The welfare state and middle class political dominance

The Finnish Academy of Science and Letters Centennial Celebration Seminar in Social Sciences Helsinki Jan 28, 2008 Professor Bo Rothstein University of Gothenburg

Some basic facts

           

Nordic countries (ex. Norway)

Growth: WEF rank: GDP/Cap: Public exp: Inf. Mort: Life exp: Hours worked: In poverty all: Poverty child: Social Trust: In prison: 3,1% 3,4, & 6 33000 48% 3,5% 79 1600 5% 3,5% 59% 72 /100000

US

3,2% 1 41000 27% 7% 77 1800 17% 22% 33% 725 /100000

Income and Life Satisfaction

Economic Growth and Equality

     No correlation between levels of public spending and economic growth There is no “trickle down” effect Lindert: Public spending on investments in “human capital” increases growth Social policies may increase flexibility on labor markets Policies for equality increases social trust that may increase economic growth

Measuring country performance

            Human Development (UNDP) Economic competitiveness (WEF) GDP/capita (World Bank) Democracy (The Economist) Globalization (The Swiss Economic Institute) Political Freedom (Freedom House) Gender Equality (WES) Corruption (Transparency International) Environmental Protection (Yale, WEF) Doing Business (World Bank) Knowledge Economy (World Bank) Good Society Index (Quality of Government Institue, Gothenburg)

Meta Index

       1. Sweden 2. Denmark 3. Iceland 4. Norway 5. Finland 6. Switzerland 7. Canada

Conclusions

   Government spending can reduce inequality Equality does not harm growth Equality “from below” is more important than equality “from above”

The Linguistic Problem

    Welfare State or Social Insurance State or Social Service State or Social Protection State or

Gustav Möller’s 1948 discovery

     Contrary to the predictions of the Marxist theory, the industrial proletariat did not grow larger The white-collars strata had started to grow faster than the traditional working class The while-collars strata would start to play a key-role in the elections If the Social Democrats would continue in power, the party had to create new policies that would appeal to the white-collar segment without alienating the traditional blue-collar working class voters A strategic dilemma

The solution: A conceptual innovation

     From workers to wage-earners From ”middle-class” to wage-earners From working class (or middle-class) politics to wage-earners’ politics To unite people without property Support of a strong and well-organized white-collar union movement

Four policy solutions

     1. Universal social services and benefits 2. Income-related social insurance system 3. A strong emphasis on eduction 4. Gender equality policies MÖLLER’S STRATEGY: CREATING SOLIDARITY BY POLICIES FROM ABOVE

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How does the system works?

Group A (20%) B (20%) C (20%) D (20%) E (20%) Ratio between groups A & E Average income 1000 800 600 400 200 5/1 Tax (40%) 400 320 240 160 80 (= 1200) Transfers 240 240 240 240 240 (1200/5=24) Net Income 840 720 600 480 360 2.33/1

The efficiency argument

    Could the market do it?

Would privatization be more efficient?

Would the middle class be better of with lower taxes that would make it possible to by private insurances?

The theory about ”assymetric information says” – probably not.

 ”Information failures provide both a theoretical justification of and an explanation for a welfare state which is much more than a safety net. Such a welfare state is justified not simply by redistributive aims one may (or may not) have, but because it does things which markets for technical reasons would either do inefficiently, or would not do at all”  ”Both theory and the performance of systems in practice overwhelmingly support the view that a hypothetical pure private market for medical care and medical insurance would be highly inefficient and also inequitable”  Nicholas Barr: Economic theory and the welfare state”

Conclusions

     The Nordic welfare state is very much program that serves the middle-class (wage earners more than small business) This was, at least in Sweden, a very deliberate political strategy Non-socialist (centre-right) governments seem to be locked-in into this system However, the system works pretty well, so far

Thanks for listening!

   Questions Comments Critique