Leaders

Bouncingback

How tomake a social safety net for the post-covid world

 



Mar 6th 2021  | words 1010

 

Afterthe Depression and the second world war, voters and governments in richcountries recast the relationship between the state and its citizens. Now thepandemic has seen the old rules on social spending ripped up. More thanthree-quarters of Americans support President Joe Bidens $1.9trn stimulusbill, which is due in the Senate and includes $1,400 cheques for most adults.And in the budget on March 3rd Britain extended a scheme to pay the wages offurloughed workers until September, even as public debt hit its highest levelsince 1945 (see article). Such boldness brings dangers: governments could stretchthe public finances to breaking-point, distort incentives and create scleroticsocieties. But they also have a chance to create new social-welfare policiesthat are affordable and which help workers thrive in an economy facingtechnological disruption. They must seize it.

 

Thepast year has seen a wild experiment in social spending. The world launched atleast 1,600 new social-protection programmes in 2020 (see article). Rich countrieshave provided 5.8% of gdp on average to help record numbers of workers.Government debts are piling up, but so far low interest rates mean that theyare cheap to service. The publics mood had already been shifting. Britons usedto grumble that layabouts sponged off the welfare state; now they are morelikely to say help is too stingy. Last year over two-thirds of Europeans saidthey supported a universal basic income (ubi), an unconditional recurringpayment to all adults. Affluent professionals have had their gaze drawn to theworking conditions of those who deliver food and look after the sick. Thestruggles of women who have dropped out of the workforce to care for childrenand the elderly have become impossible to ignore.

 

Thesocial safety-net in many rich countries was creaking before covid-19 struck.Modelled on the ideas of Otto von Bismarck and William Beveridge, it had oftenfailed to cushion workers from globalisation and technological and socialchange. In 1999-2019 the number of Americans aged 25-54 outside the labourforce grew by 25%, or 4.7m, over six times more than the number who receivedhelp from the main assistance programme for displaced workers. As health-careand pension costs soared in recent years, governments cut back support forworking-age people. Between 2014 and 2018 Britains state-pension bill grew inreal terms by 4bn ($5.8bn), even as the rest of its welfare budget shrank by16.5bn. A dwindling share of middle-income jobs and the growth of the gigeconomy fuelled fears that labour markets were changing faster than flat-footedgovernments could.

 

Withthe public and some economists cheering on, it is tempting for politicians tostoke the economy with more ad hoc spending, or put in place vast schemes suchas ubi. Instead they need to take a measured, long-term view. The safety-netmust be affordable. Tight budgets, not milk and honey, will define the 2020s.The annual deficit of big advanced economies was 4% of their combined gdp evenbefore the pandemicand much ageing is still to come. Already bond yields arerising again (see article). Social spending must flow quickly and automaticallyto those who need itnot, as in America, only during crises when a panickedgovernment passes emergency legislation. And governments need to findmechanisms that cushion people more effectively against income shocks andjoblessness without discouraging work or crushing economic dynamism.

 

Thefirst step towards satisfying these goals is to use technology to make ancientbureaucracies more efficient. Postal cheques, 1980s mainframe computers andshoddy data need to be relegated to the past. In the pandemic many governmentstemporarily short-circuited their existing systems because they were too slow.In Estonia and Singapore digital-identification systems and a disdain forform-filling became an asset in the crisis. More countries need to copy themand also to ensure universal access to the internet and bank accounts. The callfor efficient administration may sound like tinkering but one in five poorAmericans eligible for wage top-ups fails to claim them. Nimblerdigital-payment systems will reduce the need for costly universalism as afail-safe, and allow better targeting and quicker response times. Digitalsystems also permit the emergency option of making temporary cash payments toall households.

 

That isthe easy part. Balancing generosity and dynamism is harder. Part of thesolution is to top up the wages of low-paid workers. Anglo-Saxon countries havedone this well since reforms in the 1990s and 2000s. But wage top-ups are oflittle use to the jobless and are often scant compensation for people who losegood jobs to forces beyond their control. Paltry support for the unemployed inBritain and America preserves incentives to work but at high human cost. Thesparsity of social insurance has undermined political support for creativedestruction, the catalyst for rising living standards. Continental Europe tendsto underwrite traditional workers incomes more generously. But the distortionof incentives leads to higher unemployment and divisions between coddledinsiders and a precariat. Both sides of the Atlantic lack a permanentsafety-net that insures gig workers and the self-employed.

 

Thereis one country that combines labour-market flexibility with generosity:Denmark, which spends large sums1.9% of gdp in 2018on retraining and onadvising the jobless. These interventions stop the unemployed from falling intodependency. The inadequacies of policies elsewhere are often glaring. Britainsefforts have flopped. Americas comparable spending is less than a 20th aslarge as Denmarks, even though the few lucky beneficiaries of itstrade-adjustment assistance earn $50,000 more in wages, on average, over adecade.

 

Bungeeeconomics

Foryears social spending has favoured the elderly and an outdated safety-net. Itshould be rebuilt around active labour-market policies that use technology tohelp everyone from shopworkers who are victims of disruption to mothers whoseskills have atrophied and those whose jobs are replaced by machines.Governments cannot eliminate risk, but they can help ensure that if calamitystrikes, people bounce back.







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Economist | Bouncingback

 

 

Leaders

Bouncingback

How tomake a social safety net for the post-covid world

 



Mar 6th 2021  | words 1010

 

Afterthe Depression and the second world war, voters and governments in richcountries recast the relationship between the state and its citizens. Now thepandemic has seen the old rules on social spending ripped up. More thanthree-quarters of Americans support President Joe Bidens $1.9trn stimulusbill, which is due in the Senate and includes $1,400 cheques for most adults.And in the budget on March 3rd Britain extended a scheme to pay the wages offurloughed workers until September, even as public debt hit its highest levelsince 1945 (see article). Such boldness brings dangers: governments could stretchthe public finances to breaking-point, distort incentives and create scleroticsocieties. But they also have a chance to create new social-welfare policiesthat are affordable and which help workers thrive in an economy facingtechnological disruption. They must seize it.

 

Thepast year has seen a wild experiment in social spending. The world launched atleast 1,600 new social-protection programmes in 2020 (see article). Rich countrieshave provided 5.8% of gdp on average to help record numbers of workers.Government debts are piling up, but so far low interest rates mean that theyare cheap to service. The publics mood had already been shifting. Britons usedto grumble that layabouts sponged off the welfare state; now they are morelikely to say help is too stingy. Last year over two-thirds of Europeans saidthey supported a universal basic income (ubi), an unconditional recurringpayment to all adults. Affluent professionals have had their gaze drawn to theworking conditions of those who deliver food and look after the sick. Thestruggles of women who have dropped out of the workforce to care for childrenand the elderly have become impossible to ignore.

 

Thesocial safety-net in many rich countries was creaking before covid-19 struck.Modelled on the ideas of Otto von Bismarck and William Beveridge, it had oftenfailed to cushion workers from globalisation and technological and socialchange. In 1999-2019 the number of Americans aged 25-54 outside the labourforce grew by 25%, or 4.7m, over six times more than the number who receivedhelp from the main assistance programme for displaced workers. As health-careand pension costs soared in recent years, governments cut back support forworking-age people. Between 2014 and 2018 Britains state-pension bill grew inreal terms by 4bn ($5.8bn), even as the rest of its welfare budget shrank by16.5bn. A dwindling share of middle-income jobs and the growth of the gigeconomy fuelled fears that labour markets were changing faster than flat-footedgovernments could.

 

Withthe public and some economists cheering on, it is tempting for politicians tostoke the economy with more ad hoc spending, or put in place vast schemes suchas ubi. Instead they need to take a measured, long-term view. The safety-netmust be affordable. Tight budgets, not milk and honey, will define the 2020s.The annual deficit of big advanced economies was 4% of their combined gdp evenbefore the pandemicand much ageing is still to come. Already bond yields arerising again (see article). Social spending must flow quickly and automaticallyto those who need itnot, as in America, only during crises when a panickedgovernment passes emergency legislation. And governments need to findmechanisms that cushion people more effectively against income shocks andjoblessness without discouraging work or crushing economic dynamism.

 

Thefirst step towards satisfying these goals is to use technology to make ancientbureaucracies more efficient. Postal cheques, 1980s mainframe computers andshoddy data need to be relegated to the past. In the pandemic many governmentstemporarily short-circuited their existing systems because they were too slow.In Estonia and Singapore digital-identification systems and a disdain forform-filling became an asset in the crisis. More countries need to copy themand also to ensure universal access to the internet and bank accounts. The callfor efficient administration may sound like tinkering but one in five poorAmericans eligible for wage top-ups fails to claim them. Nimblerdigital-payment systems will reduce the need for costly universalism as afail-safe, and allow better targeting and quicker response times. Digitalsystems also permit the emergency option of making temporary cash payments toall households.

 

That isthe easy part. Balancing generosity and dynamism is harder. Part of thesolution is to top up the wages of low-paid workers. Anglo-Saxon countries havedone this well since reforms in the 1990s and 2000s. But wage top-ups are oflittle use to the jobless and are often scant compensation for people who losegood jobs to forces beyond their control. Paltry support for the unemployed inBritain and America preserves incentives to work but at high human cost. Thesparsity of social insurance has undermined political support for creativedestruction, the catalyst for rising living standards. Continental Europe tendsto underwrite traditional workers incomes more generously. But the distortionof incentives leads to higher unemployment and divisions between coddledinsiders and a precariat. Both sides of the Atlantic lack a permanentsafety-net that insures gig workers and the self-employed.

 

Thereis one country that combines labour-market flexibility with generosity:Denmark, which spends large sums1.9% of gdp in 2018on retraining and onadvising the jobless. These interventions stop the unemployed from falling intodependency. The inadequacies of policies elsewhere are often glaring. Britainsefforts have flopped. Americas comparable spending is less than a 20th aslarge as Denmarks, even though the few lucky beneficiaries of itstrade-adjustment assistance earn $50,000 more in wages, on average, over adecade.

 

Bungeeeconomics

Foryears social spending has favoured the elderly and an outdated safety-net. Itshould be rebuilt around active labour-market policies that use technology tohelp everyone from shopworkers who are victims of disruption to mothers whoseskills have atrophied and those whose jobs are replaced by machines.Governments cannot eliminate risk, but they can help ensure that if calamitystrikes, people bounce back.







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