America’s Coming Social Democracy?

Almost all of the world’s developed countries consider themselves, and are, social democracies: mixed economies with very large governments performing a wide array of welfare and social insurance functions, and removing large chunks of wealth and commodity distribution from the market. The United States is something different. Or is it? Whatever it has been in the past, the US in the future will have to choose whether, and how much, it will be a social democracy.

Once upon a time, according to mythology at least, America had little downward mobility. On the contrary, before the Civil War you could start out splitting rails, light out for the Western Territory, make a success of yourself on the frontier, and wind up as President – if you were named Abraham Lincoln. In the generation after World War II, you could secure a blue-collar unionized manufacturing job or climb to the top of a white collar bureaucracy that offered job security, relatively high salaries, and long, stable career ladders.

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This was always half myth. Setting out for the Western Territory was expensive. Covered wagons were not cheap. Even in the first post-WWII generation, only a minority of Americans – a largely white, male minority – found well-paying stable jobs at large, unionized, capital-intensive manufacturing companies like GM, GE, or AT&T.

But if this story was half myth, it was also half true, particularly in the years after WWII. Largely independent of education or family, those Americans who did value stability and security could grasp it in the form of jobs with “a future.” Even for those not so lucky, economic risks were usually fairly low: the unemployment rate for married men during the 1960’s averaged 2.7%, and finding a new job was a relatively simple matter. It was during this era – roughly from 1948 to 1973 – that sociologists found that a majority of Americans had come to define themselves not as working class, but as middle class.

The post-WWII period stands as a reference point in America’s collective memory, but it was in all likelihood an aberration. In the early postwar decades, foreign competition exerted virtually no pressure on the economy, owing to the isolation of America’s continental market from the devastation of WWII. At the same time, the war left enormous pent-up demand for the products of mass production: cars, washing machines, refrigerators, lawn mowers, television sets, and more.

Government policy back then began with a permanent military program of spending and R&D and continued through massive public works program and suburbanization, underpinned by the Federal Highway Program and subsidized home ownership loans from the Federal Housing Administration. The regulatory institutions and behavioral norms that originated in the New Deal and developed during WWII came into full force: social security, a system of unionized labor relations, market regulation.

Favorable macroeconomic circumstances, the absence of foreign competition, a system of government support and regulation, and large-scale private provision of what in Europe would have been public social insurance all combined to give post-WWII America many of social democracy’s benefits without the costs. The economy did not stagger under the weight of ample benefits or high taxes. Americans – at least white, male Americans – did not have to worry about tradeoffs between security and opportunity, because the US offered the advantages of both. Corporate welfare capitalism substituted for what in Europe would have been government provided social democracy.

America was thus a special place. It had its cake and ate it, too: a combination of security with opportunity and entrepreneurship. It seemed that this was the natural order of things. Hence there was little pressure for government-sponsored social democracy: Why bother? What would it add?

Now things are very different. The typical American employer is no longer General Motors. It is Wal-Mart. Private businesses are providing their workers with less and less in the form of defined-benefit pensions, health insurance, and other forms of insurance against life’s economic risks.

Sharply rising income inequality has raised the stakes of the economic game. A government that cannot balance its own finances cannot be relied on to provide macroeconomic stability. Indeed, former Chairman of the US Federal Reserve Paul Volcker sees the US as so macroeconomically vulnerable as to be running a 75% chance of a full-fledged dollar crisis over the next several years.

The coming generation will be one of massive downward mobility for many Americans. The political struggles that this generates will determine whether America will move more closely to the social democratic norm for developed countries, or find some way to accept and rationalize its existence as a country of high economic risk and deep divisions of income and wealth.