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Saturday, July 02, 2011

Why the Wealthy Need the Welfare State

We have forgotten what it was like before the welfare state (I prefer the term social insurance state), and why it was put into place:

What history teaches us about the welfare state, by Francois Furstenberg, Commentary, Washington Post: In the wake of the economic crash, which has led to soaring budget deficits, Democrats and Republicans are negotiating “to move forward to trillions of spending cuts,”... unprecedented reductions in the size of the welfare state... Lost in this debate is an appreciation of the historical origins of the American welfare state — long before FDR and the New Deal, after another epochal financial crash.
Much like our time, the Gilded Age was an era of economic booms and busts. None was greater than the financial crisis that began in September 1873... For 65 straight months, the U.S. economy shrank — the longest such stretch in U.S. history. America’s industrial base ground to a near halt... Until the 1930s, it would be known as the Great Depression. ...
As demand collapsed, businesses slashed payrolls and reduced wages, and a ruinous period of deflation began. By 1879, wholesale prices had declined 30 percent. The consequences were catastrophic for the nation’s many debtors and set off a vicious economic cycle.
Neither political party offered genuine solutions. ... With laissez-faire ideas dominant and the political system in stasis, economic decline persisted. The collapse in tax revenue only strengthened calls for fiscal retrenchment. Government at all levels cut spending. Congress returned the country to the gold standard...: “hard money” policies that favored Eastern financiers over indebted farmers and workers.
With neither major party responding to the crisis, new insurgent movements arose: antimonopoly coalitions, reform parties and labor candidates all began to attract support. ... The continued economic misery for the many, juxtaposed against fabulous wealth for the few, generated intense hostility to great fortunes. Workers, suffering the most without a welfare state, responded with ever-greater militancy.
The labor struggles of the age were as epic as the fortunes of the tycoons: the Molly Maguires of the Pennsylvania coal fields; the great railroad strike of 1877 that nearly paralyzed the nation; the Haymarket affair of 1886, in which a bomb killed eight people in a Chicago demonstration; the Homestead strike of 1892, probably the most violent labor conflict in American history. But these were just the most famous episodes...: Between 1881 and 1890, there were 9,668 strikes and lockouts... State and federal militias were repeatedly called out to quash labor unrest. ...
Wealthy Americans began to fear for the stability of the social order. What force, the wealthy asked in desperation, might mitigate the social chaos and misery, and mute what one public official called “the antagonism between rich and poor”? ...
Today, new fortunes have been accumulated that rival those of the Gilded Age. Some of that wealth, possessed by people like Charles G. Koch and David H. Koch or Peter G. Peterson, has been used to promote cuts to social spending. Before ...  dismantling of the welfare state, however, they might think harder about the reasons such policies were put in place.
The Gilded Age plutocrats who first acceded to a social welfare system and state regulations did not do so from the goodness of their hearts. They did so because the alternatives seemed so much more terrifying.

Though it doesn't fit precisely, I keep thinking of the ultimatum game. When the distribution of gains crosses some threshold of unfairness, people become willing to sacrifice in order to make a larger point. For example, in a strike they are willing to impose costs on themselves in order to impose even larger costs on someone else and hopefully bring about desired change.

I don't know how close we are to the boiling point, the point where people become willing to go on strike, sabotage production, etc., etc. in protest over intolerable levels of inequality in the distribution of the nation's output. But I fear we are closer to that point than we think, and attempts to dismantle the welfare state will make the tipping point come sooner rather than later.

    Posted by on Saturday, July 2, 2011 at 10:17 AM in Budget Deficit, Economics, Fiscal Policy, Monetary Policy, Politics, Social Insurance | Permalink  Comments (57)


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