Chapter 7
Neoliberalism and WS 2.0
The welfare states that enjoyed three decades of expansion after 1945 have endured a challenging period in the decades since. Beginning in the late 1970s, in one country after another, opposition groups mounted a sustained attack on welfare states in the name of free markets and conservative family values. More recently, political leaders and policymakers have struggled to adapt welfare state programmes to meet the challenges of the post-industrial world in which they nowadays operate. Both these developments—the neoliberal assault and the post-industrial adaptations—are, in their different ways, responses to socio-economic transformations driven by late 20th-century capitalism: changes that were initially experienced as an economic crisis and later as a shift in prevailing modes of production and social organization. This chapter describes the first of these phases: the economic crisis of the 1970s and the neoliberal onslaught it unleashed. Chapter 8 discusses the socio-economic transformations and adaptive reforms that are currently unfolding.
The ‘New Right’ coalition
Amidst the economic disruptions of the 1970s, a coalition of free-market and socially conservative political forces seized the opportunity to push back against the post-war welfare state and the balances of power it established. The loudest voices in this ‘New Right’ movement demanded the abolition of the welfare state and a return to free markets, self-help, and private charity. But though this radical approach often set the terms of debate, the movement’s political leaders were more pragmatic, targeting unpopular aspects of the welfare system, such as social assistance for the poor, rather than broadly-supported middle-class programmes such as Social Security or the NHS.
Despite their political dominance in the 1980s and 1990s, New Right reformers did not in the end abolish the welfare state—not even in the USA where welfare state government has always been most embattled. Indeed the failure of their prolonged assault might be taken as proof of the impossibility of doing without a welfare state, at least where democratic processes still operate. But even as they fell short of their goals, reformers succeeded in changing the character of welfare states, creating a less expansive, more austere version—let’s call it ‘WS 2.0’—based on a neoliberal, ‘de-regulating’ style of economic government and a market-oriented reworking of social policy.
The impact of the neoliberal challenge has been felt in welfare states everywhere. Germany reformed its labour market policies, reduced unemployment benefits, and curtailed federal spending. Sweden cut taxes, partly privatized social security, and tolerated unprecedented levels of unemployment. But the heartland of neoliberal reform was in the liberal Anglophone nations: in Canada, Australia, New Zealand, and above all, America and Britain. And it is on these last two nations that my discussion will concentrate.
Economic downturn
In the mid-1970s a steep and prolonged economic downturn began, affecting welfare states everywhere. Expanding markets, cheap energy, and stable money had enabled post-war growth and welfare state expansion but from the late 1960s onwards, falling rates of profit, declining productivity, balance of payments problems, budget deficits, and recurring fiscal crises signalled that the world economy was slowing down and welfare states appeared to be reaching the limits of growth.
It was the OPEC oil shock of 1973 that precipitated the crisis but equally important was the prior collapse of Bretton Woods—a framework of international monetary controls that had enabled national governments to manage their economies and allowed welfare states to flourish. Without the discipline of the system’s fixed exchange rates, governments spent more and fuelled inflation, causing instability in the currency markets. When, as a result, investment fell and unemployment rose, government efforts to stimulate demand set off an inflationary spiral. US inflation rates topped 10 per cent in the mid-1970s, peaking at 13.5 per cent by the end of the decade. UK rates rose even higher, reaching 24 per cent in 1975. Against this troubled background, OPEC’s decision to end cheap energy threw western economies into turmoil. Within months, the price of oil doubled, stock markets plunged, inflation surged, and unemployment began its steep upward climb.
Industrial relations entered a new era of instability—a militant period of strikes, stoppages, and demonstrations that shook public faith in the capacity of western governments to govern. Distributional conflicts that had been effectively managed in the growth decades (when rising productivity enabled wage increases and rising incomes enabled higher taxes) now became sharper and more divisive. Welfare state funding came under pressure as rising unemployment reduced tax receipts and insurance contributions while increasing benefit payments. Efforts to fill the fiscal hole by increasing taxes met with stiff resistance.
Political response
Western governments at first reacted by applying the standard Keynesian formulas: increasing expenditure and lowering interest rates to buoy up aggregate demand and encourage job creation. But the familiar recipes were no longer working. Instead of reducing unemployment, increased spending heightened inflation, resulting in the toxic coexistence of recession and inflation—an anomaly that cast doubt on the conceptual basis of post-war economic management and left governments uncertain as to how to proceed.
Under pressure from international markets, governments decided they had little choice but to abandon expansionist policies and focus instead on cutting public expenditure and establishing ‘sound money’. In a historic reversal of priorities, control of inflation replaced full employment as the primary economic objective—with devastating effects on the numbers of people out of work. Ironically, it was the Democratic and Labour governments of President Carter and Prime Minister Callaghan (see Box 12) that first undertook this political volte-face. But these efforts only succeeded in reducing their electoral support and reinforcing the view that serious reform could best be undertaken by right-wing parties less closely associated with trade unions and with the tax-and-spend policies of the welfare state.
Conservative politicians seized their opportunity. Margaret Thatcher and Ronald Reagan led the way, each of them assailing the post-war settlement with powerful rhetorical attacks combining neoliberal economic prescriptions with neoconservative nostrums designed to reassert national ‘greatness’ and reverse the cultural changes of the 1960s. Blame for their nations’ economic and moral decline lay, they insisted, at the door of labour unions, left-of-centre politics, and the welfare state. The solution was to curtail the power of organized labour; reduce social expenditure; raise interest rates; cut taxes; and embrace open markets. They also sought to transform the state, building its military strength while reducing its role in social and economic affairs. If the classic liberal state was a minimalist one, the New Right state was to be minimal in some respects but strong in others. ‘Big government’ was a beast to be starved—preferably by cutting taxes—and the public sector was to be reduced to a minimum. (As anti-tax crusader Grover Norquist put it: ‘Our goal is to shrink government to the size where we can drown it in the bathtub.’) But at the same time a powerful state was needed: to maintain national strength abroad; force through economic reforms; cut public spending programmes and taxes; privatize public assets; abolish regulatory controls—and deal with the resistance that these reforms generated (see Figure 10).
Box 12 The crisis of Keynesianism
‘We used to think you could just spend your way out of a recession and increase employment by cutting taxes and boosting spending. I tell you in all candour that option no longer exists.’
Prime Minister James Callaghan, addressing the Labour Party Conference, 1976
In all of this, politicians drew upon the ideas of libertarian intellectuals and free-market economists such as Friedrich Hayek and Milton Friedman as well as the practical support of the right-wing ‘think tanks’ that emerged in this period, generously supported by the business community. Soon neoliberalism was shaping the policies of other western governments, being embraced by centre-left parties, and dominating international institutions such as the IMF, the World Bank, the OECD, and the EU. By the 1990s, the post-war welfare state settlement was being replaced by a new ‘Washington Consensus’ that pressed for globalization, free trade, free flows of capital, and deregulated labour markets.
10. Striking miners and police during the 1984–5 British miners’ strike, Bilsten Glen Colliery, Scotland.
Neoliberal government
From the 1980s onwards, US and UK governments abandoned their commitment to full employment and Keynesian demand management in favour first of ‘monetarism’, which prioritized inflation control and ‘sound money’ and then ‘supply-side’ policies, which sought to reawaken enterprise and restore incentives by cutting social spending and taxation. The predictable result was a massive rise in unemployment. Around 1.5 million Britons were out of work when Mrs Thatcher was elected in 1979 (a rate of 5.4 per cent); by the end of her first term that number had more than doubled to over 3 million (11.9 per cent). In the early 1980s, the US unemployment rate rose to nearly 10 per cent: twice the rate of previous decades.
Mass unemployment helped right-of-centre governments undermine the power of the unions, force through wage cuts and flexibility agreements, and de-regulate labour markets by relaxing restrictions on hiring, layoffs, and wages. In America and Britain, industries such as coal, steel, shipbuilding, and car manufacture—all heavily unionized—were allowed to collapse even as governments elsewhere (in Germany and Sweden for instance) invested in the modernization of these sectors in the belief that they were vital to the nation’s economic health. The numbers employed in manufacturing plummeted, along with union membership.
The new pro-market policies divided working people, separating those in well-paid, secure jobs from the unemployed and those in precarious employment. The Conservative and Republican parties assiduously courted disaffected Labour and Democratic voters, targeting a demographic of affluent workers who owned their homes and preferred tax cuts to welfare benefits. In this changed electoral landscape, market-friendly policies favouring the better off ceased to be off-limits and were seen instead as essential to encourage enterprise and improve international competitiveness. Tax cuts and benefits for the rich would, it was claimed, eventually ‘trickle down’ to benefit everyone.
The neoliberal reforms of the 1980s and 1990s reversed the social and economic orthodoxies of the post-war decades. Tax cuts were everywhere emphasized, even as the poor had their benefits cut and despite the large deficits they produced. Nationalized firms, public utilities, and public assets were sold off to raise revenues and transfer control from public to private hands. In the short term, privatizations provided windfalls for hard-pressed Treasury departments coping with higher unemployment and reduced tax revenues. In the longer run, they shrank the size of the public sector and with it, the power of public sector unions. Where the sell-offs were popular with the electorate—as with council house sales (which greatly reduced Britain’s stock of social housing) or British Telecom’s 1984 huge public share issue—they expanded the extent of homeownership and shareholding and enlarged the appeal of conservative parties.
The deregulation of banking and finance was another major policy change. From the 1980s onwards, banks lost their monopoly over lending and large retail firms provided financial services to customers, creating a financialized economy in which profits flowed primarily from credit and financing rather than from manufacture. One result was a massive expansion of consumer credit, making it easier for households to borrow, even in the absence of substantial assets or secure incomes. Easy credit operated as a substitute for wage rises and improved welfare benefits, swelling aggregate demand and ushering in the boom years of the 1990s. It was, as sociologist Colin Crouch observed, ‘privatized Keynesianism’.
11. Average number of capital controls for fifteen OECD countries.
Deregulation extended to the currency and capital markets, which were now ‘liberalized’ from the restrictions of the Bretton Woods era (see Figure 11). Exchange controls were abolished, unleashing the flow of trade, finance, currency, and capital.
The results, as usual, were mixed, with massive gains going to the financial centres of London and New York but at a cost of increased exposure of domestic industry to international competition.
Attacking the welfare state
Libertarians had long regarded the welfare state as an abomination that undermined the operation of markets and the freedom of individuals. Conservative classics like Hilaire Belloc’s ‘The Servile State’ and Hayek’s ‘The Road to Serfdom’ portrayed it as a path to totalitarianism—a view that found echoes in the writings of Milton Friedman and Chicago School economists. For most of the 20th century, these beliefs had few mainstream adherents but in the crisis-ridden context of the 1970s, they gained influence, feeding into anxieties about social and cultural change as well as widespread economic frustration.
For many on the Right, the welfare state was fundamentally misconceived: getting in the way of enterprise and industry, undermining the market economy, and demoralizing those it claimed to help. This critique was especially powerful in liberal regimes where welfare institutions were residual and where many labour-intensive and service sector firms competed on cost rather than quality. Policy challenges that might have been viewed as problems of adaptation or maladministration were presented as insurmountable difficulties. Negative political interpretations were projected onto any and every problem, making each new difficulty another reason to abandon the welfare state. And of course the standard critiques—welfare produces perverse effects; welfare jeopardizes cherished values; welfare is futile—were rolled out, dusted off, and applied to every instance of welfare state government.
Welfare states were blamed for ending growth and fostering the economic downturn. Instead of permitting benign market forces to work unhindered, maximizing competition and efficiency, the welfare state interfered with the market’s self-regulating order, allowing ‘special interests’ (unions and public employees) to distort market signals and introduce ‘rigidities’ (employment rights) into labour markets that ought to be fluid and flexible. That welfare states had come into existence precisely because free markets produce calamitous effects; that welfare states had enabled a prolonged period of unprecedented growth; that cross-national evidence refuted the claim that welfare states were a drag on economic performance, and that big corporations were the major ‘special interests’ shaping government policy—these were considerations that got lost in the clamorous rush to discredit welfare state government.
Welfare reform
The assault on welfare states began with a battle for hearts and minds. Reform proposals were accompanied by a steady drumbeat of criticism, in which welfare states were demeaned and demonized. The welfare state was a socialist monstrosity sapping the nation’s spirit and ruining its economy. The public sector was costly, bureaucratic, and inefficient. Welfare clients were cheats and scroungers. Handouts were the opium of the masses, leading to dependency, idleness, drugs, and crime (see Box 13).
The first reforms—beyond the endless ‘efficiency reviews’ that governments began to put in place—were simple cutbacks: reductions in benefits, reductions in the scope and quality of social services, a tightening of eligibility conditions. Cost-cutting ministers looked at every head of expenditure but political prudence ensured that cuts mostly targeted discretionary social assistance programmes rather than pensions or healthcare.
Reformers sought to eradicate any trace of ‘dependency culture’ that might discourage benefit recipients from finding work, forming marriages, or cultivating personal independence. This attack on dependency—which drew on the writings of academics such as Lawrence Mead and Charles Murray and became something of an obsession among social conservatives—began by imposing new behavioural requirements and making benefits more conditional. Instead of being a right or entitlement, income support was made conditional on changes in the recipient’s conduct. Those receiving social assistance—above all single parents and the long-term unemployed—were required to demonstrate that they were actively seeking work, engaging in job training, or obtaining educational qualifications. And government spending increasingly favoured tax credits for the working poor rather than assistance for out-of-work individuals, leaving those in extreme poverty to turn to food banks, relatives, and survival strategies of one kind or another.
Box 13 The evils of social provision
‘Welfare benefits, distributed with little or no consideration of their effects on behaviour, encouraged illegitimacy, facilitated the breakdown of families, and replaced incentives favouring work and self-reliance with perverse encouragement for idleness and cheating.’
Margaret Thatcher, 1993
In Britain, unemployment benefits became ‘Jobseeker’s Allowances’ and a new emphasis was placed on ‘welfare to work’—though these efforts ran up against the shortage of real jobs and the limits of government job-creation schemes. In the US, President Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act (1996)—abolishing the federal programme providing aid to dependent children and their parents and replacing it with a more restrictive, state-run scheme entitled Temporary Assistance to Needy Families. TANF required single mothers to find work if they wanted to receive welfare benefits—thereby reversing the original purpose of such aid, which had been to enable widows and single mothers to stay home to care for their children.
Encouraging a return to work and helping individuals avoid long-term reliance on welfare are ideas with widespread support: social democratic welfare regimes have long adopted the same principles. But in America and Britain—in a context of mass unemployment, low-wage labour markets, and with an absence of supporting institutions such as free public childcare—these policies took a much harsher form. As sociologist Jamie Peck remarked, ‘Workfare is not about creating jobs for people that don’t have them; it is about creating workers for jobs that nobody wants.’
Cutbacks also affected public sector jobs, particularly in the USA where reducing the size of the federal government became an aim of successive Republican administrations. President George W. Bush shrank the federal government to a point where it was, in relative terms, smaller than at any point since 1940—a job destruction programme that disproportionately affected minorities and further reduced the capacities and competence of the American state.
Neoliberal management
Governments tightened welfare funding and cut back benefits but these were policy adjustments that might later be reversed when prosperity returned. (And in fact the New Labour governments of Tony Blair and Gordon Brown did just that in many areas.) A more radical, and more enduring programme of structural reform has changed how welfare agencies are funded and managed, and the ways in which benefits and services are delivered.
Neoliberals had long insisted that goods such as housing, health, education, and pensions could be more efficiently supplied by the market than by the state. Given the impossibility of abolishing the welfare state and returning to unregulated markets, their preferred solution was to restructure welfare institutions in ways that made them behave more like market actors. To this end, a series of managerial reforms—the ‘new public management’—was introduced, applying to public agencies a number of private sector techniques such as cash-limits, target setting, and performance-indicators. Subsequently, internal markets and competitive practices were introduced to break up the ‘monopolies’ enjoyed by public housing, hospitals, schools, and universities, and induce these institutions to function more cost-effectively.
Another neoliberal reform was the establishment of ‘contracting out’ and ‘purchaser-provider’ arrangements. This restructuring ended the old system whereby public agencies received funding, delivered services, and monitored their own performance, replacing it with a more complex, marketized arrangement in which public agencies are required to contract out the task of delivering services to private firms that compete to get the work. The new system—which relies on competitive tendering to drive down costs and improve service quality—has effectively privatized much social care.
Vouchers and ‘opt-outs’ had similar effects. Instead of financing housing or education authorities, public funding (in the form of vouchers) goes directly to ‘consumers’ who are allowed to choose which schools or housing they will ‘buy’ into. And opt-out schemes permit individuals to quit public sector schemes and ‘go private’: for example, leaving the public pension scheme and insuring oneself in the commercial market. Although it is frequently proposed, the privatization of National Insurance and Social Security has proven politically unfeasible, and neoliberal reformers have had to settle for a system in which individuals are incentivized to supplement publicly insured pensions and healthcare with personal policies purchased in the private sector.
Neoliberalism’s impact
Neoliberal policies were, no doubt, intended to generate prosperity and enhance welfare. And economies run on neoliberal principles sometimes do prosper, as the USA and the UK showed in the boom years of the 1990s and early 2000s. But as well as being destabilizing (as the 2008 crisis showed) neoliberal policies are profoundly inegalitarian and heavily biased towards powerful market actors. Their immediate, direct benefits go to the rich not the poor; to employers not employees; to capital not to labour. And they are party-political in their impact, tending to reduce support for the parties of the welfare state and increase it for parties aligned with business and markets.
WS 1.0 generally advanced the interests of industrial workers, creating a prosperous middle class, and increasing living standards for the vast majority of families. Its expansion was accompanied by a large-scale shift in income distribution, narrowing the gap between top and bottom earners, creating more equal societies in which fewer people were either very poor or very rich. The policies of the 1980s and 1990s reversed these developments. For the most part, they worked to the advantage of corporate executives, finance capitalists, large employers, and property-owners. They restored the power of economic elites, re-established conditions for capital accumulation, and shifted power and influence towards finance capital. In the course of a few decades, they undid the equalizing, democratizing effects that the New Deal and the welfare state had achieved (see Figure 12).
12. Income share (excluding capital gains) of the top 1 per cent in affluent democracies.
The weakening of economic and social rights reinforced these new inequalities. Governments in America, Britain, and elsewhere took steps to make labour markets more flexible, which generally meant more precarious for workers. Employment protections were weakened; the union movement collapsed; wage stagnation continued despite longer hours and improved productivity; new industrial relations laws favoured employers; tax rates were reduced and funding for discretionary social spending was withdrawn. The result is a ‘winner takes all’ economy, in which the rich are rewarded, the poor are pressurized, and those in the middle are rendered more insecure.
But despite these radical transformations, despite the falling off in social assistance, and despite the emphasis on choice, consumerism, and competition that is the hallmark of WS 2.0, it is a striking fact that the core institutions of the original welfare state have largely survived and remain firmly in place today. The welfare state’s corporate and plutocratic opponents have regained their economic and political ascendancy but they have left its middle-class institutions more or less untouched. Indeed, the international evidence shows that the major welfare state programmes of pensions (see Figure 13), unemployment and sickness benefits (see Figure 14), and healthcare (see Figure 15) provide more extensive, generous coverage today than they did at the start of neoliberalism’s rise to power. Neoliberalism’s assault on the welfare state has chiefly impacted welfare for those in need; not those in work.
The neoliberal assault succeeded in modifying welfare states everywhere, restructuring the programmes of WS 1.0 into the more market-oriented forms of WS 2.0 and bringing to an end the remarkable expansion of the post-war decades. But after thirty years of political dominance, neoliberalism has neither displaced nor dismantled the fundamental institutions of welfare state government nor has it diminished their continuing popularity with the electorate. Instead, taxes and social expenditures as a share of GDP have levelled off—at different rates in different regimes—and reforms have mostly assumed steady-state funding rather than the rapid growth of the earlier period. This does not mean, of course, that such dismantling may not occur in the future in one nation or another. But it does mean that welfare states have shown themselves to be remarkably durable and resilient in the face of very powerful opposition.
13. Standard pension benefit, 1971–2002, in social democratic, conservative, and liberal regimes.
14. Sickness benefit, 1971–2002, in social democratic, conservative, and liberal regimes.
15. Unemployment benefit, 1971–2002, in social democratic, conservative, and liberal regimes.