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(Newsletter): 2011 10/11

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The Economic Crisis and Social Policy

David Piachaud, Professor
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Social Policy in Times of Crisis

Bent Greve, Professor
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The Economic Crisis and Social Policy

David Piachaud, Professor, London School of Economics
The pioneers of social policy in Britain, Beveridge and Titmuss, made
the assumption that the economy would function smoothly achieving
full employment and some economic growth. For 25 years after the
Second World War this was a reasonable assumption. Now, such times
are a distant memory as the economic crisis has resulted in devastating
unemployment and negative growth in many countries, most damagingly in
Greece. This has massive consequences for social policy.
First, there are the direct and immediate effects of recession. There
are many sceptical about trickle down and how widely the benefits of
economic growth have been distributed. Yet there can be little doubt
that the effects of no or negative economic growth are far more unequal.
Unemployment across Europe rose from 7% in 2007 to 10% in 2011. This
immediately adds to costs of social protection. Indeed a recent report on
The Great Recession and the Distribution of Household Income found
that:
Although GDP fell, national accounts data for 16 countries show that
Gross Household Disposable Income rose in 12 of them between 2007
and 2009. The household sector in aggregate was protected from the
impact of the downturn by additional support of governments through
the tax and benefit system (largely concentrated on the bottom half of
the distribution. (Jenkins et al., 2011:0-ii)
Thus, social policy worked, but at a substantial cost.
Second, as costs have risen and the yield of taxation has fallen, public
sector deficits have rocketed. Government responses to this, whether
decided internally or imposed from outside, have varied. In Britain
under the new Coalition Government the bulk of the reduction is being
extracted from public spending with a much smaller increase in taxation.
The resulting effects on the distribution of incomes was estimated by the
Institute for Fiscal Studies (Browne, 2010) who concluded that by 201415 the reforms were clearly regressive within the bottom 90%; the biggest
(and similar) proportionate losses occurred in the bottom and top deciles
of the income distribution. Families with children will be the biggest losers
because of cutbacks in social benefits and education.
Social policy is concerned with many goals but primarily with social
justice. One central aspect of this is poverty and income inequality. It is
not yet clear how relative poverty will be affected because a decline in real
income levels reduces a relative poverty standard. What seems certain is
that in many countries absolute poverty is increasing. Income inequality
is also almost certainly increasing: in the UK, the CEOs of the largest
firms received average pay increases of 50% last year when the average

workers in general got an average increase of 2%. There can be little sense
of social justice when the rich and poor are treated so differently. The British
Governments claim that in tackling the crisis we are all in it together is hard
to credit.

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A second aspect of social justice is the inequality of life chances. With

youth unemployment running at 36% in Greece, 20% in the UK and 44% in
Spain the prospects of young people are worse than at any time in the past
50 years. More education improves an individuals job prospects but it also
creates more competition for each job and the prospects for the unskilled
are bleak.
As far as banks are concerned, it is long established that the government
or central bank must act as lender of last resort. It is hard not to feel
revulsion at vast sums being handed to banks whose folly has brought
about the economic crisis but the consequences of a widespread banking
collapse may make this inevitable.
For a society, a collapse of opportunities for young people can have
devastating consequences. Faced with this, a government seriously
concerned at the state of society needs to take on the role of employer of
last resort. This would pose big challenges for social services, for working
with the private sector, for social benefits and for migration policies. Yet
without such a guarantee, and the obligations that go with it, societies are
in peril. The economic crisis is not a problem only for the economy, it is a
problem for society and may ultimately undermine democracy.
The current economic crisis is exceptionally difficult to tackle because of
its global dimension. To the extent that public debt is a cause of the crisis, it
could not have arisen without a global banking system and massive global
imbalances. Many would interpret the root cause of the crisis as being the
long-running imbalance between Chinese exports and imports, leading to
huge flows of financial capital into the US banking system, leading to the
banking crisis, which in turn has escalated into a crisis affecting whole
economies. National institutions become powerless in the face of global
pressures.
Another global dimension is the impact on the migration of labour
that results from chronic unemployment in some countries. In the past,
possibilities of migration have been limited. Now migration places strains on
social policy and on societal relations. The British riots of 2011 were in part
the result of unemployment of unskilled young people whose employment
prospects were damaged by migrants willing to take unattractive jobs at low
wages. One nations problems now diffuse through the world.

cskamnak@socadm.duth.gr

Social policy is concerned with the whole of society. Nobody wishes their
whole society to be damaged or apparently put up for sale - as the result
of a crisis for which they had no direct responsibility. Yet the crisis highlights
the inter-relationship between social policy and economic policy something
that the pioneers of social policy unwisely took for granted. The economic
crisis will not be solved by placing the entire burden on social policies, as
some wish to do. Economic policies must change to ensure social justice
and fair life chances.
References:
Browne, James, 2010, Distributional analysis of tax and benefit changes
Online at http://www.ifs.org.uk/publications/5313

: -

Jenkins,S, Brandolini,A, Micklewright,J, and Nolan,B, 2011, The Great

Recession and the Distribution of Household Income, Report for XIII
European Conference of the Fondazione Rodolfo Debenedetti, Palermo

 (Newsletter) 10/11

Social Policy in Times of Crisis

Bent Greve, Professor, Roskilde University
Economic, fiscal and legitimacy crisis is not a new
experience neither in nation states, nor in the global
economy. There has been many and very varied times
of crisis, even by speculations in tulips way back in the
Netherlands in the sixteen century. Discussing crisis
in welfare states and social policy has been on the
agenda before, and will in all likelihood, be it again at
certain times and certain intervals.
A core difference being that in this present economic
crisis the available instruments seems less available
than, for example, in the times of depression in the
1930ies where, for example, the New Deal in the
US was a way to create new jobs, and also the
times where the suggestion and focus was on how
public sector budget could be important as an aspect
in helping to solve the economic problems at the
times. Economic interventions as those made in the
seventies after the first and second oil price shock on
the world economy, where many countries also turned
to active labour market policy as a central aspect and
also different ways of using fiscal incentives to help the
economy grow again, e.g. there was a relatively strong
emphasis on demand side economic management.
Whereas the crisis in the seventies focus on and used
the public sector as an instrument to cope with the
crisis, the recession in the nineties implied a shift more
towards and stronger emphasis on monetary policy
and supply side measures.
The latest crisis have also been more global and
more clearly indicating how economies are by now
interconnected to such a degree that if one country
catch a cold this might imply world wide sickness,
especially if it is a large country. The problem in the
financial system thus quickly moved around the globe
with the consequence that many countries public
deficits where increased due to the money paid out and
into the financial sector to solve this crisis, and, further
as a result of negative economic growth the result
was both increased expenditure and falling public
sector income. International economic recovery now is
dependent on presumably a combination of increased
consumer confidence in the more affluent countries
and higher demand from the growing economies,
especially China.

Despite the previous financial and economic crisis

welfare states have seemingly continued to expand
and grow, and focus has at least in several countries
moved from a strong focus on income transfers,
including as an important element pension in old age,
towards a higher focus on welfare services including
care for children and the elderly. The welfare state
can thus be discussed to be either a burden on the
economy or seen as an investment in the future.
Whether the welfare state is seen as a burden or an
investment have important implications for the way in
which policies are enacted. If seen as a burden then
focus will be on retrenchment policies and reduction in
public sector spending and less on a variety of ways to
finance the welfare state through either higher taxes
or duties or reduction in fiscal welfare, e.g. fewer tax
expenditures.
If the welfare state is seen as a social investment then
more careful analysis of spending and how this in the
longer run will imply a higher level of productivity and
make it possible to ensure a more coherent society
with a higher degree of equality. Naturally, at clear
restriction on a more active approach is the level of
the public sector debt. A high level of public sector
debt will imply that it is more expensive to finance
investment activities. Therefore, in order to be able to
pursue a more active approach it is important to have
stable and secure public sector finance. However, the
problem being that in the present economic crisis fewer
countries will be able to do this, and also the likelihood
that more countries will need to ensure sustainability in
the long run have the implication that this crisis might
take longer time than previous economic crisis, as
fewer countries, at least in Europe and US will be able
to expand and start a pathway towards expansion.
Therefore, it also seems likely that in order to avoid in
the future the recent dramatic downturn a consolidation
of public sector economies will be central, while at the
same time more control on the financial sector and its
many products will be important. The public sector will
need money in order to be able in future crisis to more
rapidly help in a more expansionary economic policy.
The financial sector will need to have more reserves,

4
and, this will in the short run dampen the ability to
increase the economic growth. Furthermore, it seems
important to ensure a development by using especially
the tax system towards more equitable societies, which
seems to be more cohesive and stable. They are also
more happy societies (Greve, 2011). Therefore policies
to ensure a more sustainable public sector finance will
include a focus not only on public sector spending, but
also the public sector income, including the loopholes
in the tax-system. The balance between occupational
and public sector welfare will perhaps also needs to
be redesigned, albeit the risk being a greater social
division between those on the labour market and those
outside the labour market. Growth in occupational
welfare although at the same time indicates that there
is a demand for more welfare, the main discussion

being how to finance and develop welfare, including

who shall pay and who shall benefit.
Given the more global interconnectedness it seems
also possible that a greater common responsibility and
agreement on long term economic policy can be important
instruments. A global tax on financial transactions could
be important; however it is an example of, that a higher
level of international agreement is necessary. Further, if
the growing economies also start to import more from
the stagnant economies then this might help towards a
better international economic balance.
Reference:

Greve, B. (2011), Happiness. A key text. Oxon, Routledge. X.

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 (Newsletter) 10/11

19

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[Skamnakis,2011].
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- , (2010),
- , http://www.google.com/
url?sa=t&rct=j&q=%20%20&source=web&cd=1&ved=0CBoQFjAA&url=htt
p%3A%2F%2Fwww.hellenicparliament.gr%2FUserFiles%2F7f4d3181-8c97-4d49-8212-57bdfe7l860%2F2.Ai
tiologiki_Kallikratis.pdf&ei=UbC3ToLJDcPOswabrKi8Aw&usg=AFQjCNFTBVC8aa-oj5P2PBvlHyGvtWF0vg
- , (2011), , , http://www.eetaa.gr:8080/ekdoseis/ekdoseis_
details.jsp?ekdosis_id=153
- Skamnakis, C. (2011), Smaller Governments Less Social Policy? Case study in Greek Local
Authorities, rise and fall, paper presented at UK Social Policy Associations conference 2011.
http://www.social-policy.org.uk/lincoln2011/Skamnakis%20P3.pdf

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www.eekp.gr
info@eekp.gr
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