Welfare capitalism – it’s just great!

President Obama’s administration announced its proposed budget for the year beginning October 2014.  The US Congress is paralysed between a Republican majority in the House of Representatives and a Democrat majority in the Senate.  So the Obama budget won’t get through in its present form.  Nevertheless, that is not a lot to choose between the two parties on their objectives for the budget and public sector spending for next year and onwards.  Both sides agree that governments deficits are too large and public sector debt levels must be reined in.  The difference is that the Republicans want no tax increases to do it, while the Democrats want some.  But both agree that welfare spending is ‘too high’.  So just as in the UK with the Conservative-led coalition, Obama proposes sweeping reductions in real federal spending on the poor, unemployed, the sick and the old.

One of the most pernicious measures proposed is to change the inflation index used to increase state social security pensions and welfare payments.  I have commented on the iniquity of this before (see https://thenextrecession.wordpress.com/2012/12/27/the-fiscal-cliff-okuns-law-and-the-long-depression/).  The impact of using the so-called ‘chained CPI’  to index pensions will be to reduce annual increases in pensions and tax thresholds by 5% over 12 years, hitting living standards for average American households six times more than the rich. Over a course of an average retirement, future pensions would be reduced by 10%.  Of course, it is even worse with the Republican proposals for the budget,which combine tax cuts for the better-off with a huge reduction in federal spending, by half in cash terms and by 20% of GDP by 2023.

But apparently there is no alternative as the US economy cannot afford decent pensions that people have paid into through social security contributions over their working lives and/or proper federal public services and Medicare etc.  We cannot afford them, even at their current meagre levels, because we are all getting older and living longer and the workforce as a share of the total population is shrinking, even if it was fully employed (which we know it is not).  So there is no way around either reduced pensions, or higher contributions or a longer period staying at work, or all three.  Across the major capitalist economies, pension and welfare ‘reform’ is the order of the day and on the agenda of every government, whether ‘centre-left’ or ‘centre-right’.

But is it unaffordable?  Well I wrote about this issue in an earlier post (https://thenextrecession.wordpress.com/2011/12/03/the-pensions-myth-part-one/) and tried to show that if economies just raised their long-term annual output growth just a little, even just 1% a year more, the ‘problem’ would disappear. Recently, John Cochrane, a leading neoclassical mainstream economist and backer of the Republicans, came out with the same point (http://johnhcochrane.blogspot.co.uk/2013/03/fun-debt-graphs.html). As he put it: “Suppose growth is 1% and then 2% greater than the CBO (budget office) projects. What effect does that have? To keep it very simple, I assume that spending stays the same, and revenue stays the same fraction of GDP. Thus, I just divide spending/GDP by a 1% and then 2% growth rate (e^(0.01 t)) and we have the new spending as a fraction of the larger GDP. ” His graph repeated below shows that government spending (without ‘reform’) as a percentage of GDP falls from an expected 45% in 30 years time to below where it is currently (23%) if US real economic growth is just 2% pts a year faster than currently projected over the long term.  And the budget deficit (the difference between spending and revenues) would also be insignificant.

cbo_2

So just an increase in the US projected growth rate from 2.5% a year over the next 30 years to 4.5% a year would allow the Federal government to sustain current pensions and welfare spending without changing spending or taxation revenues as a share of GDP at all.

But of course, such a long-term growth rate in any of the major capitalist economies is a pipe-dream.  Long-term trend real GDP growth has steadily declined over the last 50 years and is likely to continue to do so over the foreseeable future (see my post, https://thenextrecession.wordpress.com/2012/09/12/crisis-or-breakdown/).  In reality, the global capitalist economy is in a Long Depression, or as the FT put it, “stuck in a rut, unable to sustain a decent recovery and susceptible to a sudden stall”.  At least that is the estimate of the latest Brookings Institution-Financial Times Tiger (Tracking Indexes for the Global Economic Recovery) as it is called.  The world economy is sluggish with the advanced economies flat-lining and the emerging capitalist economies growing below trend compared to before the Great Recession (see graph below).

tiger index on growth

This estimate was repeated by Christine Lagarde of the IMF at a business economists meeting last week.  She said “We do not expect global growth to be much higher this year than last. We are seeing new risks as well as old risks….In far too many countries, improvements in financial markets have not translated into improvements in the real economy.”  This story is confirmed by another index of global economic activity complied by Bank America.  Their Globalcycle indicator which tracks business conditions in economies covering 80% of the world GDP suggested that the world economy was growing at about 3.5% a year but is beginning to ‘soften’ and go ‘below-trend’ in 2013 to 3.2% a year.  And remember this includes China and all the faster large economies.  And the World Trade Organisation also reported that world trade growth fell to 2.0% in 2012 — down from 5.2% in 2011 — and is expected to remain ‘sluggish’ in 2013 at around 3.3%. “The events of 2012 should serve as a reminder that the structural flaws in economies that were revealed by the economic crisis have not been fully addressed, despite important progress in some areas. Repairing these fissures needs to be the priority for 2013,” Director-General Pascal Lamy said.  So the chances of getting sufficient growth out of these economies to enable governments to protect pensions and living standards (even if they wanted to) are non-existent.

Of course, the likes of Paul Ryan in the US or the Conservatives in Britain would not improve pensions, welfare or Medicare anyway.  They would always argue that was not enough money or resources to do so.  And it would be best for the poor, vulnerable and sick to have an ‘incentive’ to work by reducing their benefits or pensions.  That contrasts with the view that the best way to incentivise the rich is to reduce their taxes, raise their bonuses and stop trying to ‘regulate’ them.

So the myth of the social security ‘scroungers’ is perpetuated and promoted on both sides of the Atlantic pond.   I dealt with this issue in the UK context in a recent post (https://thenextrecession.wordpress.com/2012/10/08/who-are-behind-the-blinds-george/).  But the New Economics Foundation has just released an excellent paper exposing the fallacies and lies perpetrated by the British government in its drive to persuade people that there are too many ‘shirkers and scroungers ‘living off the rest of us’ and unwilling to work (Strivers_vs._skivers_online).

As the authors of the paper put, the lies are :“There are two distinct groups of people, one good and one bad; individuals choose to be in one group or the other. ‘Strivers’ work hard and put money into the economy while ‘skivers’ are just lay-abouts who take money out. Claiming benefits traps people in dependency, which is a social evil, passed from one generation to the next. People not in paid work contribute nothing of value to society.”

In reality, people slip between employment and unemployment, often within the space of a few months, as the economy relies increasingly on short-term, low pay, insecure contracts. This happens even more in areas where the economy is especially weak.  The vast majority of those who are not in paid employment are unable to work because they are disabled or have caring responsibilities, or because there are no jobs available. Even in the best of times, it is harder for disabled people and carers to find suitable employment.  A far greater proportion of social expenditure is spent on people in paid work, through working tax credits, than is spent on the fit and able-bodied unemployed. Only 2.6 per cent is actually spent on the able-bodied unemployed (see graph).

For the first time ever in the UK, in-work poverty has overtaken workless poverty, with 6.1 million people in working households living in poverty. Instead of tackling the problem of low income, the government is subsidising employers offering poor quality employment through working tax credits. Taxpayers are picking up the bill by topping up wages so that paid workers can feed and house themselves and their families.  The vast majority of people claiming Job Seeker’s Allowance do not claim over the long-term. Less than half claim for more than 13 weeks and only 10 per cent of all claimants claim for more than a year.  And a great many people who are not in paid employment do valuable unpaid work, caring for others, bringing up children and looking after their families, homes and neighbourhoods.  The formal economy would grind to a halt without it. Even if time spent on child care and housework were paid no more than the minimum wage, it would still be worth the equivalent of 20 per cent of GDP. Many people are not in paid work because they have prior responsibilities that involve unpaid labour. These so-called ‘skivers’ contribute a great deal more than nothing for the something they receive.

So there it is.  Reduced pensions, reduced public services, reduced welfare and health services – because capitalism cannot afford them.

16 Responses to “Welfare capitalism – it’s just great!”

  1. billjefferies Says:

    3% growth is not a Great Depression.

    • Ed Says:

      3% was the lowest level of average growth between ’57 and the present crises. It’s not great.

      • billjefferies Says:

        Not great is not a great depression or even a long one. In Western Europe there is slow growth, not due to long profit rates, but governments are slashing the public sector. In the USA growth is relatively strong, in China it is very strong. If the two largest economies in the world are growing strongly (relatively or very) then its ridiculous to talk about a Depression in any form.

      • GrahamB Says:

        Not sure why your starting point is 1957, during the long boom. Looking at the last twenty years, I would think trend global GDP growth is around 3.5%.

        I also think it’s dubious to highlight that emerging economies are growing below pre-crisis trend when the big figure is the disparity between growth rates in the developed and emerging global economy – both before and after 2008.

        We’re in an unusual period for the OECD economies: decent profitability but flatish GDP. Not surprising given the strategy of austerity and wage cutting – and the EZ crisis. This will drag on all parts of the world, pulling down global GDP growth to the 3% figure.

      • billjefferies Says:

        the other thing to say on that of course is that the official GDP figures misestimate the transition of the centrally planned economies to capitalism, but that’s a whole different story.

    • paulc156 Says:

      He actually does quote an alternative label in the article:

      “In reality, the global capitalist economy is in a Long Depression, or as the FT put it, “stuck in a rut, unable to sustain a decent recovery and susceptible to a sudden stall”

      Semantics really.

      However Eurostat in 2010 produced this useful paper which compares various crises including the current one and the 30’s depression.

      “The current crisis is the deepest, most synchronous across
      countries and most global one since the Great Depression of the 1930s…Today’s collapse in trade, fall in asset prices and downturn in the real economy are faster and more synchronous than during any previous global crisis.”

      Chart there shows that for the first three years of the current crisis world industrial output fell at the same rate as in the 1929-32 period.

      http://epp.eurostat.ec.europa.eu/portal/pls/portal/!PORTAL.wwpob_page.show?_docname=2304420.PDF

      • billjefferies Says:

        Sure back in 2010, but its now 2013. What that paper showed was that for 10 months the credit crunch crash traced the 1929 crisis, but after that it recovered quickly. So that 21 months after the initial fall, industrial production had entirely retraced its decline.
        All that really shows is that both crises were financial ones, apart from that they were completely disimilar.

      • paulc156 Says:

        “All that really shows is that both crises were financial ones, apart from that they were completely disimilar.”

        Well that would presumably be due to the massive efforts made to prevent complete collapse of the financial system back in 2008/9. Now we have bigger too big to fail banks carrying unrealised losses on their books or zombie banks but the wider economy did not implode completely, [due to automatic stabilisers as well]. Nonetheless we could be facing another decade of substandard ‘below trend’ growth in the developed economies just as Japan has done since the 1990’s, all the while highly vulnerable to another financial shock. I don’t think anyone believes we are anywhere near a resolution.

      • billjefferies Says:

        Indeed and the bailing out of the banks was the reason why it wasn’t a “Great Depression”. Over the last four years massive quantities of bad debt have been written off, and the EZ basically stabilised. The ongoing attack in the UK and Europe on the public sector is not a sign of the economic “crisis” but of working class crisis, the weakness of the labour movement. Given that the trade unions have effectively clamped down on any opposition to austerity, indeed, expect it to continue.

      • paulc156 Says:

        EZ is stabilised for the moment. We have the prospect of Portugal imploding and in need of new finance but without the willingness to continue austerity with the same vigour Spain continuing on a road to political perdition, Italy basically giving the finger to Berlin and France under increasing pressure from within to break ranks with Merkel. What looks like a stabilisation is a slow motion train wreck.
        Trade unions in the UK are too weak to mount a challenge.[thanks Maggie]. We and the EU are still massively indebted so ensuring near flatlining/low growth for the next year or two
        and China beginning to hit the wall with increasing frequency due to repeated fiscal injections that get progressively less effective. What’s basically happening is a strung out 30’s type scenario. It is obviously less deep but may last twice as long before any increase in underlying growth trends.

      • billjefferies Says:

        But train wrecks don’t happen in slow motion. They require fast motion or otherwise the driver puts on the brakes. The 1930s analogy is so wide of the mark you can forget it.

      • paulc156 Says:

        Yeh I see that is the focus of your comments. No two recessions are ever alike. But you are over egging the differences. The UK has done worse in terms of GDP than in the 1929-34 period http://notthetreasuryview.blogspot.co.uk/
        in terms of duration and cumulative lost output and the EZ has 505 of its states enduring depression levels of unemployment and economic contraction…so you pays your money you takes your choice. As for the train wreck analogy I beg to differ. Slow motion as in no one [Berlin/ECB]has really accepted they are heading for rocks and many are thinking domestically rather than collectively so the driver has been ordered to take a nap. Of course if the ECB open the spigots at the 11th hour and stop fussing about conditionality or inflation targets they too may avert carnage but they will already have to deal with hysteresis effects of prolonged mass unemployment Very 30’s like indeed.

      • paulc156 Says:

        505 above should read ‘50%’ of course.

      • billjefferies Says:

        You mean very like the 30’s as in – not at all – like the 30s, I take it?

    • paulc156 Says:

      No point in labouring the semantics but some parts of the global economy are very like the 30’s as described above-extremely low or negative growth across swathes of Europe accompanied by mass unemployment [what’s not comparable about that?], as well as a worse growth performance in the UK these last five years than in the 1929-34 period. The US has fared much better, as the UK fared much better in the great depression. So ‘not at all’ is about as far fetched as ‘identical…imo.

  2. paulc156 Says:

    It’s worth noting re the social security debate in the US where as you rightly state ‘both’ parties have agreed ‘cuts’ by instituting a chained CPI measurement for pensions which by many accounts is likely to not merely reduce payments over time but reduce them without justification. ie; It’s quite possible that the inflation rate for elderly people is substantially higher than that for those of pre retirement age. That’s supposedly the rationale for switching to a chained CPI after all- it’s supposed to be more accurate.

    That aside, Dean Baker and others have explained that according to the CBO’s own estimates there is enough money available in the social security trust fund to fund social security for another 21 years [until 2034] without making any adjustments at all. Even if at that point [2034] a reduction of some 20% in social security payments was deemed necessary [as projections presume] in the meantime even with under trend productivity growth of 1% social security beneficiaries will still be better off in 2034. That is PROVIDED they gain their share of that productivity increase [ie; 1% per annum for 21 years] . This translates into income gains of well over 20% in real terms in the time frame, so there really is little need to alter anything [except no one would want a sudden 20% reduction in benefits overnight in 2034 if at all possible].

    An alternative method of collecting most if not all of the potential shortfall is the raise the cap on contributions, so turning a most regressive tax into a somewhat less regressive one.

    http://www.cepr.net/index.php/blogs/cepr-blog/the-nonsense-about-a-demographic-crisis

    http://www.cepr.net/index.php/press-releases/press-releases/the-effects-of-raising-the-social-security-payroll-tax-cap

    Neither of these proposals is considered likely…of course.

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