International institutions played their role, too. The European Union promoted the principles of neoliberalism as it began building the European single market in 1986. The so-called “Washington Consensus” provided many countries with the standard package of reforms to convert to a neoliberal approach. After the fall of the Berlin Wall, a vast ideological offensive was launched to convert the rising elite in Eastern European countries. At stake was their support for democracy but also the assurance that pro-market leaders would have the upper hand.
Over time, the neoliberal offensive bore fruits as it contributed to accelerating the development of less developed regions and lifting many people out of poverty, actually narrowing the global inequality gap[83]. But for the Western middle class, there was a price to pay. Increased global competition forced flexibility onto the labor market. Jobs in manufacturing and then in services were destroyed and replaced by cheaper jobs in other regions of the world. Stagnating wages and rising unemployment made it difficult to finance the most advanced welfare states. Taxes were raised and benefits were decreased.
The shift accelerated with a radical transformation of the corporate world. From the 1970s onward, most businesses born in the prosperous age of the automobile and mass production experienced a sudden and unprecedented pressure that forced them to redesign their entire system of operations to make them more efficient. Trade barriers and tariffs came down, facilitating the integration of corporate operations on a global scale. Corporations grew even larger, industries became more concentrated[84], and global value chains were consolidated by geographical arbitrage and changes in the tools and methods of business[85]. These all played a key and positive role in increasing the competitiveness of firms. But they also contributed to weakening the Western workers’ bargaining power. What David Weil calls the “fissured workplace”, which relies more on outsourcing and contracting[86], now leaves fewer steady jobs to be had by Western workers.
Similarly, finance’s going global meant that corporate shareholders grew more powerful at the expense of workers. At one point in the 1930s, General Motors had more individual shareholders (half a million) than it had employees (a quarter of a million)[87]. That division of shareholders’ forces helped CEO Alfred P. Sloan dictate his terms and do as he pleased, without paying too much attention to what individual shareholders had to say.
But from the 1970s onward, power shifted. Households now invested their savings through large and powerful intermediaries such as pension funds and mutual funds. The rules that had been set up to protect individual savers against the greed or incompetence of corporate executives were now leveraged by professional agents with billions of dollars of assets under management[88]. What’s more, the financial services industry came to rely more on information and communication technologies, concentrating itself in a very few select cities rather than being spread all over the world. With this unprecedented concentration and the related emergence of global financial powerhouses, increasingly short-term constraints began to be exerted on public corporations[89].
At some point in the 1990s, the overall pressure on employment and wages became a macroeconomic threat to mass consumption, even in the presence of cheaper products. To maintain the middle class standard of living, the financial system was summoned to support mass consumption through the rise of private debt. Western households were eventually showered with cheap and abundant banking credit so that they could keep on consuming and buying houses. But the end result was the 2008 financial crisis and its destruction of any remaining delusions as to the state of the Western middle class.
All in all, the long period from 1968 to 2008 was tough on the middle class from many points of view. Innovation slowed down[90], the inequality gap widened[91], economic insecurity reached heights unknown since World War II[92], and populism rose again[93]. The rise of technology has hardly eased the pain. Over time it has even made some things worse.
This is why I call this period the Dark Ages: a long and ambivalent period between the fall of the Empire (the fading age of the automobile and mass production) and the Renaissance (the flowering age of ubiquitous computing and networks). We could make the most of this Renaissance and harness technology to increase economic security and prosperity for all. But first we need to understand how much the Great Safety Net of the past has been dismantled in recent decades.
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How the Dark Ages shifted risks onto individuals
2008 revealed the advanced decay of the age of the automobile and mass production. In the previous decades, we had managed to prolong the life of an exhausted techno-economic paradigm by using levers such as the rise of mass consumption in China, Brazil, Russia, and the Middle East, the possibility of making products cheaper by producing them offshore, the expansionary monetary policy that followed the terrorist attacks of 9/11 in the US, and the development of fracking to prolong the era of cheap fossil fuels. Governments used these to keep buying a few more tenths of a point in annual economic growth to counter unemployment and appease their voters. But the crisis brought all that to an end.
The problem is that the conversation on what should be done has been focused on the wrong issues. Because the agony of the previous techno-economic paradigm was revealed in a financial crisis, most discussions have been focused on finance itself. In her global best-seller Makers and Takers, Rana Foroohar has called for tackling the issue of financialization “to ensure not only more sustainable growth, but more stable politics”[94]. Harvard University’s Clayton Christensen has dedicated a great deal of thought to how financial ratios have trumped corporate strategy and led the economy into the ground[95]. And in the US, the Dodd-Frank Act, the main regulatory response to the financial crisis, is still touted as a major part of Barack Obama’s legacy[96].
Yet the extent of the crisis goes well beyond finance. The fact that the financial system is oversized and prone to systemic crisis doesn’t call for regulating it more while leaving other policies untouched. Rather we must realize that the financial system has gone awry because we’ve left it as the only remaining pillar of the Great Safety Net 1.0, without the other pillars of social insurance and collective bargaining to complement it. This can be seen in how conservatives keep on stressing the importance of “ownership” as the best safety net for households[97], the inflating bubble of student loans, or the excessive reliance on consumption driven by credit card debt. With the financial system as the only mechanism for sustaining production and consumption, today’s problem is less with the excesses of that particular system than with the failures of the Great Safety Net as a whole. And so tackling finance as the cause of our current problems is like prescribing cough drops to someone who’s suffering from lung cancer.
One key feature of the Great Safety Net was the pooling of risks through social insurance. This was a major advance when compared with the past, when risks would only be covered by the family or small-scale pooling mechanisms such as mutual aid societies. The pooling of risks at a much larger scale boosted consumption because people were not required to save based on an excessive fear of what potential disaster tomorrow could bring. It also unleashed geographic mobility because workers were not required to stay close to their families and could pursue job opportunities elsewhere.
Alas in the past decades the old social insurance mechanisms have been dismantled or rendered less effective. Many risks are being gradually shifted back onto individuals again. The cost of healthcare has risen, and so households bear a larger part of the financial burden that comes with leaving work when they’re sick and receiving treatment. The redistributive power of the pension system has been weakened as well, with the gradual replacement of traditional ‘defined-benefits’ pensions that provided a fixed benefit for life with ‘defined-contributions’ plans like the 401(k) which, as Jacob Hacker reminds us, “offer neither predictable nor assured benefits”[98]. It’s now expected that more and more senior citizens will spend the last years of their lives without suffi
cient income[99].
There’s also the misalignment between legacy mechanisms and the risks that dominate today. A key component of social insurance in the age of the automobile and mass production is that it was focused on salaried workers with steady jobs. Yet today steady jobs are increasingly the exception rather than the norm, at least for those who are newly hired. In the new age, individuals go through more diverse professional situations marked by occasionally violent ups and downs—a far cry from the linearity of yesterday’s careers.
There are many reasons for the end of the steady job. One is simply the growing aspirations of people who like to change jobs from time to time. A more individualistic culture that promotes emancipation and innovation rather than community and continuity necessarily leads to more uneven career paths. Another reason is that technology, notably the abundance of information, makes the job market more efficient. If it’s easier to learn about other jobs and to be trained to occupy them, then people will find it easier to think about switching jobs, and will act on it more often than not.
A third reason is that firms are simply more prone to failure. Today’s economy is one in which more people embrace entrepreneurship. But their ventures also have a higher probability of disappearing in the near future. In the previous age, individuals could work for a long time in the same company no matter its size. But the new age will see an increased number of workers joining startups, which by definition are in search of their business model[100] and likely to disappear in a matter of years or even months. Others will have seemingly secure jobs at ‘giants with clay feet’—large companies which, like Kodak or Toys “R” Us, will abruptly fall as they are unable to adapt and survive.
The intermittent nature of today’s careers creates an unprecedented set of problems for social insurance. Such mechanisms that were designed for linear career paths are ill-fitted to respond to the needs of individuals whose working lives have become increasingly diverse, discontinuous and multiform. Because traditional social insurance is often linked to a stable job, it becomes discontinuous, inadequate or non-existent when individuals begin to change employers and employment status at a higher frequency.
With the unprecedented income discontinuity, intermittency itself becomes a risk that affects an increasing proportion of the population. No social insurance currently covers such a risk. Unemployment insurance, in particular, provides benefits only to employees who have contributed through their payroll taxes over a relatively long period. And by the way, a non-linear working life also means non-linear tax revenues because individuals don’t contribute during the intermittent periods when they aren’t earning a regular income.
Another adverse shift is that various social insurance mechanisms have failed to account for changes in the composition of households. Working families are evolving, with declining demographics, more blended families, older relatives that must be cared for much longer, and more single young parents—mostly women[101]. This new kind of ‘atypical’ working family has not made its way into our representation of the world. The institutions that were once designed to hedge families against critical risks still have the traditional ‘working father / stay-at-home mother’ family as the model.
Yet another risk shift is found in what economist Enrico Moretti calls the “new geography of jobs”[102]. Today, activities and jobs increasingly concentrate in the densest urban areas. Skilled workers gather in these areas in order to join the most dynamic and innovative companies whose growth and innovation efforts are fueled by the fact that they’re close to each other. For less skilled workers, these areas of increased economic activity become magnets, too, as they need to be closer to where their job opportunities are. The problem is that these powerful clustering effects cause a steady increase in the price of real estate assets. And so a growing number of individuals are exposed to an unprecedented critical risk: not being able to afford to move into the cities where most of the jobs, social interactions and networking opportunities are located[103].
There is a close relationship between the rise of intermittency and evermore unaffordable housing. Intermittency makes housing more difficult, as it complicates the proof of solvency vis-à-vis landlords or lenders. Conversely, the difficulty of housing aggravates the intermittence of career paths. Many jobs in areas with high housing prices cannot be occupied in a stable way if people can’t afford to live nearby. If the new economy creates relatively few jobs, it is not because it eliminates the needs that could be met by these jobs. It is rather because it makes it difficult to create those jobs due to the ever-increasing tension on the housing market. In other words, many jobs are not created because the majority of those who could occupy them are unable to find proper family housing in the areas where they are needed.
Collective bargaining, another pillar of the Great Safety Net, has also been weakened—even more than social insurance. In the past, state-assisted unions contributed to integrating a growing number of individuals in the workforce—including immigrants and minorities who formed a large portion of the unskilled workers toiling away in industrial facilities. For many decades, unions effectively wielded their newfound power to advance their members’ interests, forcing employers to back down and share the wealth with workers. Thus state-assisted unions were instrumental in turning the working class into the middle class and inspiring the modern standard of living[104].
One reason why collective bargaining worked so well is that workers’ unions bargain for the longer term. Unlike taxation or social insurance, the terms they negotiate are not in danger of being reversed at every electoral turn. Another distinctive feature is that unions, to quote Nelson Lichtenstein[105], are the only ones possessing an “intimate, internal knowledge of business conditions”. Finally, thanks to the power of polarization, bargaining in and of itself is a powerful means to achieve change and promote the workers’ interest.
Alas today’s unions are a mere shadow of their former selves[106]. Their demise was initiated in the 1970s. There was a growing indifference on the left as well as counter-measures such as ‘right-to-work’ laws and other union-busting mechanisms on the right. As a result, the working class has gradually turned away from legacy organizations that now fail to bargain on their behalf. Today’s unions hardly serve as a proxy to advance workers’ interests. And with their diminished influence on the political process comes rising economic insecurity for middle class workers[107] and a growing inequality gap.
This demise of most of the Great Safety Net 1.0 is mirrored by the transformation of the corporate world. During the post-war boom, the Great Safety Net was tied together by what Adam Davidson calls “the single greatest risk-mitigating institution ever: the corporation”[108]. As the entire economy consolidated around large, integrated firms[109], the government learned that it could rely on them as a proxy to implement policy in fields as diverse as collective bargaining, social insurance, and taxation. Big corporations, instead of being a foe, became a critical ally to help the state secure individuals.
Yet today big corporations are much less present. The more globalized ones are mostly beyond the state’s reach: their restructuring into global value chains[110] has emptied their substance in many countries and made them reluctant to have too many dealings with governments. And big corporations employ fewer and fewer individuals as they’ve embraced contracting and outsourcing as their preferred way to access and exploit the workforce—again David Weil’s “fissured workplace”[111]. As a result, policy primarily targeted at big Fordist corporations and using them as a proxy for risk-mitigation is bound to leave the vast majority of individuals off to the side. Employees of small and medium businesses, self-employed workers[112], students, job seekers, and startup founders are all out of reach for most institutions that used to be part of the Great Safety Net 1.0. The vast majority of workers are outsiders in a world where risks are covered only for those employed by large domestic corporations.
Even worse, the corporate world has mostly tu
rned against the very principle of a Great Safety Net. As firms have to become more competitive, they’ve come to see the Great Safety Net as a burden to be sloughed off. The rise of imported products means that the Fordist positive feedback loop of mass production and mass consumption is becoming less obvious[113]. And the financial difficulties affecting the welfare state provide conservatives with anti-welfare state arguments and lead to regressive policies.
As a result, the macro mechanism that was the Great Safety Net 1.0 was slowly unraveled from 1968 onward, with social insurance programs becoming less sustainable and less effective while unions got weaker and lost their political clout. With the rise of neoliberalism, the remedy to this disturbance was the gradual removal of those two pillars. It left us with a radical bet on the financial system as the sole means to provide economic security and prosperity to both households and businesses.
That attempt at what Colin Crouch names “Privatized Keynesianism”[114] didn’t work well and eventually went over the cliff with the 2008 financial crisis—a direct result of the economy’s excessive reliance on household debt. When one’s home became not only a shelter but also an investment for old age as well as collateral on which to borrow and consume, it exposed households to a potentially catastrophic failure of the financial system. Without the complementary balances provided by other pillars of the Great Safety Net, the goal of providing economic security and prosperity was submitted to the financial system’s own key performance indicators. Hence the rightful impression that the Dark Ages have been a time of vertiginously rising financialization.
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