The Future of Social Democracy – Crunch Time Conference Speech

Kevin Rudd has declared the global financial crisis marks the end of the romance with free markets and the beginning of a new era of social democracy. However the prospects for a return to social democracy are grimmer than widely assumed.

There are three factors lining up to suggest that social democracy will soon be facing a crisis of its own.

The first threat is perhaps the most manageable. Social democrats traditionally relied on Keynesian economics to manage the economy. Keynesian economics argues that through controlling interest rates and stimulus packages governments can manage the economic cycle. However, the current resurgence of Keynesian economics is likely to be shortlived.

Governments are between a rock and a hard place as they stare down the global financial crisis. They have no choice but to throw everything at the problem or risk being accused of having done nothing when the worst takes hold.  But governments do not have enough money to fix the size of the problem. It is likely that they will plunge themselves into debt, the economy will slump into the worst downturn in the electorates memory anyway, and the stimulus packages will be dubbed a failure and a huge waste of resources.  The Keynesian measures will be deemed to be flawed.

It is not necessarily a fair cop. Governments will not be able to prove how much worse things would have been if they had done nothing. And it does not follow that if a sea wall does not stop a tsunami that
it is not useful for controlling the tides. But if the history of ideas tells
us anything, it tells us that Keynesian ideas will be left carrying the can for the depth of the recession whether it is fair or not.

As a result, the first threat is that social democrats reputation for being able to manage the economy, and their key tool for doing
so are likely to soon be in tatters.

The second threat is even more unsettling. Professor Bob Gregory gave a presentation at the Australian National University a couple of weeks ago in which he argued this recession is likely to be the one that breaks the welfare state.

The problem is that in each recession since the 1970s a cohort of people have been thrown onto unemployment in the first year of the recession. Most of those people have never got back to full time work again. They have moved off the dole and onto other forms of welfare, but they have continued to rely on government benefits for their primary source of income. The result is that about 20% of working aged Australians primary source ofincome is a government benefit. The number of working aged men in a full time job has dropped from 88% in the early 1970s to 66% in the mid 2000s.

Gregory argued that even if this recession is only on par with the 1990 recession in the number of people it throws out of work, it
will be enough to make the system unsustainable. A workforce of only 10 million people will be supporting between 3.5 and 4.5 million people on benefits.

As a result,  the second threat is social democrats key mechanism for creating social equality is looking wobbly at best. We need to face up to the likely imminent collapse of the welfare state as a means of ensuring justice.

A commonly cited reason for the unemployment problem is the shift from a manufacturing industrial economy to a high tech service economy. Technological change transformed the structure of the economy. Each recession wipes out a string of unskilled jobs and they never come back. This transformation to a high technology economy also runs to the heart of the third
threat.

In industrial societies the bulk of workers were clustered at the  bottom of the income scale working on mass production lines. This shared experience fostered a class consciousness. When it came to voting a large coalition of workers came together to advocate for equality and support for the least well off.

Technological change has seen the economy transform. The number of low skilled jobs at the bottom has shrunk. But there has been an expansion of high skilled white collar jobs.  The result is that the mid
range voter is now a white collar worker.

The voters that decide elections no longer have a shared life experience with the people at the bottom. They have a different education background, work in different jobs and live in different suburbs. As a result it is harder to build political coalitions to fight for equality and to protect the position of the least well off.

The third threat to social democracy, then, is that the social coalition on which it was traditionally built has broken down.

In sum, neo-liberalism might have just exploded spectacularly, but the traditional model of social democracy is also heading for a crisis of its own.

This is not to say that things are not salvageable. They are. The collapse of neobliberalism does present a huge opportunity for those that want to rebuild the global order. But simply appealing to the old model of social democracy won’t be enough. Imaginitive new thinking is required.

So lets turn to this question of principles for a new era. What are the qualities we are looking for in new ways forward.

1.    Firstly we much be realistic about the looming crisis for social democracy, and to realise the that the governments we are describing are going to be:

a.     Debt laiden

b.     Unable to simply use cash
transfer to achieve equity outcomes

c.     Needing to rebuild

coalitions committed to equality

2.    We also need to take into account the criticisms of social democratic welfare states that led to the re-emergence of neo-liberalism

a.     Difficulty managing large bureaucracies, rigidity, inflexibility, unwieldy management structures, difficulty managing complexity

b.     Risk of narrow interests capturing sections of govt

3. Finally, we need to be very clear about the problem we are trying to fix. What exactly was the problem with neoliberalism. I will
leave the discussion of the financial improprieties to Steve, for me, the problems of neoliberalism are wider than the recent collapse. For me there are two central issues.

The first is the classic concern with market liberalism. That a system which is based on exchange between individuals has atendency to create accelerating divisions between rich and poor. The powerful are able to leverage greater benefit from an exchange, and the less powerful a person is the more likely they are to be exploited. With each new exchange, the power divide deepens, and so does the scope for exploitation.

Where this exchange centres on the pursuit of profit under conditions of competition, we see a reworking of centuries old argument about the race to the bottom. That competition will force those with power to
drive down the conditions of the vulnerable so as to compete.

The outcomes of this process have been evident in the greater than expected gulf that opened up between rich and poor in the Anglophone countries during the neo-liberal period.

The second issue, for me, is in a similar vein, but is the unique creature of neo-liberalism in the era of the large state.  It is the dynamic of privatizing profits and socializing costs.

For years we have seen arguments that we will not be able to compete internationally if companies are not given a free hand to maximize their profits as much as possible, and that where there are risks, costs and downsides, that governments should pick up these costs to protect international competitiveness. It is a logic that has led to privatizing the profits and socializing the costs. We see it in training and education where few companies invest in people anymore, but expect governments to do it. Where the casualization of the workforce has meant that businesses can insulate their bottom-line from the trough and peaks of demand, by reducing hours for casual employees and expecting centrelink to pick up the shortfall when people cant make their rent. We see it in expectations that government should pay for the environmental clean ups after companies have polluted.

The combination of these downsides to neo-liberalism and the threats to social democracy mean that the two track model of letting the market rip and having the welfare state pick up the tab has come to an end.

We need a way forward that addresses the problem at its source, and which seeks to make the initial transaction more just, more equitable and in the community interest.

This is an extraordinarily difficulty proposition.

A possible solution.

The sorts of solutions these challenges suggest to me have some collorary with the social entrepreneurship Cheryl Kernot was talking
about this morning.

In my book, How to Argue with an Economist, I talked about the prospect of democratic markets. That illusory ideal of if markets worked the way economists imagine they do. And I have been thinking about how one might bring such an outcome about.

One possibility might be to foster and build up a new class of enterprise, a new generation of not-for-profits. Their role is to operate in normal markets, but their function is to put competitive pressure on the for profit companies to behave more ethically.  Imagine if when government was asked to step in to prop up substantial companies or operations, if they were to place a condition in which companies had to shift their charter from seeking to maximize shareholder value, to being a guardian of the public interest in their industry. To provide good products, good jobs and a contribution to their communities.

Think of it as a form of nationalization without centralization. But it would be nationalization with some additional benefits. They would provide good services and jobs themselves, but they would also influence the rest of the market.

These not-for-profits put competitive pressure on businesses and their treatment of consumers. We know that where not-for-profit
credit unions have entered into banking and superannuation, they have exertedcompetitive pressure on the private sector operators to reduce fees and improve services, or risk losing custom to those that are genuinely operating in the customers interests. One of the most commonly cited reasons for keeping medibank private in public hands is that it puts competitive pressures on the private health insurance industry over premiums and performance.

Not-for-profits also apply competitive pressure on private sector firms around work conditions and practices. Many of the pioneering social changes we have seen in workplace practices have been implemented first in the public sector. The public sector has had a demonstration effect of showing how the new practices can work. It has shifted public and cultural norms about what is ethical and good practice. And in many instances, private sector has had to compete with public sector work conditions to secure quality staff.

Examining the means for supporting a widescale expansion of the not-for-profit sector ticks many of the boxes of characteristics we are looking for.

• it does not require large scale spending by governments
• having not for profits still having to cover their own costs limits scope for economic inefficiencies
• having to face the market test of staying financially afloat, gives a rationale for allowing them to be reasonably autonomous from government
• there is scope to build up a substantial social coalition around such entities, as they can promise benefits to consumers, to variety of classes of employees and to environmental groups and other community building stakeholders

We need to be looking at these sorts of options in the search for new models of social democracy.

This speech was delivered at the Crunchtime conference on April 22, 2009