Welfare State to Welfare Planet, CIPA, November 9, 2006


From Welfare State to Welfare Planet

A talk to the Cornell Institute of Public Affairs


Jeffrey S. Lehman

November 9, 2006

At the outset of my academic career, I devoted my research energies to understanding the American welfare state.  I was part of a group of scholars that sought to appreciate the dynamics of interaction between American democratic politics and American capitalism over time.  We were devoted to understanding how social policies of progressive taxation and redistributive public expenditure might produce a kinder, gentler capitalism, blending the creative power of free markets with social commitments to a vision of equal citizens, each enjoying a fair opportunity to participate, each protected against catastrophic material hardship, all in an environment in which material inequality was kept within tolerable bounds.

Within our frame of reference, the nation-state was the big, big deal.  Policies were evaluated for their impacts inside national borders.  Sometimes we looked at individual states and municipalities, but mostly we looked at the country.  We looked across national borders only for comparative purposes – to see other approaches that we might or might not borrow, depending on how effective they were in other contexts and on the differences between the overseas and the domestic societies.

Our modes of analysis tended to borrow from as many different disciplines as possible.  The language and tools of applied economics were useful – both to anticipate how individuals might respond to various financial and non-financial incentives and to recognize how structural market failures might lead unregulated markets to reduce aggregate welfare.  The language and tools of sociology and political science were also useful – to recognize how individuals and groups might identify and define themselves, and how they might seek to wield power over the initial distribution and re-distribution of income and wealth within society, either to favor themselves or to disfavor another group towards which they felt a special animus.

For the past year I have been moving in somewhat different circles, learning about a different world.  I have been living in the world of globalization, as it is understood in developing countries and in the developed world, by academics, government leaders, and investors of capital.

In the world of globalization, nation-states are not the big, big deal.  The big, big deal is the planet.  Nation-states matter, of course.  But they are artificial constructs.  They have less fundamental significance than do questions of global capital, global labor, and the transaction costs of shifting those factors of production, along with production itself, from place to place.

Let me put it differently.  It is only a slight exaggeration to say that in today’s conversations the United States and France and China and Bangladesh are spoken of in the way that we used to speak about New York and California and Alabama.  

So this afternoon I would like to talk, in a rather tentative and exploratory way, about the collision between these two domains.  The domain of the semi-autonomous welfare state and the domain of globalization.  I’d like to raise a few questions about how they are intersecting, and about how their interactions are likely to affect each domain in the near future.  And I’d like to make a few suggestions about how different perspectives might lead one to make radically different predictions.

I will begin with the world of the welfare state.  In 1941, the future Archbishop of Canterbury, William Temple, published the book, Citizen and Churchman.  In it, he declared: "The state is a servant and instrument of God for the preservation of Justice and for the promotion of human welfare."  The concept was not new.  Almost a century earlier, Nassau Senior, in his Oxford lectures, had said, “It is the duty of a government to do whatever is conducive to the welfare of the governed.”  Nonetheless, the popular convention is to credit Archbishop Temple with having brought the term “welfare state” into widespread popular usage.

The term has come to embrace many different forms of public effort to protect individuals from material deprivation – either relative to a socially defined baseline or relative to a personal life-course baseline to which they had grown accustomed.  

Different nations have employed very different kinds of programs to create their welfare states.  Some welfare states just tried to fill in the gaps, to catch people who fall through the cracks.  These states emphasized means-tested programs.  Others were more universal, offering programs of partial earnings replacement or even a flat benefit to all citizens, in an effort to bolster solidarity among all the citizenry on account of their shared participation in the system.

But, to one degree or another, all industrialized societies developed pension, disability insurance, health care, child care, and unemployment programs to care for their most vulnerable members.

I find it helpful to think of the different kinds of welfare state programs as a set of three rings radiating out from a core.  At different times and in different places, the term has been used to refer to the inner ring, or to the inner two rings, or to all three rings.

The inner ring includes programs that transfer income.  I use the term “income” broadly, to embrace a variety of purely private goods such as cash, food, shelter, health care, and child care (focusing on the benefits that child care offer to the parent).  These inner-ring, income transfer programs are of two types.  

The first comprises so-called “means tested programs,” programs of assistance that require a demonstration of poverty as a prerequisite to eligibility for benefits.  It is conventional to trace the origins of means-tested income transfer programs back to the English Poor Law of 1601.  That Law, a refinement of a 1597 Law which had in turn superseded a wide range of local enactments dating back into the fourteenth century, required local parishes to give work to the able-bodied poor and relief for the so-called impotent poor.

The second type of inner-ring, income transfer programs are so-called “social insurance” programs.  These programs do not employ a means test as an absolute screen on eligibility, although they might influence the scale of benefits.  It is conventional to trace the origins of social insurance programs back to Otto von Bismarck’s “Speech from the Throne” in 1881.  In the succeeding decade, Germany established three compulsory national programs providing insurance against sickness, accidents, and old age and invalidity.

The middle ring of welfare state programs includes programs that provide education – human capital investment – a benefit that is primarily a private good but has public good dimensions to it.  Such programs can begin shortly after birth and can extend through preschool, primary and secondary school, college, graduate school, and then take various forms of training and retraining throughout adulthood.

The outer ring of welfare state programs are regulatory in nature.  Not every element of the regulatory state can be thought of as an aspect of the welfare state, but many scholars – especially Europeans – understand the welfare state to include those regulatory systems that enhance the position of workers in their relationships with their employers.   Laws affecting wages and hours, laws affecting working conditions, laws protecting the rights of workers to band together to negotiate with employers – all of these serve to enhance the material well-being of people who sell their labor in the marketplace.

The twentieth century saw the gradual emergence of welfare states throughout the industrialized world.

Why was that?  One major driving force was the worldwide great depression of the 1930’s.  The depression taught two important lessons.  First, markets fail.  I will say more about that in a moment.  Second, life isn’t fair.  People can do everything right – learn skills, work hard, stay out of trouble – and still discover that, for reasons beyond their control, they are out of work and destitute.

Let me say a little more about market failure.  I want to talk about market failures that lead to inefficiencies within the economy, and market failures that lead to inhumanity within the economy.

Let’s begin with the standard list of market failures that lead to inefficiencies in the production and distribution of goods and services.  

- You have the problem of asymmetric information, where one party to a sale knows something the other party doesn’t.

- You have the problem of externalities, where the costs of an activity aren’t borne by the same entity that reaps the benefits of that activity.

- You have problems of monopoly and oligopoly, where a seller of a good or service is able to extract a so-called rent on account of the lack of competition.

- You have the problems of so-called public goods, where many people are able to enjoy the benefits of someone else’s purchase without having to share in the costs.

- You have the problems of immature markets, where for any of a number of reasons the resources simply are not available to do things that make economic sense, such as borrowing against one’s future earning capacity.

The early twentieth century saw each of these kinds of market failure become significant causes of inefficiency in most industrialized economies, and what followed was the emergence of the regulatory state, or mixed economy, a system of legal rules and enforcement mechanisms designed to counteract them.

So monopoly and oligopoly problems yielded to antitrust and competition laws.  Information issues yielded to the securities laws.  Bargaining power issues yielded to the development of legally sheltered worker unions.  Public goods were financed through public taxation and then produced either directly or through privatization.  And new markets were created, often subsidized or insured by public funds.

It was, quite frankly, a very good run.  And well-regulated mixed economies started to significantly outperform any of the alternative systems of production that were being offered up around the planet.

Over the course of roughly the same period we also found a way to deal with the problem of markets being inhumane.

What do I mean by markets being inhumane?  Markets compensate people for producing something that others are interested in buying.  But sometimes individuals lack the capacity to produce things that others want to buy.  

Maybe they lack that capacity because they’re old.  Or sick.  Or feeble.  Or because they invested heavily in mastering a skill that has suddenly become obsolete.  There’s not a lot of demand nowadays for typewriter repair mechanics and even auto repair mechanics now find that computers and robots do a lot of their work much better.  (As an aside, I sometimes ask myself how much of the work of lawyers and teachers, and especially law professors, might be headed for a similar kind of obsolescence.)  

Sometimes this lack of market-valued capacity is temporary.  Maybe I learned how to operate a computer punch-card machine, and that’s obsolete, but in only a few months I can learn how to operate a word processor and become marketable again.  Or maybe I just had a baby and need to be home for a little while to care for it, but will be back in the paid workforce soon enough.

But sometimes the lack is permanent.  Maybe I’ve suffered an injury that will keep me unemployable for the rest of my life.

Up until the 1980’s, industrialized societies tended to keep expanding the range of public programs designed to mitigate some of the inhumanities of the market place.  In the United States, for example, the Progressive Era brought us unemployment insurance, the New Deal brought us social security pensions, aid to the aged, blind, and disabled, and aid to dependent children.  The Great Society brought us Medicare and Medicaid and expanded programs of subsidized housing.

Of course, on the global scale the American welfare state was quite modest.  Other nations did much more, offering similar programs at much higher levels of generosity, as well as other programs – like child care, children’s allowances, and the like. 

There is a long and robust literature analyzing and debating the reasons why welfare states evolved in different societies, and why different countries’ welfare states assumed different structural forms.

Most such accounts include reference to overarching commitments of societal principle – usually to the reduction of suffering and to the creation of opportunities to prosper within a market economy.

Many accounts also note the utility of welfare states in promoting the self-interest of one or another social class within society.  Thus, some accounts have stressed the value of welfare states as instruments through which the non-poor maintain control over the poor.  Others have stressed the utility of welfare states in maintaining industrial stability.  Others have stressed their capacity to enhance sentiments of community solidarity.  Still others have pointed to their utility in promoting fertility.

And some accounts have explored how the contours of different welfare states have been shaped by structural features of different societies, from corporatism to bureaucracy, from racism to patriarchy.  These accounts have tended to stress the convergence of welfare states around common paradigms, placing less emphasis on how local sociopolitical conditions generate different outcomes in different contexts.

Sixteen years ago, Gosta Esping-Anderson painted a highly influential portrait of the universe of welfare states in his book, The Three Worlds of Welfare Capitalism (1990).  Esping-Anderson described three different welfare state regimes:  liberal (primarily means-tested), conservative or Christian democratic (universal within occupational strata), and social democratic (universal).  As archetypes of the three regimes, think of the U.S., Germany, and Sweden.  The key dimension of difference among the regimes was what he termed “decommodification” – the extent to which a welfare state strengthened a worker’s power to bargain over wages and working conditions by giving her or him the option of refusing to work without fear of starvation.

Naturally, the accuracy of Esping-Anderson’s portrait has been debated.  But even if we grant that it captured an important descriptive truth in 1990, it has proved to be a snapshot of a rapidly changing world.  The past quarter century has seen a dramatic shift in the nature and extent of the welfare state in industrialized societies.  Perhaps “shift” is too generic a term.  Let me be more direct.  The past quarter century has halted the expansion of the welfare state and, in some areas, has brought contraction.

This change of direction has spawned an animated scholarly discussion – of its extent, its causes, and its larger meanings.  Some see the changes as relatively minor adjustments in course, others as much more profound changes in direction.  

One of the most thoughtful analyses was presented by Neil Gilbert in his 2002 book, “Transformation of the Welfare State.”  In that book, Gilbert described the shift as a change from the “welfare state,” focused primarily on providing social protection to the individual’s interest in material well-being, to the “enabling state,” focused primarily on providing public support for private responsibility -- the responsibility of private individuals and voluntary organizations for people’s material well-being.

What caused the reversal of what had seemed to be an inevitable never-ending expansion of the scope of the welfare state?  

Some see it as a simple, rational course correction.  The structure and scale of programs had become a “trap” for the people it was supposed to help, deterring them from workforce participation and thereby undermining the long-term well-being of the beneficiaries and their families.

Others see the dominant force as the completion of the process of de-industrialization.  In one version of this argument, growth of the welfare state came because the economy was shifting from manufacturing to services and workers in the vulnerable manufacturing sector successfully agitated for public protection.  As the process of de-industrialization was completed (and a second shift – from services to knowledge enterprises began), the political energy for continued expansion dried up.

Others point to the interaction of domestic fiscal issues and domestic politics.  According to this view, political cultures create maximum levels of taxation that a society is willing to endure.  Countries bumped into those ceilings in the 1980’s, just as they were facing new demands for other forms of public expenditure.  The result was tremendous pressure to contract the welfare state.

Still others have argued that the dominant factor was political structure – such qualities as presidentialism – a concentration of policymaking power in the executive – and decentralization.

The most popular explanation, however, has been globalization.  Popular in the sense that it has been politically popular, invoked in debate, in the form, “We have to cut back on our welfare state if we are to be competitive in a global economy.”  And it’s been popular in the popular press. 

Here is the popular globalization argument in a nutshell.  During the 25 years from 1946 to 1971, the Bretton Woods agreements gave national governments a lot of flexibility.  They set the value of their own currencies.  They managed capital flows in and out of their countries.  The International Monetary Fund helped to bridge currency reserve imbalances.

During this time period nations also had a lot of policy tools available with respect to their economies.  They could run deficits.  They could print money and accept inflation.  They could interfere with free trade – the General Agreement on Tariffs and Trade was a weak instrument, with lots of areas that it left untouched.  So tariffs were still a big part of the scene, as were export restrictions, import quotas, and subsidies.

The trend since 1971 has been to reduce dramatically the power of national governments to regulate the movement of capital, goods, and services.  The first step was the abandonment of the gold standard.  In response to overwhelming market pressures, Richard Nixon announced that the dollar would no longer be convertible to gold at the rate of $35 per ounce, and soon currencies were traded freely on markets for foreign exchange.  During the 1970’s and 1980’s, developed countries lifted virtually all controls on capital.  And during the 1990’s, as part of the so-called “Washington consensus,” key institutions of international finance pressured developing countries to remove their capital controls as well.

Meanwhile, in the world of tariffs and trade, the multinational system knows as the GATT kept expanding.  It came to include more and more countries.  And whereas early rounds were primarily a mechanism through which the members would all agree to lower tariff rates at the same time, the Kennedy and Tokyo rounds began to take on the ability of countries to use so-called non-tariff barriers such as anti-dumping rules.  The Uruguay round reached out to promote trade liberalization with regard to export subsidies, intellectual property, subsidies, services, and foreign investment.  It also created a WTO with much greater power to enforce its decisions in the area of trade liberalization.

At the same time that national governmental power was giving way to a philosophy of free movement of capital, transaction costs that used to inhibit movement were also withering away – technological improvements such as containerization and infrastructure investments such as transoceanic fiber optic cable were reducing transportation and communication costs, English emerged as a global commercial language, food could travel longer distances without spoiling, etc.

That’s globalization.  Over the past fifteen years we have successfully crafted an interdependent global economy that engages a vastly larger portion of humanity than ever before, and that is well on its way to engaging virtually everyone on the planet.  That development has meant that we have seen poverty rates fall faster than they have ever fallen before, and we have also seen virtually unprecedented rates of overall economic growth.  People everywhere are living better because of globalization.

So how could all these wonderful changes have put pressure on welfare states?  With its newfound freedom to move around, capital would start to roam the world in search of ever-high rates of return on investment.  Thanks to pressures from the international governmental organizations, it could feel safe entering into newly developing countries, knowing that the local governments had relinquished many of the tools that might have made such investments riskier in a prior era.  They could move manufacturing and production into countries where labor costs were 1/5 or 1/10 or 1/20 what they are in the industrialized world.

In the most visible form, what we know as “outsourcing,” existing companies would pack up and move, closing down operations in one country while re-starting those same operations in another.  But in a world of free movement of capital, the same thing can happen in much subtler ways.  The company can keep its existing operations just as they were, but could locate all its expanded activities in low-labor-cost areas, when it would previously have located them near the existing production base.  Or the company can stay loyal to its home base, watch a new competitor emerge with much lower costs, and then go bankrupt trying to compete with that seller of lower-priced finished goods in the retail marketplace.

In such a world, companies’ loyalties would necessarily be to their shareholders and not to their putative home towns or home countries.  They would organize their activities so that at all times they could keep their production costs to a minimum, relative to the value of the goods and services they produce.  They would develop production facilities in two or three different parts of the world, and they would develop a rapid-response capacity to quickly shift production from facility to facility, in response to shifting cost structures.

And companies would not be shy in telling national governments about their strategies.  They would tell those governments, “We pay close attention to labor costs per unit of production.  If you increase those costs to us through third-ring regulations of the labor markets, we’re gone.  And if you increase those costs to us through first-ring social welfare programs that are paid for by taxes that ultimately are borne by us, we’re gone again.”

Hearing such pressures, and desperate to promote the employment of their citizens in multinational firms, national governments would engage in so-called “tax competition.”  They would do everything possible to lower the taxes that companies would have to bear, directly or indirectly.  And especially taxes on labor.  

With their tax bases shrinking due to tax competition, governments would thrash about trying to find ways to pay for their welfare states.  But they would find that the global economy will punish them if they do the things they could do in the old days, like undervaluing their currencies, or inflating them, or running huge budget deficits.  In the end they would be forced to cut back, producing a so-called “race to the bottom.”

Interestingly, this globalization argument has been popular with academics, but in a different way.  It has proven to be a popular thesis for researchers to test and refute.  I have been collecting books from places like the Oxford University Press that include lots of chapters refuting the popular globalization thesis.

Paul Pierson has a nice sidebar on this phenomenon in one of those books.  He asks, “Why has the globalization thesis been widely accepted in popular discussion if the direct evidence supporting it is at best weak?  The answer is straightforward.  What makes the globalization thesis so convincing to many is the undeniable difficulty that governments now face in funding their social policy commitments.  Austerity has been on the agenda everywhere…. The correlation in timing between globalization on the one hand, and both mounting demands for austerity and strong indications of lost policy making capacity on the other, has lent credence to claims of a causal relationship between globalization and a weakening nation-state.”

Now I would hasten to add that Pierson may be excessively optimistic about the extent of empirical support for the globalization story I told a minute ago.  Recently Assaf Razin and Efraim Sadka published a study that shows support for the popular story.

Moreover, my own anecdotal experiences of the past year show that, even if the popular story is false, there are a lot of people out in the world who believe it is true and who act as if it were true.

Listen to a businessman whom I interviewed in Shanghai about ten months ago.

“Price competition is just ruthless.  Our business model requires us to be the price leader, and that means we have to be the lowest-cost producer.  Today that means we’re in China.  But we’ve got our eyes on Vietnam, on Bangladesh, on Brazil.  We’re watching wages, productivity, currency valuations, and especially tax rates.  We’re ready to move, whenever we have to, in order to keep chasing down the price curve.”

What if the popular story is right?  What does that mean?  Does that mean that, in the twentieth century, we are going to see the welfare state ‘wither away,’ not because it is no longer needed but rather because it is a luxury nobody can afford in this brave new world?

That seems implausible for many reasons, but the primary reason is political.  It would be a mistake to underestimate the power of capital as it is manifested through transnational businesses and intergovernmental organizations.  That power provides strong pressure for free capital markets and free trade.

But it would also be a mistake to underestimate the power of politics.  If enough constituents in the democracies of North America and Europe scream loudly enough, politicians will respond, no matter what the theoretically correct global welfare maximizing policy might be.  Politics may no longer be local, but it’s certainly not global.

Moreover, the power of the large democracies is real.  If the economies of Europe and North America were to cut back, it would take a braver soul than I to predict that global business would just pack up and leave, shifting all its activities to the rest of the world rather than pay whatever hold-up price the western countries might be exacting.

Let me put the point slightly differently.  The popular globalization story assumes that there is a political conversation going on in national capitals in which one side says, “Look, our workers need to prosper in globalized markets.  To do that, we simply can no longer afford our welfare state.”  The political counterstory raises the possibility of the following response.  “Look, our citizens need our welfare state.  To do that, we simply can no longer afford globalized markets.”

Some scholars have advanced the argument in almost this way.  Elmar Rieger and Stephan Leibfried have asserted that, “The unlikely emergence of a system of open and increasingly integrated national economies … was made possible by an autonomous social policy. … The claims for social protection and for the compensatory equalization of distributional market outcomes for the politically and electorally significant groups in society had to be effectively fulfilled before foreign trade barriers could be lowered.”  

Indeed, as a matter of theoretical principle and domestic political reality, trade liberalization should require expansion of some key aspects of the welfare state.  Under Ricardian principles of liberal trade, national specialization along the lines of comparative advantage will create winners and losers within each country.  To protect the losers, who are harmed through no fault of their own, countries need to make heavier investments in such welfare state features as trade adjustment assistance, in order to keep their workers agile.  And they need to be prepared for rising numbers of workers who are rendered technologically obsolete.

But what if the state cannot figure out a way to pay for such programs without scaring global capital away?  What if it refused to redistribute the benefits of globalization so that the losers remained losers?  The implicit argument here is quite scary.  In his blurb on the back of Rieger and Leibfried’s book, Hugh Heclo wrote, “This book [shows] how the modern welfare state has served as the midwife for globalization.  It offers a powerful warning for those who take globalization for granted.  What the midwife nurtured, she may also help strangle.”

But what a price that would exact!  Whatever one might believe about the distribution of wins and losses internally, within countries, as a response to globalization, it has clearly provided enormous benefits at the global level.  Hundreds of millions of people have been lifted out of poverty in China as a result of liberalized trade.  The prices of what were once luxury goods have plummeted, so that those goods can be enjoyed by hundreds of millions of people instead of a few thousand.  Isn’t there a way for us to avoid seeing such progress be stalled, if not strangled?

Which brings me to my title, “From Welfare State to Welfare Planet.”  In 1960, the extraordinary thinker Gunnar Myrdal wrote a book called, Beyond the Welfare State, in which he speculated about the transition to a “welfare world.”  His specific ideas have no great bearing today, but his general idea suggests one way out of the box.

What if we were to move from a welfare state to a welfare planet?  What if social protections were roughly the same everywhere?  What if all governmens paid for them in roughly the same way?  What if, in stead of engaging in tax competition, they engaged in tax cooperation, creating a kind of cartel?  In such a world, capital could and would continue to move freely.  But differences in welfare states would no longer make a difference.  There would be no reason for citizens and politicians to shrink the scope of their social programs in order to gain an advantage in the international markets.

But who would create and maintain such a system? Presumably some institution of global governance would have to set worldwide baseline standards for social protection.  In other words, they would create the terms on which we would move from a welfare state to a welfare planet.

Right now, there are institutions of global governance -- the WTO and the Bretton Woods organizations.  But among them only the WTO could arguably claim jurisdiction over such a topic, making social welfare rights a predicate for increased trade liberalization.  And frankly, with the collapse of the Doha round, it seems somewhat laughable to think of the WTO system taking on anything as ambitious as a universal social welfare floor.

Is there some other way?  Some decentralized, negotiated way, to get there?  I don’t know the answer.  The path may be very messy.  It may require the emergence of a coalition of poltical and business leaders capable of developing a new consensus, perhaps pointing to the dangers of failing to do so without needing for us all to experience those dangers first-hand.

The only other possibility I have been able to come up with comes, interestingly, from a very different place.  It comes from China.

There is at present a serious inquiry within China into the question of what its welfare state should ultimately look like.  As it transitions from a planned economy to a mixed economy, China must develop a replacement for its old system of social protections if it is to avoid its own problems of domestic instability.

China has an opportunity to develop financing systems for its social welfare programs that do not appear immediately as a tax on movable capital or as an additional cost of using Chinese labor.  And even to the extent the price of its social programs do appear in one of those ways, it is not entirely clear that global capital will respond quite as glibly as that Shanghai businessman suggested.  The sheer size of the labor pool in China is without parallel in the rest of the world.  If every multinational company that is currently producing in China tried to shift production to, say, Vietnam, the overheated demand for Vietnamese labor would undoubtedly bid away any potential price differences in short order.  And there are nontrivial extra costs associated with making the transition; labor and capital markets are not quite so frictionless as we sometimes assume.

And once it acts, China’s decisions could well have the effect of establishing a kind of global baseline.  In other countries, the threat of “moving to China” would not mean a threat to capture cost savings measured between welfare state A and nothing state B.  Rather, the threat would be based on the differences between welfare state A and welfare state B.  And those differences might be small enough to keep a rough global balance.

Or maybe not.

The history of the welfare state over the past 65 years has been a history of expansion, maturation, siege, and partial retrenchment.  Globalization may or may not be the cause of today’s pressures to cut back.  But I believe it will be a factor in how the welfare state continues to evolve.  And my optimistic side tells me that, in the end, globalization could play the central role in the transition, 50 years after Myrdal, from welfare state to welfare planet.