Re-Theorizing the Welfare State and the Political Economy of Neoliberalism’s Campaign Against It

Abstract:

This article seeks to frame neoliberalism’s relation to the welfare state. At issue are competing views regarding the size and organization of the welfare state. The article presents a new theoretical framework that distinguishes between modes of production and financing of the welfare estate. The framework helps understand both comparative country welfare states and the goals of the neoliberal attempt to refashion the welfare state. The article then explores the political economy strategy behind the neoliberal campaign. It argues neoliberalism seeks to politically discredit the traditional welfare state and change the economic structure so that the latter becomes unviable. Economists have been active agents in this process.

Keywords:

• welfare state
• neoliberalism
• mode of production
• mode of financing

• JEL Classification Codes: H1
• H10
• H50

Notes

1 Neoliberalism is a political economy philosophy. The political dimension is that free markets are the best way of protecting freedom. The economic dimension is that free markets are the best way of providing economic prosperity. For a brief discussion of neoliberalism see Thomas Palley (2012, 9–20). In practice, neoliberalism ends up being a business friendly policy paradigm that rewards rent seeking, shifts income from labor to capital, and increases income inequality (see Galbraith 2008).

2 The Beveridge Report is a UK government report, officially titled Social Insurance and Allied Services, published in November 1942.

3 See https://leftfootforward.org/2018/06/70-years-of-nhs-privatisation-is-a-race-to-the-bottom-the-nhs-needs-public-investment/

4 Tax expenditures are deductions given to companies and individual tax payers that reduce their tax liability, thereby reducing tax revenues. Tax revenues are thereby spent; hence, the terminology of tax expenditures.

5 Education may produce multiplicative interaction effects whereby the economic value of my education is increased if you are also educated.

6 Angus Burgin (2012) provides a history of the rise of neoliberalism that includes coverage of the business community’s contribution.

7 Irwin Garfinkel and Timothy Smeeding (2015, 14–20) concisely summarize these contributions of the welfare state.

8 Now that the economic contradictions of neoliberalism have surfaced with the financial crisis of 2008, the crystal ball is unusually murky. Growth may fall further, but the implications for volatility are unclear. Stagnation (i.e., even slower trend growth) may be associated with even lower volatility. Alternatively, it could be associated with boom-bust cycles around slower trend growth, thereby resembling the pre-welfare state era (1871–1939).

9 Tax subsidized private homeownership undermines working and middle class support for public housing. First, house price inflation yields a private capital gain, which provides an incentive to own rather than rent. Second, financialization promotes ownership both by making available easier financing and by accelerating house price inflation. The capital gains benefit individual homeowners but viewed from a systemic perspective they have a significant element of robbing Peter to pay Paul. Housing is transformed into an asset market in which working people bid against themselves. Younger generations are squeezed for the benefit of older generations, while all are squeezed by higher interest rates that are needed to stabilize the economy in the face of house price inflation.

10 This is an implication of efficiency wage theory (Shapiro and Stiglitz 1984). Welfare assistance and unemployment insurance reduce the deterrence effect of unemployment, requiring firms to pay more to elicit effort from workers. The resulting higher wage reduces the demand for labor.

11 According to Manmohan Kumar and Dennis Quinn (2012), the logic behind this tax rate dynamic is a race to the bottom in corporate tax rates led by the United States. In their model, corporate tax rates are determined according to a Stackelberg equilibrium, with the United States acting as Stackelberg leader. When the United States lowers its corporate tax rates, other countries follow to stay competitive. President Trump’s latest round of corporate tax cuts (signed into law in 2017) are therefore likely to trigger a global round of corporate tax cuts in response.

12 These include inadequate contributions, poor individual investment performance, high fees that diminish rates of return, stock market risk, and the failure of individuals to do the cross-walk from wealth accumulated to implied future income.

13 In effect, the bail-out of the financial system transformed the financial crisis into a fiscal crisis. This was particularly true in Greece, Ireland, and Portugal. Even if bail-outs were the best policy response (which is very debatable), they still left a political legacy of public misunderstanding whereby the increase in budget deficits and public debt was misunderstood as reflecting government profligacy. Additionally, the recession caused by the financial crisis, lowered tax revenues. That created a significant induced echo effect which further increased budget deficits and the public debt.

14 It is sometimes claimed that adverse demographic developments promise to make the existing welfare state unaffordable. It is true that aging populations will increase pension claims, but there are offsetting factors. The welfare state also supports the young via education, family assistance, and health care. The financial burden on the welfare state is determined by the “dependency ratio” which is the ratio of welfare state dependents to the working population. Dependents consist of young and old. The dependency ratio has actually decreased over time because of declining family size, while labor force participation has increased. A second reason the welfare state remains affordable is productivity growth. Since workers are more productive, it is as if the working population is growing faster measured in “effective” workers. That lowers the productivity adjusted dependency ratio which is the ratio of welfare state dependents to the effective working population. These issues are discussed in Palley (1998).

15 Greta Krippner (2005) and Gerald Epstein (2004) were early contributors to the concept of financialization. David Zalewski and Charles Whalen (2010) argue that financialization is associated with a rise in income inequality across countries. Thomas Palley (2013) provides a comprehensive economic analysis of financialization.

Additional information

Notes on contributors

Thomas Palley

Thomas Palley is an independent economist living in Washington, D.C.