“Risk” may be a central idea of the early 21st century, just as “globalisation” was the dominant idea of the 1990s. The fact that individuals and families are vulnerable to a wide range of social, economic and other risks — and that collective action is needed to help reduce and manage these risks — has long been an important theme in social-democratic thinking.

In the fourth part of a serialised paper first published by the Centre for Policy Development, University of Queensland economist John Quiggin writes that an improved understanding of risk can contribute to the development of a modernised social democratic model.

The great risk shift

In the last quarter of the 20th century, there was a strong reaction against the welfare state, associated with the movements variously known as ‘Thatcherism’ in the United Kingdom, ‘Reaganism’ in the United States, ‘economic rationalism’ in Australian and neoliberalism more generally. The neoliberal movement criticised the welfare state as a costly, inefficient and ultimately inequitable drag on economic performance.

One influential way of framing this critique was the claim that by socialising the risks faced by individuals and households, the welfare state necessarily reduced incentives to pursue risky opportunities. Hence, it was argued that reductions in welfare benefits would reduce welfare dependence and create a more enterprising society. This is far from obvious, particularly once we look beyond the sphere of for-profit business enterprise. Social innovations of all kinds flourished in the 1960s, a time of full employment and a strong welfare state. Fear of poverty tends to encourage conformity to existing social norms and established career paths rather than a willingness to experiment.

During the 1990s, it was widely argued that the transformations of economic and social structures associated with the increased importance of risk rendered social democracy obsolete. It would inevitably be replaced, it was argued, by the emergence of a new global turbo-capitalism. But in the 21st century, it seems that social democracy has proved more resilient than its critics expected, and than some of its supporters feared. In the English-speaking world, where the neoliberal push has been most vigorous, the main institutions of the welfare state, including public health, education and social security systems, remain intact – despite continuous pressure.

The persistence of the welfare state has surprised many observers, given the decline of many of the mass institutions that supported it (most obviously trade unions) and the emergence of an increasingly diverse and individualistic society. A focus on shared risk may help to explain this resilience. Many discussions of social democracy focus on notions of community that derive ultimately from membership of some specific group, and therefore appear vulnerable to social change that breaks down the boundaries between groups.

By contrast, consideration of the risks we all face, and a view of society as a set of institutions through which we jointly manage those risks, may have less immediate emotional appeal than specific claims about community. But it can be supported by reasoned ethical judgements that are consistent with diversity and individualism. Neoliberalism affected not only the explicit institutions of the welfare state like social welfare benefits, but also the implicit contracts between workers and employers, under which employers would seek to preserve jobs, except in circumstances where the viability of their business was threatened, and to reward the loyalty of long-term employees through the maintenance of career paths. From the 1980s onwards, businesses routinely dismissed employees in large numbers, not as a last resort, but as a preferred method of making already substantial profits even larger.

With the advantage of hindsight, it is evident that the transfer of risk from government and business to households has been one of the most significant outcomes of the neoliberal era, referred to by Jacob Hacker as The Great Risk Shift.

A particularly striking feature of this transfer has been the extent to which business and political leaders have been insulated from it. Top managers are protected by increasingly generous ‘golden parachutes’, ensuring that even if they lose their jobs for poor performance they are still entitled to large payouts. Although this has been accompanied by the expanded use of devices like payment in share options, which appear to expose senior managers to risk, these are largely shams. Options that fail to deliver the expected benefits, because the price of the company concerned falls below expectations, are routinely repriced or reissued by company boards. Likewise politicians, so long as they have not offended business interests, can expect to enhance their generous superannuation with lucrative jobs in the private sector, many of which appear so undemanding as to be virtual sinecures.

Meanwhile, households are exposed to increasing levels of financial risk. The results are most evident in the United States, where bankruptcy has become more and more common. By 2005, more Americans experienced bankruptcy than divorce. A ‘reform’ introduced in that year made bankruptcy much harder, but this merely shifted the form of financial distress. Because the new laws made it harder to refinance housing debt in bankruptcy, they contributed to a wave of foreclosures on ‘sub-prime’ loans made to high-risk borrowers. Rapid growth of household debt means that Australians are vulnerable to similar risks in the event of an economic downturn.

The transfer of risk has been symbolised in Australia by the misleadingly named WorkChoices laws, likely to be experienced by the average Australian worker in the form of a take-it-or-leave-it individual contract. Not surprisingly, there has been a resurgence of support for the traditional role of the state in protecting individuals and families from the risks of a market economy, particularly in relation to employment.

Moreover, the claims made on behalf of unfettered capitalism in the 1990s have increasingly come under question. The dot-com boom, ending in the crash of 2000, cast doubt on the idea that the growth of an information-based economy was best directed by speculative investors. And it has become increasingly apparent that the main effect of neoliberal reform has been to shift risk from business and governments to workers and consumers.

As a result, voters seem disinclined to abandon social democracy in practice. Even John Howard observed in the lead up to the 2004 Federal election that “There is a desire on the part of the community for an investment in infrastructure and human resources and I think there has been a shift in attitude in the community on this, even among the most ardent economic rationalists.” More recently, Howard has conceded the need for action on other risks such as climate change.

Tomorrow: A new case for social democracy