The economic crises of today: Crises and coping strategies

Joakim PalmeUppsala University

Crisis management and research

• Lessons from the past,advice for the future?

• 30s• 90s• Averting the old-age crisis• Global financial crisis, and beyond

Lessons from the 1930s

• The Great Crash and the Depression- Keynesianism emerging (A treatise on money, 1930; Stockholm School; General theory, 1936)

• Crisis of the Population Question- social policy of reproduction, quality of population (The Myrdal Legacy)

Research and ways out the crisis?

The Golden Age

• Putting Keynesianism to work• Rediscovering the gender agenda

The welfare state in crisis (OECD, 1980)

• Growth to limits• The unemployment problem• ”The need to see economic and social policies

together”• Is it possible to return to non-inflationary

growth?• Research: diagnosis vs. Prescription• Beyond redistribution, new priorities, full

employment without growth, welfare society

The Swedish crisis of the 1990s I

Lindbeck commission; 113 reform proposals for ’Turning Sweden around’:

• Stricter budget process• Independent central bank• Quantitative inflation target• Competion in/for the public sector• Etc, etc

• Research and ways out the crisis: prescription

The Swedish crisis of the 1990s II

• Welfare commission, Balance sheet, results:• The macro economy and the vulnerable• Prolonged employment crisis• Monetary and fiscal polices too tight (Ministry

of Finance)• Social deficits• Research and ways out of the crisis,

conclusions

Welfare state in crisis:How to protect the rights whilst controling the costs?

A study for the Council of Europe

Cheap rights or more taxpayers

10 commandments for more taxpayers

• Improve tax collection• Prevention and rehabilitation• Sustainable entitlements• Two-earner family support• Policy coordination: e.g. taxing and spending• Universalism > means-testing• Rights of children, responsibilities of parents• Breaking benefit dependency, not rights• Civil society and respecting entitlements• Removing barriers to employment: incentives, education,

services, opportunities

Increasing the number of tax payers: Nordic experience female employment

By;• improving work incentives in the tax system,

as well as in the benefit systems• promoting human capital investements

(among women and children)• subsidising social services for children and frail

elderly relatives• offering employment opportunities

20

30

40

50

60

70

80

90

1970 1975 1980 1985 1990 1995 2000

Labor force participation among women in prime child-bearing age (20-44) in different family policy models 1970-2000

Dual-earner model

Market-orientedmodel

Traditional model

Per cent

Policy learning is possible only if we move away from the concept of a

model, or culture, and instead apply an institutional program specific

approach and look for institutional complementarities

In the shadow of the ageing crisis

Sustainable policies in ageing societies

Edited by Lindh and Palme

Rethinking social policy in ageing societies

• Social security is strongly redistributive over the life cycle: the ageing of societies puts tough fiscal pressures on public spending

• The debate on ageing issues has been overly focussed on pension reforms and savings

• How social policy interact with fertility, education and labour supply is of vital concern: secure the future tax base!

Education and Growth:Macro model

Statistically significant relations– Education expenses have a positive impact on

GDP/capita – GDP/capita has a positive impact on average years

of education but a negative impact on the GDP share of education expenses

Lehman Brothers and beyond

The Econonomic Life-Cycle and the a future for Social Investment?

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0 10 20 30 40 50 60 70 80 90+

Age

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Austria (2000) Sweden (2003) USA (2003)

Institutional variation behind life cycle variation in the intergenerational transfer system

Life cycle deficits per capita

Source: NTA project 2007: www.ntaccounts.org

The strategy EU2020 puts forward three priorities:

• Smart growth: developing an economy based on knowledge and innovation.

• Sustainable growth: promoting a more resource efficient, greener and more competitive economy.

• Inclusive growth: fostering a high-employment economy delivering social and territorial cohesion.

Flaw of the EU 2020 Agenda:How can the sole focus on expenditure cuts, generate the

necessary revenue for a social investment approach?

The Social Investment Pact

The New Agenda from the EU Commission (Andor)

Social Investment Pact

• Social protection, investment, stabilization• Recomendation on early child-hood• Youth Package• Employment Package• Elderly care• Stabilization via EU UI• ESF….

Social investment approach is unattainable and elusive,

unless boldness and willingness to take political and other risks. This includes raising enough taxes for

massive social investment.

Agenda for a social investment approach

• Go beyond immediate responses to the current crisis not to reproduce the failures of the recent past.

• Global crisis in the financial system may change our views on what is possible.

• Human capital investments have been getting less attention in the debate.

• How can we rethink the future with the time horizon being prolonged by the issue of climate change?

Capability formation:A life course perspectivePublicly funded child-care invests in cognitive skills essential for

life chances of children

Quality of compulsory education – PISA studies of core competencies: reading, mathematics, science

Skill needs in advanced industrial societies have changed –polarization among youth is a reality and a threat

The ”learning economy” requires a constant renewing of capabilities in firms and competences of workers

Nelson and Stephens 2011:Policies Outcomes• Cumulative Educational Spending• Educational Spending 1995• Skill Acquisition Index• Cumulative ALMP Spending in 1995• ECEC (cumulative daycare spending)• Short Term Unemployment Replacement

• Bottom 5th Percentile Literacy• Average Literacy• Employment Levels in 1995• Discretionary Learning Employment

Political economy of social investment

• European social models are attempts to apply ‘strategies of cooperation’, time to revitalise, else no social cohesion

• Social investment approach is unattainable and elusive, unless boldness and willingness to take political and other risks

Neo-Schumpeterian approach

• During great transformations there are always winners and losers.

• Old forms of security are replaced by new ones.• We can speak about a constructive destruction

(Schumpeter).• Nordic experience of making winners of the potential

losers in structural transformation• Support to globalization contingent on the social and

policy fabric of society

Goals/functions of social policy

• Redistribution• Insurance• Services• InvestmentInstitutional, functional

complementaritiesEconomic and social sustainability

Too early to tell….

Crisis, and its opportunities

• GFC triggered what has become an on-going ‘global’ economic crisis, from a Eurocentric perspective…

• …exogenous shock that has repercussions for societal institutions and individual conditions….

• …as effects are mediated by institutional factors, we may talk about endogenously conditioned shocks…

• Divergence in policy output (spending) and outcomes (poverty)

• Study changes in social protection entitlements and their correlates in EU+ , 2008-2014

Lessons from previous

Crises and social policy change

• Class-based politics have not ceased to influence mature welfare states

• Unemployment key role; as an outcome of distributive conflict and as a ’risk factor’ for retrenchments

• Political institutions and electoral systems matter for the likelihood and magnitude of change

• Institutional design matter: co-integrated causal processes at work

• Institutional change not only paradigmatic, also incremental, but what processes are at work?

• Policy feedbacks from welfare state institutions reflect interactions between institutions and the socio-economic distribution of risks and resources among citizens

• Type of data matters for results; spending confuse • Methods matter for the results; important to come

close to the political decision-making

All insurance-schemes average per year 2008-2014

Baltic New Members Old Members GIPS0

0.5

1

1.5

2

2.5

Average Expansions Average Retrenchments

Cuts Total Familybenefit

Socialinsur.

Pension Unempl.Ben.

EligibilitySI/UI/WA

GDPlevel ---

Growth +Budgetdeficit +++ +++ + -Unempl.Rate +++ ++ +++Socialspending ++Leftcabinet% --- --- ---

Tentative conclusions

• Large number of expansions too, not only first years• Family benefits not as severely hit as social insurance programs for

the working aged• Sickness cash benefits cuts on par with unemployment benefits cuts

(in contrast to 1975-1995)• Changes affecting precarious workers by sharpening the eligibility

criteria• Changes in pension systems: sharpening the qualifying conditions• Paradigmatic shifts vs. incremental change: drift, layering,

displacement, exhaustion and political economy

• Cuts:- budget deficit and unemployment are risk factors- left cabinet share protect, at least social insurance

• Expansion:- weaker and unpredicted correlates, catching up, growth and family policy modernisation

• Understanding the EU level influence: MOU+• Effects on inequality outcomes from the imposed

changes, as well as the initial differences, to be explored…

Greece and social consequences of the crisis

Average number of expansions & retrenchments

2008 2009 2010 2011 2012 2013 20140

1

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Greece Rest of GIPS EU-28

Expansions and retrenchments by insurance type

Greece Rest of GIPS EU-28-0.2

-1.66533453693773E-16

0.2

0.4

0.6

0.8

1

1.2

1.4

-1.4

-1.2

-1

-0.8

-0.6

-0.4

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Family Policy Sickness, Unemployment and Work inj.Pensions

Type of change

Greece Rest of GIPS EU-28-0.2

-1.66533453693773E-16

0.2

0.4

0.6

0.8

1

1.2

-1.2

-1

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Benefits Eligibility Duration

Political sustainability

Strategies of cooperation

Social conservatismSocial liberalismSocial democracy

Political economy:How are interests structured by regimes?

Unemployment Benefits in EU Member States

Background

• Growing imbalances• Responses to the crisis should foster

strengthened solidarity• European integration needs an elaborate risk-

sharing system• One strategy is to set up some kind of EU- or

Eurozone wide unemployment provision

Template

• Automatic stabilisers as an insurance mechanism as well as stabilisation mechanism

• Unemployment benefits are an obvious candidate for becoming a European automatic stabiliser

• Not only have macroeconomic impacts but also positive effects on citizens’ living conditions

Purpose of my presentation

Good reasons to explore the basic character of unemployment benefits in EU Member States and highlight potential institutional barriers to the introduction of an EU wide framework for unemployment benefits

Approach

• The data is from the Social Policy Indicator Database (SPIN), which is under construction at the Swedish Institute for Social Research (SOFI), Stockholm University

• Not income packaging à la OECD• Our approach of focusing on unemployment

insurance programs as such, avoiding the analytical confusion which appears when different kinds of benefits are lumped together

Assumption• We interpret the underlying ambition to

promote a European stabilisation/insurance mechanism, is about making the provision of unemployment compensation more generous

• Identify countries that deviate markedly from broader European patterns, indicating where special adjustments are most immediate in Europe

• Possible to identify common denominators for key dimensions of the systems

Observation

Variation among the Eurozone countries is slightly lower as compared to the entire EU, cross-national differences are evident enough to warrant further reflections

Discussion I

• Harmonize:- Contribution period of 26 weeks. - Benefit duration period by extending it to 52

weeks. - EU should not subsidize benefit periods beyond one year.- Replacement rate of unemployment benefits

between 60 and 80 per cent.

Discussion II

• One option would be to restrict the EU participation to the funding of deficits of unemployment insurance programs, building on voluntary harmonisation

• MS would have to agree on some kind of symmetric participation in the funding of the common element

Social policy context of social investment

Key concepts in EU• Social cohesion• Social inclusion• Social capital• Social investment• Social citizenship

What if it gets much worse?

What if it gets much worse?

Never to late to give up!

What if it gets much worse?

Never to late to give up!Or:Try harder! Act Wiser!