The Welfare State as Crisis Manager

Explaining the Diversity of Policy Responses to Economic Crisis

P. Starke, A. Kaasch, F. Van Hooren, Kenneth A. Loparo

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137314840
• Topic: Politics & International Relations
• Subtopic: Social Policy
• Index: Politics & International Relations

This book presents an in-depth analysis of social policy reactions to international economic shocks in four different welfare states, over a 40-year period. It reveals how expansion and retrenchment are shaped by domestic politics and existing welfare state institutions.

1

Introduction

Crisis and the state

The topic of this book is the welfare state in times of global economic crisis. The financial crisis of 2008, which led to the so-called Great Recession is only the latest of a number of deep global economic downturns since the second half of the nineteenth century, but it has brought up questions about the appropriate role of the state and the market with renewed urgency. The crisis has been dominating politics across Organisation for Economic Co-operation and Development (OECD) countries since 2008 and remains a source of enormous uncertainty. It has, once again, inspired speculation about the new role of the state in rich market economies and about the possibility or necessity for ‘government reinvention’ (Datz, 2009). Have we seen a ‘return of the state’¹ or a ‘new age of austerity’, as announced by the British Prime Minister David Cameron in April 2009 (see also Edsall, 2012; Farnsworth and Irving, 2012)?

The state may be back in fashion. There have been apparent failings of ‘the market’ in the run-up to the crisis, and adequate mechanisms for banks and companies to save themselves were absent during the crisis. Even major economies such as the United States and Germany not only bailed out their banks but also set up ‘cash for clunkers’ subsidies for the auto industry, channelled billions into public infrastructure projects and increased labour market benefits. As it was obviously the state that was expected to step in when things turned out badly, why not generally acknowledge the state’s important role in the economy?

At the same time, by doing the ‘unavoidable rescue work’, the state may have sown the seeds of its own decline. A huge pile of public debt restricts the room for manoeuvre, and makes even some conventional state functions appear like luxuries. Austerity is bound to remain the guiding force in years to come and painful cuts are the only thing left to be distributed. From this perspective, the return of the state was no more than a Pyrrhic victory, and a retreat will follow (Vis et al., 2011). Radical retrenchment not only in the United Kingdom (Taylor-Gooby, 2012) but also in Southern European countries seems to bear this out. To many observers, this is a surprising turn of events. Colin Crouch describes it as the ‘strange non-death of neo-liberalism’ (2011). Although many of the optimistic predictions of the neoliberal ideology were forcefully proven wrong after 2008, it has not been replaced by a coherent alternative worldview (Fukuyama, 2012).

Despite these differences in the interpretation of recent developments, however, both sides – the state optimists and the pessimists – essentially assume uniform policy responses to crisis.² But is this really the case? Do we indeed witness standard crisis response mechanisms with little variation across countries and times? Does crisis inevitably lead to retrenchment? This book fundamentally challenges this assumption of uniformity.

Social policy and crisis management: Research questions and design

Why study the welfare state in times of crisis? With social policy schemes taking up around half of total government expenditure in virtually all rich countries, social policy is not just a sideshow. Today, OECD states are welfare states. This might have consequences in times of crisis. On the one hand, welfare state schemes, such as unemployment benefits, are straightforward crisis management instruments; on the other hand, the welfare state, as the largest item on the bill of modern governments, is also a common target for cutbacks. This tension is succinctly captured in the following quote:

The crisis has boosted social security’s status, not least in fashioning its role as a social buffer and economic stabilizer. But the crisis has also underlined that increased social spending on benefits, especially when this accompanies reduced income from contributions and investments, has reduced the latitude for maintaining, indeed increasing, levels of social spending required in the future.

McKinnon (2010: 2–3)

Not least due to these twin characters of crisis manager and fiscal burden, the dynamics of crisis response are everything but straightforward and may depend on important institutional or political conditions.

We ask the following questions: What are the patterns across time and space of social policy responses to global economic crises? How uniform are policy changes and to what extent do they mirror international policy ideas? To what extent are responses shaped by domestic factors, especially pre-existing welfare state institutions and partisan ideologies? Do crises frequently lead to fundamental, path-breaking policy changes or do responses mostly come in the form of incremental changes?

In order to answer these questions, we take a comprehensive view of the welfare state and analyse legislation (rather than just expenditure or rhetoric) in a comparative manner both across countries and over time. Besides being one of the few studies that look at social policy responses to economic crises, this book is also innovative in its comprehensiveness, taking into account a broad range of social policy fields, not just one specific policy area. Already, some studies of crisis-related developments in policy sectors have been published, including labour market policy (Chung and Thewissen, 2011), health policy (Frisina Doetter and Götze, 2011) and family policy (Richardson, 2010). More comprehensive studies, however, are still rare (but see the edited volume by Farnsworth and Irving, 2012).

It is important to focus on government responses to crisis, that is, legislative decisions. Neither expenditure data nor government rhetoric alone gives us an understanding of what is really happening. Data on the development of social spending during the downturn and projections of future trajectories show that expenditure has increased in all OECD countries over the course of the crisis (Adema et al., 2011). On average, public social expenditure as a percentage of gross domestic product (GDP) shot up from 19.2 to 22.5 per cent between 2007 and 2009, and decreased slightly to 22.2 per cent in the following years, where it is projected to stabilise. This could be read as a return of the state. However, social expenditure data is heavily driven by beneficiary numbers and GDP growth, and tends to reflect automatic mechanisms rather than intentional policy responses, particularly during times of crisis. While expenditure is a good indicator for long-term developments, it is a rather poor guide when it comes to immediate policy change.

In a similar vein, regarding the rhetoric of crisis (Masters and ’t Hart, 2012; ’t Hart and Tindall, 2009), we argue that publicly interpreting the crisis and communicating what should be done can be an important object of research, yet it is not the same as actual policy change. Both are certainly interrelated but can, at times, diverge. We consider the dominant debates about the appropriate role of the welfare state, especially in the transnational sphere. In order to investigate actual policy change caused by the crisis, we need to dig deeper. Our analysis is based on a systematic qualitative comparison of crisis-induced legislative changes. We have developed a conceptual map to compare the content and type of responses enacted across very different countries and welfare state schemes (see Chapter 2).

It is important to compare different countries and not just focus on the extreme cases. Countries such as Greece and Portugal have, without doubt, undergone massive change, but they are the exceptions rather than the rule in the OECD – at least so far. They have de facto given up policy autonomy in order to avoid default and have come under the strong-armed regime of the European Union (EU), the International Monetary Fund (IMF), the European Central Bank (ECB) and private creditors. Most other countries have responded in a relatively autonomous way, however. While seriously affected by the downturn, they were at no time threatened by imminent insolvency. For a balanced comparison, we chose four countries that were all affected by the crisis but differ on the basis of their institutional design. These are Australia, Belgium, the Netherlands and Sweden (see Chapter 3 for a detailed description of the cases and the rationale for case selection). What is more, these countries are small open economies, which, according to an important strand in the political economy literature, should make them both more vulnerable to world market shocks and more adaptable (Cohen et al., 2012; Katzenstein, 1985; Obinger et al., 2010).³ In addition to the four-country comparison, we embed our findings in a larger selection of countries by comparing them with developments in other OECD countries, both large and small, in the book’s conclusion.

Finally, we look at the past to learn about the present. In a similar vein to what Peter Gourevitch did in Politics in Hard Times (1986), we compare reactions to the current financial crisis⁴ with the situation after three similar global downturns in the past.⁵ Our reference points are the two oil shocks of 1973 and 1979, and the worldwide recession of the early 1990s (see Pontusson and Raess, 2012, for a similar research design). To be sure, history does not repeat itself. The oil shocks were caused by different forces than those that led to the 1990s recession and the financial crisis. But these shocks had many features in common: They are what have been called ‘transboundary crises’ (Boin, 2009) that spill over across countries as well as policy sectors. Moreover, in each episode, the relationship between the (welfare) state and the market has come under scrutiny, not least at the level of international discourse. Comparisons over time also allow us to hedge against the risk involved in trying to hit a moving target. Even though four years have passed since the onset of the crisis, it has not ended in many countries. A possible default of one or several Eurozone countries could trigger another recession and lead to wholly new policies, perhaps proving us wrong on some points. The comparison with earlier crisis episodes places our conclusions on a firmer setting.

Crisis and change

The concept of crisis is difficult to pin down. It is both highly intuitive and analytically complex. It is not a neutral and technical concept. The term ‘crisis’ has strong emotional and normative connotations, which makes it perfectly suited for rhetorical use in political debates and by the media. Over the centuries, the idea of crisis has acquired various meanings and subtly different uses across the disciplines of medicine, theology, law, politics, philosophy, history, economics and psychoanalysis. Historian Reinhart Koselleck concludes that ‘there is virtually no area of life that has not been examined and interpreted through this concept with its inherent demand for decisions and choices’ (2006: 358; see also Masur, 1973).

Crises mark disruptive moments in the course of a person’s life as well as in the history of a society. Crises are times of great uncertainty, hesitation and doubt. They unsettle long-held beliefs and disturb the routines taken for granted during normal times without immediately replacing them with something new. Given the emotional connotations and the complexity of the issue, social scientists face the challenge of capturing the meaning of crisis and explaining its consequences without being alarmist or providing sweeping generalities. This calls for a precise definition of the concept and the focus for the investigation in this book.

We focus on major international economic crises. An economic crisis is marked by a sudden, and often unexpected, deterioration of most, or all, key macroeconomic indicators. These indicators include GDP growth, unemployment levels, inflation rates and public debt. A crisis is international when it is experienced simultaneously by a large number of countries on several continents. What is more, we examine crises caused by external shocks: The crisis of the late 1970s and early 1980s was triggered by two sudden oil price hikes in 1973 and 1979;⁶ the crisis of the early 1990s by a conjunction of geopolitical instability and a financial and currency crisis; and the most recent crisis by a financial crisis following the collapse of the subprime housing market in the United States. For many readers, the crisis of the 1990s, at first glance, could not be considered a global shock comparable to the other two episodes. However, as we show in more detail in Chapter 5, the recession of the early 1990s was not a ‘regular’ recession. In most OECD countries, it was much deeper than first expected and it was highly influenced by international events such as the fall of the Iron Curtain and the Gulf War.

An economic crisis is not a one-off event. A first shock is usually followed by several ‘aftershocks’ (Hemerijck et al., 2009). This is clearly visible during the most recent crisis episode, where a domestic American housing crisis led to a global financial crisis which was followed by a worldwide recession and, finally, a sovereign debt crisis. Nonetheless, a crisis is a relatively bounded phenomenon – an eventful episode.

To capture this, we employ an explanatory framework of ‘events as causes’ (Mayhew, 2008). Thereby we do not focus on more gradual forms of crisis and transition; for instance, the alleged ‘old age crisis’ caused by changing demographics (World Bank, 1994) or notions of ‘permanent crisis’ (e.g. van de Walle, 2001). Potential social and political changes are not taken into account as triggers of change either, such as the ‘legitimacy crisis’ of Western governments that was diagnosed in the 1970s (Habermas, 1975 [1973]) (although it may well be that an economic crisis leads to a legitimacy crisis, which is, however, a question beyond the remit of our study). By restricting the concept to major international economic crises, we increase analytical precision and steer clear of an imprecise and misleading use of ‘crisis’ as a mere catchword.

The concept of crisis is intimately connected to change; so much so that the two are near synonyms. In policy analysis and political economy, the belief that macroeconomic (or other types of) shocks serve as a trigger for policy change is largely undisputed (Bates and Krueger, 1993; Keeler, 1993; Kingdon, 1984; Vis and van Kersbergen, 2007; Williamson, 1994).⁷ We go beyond this simple proposition and analyse the content of policy reactions in terms of their direction and their form or quality with regard to the fundamental or incremental character of reform that takes place. In order to explain the pattern of crisis responses, we examine a number of different explanatory factors but focus on two factors in particular, namely partisan politics and institutional path dependence. Let us briefly explain why we think these two perspectives are important.

The partisan politics of crisis management

Against the backdrop of the long-standing tradition in comparative welfare state research of looking at welfare state development through the lens of partisan conflicts – often representing deep-rooted class cleavages – studying the impact of political parties is a key element of this analysis. The expansion of the post-war welfare state is often understood as being shaped by specific partisan reactions to the devastation brought by the Great Depression of the 1930s. The following quote illustrates this line of thinking:

[P]arties of the Left (and perhaps too the Christian Centre) right across the industrialized world learnt the lessons of the mass unemployment of the 1930s and, wherever subsequently elected, put policies in place that would prevent such outcomes occurring in future, whether through the creation of new welfare state programmes, the extension of existing ones or through the kind of Keynesian economic policies that the conservative governments of the 1930s had eschewed.

Castles (2010: 94)

It is unclear, though, to what extent this partisan argument applies during times of major economic crises, or whether it was specific to the immediate post-war era. Does it hold for mature welfare states? Do partisan differences equally shape the short- to mid-term responses to crisis, not just the long-term lessons mentioned in the preceding quote?

Given that economic crises often also give rise to questions regarding the role of the (welfare) state in the economy, and given the significant distributive impact of different crisis responses, we can expect partisan ideology to have an important effect on reactions, as Scharpf has shown for macroeconomic policy responses to the oil shocks (1991).⁸ From this perspective, economic crises are ‘moments of tr...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Figures and Tables
• Acknowledgements
• List of Abbreviations
• 1. Introduction
• 2. The Politics of Crisis Response
• 3. How the Countries Compare
• 4. The Oil Shocks of 1973 and 1979: Keynesianism and Beyond
• 5. Recession in the 1990s: The Resistible Rise of Neoliberalism
• 6. Managing the Global Financial Crisis of 2008 and Its Aftermath: The Role of Social Policy
• 7. Conclusion
• Appendix 1: Party Systems
• Appendix 2: Governmental Majorities
• Notes
• References
• Index