Dylan Matthews: "Social democracy" is discussed a lot in other countries but is somewhat foreign to American politics. What do you mean when you use that term?
Lane Kenworthy: I use it to refer to the political economy that is best exemplified by the Nordic countries, particularly Denmark and Sweden. It originated as a movement — the labor movement and affiliated political parties, which were often but not always called "Social Democratic" parties — that blossomed in the early part of the 20th century as an alternative to Communist or Socialist and other, more left-wing movements that wanted to replace capitalism.
The idea behind social democracy was to make capitalism better. There is disagreement about how exactly to do that, and others might think the proposals in my book aren't true social democracy. But I think of it as a commitment to use government to make life better for people in a capitalist economy. To a large extent, that consists of using public insurance programs — government transfers and services — to achieve three goals in particular.
The first is "economic security," and that has a long history. That was the motivating force behind a lot of the programs implemented in the Nordic countries and our own New Deal. They were aimed fundamentally at addressing problems of economic insecurity.
The second is "opportunity." No one believes any society could have equal opportunity, but we could have less unequal opportunity.
The third is "shared prosperity," which is another way of talking about income inequality, though it's not quite identical. The idea with shared prosperity is that as economies grow, everyone should benefit. You don't necessarily need to be reducing income and wealth inequality, but those on the bottom should benefit when there's economic growth.
I'll add one other point, which is that, empirically, in Nordic countries social democracy has involved a lot of other stuff, as well, including very active input by confederations of labor unions and confederations of employers into policymaking, centralized wage bargaining, various kinds of regulation, and some farther-left economic proposals like the Meidner plan in Sweden in the 1970s, which never got implemented but would have steadily transferred ownership of companies to unions and their pension funds.
But I make a point in the book of suggesting that the Nordic countries rely very heavily on public insurance and less heavily on regulation than many American progressives believe, and they have been moving further in that direction over time. One indicator of that is the coinage of this term "flexicurity," which is associated with the Danish approach. The idea is that you focus more on public insurance and public services and less on regulating or constraining what employers and other people can do.
There are people who would say this is a departure from social democracy. My view is that this is a new form social democracy has taken.
You see that in non-social democracies, too, in debates about whether Clinton/Blair-style "Third Way" politics is authentically left-wing.
Right. Critics on the left said that's neoliberalism -- it's caving in to Thatcher and Reagan. Whereas other people think that social democracy is an idea and strategy that evolves over time. I'm of the latter view. But we shouldn't get too hung up on terms or names. The substance is what matters.
The proposals in the book rely on a mixture of direct provision of specific benefits or services — early childhood education, health care, parental and vacation leave — and of straightforward income transfers, like the Earned Income Tax Credit expansion or the Child Tax Credit boost. How do you think about the tradeoffs between those two ways of going about expanding the welfare state?
I think these are empirical questions. To some degree they're driven by your priors, but at this moment in history, we have empirical data to go on — not enough, but a lot more than we used to, because various countries have tried various things. We certainly don't know everything. For instance, some people on the left and some on the right think the real way forward is a basic income grant. No country has tried that, so we can only speculate on what that'd do compared to the array of programs we have now. But different countries have tried different things, and I try to be flexible and pragmatic in thinking about what might work. A lot of what I suggest we do is based on previous experiences. Paid parental leave, for example, has existed for more than a generation in some European countries, as have universal child care and preschool.
The right thing to do is to look at the evidence. That doesn't mean we should write off untried approaches, but I try as best I can to look at evidence from actually existing rich countries, including our experience here in the U.S. We have some excellent programs (though nothing's without flaws), not least of which is the EITC, which is one of our own innovations that the Swedes, among others, have now copied.
A 10 percent of GDP expansion of government sounds like a lot. Put that in perspective for us.
The best number, to give people a sense of where we are now, is government spending as share of GDP in 2007, because recessions throw these numbers out of whack. At that moment we were at about 37 percent, including all levels of government. If we went up by 10 percent — and I should say that the 10 percent is just a ballpark estimate — we'd be slightly above the average of the 20 rich countries that I use as a basis of comparison. I'm projecting that that might be where we end up in 2060 or so.
What role do you see for states here? A lot of our existing safety net, including Medicaid, TANF, the Obamacare exchanges and SCHIP, is state-based.
If I were designing our government structure from scratch, I'd probably have a lot less federalism, though it does allow for experimentation and the ability to respond to local needs. But that's the reality we're stuck with, and any changes going forward will be affected by the fact that we do have this structure.
Some on the left would say that, to get median wages rising again and improve things for the working class, we need to affect distribution before taxes, transfers and services through things like cutting the trade deficit, reducing low-skilled immigration or increasing union density. Why don't you take that approach?
It's a combination of two reasons. One has to do with my normative inclinations. So, for example, I would be against reducing immigration because people who come here tend to be poorer than even the poorest Americans, and their lives tend to be better off because they came. Even though I agree that the evidence suggests immigration reduces the wages of low-skilled native workers, I still think we shouldn't cut back on immigration.
The same thing is true with imports. Imports and foreign direct investment abroad and various other aspects of globalization benefit workers in China and other developing nations. Even though I agree that imports and investment flow out of the U.S. are part of our wage problem, I still wouldn't favor addressing the problem in that way, because I think it'd do more damage to those with an even lower standard of living.
There's also technological change — robots putting people out of work — and I don't think we want to stop technological progress. It's tended to do a lot more good than harm, so I don't want to move in the direction of blocking that.
The second reason is that I'm very pessimistic about our ability to do the kinds of things that might boost wages for those in the lower half of the distribution. One is to increase union strength. I think it'd be a good thing if we could, but I don't think anyone's come up with a plan for how to do that. I look at what's happened in Western European countries, and I see union density declining nearly everywhere, except places where you can't get unemployment insurance without being a union member. So I'm pessimistic about that.
There have been fundamental changes in the way that our economy functions. There have been changes in corporate governance, with the shareholder value movement and the glorification of CEOs. There's been a continued shift away from manufacturing to services, particularly low-end services, where it's tough to increase productivity. There's been an increase in firms doing pay-for-performance, where they try to measure productivity and tailor pay to that, instead of wages based mainly on seniority, and that, too, has helped accelerate this divide. The winner-take-all market phenomenon, also -- I don't really see the path whereby we reverse that.
Some people advocate salary caps, and some version of that may come to pass in certain ways. But I think it becomes hard to justify that when you have hedge fund folks or athletes or people in finance who aren't executives and aren't getting most of their money from salaries, who continue to get these very high compensation levels. I don't see, in practice, how we could do it. It's not that I'm opposed, say, to turning back the "shareholder value" orientation or increasing unionization. I'm just very pessimistic, in practice, about our ability to do that.
There seem to be two arguments that lefties who focus on increasing union density make. One is that unions boost wages through collective bargaining, which if I understand correctly is what you were just talking about. The other is that they provide a political base for defending and expanding the welfare state. How much do you buy the latter argument? Do we need stronger unions if we're going to pass the proposals in this book?
I think it's a sensible concern. If you look broadly, historically, at these 20 or so rich democratic countries, it's very clearly the case that countries with stronger and more centralized labor movements have gone further, faster in introducing generous public insurance programs.
But at the same time, an awful lot has happened here in the United States despite the fact that we have a comparatively weak labor movement. You could infer from the state of American labor that prospects for advances in social programs are going to diminish severely, but I'm far less pessimistic.
I think social scientists don't have a very good story or explanation for when and why social policy advances have come. We have a pretty compelling explanation for why countries have varied in the speed and extent of their social policy advances, but not for why things have or haven't happened here in the U.S., or at least no good systematic explanation for that.
You can point to social policy advances where the labor movement wasn't leading the charge, including Medicare and the Earned Income Tax Credit and the Affordable Care Act. It's not that they weren't involved at all, but it's very hard to tell a compelling story wherein these things happened mainly because the union movement pushed for them. That leads me to be a lot less pessimistic than a simple version of that political economy story would lead one to be.
Another argument you hear is that only small, homogeneous societies like Denmark or Sweden can muster the level of social solidarity necessary to pass this stuff. I gather you're more optimistic than that, too?
That view, like the labor power view, tends to think of this in categorical terms. You have strong or weak labor, homogenous or heterogeneous societies. I think it's much more useful and accurate to think of it as a continuum. A stronger labor movement helps, but it's not as if we have no welfare state without one. We have a much more expansive welfare state, in terms of transfers and services, than we did a hundred years ago. We've gotten steadily better over time, despite having a weak labor movement and a diverse society.
I suspect homogeneity does make a difference in the degree and pace at which social policy advances, but I don't think the categorical approach is really the right way to think about it. We have a lot of impediments that have led us to go at a much slower pace than many other rich nations, but we have advanced, and I think we'll continue to in the future. Another way that I think about this is that, in terms of social policy size and scope, there's much less distance between the U.S. today and Sweden and Denmark today than between the U.S. in 1914 and the U.S. today.
Something of a debate broke out after President Obama's inequality speech about whether inequality per se ought to be Obama's primary concern, or whether things like poverty, median wage stagnation and full employment should be bigger priorities. Our own Ezra Klein is in the latter camp. You've weighed in a bit on this, but I'm curious as to your thoughts on how to think about that question.
I have mixed feelings. A good bit of the research I've done in the last 20 years or so has been on income inequality and various causes and consequences of it across countries, and it's something I care a lot about. But I think it's probably not the right issue for the American left to put front and center. I think it should be one of these issues; shared prosperity, one of my three objectives in the book, is a way of thinking about income inequality.
There are two reasons why I worry about making income inequality the central issue. One is just the simple, pragmatic one, which is that public opinion data tell us that Americans haven't felt this should be a key issue for policymakers to address. Unless that changes, it may not be politically all that sensible to focus on inequality. An alternative is to focus on other themes, which may lead you to policies that would have the consequence of reducing income inequality. If you emphasize opportunity, you could get early education or an increase in the minimum wage and EITC, and some of those would also help to reduce income inequality.
Maybe things have changed in the last year. There's been an awful lot more attention — first after Occupy Wall Street, but now it's back — so maybe Americans are now more receptive to inequality. It could be that income inequality is exactly the thing to focus on, even if your primary goal isn't to reduce inequality but to increase economic security or improve opportunity. Maybe, like [new New York City Mayor Bill] de Blasio, you can make it a centerpiece of your campaign, and in practice do stuff like universal pre-K that fundamentally addresses these other goals. So, I'm not sure whether I'm right or not. My concern about the politics is based on how things have played out up to now.
The second reason is more substantive and has to do with revenue. If your goal is to reduce income inequality, you're likely to focus on increasing taxes for those at the top and making the tax system more progressive. But if your goal is to deal with things like economic security and opportunity, or even shared prosperity, I argue in the book that you want to look to public insurance.
To do that we need more revenue, and we can't get close to the quantity of revenue we'd want and need if we focus on those at the very top. We'd have to raise the effective tax rate on the richest one percent or five percent way above what it's been historically, and that's just implausible.
It's also not the way it's done in all actually existing countries that have a more generous array of social insurance. They all have flat or proportional tax systems, and use them to have very progressive transfers and services. So it's not as though they sock it to the rich more than we do. Their tax systems are slightly less progressive, though it's hard to measure. We have a slightly more progressive, or less regressive, tax system than other affluent nations.
So I worry that the focus on income inequality distracts us from where we want to go. We need to overcome this idea that we ought to keep taxes for most Americans at current levels or even reduce them. If you're aimed at inequality, you may think you want to increase taxes only on the rich, and that wouldn't get us the revenues we want and need.
Where does monetary policy, and efforts to ensure full employment, fit into this for you? How important is that to achieving social democracy?
A number of people, most clearly and carefully Dean Baker and Jared Bernstein in the book they just published, "Getting Back to Full Employment," as well as Robert Pollin in his book a few years ago, have pointed out the need for full employment. I fundamentally agree with them. I think full employment or something akin to that is probably our best hope for getting wages rising again for Americans in the bottom half. As I suggested earlier, I'm not high on other strategies, like slowing down globalization, and I'm pessimistic about other proposed mechanisms, like increasing union strength, so I think full employment is probably our best bet.
In the past generation, wages have been pretty much stagnant for the lower half, and the only period during which wages rose across the board was the late 1990s. I'm pessimistic that we can achieve this because it's only happened once in the past generation, and when it happened, it was idiosyncratic. It was [then Federal Reserve Chairman] Alan Greenspan overruling the Fed board and keeping interest rates low. It was exactly the right thing to do in helping the labor market and wages, but I fear it's unlikely to happen again.
It could be that with the experience of this crisis, the continuing stagnation of wages in the lower half and Janet Yellen coming in to head the Federal Reserve, that we could have a new approach to full employment and monetary policy that says: When the economy gets humming, we need to keep rates low for longer than we did in the 1980s and the 2000s. I hope that happens, but I'm not optimistic. I very much hope I'm wrong. If we spend more time at or near full employment, that's terrific both in and of itself and because it takes pressure off of social programs in terms of how much help they need to provide.