-

Essay Question- Do electoral systems affect the levels of welfare expenditure? A comparison of the USA and Sweden. Candidate Number- R20395 Module Code- 7SSPP002 Word Count- 3,451

The termination of the post war economic boom in the 1970s created large scale political challenges to the welfare state and social programmes that had been expanding since the 1950s (Pierson, 1996). Fiscal austerity, which characterizes the era of retrenchment, is a formidable challenge to governments. On the one hand governments face a need for fiscal responsibility which calls for retrenchment and radical welfare reform, whereas on the other, retrenchment is becoming continuously harder to implement due to its unpopularity and the growing size of the interest groups negatively affected (Jensen & Mortensen, 2011. Pierson, 1994). The nature and extent of this retrenchment is subject to serious debate within the comparative literature and has established three key issues influencing welfare retrenchment: post-industrialism, economic transnationalization, and distributive conflict articulated in partisan politics (Korpi, 2006). The post-industrialist argument holds that welfare state expansion was primarily down to a manufacturing based economy which could afford a rapidly expanding welfare state. The new era of post-industrialism, characterized by a service-based economy, does not allow the same increase in productivity needed for constant expansion (Martin, 2005). The Globalization thesis holds that in the age of globalization an economy that has generous social policies is costly for business. High taxes, high wages and alternatives to the labour market all contribute to this. As companies move to more prosperous shores, where wages and taxes are lower, unemployment tends to rise which erodes the tax bases needed for welfare expansion. However these two arguments do not appear to distinguish between countries that undergo severe retrenchment and those that do not (Martin, 2005). In sum, the size of the service sector is not correlated with the amount of retrenchment and some of the most open economies also seem the most committed to welfare expansion (Swank, 2002). For these reasons, in seeking to explain retrenchment differences, many scholars have turned towards theories of political mediation, which is what I shall do in this paper (Martin, 2005). The reason for my focus on domestic partisan differences is due to the differing responses to retrenchment between countries. The USA and Sweden represent very different cases of

retrenchment. Figure 1 is an aggregate representation of total social expenditure between the USA and Sweden between 1982 and 2012 and, as we can see, the levels of expenditure for Sweden, while much higher than that of the USA, tend to be decreasing, while the USAs expenditure level, while low, is increasing. I shall be comparing these two countries because it seems retrenchment is occurring much more in Sweden than in the USA. The layout of the argument will proceed as follows. My argument asserts that electoral systems affect partisan accountability, or blame avoidance, in government. The first stage will analyse the influence of parties and Piersons (1996) new politics stance that disputes the importance of parties. The next stage will highlight the importance of electoral institutions; more specifically I am looking at the constitutional structure. I will analyse how a proportional system, through the use of the veto point thesis, can actually increase the scope and chance of retrenchment (Crepaz & Moser,2004). In sum, I am asserting that the constitutional structure determines how the electorate react to the decision-maker, through blame, and also how influential interest groups are in political decision-making. Welfare retrenchment has been argued, especially by Pierson (1996), to not be as extensive as previously thought. Pierson uses the Reagan administration in the USA as a primary example of a government that unsuccessfully tried to roll back the welfare state (Pierson, 1996).The primary problem with this argument is that it relies on aggregated data such as government programme spending, social transfer data, among others, as percentages of GDP (Allan & Scruggs, 2004). While Figure 1 represents a good place to start, aggregate measures of welfare expenditure, such as total transfer payments as a percentage of GDP or total public social expenditure, are problematic when used to analyse a countries welfare strategy. For example, structural changes in the dependent population can mask real cuts at the individual level. An example can be seen in the UK during the recession of the early 1980s, where aggregate social spending grew even though individual entitlements were cut back (Allan & Scruggs, 2004).

Figure 1.
Social Expenditure of Government as % of GDP 40 35 30 25 20

Social Expenditure as % of GDP

Sweden 15 10 5 0 USA

Year

* Figures from OECD Index

The most important critique of aggregate measures concerns their lack of utility (Allan & Scruggs, 2004). As Esping-Andersen (1990) points out; by scoring welfare states on spending, we assume that all spending counts equally (Esping-Andersen, 1990, p. 19), and, according to Esping-Andersen, not all the items that constitute social expenditure have the same welfare-conferring status (Castles, 2008, p. 46). One of the primary aims of the welfare state is to protect individuals from misfortune and to this effect overall spending levels are not directly relevant to the protection provided (Allan & Scruggs, 2004). The use of such data cannot tell us how welfare is spent and on whom. Piersons (1996) use of this kind of data has led to premature conclusions on the extent of welfare-state regress (Korpi & Palme, 2003, p. 426).I shall instead be looking at net-replacement rates (Allan &

Scruggs, 2004). Replacement rates are forgone earnings that have been replaced by welfare insurance (Amable, Gatti & Schumacher, 2006, p. 435).

Figure 2: Social Expenditure and Replacement Rate Retrenchment 1980-2002 Change in Total Change in Social Country Sweden USA Expenditure 0.09 1.52 Replacement Rates -0.36 -0.07 Change in Social Expenditure -1.86 1.35 1990-2002 Change in Total Replacement Rates -0.24 -0.05

* Calculated by the difference in 2002 minus 1989 and 1990 respectively

Figure 3: Trends in Unemployment Replacement Rates Last Year of Column1 1975 1985 1999 Maximum Maximum Sweden USA * Allan & Scruggs, 2004. Net replacement rates show a completely different picture. We see that the USA has cut unemployment insurance replacement rates by nearly 10 points from 67 in 1985 to 57.5 in 1999. Sweden has undergone an even more radical shift of cutting unemployment insurance replacement rates by 14 points from its post-1975 peak of 86.5 to 72.5 in 1999. While overall net replacement rates from 1980-2002 show considerable retrenchment in Sweden, but not so much in the USA. From this we can we see that there has been, contrary to what Pierson argues, a great deal of 79 63 82.5 67 72.5 57.5 86.5 67.5 1988 1984 1999-1975 -6.5 -5.5 Maximum -14 -10 Difference Difference 1999-

retrenchment, and at differing levels with Sweden facing much more retrenchment than the USA. There has been some convergence in these replacement rates between the USA and Sweden, which could also raise questions over the relevance of path dependency (Allan & Scruggs, 2004). It seems that Piersons theory, arguing why retrenchment has not been extensive, may be somewhat accurate regarding the USA, but it seems Sweden has faced some extensive retrenchment, causing problems for Piersons thesis. Sweden is a nation were leftist parties have dominated during the post-war period whereas the USA has a history of right party prevalence. There is a vast literature that links party dominance to welfare expenditure primarily because the composition of the party system, as well as the relative strength of parties within different constituencies, shapes the nature of state intervention and the economic and social policies that result from this intervention, including welfare policies and allocation (Hicks & Swank, 1992. Korpi, 1989). More specifically, it is widely claimed governments controlled by left parties, including social democratic and Christian democratic parties, tend to increase redistribution (Korpi, 1989. Hicks & Swank, 1992) whereas right-controlled governments predominantly cut welfare allocation (Allan & Scruggs, 2004). In a similar vein however, there has been little acceptance of this partisan influence after the 1970s. In fact, it has been argued that, although political parties were relevant in explaining welfare expansion, their relevance has vastly diminished with concern to the new era of welfare retrenchment (Pierson, 1996). Piersons critique of political parties, and their waning influence on welfare allocation, is based upon two fundamental assertions. Firstly, the goals of policy makers have changed; unlike the policies of welfare expansion, dismantling welfare provision is unpopular. The difficulty of retrenchment is made even harder for the decision maker by the existence of informal or formal institutional veto points (Pierson, 1996). In sum, the cutting welfare provision is an altogether different procedure compared to extending it; it is an exercise of blame avoidance rather than credit claiming (Pierson, 1996, p.2). Secondly, the development of the welfare state itself has led to a substantial change in

the political context (Pierson, 1996, p. 240). The welfare states expansion has led to a melting away of traditional class divides and has instead initiated the rise of powerful new interest groups who are dependent on welfare programmes; recipients of benefits, such as pensioners and the disabled, as well as new employees caused by these benefits. This maturation of the welfare state leads to a change in the nature of interest group politics, creating new interest groups, which in turn has resulted in partisan politics having a smaller effect on welfare state changes because the groups that are represented have transformed (Amable, Gatti, & Schumacher, 2006). As Pierson argues, the welfare state is less dependent on political parties, social movements, and labour organizations which extended benefits to begin with (Pierson, 1996, p. 147). The change in goals of the policy maker and the wider political context is the new politics of the welfare state. Piersons distinction between the old and new politics of welfare allocation is widely accepted and is key to our argument as it highlights the changing nature of interest groups within the welfare states (Starke, 2006). A key problem with the traditional partisan approach is it sees left parties as unchanging. It postulates that left-parties still represent the same working-class interests of redistribution that it had during welfare expansion, and the partisan battle for welfare allocation is the same democratic class struggle it was half a century ago (Hausermann, Picot & Geering, 2013). What Pierson shows is that there has been a change in context and that there are new interest groups within the welfare state; left parties cannot simply be representing the same class interests it did 50 years ago. Figure 4: Electoral System Information Election Number of Country Years Elections Covered MajoritarianUSA 1946-90 23 Plurality 1 433.83 435.17 35 Formula Magnitude Districts Electoral District of Size Threshold Number Assembly Effective

Sweden (Phase 1) Sweden (Phase 2) 1970-88

* Lijphart, A. (1999)

PR- Modified 1956-68 6 Sainte-League PR- Modified 7 Sainte-League 349.29 1 349.29 4 8.27 28 231.67 8.4

Harsh cuts entailed in the first crisis package in Sweden in 1992 were agreed upon by the centreright government and the leftist Social Democrats in opposition. This raises doubt over the unitary explanatory power of the left party thesis and leads me to believe that other factors are of more influence, as I will show later (Dahlstrom, 2005). In fact, even though each party is meant to want radically different welfare policies (according to the traditional partisan thesis), there was astonishingly few disagreements among political parties as to which social should carry the burdens of the cuts (Dahlstrom, 2005). This incident, and the retrenchment in Sweden during the 1990s cannot be wholly explained by interest groups, including the old class groups of the left power approach or the new interest groups highlighted in Piersons theory, as interest groups were excluded, at least from the 1992 welfare cuts policy (Dahlstrom, 2005). The constitutional dynamic may go same way to explaining this behaviour and why Piersons assertion regarding a lack of retrenchment may be wrong. The constitutional mechanics, more specifically the influence of veto points on domestic politics, is one influence that can solve this dilemma in consistency. A veto point is an individual or collective actors whose agreement is necessary for a change of the status quo (Tsebelis, 1999, p. 593). Most measurements of veto points concern the effective number of parties within the decision-making system (Crepaz & Moser, 2004). The common argument in the literature is that the more veto points present, the more difficult it is to change the status quo (Tsebelis, 1999). In a sense, a large proportion of veto points create a more immobile and stagnant decision-making process, where it is

a lot more difficult to create substantial policy changes, due to the more diffuse and wide ranging interests represented in the decision-making system. This leads to the conclusion that large policy changes are much harder under proportional systems, like Sweden, as they allow for more effective parties within the government. Sweden is a characterized as a consensus democracy, which means it has certain institutional characteristics: a multi-party system, executive-legislative balance, a proportional electoral system, and a corporatist type of interest intermediation (Birchfield & Crepaz, 1998). This form of democracy allows for a broader range of interests to be heard and catered for in the political process, primarily due to proportional representation, which allows more parties to hold influence due to the higher chance of a coalition government. It therefore allows for political authority to be dispersed and with it the length and sequence of the chain of decisions necessary for a bill to become a law (Martin, 2005). This is a system, according to the traditional veto point theory, which has oversized coalitions that will be locked into the previous policy pattern (whatever that pattern happens to be) (Tsebelis, 1995, p. 592). This is because the large numbers of effective parties are equivalent to a large amount of collective veto points. It is therefore harder for policies to be altered in a radical way, because the decision-making process is a lot more eclectic, and the amount of interests represented a lot more diverse, involving a lot more political decision-makers. Figure 5: Mean, Lowest and Highest Effective Numbers of Parliamentary Parties and the Number of Elections on which these Averages are Based, 1945-1996 Number of Country Sweden USA
* Lijphart, A. (1999)

Mean 3.33 2.4

Lowest Highest 2.87 2.2 4.19 2.44

Elections 16 25

There is a dilemma with Tsebeliss theory. Esping-Andersen (1990) posits that during the 1960s welfare spending was extraordinarily similar between OECD countries. If more veto points translate into a smaller chance of large policy change then we should see that, over the course of welfare expansion, the most generous welfare nations are the ones with the least veto points. As veto points are measured in the effective number of political parties we should see systems that promote single party governments and therefore two party systems as having the most rapid welfare expansion, as there are less veto points. An example here would be the USA, where single party majority governments are the norm (Crepaz & Moser, 2004). However this is not the case. In fact we see the opposite. The countries that have expanded the most with regard to welfare expenditure have been consensual democracies with large numbers of effective parties, such as Sweden (Crepaz & Moser, 2004). We have also seen that Sweden faced more radical retrenchment than the majoritarian system of the USA which is also at odds with the veto point theory. To elaborate my argument I shall use Tsebelis (1995) helpful distinction between two kinds of veto points; partisan (e.g. the number of parties) and institutional (e.g. federalism). Crepaz & Moser (2004) expand on Tsebelis classification and assert that these veto points are not equal in influence or effect. Political veto points, mostly embodied as political parties, have expansionary and consensual effects whereas institutional veto points, such as Federalism, tend to inhibit policymaking, promoting competitive behaviour. The difference between the two is the setting in which they occur (Crepaz & Moser, 2004, p. 11). Competitive veto Points are present when different partisan and political actors work through separate institutions but with similar veto powers, an example would be the Presidential system of the USA. These veto points act in way consistent with Tsebelis veto theory. Here veto points are dispersed among different political actors in different institutional settings; they are institutionally separated (Crepaz & Moser, 2004). These veto powers are mutually effective which means there is a

greater chance of deadlock and immobility. This, in turn, leads to a larger capacity to restrain government as was seen in the USA in 1995 and 1996 (Birchfield & Crepaz, 1998). Sweden on the other hand is a nation with predominantly political veto points; embedded in institutions where different political decision makers are in the same decision-making body. Here there is more chance of interaction and bargaining on a face to face basis. Unlike competitive veto points, political veto points allow for shared responsibility and collective agency (Birchfield & Crepaz, 1998). Coalitional partners have provincial interests alongside a huge power to halt policy progress however if a majority of parties seek to expand, or retrench welfare allocation, it is not rational for one party to go against this and hence the actors are caught in a collective action problem (Crepaz & Moser, 2004). Parties in coalition governments also share political responsibility, in other words, where there is a formal coalition, collective agency has been created, and all parties to it will be judged by its success or failures (Goodin, 1996, p. 331). In the Swedish system prolonged negotiation will result in policy making that is much more goal oriented and therefore the collective veto points within the Swedish system does not translate into a smaller capacity to change the status quo. While Crepaz & Mosers (2004) distinction between veto points is used to explain the extensive welfare expansion of consensual democracies it seems, at least arguable, that if consensual veto points allow for more expansion, through consent, then it could also allow further retrenchment, given the correct economic and partisan conditions. What we can see from the Swedish case, and has been argued by Jensen & Mortensen (2011), is that fiscal austerity can have different consequences depending on the specific constitutional framework of a nation. In highly consensual and fragmented systems, like Sweden, blame avoidance is easier, and retrenchment is more likely by all governments, especially if there is a fiscal shock like that felt by Sweden in the 1990s. It has been noted fragmented and proportional political decision-making institution, like that in Sweden, facilitate blame avoidance because it is more difficult for the electorate, or interest groups, to

10

ascertain who is responsible for unpopular reform, primarily because there is no single actors (Jensen & Mortensen, 2011). In the USA, where there is much more concentrated authority, due to the two-party system and the high prevalence of single party governance, it is much harder to avoid blame for unpopular policies. The collective agency in coalitions of consensual democracy means blame avoidance is easier in Sweden. Due to the small number of competitive veto points it is also easier to enact policies without the impact of many interest groups if needed. It seems that Piersons argument is lacking in explanation regarding Swedens retrenchment activity. The popularity of welfare programmes among the populace means that, for politicians to be successful in blame avoidance, they use three strategies in changing welfare allocation: compensation, division, and obfuscation (Starke, 2006). The problem is that these strategies are dependent upon certain institutional structures and existing policy designs (Pierson, 1994, p.50). In other words, how vulnerable a decision-maker is to blame and how influential interest groups are on political decision-making depends upon the institutional and, as I have argued, the constitutional system. Piersons argument regarding the political unpopularity of welfare retrenchment due to large welfare dependent interest groups misses crucial elements of the Swedish system. His analysis is based upon two pluralistic political systems, the USA and the UK, and therefore his study neglects aspects of retrenchment politics in corporatist polities (Anderson, 2001, p. 1064). His study is much more adept at explaining retrenchment in competitive democracies, where blame avoidance is much harder, such as the USA. The power of the partisan theory to explain welfare retrenchment is limited, specifically by the institutional constraints to which these political actors are embedded in. Although the electoral and political institutions do not determine what policy is enacted, these outcomes are limited by these constraints. We have seen that the partisan theory itself cannot explain either the retrenchment patterns of the USA or Sweden. The USA can be explained by Piersons thesis however it does not take into account the electoral distinctions between countries; he assumes that all countries have

11

similar constitutional activities to the two majoritarian regimes he analysed; the USA and the UK. When analysing Sweden on the other hand, we see that the constitutional dynamic of proportional representation, and the characteristics of consensus democracy, can actually excel and expand retrenchment if the right fiscal shocks are felt.

12

Bibliography Allan, J.P. Scruggs, L. (2004) Political Partisanship and Welfare State Reform in Advanced Industrial Societies. American Journal of Political Science, 48(3): pp. 496-512.

Amable, B. Gatti, D. Schumacher, J. (2006) Welfare State Retrenchment: The Partisan Effect Revisited. Discussion Paper, (Unpublished Paper), Available Online:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=889041&download=yes

Anderson, K.M. (2001) The Politics of Retrenchment in a Social Democratic Welfare State: Reform of Swedish Pensions and Unemployment Insurance. Comparative Political Studies, 34(9): pp. 1063-1091.

Birchfield, V. Crepaz, M.M.L. (1998) The Impact of Constitutional Structures and Collective and Competitive Veto Points on Income Inequality in Industrialized Democracies. European Journal of Political Research, 34(1): pp. 175-200.

Castles, F.G. (2008) What Welfare States Do: A Disaggregated Expenditure Approach. Journal of Social Policy, 38(1), pp. 45-62.

Crepaz, M.M.L Moser, A.W. (2004) The Impact of Collective and Competitive Veto Points on Public Expenditures in the Global Age. Comparative Political Studies, 37(3): pp. 259-285.

Dahlstrom, C. (2005) Big, Cuts, Little Time: Welfare State Retrenchment in Sweden. CES Working Paper, no. 128. Available Online: http://aei.pitt.edu/9127/

Esping-Andersen, G. (1990) The Three Worlds of Welfare Capitalism. Cambridge: Polity Press.

Goodin, R.E. (1996) Institutionalizing the Public Interest: The Defence of Deadlock and Beyond. American Political Science Review. 90(2): pp. 331-343

13

Hicks, A. Swank, D. (1992) Politics, Institutions, and Welfare Spending in Industrialized Democracies, 1960-82. American Political Science Review, 86(3): pp. 658-674.

Hausermann, S. Picot, G. Geering, D. (2013) Review Article: Rethinking Party Politics and the Welfare State- Recent Advances in the Literature. British Journal of Political Science, 43(1): pp. 221-240.

Jensen, C. Mortensen, P.B. (2011) Blame Avoidance, Partisanship, and Government Responses to Fiscal Austerity. Aarhus University, Draft Version, Available at: http://www.epa.aau.dk/fileadmin/user_upload/ime/CCWS/Conference2011/Jensen___Mortensen_March_2011.pdf

Korpi, W. (2006) Welfare State Regress in Western Europe: Politics, Institutions, Globalization, and Europeanization. In: Pierson, C. Castles, F.G. The Welfare State Reader. Cambridge: Polity Press.

Korpi, W. Palme, J. (2003) New Politics and Class Politics in the Context of Austerity and Globalization: Welfare State Regress in 18 Countries, 1975-95. American Political Science Review, 97(3): pp. 425-446

Korpi, W. (1989) Power, Politics and State Autonomy in the Development of Social Citizenship: Social Rights during Sickness in 18 OECD Countries since 1930. American Political Science Review 54(1): pp.309-329

Lijphart, A. (1990) Patterns of Democracy. London: Yale University Press. Martin, I. (2005) Constitutional Structure and Welfare State Retrenchment. (Unpublished) Available Online: http://www.northwestern.edu/rc19/Martin.pdf

Pierson, P. (1994) Dismantling the Welfare State? Reagan, Thatcher, and the Politics of Retrenchment. Cambridge: Cambridge University Press.

Pierson, P. (1996)The New Politics of the Welfare State. World Politics, 48(2): pp. 143-179.

14

Starke, P. (2006) The Politics of Welfare State Retrenchment: A Literature Review. Social Policy & Administration, (40)1: pp. 104-120.

Swank, D. (2002) Global Capital, Political Institutions, and Policy Change in Developed Welfare States. Cambridge: Cambridge University Press.

Tsebelis, G. (1999) Veto Players and Law Production in Parliamentary Democracies: An Empirical Analysis. American Political Science Review, 93(3): pp. 591-608

Tsebelis, G. (1995) Decision Making in Political Systems: Veto Players in Presidentialism, Parliamentarianism, Multicameralism and Multipartyism. British Journal of Political Science, 25(2): pp. 289-325.

15