Social democracy: the Disneyland political solution

For a brief time, the champions of government intervention (at least in Australia) could look to the import-substitution policies that worked during the 1950s and 1960s when manufacturing employment and higher wages were promoted at a time when many currencies were tied to the US dollar, in turn fixed to a price for gold.

But the US could not sustain its leadership of international relations, nor could capital flows be controlled. By the early 1970s - even at a time of relatively limited capital mobility - speculative attacks were occurring on the major currencies. Hence, the US ended capital controls and fixed currencies in an attempt to counter its declining trade position, higher interest rates, and slower growth.

Again, I ask social democrats what the US should have done to preserve its own national interest without abandoning support for freer trade? Having lost their advantage in manufacturing because of higher wages, it (and other Western governments) looked more to services for prosperity, although debt has increasingly helped many nations maintain a high standard of living for the time being.

Freer trade and capital flows are not the villains. While many so-called social democrats mock aspects of recent policy trends, they forget how a freer flow of capital helped many nations to prosper (including Australia). For instance, Norway borrowed as much as 14 per cent of gross domestic product in the 1970s to develop its North Sea oil reserves, while Singapore reached double-digit ratios of foreign lending as a proportion of GDP during the 1990s.

And social democrats should also recognise that aggregate wealth for the world did increase and many jobs in both the developed and developing world were created from a booming international economy aided by capital flows, notwithstanding the environmental consequences from higher economic output.

The real problem that confronts developed nations, and which is merely being postponed by the current global economic crisis, is that an increasing proportion of investment is going to poorer nations. Despite what the economic Right tells us about the benefits of free trade, such as much cheaper consumer goods coming from Asia, many Western societies have increasingly struggled to fund a variety of economic, social and environmental policy needs.

The fact is that the developed world has struggled to remain competitive against the rising giants of the developing world with Western societies (both governments and voters) happy to adapt through ongoing economic reform until the folly of much higher debt was exposed. By 2009, the US had a federal government debt of $US11 trillion, of which $6.5 trillion was owed to those who buy government bonds; such as individuals, banks, and foreign countries.

And while the US federal debt level was higher in 1950 (94 per cent of GDP compared to 65 per cent in 2007), it (like other Western nations) can no longer rely on a boom in manufacturing to create wealth and reduce debt.

With many companies moving production offshore to developing nations to escape higher wages and taxation costs, Western societies have been forced to respond. Not only have governments made the hard decisions in regards to taxation and labour market reform, but they are expected to maintain high levels of social welfare spending to win public support and offset the negative impact of economic reform. No wonder Western governments privatised sectors and services within their economies.

Sure there are important differences between Western societies in how services are provided and wealth is distributed, but most have increasingly relied on services and debt in recent decades. Hence, most developed nations have been adversely affected once the credit bubble burst.

But contrary to the waffle offered by so-called social democrats who kid themselves that they have a monopoly on social justice, we either adhere to freer trade and more painful reform as wealth is lost to poorer nations once the international system stabilises from the current economic crisis, or reintroduce protectionist measures which may also be disguised as redesigned international governance.

The answers are really about the willingness of richer democracies to allow their way of life to come under greater pressure.