A New Social Contract
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Bibliographic details
- Authors: Nemat Shafik
- Published: December 1, 2018
Overview
- Thesis: Overcoming fears of technology and globalization requires rethinking the rights and obligations of citizenship—the social contract—to provide citizens with greater security and confidence.
- Framing: Growing insecurity, declining trust in liberal democracy and global institutions, and political backlash reflect slow growth, flatlining productivity, stalled social mobility, demographic change, and automation.
Causes of insecurity and political backlash
- Economic drivers:
- Hyper-globalization, automation, and intensifying global competition have driven down wages of less skilled workers.
- Sluggish growth since the Great Recession amplified grievances.
- The combination of globalization, the 2008 financial crisis, and subsequent austerity produced massive shocks with thin safety nets.
- Social drivers:
- Rising perceptions of inequality and fear about future prospects, especially for middle classes in advanced economies.
- Precarious work: low wages, minimal or no benefits, loss of agency, and poorer physical and mental health.
- Political expression: rising support for nationalist and illiberal politicians; declining perceptions of well-being and trust.
Key evidence and statistics cited
- McKinsey Global Institute (study of 25 advanced economies, 2005–2014):
- "65 to 70 percent of households (or 540 million to 580 million people) experienced flat or falling incomes before taxes and transfers from 2005 to 2014."
- Fiscal policy reduced this decline to "20 to 25 percent" in terms of disposable, or after tax, incomes (2016 McKinsey study "Poorer Than Their Parents? Flat or Falling Incomes in Advanced Economies").
- Country examples:
- United States: safety net turned a "4 percent drop in market incomes into a 1 percent gain in disposable incomes over time." This "5 percentage point change" was helped by the Obama administration’s stimulus plan, which transferred "more than $350 billion" to households.
- France: safety net raised median disposable income by "3 percentage points" above median market income.
- United Kingdom: transfers "fully offset the decline in market incomes."
- Labor market and automation:
- US Bureau of Labor Statistics prediction: for every highly paid job in software development, there will be "six new low-paid jobs for personal care and home health aides between 2014 and 2024."
- Political correlation: Delsman (forthcoming) finds that "21 of the 22 states where jobs were most vulnerable to automation voted for Donald Trump in the 2016 presidential election," while "all 15 least vulnerable states backed Hillary Clinton."
- Intergenerational spending:
- OECD data: as the age of the median voter rises by a year, public spending on pensions goes up by "0.5 percent of GDP."
Problems with current approaches
- Welfare retrenchment and austerity after crisis exacerbated grievances and perceptions of being left behind (example: Fetzer (2018) and regions that voted for Brexit).
- Perception of "hard-working people" vs. "welfare scroungers" is misleading; LSE evidence (John Hills) shows most people take out broadly as much as they put in over their lives.
- Declining progressivity of tax systems: advanced economies lowered corporate taxes and top personal income rates in the 1980s and 1990s and raised value-added taxes.
- Wealth inequality has grown faster than income inequality, suggesting exploration of taxes on inheritance, land, and real estate.
- Universal basic income: not favored in most middle-income and advanced economies—deemed expensive and inferior to a functioning welfare state; potential to undermine work incentives and meaningful work.
Policy recommendations and elements of a new social contract
- General principles:
- Reinvigorate reciprocity and insurance elements of welfare provision to sustain mutual obligation and political buy-in.
- Preserve universal benefits where they help maintain broad engagement and quality of public services.
- Different societies will choose different specifics; the social contract is values-driven.
- Redistribution and pre-distribution:
- Medium-term focus on "pre-distribution" policies: education, social mobility, infrastructure investments in poorer regions, and spreading productivity improvements to the frontier.
- Invest in equalizing education opportunities to unlock talent (reference to "lost Einsteins" literature).
- Explore taxing wealth (inheritance, land, real estate) as wealth inequality outpaces income inequality.
- Labor market policies:
- Ensure flexibility for firms to hire and fire, coupled with generous unemployment benefits, training, and job placement ("flexicurity" model as in Denmark).
- Raise investment in worker education, training, and transitional support—address declining spending on training across most countries.
- Strengthen rights for part-time and temporary workers (pensions, paid leave, training), as in Denmark, Germany, and the Netherlands.
- Consider wage subsidies, earned income tax credits, and higher minimum wages combined with access to services (education, healthcare) to protect low-wage earners.
- Promote mechanisms for workers to claim a fair share of gains: level playing field in wage negotiations, profit sharing, and cooperatives.
- Lifelong learning and pension reform:
- Abolish mandatory retirement ages and remove age limits for student loan eligibility to facilitate longer working lives and repeated retooling.
- Link pension eligibility to life expectancy (Netherlands example).
- International tax fairness:
- Remove policies that tax labor more heavily where feasible.
- Pursue international efforts to tax capital where economic activity takes place to reduce income shift from labor to capital and curb offshore "tax efficient" structures.
- Intergenerational fairness:
- Provide young people entitlements to improve skills over their lives, with expectation of repaying investment via higher future taxes to finance elderly care.
- Recognize the need for redistribution in the near term while addressing longer-term mobility and intergenerational issues.
Conclusion
- A new social contract is required to restore a sense of security in a globalized, fast-changing economy by renegotiating past choices that no longer fit current or future circumstances.
- Such a contract would pool resources to provide agreed public goods, support those affected by adverse shocks, and sustain political support for open economies and societies.
Source: Nemat Shafik, "A New Social Contract," F&D Magazine, December 2018.
Content in this bundle
- عقد اجتماعي جديد
- Un nuevo contrato social
- UN NOUVEAU CONTRAT SOCIAL
- 新しい社会契約、ネマト・シャフィク著、ファイナンス＆ディベロップメント2018年12月月号
- A New Social Contract – IMF Finance & Development Magazine | December 2018
- sdn1402 - Executive Summary