socio-democrat will soon face crisis

Reinventing social democracy vital for progress | theage.com.au

KEVIN Rudd has declared that the global financial crisis marks the end of the romance with free markets and the beginning of a new era of social democracy. But the prospects for a return to social democracy are grimmer than widely assumed.

There are three factors lining up to suggest that social democracy will soon face a crisis of its own. The first threat is perhaps the most manageable. Social democrats traditionally relied on Keynesian economics to manage the economy, arguing that through controlling interest rates and stimulus packages, governments can manage economic cycles. However, the current resurgence of Keynesian economics may be short-lived.

Governments are between a rock and a hard place as they stare down the global financial crisis. They have no choice but to throw everything at the problem or risk being accused of having done nothing when the worst takes hold. But they do not have enough money to fix the size of the problem. It is likely that they will plunge themselves into large debts, the economy will slump into the worst downturn in the electorate's memory anyway, and the stimulus packages will be dubbed a failure and a huge waste of resources. The Keynesian measures will be deemed to be flawed.

It is not a fair cop. Governments will not be able to prove how much worse things would have been if they had done nothing. And it does not follow that if a sea wall fails to stop a tsunami, it is not useful for controlling the tides. But if the history of ideas tells us anything, it is that Keynesian ideas will be left carrying the can for the depth of the recession whether it is fair or not.

The second threat is even more unsettling. Professor Bob Gregory gave a presentation at the Australian National University a few weeks ago in which he argued that this recession is likely to be the one that breaks the welfare state.

The problem is that in each recession since the 1970s, a cohort of people has been thrown into unemployment in the first year of the recession. Most of those people have never got back to full-time work again. They have moved off the dole and on to other forms of welfare, but they have continued to rely on government benefits for their primary source of income.