No doubt those familiar features of the German “social market” economy help explain its dominance in Europe and its low, low 5.4 percent unemployment rate. But they date to the economic wunder of the ’50s and ’60s.
What really propelled Germany’s economy to new heights was the package of market-oriented reforms launched by Chancellor Gerhard Schroeder 10 years ago. Schroeder acknowledged that Germany’s safety net had become a bit of a hammock. He restructured and reduced unemployment and welfare benefits while giving employers more freedom to hire and fire.
As it happens, Schroeder’s plan reflected his admiration for U.S. capitalism, which, in his view, had surpassed Germany’s in dynamism, flexibility and innovation. But it triggered resistance within his own center-left Social Democratic Party — and from ordinary workers, one-eighth of whom were receiving some form of government aid by 2003. The struggle probably cost Schroeder a third term in the 2005 elections.
History’s verdict has been kinder — the Organization for Economic Cooperation and Development has given Schroeder’s reforms much of the credit for Germany’s “labour market miracle” — which brings us back to Obama and the United States’ economic predicament today.
That predicament has both cyclical and structural components: It is the result not only of a spectacular financial crisis but also of accumulated rigidities and inefficiencies. In the United States, too, certain outdated or unwise policies discourage work and investment (Schroeder’s impressions a decade ago notwithstanding).
Social Security Disability Insurance (SSDI) is a case in point. Congress created this program in 1956 to help workers age 50 and older who were terminally ill or unable to work for the rest of their lives, but it has steadily expanded so that now it covers workers in their 20swith maladies such as back pain.
SSDI spending has tripled since 1970, relative to the economy’s size, and it now approaches a full percentage point of gross domestic product. The program paid $135 billion to 8.8 million beneficiaries (plus 2.1 million spouses and children) in fiscal 2012. Since beneficiaries are eligible for Medicare after two years on SSDI, the program also added $80 billion to the federal government’s health-care tab.
An aging labor force explains some of the program’s growth; older workers are more likely to become disabled. But a growing body of economic and journalistic evidence suggests that SSDI reduces work incentives, because of its permissive eligibility criteria and relatively high benefits, as compared to low-wage workers’ potential earnings.
Once a backup plan for dying or incapacitated workers near retirement age, SSDI now serves as ersatz unemployment insurance or welfare — particularly attractive, and particularly hard to give up, in a sluggish economy.
A June analysis for the Rand Corp. confirms that SSDI discourages work, saying that “the employment rate of new beneficiaries would have been 28 percentage points higher in the absence of benefit receipt.”
SSDI is one reason, in addition to recession and aging, that the U.S. ratio of employment to population declined from 62.5 percent to 58.5 percent in the past 10 years. The ratio in Germany, an older society than the United States, went up 5 percentage points over the same period.
The longer we wait to reform SSDI, the more it will drain the Treasury and erode the workforce. But Obama has said little — perhaps because of potential political blowback, especially from liberal fellow Democrats.
Indeed, current SSDI eligibility rules reflect the outcry over efforts by presidents Jimmy Carter and Ronald Reagan to trim the rolls during an economic downturn. In 1984, an election year, Congress called a halt to the cutbacks, and Reagan assented. The permissive criteria enshrined in law that year account for much of the program’s growth since.
Obama needs some of Schroeder’s political courage and long-term perspective on the social safety net. “Either we modernize ourselves, and by that I mean as a social market economy,” Schroeder said in 2003, “or others will modernize us, and by that I mean unchecked market forces which will simply brush aside the social element.”
Actually, taking on SSDI poses less political risk for Obama than Schroeder’s plan posed for him. Unlike the German, Obama doesn’t have to worry about reelection.
If they can do it, we can do it.