Progressives must entirely redesign the welfare state

5 June 2020

If progressives want to play a powerful role in the future, they must be willing to really tackle social inequalities

Francesco Gualdi
Francesco Galletti
Editorial credit: ShustrikS / Shutterstock.com

How can the state protect its citizens? Any analysis and reflection into what-to-do in the wake of the COVID-19 pandemic should begin with this basic question. National governments and international organisations have already worked out a number of policies that are designed to contain and alleviate the most dramatic socio-economic effects of the virus. Many countries which hadn’t fully recovered from the economic and social consequences of the 2008-financial crisis, now face an even more daunting challenge. At the time of writing, the most updated estimates foresee a loss of at least 7.1% of GDP in the European Union, and of 5.9% in the United States (IMF, 2020). Beyond these figures, the pandemic is also likely to produce a worse recession than the financial crisis, as Kenneth Rogoff has argued. For instance, the US economy lost 20.5 million jobs in the month of April: the single largest decline since the Great Depression (US Bureau of Labor Statistics). Job loss might cause severe social consequences, involving increasing poverty, difficult access to health systems, and food insecurity. The World Bank has recently released an astonishing forecast which contends that the risk of acute hunger may double worldwide in 2020 due to this crisis.

Observers and scholars were ready to define Covid-19 as the perfect symmetric crisis, resulting as it does from an exogenous shock (Demertzis et al. 2020, Roubini 2020). In one way they are correct, as a pandemic can be viewed as a textbook case to describe a single event that can hit in a similar way across all actors and sectors in a society. The same textbook could also explain how the 2008 economic crisis in the European context, which was primarily a public debt crisis, was a good example of an asymmetric crisis, given the dramatically different experience of the crisis in different parts of Europe. However, it is also abundantly clear that the most severe health, economic and social consequences of the crisis are experienced much more acutely by some sectors of society than by others.

Indeed, some of the earliest available (and reliable) research confirms that the impact of the crisis not just affects specific groups of people within society, but, broadly speaking, will increase domestic inequalities (Furceri et al. 2020, World Bank 2020). Now, even only a few months since the start of the pandemic, we can easily identify categories in society that are scarcely impacted by the crisis, and others which have been devasted. For example, public employees, private employees of medium-to-large businesses, and retired people have tended to suffer less as a result of the economic lockdown. This is hardly surprising as this first group are often referred to as ‘sheltered sectors’. As the current crisis involves both demand and supply challenges, we cannot discount that many things may also change for these categories in the future. A clear-cut example might be an increasing tendency towards the automation of some public administration services as a result of the crisis. However, other social groups are clearly going to pay a far higher and immediate cost from the inevitable recession that the pandemic will cause, including people in small enterprises, self-employed people, temporary workers, and the precariously employed. In several countries, these categories constitute the backbone of the economy, and the need to sustain such groups, directly or indirectly, will be paramount to a general recovery of the economy and society (see OECD, 2019 for the role of part-time workers in the Netherlands; ESPON, 2018 for the extensive role of small-medium enterprise in Europe, and ILO, 2018 for how work work has evolved).

All over the world, and particularly in Europe, governments have launched ambitious ad hoc welfare programs to combat the immediate impact of the crisis. The United States government has also transferred money directly to American citizens to help them through the unprecedented period of disruption. In Europe, governments have often relied on the strengthening of short-time work schemes (e.g. Cassa Integrazione e Guadagni in Italy, Kurzarbeit in Germany, etc.). Consistently, the funding of such measures, and similar interventions for the self-employed, is a pivotal part of SURE, the EU instrument for temporary Support to mitigate Unemployment Risks in an Emergency (European Commission 2020)

However, these are only the immediate responses which aim to contain the most immediate economic losses and to guarantee some essential needs and demands of citizens, as especially in countries that tend to save money, such as Italy and France (see Bank of Italy, 2018 for historical data on Italian savings), citizens can became even more cautious to spend. Italian and French savers put aside respectively €16.8 billion and €20 billion in March 2020, nearly twice the rate of Spanish savers (€10.1 billion) and way more UK savers (£13.1 billion), according to ECB and BoE (Financial Times, 2020). We don’t aim to inquire whether these strategies are correct – most of them are. After all, we are still in the middle of the crisis, and governments throughout Europe are only gradually lifting the lockdown measures. The key question, in our view, is what is going to happen to sustain the demand for state welfare supports in the medium-to-long term.

The pandemic affords an opportunity to rethink the whole nature and structure of the welfare state. In our view, there are two different major challenges to address when discussing the post-crisis recalibration of welfare systems. First, how might the structure and funding of the welfare state need to change as a result of the pandemic. For example, is the need for regional coordination – at European level, for instance – more or less necessary as a result of the crisis. The second factor requires a more nuanced approach, as it involves analysing and prioritising who to help within the framework of the welfare state, and whether, for example, unitary states will need to redesign welfare provision to address the needs of specific regions or sectors in society.

Meanwhile, states are responding to the challenges of the crisis in more or less the same way, by accumulating debt in order to finance a panoply of welfare and recovery measures. Many of these policies focus on welfare issues, such as the extension and provision of unemployment insurance, tax credits, the extraordinary financing of health services, and the mitigation of unemployment risks through short time work schemes. In principle, the aim to protect as many categories and social groups as possible is the right one. The potential explosion of new and deepened inequalities would be a lose-lose situation that any government would want to avoid. In practice, we suspect that one-size-fits-all policies would only risk worsening the challenges of already fragmented and unequal societies, and would ultimately widen the gap between insiders and outsiders that already exists in several European countries.

If progressives want to play a powerful role in ameliorating this situation, they must show the willingness to really tackle social inequalities. To do so, progressive policies must carefully evaluate who are the real ‘left behinds’ as a result of the current crisis. The political translation of this assumption is that if progressive really want to tackle the inequalities produced and worsened by Covid-19, then they must design and deliver a recalibrated welfare system that fits the dramatically transformed situation. In many countries, young people, the self-employed, and those working in small businesses are the forgotten groups which seldom fit in the progressives’ political agenda, at least when it comes to welfare provision. The emergency solutions introduced to provide welfare support and social protection for such groups might provide a starting point for progressives to build upon.

The need to introduce a more inclusive welfare system is essential, particularly as the social groups that are impacted the most by Covid-19 are typically those which have been hit the hardest by impact of digitalisation and the automation revolution. It has been well documented that middle class jobs have oftentimes been crowded out by an increasing automation of routine tasks and by the resulting wage polarisation (cfr: Acemoglu & Autor, 2011, Autor & Dorn, 2013). In other words, while job creation has occurred at both the upper and lower tiers of the value chain, it is at the lower tier where Covid-19 is likely to have the greatest impact. Hence, the redefinition and recalibration of welfare provision must include remedies and adjustments that reflect this double impact of digital automation and the Covid-19 crisis.

Progressives must also acknowledge that some of their traditional constituencies might already be relatively well-protected, and the reiteration of the same welfare policies can end up deepening the divide between social groups and strengthening the insiders-outsiders cleavages. The hidden truth in this argument is that shifting constituencies has a political cost, and the reorientation of priorities might produce turmoil and social discord. We are aware that taking this route has many potential drawbacks. However, progressives now more than ever must be prepared to intervene in and lead these ongoing social transformations, rather than passively observing the worst consequences of the Covid-19 pandemic.