ALFRED PFALLER Social Democracy in the Globalized Post-industrial Society

emocratic government, rule of the law, obser- Fundamental challenges Dvation of basic human and civil rights, indivi- dual freedom from unwarranted impositions by At the turn of the millennium, the achievement of others (including the community), increasing (and »prosperity for all« faces a number of serious chal- sustainable) material prosperity and an adequate lenges, which require major institutional adjust- participation of all citizens in that prosperity can ments. These challenges are: be considered to be central goals of the affluent increased exposure of national economies to welfare states in Europe, the Pacific Basin and international competition; North America. The goal that every citizen shall relative abundance of labor and a corresponding participate to an adequate extent in the prosperity scarcity of stable well-paid jobs; of the nation is the one that is most distinctly the »aging-society« syndrome; »social democratic« even though it is by no means greater volatility of work-life. specific to social democratic or socialist parties. It To these challenges another, far less comprehen- has in the past been shared and promoted by poli- sive one could be added: the rising costs of health tical forces that would not consider themselves care and the ensuing threat to its general availa- as social democratic. The slogan »prosperity for bility. The paper will not address this problem. all«, which sums up very well what a »social« However it recognizes that it could – depending democracy (taken here as a generic term, not on a country’s particular health care system and a label of a particular political group) is about, the particular political dynamics of the adjustment has been coined by German Christian Demo- process – turn into a major issue with regard to the crats. Other terms which refer to the essence of a maintenance of a »social democratic« society. »social democracy« are »social market economy«, Neither will the paper explore challenges that »social citizen rights«, »inclusive society« or »just in certain respects are crucial to modern society society«. but are not directly related to the maintenance This paper tries to outline the policies which of »prosperity for all«. These additional challenges can ensure »prosperity for all« in advanced capi- include talist countries in the foreseeable future. It iden- the »globalization« of a whole range of social tifies several crucial challenges that put this central relations beyond production and markets (rela- social democratic value at jeopardy and discusses ting to culture, values which orient the con- policy options for coping with them. Altogether, it duct of life, global commons, migration, crime, presents a case of comprehensive optimism with hazards of all kinds) regard to the economic feasibility of the agenda the persistent and partially widening North- made up by these options. The author is less opti- South prosperity gap mistic about the chances of constructive turns in the erosion of the socially cohesive traditional the ideology-driven public debate and of problem- values inherited from pre-modern times adequate policy re-designs in real-life politics, but the growing manipulative power of man with also about the political support a truly social regard to its own natural fundaments (environ- democratic agenda can still muster. ment, genetics, artificial intelligence). As mentioned, the paper’s basic concern is with the threat that the four challenges listed above pose to the achievement of »prosperity for all«. Yet

160 Alfred Pfaller, Social Democracy in the Globalized Post-industrial Society IPG 2/2000 this concern would be too restricted and would legitimacy of the »social-democratic« agenda. This omit an important element of what a »social implies three things: democratic« society should offer to its members Support must be mobilized for the agenda. This if it did not pay attention to the human and requires on the one hand a comprehensive social costs of material prosperity. There are »social »vision« that connects the essential values of externalities« to the market process which are in »social democracy« with modernized policy danger of being neglected to an excessive extent. concepts and on the other hand probably a The concept of »social externalities« refers to the good deal of political skill and charisma. negative (restrictive or destructive) effects the eco- Priority must be given to policy options that nomic process has on the non-commercial sphere have a higher chance of acceptance than others. of life, on human and societal reproduction, but In the present ideological climate this implies, also on the enjoyment of life (which from the for instance, that low-tax solutions are to be restricted point of view of economics is subsumed preferred to high-tax solutions, even if the under the concept of »consumption«). Under this latter may in some cases constitute a more extended perspective, meeting the four challenges rational approach.1 In other words, attention means safeguarding »prosperity for all« while at must be paid to efficiency-legitimacy trade-offs. the same time protecting the »sphere of life« from The temptation must be resisted to allow the excessive impositions made by and on behalf of essence of the agenda to be hollowed out in the the market process. However, broadening our quest for political support. focus like this invariably brings an additional challenge into the picture: the erosion of family functions in the wake of the emancipation pro- »Prosperity for all« yesterday and tomorrow cesses associated with modernity. This paper will discuss the options in dealing The means to achieve the goal in the past with the five challenges which are seen as requiring adjustments in the way »social democracy« func- In the decades after World War II, some countries tions. On the whole, it will define plenty of have achieved the goal of »prosperity for all« to scope for adjustments that are liable to consolidate a very high degree. The socio-economic mechan- »social democracy« in the »globalized post-indu- isms which were crucial for this achievement were: strial« society. However there is a challenge on an economy that ensured (nearly) full employ- a different level: The very concept of »social ment at »decent« wages (the full-employment democracy« (or »inclusive society« or »social mar- pillar of the social democratic society); ket economy«) is in danger of losing consent and effective insurance against the standard risks of of being abandoned as an overriding societal goal. life, such as disease, disability, old-age poverty, A generalized belief is currently emerging that temporary unemployment (the social-security »social democracy« is a concept of the past and pillar); illusory in the new age of globalization, informa- (means-tested) income support and specific tion or whatever. This belief is made up of a per- consumption subsidies for the needy (the po- ception of accumulating problems, of an ideologi- verty-alleviation pillar); cally enhanced cover-all interpretation (»too much provision of essential public goods free of state«) and an instinctive resistance against higher charge, most importantly: education up to uni- financial burdens. While the ideal of an »inclusive versity level (the public-goods pillar). society« may remain appealing on a highly ab- The relative importance of the various mechanisms stract level it may nonetheless lose support as a varied from country to country, giving rise to relevant political agenda. Solutions to the pro- various attempts at classifications. For our purpose blems exposed below may be feasible and sensible of discussing the options »social democracy« has in technical economical terms but they may not meet the test of political acceptance. Therefore, the over-riding challenge for those who want 1. See in this respect e.g. Holtham’s plea for developing »prosperity for all« is to maintain (or regain) the public ownership (Holtham 1999).

IPG 2/2000 Alfred Pfaller, Social Democracy in the Globalized Post-industrial Society 161 for coping with the challenges listed, a distinction pation in national prosperity, a goal that is very far proposed by Gøsta Esping-Andersen (1990) is of from any »equality of outcomes« often alleged to particular value. So-called »residual« welfare states be the unrealistic alternative to a strategy aiming at concentrated on correcting market results through equal chances.3 income and consumption subsidies targeted at those without adequate market income (»the poor«). The ideal-typical example is the USA. The The capitalist context for the pursuit of the goal »Christian Democratic« welfare state, typical for the founding countries of the European Com- Social democratic society, in the wider meaning of munity, emphasized social insurance tied to em- the term, has so far been based on a capitalist eco- ployment and aiming at the preservation of em- nomy. The term »social market economy« points ployees’ economic status throughout the vicissi- to that particular combination of organizing prin- tudes of life. The »Social Democratic« welfare ciples. It implies the belief in the ability of »dome- state of Scandinavian provenience centered on sticating« capitalism through an appropriate regu- the universal provision of essential services and lative and corrective framework – regulative for the income-maintenance as economic citizen rights, purpose of mustering the market forces for the independent of citizens’ market income. goal of mass prosperity, corrective for the purpose of protecting the victims of the market. This belief is not adopted here as an axiom which should Equality of chances as a substitute? never be questioned. But the paper does adopt the strategy of investigating future chances of »dome- Now that these pillars would have to be mended sticating« capitalism through adjusted welfare- in order to obtain the goal of »prosperity for all« state mechanisms before thinking of more radical under the changing conditions referred to above, alternatives. Moreover, it gives priority to dome- the goal itself is being questioned. It is being pro- stic solutions before turning to supranational ones. posed that major increases in income inequality be accepted as compatible with the concept of a »just society« and that justice be seen to a larger extent Citizens, not employers, should pay for social in the equality of chances rather than the equality security: Meeting the challenge of international of results (see e. g. Giddens 1999). The proponents competition of this conceptual adjustment see it as a concession to the perceived impossibility of attaining income Even though several European welfare states have equality in the future to the extent that some always had highly open economies, international countries have experienced in the past. Yet, if pur- competition has assumed a new quality. It is no sued seriously, equality of chances is a fairly radical longer only the international trade that defines concept that would be in conflict with well-estab- openness, increasingly it is transnational organiza- lished privileges. It implies a high degree of down- tion of production within firms. National firms ward mobility for the privileged. Typically, equality used to be an asset of national economies compe- of chances has not been achieved in most existing ting in the global market-place. »Global firms« no welfare states. But the persisting inequality was longer qualify as such an asset. It is now increa- acceptable because of a general participation in singly territory-bound national production factors society’s growing prosperity. Compensating a that compete for the »favor« of being hired by higher degree of social polarization with increased transnationally operating firms. equality of chances would be politically much more demanding than compensating persisting privileges based on wealth and family background 2. See also Le Grand 1991 and Holtham 1999: 54 ff.. with »prosperity for all«.2 This paper does not For a summary of the relation between equality, justice investigate the options for establishing true equal- and citizen rights see Plant 1998. 3. »Adequate participation« corresponds to Frank ity of chances, but rather concentrates on the Vandenbroucke’s notion of a »threshold version of options for safeguarding adequate general partici- equality« (Vandenbroucke 1998).

162 Alfred Pfaller, Social Democracy in the Globalized Post-industrial Society IPG 2/2000 Safeguarding prosperity ment. Most of all, this appears to weaken the »so- cial-security pillar« of a »social democratic« so- Intensifying global competition has raised fears ciety. In addition, it could be seen as eroding that the very basis of »prosperity for all«, namely the »full-employment pillar« and the »public- national prosperity itself, is in danger. Even goods pillar«, the latter because of dwindling tax though the issue of how to safeguard the national revenues. economy’s competitiveness in the global market- As to competition and social security, the pro- place is the dominant theme in many national position that traditional welfare state protection debates, this is not a challenge which can be has become too expensive in today’s global mar- meaningfully addressed on a general, not country- ket-place is conceptually wrong. Cost competition specific level. All the tremendous transformations would affect those parts of welfare-state protection in the organization of production, businesses and and redistribution (a core part of the »social de- markets are, first and foremost, a prosperity- mocratic« society) which are financed by compa- enhancing force – otherwise the market would nies, including quickly discard them. But it can, of course, be that employers’ contributions to social security some countries have to adjust so as to facilitate schemes (important in some, but not all modern high value-added production, employing national welfare states), manpower, on their territory. wage payment during sickness, To a large extent, such adjustment does not paid leaves during pregnancy and early mother- question any of the four basic pillars on which hood, and »prosperity for all« rests. It refers to the traditional on a somewhat different level: the regulation means which enhance a country’s »industrial fer- of working-time as a function of family/com- tility«, i. e. provision of human capital, of infra- munity priorities rather than productive prior- structure, knowledge-creating and disseminating ities. institutions, etc.4 It also refers to the removal of Yet from an economic point of view, cost competi- obstacles that keep enterprises from unfolding tion is essentially irrelevant for the affordability their innovative and productive potential. But a of social protection, welfare-state services and prevalent theme in national debates is, in addition, redistribution. That overall production costs stay cost competitiveness. In this respect, a conflict be- within the limits dictated by competition has tween the conditions for safeguarding national always been a condition that had to be met in the prosperity and the goal of having all citizens parti- production of tradables. The level of employees’ cipating in this prosperity might be perceived. total remuneration compatible with these limits has always depended on productivity. The mechanisms to keep real pay within viable limits Safeguarding »prosperity for all« economy-wide have been collective bargaining, exchange-rate adjustments, productivity adjust- The new quality of international competition, i. e. ments and occasionally government subsidies. transnational organization of production by »glo- More weight lies today with collective bargaining bal firms«, implies the danger that cost disadvan- as the exchange-rate is less available as a policy tages will lead to a loss of market chances more instrument and as productivity adjustments are quickly than was the case when they could spur less reliable as a response of companies. But the af- national companies to higher levels of productivity. fordability of a particular component of overall At any rate, the threat of shifting production or costs does not depend on the limits to these costs. investment abroad has become a bargaining chip Welfare-state costs are about the share of income of companies in negotiations over wages, non- citizens are prepared to devote wage labor costs, taxes and workers’ rights. Inter- national comparisons of hourly wages, taxes on companies, employers’ contributions to social se- curity etc. can be more readily instrumentalized 4. On the concept of industrial fertility see Kamppeter for political pressure towards downward adjust- 1995.

IPG 2/2000 Alfred Pfaller, Social Democracy in the Globalized Post-industrial Society 163 to the provision for old age and the risks of life, higher than normal taxes on enterprises. The result and of either kind of adjustment would be that welfare- to solidarity with their less privileged fellow state costs would be largely immunized against citizens. international competition. Political attention would These shares result from essentially political deci- be relieved from this apparent issue and could sions about priorities and are not a question of focus on the really relevant issues. economic affordability. Using Esping-Andersen’s typology, immun- If welfare-state costs face increasing pressure by izing social protection against international cost international cost competition, that is because the competition implies that the employee-centered institutionalized process of decision-making in »Christian Democratic« welfare systems of conti- these matters obscures the priority question rather nental Europe would move closer to the citizen- than bringing it to the fore. It tends to exclude centered »Social Democratic« type of Scandinavia trade-offs between cash and entitlements from (see Levy 1999). the bargaining tables. It is typical for the continen- tal European welfare states of the »Christian Democratic« type that the process which leads to Safeguarding taxation justice the determination of employers’ social security contributions and to employees’ entitlements is The fallacy of the cost-competitiveness argument separated from the process of wage determination. with regard to welfare-state protection extends Thus, the inherent trade-off between take-home also to the provision of public goods. They, too, wages and social entitlements of all sorts disap- are essentially a matter of political priority and not pears from the »screen« of policy-relevant atten- of affordability. But such analogy does not apply to tion. the fear that increasing competition might under- To defuse the politically salient but economi- mine the »full-employment pillar« of a »social de- cally inappropriate question of how much social mocratic« society. I shall deal with this challenge in security etc. is compatible with competitiveness, the next chapter. At this point, I want to refer institutionalized attention must be directed to the briefly to another aspect. question of how to divide overall available income While international cost competition does not (itself a function of market prices, productivity and affect the affordability of welfare state entitlements labor’s bargaining power) between present con- (protection and access to public goods), the inter- sumption, provision for the future and solidarity. national mobility of capital does create a problem The answer to this question is inherently poli- of justice. Income accruing from capital can be tical, reflecting citizens’/employees’ preferences. shifted abroad in order to avoid national taxation Abandoning employers’ contributions to social whereas the bulk of wage income can not (see e. g. security systems would greatly facilitate an explicit Tanzi 1995 and Rodrik 1997). As a consequence, decision on preferences in this matter. Alternatives the rich get away with contributing less to the pro- are: vision of public goods and to solidarity with the 5 financing social security expenses out of the poor. Labor’s share in financing public expendi- government budget (the Danish model); ture tends to increase. To the extent that the wel- financing it through employees’ mandatory con- fare state amounts to a redistribution from high- tributions only. income to low-income citizens (everywhere a An additional element of freedom with regard to rather small extent indeed) this tends to become a preferences could be introduced by leaving provi- redistribution within the »working class«. sion for the future and for risks (not solidarity!) Restoring taxation justice must form part of a to a certain extent up to the individual (the Swiss social democratic agenda – because basic principles model). If social security is to be financed out of the government budget (like other welfare-state components anyway) the revenues needed would 5. Anthony Giddens (1998: 103) refers to this as the self- exclusion of the elites in the globalized economy, which have to be raised primarily through taxes on supplements the involuntary exclusion of those without households and consumption and not through decently paying jobs.

164 Alfred Pfaller, Social Democracy in the Globalized Post-industrial Society IPG 2/2000 of justice are violated and because the acceptance sperity for all«. In many countries it has instead of collective solutions to many problems (solidar- become a mechanism of exclusion, be it in the ity with the destitute, provision of public goods) form of mass unemployment or be it in the form of might become threatened. There are a number of mass low-wage and low-security employment. obvious ways to reduce the extent of the problem. Compensatory welfare-state mechanisms (part of One is the closing of legal tax loopholes so as to the »social-security pillar«) were not designed to broaden the tax base on rich people’s income that cope with such a large number of victims of stays in the country. Another one is a consump- the market. Expenses have gone up because more tion-based tax structure that discriminates against people have become dependent on substitute luxury consumption. A third possibility is offered income (unemployment insurance and others). by taxes on real estate, the least mobile of all assets. Welfare scheme revenues have declined because Finally, competition policy should be mentioned as the number of contributors has decreased. Thus, a potentially powerful instrument for limiting pro- the »social-security pillar« is being put at jeopardy fits and distributing the fruits of productive pro- as well. At the same time social polarization has gress among the mass of consumers. Such dome- become more accentuated, thereby eroding the stic solutions go a certain way, but most likely they essence of the »social market economy« or the will not amount to a complete remedy. To tackle »social democratic society«. This has increased the problem at the root, international agreements the importance of the »poverty-alleviation pillar«. are needed which set reasonable floors for taxes However, as we shall see, this pillar is also increa- on capital. Countries that pursue a deliberate tax singly being questioned in the attempt to deal with haven policy, such as Luxembourg, would have to mass unemployment. be put under international political pressure. Throughout large parts of the West, reasonably It should be emphasized that a satisfactory well paid jobs have become scarcer during the last solution to the problem of how to fight tax evasion 25 years due to the combined effect of three pro- by mobile capital is not a precondition for making cesses: adequate social protection »globalization-proof«. Productivity increases have continued to make Social-protection schemes are overwhelmingly production less labor-intensive, albeit on a lesser financed by their very beneficiaries and constitute scale than during the era of near full employ- for the most part neither a redistribution from ment. capital to labor nor from the rich to the poor. Economic growth, i.e. the expansion of produc- Those elements of redistribution which are in fact tion, has declined considerably and has often part of the classical western welfare state (impor- not sufficed to compensate for the labor-saving tant in health care and public education, essential effect of productivity increases (see table 1 be- in income support for the needy) have always low). amounted much more to a redistribution within An increasing labor force has in some countries the »working class« than to a redistribution from and during some time periods elevated the capital to labor.6 There is no indication whatsoever threshold of minimum economic growth need- that they can no longer be financed by taxes which ed for preventing an increase in unemploy- remain unchallenged by »globalization«. ment. This increase in the labor force has been due in part to immigration, in part to demo- graphics (baby boom generation) and in part Higher growth rates and three options of labor to an increasing participation of women in market adjustment: Meeting the challenge of labor the labor market. It has been countered to some abundance extent through a declining average retirement

It is quite evident that the »full-employment pil- lar« of the modern »social democratic society« is in 6. Of course, the redistributive element varies in signi- bad shape throughout much of the Western world. ficance between the different types of welfare states. It is least pronounced in Esping-Andersen’s »Christian- The labor market, from the 1970s onwards, has Democratic« type, which prevails in Continental Europe stopped being a mechanism which ensures »pro- (Germany, France, Italy etc.)

IPG 2/2000 Alfred Pfaller, Social Democracy in the Globalized Post-industrial Society 165 age and a later average entrance age due to point can perhaps be made that the scarcity of high- longer education. skill labor has turned into a bottleneck-creating The last mentioned of the three processes will in obstacle of economic growth, causing output some countries (especially those with low female growth to trail productivity growth. participation rate so far) keep increasing the demand for jobs. In other countries it might even alleviate the pressure on the labor market because The issue of economic growth baby boomers reach retirement age. Productivity growth has recently somewhat accelerated again, At present, long-term tendencies of labor supply but has still not reached the speed of the 1950s and productivity growth notwithstanding, eco- and 1960s. In the long run, it is to be expected to nomic growth appears as the decisive variable in slow down because the sectors of the economy the labor market equation. If average economic susceptible to high growth rates of productivity growth (throughout the business cycles) accelerated (most of all manufacturing) will provide for an sufficiently labor abundance would soon be a ever shrinking percentage of total employment. phenomenon of the past (leaving only problems Service branches without much potential for pro- of mismatch, which are susceptible, however, to ductivity growth (and hence for labor-saving) will effective treatment). The following table illustrates increase in relative importance. the growth gap which is at the origin of increasing It should be emphasized here that at the root of labor abundance. the problem is a general turn to the worse in Despite the obvious importance of economic the labor market equation and not just a decline in growth in the labor market equation, here the the demand for low-skilled labor, as it is often main- overall argument is being made that it is possible tained. A mere shift in the composition of labor and desirable to ensure »prosperity for all« in a demand towards higher skill levels – be it due to context of generally slow economic growth. The developments of production technology, to chang- line of reasoning is as follows: ing consumer preferences or to increasing low-wage It is highly uncertain that sustained high growth competition – would boost high-skill employment can in fact be engineered through appropriate at the same time as it diminishes low-skill employ- economic policies. ment. If supply were inelastic it would boost high- »Prosperity for all« should not be made hostage skill wages. With the exception of highly specific to such an insecure outcome. and relatively small labor market segments, neither The dismal effects of labor abundance can in of the two phenomena can be observed in the fact be neutralized through appropriate labor slowly expanding economies, characteristic of the market policies even under conditions of pro- Western world over the past decades. However, a tracted economic stagnation.

Table 1: Real economic growth in major highly developed countries (in average yearly percentage rates)

1661–1970 1971–1980 1981–1990 1991–1998

USA 4,1 3,0 2,9 2,6 Germany 4,7 2,7 2,3 2,0 France 6,0 3,4 2,4 1,6 Great Britain 3,0 1,8 2,7 2,0 Italy 5,9 3,9 2,2 1,2 Japan 10,911 4,4 4,0 1,4

Source: OECD.

166 Alfred Pfaller, Social Democracy in the Globalized Post-industrial Society IPG 2/2000 However, it is, nonetheless, a political imperative stability-oriented wage increases to do everything possible to accelerate economic a monetary policy that fully takes into account growth in a sustained way. Every bit of success the economy’s productive potential on the growth front alleviates the task on the investment-encouraging and facilitating regula- labor-market front. Besides, enlarging the »cake« tions (including taxes) that constitutes the prosperity to be shared is a the provision of overheads that favor produc- worthwhile goal in itself. In a way, activating eco- tivity and innovation nomic growth is the primary challenge of any a manpower policy that prevents early bott- government today – all over the world. Any »social lenecks in labor supply democratic« agenda has to include a bid for higher might well add up to an adequate policy mix, growth, even though it has to provide, on the rewarded also by the financial markets and hence other hand, for the social consequences of con- »globalization-proof«. tinuing slow growth. But it is not the aim of this paper to discuss the Social democrats have traditionally been advo- most promising way to faster economic growth. cates of Keynesian demand management as an The point is that this discussion can and should be essential policy tool in the bid for full employ- conducted in an open, »value-free« fashion. Still, a ment. Yet there is nothing inherently »social de- few words are in order on the dimensions the dis- mocratic« in Keynesian approaches to economic cussion might get us into. Demand management growth. The affinity of Keynesian economics and versus supply-side improvements is perhaps too social democracy was one of convenience during narrow, too technocratic a focus. The key to the the first three decades after World War II: Keyne- understanding of the marked slow-down of eco- sian economic management might have helped – nomic growth since the 1970s might be the succes- under the specific conditions of the time – to sive dismantling of a framework of stability and sustain a high demand for labor, which was the secure expectations in the post-Bretton Woods era. basis of »prosperity for all«. If it were possible to »Globalization« might well have contributed to restore that virtuous circle of growing produc- this destabilization. Moreover, the whole process tivity, rising wages, increasing mass demand and might have to do with a secular shift in »class« alli- the expansion of productive capacity, it would ances away from the »growth-and-productivity« certainly be good news for the social democratic coalition between labor and capital towards a new agenda. But growth-enhancing policies have to be pre-eminence of interests centered on asset mar- judged by their present functional adequacy, not kets (see Schulmeister 1998). In this case it would by their affinity to social democratic traditions. have to be a central »social democratic« objective That implies that the social democratic agenda also to forge a new »growth-and-productivity« coali- has to be open to those supply-side ideas about tion, something which could be envisaged as economic growth that have traditionally been fought for under the banner of a new »post-neo- associated with the center-right of the political liberal« ideology (which would have to go well spectrum. Whether supply-side and/or neo-liberal beyond the Third Way) but as well as the outcome ideas on economic growth are right or wrong, is of transformations that do not follow a blueprint a judgment that can not be derived from social de- and are not yet clearly understood at the time mocratic concerns about distributive justice. Ho- when they take place. wever the judgment does not affect the validity and viability of the »social democratic« agenda of justice either. If economic analysis and empirical Coping with labor abundance under conditions of slow information suggest that demand management has growth its limits in the context of investment-impairing and/or demotivating supply-side obstacles to Higher economic growth would be the best way growth the social democratic agenda has to – and to restore full employment at »decent« wages, should be perfectly able to – accommodate that. which was the economic foundation of »prosperity A balanced, though counter-cyclically modu- for all« in the so-called golden age of welfare capi- lated, state budget talism. However, as argued above, allowance

IPG 2/2000 Alfred Pfaller, Social Democracy in the Globalized Post-industrial Society 167 should be made for the probability that sufficient important employer of »permanent resort«. A growth will not be forthcoming – the US »miracle« variant of the third option can be observed in the of the 90s notwithstanding. Even if a mix of Netherlands (much part-time employment) while appropriate policies and favorable circumstances the first option is being timidly tinkered with in should significantly accelerate sustained economic the USA (earned-income credit) and in Germany growth (for an optimistic view see Bluestone/ (»Ökosteuerreform«). Harrison 2000) it is highly unlikely that it will The crucial point here is that there is no gratis reach the magnitude needed for restoring, by option for regaining full employment at »social de- itself, full employment at »decent« wages in coun- mocratic« conditions, save the »deus ex machina« of tries like Germany, France or Spain. Some adjust- sustained high economic growth (see also ment of the labor market to conditions other than Solow 1998). Full employment at socially acceptable permanent spectacular growth rates is unavoidable conditions, in turn, is the single most important in these countries. The dose of the adjustment condition to be met if »prosperity for all« is to be needed will, of course, depend on the rate of regained in a way that is broadly compatible with a economic growth. This applies to countries with market economy. For full »high-wage« employ- better adapted labor markets as well. ment secures that basic justice in market outcomes The USA has shown how a widely deregulated which keeps post-market corrections in manage- labor market can in fact make economic able and politically acceptable dimensions. growth much more employment-intensive. But The three alternatives listed above indicate the non-amended it might create large-scale employ- major strategies available for adjusting the labor ment at unacceptably low wages and at unaccep- market in a socially acceptable way to protracted tably bad conditions. There are three basic options slow growth. The choice between them is not to adjust the labor market in a way that is com- entirely one of political preference. Only the first patible with the core values of social democracy: option (deregulation plus top-up income) is com- deregulation plus a top-up income for those patible with the existence of a large low-skill sector who earn unacceptably low wages (either direct- in the work-force. The other two, especially the ly via negative income tax etc. or indirectly third one (reducing labor supply by shortening via social security subsidies, wage subsidies to working time), are only feasible if the skill struc- employers etc.); ture of labor supply can be adjusted to more or less expansion of state employment (e. g. in socially match the structure of demand. To the extent that useful services); skill requirements change more rapidly nowadays sharing of available (»decently« paid) employ- than they used to, this would require a major ment among all members of the labor force. effort at retraining people and most likely also The first two options have to be financed by the of making them retrainable through an adequate tax-payer, i. e. by the citizenry at large, even basic education. The emphasis the Third Way con- though top-up incomes are, to a certain extent, cept lays on that point is fully justified. But, of self-financing because they make income support course, making people employable does not get for the unemployed obsolete.7 The third option is them employed if jobs are scarce. more specifically at the expense of »job-owners«, because as a principle they must not only renounce part of their work but also part of their remunera- tion.8 The three options can be combined and 7. Employment-facilitating wage subsidies are implicit they can be put to practice in many different con- in any social-security system that is financed out of general tax revenues rather than by employer/employee crete ways. All this merits an in-depth discussion of contributions. In this respect, the German »Ökosteuer« relative advantages and disadvantages, a discussion tax reform (introduction of energy taxes against relief which has to be omitted here. It may suffice to of social-security contributions for the receivers of low remark that the second option has been practiced wages) is in the line of the deregulation-cum-top-up- by Sweden and to a lesser degree by other Scan- income approach to full employment. 8. For an elaboration on the question of who pays dinavian countries, where the state has not really for the various full-employment strategies see Pfaller been the »employer of last resort«, but rather an 1998: 11 ff..

168 Alfred Pfaller, Social Democracy in the Globalized Post-industrial Society IPG 2/2000 Those people who are – for genetic or other One is the affordability for employers in the reasons – bound to stay in the low-skill bracket context of international competition, an issue dealt despite improved education and training can only with above. This problem is not confined to a earn »decent« wages if a booming labor market pay-as-you-go system, but considered as particu- makes their »skills« scarce as well. But if it is true, larly salient there. The clearest way of avoiding it as it is often claimed, that the new international in such a system is to finance the monthly disbur- division of labor and/or the technological innova- sements to the retired out of the government bud- tions of the »information age« make the kind of get, i. e. through general taxes rather than work they can do in large part obsolete,9 the first specific contributions. This has the additional strategy presents in fact the only way to have them advantages of (a) facilitating employment by participate in their society’s growing prosperity. reducing the overall pay-roll tax, (b) ensuring a However, one should not be too hasty in defining fairer distribution of the financial burden in times rigid skill resistance as the central problem to of wide-spread unemployment and (c) avoiding which the labor market has to adjust. The differ- the danger of the »contribution fatigue« referred ences in the skill composition of the labor force, to above. However, such a state-financed system is say between the USA and Japan, seem to indicate permanently vulnerable to political pressure arising that institutions can achieve a lot before genetic out of budget problems in the wake of economic limits are felt. Adjusting labor markets along the down-turns or government profligacy or overall US pattern (even if sweetened by generous top-up »tax fatigue«. incomes for low-wage workers) could amount to a A second issue is the current contributors’ significant waste of potential »human capital«. suspicion that their ever-rising contributions to the system will not be rewarded later on when they are retired. As this suspicion approaches conviction, Reform options, but no solutions: Meeting the political pressure is building up to limit the contri- challenge of the »aging-society« syndrome bution-load on the economically active population and have the retired share the burden of adjusting The changing demographic composition of society to the aging of society. This, in turn, confirms throughout the OECD world and even beyond the suspicion that the implicit promises of the (Asia Pacific) is another challenge that affects the »generation contract« will no longer be honored – »social-security pillar« of the »social market eco- a vicious circle which destroys the system’s legiti- nomy«. It makes one of the three adjustments in macy. The implication is not that the economically the old-age pension systems, or a combination active are over-burdened, that they prefer to make thereof, unavoidable: less provisions for their retirement age and rather higher financial provisions for retirement consume more now. On the contrary, they might lower income during retirement supplement their contributions to the public later transition into retirement. pension system by increased payments into private All three options are highly unpopular, but none pension funds – out of fear. The point is that the of them mean social disaster. However, the disaster pay-as-you-go system rests on trust and that it is of a re-appearance of wide-spread old-age poverty doomed when this trust is eroded. There are two could result from a non-adjustment of the pension ways out of this problem: system to the erosion of »standard« full employ- to abandon the system and replace it by another ment. The central question should be how to pre- one, less dependent on trust, though not neces- sent the unpleasant choice to the citizens in such a sarily more rewarding as far as the buying-power way that decisions reflect their preferences. The of future pensions is concerned, or heated debate on the financial limits of present to fully restore the trust on which the system pension schemes, which prevails in countries with hinges. a pay-as-you-go system, somehow implies that people would opt for anything but higher contri- butions (»unaffordable«). In reality, three issues 9. For a recent review of the low-wage-competition- get mingled here. vs.-technological-change controversy see Feenstra 1998.

IPG 2/2000 Alfred Pfaller, Social Democracy in the Globalized Post-industrial Society 169 The first way out leads to privatization (see be- pulsory) savings of the shrinking relative numbers low). The second way out implies that decisions on of the economically active if their claims on a the system’s functioning are taken out of the growing share of the national product are not to sphere of politics and enshrined in some kind of a be invalidated. Such depreciation of the real value »pensions constitution«.10 of the funds accumulated during a life-time can The third issue refers to the extent, to which happen via inflation (the saved money buys less the individual should be allowed to choose be- goods, whereas the active population protects tween the three adjustment options of (a) safe- itself against that inflation through wage increases) guarding the present consumption standard at the or via a nominal depreciation of the pension funds’ expense of old-age income, (b) safeguarding old- financial assets (many sellers, few buyers). age income at the expense of present consump- A longer working-life defuses most clearly the tion and (c) working longer. There is nothing »pension time-bomb«. But it constitutes an addi- inherently unsocial in setting a limit to compulsory tional burden on the labor market and would provision and to the monthly pay-out derived demand more radical adjustments there along the from it, leaving everything beyond that to volun- lines discussed above. Since these adjustments tary provision. That leaves the – manageable – pro- cost, they would neutralize at least part of the blem of honoring the acquired entitlements relief from the contribution load which the pro- during the transition phase to a more restricted longing of working-life is all about to start with. public pension system. That is to say that lower contributions into Partial or full privatization of the old-age pen- pension schemes of whatever sort would have sion system has several advantages. to be bought by higher taxes needed for top-up It reduces the politically ultra-sensitive share of incomes or the expansion of public employment or the public sector in GDP, without necessarily by lower wages coming as a corollary of shorter affecting the level of social protection during working hours within work-sharing schemes. old age. However, it can perhaps be expected that in a well- It takes the issue of the relation between functioning economy (how to ensure that?) more monthly pay-outs and wages out of the realm labor supply allows for additional economic of politics because the entitlements acquired growth rather than just adding to unemployment. through a life-time of contributions are fixed in From the point of view of social democratic terms of an overall financial volume available for values, the whole range of pension reform options monthly disbursements. This volume reflects is acceptable. The decision for a particular adjust- the accumulated yields of the capital invest- ment mix should be informed by a careful exami- ments done with the contributions. But it does nation of the trade-offs involved in every option not in any way respond to the changes in aver- and, ultimately, by political preferences. However, age life expectations between the signing of the some reforms would require particular provisions insurance or savings contract and the start of to protect persons unable to acquire adequate disbursements. Longer life expectancy automa- individual entitlements (e.g. mothers without a tically means smaller disbursements. full labor market career or surviving spouses who It has a real financial advantage as long as inte- relied on family-related entitlements). rest rates, which expand the fund available for pensions, are higher than economic growth rates, which determine the reference variable for Retraining, detaching social security from pensions in a pay-as-you-go-system. This con- employment, setting limits to flexibility: dition has applied during the past 25 years or so, Meeting the challenge of working-life volatility but not during the 20 years before. There is a trend throughout the industrialized However, privatization also carries risks. One is world towards greater volatility of working life that interest rates drop below growth rates, as it should be anyway. More importantly, the negative saving of the swelling cohorts of retired persons 10. Peter Bofinger (1999) has elaborated a proposal must be matched by increased (voluntary or com- along these lines for Germany.

170 Alfred Pfaller, Social Democracy in the Globalized Post-industrial Society IPG 2/2000 with its triple aspects of less standardized working maining contributors and their employers. At the time, reduced job stability and increasing demand same time, social security protection declines, leav- for professional and geographical mobility. This ing an increasing part of the work force not trend reflects, first of all, the new flexibility needs covered by the schemes. The twin threat can be of modern production. Standardized large-scale neutralized if social security were detached from industrial production that set the paradigm for the employment, be it by extending compulsory mem- organization of work life in the past is becoming bership to all citizens, not just the dependently more and more obsolete, a transition referred to in employed ones, or be it by financing the schemes the concept of post-Fordism. This has to do with out of the government budget. Conceptually, this technological changes in industrial production, the is not a major change but in practice it constitutes increasing importance of services and a more rapid a rather radical departure from welfare-state tradi- pace of market changes due to innovations. tions in some countries. Increased working-life volatility affects – like The response to the other challenge is less most of the other challenges – the »social-security straightforward. Working-life volatility highlights pillar« of a »social democratic« society. In addition a relatively recent tendency in modern affluent it touches upon an intangible, yet crucial, aspect of societies that reverses a more than hundred year such a society: an adequate protection of the old trend of protecting private life from the »sphere of life« against the demands of the mar- demands of working-life. The old, and always pre- ket. Moreover, it poses a challenge for society’s carious, compromise between market and »life« or manpower management for the sake of both com- »working-life« and »private life« is being under- petitiveness and employability. Repeated retraining mined. The demands of the market reduce the might become an important precondition for time autonomy of the individual, the protected maintaining both and, hence, for mending the time space in which citizens can organize their damaged »full-employment pillar« of the »social private life becomes narrower. Added to the grow- democratic society«. Finally, the decreasing impor- ing demand for mobility, this tends to erode the tance of stable employment in large production stable social environments which had been allowed units weakens social democracy’s traditional poli- to form after the upheavals of the early industrial- tical basis, making it more difficult to mobilize ization period and to put at jeopardy their integra- support for a »social democratic« agenda (see tive effects (see also Ehrke 2000: 89 f.). below the chapter on political strategies). On the However, sacrificing private autonomy to the other hand, economic restructuring – an impor- demands of working-life should be a personal deci- tant precondition for continued prosperity – might sion, not one imposed by a demand for manpower become politically more difficult as well, because which shows itself inflexible in this respect. In fact, in the context of labor abundance, less stability in the flexibility needs of production are themselves employment creates significant economic insecu- flexible. Productive progress has done away with rity for the individual member of the work force the necessities once imposed by nature. There is and, hence, resistance against structural adjust- no real societal need to sacrifice private autonomy ments. and enjoyment of life to ever higher productivity. But the principal question which arises in the Society and individuals should have the choice of context of our normative focus is how to deal with sacrificing productivity and income gradually, the danger the increasing volatility of work-life without suffering drastic sanctions in terms of implies for the »social-security pillar« and for the chances on the labor market. The concept of a »so- as yet undiscussed meta-economic »sphere of life«. cial democratic« society clearly should set limits to To the extent social security is linked to »stan- the flexibility imposed on employees (see Etzioni dard« employment, as it is in Esping-Andersen’s 1998). »Christian Democratic« type of welfare states, a It is not valid here to argue with the necessities twin problem arises: The number of contributors of post-Fordist production or intense international to the various insurance schemes declines, which competition. Limits to working-life flexibility may has negative effects on the schemes’ finances and reduce hourly productivity and hence – depending might increase the financial burden on the re- on foreign competition – the wage that can be

IPG 2/2000 Alfred Pfaller, Social Democracy in the Globalized Post-industrial Society 171 paid. In a dynamic context, limited flexibility Permeable work careers or socialized child-rearing: would narrow the scope for wage increases rather Meeting the challenge of eroding family functions than reducing wages. There are different ways of institutionalizing the possibility of choice in the The social costs of unchecked increases in produc- trade-off between money income and freedom tion efficiency are compounded by another pro- from excessive adjustment pressure. The choice cess with deeper roots, which emanates from the can be imagined on the individual level (e. g. op- emancipatory aspect of modernization and exposes tional, higher-paid off-hours work) as well as on a fundamental deficit in the social regulation of the the level of collective bargaining, where the pro- society-market relationship. The sphere of »repro- tection of the »sphere of life« has been a promi- duction« has never been radically adapted to nent function throughout the history of labor the individualistic emancipatory core values of unions. modernity. It has to a very large extent continued If a production sector is not exposed to inter- to function as a relic of pre-modern times, making national competition the government can set cer- use of the commercially unrewarded work of tain limits to flexibility, substituting law for women. To a large extent, modernization proceed- collective agreements. In these sectors, the cost of ed on the very basis of women maintaining protecting the »sphere of life« are passed on to the their traditional role of taking care of the house- consumers. Such limits are economically feasible hold, most importantly: of the raising of children. also in sectors in which foreign unit labor costs are Once it incorporates women on equal terms, not dramatically lower. But, of course, there may modern work-life – the way we know it, not the be economic activities in which competitive unit way it can be imagined in utopian thinking – costs cannot be achieved without adjusting to greatly reduces the space for the care for children. foreign flexibility standards the benefits of which To put it succinctly, children do not really fit into a have been passed on to global consumers. Here fully modern society (see also Stiefel 1998). Other a rational choice would have to consider the forces eroding family functions must be added option of renouncing that particular activity, just to this, forces that also have their origin in the like highly industrialized countries did when they individual’s liberation from pre-modern compul- abandoned many production lines to low-wage sory social ties. countries. Naturally, such a decision is difficult in a This is the least tractable, but perhaps also context of mass unemployment, which tends to the most serious threat to a desirable kind of justify everything that saves jobs. society. It goes beyond the challenges which are Ultimately, to the extent that the »sphere of specific to the goal of »prosperity for all«. It is life« is sacrificed at the altar of competitiveness, we not just a matter of »quality of life«, individual have an exploitation of workers by consumers time autonomy or freedom from adjustment (who reap the benefits in the form of low prices or pressure. At stake is an important pillar of the the convenient supply of services). But to the extent external foundations on which modern society that the consumer and the worker are one and the with its highly differentiated institutional same person, a collective decision in favor of more spheres – among them the industrial economy »time autonomy« at the expense of less »consumer with its high division of labor and its highly elab- benefits« should be perfectly acceptable to the orate market exchanges – rests. The sphere of market. That »consumer benefits« get preference »reproduction« is part of the »societal commons«, does not reflect a legitimate choice of society, but so to speak, which the economy has always made the absence of an institutionalized opportunity of use of . These are now being threatened not only choice. The flexibility »needs« of production tend by the economy’s dis-regard for them (as is the na- to be presented as an absolute rather than as a que- tural environment) but also by an immanent ten- stion of trade-off. Accordingly, the enhanced flexi- dency of erosion. This carries the danger of large- bility’s yield of productivity gains is often not even scale anomy with all its disruptive consequences, passed on to those who made them possible by thus destroying the basis of any sacrificing their time (or geographic) autonomy. »social democracy« (see also Oppenheimer 1994, Fukuyama 1999 and Lewis 1999).

172 Alfred Pfaller, Social Democracy in the Globalized Post-industrial Society IPG 2/2000 One can think of three basic responses to meet Political strategies this challenge: (1) restoring the endangered social environment in its old family form, (2) devising a National and international strategies substitute of the family that is functionally equiva- lent in terms of societal (not just physical) repro- This analysis has not brought to the fore any duction, (3) releasing resources from the economic urgent need for internationally coordinated or to the family sphere so that the latter can make up supranational approaches to safeguard »prosperity for the »loss of the house-wife«. Restoring tradi- for all« in the foreseeable future. In fact, the con- tional family life would mean undoing women’s clusion is straightforward: With the exception of economic emancipation. This is neither desirable taxation justice, all the challenges can be suc- as a general norm in a »social democratic« society cessfully met at the national level. And taxation nor really feasible without stable family support justice, though highly desirable, is not a necessary and without a stable »bread-winner« income. condition for »prosperity for all«. This does not Moreover, a general restoration of the old male- mean that supranational approaches are irrelevant. breadwinner family is hard to imagine without Within the European Union in particular they the underpinning of wide-spread traditional value can make up for the lack of political will on the orientations. And a reversal of the economy-driven national level. They can create new relevant process of individualization is not in sight. But on majorities. The same applies to internationally the other hand, women will never have equal agreed social standards. These can make it easier chances in working-life as long as the responsibility for countries to withstand the pressure of foreign for child-rearing remains de facto overwhelmingly competition when it comes to deciding on costly theirs. Therefore one has to turn to the other two protection schemes. response options. Where it is not a matter of mandatory supra- One of them is to replace the economy’s old national standards, at least informal pressure by a eroding reproductive support structure by a new certain »community of states« can be established. one that is functionally equivalent. This could be Foreign examples can also adopt a normative achieved by good-quality collective child-rearing quality in the domestic debate. facilities from earliest infancy till the end of high The importance of international coordination school that are available to all mothers. Private appears in a different light when it comes to the supply of child-rearing services (»day-mothers«) is issue of economic growth. Depending on the available only for the well-to-do and can not solve explanation of growth rate variations over time the larger problem. and between countries, coordination can be seen The other option would be to devise flexible as a key policy factor for moving up the trend life-time income flow schemes that allow for rate of economic growth. This refers to macro- longer paid and only minimally career-destroying economic process policies and to the regulative education periods for women and men (perhaps framework for cross-border transactions. Macro- based on part-time work during intensive child- economic coordination can make sense for purpo- rearing periods), topped up by significant public ses of effective demand management, particularly subsidies. in response to globally significant demand or sup- No ready solutions are at hand. At present it ply shocks (hikes in oil price, financial crises, would be important to counter the trend of recession in a major country). It can also make treating child-rearing as a collective good that is sense for the purpose of stabilizing investment- available for free to the economic sphere, i. e. not relevant expectations, most of all with regard to paying sufficient attention to the fact that the tra- exchange rates. There are strong arguments sup- ditional supply structures of this »collective good« porting the notion that markets need for their are eroding. Creating new viable institutions of proper functioning a set of rules which are effec- child-rearing must be recognized as one of the top tively enforced by a sanction-wielding authority. If priorities on the agenda for the decades to come. the arguments hold it is difficult to see why global markets can do without such rules. For instance, contagious financial crises of such negative wel-

IPG 2/2000 Alfred Pfaller, Social Democracy in the Globalized Post-industrial Society 173 fare effects as we have witnessed in 1997/98 point not be sold easily to these majorities. It is rather at the need for more appropriate regulation con- burden-relieving programs which gain in appeal. cerning cross-border monetary transactions (see The danger arises that the ideal of »prosperity e. g. Griffith-Jones 1999 or Eatwell/ Taylor 1999). for all« is pushed aside by a new legitimizing Such regulation then must be incorporated into formula that stresses individual merit and mobility, a social democratic agenda because it could help postulates equality of chances without really safeguard »prosperity for all«. establishing it (see section II of this paper) and Of course, international approaches are un- tolerates a large number of »losers«. Not to belong avoidable where national policy is already bound to the »losers« becomes then more important than by supranational agreements and rules, as it is to make sure there are none (see also Crouch the case in the European Union and even more 1999). It is not too far-fetched to attach to such so within its EMU core. There it is no longer a shift in priorities the label »Americanization«. In question of moving policy decisions on to a, sup- view of this perspective, a decisive political battle posedly more effective, supranational level. It is a will be fought on the ideological front: How to matter of setting the right direction for supra- keep »social democratic« forces from adopting national policies. The case may even arise for re- such a US-style »winners-oriented« policy stance gaining national freedom to pursue appropriate (»Neue Mitte« without the »new excluded mar- policies, as some have claimed with regard to the gins«)? As a political realist one might be tempted stability pact ruling EMU members’ fiscal behavior. to see the only salvation in renewed strong eco- nomic growth that raises the majority’s incomes and increases, thus, their willingness to endorse How to ensure support for effective »social democratic« policies conducive to a broader participation in the policies newly assured prosperity. This constitutes, in fact, another strong reason to assign high priority There is plenty of reason to assume that the idea of to economic growth on the »social democratic« »prosperity for all« continues to have considerable agenda. It would also be a reason to favor solu- appeal in most of the advanced capitalist countries. tions that make the financial burden less visible. However, this is by far not enough to secure effec- With regard to old-age pensions, for instance, a tive support for policies that make the ideal prevail solution that relies largely on private provision in practice. Nor is it enough that parties that con- would seem most acceptable. With regard to labor sider themselves »social democratic« gain elections market adjustment, deregulation plus income sup- and get into the positions of government power. port seems to be more in line with the general In fact, programs and policies that gain elections sentiment than increased public employment or might conflict with policies that secure »prosperity cuts in working time and take-home pay, because it for all«. The extent to which this might be the case pays, to a great extent, for itself and contributes to varies with regard to the various challenges dealt low consumer prices. with in this paper. Moreover, to deal meaning- Another line of thinking directs attention to fully with the issue of political support would the area of political mediation beyond (or below) require a very differentiated approach which is the sphere of electoral politics. Policy packages not feasible here. But at least one of the core chal- that are decisive for meeting the challenges discus- lenges, abundance of labor, stipulates responses sed above are seldom simple enough to be »sold« that easily set the interest of an affluent majority directly to the electorate. Negotiations between against the ones of a needy minority (see also organized interest groups could prove much more Ehrke 2000: 87 ff.). This tendency can be expected important for determining outcomes. This per- to be especially pronounced in times when large spective brings two crucial aspects to the fore: parts of the middle strata, without really becoming the institutions that facilitate or impede con- bad off, face a certain danger of economic decline. structive negotiations (keyword: corporatism), Policies that demand additional sacrifices from the deals that can be struck between the nego- majorities whose consumption standards and pro- tiating parties so as to advance the cause of a spects for the future are already under stress can- »just society«.

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