Using welfare systems to hide the problem of deindustrialisation

There have been lots of E-mail requests overnight for commentary on the US election result. I think that space is pretty crowded at present – with Clinton supporters trying to reconstruct events to defray their responsibility (a denial strategy), in a similar vein to the Remainers in Britain in the early days after the Brexit vote. I expect to read learned columns in the New York Times and other establishment newspapers in the weeks ahead outlining, with all the gravity that is possible in the written word, how millions of Americans who voted for Trump are now regretting it. Same as in the UK. I expect to read a lot about racism and misogyny and various numbers wheeled out to show who voted for whom to prove this or that. The twitterverse has already gone crazy with this sort of ‘analysis’. Maybe later when I have had a chance to reflect on the actual data I might write something. But what part of “the people are sick of the establishment even though they don’t quite know what they are going to do about it and given the choices support those who will do little about it” is hard to understand. The neo-liberal lust has created a monster that they now cannot control. The highly concentrated mainstream media doesn’t call the shots as much as it did. The academic economists who preach fear of change but who people know from the GFC are a depreciated cohort without much insight at all are now ignored. That is how I am seeing it. A great chance for a new progressive element but also space for the worst of the right-wing to fill. A big contest is now there for ideas to play out. The only problem is that the mainstream ‘progressive’ forces (like the Democrats, British Labour Party, Socialist Parties, etc) have been so captured by the establishment that they have become the establishment – neo-liberal to the core. But today, I will write a bit about the abuse of Disability Support Pension schemes to hide unemployment and make austerity look less worse than it is.

I read an interesting report yesterday, while the radio was steadily broadcasting the demise of Hilary Clinton in the background, about the way the British de-industrialisation played out in labour market terms.

The report (released November 2016) – Jobs, Welfare and Austerity – by Sheffield Hallam University researchers Christina Beatty and Steve Fothergill, traces the

Its overall premise that “the destruction of industrial Britain casts a shadow over present-day public finances” is deeply flawed because it considers rising British fiscal deficits to be problematic.

I will return to that theme later.

But in the research phase of the Report, the results are interesting and depict a general trend among neo-liberal governments to hide the dirty trails left by austerity to make the outcomes look less worse that they really are.

The essence of the work is:

1. “UK manufacturing employment has fallen from 8.9 million to just 2.9 million over the last fifty years, and 500,000 jobs have disappeared from the coal industry”. There is hardly anyone employed in the coal industry anymore in Britain.

As in all cases of attrition of regionally-concentrated industry, where the local labour is dominated by one sector or firm, the loss of jobs threatens the social settlement of the communities.

The Report finds that the de-industrialisation (particularly of coal) “has destroyed the economic base of many communities, especially in the North, Scotland and Wales”.

2. The job losses did not show up fully in unemployment numbers because the government diverted “vast numbers of men and women out of the labour market onto incapacity-related benefits … the highest claimant rates – 10 per cent or more of all 16-64 year olds – are nearly all in older industrial areas.”

As we will see, it is a common tactic to push the unemployed out of the labour force (so they don’t count in the unemployment rate) when times are tough through shifting eligibility criteria or more casual oversight of existing rules.

The problem that then arises is that when times are better, neo-liberal governments then tighten the screws and start claiming that the disability ranks are full of work dodgers. This is the current strategy in Australia – as we will see.

3. The combination of low pay and rising numbers on disability support benefits (Employment and Support Allowance in Britain) simultaneously reduce tax revenue and increase government spending.

4. As the fiscal consequences become apparent, the neo-liberal bean counters misdiagnose:

… high welfare spending as the result of inadequate work incentives and … [blame] … individuals for their own predicament, whereas in fact a large part of the bill is rooted in job destruction extending back decades.

The individualisation of systemic problems is the hallmark of the neo-liberal era and helps the elites divide-and-conquer the workers.

Constructing unemployment as indolence and disability as a ruse to avoid work and live on government benefits is a classic way of segmenting the unity of the workers.

It fits in with other strategies, including opposition to refugees, etc.

When there are not enough jobs being created, those without them can do nothing to improve their lot. A systemic failure overpowers the choice of individuals.

That solidaristic view of systems has been replaced under neo-liberalism by the ‘blame the victim’ approach because the former makes a prima facie case for active government intervention to produce jobs and better pay etc.

5. Just as in the past, the austerity push targets those on welfare and the Report finds that changes to welfare support in Britain “since 2010, and strengthened since the 2015 general election, hit the poorest places hardest. In effect, communities in older industrial Britain are being meted out punishment in the form of welfare cuts for the destruction wrought to their industrial base.”

Neo-liberal governments always target the weak and the vulnerable first because they formed the view that they have no ‘voice’ in the political process. These cohorts tend to be poorly educated, de-skilled, with limited social networks and very little mobility within these networks (they don’t know any ‘important’ people).

As a brief return to the US election, the assumption that these cohorts are voiceless is probably flawed. Social media etc have changed the capacity to communicate. In part, Trump’s success is due to the “forgotten people” demanding a voice for the first time in decades.

The same could be said for the Brexit outcome.

6. The Report recommends a “a genuine rebalancing of the economy in favour of industrial production and a revival of regional economic policy.”

In part, neo-liberalism led to the abandonment of regional planning or regional development strategies that had worked well in the past to maintain some sense of continuity between the economic settlements (where the jobs are) and the social settlements (where people live).

Then, along came ‘New Regionalism’, which claimed that market forces will spatially allocate resources appropriately and regional entrepreneuriship will turn spaces into export powers independent of what is going on at the national level.

In their rush to create justifications for reducing the footprint of government on the economy (and society), economists invented a number of new ‘approaches’ to economic development, unemployment and poverty which rely on an increased private sector presence.

New regionalism became popular as part of the so-called Third Way movement in Britain and Europe in the 1990s and beyond. Concepts such as social entrepreneurship and new regionalism emerged as the governments embraced the so-called ‘Third Way’ – neither free market (right) or government regulation (left) – as a way to resolve unemployment and regional disadvantage.

The Third Way movement included new ideas about space – that is, the global, national and local regional layers which still rely on individualistic and market-based constructs inherent in neo-liberalism.

Unemployent is still rendered as an individual problem – the ultimate ‘privatisation’.

New Regionalism proposes a series of ‘solutions’ or separate policy agendas that build on these individualistic explanations for unemployment and accepts the litany of myths used to justify the damaging macroeconomic policy stances that are now the norm in Europe and beyond.

By failing to ask the correct questions, these ‘solutions’ then appear, on first blush, to have (undeserved) plausibility.

New Regionalism emerged in the mid-1980s and was largely driven by case studies documenting economic successes in California (Silicon Valley) and some European regions (such as Baden Württemberg and Emilia Romagna).

The interlinked ideas that define this approach to ‘space’ are consistent with the oft-heard claim from neo-liberals that the ‘national’ level of government is now getting in the way of development.

New Regionalism claims that ‘the region’ is now the “crucible” (to use the words of British regional scientist John Lovering) of economic development and should be the prime focus of economic policy.

In this way, the claim is that regions have now usurped the nation state as the “sites of successful economic organisation” (Scott and Storper’s words) because supply chains (in the post Fordist era) have become more specialised and flexible given the need to deal with uncertain demand conditions.

New Regionalism advocates argue that regional spaces provide the best platform to achieve flexible economies of scope that are required to adjust to increasingly unstable markets.

These socio-spatial processes involve localised knowledge creation, the rise of inter-firm (rather than intra-firm) relationships, collaborative value-adding chains, the development of highly supportive localised institutions and training of highly skilled labour.

These dynamics require firms to locate in clusters, often grouped by new associational typologies (for example, the use of creative talent or untraded flows of tacit knowledge) rather than by a traditional economic sector such as steel.

The new post-Fordist production modes emphasise new knowledge-intensive activities encouraging local participative systems. By achieving critical mass of local collaborators, a region could be dynamic and globally competitive.

Most these claims are based on induction of regional ‘successes’ without regard for the specific cultural or institutional contexts, and lack any coherent unifying theoretical underpinning.

It is highly disputable whether the empirical examples advanced to justify the claims made by New Regionalist proponents actually represent valid evidence at all.

For example, John Lovering (1999: 382) examined the claimed made in the 1990s about Wales and concluded:

If one factor has to be singled out as the key influence on Wales’ recent economic development … it is not foreign investment, the new-found flexibility of the labour force, the development of clusters and networks of interdependencies or any of the other features so often seized upon as an indication that the Welsh economy has successfully ‘globalized’. Something else has been at work which is more important than any of these, and it is a something which is almost entirely ignored in New Regionalist thought … It is the national (British) state.

[Reference: Lovering, J. (1999) ‘Theory led by policy: the inadequacies of the New Regionalism’, International Journal of Urban and Regional Research, 23, 379-395]

That is, a supportive macroeconomic policy framework – read deficit spending from the currency-issuing government.

While many criticisms can be levelled at New Regionalism, its major weakness is that perpetuates the notion that regions can entirely escape the vicissitudes of the national business cycle through reliance on a combination of foreign direct investment and export revenue.

It is a different spin (a variation) on the ‘business cycle is dead’ notion and amounts to a denial that macroeconomic policy – that is, at the national level – can be an effective response to global trends that penetrate via the supply chains defined by trade patterns to the local region.

New Regionalism thus supports neo-liberal claims that fiscal and monetary policy is impotent and, in turn, it constructs mass unemployment as an individual phenomenon.

By ignoring the fact that mass unemployment demonstrates the unwillingness of the central government to spend sufficient amounts of currency given the non-government sector’s propensity to save, the neo-liberal position is left unchallenged and is actually reinforced and a new style of Says Law emerges with claims that post-Fordist economies need to focus on ‘supply-side architectures’.

The Report provides a very detailed documentation of the way in which these hollowed out regions in the UK have become dependent on welfare support of various guises.

This, of course, makes them particularly vulnerable to the caprices of neo-liberal policy makers.

The Report is correct in noting that:

… much of the increase in incapacity numbers was a form of ‘hidden unemployment’. These were men and women who in a fully employed economy might have been expected to be in work but whose health problems or disabilities entitled them to incapacity-related benefits (these days Employment and Support Allowance) instead of unemployment benefits.

It is in the government’s interest to shift workers out of the official labour force data into inactivity because it means the official unemployment rate does not rise as much as it would if the disability pension recipients didn’t rise.

It is for this reason, among others, that we say that ‘unemployment is the tip of the iceberg’, which is the title of a book I co-authored in 2001.

Please read my blog – The aftermath of recessions – for more discussion on this point.

The rest of the Report pursues “what this has meant for welfare spending and for the Treasury’s struggle to balance public finances”.

So its other major contention is that the reliance on welfare payments due to high unemployment transformed into disability payments etc and low wages triggering so-called “in-work benefits” (tax credits etc) undermine the fiscal credibility of the national government.

The short answer is that the claim is nonsensical.

The Report is doing the disadvantaged workers they are analysing a major disservice by tying their status into spurious arguments about fiscal sustainability.

The so-called “struggle to balance public finances” is a non-struggle. It is a pursuit in search of a non-legitimate goal.

But by pointing out how many welfare recipients there are and how they are ‘damaging’ the fiscal outcome, the Report really provides a platform for venal, neo-liberal policy makers to use these arguments to cut benefits and push the problem that began with deindustrialism further underground (no pun with respect to the demise of the coal industry intended).

There is no fiscal problem in the UK. A sovereign government like the British government is never revenue constrained because it is the monopoly issuer of the currency.

It rising deficit was good because it supported growth at a time when non-government spending was weak.

DSP and other pension recipients tend to have high propensities to consume (which means they spend a lot out of each extra pound they receive) and so the government would do well to increase their benefits to further stimulate growth from its low base at present.

Further, the resort to non-work type welfare categories when the labour market is in downturn reinforces the need for a Job Guarantee.

As industry shifts go on, the regional labour markets will adjust more quickly without having to hide the problem with disability pensions etc, if there is a guaranteed public sector job always available.

Australian government cynicism and DSP

The following graph shows the total Disability Support Pension recipients in Australia from 1974 to 2016 (total, males and females).

The upward trend has been interrupted (accelerating) at various times by guess what – downturns in the overall economy and rising unemployment.

The growth of female recipients is another feature of the data.

Finally, the sharp downturn in the last 3-4 years despite the slowdown in the economy is the result of deliberate tightening of eligibility requirements in order to cut the number of people in receipt of the pension.

The conservative government decided to attack the DSP recipients, of which around 44 per cent live below the acceptable poverty line, by cutting pension entitlements and changing the indexation arrangements to ensure that the existing pittance is slowly deflated away by price rises.

The government is intent on pushing the recipients onto the lower unemployment benefit, which in many cases amounts means losses of around $A120 per week.

But there are very few jobs available for this cohort – they are generally at the back of the queue. As the next graph shows, the latest policy attacks on the DSP recipients are even more cynical than is usually the case.

The next graph shows the annual change in DSP recipients (blue bars) against the Unemployment rate (right-axis, red line) from 1974 to 2016.

This brings into relief what goes on. When unemployment is rising due to a slowdown in economic activity, the government turns a blind eye to applications for DSP from those who lose their jobs and convince a sympathetic doctor to sign a certificate saying they cannot work (“bad back syndrome” is common).

Everybody knows what is going on. The government relaxes its vigilance because it wants to get as many people as they can out of the official labour force which means they will not be counted as among the unemployed and thus the unemployment rate is lower than it actually would be if the rules were not relaxed.

But then, typically, the neo-liberal governments we have had over this period, “get tough” on DSP recipients as the economy starts to grow again and drives them back into the labour force.

Even though the unemployment rate is falling during these periods, the DSP recipients remain a disadvantaged group in the labour market – given their lack of work experience etc.

The stark aspect of the latest period is that the Australian government has attacked the DSP recipients at a time when unemployment is rising again due to poorly crafted economic policy and subdued private sector spending growth.

This is the latest manifestation of austerity – a heartless, people-void where fiscal outcomes rule and society loses.

Different forms of deindustrialisation

The Report notes that:

The shift from manufacturing to service sector employment is a phenomenon shared by other advance economies …

While I will write more about this another day, the way the Anglo world embraced the shift to service sector activity and away from manufacturing is quite different to the way nations such as Norway managed the same sort of process.

In the Anglo nations (Australia, the UK etc), the well-paid and secure manufacturing jobs has been replaced by precarious, low-paid, casualised service sector jobs in the private sector.

Supporting legislation has encouraged a ‘race-to-the-bottom’ where private employers drive wages and conditions further down, claiming that cost cutting is necessary to stimulate further employment.

That has been music to the neo-liberal governments who have complied with pernicious legislation and welfare changes to make it harder for workers to stay on pensions and for trade unions to even represent the workers, much less get decent wage outcomes.

But Norway has seen the service sector expand within the public sector with career-based, well-paid jobs the norm.

A totally different approach and the results are vastly superior.

Conclusion

These attacks on DSP recipients and the cynical use of welfare categories to disguise the lack of jobs and the unwillingness of governments to take responsibility for ensuring there are enough jobs has been with us for several decades now.

It is one reason why, finally, people are starting to rebel in the only way they can – by voting for non-establishment type candidates even though the winning candidates might not actually represent their best interests. A strike against the elites is the name of the game not the certainty of improved outcomes.

I am now pitching my hopes that Marine Le Pen will win the French elections and take France out of the Eurozone. Not because I have the remotest attraction to her policies. But at this time of history, the disruption to the elites has to continue and start creating the dynamic for the Left to reinvent themselves.

That is enough for today!

(c) Copyright 2016 William Mitchell. All Rights Reserved.