The rise and fall of social democracy

I have long believed that we are living in an age of conservative social democracy where both major parties are roughly happy with our current size of government. It appears that this thesis is picking up supporters all over the shop — including Mark Bahnisch, Andrew Norton & John Quiggin.

I see the 20th century as the “century of the state”, where the angloworld moved from liberal (ie moderate libertarian) democracy to social democracy. At the beginning of the 20th century tax made up under 10% of GDP. Now it is about 40% in the anglosphere. The social democrats have won. We are now living in the wet dream of the fabian socialists of 100 years ago. We are living in the world of Whitlam/Labor and Howard/Liberals are defending it.

Some commentators point to the supposed “neo-liberal” revolution of the 1980s as evidence that the tide has turned. Thatcher (UK), Raegan (US), Hawke/Keating (Aus), Roger Douglas (NZ). Unfortunately, none of these people have successfully wound back the size of government. What they have done is stopped the growth of government. The “neo-liberal” revolution wasn’t liberal at all… it just marked the end of the growth of government.

During most of the 20th century there have been political marriages of convenience between the conservatives/liberal democrats (as conservatives wanted to conservate liberal democracy) and also between the socialists/social democats (as they both wanted reform towards bigger government). But both of these unions are now falling apart.

It no longer makes sense for liberal democrats to tie their flag to the conservative vote-getting engine. Conservatives have stayed trued to their name (and lack of real political philosophy) by now defending the new statist quo of social democracy. True liberals don’t want to conserve much about the current system. We want big change and smaller government.

And it no longer makes sense for socialists to tie their flag to the social democrat Labor-machine. Mainstream Labor isn’t going to move any further left, so if the socialists want to drag us further towards Havana, they’re going to have to do it without their more popular & moderate ex-comrades.

Unfortunately in Australia, while liberal democrats have so far largely failed to organise outside the Liberals the socialists have found an effective new vehicle to push their argument for even bigger government — the Greens. We can only hope that the Liberal Democratic Party can one day immitate their success.

But while the conservatives and social democrats move away from their ex-partners they are increasing moving towards each other. Howard defends Whitlam’s welfare systems and is the highest taxing/spending PM in Australia. Bush is the highest spending Pres in the US. New Labor in the UK outflanked the Tories on the right, and now the Tories under Cameron are trying to outflank New Labor on the left. Thatcher & Raegan may have been from the right, but Hawke and Roger Douglas were from the left. Modern political differences are about cultural issues or minor differences made to look big on TV.

The big question is what happens next? I prefer liberal democracy, but I am happy to admit that social democracy is a good system. Certainly better than environmental socialism (Greens), national socialism (One Nation) or any other alternative floating around in politics today. I think the current system can be successful for quite a while… and while it is successful then people will be happy to let the mediocre similarity of the major parties bore them to indifference.

But I fear that social democracy may face problems some day. It promises all things to all people and provides half to each. It encourages bureaucracy and government dependency. It lacks the flexibility of liberal democracy and instead insists that the government should fix everybodys problem. But it can’t. If/when there is some sort of external trigger, will people reject social democracy, and if so then what alternative philosophy will they turn to?

24 thoughts on “The rise and fall of social democracy

  1. Is this like a Dororthy Dixer?

    I say ‘God bless the tax havens’. And globalisation and outsourcing. And internet gambling. All these economic forces will do more to slash the size of the State over time than any political force.

  2. I hope so. But some tax havens are being shut down or getting more regulation and globalisation is being increasingly regulated and controlled by international bodies like the EU, WTO, NAFTA, UN etc.

  3. I’m still prepared to defend the view that we are operating on the essentially flat topped platue of the laffer curve and whilst tax cuts won’t necessarily increase tax revenue (as some laffer curve proponents often argue) they won’t significantly reduce revenue (as some anti laffer curve proponents argue). So even substantial tax cuts won’t reduce the size of the government sector in any significant absolute way. However they will quite readily expand the private sector and the total pool of goods available to improve wealth and general welfare.

    The current policy problem is that the Liberal/National coalition is now busy convincing itself that tax cuts are going to cause either inflation or high interest rates. Which is essentially just the same old Phillips Curve rubbish that should have been put to bed years ago. With the flawed monetary regime that we currently use the reality of tax cuts and economic growth is obscured. For a fixed amount of currency economic growth is in fact deflationary and tax cuts reduce the incidence of price rises. The flawed demand push philosophy that dominates modern macroeconomics operates in denial of all the historical evidence.

    We can reduce the burden of high tax rates without reducing government services. Much smaller government in relative terms is easily within the reach of any government with the will to act. It is only very small government that will require significant adjustment.

    The most important thing that we need at this point is for voters to always have available a credible candidate advocating tax cuts. With a political menu that is clear and unequivacal the masses are usually pretty smart. It is only when the political class conspires to offer a limited political menu that the electorate is forced to choose on the basis of more petty matters. Whilst I don’t think the LDP should be a single issue party its tax cutting stance must in my view be at front and centre of any campaign. Their must be no room for voters to believe that there is no tax cutting candidate to vote for. The best campaign PR message would come from a prominant politician attacking the LDP for tax cutting extremism and for an hysterical media to run with it. I think the LDP should be clear that it will oppose all tax increases and support all tax cuts.

  4. Excellent posts, all of them.

    I suppose logically the only practical thing that can cause smaller government is a political movement and a political party that cuts taxes and the size of government. Problem is, i just can’t see it happening, even though, oddly enough, I think there is a large number and proportion of the population who would be in favour of it. The reason is because the democratic machinery tends to favour concentrated vested interests close to the state over dispersed interests spread out in the general popluation.

    Any talk of tax cuts raises the spectre of cuts to government services. I personally believe that creating any government job requires the destruction of much more social value, or utility, or whatever you want to call it. For my money, cutting government to about ten percent of its current size would be ideal, but hey – I’ll accept a cut to twenty percent!

    Terje, why do you say, and how to you think we can reduce the burden of high tax rates without reducing government services? Do you mean by reducing tax rates in a way that does not much reduce revenue?

    John, are you the author of the original article. This software doesn’t seem to show the author with the article.

  5. By the way, there is somewhat of an anti-green movement forming around the outdoor recreation parties, such as the fishing, the shooting, the four-wheel drivers, the trail-riders. This should provide for the liberal movement a nucleus to form around.

    One would think it would be the easiest thing in the world to get the support, for example, of businesses and contractors for less tax and regulations.

  6. “If/when there is some sort of external trigger, will people reject social democracy, and if so then what alternative philosophy will they turn to?”

    It would have to be a pretty big trigger – my impression is that most people are not completely unhappy with the current general set-up.

  7. John’s summary of the status of the ideas war is excellent, although I’m a bit concerned at his comment about social democracy. I agree it’s better than environmental socialism or national socialism, but that does not make it “good”. Indeed, for the very reasons he gives, it is fundamentally bad.

    I nonetheless agree that an external trigger may prompt a rethink of accepted attitudes. But would that lead to rejection of social democracy, as John claims? I’m not so sure.

    Given widespread anti-American sentiment and the potential for America to be blamed for any trigger (whether warranted or not), there is a chance the outcome will be more rather than less social democracy. The alternative examples will be corrupt states (Russia etc) and Islamic theocracies (Iran etc). Unless Europe goes into serious decline (a possibility, especially in France), social democracy might continue to look good.

    My main hope is that liberal democracy will come to be seen as a necessary part of economic growth. For example, restrictions on global trade will slow the economy and cause unemployment, leading to removal of the restrictions. Repression and corruption in China will inhibit investment, leading to improvements in the legal system. You get the idea.

    As to Justin’s signs of hope with the outdoor recreation groups, I doubt it. While they are certainly anti-Green, they are not liberal on most issues. Indeed, many were strong One Nation supporters. I was Chairman of the Shooters Party for 5 years and found that aspect very difficult.

    The LDP is signing up shooters in the hope they will understand that freedom for their cause necessitates freedom for others as well, but there’s a long way to go. I guess they are not alone in having that problem though – most libertarians can be pretty selective as to the specific liberties they support.

  8. Justin,

    The laffer curve is a product of two effects. The pure arithmetic effect says that a higher tax rate yields higher revenues and a lower tax rate yields lower revenues. Of course the size of the tax base matters and all else being equal a low rate of tax will lead to an expanded tax base (ie more transactions and private sector output per unit of time). Hence the laffer curve tends to look like Uluru with the arthmetic effect dominating at low rates of tax and the incentive effect dominating at high rates of tax and revenues flat for most of the middle range.

    In simplistic terms aggregate welfare is the sum of private goods and public goods so if a tax cut causes little change in public goods and an increase in private goods then it’s a policy no brainer.

    If you argue for tax cuts but believe that it would on aggregate make us worse off then you are some type of strange ideologue. But if you think that private sector output would rise faster that the decline in public sector output suggested purely by the arithmetic effect of tax cuts, then in practice you must believe in a flatter laffer curve (ie the incentive effect will compensate the arithmetic effect). In which case you should not expect much decline in tax revenues mid term even under significant cuts in the tax rate.


  9. I think that the forces of liberalism made a tactical mistake during the period since the 1980s by expending more political capital on privatisation than on tax cuts. However with little left to privatise maybe tax cuts will now get more focus. Of course the sequence chosen means that the owners of wealth have benefited more than the builders of wealth (relative to the opposite sequence).

  10. “Little left to privatise” ????

    Terje, could you please write a policy for the LDP on privatisation of what’s left? Include Medibank, the ABC, SBS, electicity generators, water authorities and anything else the government should not own.
    With such a short list, I don’t expect it to take a lot of time.
    I asked John Humphreys to do it but he’s too busy blogging and writing essays.

  11. I agree with Terje that tax cuts are a much higher priority than privatisation at this point.

    That said, everyone sees social democracy and thinks of Australia, England or The US in that frame.

    There are other social democracies like Hong Kong that still have a tax and welfare system, but the size of their government is less than half of that of the Anglospheric countries.

    Hong Kong has a very progressive tax regime with a minimum tax rate of 2% and a maximum of 19%

    Hong Kong’s lowest 2 percent rate is a huge revenue loser with no beneficial impact on incentives. Every taxpayer, including the richest, pays only 2 percent on the first $3,800 (in U.S. dollars) of taxable income, then 7 percent on the next $3,800, 13 percent on the next $3,800, and 19 percent on the rest (or 16 percent without personal allowances at high incomes).

    If we could look to emulate that kind of social democracy then social democracy isn’t really so bad.

  12. Yobbo — I would suggest that Hong Kong is one of the few places left that still deserves to be called “liberal democracy” instead of “social democracy”.

    If it is a choice, I also would pick tax cuts before further privatisations. But it’s not a choice. So I pick both. And with regards to privatisations, I still support the idea of giving away some public assets: the ABC is a perfect example, if it really is “our ABC” then give it to me. This also highlights that we’re not selling off the silverware to live beyond our means, but because we think the rightful owners are free individuals.

    Yes Justin — this was my post. If you look at the front page of the blog (instead of the post page) then it tells you the author.

  13. Well, Hong Kong has all the markers of a social democracy – progressive taxation, public health care, public schooling and unemployment benefits. According to this article unemployment benefits in Hong Kong are about $5000 HKD per month, which is basically identical to what you get in Australia.

    It is a lot harder to get it though.

    Basically Hong Kong is proof that social democracy is possible even when combined with a low tax regime. Government is 22% of GDP vs 40% in most other countries.

  14. Also I should point out that “Liberal Democracy” as we see it also comes with a Liberal attitude to vice and the like, something which Hong Kong has never really had.

    I think the only real example of “Liberal Democracy” as we describe it was the US pre-WWI.

  15. I agree with you after living in HK yobbo (I wish everyone would live there for a while and see for themselves the benefits of not giving middle-class people handouts), Except that the maximum tax rate is 16%, not 19% (I’m not sure where that 19% comes from — the maximum it says on the tax form you can pay is 16% — I know, I payed it). The other thing you should realize is that the majority of the population doesn’t pay any tax at all, and in fact all the linear increase between 0% and 16% is in fact catching such a small part of the population you may as well just believe it to be 16% flat. They should just can the intermediate stuff, I’m sure no-one would complain too much.

    Also, as far as I am aware, the rate of unemployment benefits has gone down, although the actual conversion is misleading because a) 45%(?) of the population lives in public housing which is very cheap (and very poor quality — although it doesn’t seem to worry people); and b) because there is no minimum wage, no tax for poor people, and few business restrictions, lots of people set up little business selling things like food extremely cheaply (cheaper than you could buy/make it yourself), so the cost of life is less.

    I think the other thing HK shows you is that the idea of “social democracy” is a bit of a farce in many countries — it isn’t helping poor people at all. Its just a corrupt system for recycling money amongst people that already have enough.

  16. I agree with John that you can cut taxes and privatise at the same time as the Hawke government did. However privatisation creates lots of debate, pisses off a lot of people and costs the government concerned more votes.

    As for privatising water and electricity etc I agree. However most of these are still very secondary to tax cuts.

  17. Conrad: I think they have a different tax system for expats, and the 16% figure doesn’t allow deductions or something. I’m not entirely sure about that though.

  18. Yes that is the impression I was under too. I’m guessing most expats choose the 16% because they are mostly salaried workers who would have nothing to deduct anyway.

  19. As an individual, there arn’t any threshold changes for anything apart from a few things like having children and looking after an invalid older relative (very CHinese) which only the most die-hard libertarians would argue about (especially because you are going to be paying for that invalid relative, and not the government). Not being a tax lawyer, I could be wrong on that, as I didn’t investigate things that were not on the tax forms. I figured 6 minutes of my time to fill in the form put a smile on my face compared with thinking about how long the Australian version takes and what ridiculous deductions there are (even the French forms are simpler — no jokes). There also isn’t a separate tax system for expats/non-expats (everyone pays the same).

    The is a little bit of mess in the middle where you go onto a scale which takes a very slightly higher percentage than the maximum percentage you can pay. When you reach the maximum percentage because you are paying the slightly higher rate, it is capped at that rate (i.e, 16%). This means that the percentage of tax you pay slightly increases up to a certain amount, and then it is flat. I can’t remember the numbers as I was lucky enough to get to the 16% rate, which means you don’t need to worry about it. You just save 16% of your money and give it to the government at the end of the year.

    I don’t know why they have this funny intermediate scale, since it affects only a small proportion of the population. At a guess it is just a historical left-over.

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