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

Yves here. Notice how strong the shift in conventional wisdom has been over the last eight years. It is hard to imagine Martin Wolf writing an article like this today, even though if anything the evidence supporting his case has become stronger. Describing a “welfare state” in a positive fashion is now close to a taboo in the mainstream media. Worse, soi-disant liberals are still pretending that Obamacare insurance policies are a good approximation of “universal health care,” even as it is becoming more and more obvious that the scheme is going into a death spiral (see this Guardian story on how more people in the US are trying to use crowdfunding to pay their medical expenses).

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. James Levy

    I have no idea if Marx was right, in the long run, or wrong–the verdict is still out on the long-term viability of industrial capitalism, which is less than 250 years old and creaking mightily as I write this. It may be that when Rosa Luxemburg said that the choice was between Socialism and Barbarism, she underestimated how likely barbarism was. What I do know is that capitalism today isn’t just too ugly to tolerate, it is downright murderous. Its imperatives are driving the despoliation of the planet. It’s love of profit over all else is cutting corners and creating externalities that are lethal. But it has made a few percent of the global population comfortable and powerful, and they are holding onto that comfort and that power come hell or high water (and, ironically, if things continue apace both are on the menu).

    Our problem is that we are asking for concessions that are beyond the acceptable limit for elites in any historical epoch. We’re asking the powerful and the rich to give up their money and power for the greater good of all mankind. This is not likely to happen unless a powerful enough segment of the elite comes to the inescapable conclusion that they’re literally dead meat if they don’t and therefore opts for survival over position. I am not enthusiastic that this will happen before it is way too late to save more than a fraction of the current world population, and send those people back to the lifestyles and thought patterns of 30 Year’s War Europe.

    1. digi_owl

      Its a generational thing. Right after WW2, many of the elite had just that epiphany that unless they have the common people behind them, they are toast. But now they are dead or dying, and their grandkids are basically once more thinking that they can go it alone. This because they have not had the required experiences that help develop the wisdom.

  2. Paul Tioxon

    What Marx saw long ago, we can see today, and without relegating ourselves to his analysis, come to our own conclusions. Contradictions, summed up well by Lincoln as a house divided against itself cannot stand is just as true today. Millions of guns to protect the citizenry from tyranny have only resulted in a 1/4 million murders and 5 times as many shootings since Jan 1, 2000, some placing people in wheel chairs and other crippling gunshot afflictions, and more and more institutionalized state oppression, economic exploitation and miserable lives propped up in an alcoholic haze until the liver or brain gives out. We have more food than we know what to do with so we throw away almost as much as we eat. And we have eaten ourselves into morbid obesity, diabetes and heart disease. The contradictions abound from the kitchen table to the kitchen cabinet of the White House where there seems to be nothing passed so freely as bad advice.

    The Welfare State arose from the sacrifices of the population in giving their sweat, blood and tears to defend their nation during war, to be rewarded for their sacrifices, rewards which were demands for power sharing and more in the paycheck, more benefits and more time to enjoy the life spent in a more prosperous world. It seems to me that Obamacare is not simply in death spiral all of its own making, but even more so, because it is the best attempt capitalism can produce in an America that is the most capitalist of societies down to the marrow its bones. Little competition from the Church or the social relations between nobles and subjects set for in the laws that were disestablished to free markets for commodification and money making. Money making enterprises structured the laws from slavery, to the voting franchise with little from the state to cushion any of the hardships of life in America.

    Health care is the largest industry we have. It is approaching 20% of the GNP. I remember the great national freak out in the late 1970s when congress realized it was approaching 10%. Nothing seems to be stopping the costs from spiraling upward and onward. No risk of deflation here where nothing is spared to save a life, operate on some poor little afflicted child, or buy a piece of equipment the size of an office building that shoots a proton beam at cancer, one cancer cell at a time.

    When Obama Care becomes a clear burden to even the democrats who can point to it now as some sort of accomplishment, and it is an accomplishment for the people who finally get to see a doctor, get into a hospital, get that operation or diagnosis that saves their lives, when even those accomplishments number in the millions, it will be part of a health care industry for which $Trillions of dollars can no longer be justified or even funded. As that financial collapse approaches, it would be better for politicians to declare the defeat of a program better rolled into one universal single payer system currently operating as Medicare, than try to reform, shore up or the old tried and true public lie, get rid of its waste and corruption.

    Declare victory with Medicare as the solution and put everyone into it. The only paper work left should be each person’s medical history with diagnosis and healing as the happy ending to the story.

  3. jgordon

    There is a fundamental error in perception in the Western world that is so pervasive that people can’t even see it. As a most basic component of a healthy society people need to be able to survive at a local community level without outside support. Only after that is taken care of should people concern themselves with luxuries, inter-community and international relations.

    Welfare–not to mention other government services–can appear to have positive impacts if one only looks at their effects in isolation, however I think there is a devastating and pernicious impact on people’s ability to form community bonds and have local resilience with things like welfare.

    Also, let’s also not forget that Americans consume far more of the earth’s precious resources than any other group in the world. Welfare etc are social services that can only be funded through the world-wide looting operation of the American empire. Do these recipients of empire benefits have a moral right to share in the loot of empire? Perhaps instead of domestic welfare it would be more ethical for the American empire to provide social benefits for the indigenous peoples who are forced from their lands to work like slaves for the empire’s benefit. Although admittedly if the American empire used it’s loot for the benefit of the foreign peoples whose lives it destroyed then there’d probably be nothing left to spread around to the military, or to pacify and police the domestic population. So I suppose that’s not a serious proposal.

    1. Left in Wisconsin

      Welfare etc are social services that can only be funded through the world-wide looting operation of the American empire

      This is obviously not true. Unless every social democratic country in the world is considered as a piece of the American empire. And even then, I would argue that we can easily afford a generous welfare state with a small shift in priorities away from (globally destabilizing) defense spending to social productive spending on human development.

      1. jgordon

        Obvious to who? America lavishes so much money on its military not only because of corruption, but also because it has the world reserve currency and is a guarantor of the safety of international shipping. These facts are inextricably linked to the America’s status as the world hegemon. The empire provides order and structure, and enforces the extraction of resources from the periphery to the center. The bread and circuses are inextricably linked to the empire’s military activities and trying to tease them apart will only lead to collapse of the entire system sooner than it will otherwise happen.

        “Social Democratic”–now that’s an interesting phrase. Did you know that Syria is a democracy, and was an extremely prosperous and well-education nation prior to 2011?

        1. Vatch

          “Did you know that Syria is a democracy”

          Here’s a telling paragraph from the Wikipedia article about Syria:

          Hafez al-Assad died on 10 June 2000. His son, Bashar al-Assad, was elected President in an election in which he ran unopposed.[68] His election saw the birth of the Damascus Spring and hopes of reform, but by autumn 2001 the authorities had suppressed the movement, imprisoning some of its leading intellectuals.[84] Instead, reforms have been limited to some market reforms.

          He was “elected” President in an “election” in which he ran unopposed. That’s not a democracy.

            1. Vatch

              Ha! Good point! I didn’t say anything about the U.S. plutocratic oligarchy, I was just commenting on Syria.

              Although in the U.S., we still have the opportunity to do something about our leadership. I know it seems like blaming the victim, but the problems in the U.S. have been developing for several decades, and low citizen participation in the process of government is a major reason for our decidedly un-democratic situation (it’s not the only reason). This has been discussed before:


              In some U.S. Presidential elections, voter turnout is under 50% (1920, 1924, 1996; only 50.3% in 2000), and it is usually even worse in off-year elections. The low turnout in off-year elections is extremely helpful to incumbents who usually only care about what their major donors want them to do. If more people would actually vote, we might be able to get rid of some of those incumbents.

    2. James Levy

      So every small community should have its own wool, flax, cotton, leather, iron, wood and/or coal, whale oil or kerosene, medical schools, veterinary schools, ability to make its own digitalis, penicillin, and insulin for children born with diabetes, etc.? Unless you want to live like 11th century peasants on local manors your formulation just doesn’t work out well. How can we even live like 18th century English farm laborers without the support of a huge network of production zones knitted together by the same currency and the same set of laws?

      1. jgordon

        You have ideas about what sort of standard of living is supposed to be standard, but those ideas have been formed during a period where the human race has been burning hundreds of millions of years of stored fossil fuel energy in the period of 200 years. Local systems will be able to compensate for some of the things you’ve listed that are worthwhile, but in all likelihood things like medical schools and veterinary schools are basically not going to exist in the future as they are currently configured, and people with diabetes, etc–well it sucks but they are probably on the short list of people to not be around any more when the economy and social conditions disintegrate a bit more in America. As Dmitry Orlov has recounted from his experiences with the collapse of the USSR, at first there desperate calls for desperately needed medicines to make it out to the needed areas, and then those calls suddenly all went quiet shortly thereafter.

        1. LifelongLib

          Yes, we’ll find out why humans have been trying to escape nature for millennia. The first guy who built a fire was looking for a better life than what nature provided. Modern technology is just an extension of that. You can say we overreached but I for one don’t think we were wrong to try, given the miserable alternative.

          1. Synoia

            Humans can only survive in a limited range of climate zones. To spread beyond these humans used their intelligence, and greed.

            Greed, combined with our intelligence appear as an evolutionary dead end.

            If you have data indicating this is not do, please post links .

            1. LifelongLib

              Wanting to survive and have a better life is not greed. Wanting to be free of hunger and disease is not greed. Wanting a world where we don’t watch our children die is not greed. The most cursory study of science or human history shows that hunger, disease, and the deaths of children (young) are the natural norm. Only by using intelligence to alter nature can we reduce those things to some degree, usually not enough.

              It is consciousness (not greed) that motivates our attempts to escape nature. Without it we would have no awareness of how horrible our natural condition is, or any desire to escape it. It may be that nature cannot be altered to the degree necessary to satisfy our conscious needs. That would mean that consciousness itself is the evolutionary dead end. Quite possible.

              1. LifelongLib

                Got caught while editing. Wanted to say “using intelligence to change our environment” rather than “using intelligence to alter nature”.

    3. John Zelnicker

      @jgordon – “however I think there is a devastating and pernicious impact on people’s ability to form community bonds and have local resilience with things like welfare.”

      I believe you have this backwards.

      Consider this: If I am trying to support myself or a family at the prevailing non-living wages in this country, then I have to hustle around trying to find additional income by working other jobs, perhaps, or System D.

      If, on the other hand, if I am making a living wage, then I have much more free time available to devote to community building, etc.

      Likewise, with basic human welfare services such as medical care, secure retirement, etc., provided by the federal government, my life is much less stressful and I am much more likely to be interested in forming community bonds. (As a side benefit, if the government provides the funding for these, then companies don’t have to and maybe some will share the savings with their employees.)

      This is not to deride local resilience at all. It is a necessary, but insufficient, component of creating a better life in this time and place.

    4. bdy

      Local, simple living is more resource efficient than broad trade networks that rely on fossil fuels and heavy equipment to move things around. Getting from that reasonable premise to “welfare doesn’t work” is a stretch.

      Compassion and cooperation aren’t restricted by scale. “America is too big for Scandinavian style Socialism” or “Handouts erode indepent communities because everyone should pitch in” or however else you want to spin it, it’s the same note: kindness is bad when extended by the State.

      Bull****. There’s nowhere in the world where a person can farm, hunt or forage without the permission of privilege. People have the right to contribute with meaningful labor, and we have the right to food money irrespective of that contribution. The alternative is to declare “such a shame” (or “serves ’em right”) while we watch our brothers and sisters starve.

      As for international corporations looting every corner if the globe . . . sure, let’s quit that. We can still feed the hungry.

  4. cripes

    The claim there is not enough resources to go around to maintain a decent standard of living for the US or world population is dear to the hearts of David Rockefeller and his pals at the club of Rome, etc. You’re parroting their public relations in anti-colonialist, green garb. They said we wouldn’t make it to the year 2000 without a total population collapse. Yeah, not so much.
    However, when I see the billionaire towers rising in Dubai, Manhattan, Miami and elsewhere, my spidey sense tells me that the yearning of toiling workers in India, Brazil or the US for healthcare, affordable education and housing is not the problem so much as it is the solution. It would require serious examination of the distribution of resources, alternate energy sources, perhaps a reduction in population which is self reinforcing in stable advanced societies anyway. Ergo, we have population deficits in some countries and surplus in others and see Sweden trying to absorb 150,000 Syrian refugees from western destabilization in an effort to boost economic growth in the aging industrial core. Think Japan also.
    Of course, this may work out in mass death by war and famine as Orlov cautions us, or the power of the private wealth hoarders, along with their allies in the military/academic/financial/tech/pharma cabals can be broken and replaced by a citizen-worker governing system. I’m not sure about the dictatorship of the proletariat…how about the democracy of the proletariat?
    Or collapse, but it won’t be because we just don’t have enough to eat.
    You might as well say the poor will always be with us, so why bother?

  5. Political Economist

    “Marx believed that the contradictions of capitalism would lead to its destruction. The history of the 20th century proved otherwise.” Yves, I think you might want to read some articles from Monthly Review before claiming that Marx was wrong about capitalism. If that does not suit you, perhaps Naomi Klein’s latest book, “This Changes Everything.”

  6. Keith

    Capitalism is like Siamese twins at war with each other.

    “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” Warren Buffett

    This has rolled out globally with the Neo-liberal ideology.

    The 1% have gone to war against the 99% (aka the global consumer base)

    This is what the 1% winning looks like – global recession.

    The 1% and 99% always fighting each other to get more, but if either side win they destroy each other.

    The 1% were in the ascendency in the 1920s and blew it up with a Wall Street Crash in 1929.

    The 99% were in the ascendency in the 1970s and blew it up with constant strikes making individual nations uncompetitive.

    The 1% are in the ascendency again and have already caused another Wall Street Crash (2008) plunging the world into a global recession that seems without end.

    The 1% haven’t worked out that they have gone to war against the consumers that buy their products and services.

    How is the global consumer base?

    1) The once wealthy Western consumer has had all their high paying jobs off-shored. As a stop gap solution they were allowed to carry on consuming through debt. They are now maxed out on debt.

    2) Japanese consumers have been living in a stagnant economy for decades.

    3) Chinese and Eastern consumers were always poorly paid and with nonexistent welfare states are always saving for a rainy day. Western demand slumped in 2008 and the debt fuelled stop gap has now come to an end.

    4) The Middle Eastern consumers are now too busy fighting each other to think about consuming anything and are just concerned with saying alive.

    5) South American and African consumers are busy struggling with economies that are disintegrating fast.

    The 1% are winning, Warren Buffet was right.

    Global commodity prices are at record lows as there is little demand for the raw materials that real things are made of.

    Obviously this was all spotted by Marx a long time ago, but he had never seen the results of the 99% in power (Pol Pot’s Cambodia, Stalin’s Russia, Mao’s China, etc …). He came from a wealthy family and was only too aware of the greed, self-interest and hypocrisy in his own class.

    Capitalism is an endless fight between the two sides, but neither side can win, to do so destroys themselves.

    A more balanced approach is needed but the very thing that makes Capitalism work, self-interest and greed, ensures neither side is ever happy with their lot and always wants more.

    The pendulum must swing back again because the very things that both sides think they want, destroys the system.

  7. Keith

    Capitalism benefits those with Capital (the clue is in the name).

    Inequality grows as wealth concentrates due to the benefits of wealthy parents being able to provide the best education and passing their wealth on in inheritance.

    With Neo-liberal ideology taking us further to the Right this effect is magnified.

    “What is a meritocracy?”

    1) In a meritocracy everyone succeeds on their own merit.

    This is obvious, but to succeed on your own merit, we need to do away the traditional mechanisms that socially stratify society due to wealth flowing down the generations. Anything that comes from your parents has nothing to do with your own effort.

    2) There is no un-earned wealth or power, e.g inheritance, trust funds, hereditary titles

    In a meritocracy we need equal opportunity for all. We can’t have the current two tier education system with its fast track of private schools for people with wealthy parents.

    3) There is a uniform schools system for everyone with no private schools.

    Thinking about a true meritocracy then allows you to see how wealth concentrates.

    Inheritance and trust funds are major contributors.

    When you start off with a lot of capital behind you, you are in life’s fast lane.

    a) Those with excess capital invest it and collect interest, dividends and rent.
    b) Those with insufficient capital borrow money and pay interest and rent.

    If the trust fund/inheritance is large enough then you won’t need to work at all and can live off the rentier income provided by your parents wealth and the work of an investment banker.

    If you are in life’s slow lane, with no parental wealth coming your way, you will be loaded up with student debt, rent, mortgages and loans.

    To ensure the children of the wealthy get the best start we have private schools to ensure they get the best education and make the right contacts ready for the race of life.

    The children of the poor are born in poor areas where schools are typically below average and they are handicapped before they have even started the race of life.

    Wealth concentrates because the system is designed that way.

    With Capitalism always biased to favour the wealthy, the new Neo-Liberal ideology has moved us further to the right and made this inherent bias obvious to everyone.

    Just in case anyone has missed it, the current campaign to tilt the playing field down even further for the less affluent young, should leave no one in any doubt at all.

    Generation rent are being used as a traditional source of rentier income for those with more Capital:

    “The Landlord is maintained in idleness and luxury by the labour of his tenants.” Adam Smith

    Then student loans gives a life of repayments before they have even started working.

    1. Keith

      Thought for the Right …….

      If you like the idea of Social Darwinism you should be against inheritances and trust funds.

      The animal world has no such thing and this ensures the survival of the fittest.

      Inheritances and trust-funds favour the children of the wealthy and circumvent Darwinism.

      1. LifelongLib

        William F. Buckley argued that inheritances and trust funds were good because being able to leave wealth to your children was a motivator for you to work harder. I don’t recall his answers for why the recipients of the inheritances and trust funds should work at all (noblesse oblige?).

    2. Felix_47

      One consideration would be to tax away all inheritance money. I have a funny feeling that would not change much. The parents can and do teach the kids how to save and earn and budget and those would eventually get ahead. The best idea to make society fair would be to address inequality head on. How about outlawing anything but marriages to people assigned by the government through a lottery. That way in just a few years racial discrimination would vanish……..instead of an investment banker Chelsea Clinton might have ended up with an illiterate sugar cane cutter from Central Florida…..and economic differences would last only one generation. Resistance to Moslems would vanish because even those resisting would have Moslem grandchildren. Instead of a gorgeous model Trump might be married to an obese diabetic chain smoking Moslem lady refugee on SSI from Iraq. What societal purpose does allowing free choice of spouse serve? It does seem to serve to perpetuate inequality though.

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