In his contribution to the latest issue of Renewal, Colin Hay invites us to envisage a world of ‘environmental catastrophism.’ A place where the welfare state implodes in a black hole of public debt generated by the uninsurable risk of the climate crisis. It’s an important and insightful intervention. There are three moves to Hay’s argument. I agree with two of them.
The first agreement is that environmental shocks never have been, and increasingly cannot be, seen as exogenous to capitalism itself. They are instead deeply endogenous. In doing so Hay implicitly calls out the ‘boosters’ of endless accumulation and technical progress who make a good economic story out of pricing and internalizing environmental externalities, such as global heating, through markets and incentives, when in reality we utterly fail to do so. The result, as Adam Tooze and others have noted, is ‘a polycrisis’, where overlapping and accelerating emergencies disabuse us of any notion that there is a ‘mean/normal’ state to regress too via Pigouvian taxes and other technical devices. We find ourselves instead in world where Taleb’s tail risks have become the central tendency, and where we can’t even define the parameters of the problem we face beyond ‘the past is no guide to the future,’ which is never a great launchpad for positive public policy.
Hay’s second move, which I also agree with, broadly, is to insist that in moving into the stage of environmental catastrophism we need to think very differently about the welfare state. Specifically, rather than think in terms of how the welfare state compensates for shocks, once we enter catastrophism, ‘for every exogenous shock there is an equal and opposite endogenous frailty’. That is, the institutional solutions we have found to date for the problems we are used to caring about (unemployment, inequality, skills) are, like those famous Star Wars droids, ‘not the problems you are looking for’ in this new world. These policy foci instead become future fragilities.
This occurs because rather than decommodify the individual by lessening their reliance on markets, what the welfare state has really always been about, deep down, and will absolutely be about going forward, is tail risk. The uninsurable. The proverbial and actual ‘black swan’ that tragically becomes the everyday. The welfare state today may help with healthcare and housing costs, but it’s true self is exposed only in moments of deep crisis. Again, as Hay puts it, ‘it[s] [job] is about taking responsibility for the uncommodifiable – the things the market cannot supply.’ He continues: ‘When all else fails, it is to the state that we turn.’
From here, Hay makes two further claims, and this is where I start to disagree, which is good because that gives us at least a small break from his pessimism.
The first is to invoke New Orleans, that paradigmatic example of where not to live due to hurricanes and the other ‘catastrophorics’ that will multiply in our future. These forces are the Avant Garde of the climate crisis, and their march, at least going by Hay’s graphs, is inexorable. That inexorability however quickly runs into a fiscal limit, where states formally addicted to austerity (but declaring ‘exceptions’ for financial crises, then Covid, then war induced energy shocks) ultimately implode with the cost of covering all this.
In such a world these fiscal exceptions can no longer be seen as exceptions. They will become the norm as the polycrisis envelops us. And the financing of these exceptions will eventually, and necessarily, bankrupt the very welfare states that seek to save us from such shocks. We are on a one-way train to ruin, both fiscal and physical.
I can buy a lot of that. But then I remember that I am old enough to recall the first time we read James O’Connor on the fiscal crisis of the welfare state. Despite the theory being really convincing, it’s important to remember that didn’t happen. The welfare state was ‘retrenched,’ ‘redeployed,’ and perhaps even ‘reinvented.’ But it didn’t implode.
O’Connor wrote about the crisis of the welfare state in the mid-1970s. It’s worth going back to look at the numbers. Take the UK, for example. UK public debt at the height of the welfare state’s first ‘terminal’ crisis was around 55% of GDP and an unemployment rate that peaked at 7% while averaging 5%. We’d kill for those numbers today. It took the Tories and a deliberately engineered detonation of UK industrial capacity to really move the needle on those numbers, and when they did the welfare state, despite ‘the cuts’ of the 80s got bigger, not smaller, as New Labour in the 90s eventually expanded that which was supposedly in a terminal fiscal crisis, before Cameron and Osborne gutted it again in the 2010s.
Such an analysis troubles me because it gives a structural cause to a political fact. Tories like to gut spending. That’s what they do when they get in. It’s not due to some endogenous crisis logic. It’s a choice, as the graph below makes plain. Look when the Tories are in (except for the Covid period, which has now spawned a new set of commitments to austerity) and when they are out.
My second reason for departing from Hay’s predicted future is an issue of extrapolation. Hay’s figure two for US disaster relief expropriations shows a rising trend, but it is not exponential. Indeed, he notes that ‘federal disaster relief appropriations for 2021 exceeded for the first time those of 2005 [when Katrina/New Orleans happened]’ (italics added).
It’s worth paying attention to that sentence. It means that for the 16 years following Katrina expenditures were down, not up. That’s pretty weak evidence for concluding from one data point in 2021 (exponentially) that ‘US disaster relief by the mid 2030’s…is likely to represent almost half of US public expenditure’. I make this comment not to give succour to climate change denialists. Rather, it is simply to note that when making exponential claims, one should have some evidence of the size of the exponent.
Perhaps still more troubling is the focus on the USA as ground zero for the crisis of the welfare state, for two deeper reasons.
First of all, the US, unlike European welfare states, takes a rather ‘Schumpeterian’ attitude to public insurance. The US allows cities like Detroit to utterly decay in a way that Europeans would never tolerate (try to name a major European city whose population has gone from 1.8 million in 1950 to 637,000 today with a similar reduction in per capita income). Moreover, the US welfare state, as scholars such as Suzanne Mettler have shown, is really about middle-class redistribution rather than tail risk insurance. The fact that the US federal government is rapidly dialing-back its promises on coastal flood insurance to home owners suggests that they are quite aware of the risks, and their fiscal costs, and have no intention of insuring them.
Secondly, if you are going to pick a place that is going to go bust, don’t pick the US, especially when its already dialing back its promises. The US has the US Dollar. It’s the global reserve asset, and that matters. As scholars such as Matthew Klein and Michael Pettis and Herman Mark Schwartz have argued, the structure of the world economy is such that there are too many exporters who cannot absorb the surpluses that they produce. As such, they must sell to the folks running the deficits (principally the US, but also the UK) and accept payment in whatever they offer. This creates an asset/liability mismatch in the export countries’ earnings that has to be rectified, and the easiest way to do this is buy another ten-year Treasury. Lacking any other alternative asset with similar depth and liquidity there is literally no limit on how much debt the USA can produce, except up to the limit of production that the exporters on the other side of the trade can muster. As Mel Brooks memorably put it, ‘it’s good to be the King’: you get to issue the safe asset.
In a climate shocked world, demand for such safe assets will only grow. And given the US’s rather ‘laissez faire’ attitude to public insurance and the inability of exporters to provide an alternative asset (they don’t import enough to become an alternative global currency) the US is the most likely place to be able, paradoxically, to afford exactly what the US does not want to fund – a welfare state. And even if they have to do that because of climate change, they will be able to, in part because everyone else will lend them the money.
The real ground-zero for a welfare state crisis is then, again paradoxically, in its core, in Europe. As Hay correctly points out, the solutions of today become the fragilities of tomorrow. For example, Germany’s addiction to balanced budgets and defunding public investment to get there means that one of the richest countries in the world ‘cannot afford’ (it’s a choice) to replace gas heating with heat-pumps. That decision has much more to do with the structural properties of its growth model than an endogenous and general crisis of the welfare state. Similarly, the UK has literally cut itself to death with a combination of austerity and Brexit. All choices. Bad ones. But it need not be that way.
As none other than Olivier Blanchard put it, even if you are not the global hegemon, don’t fear the debt. The costs of repayment often outweigh the benefits of doing so. And if states generate debt to build assets that have a positive return (think quality public housing or renewable energy) then the net asset position of the state improves. Far from a fiscal crisis, the forthcoming catastrophe could be a fiscal boom where austerity is confined, finally, to the dustbin of bad ideas.
So I give two cheers to Hay’s catastrophism. The first for insisting that the future will not be like the past and that the tools of the past will not be fit for that future. The second for identifying the state as the ‘insurer of last resort’ and the problem of insuring the uninsurable as the hidden mission of the welfare state. But I diverge when it comes to thinking that the balance sheet logic of running a corner shop applies to states in moments of crisis, especially hegemonic states.
Hay argues that a generalized default is where we are headed. But I ask, who will ‘we’ default onto? Mainly ourselves, and we are all in this together. As the climate activists remind us, you can’t print another planet, but you can print money. And in that extremis, in our catastrophic future, I have no doubt that we shall do just that and fins a way to make it work. The alternative to not doing so is far worse than bankruptcy or inflation. It is species extinction.
Mark Blyth is the William R. Rhodes ’57 Professor of International Economics
and Professor of International and Public Affairs at Brown University