Summer Rerun: “Why America Will Need Some Elements of a Welfare State”

This post first appeared on February 14, 2007

An excellent column by Martin Wolf in the Financial Times, where he is the lead economics editor. Starting with principles put forward by Ben Bernanke in his recent speech on income inequality, Wolf concludes that America cannot do without some form of a welfare state, specifically improved training, education, and universal health care.

The section of the speech that Wolf uses as his point of departure has been neglected by the US press. Perhaps it’s because most Americans would agree with the objectives Bernanke sets forth, but they sit poorly with the Administration and free market fundamentalists:

That economic opportunity should be as widely distributed and as equal as possible; that economic outcomes need not be equal but should be linked to the contributions each person makes to the economy; and that people should receive some insurance against the most adverse economic outcomes, especially those arising from events largely outside the person’s control.

Put this way, it’s hard to argue with Bernanke. Yet, for example, the point of private schools and tutors is to assure that your children get into good schools and have good jobs to give them a big leg up in the game of life. This behavior demonstrates that people in the upper echelons are making considerable investments of time and money to make sure that economic opportunity is not equally distributed, but is skewed in favor of their progeny. They wouldn’t be spending this kind of money if they didn’t think it worked.

And Bernanke finds that income inequality is indeed increasing:

In real terms, the earnings at the 50th percentile of the distribution . . .  rose about 11½ per cent between 1979 and 2006. Over the same period, the wage at the tenth percentile . . .  rose just 4 per cent, while the wage at the 90th percentile . . .  rose 34 per cent.

In the course of the article, Wolf poses some questions about income inequality, two of which are crucial, and one of which has been considered, at best, in passing in the US: what are the causes and what should be done? Bernanke and Wolf feel that technological change, rather than globalization is the main culprit:

Mr Bernanke himself comes to the standard and, in my view, largely correct, conclusion that “the influence of globalisation on inequality has been moderate and almost surely less important than the effects of skill-biased technological change”. This has long been the persuasively argued view of Jagdish Bhagwati of Columbia University (see Technology, not globalisation, is driving wages down, FT, January 4, 2007). Support for it is given in a very recent paper by Robert Feenstra of the University of California, at Davis.***

Prof Feenstra notes that the relative wages of non-production workers have been rising in US manufacturing (see chart). In the 1980s, there was also increased employment of such people, though this was less true in the 1990s. Interestingly, exactly the same phenomenon could be identified in Mexico: higher wages and employment of non-production workers.

Standard trade theory cannot explain this combination. The normal proposition would be that relative wages of the less skilled production workers should have risen in Mexico, where such people are relatively abundant, and fallen in the US. This suggests that technical change is the more plausible explanation. Yet Prof Feenstra notes that new possibilities for specialisation in tasks along the value chain may increase demand for skilled labour in both richer and poorer trading partners. But his empirical evidence still suggests that technology is more significant. More important still, productivity is the principal determinant of real wages in the long run. It is here that openness almost certainly makes its biggest contribution to the economy.

Wolf discusses the implications: preserving fairness and equality of opportunity requires government intervention.

Surprisingly perhaps, evidence suggests that inter-generational mobility is smaller in the US and in the UK than in the Nordic countries and even Germany.*** The plausible explanation is that the relative poverty of the parents is visited upon the educational achievements of their children. Thus, rising inequality directly undermines the achievement of Mr Bernanke’s first principle. Equally, the more competitive the business environment and the smaller the identification between companies and domestic workers, the less able or willing will companies be to provide either health insurance or pensions.

In a country in which much social insurance has historically been supplied by employers, the loss of jobs and the closure of businesses is particularly traumatic. Protectionism then emerges as the politically correct form of resistance to the market.

For these two reasons, developments now under way threaten the survival of Mr Bernanke’s principles. There are two possible responses. One is to insist that people are simply on their own. The present administration will, I predict, be the high water mark of this conservative tide. The other is to create a system of support that does not destroy incentives. That would have to contain at least two elements: greater funding of education for the disadvantaged (ideally, with private supply) and universal health insurance. The left will also want higher minimum wages and generous subsidisation of low earnings.

I am not suggesting that the US should embrace Europe’s interventionist follies. But without more generous government-financed services, the US may be unable to maintain a dynamic, internationally open and socially mobile society. That may seem a paradox. It is not.

Marx believed that the contradictions of capitalism would lead to its destruction. The history of the 20th century proved otherwise. But as Wolf’s analysis shows, the contradictions of capitalism inhibit it from existing in its pure, unchecked form. It’s too ugly for most people to tolerate.

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  1. attempter

    It sure is weird reading Bernanke held up as an apostle of economic justice. I guess a lot of these old pieces will have such strange features.

    outcomes need not be equal but should be linked to the contributions each person makes to the economy

    I just saw a new study which tries to measure the real contribution of various kinds of workers (or parasites) vs. what they’re paid.

    Unsurprisingly, it finds that people with real jobs are mostly paid far less than they contribute to social wealth, while the worst vandals and traitors are paid the most, while they destroy far more than they generate and are thus not just parasites but economic terrorists. Banksters and tax attorneys are two prime examples.

    Bernanke and Wolf feel that technological change, rather than globalization is the main culprit

    Ah yes, even for those who recognize a problem, it’s always this reason or that reason, but it’s NEVER class war, oh no.

    One of Krugman’s main projects lately has been to explain the motivations of the austerity-mongers in terms other than class war, which he explicitly disavopwed in one of his early blog posts on the subject. “It’s not class war, it’s…..”

    Same here: “class war via globalization itself isn’t to blame, technology is causing imbalances..” Never mind that part of the point of neoliberalism is to exploit technology economically vs. the people. Oh no, technology’s just an impassive force of nature which thwarts the ionnocent intent of the globalizers.

    One is to insist that people are simply on their own. The present administration will, I predict, be the high water mark of this conservative tide.

    This sure proved to be wrong. Obama and the Democrats have done all they can to normalize all the worst Bush/Cheney policies, which used to be called abuses and excesses (when the Dems were out of power), as standard policy. The MSM applauds this every step of the way. The elites as one bloc now wage vicious, unrelenting war on the people.

    We now know Hobbesian kleptocracy and Permanent War, with an intent toward a full police state and the restoration of medieval feudalism, is the intended final state for the system as such. Both kleptocratic parties are fully committed to it.

    Marx believed that the contradictions of capitalism would lead to its destruction. The history of the 20th century proved otherwise.

    At any rate, cheap oil temporarily proved otherwise. Its effect in propping up capitalism in spite of itself was greater than Marx anticipated. But then orthodox Marxism (industrial capitalism generating the industrial proletariat which then creates industrial communism), like all of classical and neoclassical economics, is specific to the oil age anyway.

  2. John Maynard Keynes

    “But then orthodox Marxism (industrial capitalism generating the industrial proletariat which then creates industrial communism), like all of classical and neoclassical economics, is specific to the oil age anyway.”

    All were invented long before oil became the fuel of engines in the 20th century.

  3. dearieme

    But, but, but… surely “skill-biased technological change” is amplified by globalisation, exposing the dim, ill-educated, self-esteem-laden American rube to competition from sharp, well-schooled youngsters in the Orient? Meantime illegal immigrants from Latin America undercut his earning power in intellectually undemanding jobs. He would seem to be fighting on three fronts.

  4. michel

    The issue has nothing to do with capitalism as compared to some other (undefined and unspecified) system, and as for Marx, his ideas now are of purely historical interest, he was living in and writing about a social and industrial configuration which has vanished as completely as the Aztecs and Incas. One might as well read De Tocqueville as a guidebook to modern America.

    What has happened in the UK is a sort of strange cultural consensus implemented in the taxation and welfare system. It is collusion between three interest groups: the left wing upper class establishment, and the welfare clientele, and the state sector union membership.

    The bitterest hostility of these groups has been directed towards the working and lower middle class people whose aim is self improvement, thrift, betterment through education. The school system has been wrecked in the name of equality of opportunity, so that it no longer delivers even basic literacy. Look at where the Labor politicians who have wrecked it send their children: to private or church schools.

    This has also happened in America. Discrimination against the white working class has become a way of life. Read some of the recent material that is emerging about university entrance and access to funding.

    The welfare system has been endlessly tweaked so that for a huge proportion of the population, work not only does not pay, it positively loses money compared to remaining on welfare.

    The health system has been made into an overmanned public sector union monopoly, with enormous amounts of money spent and wasted in anything but direct health care provision.

    Private pensions have been raided and confiscated, not once but twice. The second time was to reduce the deficit caused by the first, which imposed double taxation of dividend contributions to pensions.

    All this is reported on enthusiastically by the BBC, which has a state monopoly on funding of media by the taxpayer.

    And all this is supposed to in some way ameliorate something called ‘capitalism’? Only in Hampstead. Not on Planet Earth.

    1. attempter

      One might as well read De Tocqueville as a guidebook to modern America.

      That’s ironic, because I have been reading Ancien Regime and the French Revolution, and it’s amazing how topical most of it is.

      1. michel

        One imagines that one of the social welfare services Wolff is anxious for America to profit from is the envy of the world, as these things are usually put in the UK.

        In the UK, local government offers a service found nowhere else in the West. For no extra charge, just out of your ordinary local taxation. What they do for you is, assess your class and ethnic status. Then they will examine your garbage in detail after collecting it. Then they will tailor their marketing materials to what this shows about you and other members of your class and ethnic group. Perhaps your religion, also. Who knows?

        You can see that America, with its private industry garbage collection, is suffering from a grave deficiency in service provision in this sector, while the UK clearly is a world leader in the provision of such caring and sensitive welfare services.

        Let us hope that America pays attention to Martin, and emulates this and other aspects of social welfare provision. Clearly, they have a lot to learn, and they can go over to the UK any day they like and learn it there.

    2. Lucio

      Michel, while i understand your anger directed to those barbarians that have progressively shifted the UK policy from an amendment to the Thatcher era to an utopic third-world-gauche-caviar dream come true, you must admit to be partially off topic, since your country’s problems are quite different from those of the United States, where in the last 40 years a scientifically engineered mass robbery has been perpetrated by the first percentile.
      I used to look at the USA as a country where the powers were well balanced and the freedom really felt; now, i’d rather prefer Zimbabwe, were things look for what they are… ;-)

      1. NOTaREALmerican

        The US was “ruined” by the civil-rights backlash. When the white peasants began voting Republican to “get even with those people” it was all over.

        Pre civil-rights, the Unions controlled the peasants and extracted loot from the nobility. This was a workable balance. The Democratic Party (outside the southeast) was basically a labor party. The Republicans were the management party. Most of the arguments were about who got the loot. The civil-rights movement forced the sociopaths (politicians) in both Parties away from discussions about “who has the loot” towards “social issues”.

        The Republicans captured half the peasants from the Unions, and it’s been down-hill all the way.

        There’s no way to fix anything until a solid majority of the peasants realize who the enemy is. There are still way too many racist dumbasses running around worried about “those people”.

    3. walter_map

      “Discrimination against the white working class has become a way of life.”

      Some people would be shocked to discover how true that is.

      Wall St. punishes corporations that hire Americans or invest in the US economy and has no use for Americans except as consumers of the product of their desperate minions overseas.

      Labor arbitrage through globalization is the primary tool toward their goal of bleeding the US middle class out of existence and liquidating the US economy. This is why some have observed that the class war is already over, and that really what you’re seeing now is the mopping up operation.

  5. Mickey Marzick in Akron, Ohio

    “Marx believed that the contradictions of capitalism would lead to its destruction. The history of the 20th century proved otherwise… “

    Perhaps we need to step back and consider the period 1932 – 1980 more as an exception than the rule in the long and winding road of capitalism. For it was only during this period that the working classes in Western Europe and Canada/US/Australia were able to extract wages/benefits that “proved” Marx wrong! But since 1970 technological change and globalization have taken the industrial masses in all of these countries to the wood shed for a hiding – even in Sweden where Social Democrats governed uninterruptedly for 1932-1976. Then with Margaret Thatcher the “milk snatcher”’ and Ronald Reagan’s elections in the UK and US, the gallop to the right pulled all “Labor” parties rightwards as their political base – industrial workers employed in manufacturing – disappeared because of TECHNOLOGICAL CHANGE and GLOBALIZATION. Watching a “labor” government” – whether here or in Europe – impose austerity in a “welfare state” says it all. Market confidence must be maintained in a global economic system. And this has not been lost of “labor” governments forced to confront technological change amidst globalization. To pretend otherwise is wishful thinking.

    Capitalism has involved technological change and globalization since its inception. They go hand in hand. Think of the Dutch East India Company, its successor the British East India Company, the Hudson Bay Company and other nationally-chartered corporations as the precursors of the modern MNC. Whether it was spices, sugar, fur, tobacco, or cotton, production was quickly organized into what would become a known as a vertically-integrated firm involving land, seed, labor, [plantation] raw material, processing, transport and shipment from the “colony” to its final destination in the “mother” country for sale. One need only read Marx’s chapters on MACHINERY in Volume One of Das Kapital to see the workings of technological change and globalization. Recall there that the process Marx described was the transition from “manufacture” to “machinofacture”, the displacement of hand-loom weavers in England by weaving machines. Likewise, then once the cotton textile mills became the technological apex of the factory system, the calicoes and cotton textile prints were exported to India with the destruction of the hand-loom weavers there, devastating the local textile industry for generations. Sound familiar? If anything, Marx was one of the first economists to analyze technological change and globalization in conjunction with CLASS FORMATION. Joseph Schumpeter, no Marxist by any stretch of the imagination, acknowledged Marx’s insight into the dynamics of capitalism in enunciating what would become known later as ‘creative destruction”.

    Hence, what Bernanke et al are describing is only the latest round of technological change and globalization associated with capitalism – and its adverse consequences – growing income inequality. Instead of looking at the WEST as the precursor of the future perhaps we should look at what is transpiring in the “periphery” for a more realistic view. There first-rate production facilities with the most advanced technological processes involving CAD/CAM, various forms of automation and control, coupled with an industrial reserve army looking for gainful employment, little regulation, and authoritarian regimes make conditions for capital accumulation propitious. Needless to say, unions and political parties predicated on them are unnecessary “fetters on production”. And so long as these conditions exist, it remains to be seen if Marx has been proven wrong by a mere four or five decades, if that, of industrial relations in welfare states characterized by rising wages/benefits and a subsequent decrease in inequality specific to North America and Western Europe. This is clearly no longer the case. If the rising income inequality, crumbling infrastructure, and the “dumbing down” of education in the United States since 1980, presumably the most advanced capitalist nation, are any indication, Marx may have the last laugh as technological change and globalization since then have undermined the very conditions that made for the “American Exceptionalism” that purportedly proved him wrong.

    So long as we keep telling ourselves that we’re still the most advanced capitalist country, instead of merely the biggest, we may fail to see that the most advanced production forces and their accompanying social relations of production described above now located in Asia and elswhere may presage our future – not the other way around. Marx was wrong only insofar as geography was concerned and even then it remains to be seen if the “historical period” [1932-1980] that proved him wrong was merely an outlier in the uneven development of the capitalist mode of production. On this score, I hope he was wrong!

    1. Mickey Marzick in Akron, Ohio

      I might add to the above that the existence of the Soviet Union during the period 1932-1980 also colored this equation. With communist parties participating in elections – PCF/PCI – and represented in national legislatures, there was an “alternative” to capitalism just a stones’ throw away. While Western Europeans had no illusions about Stalinism, capitalists begrudgingly conceded “the welfare states” as an effective antidote to it. As Naomi Klein has pointed out, it’s no surprise that with the collapse of the Soviet Union capitalism went on a GLOBAL full front offensive – ideologically, politically, and economically – against unions and the welfare state at the same time that technological innovation and globalization put unions and adherents of the welfare state on the defensive. As employment in manufacturing attributable to these two forces declined is it a surprise that the electoral fortunes of political parties dependent on the latter declined as well? Whatever the message, the political/economic realities underlying it had changed VISIBLY!

      The failure of the Soviet Union as the “first” experiment in socialism/communism also has to be taken into account, especially when Marx – not Engels – had predicted that “revolution” was likely in a more advanced capitalist country like Germany – not backward Russia. Recall Fukayama’s “End of History” gibberish on this score heralding the advent of the fusion of capitalism and representative democracy as the height of humankind. Forgetting four centuries of Western intrusion and colonization, it was now the Western man’s burden to “bring” this idyllic combination of politics and economics to his Eastern brothers and sisters alike. But Lee Kuan Yew, having studied in Britain, saw things a bit differently. Industrialization [1832] came first followed by representative government [1867] then followed by the welfare state [1945-1980?]. That was the real path taken by the England and the West in general, suggesting that this historical trilemma – industrialization, representative government, and the welfare state – was UNIQUE to it. But one didn’t require the second or the third to accomplish the first. In fact, the latter two would likely impede the first, the underlying material basis for the creation of the third. Hence, it was a “fetter on production” and expendable. Whether this pattern “evolves” in the East is a comforting assumption. But that’s all it is!

  6. liberal

    …that economic outcomes need not be equal but should be linked to the contributions each person makes to the economy…

    Yawn. Hundreds of years ago classical economists realized that landowners contribute exactly nothing to the economy—witness J. S. Mill’s famous quote that “Landlords grow richer in their sleep without working, risking or economizing.” Reasonable estimates put land rent at 10–20% of GDP. Yet modern economists say very little about land as an efficient and equitable source of revenue.

    Not to mention other rent-collecting parasites, like the thugs on Wall Street.

    Until the word “rent” becomes far more prominent in our modern discussions of political economy, we’re doomed to inequality and inefficiency.

  7. PeonInChief

    The weak class mobility in the US relatively to other advanced capitalist countries is, oddly enough, the result of our ideology of class mobility. Because we believe that class mobility is easy here, we do little to promote it. In countries where it is perceived that class mobility is difficult, governments do more to promote it (cheaper education, in particular), and therefore get greater class mobility.

  8. Richfam

    We talk about income inequality when we should be talking wealth inequality. Our tax code attacks the wrong people in the name of equality.

    If you’ve moved up the latter from a lower to middle income household to a upper middle income you get pounded in the U.S. The payroll tax has its full effect on your income and you pay the highest marginal rate on income over $100k. You’re not “rich” but you’re being taxed like you are.

    You probably can’t afford private school but maybe you can afford to live where the public schools are good. That’s the ivory tower b.s. part of the Martin Wolf column – as you gain some sucess and move to another income bracket government retards your abiity to be “rich”. You actually work for a living rather than living off inherited wealth or investment income. So if you went to a good public school in a middle class upbringing you got a leg up from the government “training”. But if by skill, luck or both you turn that training into financial enrichment the governement impedes your economic progress and takes it away. Thats where the american dream gets killed.

    If you’re somewhat sucessful in the U.S. you get crushed so either be uber-sucessful or not all. But only in currently approved ways of making money, meaning if you’re in finance or a tax attorney you’re evil (like some comment above) but if you make a program that runs a computer then its well earned. Why when we pay too much for an I-whatever its okay but if you buy stock in the company symbol AAPL its evil?

    On training – plenty of money is spent for public schools and plenty is loaned for higher education. Maybe we’re just doing a poor job with that money where its needed most – for lower income groups. For example, why don’t we teach trades as well as reading and math in our schools. We act like there’s something wrong with doing that.

    Sorry about the spelling, I didn’t study that very well in high school…

  9. walter_map

    America will need some elements of a welfare state because the rapacity of the rich will leave the rest of the country an economic basket case (think Mexico) and the food riots and old people dying in the streets might give some people the wrong idea. Better to throw them a bone once in a while, if only because fighting over it will give people something to do.

  10. walter_map

    “Marx believed that the contradictions of capitalism would lead to its destruction. The history of the 20th century proved otherwise… “

    Not so. Marx believed that the contradictions of capitalism would lead to its destruction unless it could be redeemed by balancing it with socialism. Even Marx recognized that capitalism would be needed to pay for his socialism, and for a few decades after FDR’s reforms that goal was largely achieved. This is evidenced by the emergence of the modern US middle class, which is getting liquidated now that FDR’s reforms have been mostly reversed. If anything, Marx has been vindicated by events of the last seventy years.

    Capitalism’s only real value and only real justification is in the service of the people, and as a tool in the establishment of a just, peaceful, and prosperous society. Contrary to what corporatists might have you believe, and contrary to present practice, corporate charters really are not granted for the purpose of enabling a favored few to rape the country and enslave the population.

    The problem with capitalism is that it has become corrupted to serve the greed of the rapacious, to the detriment of its true purpose to serve the needs of all.

    The rapacious who run the cartels no longer have any need of capitalism, since it now has control of the US government and the US treasury and can bankrupt capitalists just as surely as it bankrupts the general population: cartels have nothing to do with competitive markets and therefore are not capitalist in nature. Now the goal is the establishment of a feudal society and the restoration of the historical social order which prevailed before the Enlightenment.

    Disbelieve if you like, but you’re watching it happen with your own eyes.

    1. NOTaREALmerican

      No system can cope with the fact that there are more sociopaths in society than we can admit.

      If you centralize the loot, the sociopaths have an easier time getting all of it. This is why – for all of human history – it’s been in the best interests of the sociopaths to centralize society. This is why we’re here now (the Anthropic principle applied to society and government).

      Libertarianism is a fantasy for this reason. The average human dumbass can’t tell who the sociopaths are (if they could our societies would be totally different). Socialism and Fascism are simply the natural end-game of all economic systems. They only collapse (end) with massive wars – usually when the peasants realize the fantasy created for them – by their sociopaths – was a lie (dud, slaps forehead, how could we have believe THAT? Let’s go kills some peasants to cover our stupidy).

  11. Gene

    “…the point of private schools and tutors is to assure that your children get into good schools and have good jobs to give them a big leg up in the game of life. This behavior demonstrates that people in the upper echelons are making considerable investments of time and money to make sure that economic opportunity is not equally distributed, but is skewed in favor of their progeny.”

    Yes. Because people in the middle echelons refuse to send their kids to school, keeping them at home, in cages, demonstrating their willingness to make sure that economic opportunity is equally distributed and does not skew in favor of their progeny over the lower echelons.

  12. Ottawan

    Here’s a doozy on the always-lurking topic of technology:

    “1.Technique has become the new and specific milieu in which man is required to exist, one which has supplanted the old milieu, viz., that of nature.

    2. This new technical milieu has the following characteristics:
    a) It is artificial;
    b) It is autonomous with respect to values, ideas, and the state;
    c) It is self-determining in a closed circle. Like nature, it is a closed organization wich permits it to be self-determinative independently of all human intervention;
    d) It grows according to a process which is causal but not directed to ends;
    e) It is formed by an accumulation of means which have established primacy over ends;
    f) All its parts are mutually implicated to such a degree that it is impossible to separate them or to settle any technical problem in isolation…

    3. The development of the individual techniques is an “ambivalent” phenomenon.

    4.Since Technique has become the new milieu, all social phenomena are situated within it.(..)Politics…is not modified by Technique as one factor among others which operate upon it; the political world is today defined through its relation to the technological society. Traditionally, politics formed a part of a larger social whole; at the present the converse is the case.

    5. Technique comprises organization and psycho-sociological techniques…

    6. The ideas, judgments, beliefs, and myths of the man of today have already been essentially modified by his technical milieu…”
    (pg 11 and 12)

    “…the technicians have become an authoritarian and closed world.”
    (pg 28)

    Ellul, Jacques. “The Technological Order,” in The Technological Order, ed. Carl F. Stover, 10-35. Detroit: Wayne State UP, 1963.

  13. gepay

    Technology makes globalisation possible. Globalisation has made it easier for the elites to garner even more of the pie. I agree with the above comments that since the fall of the Soviet Union that gloves have come off and the American middle class is losing all the benefits it gained from the last depression. I can’t say how it is in the UK but anyone who believes it is easier to be on welfare than to have a good job has never been on welfare. It is obvious that the US government has been captured by the corporations and is rapidly becoming some kind of third world cronycapitalist-plutocracy-kleptocracy which will lead us to a police state facism. I agree with the conspiracy minded that once robots or androids are perfected we will see the elites eliminate 90% of the population. I agree with the conspiricists that the reason Kissinger and Nixon opened up China was not for the market of a billion people but for the vast regimented labor force that could be utilised by technological advances in automation – electronic communications – jet travel – airconditioning (allowed the US factories to march to the non union south which have continued on south to Mexico or around the world to China or India. One thing I have not seen in this debate on economics is the fact that we could easily live much richer lives with a much smaller GDP There is so much money spent on useless trash and big houses and … while the elites and the military in the US waste trillions. One only has to spend some time in any US city to know that there are plenty of ways to make improvements if we wanted to spend our time on money on something else than a bigger and better military. There is no shortage of things that need to be done.

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