All through the American election season we saw fierce debate and even fiercer backroom speechifying on governmental “entitlement” spending. Medicaid, Medicare, Social Security, family services, housing assistance, unemployment; all were pilloried for undermining our economic recovery and fostering a culture of dependency. And the rhetoric didn’t end with the election, of course, as entitlements swiftly took center stage in the ongoing fiscal cliff negotiations.
Though they represent opposing views on the worth of these programs, both the mainstream right and the mainstream left essentially accept the terms of the debate. For the right, these are programs that we simply cannot afford, and it’s morally bankrupt of us to mortgage our children’s futures in order to provide for people who should be able to take care of themselves. For the left, the structure of our economy leaves some people needing assistance through no fault of their own, and so these programs are expensive but necessary, and we must abide by the moral compulsion to preserve them. One side thinks “us” and the other thinks “them,” but in both cases entitlement spending is essentially construed as a public burden that we can either accept or reject; neither side seems to countenance the possibility that there could be economic arguments for the maintenance or even extension of the American welfare state.
Underlying the fights over entitlement spending is one of the central questions of comparative political economy: why is there so much more poverty in the United States than in any other developed country? As Monica Prasad explains in The Land of Too Much, for a century scholars in sociology, political science, and economics have invariably come to the same conclusion: the United States has more poverty because the American government doesn’t do anything about it. This explanation rests on the received wisdom that the United States is a “liberal” or laissez-faire country that distrusts the state and favors the free market.
However, as Prasad shows, this common notion of America’s minimal state intervention has by now been thoroughly dismantled. So, faced with the conundrum of persistent American poverty in spite of a willingly-interventionist state, in The Land of Too Much Prasad offers a new explanation, a demand-side theory of comparative political economy. It’s a brilliant and complicated analysis of agrarian statism, mortgage Keynesianism, American productivity, European protectionism, financial collapse, and credit-based consumption that we won’t even attempt to do justice here today. Instead, we’ll share just a couple of Prasad’s concluding policy recommendations that—while offered with respect to recovery from the 2008 financial collapse—seem particularly germane to these fiscal cliff fights:
Don’t just regulate the supply of credit; consider also the demand for credit. In the United States, the main response to the financial crisis has been a call for greater financial regulation. Certainly regulation is part of the answer, and regulation of credit-rating agencies in particular seems a necessary lynchpin for any viable financial system. But what regulations do is reduce the supply of credit. They make credit harder to get by constraining how much banks and financial institutions can provide. Another approach is to examine the demand for credit: why are people borrowing so much to begin with? Why are they so susceptible to offers from predatory lenders? We saw that in countries that have well-developed welfare states, deregulation of entry barriers did not increase the debt that households carry as it did in the United States, which means that something beyond regulation is going on. We also saw that in the United States, pressure to ease access to credit came from across the political spectrum, from advocates of the marginalized as well as from business interests. These two features suggest there is an underlying demand for credit caused by the absence of sustaining welfare institutions in the United States. In the absence of the welfare institutions common in Europe, credit is how Americans survive. What this means is that if we simply constrain the supply of credit, we create hardship by making it harder for people to meet health care needs or to turn to housing as a means of security and mobility. This guarantees the emergence of calls for increased access to credit from all quarters. This is the dynamic that saw feminists and African American groups and Democrats and consumer advocates supporting easier credit access and financial deregulation in the 1970s. We are sure to see a repeat of these dynamics if we constrain the supply of credit without considering why people turn to credit in the first place. Regulation of the financial sector cannot work in the absence of a focus on the demand for credit.
For the United States, poverty reduction is a growth strategy. The welfare state affects the financial system, and vice versa. One of the unexpected benefits of the welfare state is that it may stabilize the financial system. If credit is an alternative to the public welfare state, developing the public welfare state will lessen the demand for credit, and thereby reduce financial volatility. Rather than attacking the demand for credit by attacking home ownership (such as by getting rid of tax privileges for home ownership or making home mortgages harder to get, which will simply make it harder for Americans to provide for their own welfare), we need to address the underlying security needs that lead Americans to focus on home ownership, such as the cost of health care, the search for good schools, and the search for assets to guard against financial reversals. One of the main benefits of extending the public welfare state, and consequently limiting citizens’ reliance on credit to finance their welfare needs, would be the constraints this would put on the financial sector. A more well developed welfare state will lessen the appetite for mortgages and credit that is built into American political economy. Far from hurting American economic growth, it will pave the way for it, because as demand for finance lessens, rewards to the financial sector will lessen, and other, more productive and less bubble-inclined sectors will attract resources and skilled workers. For the United States, poverty reduction is a growth strategy.
In the following video, Prasad outlines her broader argument about the “paradox of poverty” amidst American abundance:
