Economic Disaster and Dismantling Danish Welfare State?

St Restrup Conf. March 2, 2011

Jørgen Goul AndersenDep. of Political Science, Aarhus University

Summary figure

• Cumulative economic growth in Denmark 2008-2010 = minus 4.2 per cent

• This has never happened in peace time at least since 1820

• Public budget balance from plus 5 – 5.5 per cent of GDP to about minus 5 per cent. Long-term structural deficit

• Not the welfare state’s fault – but it could well be the victim of it

Quarterly growth rates 2008-2010

Quarterly

growth2008 2009 2010

Source: oecd + K1 K2 K3 K4 K1 K2 K3 K4 K1 K2 K3 K4

Denmark -1,5 0,7 -0,9 -2,6 -1,6 -2,4 0,4 0,5 0,7 1,3 0,9 -0,4

Sweden -1,1 0,0 0,0 -4,1 -2,6 0,3 -0,1 0,8 1,6 2,1 2,1 1,2

Finland 0,4 0,3 -0,4 -3,4 -5,5 -1,2 1,4 -0,2 0,2 2,7 0,4 1,7

Norway -0,8 0,5 -0,5 -0,3 -0,4 -1,0 0,6 -0,2 0,6 -0,0 -1,5 2,4

Cont.Norway -0,4 0,1 -0,1 0,8 0,6 0,4 1,1 0,3

Iceland 1,8 -0,8 2,4 -3,6 -2,4 -0,8 -4,2 -0,3 -2,6 -0,3 1,2

South Korea 1,2 0,3 -0,1 -4,5 0,2 2,4 3,2 0,2 2,1 1,4 0,7 0,5

Sudden and short interruption (South Korea) vs. prolonged

Eight Year Nordic comparison: Also a long-term Danish problem

2003 2004 2005 2006 2007 2008 2009 2010

Den 0,4 2,3 2,4 3,4 1,6 -1,1 -5,2 2,1

Swe 2,3 4,2 3,2 4,3 3,3 -0,6 -5,3 5,5

Fin 2,0 4,1 2,9 4,4 5,3 0,9 -8,0 3,1

Nor 1,0 3,9 2,7 2,3 2,7 0,8 -1,4 0,4

Iceland 2,4 7,7 7,5 4,6 6,0 1,0 -6,8 -3,5

Green = Higher annual growth rate than Denmark

Continental Norway: 2009: -1.3 2010: +2.2

More indicators about the origin of crisis

2009Source: stat bur.

Export Import Priv.

Cons.

Public

Cons.

Denmark -10,7 -13,2 -4,6 +2,2

Sweden -12,5 -13,4 -0,8 +2,1

Finland -24,3 -22,3 -2,1 +0,7

Norway -4,3 -9,7 -0,1 +5,2

Iceland +6,2 -24,0 -14,6 -3,0

Danish exports not so sensitive to the business cycle. Foodstuff + medicine

More indicators about long-term development.Similar to Iceland. In smaller scale

Economic policy / Bonanza Problem:• Deregulation of credit policy. Banking crisis Iceland small scale• Deregulation of credit policy for housing loans: So called potato cure 1986

in reverse. 1. free access. 2. flexible loans 3. interest only loans housing bubble (+ credit collapse volcano; you ain’t seen nothing yet …)

• Most indebted households in the world• Pro-cyclical fiscal (& monetary) policyStructural (policy) problems:• Danish industrial production ultimo 2010 was 12 per cent below 2000.

Sweden was 10 per cent higher than in 2000• Low productivity growth, high wage increases in Denmark. Competitiveness

problem with China. But also with Germany, Sweden ...• Failure to elevate level of education• “Wrong” markets • Outsourcing of high-skilled jobs (with production + low competitiveness)

Where has the economy gone worse? 192 nation comparison of cumulative growth 2008-2010

List of worse economies:Africa: ZimbabweAsia: None (Possibly North Korea, but probably not)Norther America: NoneLatin America: NoneCarribean/Atlantic: Haiti, Bahamas, Barbados, Jamaica, Antigua

& Barbuda, Grenada Oceania: SamoaEurope outside EU: Ukraine, Croatia (Armenia probably not)EU: Estonia, Latvia, Lithuania (yo-yo economies), Hungary,

Greece, Italy, Ireland, Iceland

= 18 nations of 192 with worse growth record

Historical experience of crisis and welfare state in Denmark

• 1974-1981. Finalised the building of the Nordic welfare model in Denmark. Alternative: Very tough income policies

• 1982-1993. De facto Consolidated the welfare state. Alternative: Cost containment + reduced private consumption

• 1993-2001. Second golden age of the welfare state• 2001-2008. Silver age of the welfare state. 1992-2009: more

than 40 per cent increase in public consumption• Winning formula: Anti-immigration, pro-welfare, NPM reforms• But also much much tighter conditionality• And thorough administrative reform of ALMP• And (un-financed) tax relief (in 2004 + 2007 – counted as

stimulation measure in government’s EU report 2009)

Crisis measures (alongside old measures with new impact)

• Payment of SP pension savings (didn’t work)• Renovation subsidy (no effect at ALL)• Both have remained very popular• Cost Containment: Zero growth of public consumption from

the end of 2010• Accepted by the voter majority• Reduced duration of UB to two years (followed by improved

EPL in collective agreements) Good-bye to flexicurity• Abolish early retirement (proposal). Lowest pension age=70

years from birth cohorts 1971 ff (as compared to 60 for birth cohorts until 1958)

• Accepted by the voter majority (but not by all swing voters)

Current political situation

• Most suicidal government ever seen• Could see it as a democratic problem• Highest political distrust for years• But population majority accepts the crisis diagnosis of the

government, accept most of the stories told, does not hold government (very) responsible

• Increasing proportion believe Denmark will fare less well than others: 1 per cent in 2009; 7 per cent in 2011.

Opposition is likely to win, but …

• Not for policy reasons• Disaster is so big that austerity for several

years is unavoidable• Some institutional changes appear irreversible

• Very radical proposals have popped up. Rejected by the voters – but near-consensus that welfare cannot continue as we knew it

Economy or Party Politics?Methods of assessment

• We could take period by period and assess the changes under Social Democratic and Bourgeois governments, respectively

• Or we could take responses to prosperity and recessions under Social Democratic and Bourgeois governments – since Bourgeois governments tend to be more “Social Democratic” during prosperity

• Or we could take the major policy fields and examine when and how reforms were carried through

1. Different governments

SD government 1975-1982

Basically finished the building of the Danish welfare state (services)

Protected against social exclusion due to unemployment

Bourgeois governments 1982-1993

Accused of being anti-welfare

Strong retrenchment (by Danish standards)

Abolished automatic indexation of wages. Freeze of UB+SA 1982-86

Slow growth in public consumption (6 per cent cumulatively)

Privatization & higher user charges (largely given up)

Considerable growth in transfers to households

More universal welfare (child & student benefits, elderly care, social assistance)

Indexation of social transfer payments by wage increases from 1990

Unintentionally – but in retrospect a consolidation of the welfare model

(Because there was no majority for more radical policies)

SD government 1993-2001Priority to fight against unemploymentALMP + gradually more conditionality

Bourgeois government 2001-2008Successfully presented itself as Social Dem. – even convinced social scientistsSpent a lot on welfare services (1992-2010 about + 45 per cent cumulatively)Was it at all Bourgeois?Marketization of public sector + mixed econ. of welfareDropped user chargesOutsourcing (not very much) + competition between providers (much)Free consumer choice among usersMore conditionality of transfersActivation of tax + social protectionSystemic retrenchment: Weakening unions (tax deduction, competition & free choice between unemployment insurance funds)

1. Different governments cont’d

Bourgeois government 2009-2011 (gradual strategy shift from 2009-08)

Economic disaster: Vice into virtue. Skipped problem denial.

From concealing policy difference to emphasizing policy diff

Hope for crisis consciousness as in the 1980s

Very significant party political difference

(even though policies will be extremely unpleasant regardless of government due to the profound erosion of competitiveness and growth)

1. Different governments cont’d

2. Crisis and prosperity

1975-1982. Crisis. Social Dem.

vehicle for social improvements. Almost unlimited UI duration, lenient control, early retirement.

Crisis measures: Harsh incomes policy + More targeted welfare

1982-1993. Crisis. Bourgeois

1. reversed priorities competitiveness – employment

2. switch to supply side (perspective on) economics from 1989 (with no

immediate policy impact as there was no parliamentary majority)

Crisis measures: Cuts on maximum UB + public consumption +

private consumption (1986ff)

Accepted significant increase in unemployment

SD government 1993-2001 ProsperityALMP + gradually more conditionalityProsperity was the driver of retrenchment + conditionality for the unemployedConditionality not really “un-Social Democratic”

Bourgeois government 2001-2008 ProsperityHighest public support for the welfare state ever recordedWas as Bourgeois as possible. (Danish People’s Party=working class)Modernization of public sector according to market ideals as far as possibleBut only provision, not financingExcept tax subsidy for private health insuranceConditionality to a level where Social Democrats stepped backTax relief (passive=freezing; active=unfinanced in the short run)

2004 tax relief targeted at gainfully employed. Otherwise equal.Systemic retrenchment: Weakening unions (tax deduction for UI, competition & free choice between unemployment insurance funds)

2. Crisis and prosperity cont’d)

Bourgeois government 2009-2011 Crisis

Since 2010 rather fundamental changes & proposals

Cut duration of UB to two years = end of flexicurity

Cut public expenditure to finance tax relief of 2004 / 2007

Tax reform (net redistribution 10 bill Dkk mainly from business to people with high incomes); neutral for ordinary wage earners

Proposal to abandon early retirement allowance (no majority, designed for election)

= Class struggle from above. Dramatic change

Conclusions: 1) Political parties matter +

2) Regardless of economic situation, political parties matter

2. Crisis and prosperity cont’d)

3. Policy change approach

Welfare states do change quite dramatically• Labour market policy• Pension policy (privatization = equality)• New Public Management / Mixed econ. Welfare

(provision more than financing)• Tax policy (some distributional impact)

Continuity of direction of reforms most of the timeDifference in measures & distributional impact &

implications for citizenship

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