Social Democracy as a Recession-Fighter

Passeig de Gracia

Megan McArdle surveys the scene:

We are not even close to the bottom of the job market, much less the return to the halcyon days of low single-digits. And with the contraction of the credit markets, American consumers have lost the last safety line between them and disaster.

Of course there’s always the social safety net. And one major advantage the United States has in 2009 versus 1929 is that we have a much more substantial one than we used to. But we have a much less substantial one than do most of our peer countries in the rich world. It’s never pleasant to be laid off from your job, but in Europe such layoffs won’t generally have major implications for your ability to acquire health care for yourself and your family or for your ability to pay for your children’s schooling.

That’s nice for the unemployment, of course, but beyond that it can help maintain a certain level of confidence in the future. By reducing people’s downside risk exposure, a welfare state helps better mobilize the fact that even in a recession a large majority of the population is still gainfully employed, reducing the extent to which the employed majority starts making fear-driven financial decisions. Similarly, a large welfare state acts as an “automatic stabilizer” in fiscal policy terms. Since revenues go down during a recession but social outlays go up, a large safety net ensures that fiscal stimulus will be delivered in a timely manner without all the problems of program design and sausage-making that we’re seeing in our current congressional debate.