John Buell

Whither the US Welfare State?

Why does the New Deal-era welfare state, which arguably saved capitalism both here and in Europe, now elicit such rabid criticism not only among some business interests but also from segments of the working class?

The experience of the 1930s convinced even many capitalists that an unregulated market economy is dangerously unstable. They were reacting to the collapse of the ideal market model embraced by today’s libertarians, the gold standard. This standard served both as a symbol of fiscal rectitude and as a disciplinary tool that would curb government spending. Central banks of individual states in the face of economic downturn could not lower interest rates without seeing markets seek redemption of their currency in gold. Nor could public authority spend more for the same reason. When economic downturns hit major players and the system did not spontaneously rebound, many nations ended up abandoning the gold standard. Even this radical step was no panacea. Nations engaged in a process of competitive devaluation of their currencies. In a recent forum on European austerity, James Galbraith pointed out that after the Depression, it was necessary to rebuild the global economy on different principles, to create a social safety net that would allow a market economy to grow without the risk of crash. The means included social security, unemployment compensations, and federal minimum wage standards.

The case for a welfare state does not hinge merely on experience of the thirties. Europe today is a case study in pre-New-Deal economics. The common currency, the Euro, serves as a kind of gold standard. In some ways it is worse. In Europe of the ’20s, nations still maintained their own currencies, albeit with the gold peg. Today, however, European nations no longer have their traditional national currencies to fall back on, complicating any process of extrication from the Euro.

Though often seen as the home of the welfare state, inequality within Europe as a whole — measured as the difference between the wealthiest and poorest Eurozone state — is greater than in the US. One reason for this sad state is that the European community has no substantial mechanism to extend aid to or share debt with members of the Eurozone injured by disproportionate shocks. It is instructive to compare how Europe dealt with the implosion of banks in Ireland and Greece with US handling of the collapse of its housing bubble. Social Security and unemployment compensation, food stamps, and Medicare/Medicaid have served as a mechanism of economic stabilization in US. In Europe, crisis, though induced by the limits of the single currency, has been used as an occasion to impose further restraints on member states. The unrelenting troika of the European Central Bank, the IMF, and the European Commission have extended loans to states on the brink of bankruptcy only on condition that they curb welfare states that were already among the least generous in Europe.

Bad as the US economy is, it is still doing better than Europe — because it has retained at least the bare minimum of the welfare state for which Europe was once famous. When the US housing bubble burst, the effects were most severe in such states as Florida, Arizona, Nevada as well as New York, with its large investment banks heavily laden with mortgage-backed securities. Yet in the US system, New York State was not expected to recapitalize its banks nor was Florida asked to provide the unemployment benefits for its numerous unemployed.

The European experience with austerity and continual curtailment of its welfare state has not gone well. Greek economist Yanis Varoufakis, now a visiting scholar at the University of Texas at Austin, points out that Greece is now a failed national state. The statistics are appalling:

“Of the 3 million people constituting Greece’s labour force, 1.3 million are jobless. Of the 1.3 million jobless only 10% receive unemployment benefits. The rest must fend for themselves. Of those who work in the private sector 500,000 have not been paid for more than three months.”

The US welfare state, however, remains badly flawed, hindered in part by a continuing obsession with budget balance. In the face of this, increasing the minimum wage would have some leverage. Conservatives call the minimum wage a job killer, but there are strong empirical and theoretical arguments in its favor. Conservatives have long used European welfare states as whipping boys, but if high minimum wages supposedly kill jobs, one would expect that cuts in the minimum wage, one of tbe usual “flexible labor market” remedies advocated by conservatives, would increase jobs. Yet as Varoufakis points out, minimum wage reductions in Greece have been accompanied by continuing increases is unemployment.

The fight over such issues will not, however, be won on economic arguments alone. From the earliest New Deal days, some segments of the business class have been irreconcilably opposed to any social safety net, which is seen as giving workers some freedom to leave a current job. The Affordable Care Act makes it easier for a worker to walk away from a job he/she doesn’t like. The (largely unarticulated) rub with government spending is not the debt but the class privilege issue and the identity needs of bosses to feel they are in charge and their judgment cannot be questioned. In addition, the very notion that a government-mandated minimum wage could reduce poverty challenges conservatives’ belief is predictable self-equilibrating markets. They rely on such arguments to suppress all demands for equity and safety within the workplace even if their faith in magic markets is somehow forgotten when their own bailouts seem necessary.

The moral dimension of this issue is not confined merely to the captains of industry, as they used to be known. Varoufakis has compared reaction to capitalism’s current crisis with the 14th-century plague. He speculates that if a public opinion poll had been taken in the midst of the tragedy, large majorities of the population would blame themselves for its occurrence. Problematic as this mindset is for progressive causes, it is not insurmountable. A dramatically higher minimum wage issue is becoming an increasingly popular cause among even Republican voters. It places no strain on the Federal treasury. Indeed it may lessen the need for some federal expenditure. It also provides an opportunity to work oneself out of poverty. The very experience of a decent job and the respect that comes with it can alter one’s self-identity.

Capitalism is unlikely to survive absent some form of welfare state. The only question is whose welfare and who will pay for that welfare.

John Buell lives in Southwest Harbor, Maine and writes on labor and environmental issues. Email

From The Progressive Populist, April 15, 2014

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