capital has historically been dragged kicking and screaming into compassionate solutions. Pressure from below is usually felt by politicians and not businessmen, so often it is politicians who respond to these pressures, and business has to accept. So the strategy of business has always and will always be a mentality of accept and undermine. Let us call Brexit a prime example of this, albeit with clear divisions because the clear benefits of EU membership had to be weighed up with the cost.

    Brexit reminds us that while capital doesn’t often know what is good for it neither does the proletariat!

    I guess in the modern era business really doesn’t see the benefit of external costs, but then again did it ever?

    Business will take note when costs hit it directly. So households subsides business utility costs. We have recently seen action on sugary foods, this isn’t a response to human need but a response to an impact on business costs. Capitalism will try to reduce costs and when it isn’t trying to do that it isn’t functioning in the way it is designed to.

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    1. Ben Philliskirk30 March 2017 at 19:13

      "Don't agree with much Ben said."

      Please go on....

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  3. Herbie Destroys the Environment30 March 2017 at 19:56

    Yes that was rather rude wasn't it! Sorry Ben.

    My comment above was a sort of response to your comment but in a roundabout way. But I will keep you in suspense no longer and be more explicit.

    The expansion in welfare and public services in the post-war era created 'collective consumption'

    I don’t agree that it created collective consumption. How is consuming health services different from consuming washing machines? Didn’t the 1950’s private goods explosion create a collective consumption experience, especially with the increased and increasingly sophisticated use of advertising? You talk like collective consumption is a threat to the system rather than its main informal control mechanism.

    “where state activities created united interests among sections of the population that used them”

    United interests in creating trade unions maybe a threat to the system but shared consumer choices? In that case facebook beware!

    My point is that it is more about cost control and that business has never really accepted external costs, and strategically has always and will always accept and then work to undermine. And the motivation for doing that isn’t some kind of collective consumption threat but the inconvenience of picking up costs.

    For me Thatcher was a response to supply side concerns rather than demand side concerns.

    On the size of public spending, yes I agree it is still high but then business will look to grab as much of that for itself as it can. One way of doing this is via austerity programs.

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  4. Ben Philliskirk30 March 2017 at 20:44

    "How is consuming health services different from consuming washing machines?"

    Because the state came to realise that providing health services/public transport/education etc was essential to the running of capitalist society. At the same time, these facilities were either not feasibly run at a profit, or were very inefficient and acted as a drag on other business activities. Thus many services used by the public came under direct state control or were heavily regulated by the government. In many cases, such as health and council housing, people were therefore clients of the government. This effectively politicised the use of public services, because any demands and complaints were made to the state, and opposed to your faulty washing machine, which is the responsibility of the manufacturer.

    In an institutionally unequal society this type of politicisation creates great difficulties. Either more money is spent to improve and extend service provision, which infringes on the incomes of the more affluent, or the state democratises public services giving more control to the users. Both these potential solutions are unpalatable to the state, the wealthy or both.

    It follows, therefore, that while the state still needs to pick up the tab for these essential activities and ensure that they are provided at a reasonable level, it can free itself from more onerous demands by increasing private business's role in public service provision, transferring individual responsibility to certain sections of the population (council house sales, encouraging health insurance and private pensions), and focusing spending cuts on less popular welfare programmes (the dole, single parent benefits).

    'Didn’t the 1950’s private goods explosion create a collective consumption experience, especially with the increased and increasingly sophisticated use of advertising?'

    No, because it took place through the market and via privately-run manufacturers and retail. If you couldn't afford the latest Aston Martin then hard luck, and there was no use demanding that the government provide you with one. Where this did create collective demands was in trade union activity, where organised workers could use their workplace power to push for wage rises that would enable them to afford consumer goods.

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  5. On the question of a correlation between cultural homogeneity and the universal provision of public goods, although this link appears tenuous, the alternative suggested, that these goods exist because they serve the needs of capital, is also manifested unevenly across historical examples. Were the needs of capital for a disciplined, literate and healthy workforce any less in the US than the UK or Sweden? Are not other candidates:
    1. Reserve Army effects. Welfare is like job skills, capital prefers to take what it needs from wherever it can get it. The key characteristic of immigrants (contra Mikanovic's adverse selection) is their youth, health, mobility, lack of dependants and lack of property. They are pure labour, at least for one generation.
    2. The counter tendency is the need of national capital for soldiers. Boer war era anxiety about emaciated recruits leads straight to liberal welfarism.
    Milanovic seeks a way to protect capital from the political instability it creates. If our goal is the defend the interests of labour, universal labour, without the cross cultural social identity created through general war in a nuclear age, then we are going to have to find something else. Ideas on a postcard.

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    1. I agree that there is more than one imperative for the development of a welfare state. Bismarck's reforms were essentially political - an attempt to stymie the rise of socialism - while British Liberals were certainly influenced by eugenics and the fear of a decline in the "national stock" revealed by the Boer War.

      My point was that Milanovic's desire to avoid mentioning capital's interests, and his opportunism towards contemporary nationalism, meant that he constructed a narrow narrative for the development of welfare states that quickly falls apart under scrutiny.

      Where we can generalise is to say that the extent and sophistication of welfare tends to correlate with industrial development, at least in the period up to 1980. I think we can also tentatively conclude that the current confusion over welfare provision reflects the confusion and wrenching adjustments of the post-industrial era and uncertainty over the impact of technology on the future economy.

      Milanovic is (not incorrectly) defining the traditional welfare state as an artefact of history, but he is being partisan in assuming it is redundant (consider the growing US support for single-payer healthcare as counter-evidence) and misleading in attributing its "decline" in significant part to immigration.

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    2. Ben Philliskirk31 March 2017 at 16:07

      I think it is fair to say that capital requires that the state provide a certain standard of public services and infrastructure, but that political concerns stemming from within the state as well as pressure from without effectively shape the form that this provision takes, the level of funding, the amount of private sector involvement, etc.

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    3. Herbie Destroys the Environment31 March 2017 at 17:49

      "I agree that there is more than one imperative for the development of a welfare state."

      But those others imperatives fall to politicians who feel the pressure from the public. For businessmen the bottom line is all that matters. So for them they sometimes will accept what they don't like but then lobby their asses off to undermine the policies as much as possible.

      If the pressure from below is strong enough these policies will survive but part of the strategy over the last 30 years has been to win over workers to the idea that welfare is about supporting lazy layabouts and immigrants. So instead of undermining the policies directly they have done the even better thing, go to the source of the problem, i.e. the masses, and debase them!

      And what a good job they have done by the way!

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  6. Herbie Destroys the Environment31 March 2017 at 17:41

    "Because the state came to realise that providing health services/public transport/education etc was essential to the running of capitalist society."

    So are washing machines actually. They not only cheapen the value of labour but actually save labour time to be used by the capitalists. Women into the workplace for example was partly facilitated by consumer good technology.

    "At the same time, these facilities were either not feasibly run at a profit, or were very inefficient and acted as a drag on other business activities."

    If you look at the history the truth was often the other way round. Nationalisation was a result of costly and inefficient private sector, for example rail nationalisation.

    "This effectively politicised the use of public services, because any demands and complaints were made to the state, and opposed to your faulty washing machine, which is the responsibility of the manufacturer. "

    So what? For the capitalists this had the happy consequence that the public came to believe the state was crap and private was inefficient!! rather than being a threat it was a useful pointer to the inadequacy of state provision!

    "Either more money is spent to improve and extend service provision, which infringes on the incomes of the more affluent"

    It often doesn't infringe on their wealth actually but they perceive that it does, and I must have missed where it creates great difficulties!

    "It follows, therefore, that while the state still needs to pick up the tab for these essential activities and ensure that they are provided at a reasonable level, it can free itself from more onerous demands by increasing private business's role in public service provision"

    yes, and so what?

    "No, because it took place through the market and via privately-run manufacturers and retail. "

    Why would something taking place through the market mean it can't be a collective consumer experience? The main advertising of the 1950's, which heralded the consumer society wasn't about Aston Martins but private goods affordable to everyone, such as goods within the home, ovens, hoovers etc. This was the golden age of the collective consumer experience!! And all private goods delivered through the market. There is quite a body of literature on the topic!

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    1. Ben Philliskirk31 March 2017 at 18:51

      "This was the golden age of the collective consumer experience!! And all private goods delivered through the market."

      Unless you were at the launderette, you were consuming all these goods in the privacy of your own home, unlike healthcare or public transport.

      "So are washing machines actually. They not only cheapen the value of labour but actually save labour time to be used by the capitalists."

      Yes, but washing machines have been very successfully marketed and sold by private companies without subsidy and provision by the state, unlike most public services!

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  7. Herbie Destroys the Environment31 March 2017 at 18:21

    Just a further note that collective consumer experience can develop from privately supplied goods. And it is this that is more of a threat than when provision is state owned or organised.

    Take housing, before direct government action you had an unfettered market where property develops agitated against interference. The narrow interests of the property developers not only led to a collective consumer experience among the masses, an experience which involved living in slums but also a cost to all the other sections of capital! But the point here is that it was a collective consumer experience brought about by the market and private goods that led to great difficulties. The idea that Thatcherism was a response to pressure from below or some kind of dangerous collectivism is erroneous to my mind.

    History has shown there is a greater danger to capital when the market creates a collective consumer experience, because more often than not the outcomes are far more devastating than the so called difficulties of public provision!

    So if we flip Ben’s argument upside down then he may have a point!

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  8. Ben Philliskirk31 March 2017 at 18:47

    Not much point debating with you Herbie when you can't read.

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