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.