Social Democratic Development

Left vs. right politics is sometimes a matter of false choices. Done right, it is sometimes possible to have it all.

Here is a famous false choice:

 

 

???

Reduce Income Inequality to Reduce Social Hardship

Or

Promote a Vigorous Economy That Creates Jobs

???

 

    

When liberals want to put in social programs that would reduce poverty, there is opposition on the basis that income redistribution (which transfers money to the poor directly from the rich) and social programs (which are generally paid for by taxes on the rich) all basically hurt the economy and reduce the supply of jobs. Poor people themselves often believe this too. When times are hard, they are more responsive to candidates who say they will get the economy moving than to candidates offering government assistance. Improving the economy gets rid of poverty by putting paychecks in people’s hands. Liberal fantasy schemes – in theory - distract from the real business of creating a dynamic vigorous economy. Conservatives argue that creating a friendly environment for business in a more effective solution to poverty in the long term.

    

Strangely, most American leftists seem to agree with this analysis. Most liberal discourse in the United States is about the extent of inequality and the evils of inequality. Politicians of all stripes claim to “be able to make jobs”. Politicians of all stripes like job training. But outside of training, the left tends to roll over and play dead when conservatives argue that income redistribution and poverty programs do not create jobs. So when the public debate turns to increasing employment, liberals are often left mum with nothing to say.

    

Paul Krugman, Nobel Prize economist and New York Times columnist, is a notable exception to this. Krugman is an orthodox Keynesian who argues that increasing government expenditure increases overall demand. Increased demand increases employment. I am a Keynesian myself, and I think Krugman – and Keynes - are completely right. Poverty programs are a perfectly reasonable form of government expenditure.

    

An even better exception – and one that foreshadows the main point of this essay – is Joseph Stiglitz, Nobel Prize Economist and former Chief Economist of the World Bank. Stiglitz argues that reducing inequality is essential to stimulating the economy and creating jobs and economic growth. Stiglitz follows conventional microeconomics in arguing that the poor have a high marginal propensity to consume, while the rich have a high marginal propensity to save. What this means, in non-jargonistic terms, is that the poor tend to spend most if not all of their paychecks for what they need. They need food, clothing, housing and medical care. The rich already have food, clothing, housing and medical care. They can spend some of their money upgrading the quality of their consumption. However, they are likely to have extra income they do not need to use immediately. That money goes into savings.

    

Stiglitz argues that the poor consuming while the rich save means that money that goes to the poor goes back into the economy. It goes back into the economy in the form of purchases which increase demand for goods and services. The money that is saved does not go back into demand for goods and services. So overall demand is lower, and unemployment becomes higher.

    

Stiglitz argues that the economic stagnation that dragged down the United States and Europe for much of the twenty-first century was a direct result of inequality. Inequality rates were increasing throughout most of the nations of the world. The poor simply had less money to spend to put into the economy, while the rich were saving what they had. At the same time, there were cutbacks in government spending and government programs for the poor, most notably in Europe at national levels and in the United States at state levels. This reduced government expenditures which also contracted demand, increasing unemployment. Inequality is associated with the rise of conservative governments which favor the reduction of social spending. So inequality produced recession both through narrowly economic mechanisms and through political mechanisms.

    

Stiglitz’s argument is one specific form of a general type of argument I call social democratic development. Social democratic development is any strategy of economic development that increases economic growth by shifting resources to poor people. There are many ways social democratic development can work.

 

1. Stiglitz’s mechanism. Transferring money to the poor increases aggregate demand due to the higher marginal propensity to spend of the poor.

2. An agrarian mechanism. Inequality in land often lowers agricultural productivity. Very small farms aren’t big enough to afford equipment and high quality agricultural inputs. Very large farms are often unproductive because they are only partially cultivated by landlords. The World Bank has frequently advocated equalizing land distributions as a strategy for increasing agricultural output in the Global South.

 

3. Increasing the productivity of the working class. Reducing poverty increases education rates. This is particularly the case in the Global South, where families may be so poor that they keep their children out of school so they can work. But even in advanced industrial nations, increased income improves educational quality – even if it only means that poor children come to school well fed and are not distracted by poverty-related problems at home. In nations at the lowest levels of poverty, increasing the food and basic medical care available to poor people means that there are more people strong enough and well enough to work a fully demanding job.

 

4. Increasing women’s participation in the economy. Reducing social inequality can mean reducing gender inequality. Reducing gender inequality has its own positive effects on economic growth. (See the Women’s Power and Prosperity article on this website.)

 

5. In Central Europe and Japan, giving workers bargaining power against their employers has actually dramatically increased worker productivity and promoted economic growth. Wolfgang Streeck has consistently argued that Germany and Japan’s high productivity comes from the high levels of training that German and Japanese employers provide their workers. They provide that training while American employers do not – because laws constrain the ability of employers to fire workers. In America, layoffs are extremely common – making employers reluctant to spend money on training they could end up losing in the next downsizing.

 

*  *  *

 

The skeletal arguments presented here will probably not convince anyone that social democratic development can really work. Before the casual reader blows this position off, it is worth noting that there is a substantial body of statistical evidence linking social equality to faster rates of economic growth. For a massive, although fairly technical, review of this literature see Cingano, Federico. (2014), “Trends in Income Inequality and its Impact on Economic Growth”, OECD Social, Employment and Migration Working Papers, No. 163, OECD Publishing. http://dx.doi.org/10.1787/5jxrjncwxv6j-en. That study has an appendix that lists nearly twenty econometric studies showing egalitarian nations have faster rates of economic growth – even when other statistical control variables are factored in.  

My own research suggests that the statistical studies are not a fluke. We have a number of research results that are suggesting that social democratic development is actually fairly effective. Expect further supportive material on these pages. However, if you can’t wait – check out the article on this website on one of my earlier studies, the analysis of Norwegian fisherman and Australian sheep farmers. Both Norway and Australia had extremely successful economic growth. The historical evidence shows that social equality was part of the secret of the success of both economies.

 

(To Be Continued)

For More Information

You can find a lot of material by Paul Krugman defending Keynesian expansion as the key to economic growth on his website. www.krugmanonline.com . He actually does NOT agree with either Stiglitz or myself on social democratic development. For his counter-view, see krugman.blogs.nytimes.com/2015/06/08/musings-on-inequality-and-growth/. Note that the statistical table that he uses to support his skepticism is far cruder and less adequate than the more careful econometric analyses reported in Cingano.

For a statement of Stiglitz’s position, see his Price of Inequality: How Today’s Divided Society Endangers Our Future. Stiglitz knows how to make a rousing argument.

 

Patrick Heller is famous for his analysis of how social democracy reduced poverty and helped to produce economic growth in Kerala. See his Labor of Development, Workers and the Transformation of Capitalism in Kerala, India. Note that the economic results are more compelling for rural areas than for urban.

For the argument that labor protection is key to the economic growth of Germany and Japan, see Wolfgang Streeck and Kozo Yamamura’s edited collection Origins of Non-Liberal Capitalism: Germany and Japan in Comparison.

For a general argument that social equality has been the linch-pin of all economic growth in the West, see Dieter Senghaas’s European Experience: Historical Critique of Development Theory . I am a huge fan of Senghaas.