September 1999, Vol. 122, No. 9
for new policies?
Role of the State
Book reviews from past issues
Time for new policies?
Is It Time to Reform Social Security? By Edward M. Gramlich. Ann Arbor, MI, The University of Michigan Press, 1998, 103 pp. $24.95.
No government program is more loved or defended by Americans than Social Security. The "third rail" of politics—touch it and officials risk political suicide—was enacted in 1935 under then President Franklin Roosevelt. Now the Federal Government’s largest spending program, Social Security paid $350 million in benefits to 44 million people in fiscal year 1996. As an extensive insurance program, Social Security provides income support for the elderly, poor, and disabled.
Social Security is a pay-as-you-go system which requires workers to make payments into a trust fund through payroll contributions for a minimum of 40 quarters before qualifying for benefits. The program has operated effectively under this construction, but changes in the demographics of the American population—specifically longer average lifespans and the aging of the baby-boom generation—threatens the long-term financial balance of Social Security. Because current projections forecast a depleted trust fund by the year 2029 under the current construction, calls for reform of the program have intensified in recent years. Proposals have ranged from cuts in benefits to rises in payroll taxes.
Gramlich’s book reviews the current state of Social Security to determine if now is really the time for reform, and concludes that, although the basic goals of the program are sound, some policy changes are needed. Calling his approach "mending, but not ending, Social Security," the author cites four goals that should be achieved with any reform: first, preserve the important social protections now present in Social Security; second, bring the trust fund that pays Social Security benefits into long-term financial solvency for 75 years or more; third, make Social Security economically affordable to the Nation as a whole; and fourth, improve the financial return that workers get on their Social Security contributions. Noting that many of the suggested reforms address some but not all of these goals, the book goes on to examine competing reform proposals, and makes a recommendation as to which proposal would best serve the American population.
This book begins with a description of the history of Social Security in the 20th century, including how this defined-benefit pension plan is structured, how benefits are calculated, and how the poor and women are provided a substantial security blanket by the program. After providing the historical overview, the book goes on to examine what Social Security, as currently constructed, would look like in the 21st century. The analysis includes the impact that the baby-boom generation and the increase in expected lifetimes will have on Social Security finances. Essentially, the demographic changes will cause entitlement spending under the program to increase dramatically, and eventually could result in lower financial returns to program participants. The next chapter examines the goals of Social Security reform, which include social protection, trust fund solvency, economic affordability, and a higher rate of investment return.
The bulk of the book—and its most interesting component—is the discussion of new approaches to operating Social Security. The author begins by examining traditional responses to threats on Social Security—payroll tax increases or benefit cuts through means testing, changes in the benefits schedule, increasing the retirement age, or—of particular note to BLS employees—elimination of the use of the CPI to index benefits for inflation. (Essentially, the potential high bias within the CPI and its impact on higher spending for Social Security benefits is presented: the author states that the Bureau of Labor Statistics should be left to implement quality changes in the CPI on its own, without political influence playing a role. The author notes that, prior to 1972, decisions on how to index benefits for inflation were in the hands of politicians, and the decisions generally resulted in Social Security benefits rising more than they would have if based solely on price increases!)
The remainder of the chapter focuses on reforms that would alter Social Security from a defined-benefit plan to a mixed defined-benefit and defined-contribution plan. The centerpiece of this discussion, and the reform proposal advocated by the author, is the use of "Individual Accounts," privately owned but publicly managed investment accounts that individuals would be required to contribute to but where they would have a choice of between five and ten market index funds to invest those contributions (similar to the options currently given Federal employees under the Federal Employees Retirement System). The upside of such a plan would be new national savings, raising future GDP, and making Social Security economically affordable. Of course, investments in the stock market and other securities would increase the potential risk, but a standard, fixed benefit would remain part of the program.
The book concludes with an examination of other industrialized countries’ approaches to social insurance. Interestingly, and perhaps not commonly known to most Americans, the United States was not one of the first countries to implement a social security program. Other countries, especially in Europe, preceded the United States. They now face similar problems caused by demographic population changes, so the initial response to and reforms made because of the population changes offer insight to the United States.
Is It Time to Reform Social Security? offers a clear, concise overview of the problems now facing our country’s most popular entitlement program, and presents a wide alternative of potential reforms designed to keep things we like about Social Security, but fix the problems now facing the program. Although the book is brief, the organization of the text, the understandable language, and simple, effective charts and tables makes this book accessible to nearly everyone, not just hard core economists. Given that the Social Security problem is one facing us all, that approach is appropriate. Those who want statistical analysis or more detailed information about Social Security will have to look elsewhere, but for a quick overview of the policy questions surrounding the program, Gramlich’s book presents the foundation needed to promote independent thinking about what Americans should hope for in the future from Social Security.
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Role of the State
Redefining the State: Privatization and Welfare Reform in Industrial and Transitional Economies. By Nicholas Spulber. New York, Cambridge University Press, 1997, 254 pp. $39.95.
The size and the scope of the state’s functions have been increasingly questioned over the past two decades. As if to put a cap on such questioning, President Clinton has asserted that the time of Big Government had passed. Yet, the downsizing of government, be it by means of spending limits, deficit elimination or tax cuts; by outsourcing to private contractors; by the sale of public properties to private firms; or by deregulation, has remained high on the political agenda. Shrinking of, or where feasible, dispensing with welfare assistance to needy households, has additionally narrowed the state’s reach and obligations. These trends are the subject of Spulber’s book, as are some of the obstacles to their consumation.
The book’s title does not fully cover its ambit. In the advanced industrial countries—Spulber’s discussion centers upon the United States, the United Kingdom, France, and Germany—the redefinition of the state occurs within, even presumes, a firmly established framework of legal and economic institutions. Such presumptions cannot be maintained with respect to the countries of the former Soviet Union (the "transitional" economies) where the very foundations of the state have crumbled and must be reconstructed. Absent such reconstruction—and Spulber is skeptical that it will occur—economic growth there will be thwarted, unemployment will persist, and poverty deepen.
In both Western industrial nations as well as the former Soviet Union, the state’s role is being transformed by privatization. In the United States of course, few industrial firms have been publicly owned, and often but transiently, as during the two world wars. The most common form of public enterprise here has been the public authority (that is, the Port of New York Authority), which has corporate status, raises its funds in the capital markets, and cannot levy taxes. Such government agencies as the Reconstruction Finance Corporation, the Commodity Credit Corporation, the Federal Housing Authority, and others, have had far-reaching autonomy, and acted to facilitate and regulate financing and markets. They also blur any differentiation between public and private sectors.
A weakness of Spulber’s book is that he fails to deal with the subject of deregulation as an aspect of the government’s withdrawal from regulating and policing markets. Yet, if, as he writes, "a privatization program involves a broad redefinition of the role of the state and of its relation to the market and to society… [aiming to shift] the prevailing balance between the public sector and the private economy," then this holds with equal force for programs of deregulation. Be it noted that deregulation has in large measure driven global economic and financial policy of the leading industrial nations; and (as Spulber notes) privatization of state enterprises in developing countries has involved hundreds of billions of dollars, following the privatization model set, for example, in the United Kingdom. The rationale for privatization has been increased efficiency in comparison with the state-owned enterprise, but a more important underlying reason has been to extend the realm of the market and the investment opportunities thus opening up.
The political agenda for the reduction in the size and scope of the state’s role was perhaps most candidly expressed by Margaret Thatcher, the former prime minister of Great Britain, when she announced the ending of the "era of the postwar settlement." That "settlement" involved agreement between the Labour Party and the Conservative Party to pursue Keynesian policies ensuring full employment and economic growth, thereby providing the fiscal bases for such welfare-state institutions as national health services. Thatcher curbed the trade unions, sold homes hitherto owned publicly to their tenants, and greatly expanded the privatization of industries whose nationalization in earlier periods by the Labour Party (and to a lesser extent by the Conservative Party) was to secure control over the economy’s "commanding heights" so as to make them directly accountable to society at large.
The Reagan Administration likewise sought to downsize government. It rejected, at least ideologically, the Keynesian focus on aggregate demand, stressing supply-side economics, with tax cuts and monetary discipline the chosen instruments. It sought to diminish government’s social responsibilities by reducing welfare assistance and eligibility, devolving those responsibilities upon the states. It spelled, as Paul Starr (quoted by Spulber) has written, "A diminished commitment to include the poor in the national household," confirmed finally by the welfare reform legislation passed under the Clinton Administration. The retreat from aid to the poor, and the broader intent to constrict the state’s boundaries (also evident in continued deregulation) have been "anchored in ideas and values typical of the 19th century rather than the 20th, namely the belief in a smoothly working market without interference, the existence of limited government with devotion to well-balanced budgets, and a socially healthy environment with high family cohesion…." Its advocates also drew on the teachings of classical economists who, for example, denied the existence of involuntary unemployment, making unemployment a problem for the individual affected by it to resolve.
The pressures to reduce the state’s role have also arisen from the apparently ceaseless rise in the volume and scope of income transfers associated with welfare-state programs. All the countries Spulber discusses have confronted increases in their aging populations; single-parent families and children born out of wedlock; greater unemployment and hence unemployment assistance; and rising healthcare costs. All of them have had to ask themselves how to restrain the soaring costs of the relevant programs—whether and how to limit the state’s financial contributions; whether to reduce eligibilities, and to what extent to privatize. How these questions are being dealt with cannot be detailed here. Suffice it to note that, according to Spulber, theretofore state-sponsored pensions in Great Britain, for example, were partially privatized; other benefits (unrelated to pensions) were curtailed. "Overall, under the indicated reforms, the unemployed and certain families with children lost ground, many of the sick and disabled remained ‘at the boundaries of poverty,’ and a number of pensioners felt detached from the living standards of the working population…." In the United States, "… the entire Roosevelt and Johnson legacies in all matters related to social insurance are in debate," the earlier focus on welfare reform having been the wedge opening questions about all the major income transfer programs, their modifications and possible privatization.
We turn to Spulber’s discussion of the conditions under which privatization has taken place in the countries of the former Soviet Union, specifically, Russia.
Those conditions have differed fundamentally from those under which the redefinition of the state has occurred in the West. For in Russia (and elsewhere in the former Soviet Union), the central institutions of the state were dismantled or they "decomposed," and whatever remained was void of moral authority. But fragments of power continued to reside among industries and financial institutions; the top managers of these establishments retained their positions, and in time consolidated them by means of government-issued vouchers, the instruments of denationalization and privatization. Thus, "nomenklatura" capitalism evolved, the term deriving from the previous status of managers in the Communist Party and state hierarchies. The form of their status, not its content, thus changed. Furthermore, the monopolistic structure of industry, inherited from Soviet rule, has persisted nearly unchanged, thereby not only defeating competition and price liberalization but also discouraging new investment in plant and equipment, as well as innovation. Unemployment and impoverishment of vast strata of Russian society have resulted. Spulber believes that eventually a "dirigiste" economic regime will emerge, exercising near despotic powers.
In the West, the role of the state expanded under the impetus of the Great Depression and the social and economic crises it triggered. Nationalization of industry was to contribute to economic planning and stability, as well as to safeguard employment. Public enterprise was to an extent the outcome of earlier infrastructure needs which private capital had been unable to finance, as well as of military requirements. It is true, as Spulber notes, that programmatically the Labour Party and other social democratic parties demanded the socialization of industry and worker control. But the underlying ideas were always in controversy, such that socialists like Edward Bernstein favored wide latitude for smaller firms for their innovativeness and ability to absorb employment. Public enterprise was simply to be part of a variety of ownership structures.
Lenin and his associates adopted as their economic model the war economy which Germany had organized to pursue World War I. This model subordinated all consumption needs to investment in heavy industry and its military outputs, and centralized all economic decisionmaking in the state. The Germans left private property as such untouched, but the Bolsheviks expropriated the "bourgeoisie," thus of course depriving themselves of important resources of knowledge and competence. Lenin’s successors did not in principle, and scarcely in practice, deviate from this model (reinforced by the misperceived example of large American enterprise). This also meant the abolition of market transactions, and the conception of the economy as a vast factory. Innovation was squelched by the lack of competition and bureaucratic impediments; incentives were oriented toward political advancement, rather than industrial and economic improvement. Stagnation and eventual collapse of the system, unable to expand by other than resource exhaustion, were foredoomed.
In conclusion, it may be said that the redefinition of the state, argued with great insight by Spulber, has been a central orientation of domestic and political debate over the past two decades, but it has remained far from becoming an accomplished fact, as Spulber’s own data show. Government functions have been curtailed to but a minor extent. Government employment in the United States, for example, 14.7 percent of total employment in 1960, averaged the same figure in 1990–93. In the United Kingdom, it rose from 16.4 percent to 18.7 percent. Outlays as a percent of gross domestic product, while lower in the United States than in other industrial countries (except for Japan), increased from 26.8 percent to 36.0 percent, and in the United Kingdom from 29.5 percent to 40.6 percent.
The involvement of the state in armaments production, research and development, the sustaining of economic growth by means of infrastructure and human resource development, as well as income transfers, is unlikely to be reducible significantly. On the contrary, the state may be called upon once again to expand its role of ensuring employment and income security in a world of rapid technological transformation and the globalization of finance and industry breeding new insecurities. The limits of privatization and deregulation, hence of the state’s downsizing, are likely to have been reached.Horst Brand
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