Introducing the "Great Safety Net"

European Straits #55

Nicolas Colin

Dear all,

I’m closing in on completing my manuscript, which is currently under review by a few friends and will then enter the editing and design phase.

As always in such cases, it is near the end, as a result of the painful process of writing, that the main concepts and angles emerge from the murky depths of the author’s confused thinking. And so I’m now converging towards the book’s overarching concept, which I’ve named the “Greater Safety Net”.

The central question of the book is this: Where do economic security and prosperity come from? I believe they don’t come from a single magic-bullet mechanism (hello, !), but rather from a complex macro mechanism that goes way beyond the narrow definition of the safety net (e.g. the welfare state). This ‘Greater Safety Net’ always includes three major components.

Its foundational pillar is social insurance: programs designed to cover certain critical risks to which individuals are exposed, such as old age, illness, and unemployment. The first such program to have been deployed by government authorities was Germany’s occupational accident insurance in 1884. The goal of then-Reich Chancellor Otto von Bismarck was not to cater to the demands of the labor movement, which he hated. Rather, it was to undercut the nascent trade unions of the time as they were propagating dangerous socialist ideas. Occupational accident insurance was a breakthrough in that for the first time employers had been given a legal responsibility for the well-being of their employees.

Social insurance has an impact in many dimensions. It hedges individuals against critical risks, thus ensuring economic security for households. It also contributes to steadier consumer demand at the macroeconomic level because in the presence of such programs, households consume no matter what—even when people are injured, sick, unemployed, or simply too old to work. At the dawn of the Fordist economy, widespread instability on large consumer markets led firms to renounce investment, which in turn fueled unemployment, which in turn depressed consumer demand, and so on and so forth down to the Great Depression. Social insurance proved an adequate remedy to such instability.

The Greater Safety Net also needs a dynamic force to grow from being simple to being comprehensive and adaptative. In the twentieth century, this force was the trade unions. With collective bargaining, unions established a balance of power with employers. And with assistance from the government, they were able to gain the advantage and obtain a larger part of the added value. Much like social insurance, collective bargaining benefited both households (under the form of higher wages) and businesses (under the form of increased consumer demand). Henry Ford dreaded unions, but he also famously understood the virtuous circle that linked consumption and production in the age of the automobile and mass production: “One’s own employees ought to be one’s own best customers.”

Social insurance programs made it easier for the unions to bargain with employers. Governmental guarantees of accessing affordable healthcare and decent pensions made it possible to concentrate negotiations on wages: it’s easier to negotiate if you pursue one goal instead of three. It’s even easier if you have what negotiation professionals know as a “best alternative to a negotiated agreement” (BATNA), which in this case was provided by unemployment insurance: if unions couldn’t reach an agreement with management and the company went bankrupt because of the resulting strike, unemployment insurance was there as the safety net that workers needed to rebound.

The Greater Safety Net wouldn’t be complete without the third component, the financial system. The idea that finance complements social insurance and collective bargaining may sound odd. But you shouldn’t underestimate the power of finance when it comes to mitigating the risks to which households and businesses are exposed in their respective spheres. For instance, with a little help from the government (Fannie Mae and Freddie Mac), financial markets made it possible for American households to buy houses, which under certain conditions contributes to strengthening economic security. Finance also played a role in making pension plans more sustainable over the long term (though poor stewardship could obviously produce the opposite result). Additionally, it provided individuals with the cash they needed to consume durable and expensive goods such as cars and appliances, and it occasionally covered daily consumption thanks to credit cards and other forms of consumer credit.

Our economic history since 1908 (when the Ford Motor Company started producing the Model T) can be read as the long struggle of shaping and improving the Greater Safety Net of the Fordist age. At first, it had to be imagined: it took the sheer will of the labor movement and a great deal of help from governments (as well as the Great Depression and two world wars) to succeed. Then it bore fruits with the economic security and prosperity of the post-war boom—a time that proves that under certain circumstances there is such a thing as a Greater Safety Net.

But the system was slowly unraveled from 1968 onward, with social insurance programs becoming less sustainable and unions getting weaker. With the rise of neoliberalism, the remedy to this disturbance was the retreat of those two main components and a radical and exclusive bet on the financial system as the preferred means to provide economic security to both households and businesses. That attempt at what Colin Crouch names “Privatized Keynesianism” didn’t work well and eventually went over the cliff with the 2008 financial crisis—a direct result of the economy’s excessive reliance on household debt.

Then technology took over, making it all even worse. With the volatility that is characteristic of the Entrepreneurial Age, demand is less steady than it ever was. What’s more, with the exponential pressure exerted on workers by consumers and large tech companies (a kind of universal "Wal-Mart Effect), wages are brought lower and lower. Even the financial lending system doesn’t work anymore, because it was designed for a society of salaried workers employed by big, resilient corporations. Once workers are more precarious and corporations are more prone to failure, the financial system is proving incapable of fulfilling the financing needs of either households or businesses.

This is the challenge we need to tackle today: revisiting every function that was performed by the Greater Safety Net back when it worked so well. We need to imagine institutions to once again serve the three goals that we should all be obsessed with: making consumer demand steadier, increasing household income, and providing access to affordable credit.

It’s not about restoring things as they were in the 1950s and 1960s, because we’re in a different world now. It’s not about implementing the principles of neoliberalism, which led us to the 2008 financial crisis. Rather we have imagine a radically new mix of social insurance programs, worker empowerment mechanisms, and financial innovation to better manage risks. This is what my book is about: how technology can be harnessed to increase economic security and prosperity for all.

You can click here to see a visual representation of the Greater Safety Net of the past. I’m pleased to read your remarks on this overarching concept of my book. Simply reply to this email!

Warm regards,

Nicolas