This version: 25 January 2000

Is there a future for social democracy ?

Quiggin, J. (2000), 'Is there a future for social democracy?', <i>Australian Options</i> 20, 6-10.</p>

John Quiggin

Australian Research Council Senior Fellow

Department of Economics

Faculty of Economics and Commerce

Australian National University

EMAIL John.Quiggin@anu.edu.au

FAX + 61 2 62495124

Phone + 61 2 82494602 (bh)

+ 61 2 62578992(ah)

http://ecocomm.anu.edu.au/quiggin

 I thank Nancy Wallace for helpful comments and criticism.

Is there a future for social democracy ?

When the Whitlam government was elected nearly thirty years ago, the future seemed bright for the Left in Australia and elsewhere. The main goals of the social-democratic movement (full employment, a comprehensive welfare state, and so on) had largely been achieved. It seemed reasonable to assume that further gradual progress towards a society which embodied the socialist ideal 'from each according to their abilities, to each according to their needs' would take place over time.[1]

The economic collapse of the mid-1970s dashed these hopes. The political Èlite reacted to the failure of Keynesian stabilisation policies to maintain the full employment of the 1950s and 1960s by returning to the free-market orthodoxy of the period before World War II. They advocated privatisation, deregulation and a reduction in the scale and scope of government activity, By contrast, for most ordinary people old enough to remember them, the 1950s and 1960s stand out as an economic golden age of full employment, equality and opportunity for all.

As a result, the public policy debate in Australia and other countries exhibits a curious paradox. On the one hand, there is a dominant neoliberal consensus, particularly in the English-speaking countries, that the free-market has triumphed, and that social-democratic and socialist ideas are obsolete. On the other hand, the share of national income devoted to government expenditure (and therefore the share paid in taxes) remains high. Advocates of radical cuts in the size and scope of the public sector have suffered repeated electoral defeats (recently, for example, in Victoria and New Zealand).

One political response to this paradox has been the search for a 'Third Way', combining the political appeal of social democracy with the assumed economic superiority of the free market. However, it remains unclear whether the Third Way is a genuinely new approach to social and economic policy, or merely a convenient slogan.

If the meaning of the 'Third Way' is unclear, the alternative options for the Left are even more so. In economic and social policy, the Left has been engaged in a continuous defensive struggle for the past two decades, leaving little time for the development of positive alternatives. There has been relatively little analysis of the strengths and weaknesses of the policies of the 'golden age', or of the reasons for the crisis of the 1970s and the failure of social-democratic institutions to respond adequately to that crisis. Such analysis is essential if the social-democratic model is to be revitalised.

The Third Way

The policy content of the 'Third Way' differs from country to country in a way which suggests that, in many cases, advocacy of a Third Way is little more than a rhetorical cover for the old-fashioned political strategy of seeking the middle ground. Nevertheless, 'Third Way' theorists such as Giddens (1994), and their Australian followers such as Latham (1998) and Tanner (1999) have had a significant impact on political thinking, and their arguments require a response.

The rhetoric and assumptions of the Third Way

The neoliberal presumption that markets are invariably superior to governments in the provision of goods and services is accepted with limited qualifications. Advocates of the Third Way generally support comprehensive programs of commercialisation and corporatisation of public services, leading ultimately to privatisation. The main way in which supporters of the Third Way differ from neoliberals is in their support for education and, to a lesser extent, health services. Among advocates of the Third Way, support for free-market experiments and cuts in public expenditure on education is tempered by the desire to expand the total provision of education services. As in other aspects of the Third Way, the aim is to transcend the traditional dispute between advocates and opponents of cuts in public expenditure, but the outcome is more often an uneasy compromise.

The egalitarianism of traditional social democracy is abandoned, to be replaced by a view which is clearly favourable to high-income earners, with provision of services for the poor being considered primarily in terms of 'safety nets'. This shift is frequently expressed in terms of older debates about 'equality of opportunity' as opposed to 'equality of outcomes'. However, although the advocates of the Third Way are particularly friendly to the upwardly mobile, the hostility to inherited privilege that characterised earlier advocates of equality of opportunity has largely disappeared.

Third Way thinking relies critically on the assumed superiority of markets over governments. In general, Third Way advocates accept that interventionist policies were appropriate during the long boom, but claim that globalisation and technological change have rendered such policies obsolete.However, the case for the superiority of the free market rests almost entirely on the strong economic performance of the United States during the 1990s. If the current speculative boom, like most such booms, ends in collapse, the assumptions underpinning the Third Way will collapse along with it.

The second critical assumption underlying the 'Third Way' is that egalitarian policies based on redistributive taxation are no longer sustainable. In part, this assumption is based on acceptance of free-market economic views about the need for incentives. However, there is also a political assumption that the electorate is now dominated by what Latham calls 'downward envy'. That is, Latham assumes that voters who are (or regard themselves) as 'middle-income earners' are not particularly concerned about the high incomes of the better-off, but resent paying taxes to benefit those worse off than themselves.

There is, undoubtedly, some resentment among employed workers at paying taxes to support social security beneficiaries seen as undeserving, particularly including single parents and the young unemployed. However, hostility to the unemployed was much greater in the late 1970s, when a large proportion of the unemployed were teenagers who could easily be stigmatised as 'dole bludgers', than it is today when unemployment affects a much broader class of workers, and secure employment is almost a thing of the past.

The social democratic alternative

Public expenditure and taxation

The neoliberal orthodoxy is based on the assumption that our economic and social problems arise mainly from the intrusion of government into areas best left to the free market. The reality, however, is the opposite. The range of social problems for which market solutions are inadequate is so great that the capacity of government to address them has been overstretched. Health care, education, the environment, public safety , infrastructure and social insurance are all areas where market outcomes are both inefficient and inequitable, and they are all growing in importanceThe return of mass unemployment has placed further demands on the social security system.

However, the capacity of the tax system to raise revenue is limited. The mismatch between steadily growing demands for public expenditure and a limited capacity to raise revenue which emerged in the 1970s, was termed 'the fiscal crisis of the state' (O'Connor 1973). Except that the problem is clearly a chronic complaint rather than a 'crisis' leading to a radical resolution, this term is still apposite.

There are no easy answers to this problem, or rather, the easy answers have all proved to be wrong. In the early 1970s, the Whitlam government assumed that bracket creep (the automatic increase in average income tax rates generated by a progressive income tax system in an inflationary environment) would provide all the additional revenue needed to finance an ambitious program of public expenditure. However, workers were unwilling to accept erosion of their post-tax wages, so that reliance on bracket creep contributed to both the wage explosion of 1973-4 and the 'tax revolt' of the late 1970s.

If a renewed social democracy is to succeed, the issue of taxation cannot be dodged. The choice between lower taxes and improved public services must be debated openly. There is a good deal of evidence that, when faced with this choice, the majority of voters would prefer improvements in services (papadakis and Shapiro 1992, Withers, Throsby and Johnson 1994) Similarly, a recent survey in the United Kingdom showed that 73 per cent of respondents would support cancellation of a promised cut in all tax rates, if the resulting revenue were used to pay for improvements in the National Health Service. Even more promising was the election, in 1999, of a Labour government in New Zealand, which campaigned on a promise to raise the top marginal rate of income tax from 30 per cent to 39 per cent.

Even with higher taxes, the revenue available to governments will never be sufficient to fund all of the programs that would usefully address failures of the market. An important cause of the crisis of social democracy in the 1970s was unwillingness to accept the basic proposition that money can be allocated to one policy program only at the expense of alternative programs. (This was in part a legacy of the 1960s, when slogans like 'demand the impossible' dominated much left-wing thinking.)

To address the problem of chronically inadequate revenue it is necessary to set priorities regarding programs and between individuals. In evaluating any proposal for a new expenditure program, it is important to remember that the 'opportunity cost' of funding the program is a reduction in the money available for existing programs. However, there should not be an automatic presumption in favour of preserving existing programs. The provision of hospital services provides a simple example. In most Australian cities, hospital services are concentrated in inner-city areas where the population was located when the hospitals were set up. The option of keeping all of these services, while providing adequate services in the outer suburbs where the majority of people now live is attractive, but not feasible. The painful process of closing some hospitals in order that new ones can be established is inevitable.

In setting priorities between individuals, the object should be to secure the maximum social benefit for a given expenditure. General concepts such as 'universalism' and 'residualism' are not particularly useful here. It is clearly impossible to provide all desirable services on a universal basis. On the other hand, the 'residual' or 'safety-net' approach, in which public services are confined to the 'truly needy' represents an inadequate response to pervasive market failure. In the Australian context, where most benefits are already targeted, the highest effective marginal tax rates usually apply to low-income families receiving means-test benefits and the object of policy should be to minimise the occurrence of 'poverty traps' (situations where the combined impact of marginal tax rates and benefit withdrawal produce an effective marginal tax rate close to, or even exceeding, 100 per cent).

Public ownership, privatisation and nationalisation

The swing to free-market policies was motivated in part by the availability of apparently easy answers to the fiscal problem. Privatisation was used by the Thatcher government in the United Kingdom and by the Hawke government in Australia as a substitute for raising taxes. The use of privatisation proceeds to finance current expenditure is simply a disguised form of deficit spending. The privatisation policies of Hawke and Thatcher caused lasting damage to the Australian and British fiscal systems.

The long-run fiscal effects of privatisation, assuming the proceeds are used to repay debt have been the subject of vigorous debate. In most cases where assets have been sold by public share offers, discounts have been offered for political reasons, so that assets are sold for less than the mareket price. Where public enterprises have been sold to large private corporations, governments have generally received prices consistent with market valuations of the earnings of the enterprise.. In most cases, private buyers of public assets have not paid any premium associated with possible efficiency gains under private ownership. Hence, if private capital markets were perfectly efficient, privatisations by public float would generally reduce public sector net worth, while 'trade sales' would be neutral.

However, capital markets are not perfectly efficient, there is a good deal of evidence to the contrary. In particular, because private investors in equity demand a large risk premium, the interest savings from selling public assets have, in most cases, been less than the stream of earnings handed over to private buyers (Quiggin 1995).

There is then, a strong case for public ownership of infrastructure such as electricity and water supply system, roads and railways, both because these industries are natural monopolies which require close regulation and because they can provide a stream of income to the public in excess of the cost of servicing debt needed to finance them. A renewed commitment to public ownership would be economically sensible, as well as being politically popular.

Employment and unemployment

The sharpest conflict between the social-democratic approach and the neoliberalism of the Third Way arises in relation to employment and unemployment. Third Way advocates reject the use of Keynesian fiscal policies and accept the currently dominant view that the only sustainable route to lower unemployment is the reform of labour markets to resemble those of the United States. However, the low rate of unemployment currently seen in the United States is the result of monetary expansion rather than labour market reform. A number of European countries, notably the Netherlands, have achieved rates of unemployment below 5 per cent without an unsustainable boom and while maintaining a consensual approach to collective bargaining similar to the Prices and Incomes Accord that prevailed in Australia during the 1980s.

Although the simplistic Keynesianism of the 1950s and 1960s, based solely on the use of budget deficits and surpluses to manipulate aggregate demand, proved inadequate, the basic insight that governments must intervene to stabilise the economy at an aggregate level remains valid. An important element of a renewed Keynesian approach is the expansion of public sector employment along the lines suggested by Langmore and Quiggin (1994). Because human services such as health, education and community services are the most labour-intensive sectors of the economy, expansion of these sectors is crucial in achieving a sustainable return to full employment. Yet it is precisely these sectors where neoliberals propose the largest cuts.

The divide between social democrats and their opponents is equally sharp with respect to working conditions and working hours. Both neoliberals and advocates of the 'Third Way' favour moves towards 'flexible' working conditions. However, whereas flexibility is presented as a liberating force, allowing employees to shape their working hours and conditions to fit in with their personal lives, the reality of the policy changes introduced in the name of flexibility is that employers can shape the lives of their employees to fit in with the demands of the workplace. Working hours have increased and become more unpredictable and irregular, employment security has declined and employer control over the private lives of employees has been enhanced. The results have included an increase in work-related stress and declining morale (Quiggin 1996.).

The social democratic approach has been adopted and extended in Europe over the last two decades. A notable example is the French legislation, now coming into force, imposing a maximum working week of 35 hours. Many Europeans receive six weeks of annual leave, compared to four weeks in Australia, and the US norm of two weeks.

Political feasibility

Recent election results in Australia and New Zealand have shown that, after two decades of free-market reform and at a time of relative prosperity, voters strongly reject neoliberalism and 'economic rationalism'. There is ample evidence that workers at all levels are disillusioned and demoralised by the impact of 'workplace reform' on their daily lives.

What is lacking, in Australia at least, is a positive alternative. Labor has finally moved away from the privatisation policies it pioneered, but has yet to put forward any positive vision for the role of public enterprise. The bipartisan consensus in favour of tax cuts and a tight rein on public expenditure remains intact. While Labor no longer proposes large tax cuts, it is afraid to reverse those put in place by the Liberals, with the result that it has no solution to the chronic inadequacy of taxation revenue to meet social needs.

As long as it remains committed to the dominant neoliberal consensus, Labor can never regain its place as the party of initiative in Australia. The time is ripe for a renewal of the social democratic approach to reform and a reassertion of socialist values.

Reference List

Giddens, A. (1994), Beyond Left and Right. The Future of Radical Politics, Stanford University Press, California.

Gregory, R. G. and Hunter, B. (1995), The macro economy and the growth of ghettos and urban poverty in Australia, CEPR Discussion Paper No. 325, ANU, Canberra.

Langmore, John and Quiggin, John (1994), Work for All: Full Employment in the Nineties, Melbourne University Press, Carlton, Victoria.

Latham, Mark (1998), Civilising Global Capital: New Thinking for Australian Labor, Allen & Unwin, Sydney.

O'Connor, James (1973), The Fiscal Crisis of the State, St. Martin's Press, New York.

Papadakis, E. and Shapiro, P. (1992), åEgoism versus altruism?: Citizen preferences for public education in Australiaπ, Australian Journal of Political Science 27, 326≠34.

Quiggin, J. (1995), åDoes privatisation pay ?π, Australian Economic Review (2nd quarter), 23≠42.

Quiggin, J. (1996), åThe intensification of work and the polarisation of laborπ, paper presented at Academy of the Social Sciences in Australia Workshop, Canberra.

Saunders, P. (1998), åGlobal pressures, national responses: The Australian welfare state in contextπ, This volume,

Tanner, L. (1999), Open Australia, Pluto Press, Sydney.

Withers, G., Throsby, D., and Johnston, K. (1994), Public Expenditure in Australia, Economic Planning Advisory Council (EPAC), Commission Paper No 3, AGPS, Canberra.

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[1] I will use the term 'socialist' to refer to this broad aspiration, and 'social democratic' to refer to the specific set of policies associated with the welfare state and the mixed economy.