Big Data and the Welfare State: How the Information Revolution Threatens Social Solidarity, by Torben Iversen and Philipp Rehm, Cambridge University Press, 2022, 230 pages, $89.99 (Hardcover).
Indebted Societies: Credit and Welfare in Rich Democracies, edited by Andreas Wiedemann, Cambridge University Press, 2021, 350 pages, $110.99 (Hardcover).
The American Political Economy: Politics, Markets and Power, edited by Jacob S. Hacker, Alexander Hertel-Fernandez, Paul Pierson, and Kathleen Thelen, Cambridge University Press, 2021, 400 pages, $89.99 (Hardcover).
The world is facing major changes unseen in a century. China’s rise is one side of this coin. Another side is the complexity of political economy in developed countries. The waning of the welfare state is considered one major cause of social tension and political disorder. In this short review, the author intends to discuss three books that could help us understand the new dynamics of political economy in western welfare states and its profound influence on inequality, social disorder, and other important issues.
The impact of the information revolution on the welfare state
As Iversen and Rehm mention in Big Data and the Welfare State, the welfare state is “a public system where low-risk types are required to contribute to the population-wide pool and hence subsidize those higher-risk types” (24–25). The logic behind this “majoritarian coercion” is the inefficiency of private insurance markets under conditions of incomplete information. People with low risk would opt out of the plan and only systematic uncertainty (like the shock of Great Depression in 1930s or the coming of deindustrialization in 1970s) could moderate their preference to opt-out.
Time-inconsistency is another difficult problem. The welfare state demands that younger, healthier, and more employable workers transfer resources to disadvantaged groups, and those workers then expect to receive the same benefits in the future. However, “even in the case of a fully funded system with little or no intergenerational redistribution, people worry about the likelihood of receiving future payouts” (33). This problem could be moderated in many political-economic contexts through the inclusion of responsible political parties, the introduction of pension systems with features that include private investment tools, etc. Specifically, leftist parties and left-leaning governments tend to represent the interests of high-risk groups and to support a welfare state as opposed to a private solution. However, the function of those moderations, including the future of left-leaning politics, depends on the preferences of constituencies, which are fundamentally influenced by the distribution of information.
Thus, the power of the information revolution cannot be ignored. With the growing availability of data and the improving capacity on the part of insurers to analyze people’s risk levels, the preferences of the public are bifurcated. The economically advantaged group, including those people with middle-level incomes, demands the differentiation of welfare policies in developed countries. Moreover, the private insurance companies have developed more attractive plans to substitute the function of the welfare state. Simultaneously, the support for left-leaning parties with strong political agendas on public welfare systems have also decreased. Those dynamics will eventually lead to the change of social insurance systems from solidaristic welfare states to segmented private insurance markets.
The interaction between the financial market and the welfare state
When facing unemployment or other financial difficulties, why do people in some countries prefer borrowing money, rather than spending their savings or executing painful spending cuts? Andreas Wiedemann explains the variety in types of indebtedness across developed countries by combining the institutional features of welfare states and credit regimes. When welfare states can cover social risks and support social investments (education, training, family support, etc.), it is not necessary to borrow money (for example, in Denmark). Private finance institutions only play a complementary role by providing financial liquidity to individuals. By analyzing the effects of introducing home equity loans in 1992, the author also found that debt increased more for individuals who intentionally left their work to get a better education or raise their family. This is a clear example of how the complementary role of financial markets works.
In countries where the resources provided by the welfare state are less generous, the availability of a financial institution often determines whether people choose to borrow money. People with better access to financial institutions borrow more. In this scenario, the financial market is substituting the effect of the welfare state. For example, Americans borrow money mainly for covering financial losses incurred through unemployment or non-standard work arrangements. Variations in sub-national borrowing levels also support the substitutive effect of financial institutions to the welfare state. The author found that unemployed people borrow more in states with less generous welfare systems. Of course, this does not suggest that less influence is exerted by government interventions. In fact, the permissive financial regime in the US and its substitutive effect are highly dependent on subsidized interest rates and secondary market operations.
For countries with less generous welfare states and more restrictive credit regimes, households rely on a combination of welfare-state support and private savings, family support, or expenditure cuts to cover their economic difficulties (for example, in Germany). The author found that the activation of the Hartz IV labor market reform in 2005 led to the declining of welfare benefits, and Germans have since depended more on savings and spending cuts, which ultimately led to debt reductions. The restrictive German credit regime not only has shaped citizens’ preferences for borrowing less money, but also has influenced their spending choices. This was true even when controlling for life-course choices and childcare spending. As the author argued, “Germans rarely use credit markets as private alternatives to social policies” (237).
Capitalism with American characteristics
From the perspectives of Jacob S. Hacker, Alexander Hertel-Fernandez, Paul Pierson, and Kathleen Thelen, authors of The American Political Economy: Politics, Markets and Power, the COVID-19 crisis and the nation’s inadequate response “brought America’s distinctive mix of multi-venue governance, limited social protection, weak labor power, and loosely regulated markets prominently—and often tragically—into display” (1). To understand the dynamics of the distinctive US political-economic mix, the authors argued that it is necessary to create the field of American Political Economy (APE) with a focus on “the ways in which institutional configurations shape coalitional politics to produce long-term developmental processes” (7). Following this intellectual pursuit, the authors identified three APE features that are most crucial to understanding contemporary American capitalism: fragmentation of governance, competition of organized interests, and conflict caused by racial oppression and division.
First, the authors argue that the fragmentation of governance (which they define as divided power, the “outsized role” of the judicial system, and the local self-rule tradition in the US) is responsible for the limited authority of the federal government and the inefficiency of coordination among contested subnational governments. Ultimately, the fragmentation of governance results in the limited provision of public goods and the failure of redistributive polices.
Second, the competition of organized interests is based on diversified access to the decision-making process within the sphere of public policymaking. Organized groups can take advantage of this favorable institutional setting to influence the coordination of government actions, especially to avoid the restrictions imposed by regulations. Moreover, interest groups have powerful resources that can be used to mobilize voters, which further amplifies their influence on long-term government policy. After all, both political parties and nearly all politicians need the support of key organized interests to win elections.
Third, racial oppression and divisions are hard to alleviate given the fragmented nature of political power and the competition of organized interests. In turn, racial issues and tensions further strengthen the policy preferences of all parties in the political system and solidify their political strategies and coalitions among state, party, and organized interests.
Regarding the response to the COVID-19 pandemic, all three features have significant implications. The problem of poor coordination was caused by government fragmentation. Specifically, partisan disputes between “red” and “blue” areas at different levels (states, counties, and even cities and towns), combined with the troubled federal bureaucracy weakened by politicization, impeded the activation of more decisive COVID-19 response measures. Additionally, organized interests contributed to the inefficiency of relief policies. As the authors write, strong interest groups (big firms and banks) took advantage of the relief policies and “were in a position to pick winners and losers” (414). Finally, economically disadvantaged groups received disproportionately lower levels of help from COVID-19 relief programs. The racial divisions became even more systemic and compounding, making them more difficult to change.
Concluding remarks
The authors of the three books presented various dynamics which caused the complexity of political economy in western welfare states. The power of information revolution, the influence of financial markets and the American characteristics of capitalism (fragmentation of governance, powerful organized interest and racial issues) has weakened the solidarity of welfare states in different ways. In the future, the integration of technology, capital and politics will be very close. The waning of welfare states in developed countries seems unstoppable. Inequality, social disorder and other issues will also be more intense.
This political-economic trend in developed world has provided important implications for China. On the one hand, the waning of welfare states and its social–political consequences in western countries would increase the difficulty of policy coordination between developing and developed countries. On the other hand, China is also facing the trend of increasing connection among capital, technology, and politics. In the context of “Chinese path to modernization,” we may also need to reconsider the pros and cons of the former model of China’s social–economic development.