Social democracy and capitalism have co-existed since WW II. Can it continue?

Real-wage stagnation has disrupted the Nordic model and threatens democratic norms.

Summary

• Postwar social-democratic political success in advanced democracies was the result of assuring that capitalist surplus would be shared with wage earners and would fund the modern welfare state.

• Recent social-democratic political decline has paralleled slower economic and productivity growth since the 1970s and especially the stagnation of real wages that has impacted its working and middle-class voters. They’ve been migrating in large numbers to reactionary populism.

• Despite a surge of productivity growth in the 1990s, due largely to the effects of the information and communications technology (ICT) revolution, stagnation has continued since the 2008 Great Recession.

• Lacking the necessary capitalist surplus to support public programs, Third Way social-democratic leaders tried to boost economic growth by adopting free-market, business-friendly neoliberal policies. The effort failed.

• With post-recession and post-pandemic productivity growth still anemic, social democracy can only be revived by ending its passive dependence on capitalist growth and calling for large-scale public investment into the material standard of living and economic security of ordinary people.

• We know it can be done. In just a few short decades, large-scale public investment built a war machine that won WWII and rebuilt Europe and Japan after the war.

Declining support for social-democratic politics

We’ve been concerned with the sharply declining electoral strength of social-democratic parties in Europe. Anne Hidalgo, the social-democratic presidential candidate (parti socialiste) in the recent French elections, garnered only 1.5% of the vote in the first round. Yet her party held the presidency from 2012 to 2017. Parties elsewhere in Europe have seen less dramatic declines but, when in power, have increasingly had to make concessions to coalition partners.

What makes the trend most worrisome is the migration of the historical social-democratic working-class voter to reactionary illiberal populism, forcing social democrats to seek votes by making concessions on immigration policy, environmental policy, and welfare spending.

While the U.S. does not have a formal social-democratic party, the Democratic Party has often served in that capacity when able to implement social reforms. Yet the U.S. has also seen migration of a large segment of the working and middle classes toward reactionary anti-democratic populism, most recently associated with Donald Trump.

Remembering social democracy’s postwar success

To reverse this trend, it is imperative that social democrats point to their historic successes. Understanding that they would be operating within a dynamic capitalist economy after World War II, social-democratic leaders downplayed class war rhetoric and made it their mission to assure that ordinary wage earners shared in the fruit of capitalist growth. They mobilized working families to advocate that:

• Everyone who wanted a job would have one and that wage earners should share in the surpluses generated by increased productivity and growth;

• the 40% of society who can’t work, including children, college students, family caregivers, older adults, people with disabilities, and those temporarily unemployed, would be provided with social and economic support;

• the services and infrastructure needed to support the economy would be managed in the public interest, including utilities, natural resources, health care, transport, banking, education, environmental preservation, and more;

• trade and peaceful cooperation among nations would be a priority.

  

  London churches being restored after the war. Credit: Mediadrumimages / TopFoto

  Political historian Sheri Berman addresses how social democrats have historically related to capitalism and market economies in the postwar period:

…This social democratic order worked remarkably well: The 30 years after 1945 were Europe’s fastest period of growth ever while economic inequality declined and social mobility increased.

…In the past, social democracy stood for the view that the democratic state could and should use its power to maximize capitalism’s upsides when minimizing its downsides…and it believed in organizing workers and other voters for the long-term struggle to create a better world.

(The Development and Decay of Democracy, Vox, 6-18-19)

Without the amazing economic results generated by the operations of relatively free markets, the dramatic improvements of mass living standards throughout the West would not have been possible. Without the social protections and limits on markets imposed by states, in turn, the benefits of capitalism would never have been distributed so widely, and economic, political and social stability would have been infinitely more difficult to achieve. One of the great ironies of the twentieth century is that the very success of this social democratic compromise made it seem routine; we forget how new and controversial it actually was….The important thing is not the policies but the goals—encouraging growth while at the same time protecting citizens from capitalism’s negative consequences.

….many on the left appreciate that capitalism is not a zero-sum game—over the long run the operations of relatively free markets can produce net wealth rather than simply shifting it from one pocket to another. Because social democrats understand that basic point, they want to do what they can to encourage trade and growth and cultivate as large a net surplus as possible—all the better to pay for measures that can equalize life chances and cushion publics from the blows that markets inflict.

…..Helping people adjust to capitalism, rather than engaging in a hopeless and ultimately counterproductive effort to hold it back, has been the historic accomplishment of the social democratic left, and it remains its primary goal today in those [Nordic] countries…The Scandinavian cases demonstrate that social welfare and economic dynamism are not enemies but natural allies. Not surprisingly, it is precisely in these countries that optimism about globalization is highest. In the United States and other parts of Europe, on the other hand, fear of the future is pervasive and opinions of globalization astoundingly negative. American leftists must try to do what the Scandinavians have done: develop a program that promotes growth and social solidarity together, rather than forcing a choice between them.

(Unheralded Battle: Capitalism, the Left, Social Democracy, and Democratic Socialism, Dissent, Winter 2009)

To emphasize this same point, social theorist Lane Kenworthy goes so far as to title his latest book Social Democratic Capitalism (Oxford University Press, 2020). He describes the many historic accomplishments of social democrats in advanced capitalist nations over the last 50-75 years, focusing on the Nordic countries. Nations without a long social-democratic record, like Japan, South Korea, Singapore, and Taiwan have still instituted fairly robust social insurance and welfare programs, and even the United States, he says, with perhaps the least developed welfare state and public sector, has accomplished a great deal, including, among other things:

• Social Security

• Medicare, Medicaid, and veteran health services

• Free public K-12 education and growing adoption of pre-K programs

• Free or inexpensive public higher education; public libraries

• Unemployment, disability, and workman’s comp insurance

• OSHA and other workplace safety regulations; child labor laws, minimum wage and overtime rules; food and drug safety regulation

• Welfare benefits including housing vouchers, food stamps, free school lunches, utility discount programs

• Americans with Disabilities Act

• Public hospitals and public health agencies

• Environmental protection laws and regulations

• Inexpensive mass transit

Although several national public benefit programs are absent in the U.S. (e.g., paid family leave) and some are limited or not nearly as generous as those in mature European democracies (e.g., publicly-supported health insurance), Kenworthy emphasizes that, once any reform is instituted, the vast majority of people, across the political spectrum, do not want to give it up, including many employers who benefit from government support for their employees.

Kenworthy is optimistic that liberal capitalist societies will be relatively stable, will continue to grow, and will incrementally add to and expand their social security and welfare programs going forward.

So, why have social democrats been losing their working and middle-class voters?

The 1970s saw the beginning of a new political era in the advanced democracies featuring a sustained decline in economic growth, productivity, and long-term investment. The social-democratic working-class base has been especially impacted as real wages have flatlined or declined for the bottom two-thirds of wage earners even as salaries of those with higher education, including tech workers and other professionals, have climbed substantially.

Faced with persistent economic stagnation, political parties of all stripes, including social democrats, tried to figure out how to jump-start economic growth. Free-market neoliberals like Margaret Thatcher and Ronald Reagan called for reducing regulations, budget deficits, corporate taxes, and the size of the public sector. They introduced right-to-work and other anti-union legislation, and while the growth they were promoting might mostly benefit corporations and the wealthy, they assured voters that prosperity would “trickle down” to the general population.

Unfortunately, so-called Third Way social-democratic leaders like Tony Blair, Bill Clinton, and Gerhard Schroeder were on board with these kinds of policies, hoping that  economic prospects would be boosted and then leveraged for the benefit of ordinary people.

While the 1990s did in fact see a boost in economic growth, productivity, and wages, attributable largely to the information and communications technology (ICT) revolution, it was short-lived and ultimately unable to overcome the prevailing general economic stagnation. With the “dot com” bust, the 1997 Asian financial collapse, and finally the Great Recession, stagnation came roaring back. Economist Robert Gordon (see our earlier post on Gordon here) characterizes this as a sustained reduction of the potential for growth, or what some call “supply-side secular stagnation”.

Neoliberal politics failed and, unfortunately, so did Third Way social-democratic politics. Indeed, it was Clinton’s deregulation of Wall Street investment banks that drove the financial collapse that started the Great Recession.

Now, in a panicked response to the working-class flight to populism, social-democratic parties in Europe and the Democratic Party in the U.S. have largely given up on their historical base voter and instead have sought anti-populist votes from liberals, professionals, suburban moderates in metropolitan areas, urban minorities, and college students. When possible, they have formed governing coalitions with liberal parties, traditional conservatives, and Greens.

They have even begun adopting the rhetoric of some of their allies, often warning about the ill effects of consumerism, for example, and excessive growth, to mollify progressive Greens. By moving away from addressing living standards and economic security, it’s not surprising that working-class voters are drifting away. This is especially the case for workers in industries affected by climate change regulations. While they may recognize that they are in dying industries, they do not trust those who promise an easy and just transition to new green jobs.

The sharp decline in industrial trade unionism has added to the problem. The rapid growth of the lower-wage service sector and precarious (gig) workforce over recent decades has diminished the collective power of wage earners. While sectoral bargaining continues in Germany and elsewhere, the political strength of unions has declined significantly across the advanced sector and while union leaders may pledge fealty to social-democratic parties, their members have been migrating to other parties, including reactionary populism.

An existential crisis for social democracy?

Most agree that economic stagnation and slow growth will probably not end anytime soon. The long, slow recovery from the Great Recession and the effects of inflation have further weakened long-term investment potential. Aging populations will continue to weigh on economic growth. Inequality has not subsided. Nationalism and anti-immigrant attitudes have disrupted normal trade patterns and have reinforced isolationism and protectionism. Political stalemate has become the norm.

Addressing climate change has added further political and economic uncertainty. While the rapid growth in electric vehicle production and the sharp decline in the cost of solar and wind technology are encouraging, the advanced sector still has a long way to go to reach acceptable emissions levels and few expect the transition to increase growth in the broader economy. Persistent resistance to nuclear energy, fed by anti-growth elements in the environmental movement, has blocked a potential technological solution.

Productivity growth over the last ten years has been underwhelming, and while some place their faith in emerging technologies, there is no evidence at this stage that artificial intelligence, robots, gene editing, or driverless cars will spark an economic boom anytime soon. The potential, if it even exists, appears to be well down the road.

Many left and center-left theorists and politicians are looking to the highly successful and social-democratic Nordic Model of governance as a way to get past the failures of neoliberalism and the Third Way. This is fine, of course, except that Nordic countries have been part of the political retreat as they compete with opposition political parties and are forced into concessions.  

With large export sectors, they are also dependent on global economic conditions and need the free and open trade that has been increasingly  challenged in the current environment. Norway, of course, is heavily dependent on its legacy energy sector and will soon need to transition away from their lucrative extractive industries.

Even the Nordics are trapped by the current economic and political environment.

Social democracy can be revived. In a few short decades, advanced democracies built a massive war machine and rebuilt postwar Europe and Japan. Government-led mobilization can do it again.

As pointed out in previous posts, we believe critical problems faced by ordinary families can be addressed through large-scale government investment. Manufacturing millions of quality affordable housing units using cutting edge technology was our prime example, see here and here, incorporating important community infrastructure development including transport, schools, hospitals, and recreational spaces. Hiring and training millions of aides to care for aging boomers in their homes was another example, see here. The public will view these kinds of proposals as tangible and personal and would resonate if aggressively presented by social democrats.

There are other needs that social democracy’s natural voters perceive as important to them and their families: access to high-speed broadband, free higher education, child care services, universal public health insurance, public health initiatives, and more.

We believe government-led mobilization can accomplish these aims without compromising needed efforts to reduce carbon emissions, strengthen security and defense capacity, repair infrastructure, and promote development in less-developed parts of the world.

There’s the question, of course, of how we can afford to do this. The response should invoke the great government-led mobilizations of the past: Building the massive war machine needed to win WWII in just a few short years; rebuilding Europe and Japan after the war while establishing stable democracies in just a few decades; stabilizing economies and living standards during the recent Covid pandemic.

These efforts could be afforded through the exercise of the prerogatives of a modern, sovereign nation with a popular mandate. Everything within the scope of federal authority was on the table: cash outlays (many trillions during the pandemic), loans, taxation, government-backed bonds, wage and price controls, subsidies for industry, incentives to recruit and train essential and specialized personnel.

There was a critical additional ingredient: a willingness of ordinary people to pay their fair share, make necessary sacrifices, and join collective efforts. Solidarity can go a long way.

When Sweden decided that its ancient housing stock could not support population growth, the social-democratic leadership decided to build one million new housing units of decent quality over ten years. The project was completed on time.

When England needed to rebuild London and revive the UK economy after the war and incessant Nazi bombing raids, the Labour government of Clement Atlee, working with a popular mandate and Marshall Plan loans, nationalized healthcare, railways, heavy industry, coal mining, and the Bank of England. There was progressive taxation and rationing of critical goods and services. The popular National Health Service, socialized medicine, continues to this day, surviving constant assaults and privatization efforts by the Tories.

Though many of the UK reforms were short-lived, they are proof that government mobilization with a popular mandate can be done even in a capitalist, market-driven economy.

Without sustained growth, the current stagnation will reach crisis levels.  Without a social-democratic response, wage earners will continue to gravitate to nationalist-authoritarian leaders who blame immigrants, globalization, and the poor for the crisis and threaten hard-earned democratic rule.