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SOCIAL DEMOCRACY AND ECONOMIC DEVELOPMENT (PART III)

July 17, 2015

SOCIAL DEMOCRACY AND ECONOMIC DEVELOPMENT (PART III)

Sachs in his book breaks down the three kinds of capitalist societies. In the first group are the social-welfare states of Denmark, Finland, Norway and Sweden, and even though these countries have of late marginally adjusted social expenditure as a share of GNP, all continue to maintain extensive systems of social insurance and high levels of social expenditure. The second group of countries includes the core European continental countries of the EU, notably Germany, France, Italy and others which Sachs designates as mixed economies because they fall between the social-welfare system and the free-market system. The third group of countries includes the (relatively) free-market countries of the United States, Britain, Canada, Australia and a few others and Sachs notes that countries in this category have much lower social spending as a share of GNP than do the mixed economies and the social-welfare states. (Such overall categorizations are, of course, subject to variations in social expenditures in countries within each such group, and Sachs picked ours out for contrast with all of the others.)

The social-welfare Nordic states not only provide a high level of social expenditures but also provide a high level of direct services, such as childcare and care for the elderly, which are important not only for the services themselves but because they provide employment for otherwise hard-to-employ individuals   as part of the government’s labor market strategy. Such employees may have had low school performance or have disabilities themselves. Apparently the idea is to make employees and taxpayers out of many who would perhaps otherwise themselves be welfare recipients in a sensible choice of how such money is to be spent. By making such people employees and taxpayers, the public gets something for its money; revenues and money it would have had to spend anyway with the additional plus that women who typically stay at home with young children are released to the job market or for further education, or both, thus adding to family median wages and providing new tax revenues to government.

So, finally, let’s get to just how the economies of the Nordic countries with their high social expenditures are faring as compared with how our economy is faring, considering that we are at the bottom in terms of total public-sector social outlays even among the other free market countries with whom we are grouped), i.e., the worst in the developed world.

In addition to being the developed world’s biggest cheapskate in overall social expenditure and despite the fact that we are among the richest of all the countries in per capita GNP, we have the dubious though predictable distinction of having by far the highest poverty rate in the developed world. How could this be? Easy answer – we embrace policies which enrich the already rich and impoverish the already impoverished via a political process fueled by “campaign contributions.”

Sachs’s graphic (which I cannot reproduce here) sets out three measures of “inequality and poverty indicators” for the three categories of states (free-market, mixed economies and social-welfare) as well as our own individual economy. The United States ranks last in every category, i.e., (1) the poverty rate, (2) the share of disposable income to the lowest quintile, and (3) the so-called Gini-Coefficient (a measure of how equally wealth is distributed across the country). We are last in all measures in all three groups measured, including those in our own “free market” economy.  Such dismal numbers come as no surprise to me and only further buttress my view in one blog after another that we show little interest in investing in our people and a lot of interest if investing in the rich and investment class in a continuing and disgusting display of impoverishment of our people and service as an ATM machine for Wall Street.

Free-market critics of the welfare state loudly proclaim that high social spending paid for by high rates of taxation would be harmful to economic prosperity by reducing the incentives to hire workers and the incentives to save and invest. This is false. Social-welfare states such as the Nordic states have a higher employment rate (number of workers as a share of working-age population) than the free market countries. The free-market critics also say high taxation leads to less wealth and per capita income and leads to lower living standards. That is also false. On average, the social-welfare states have a higher per capita GNP than the free-market countries (among whom we rank last to our poorest quintile), and as Sachs notes: “The high tax burden in the social-welfare states has obviously not crushed the economy.” Furthermore, the social-welfare states achieve their high incomes with greater equality, and I need not reiterate here how our Gini Coefficient (measure of inequality) is the worst in the developed countries.

Piketty ties our inequality to Bush’s Great Recession of 2008 per the following direct quote from his blockbuster book, Capital in the Twenty-First Century, as follows: “In my view, there is absolutely no doubt that the increase of inequality in the United States contributed to the nation’s financial instability. The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms.” It’s the same old story – aggregate demand (a/k/a purchasing power) goes south as the Gini-Coefficient (measure of inequality) peaks. Consumers have to have money, and as an old judge told me, “You can’t get a quart out of a pint jar.” Wages rather than risky mortgage loans should have provided such wherewithal to consumers.

Freed from Wall Street propaganda and pretended hysteria of coming socialism, the truth is that social-welfare states have achieved high levels of income, low rates of poverty, and a more equal distribution of income than the free-market societies (within which we rank a distant last in any event). Social-welfare does not mean socialist – all the Nordic countries are prosperous democracies with capitalist economies. These countries have high rates of national savings despite the high tax burden and they have balanced budgets in spite of their large social outlays because the high public spending is matched by adequate taxation. In short, per Sachs: “The Nordic countries have achieved vibrant, well-functioning democracies that assure a very high level of social well-being for all of its citizens.” His conclusion is based on evidence and not propaganda. We would do well to emulate the Nordic experience.

The social-welfare states are ahead of the curve in technological excellence as well. Sweden and Finland prosper on their high-tech sectors in information and communications technologies. As heavy investors both in R & D and in higher education and with very high rates of patents per capita, the social-welfare countries are ranked far ahead of the so-called free-market countries in the World Forum’s Technology average rankings.

Perhaps it will occur at some point to policymakers who along with the rest of us and our country are en route to Third World status (a trip financed by Wall Street) that there is an alternative to oblivion and that it exists before our very eyes. It has occurred to me. Our current system as played out with the corrupting influence of money married to power isn’t working; it is truly time for a change.   GERALD    E

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