Monday, April 4, 2011

Social democracy and time inconsistency

Back to the usual theme of what can be done to save social democracy.

One of the areas I have been pondering is demographic and labour market change. The debate about how the aging population will make pensions spending take up an increasing share of GDP and place pressure on health services has been running for a couple of decades by now. But perhaps less attention has been paid to the ways in which changing patterns of dependency affect the ability of social democratic parties to mobilize their constituencies on the basis of solidaristic appeals.

The problem here is that centre-left parties need to appeal to people on both sides of the welfare divide: those who receive benefits, and those who pay for them. Of course, this has always been the case, but what has changed is that the proportion of recipients has grown enormously. The percentage of pensioners as a share of population has more than doubled in OECD countries since 1950, from 7.1% to 17.5% (over 20% in Italy and Germany). All of this 17.5% of the population has the right to vote, so pensioners constitute an important voting bloc.

A lot of the debate around the effects of demographic change on pensions has consisted of arguments about financial sustainability. But even if we believe (as I do) that publicly funded pensions remain sustainable in these circumstances, this does not mean that it is easy to persuade the working population to pay for them. A wedge is driven between the working and non-working parts of the social democratic constituency, because working voters suffer from a degree of time inconsistency, and are probably reluctant to pay ever higher taxes in order to enjoy a pension of uncertain value in the distant future.

This problem is complicated further by the fact that parties of the right, on the whole, avoid threatening to reduce pension or healthcare provision, mindful of their votes amongst the older population. They imply that spending can be reduced by cutting down on waste, reducing immigration, and working public servants harder. On the whole, it isn't possible to cut spending seriously without cutting real pensions and health spending. But the right has cleverly manoeuvred itself into a position where it can simultaneously reassure older voters whilst implying to younger voters that taxes can be cut painlessly.

Similar points can be made about unemployment. The share of employment in the working age population in OECD countries has, contrary to what many believe, actually increased over the post-war period, from about 63% in 1970 to nearly 67% in 2008. But the distribution of that employment has changed, with a greater number of women and fewer men working, leading to a larger number of workless households (here David Willetts has a bit of a point). Here again, the right can drive a wedge between work-rich and work-poor households, since the work-rich are required to redistribute income to the work-poor, and some of the work-poor remain so structurally for very long period. However, the answer to this is to improve activation and ensure welfare policies do not discourage work which, on the whole, has been reasonably successfully achieved in some (especially Northern European) countries. Most working households do not have an interest in the dismantling of the welfare system, since many of them will need it at some point in their lives.

The problem is therefore not so much that social democracy is no longer workable, but that the social democratic constituency has increasingly deep faultlines within it. There are still common interests, but it is also easy to identify ways in which these interests appear to diverge. Social democracy has the right policies, but has a real problem communicating them, because of the time inconsistency of voters, and widespread ignorance about how the labour market actually works and how the government spends its money. Working and non-working people do have shared interests in social democratic policies, but social change has made it much easier for conservatives to imply that their interests are conflicting by making misleading arguments about public spending, and scapegoating immigrants and the unemployed.