It's official: The US is now a 'social democracy'

The American Rescue Plan aims to move the economy in a social-democratic direction through income distribution from the rich to those who are poorer.

IT WON'T surprise anyone if, for the average American, on hearing the word "socialism" the first thing that would come to mind would be "communism". It may be a legacy of the Cold War or just years of indoctrination in school or by the media, but many Americans tend to embrace the binary notion that when it comes to political-economic models, Western societies face two choices - either "capitalism" that reflects the principles of democracy and free markets or "socialism" under which government plays a role in guiding the economy Soviet Union-style.

That explains why Republican politicians and conservative intellectuals have been successful in turning Americans against the federal government's intervention in the economy, most recently by providing for a government-backed healthcare insurance plan. Hey, next thing you know, they warn, America would turn into another communist Cuba!

Forget that since the end of World War II, most of the Western democratic nations have embraced political-economic systems under which capitalism thrived while governments provided for an expanding social safety net - aka Welfare State - and helped direct economic policies.

While these social democratic systems have faced many challenges in recent years, they have remained intact in Britain, France, Germany, the Scandinavian countries and in much of the industrialised West.

Hence even former British prime minister Margaret Thatcher, the goddess of free market economics, never proposed privatising the National Health Service (NHS) , an object of her citizens' adoration.


And come to think about it, the pro-free-market former US president Ronald Reagan had left in place many elements of the American welfare state, including the Social Security agency that provides assistance to older retirees.

In a way, notwithstanding Republican rhetoric, the United States, under both Democratic and Republican administrations, has been slowly but steadily moving in the direction of social democracy, although no American politician would use the term to describe the US political-economic system.

Starting with the New Deal programmes launched by former president Franklin Roosevelt during the Great Depression, including the formation of the Social Security agency, and later through the Great Society agenda promoted by then president Lyndon Johnson in the 1960s, and most recently the Affordable Care Act (ACA) designed by former president Barack Obama to ensure that all Americans have access to health insurance, the US has been in the process of a large expansion of the welfare state.

That process has been halted a bit under the former Republican president Ronald Reagan who had campaigned against Washington's intervention in the economy, stating in his inaugural address that "government is not the solution to our problem; government is the problem", and insisting that the American economy should be driven mostly by the private sector, a view that had made sense even to Democratic politicians like former president Bill Clinton.

But a series of economic catastrophes, including the 2008 financial crisis, and a turbulent political environment that reflected the public response to globalisation, have not only challenged the dogmas of Reaganism and Thatcherism.

These developments have helped shift the political balance of power in the US in favour of those who believe that government is not the problem; that it's in many respects the most effective solution!

Hence the deadly Covid-19 pandemic and the ensuing economic crisis have only speeded up the changes in American attitudes and eventually in the political zeitgeist. Free marketers are "out"; government intervention proponents are "in".

From that perspective, it would be a mistake to focus on the US$1.9 trillion aid bill - the so-called American Rescue Plan Act, proposed by President Joe Biden and approved by Congress last week - as merely a large emergency pandemic aid plan, which on some level it is.

Instead, this huge fiscal stimulus package, not unlike the New Deal and Great Society programmes, marks a historic change in America's social-economic agenda. Or as White House Press Secretary Jen Psaki has put it, this is the "most progressive legislation in history". President Biden himself described it as a "historic piece of legislation".

Indeed, only US$66 billion of the US$1.9 trillion package is directly a response to Covid-19, including funds for testing, contact tracing and vaccine distribution. The rest of the money will go to finance social-economic programmes, like health-insurance subsidies, tax credits, unemployment benefits, food aid, rental and mortgage assistance, student-debt relief, as well as for direct assistance to local governments and individuals.

While the Biden administration will be marketing the plan as being aimed at ending the pandemic and getting the economy moving, the overall impact of the largest federal aid programme since the Great Depression goes beyond those goals.


After all, most of the signs are already suggesting that the US is getting back to normal both in terms of combating Covid-19 and the reopening of businesses. Speeding up that process didn't require a fiscal programme costing US$1.9 trillion, especially after Congress had already passed and ex-president Donald Trump had signed into law last year a US$2.2 trillion economic stimulus bill in response to the pandemic and the economic downturn.

Instead the historic bill is a major move in overturning the Reaganite "trickle down" economic agenda with its emphasis on cutting taxes for the rich and reducing subsidies for social-economic programmes. It aims at moving the national economy in a social-democratic direction through income distribution from the rich to the lower-middle class and the poor.

Indeed, Biden administration aides estimate that the bill would cut poverty by a third and child poverty by half this year, and that most of its benefits would go to the bottom 40 per cent of America's income earners.

And unlike the tax cuts for wealthy Americans that the Trump administration had embraced, reflecting the Republican trickle-down economics school of thought, the Biden plan is more in line with the lessons of traditional Keynesian economics. Those are based on the expectation that more spending by the government and by consumers would help revive the economy and assist workers and the middle class.

Both the Obama and Trump administrations have shifted the responsibility for responding to economic crises and for accelerating growth to the US central bank. The Federal Reserve through its activist monetary policy in the form of "quantitative easing" was expected to encourage businesses and consumers to take advantage of low interest rates to buy and invest and get the economy moving. In reality, investors were the main beneficiaries of these policies.


The Biden plan shifts back the responsibility for reviving the economy to the White House and Congress and ensures a more equal distribution of the benefits, starting with the US$1,400 cheques that most American households would receive this year.

Opinion polls suggest that a majority of Americans, including a high percentage of Republicans, support the American Rescue Plan Act and give President Biden high marks for his handling of the pandemic and the economy.

Democrats are hoping that if, as expected, the pandemic would be defeated by the end of summer and the economy swings back to life, with some economists predicting annual growth of more than 6 per cent in 2021, the highest since the 1980s, Americans would reward their party with more seats in the Senate and the House of Representatives.

At the same time, driven by a powerful political momentum propelled by economic growth, President Biden would be able to get going on other items in his agenda, like rebuilding the country's infrastructure and dealing with climate change.

But then the Democrats need to recall a valuable lesson in economic history: That following huge expenditures by the federal government - in this case, close to US$6 trillion in pandemic relief spending authorised by the Trump and Biden administrations - inflation ends up rearing its ugly head, wrecking the economy and eventually punishing the politicians in power.


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