The economics of social investment

The economic policy analysis of social investment is far from self-evident. Unlike the Keynesian welfare state and the neoliberal retrenchment policy advice, the social investment perspective is not founded on one unified body of economic thought. Nonetheless, over the past decade both policymakers and expert academics have started to rethink the interaction between economic progress and social policy: from trade-offs to mutual reinforcement. The protagonists of social investment, however, hold the relationship between substantive social policy and economic performance to be critically dependent on identifying institutional conditions, at the micro, meso, and macro levels, under which it is possible to formulate and implement productive social policies. There are no 'quick fixes' comparable to the kind of straightforward micro or macro solutions dreamt up by the general theorists of neoclassical or Keynesian economic planks. The economic and institutional policy analysis of social investment relies more heavily on empirical data and case-by-case comparisons. It is crucial to consider the 'fine' structures of the welfare state. Social policy is never a productive factor per se. One cannot turn a blind eye to the negative, unintended, and perverse side effects of excessively generous social security benefits of long duration, undermining work incentives, raising the tax burden, and contributing to high gross wage costs; and, by the same token, to rigid forms of dismissal protection making hiring and firing unnecessarily costly and resulting in high levels of inactivity.

Beyond these caveats, the social investment perspective has brought social policy back into the equation as a potentially positive contributor to growth, competitiveness, social progress, and political resilience. Largely in agreement with the Keynesian welfare state, the social investment paradigm makes a virtue of the argument that a strong economy requires a strong welfare state. Social protection expenditures are powerful stabilizers of economic activity at the macro level, because they consolidate effective demand during recessions. This kind of Keynesianism through the back door is still operative today as we have experienced from the early days of the 2007-10 financial crisis. In addition, institutions of social partnership permit macroeconomically responsive wage-setting and public-regarding welfare reform, while encouraging employers and trade unions to jointly invest in vocational training programmes, thus contributing to competitiveness through human capital upgrading and maintenance at the meso level. At the micro level, social insurance, compensating workers and families who contribute to the common economic good by exposing themselves to periodic market contingencies, encourages private initiative and risk-taking. But the devil is in the detail. High unemployment benefits of short duration, coupled to strong activation incentives and obligations, supported by active labour market servicing policy are most successful in lowering unemployment and raising labour productivity (Blanchard, 2006; Bonoli, 2011). Effective policy mixes of this kind also have a moderating effect on wage developments.

Alongside this nuanced reappreciation of the Keynesian and Beveridgean welfare policy legacies, the economic policy analysis of social investment shares with the neoliberal approach a strong focus on the supply side. Social investments today generate private and public dividends in the mid to long term. Central to the notion of social investment is that the economic sustainability of the welfare state hinges on the number and productivity of future taxpayers. From this reading, social policy should contribute to actively mobilizing the productive potential of citizens in order to mitigate new social risks, such as atypical employment, long-term unemployment, working poverty, family instability, and lack of opportunities for labour market participation, resulting from care obligations or obsolete skills. The shift away from passive income compensation, through social insurance, to more active social policy support and servicing is critically informed by the mounting evidence, collected over the past decades, of the enormous social cost of early failure and (too) late policy intervention across the life course. Early school drop-out and youth unemployment massively narrow life chances in later life. Long-term unemployment easily turns into permanent labour exclusion with huge costs for individuals and society (OECD, 2007b; European Commission, 2008a).

The logic of 'social policy as a productive factor' contrasts with the neoliberal paradigm in two important dimensions. In the first place, neoclassical economics, based on perfect information and market clearing, theoretically rules out the kind of social risks and market failures that the welfare state seeks to address. Secondly, because neoclassical economics focuses only on the (public) cost side of the welfare state, it is unable to appreciate its core macro- and micro-economic benefits (Atkinson and Morgensen, 1993; Atkinson, 1999). Extensive comparative empirical research has, since the turn of the century, revealed that there is no trade-off between macroeconomic performance and the size of the welfare state. The presence of a large public sector does not necessarily damage competitiveness; there is a positive relationship between fertility and high levels of female participation in most Scandinavian countries; and finally, high numeracy and literacy rates can be achieved with educational policies that abide by the principles of equal opportunities (He- merijck, 2002; Swank, 2002; Kenworthy, 2004, 2008, 2011; Lindert, 2004). If maximum employment participation is the primary objective of early twenty- first century welfare provision, Esping-Andersen argues, the marginal incentive effects of unemployment benefits and social assistance that labour market micro-economists worry about pale in comparison to encouraging delayed retirement and providing services to families so that both women and older workers can increase their labour supply (Esping-Andersen, 2001).

The role of human capital, ensuring learning abilities during the life course, and its interaction with the welfare state is perhaps the linchpin of the social investment perspective. Social investment is essentially an encompassing human capital strategy with an explicit focus on helping both men and women balance earning and caring (Lundvall and Lorenz, 2006, 2012; Bernard and Boucher, 2007; Busemeyer and Nikolai, 2010; Nikolai, 2012). It is based on a number of discrete positive feedback loops. Social investment enhances both long-term productivity and participation, placing a heavy emphasis on participation-raising and productivity-enhancing social services in the areas of education (early childhood education and care, general education, and professional training as well as lifelong learning), health maintenance and rehabilitation, and family support in caring for dependants (children, the aged, and the sick). Output per hour improves with skill, good physical and mental health, and having dependants entrusted to skilled social workers. The long-term impact of investment in literacy on GDP is about three times more important than that of investment in physical capital (Coulombe, Tremblay, and Marchand, 2004). The positive effect of literacy is greater for women than for men. Levels of education and training are again positively correlated with average employment rates. High-quality socialized care for children significantly advances their cognitive and learning capabilities (Burger, 2010). Childcare interacts positively with parental leave entitlements. Well-paid leave entitlements are beneficial for female employment as young women strengthen their labour market attachment, because they suffer only minor income loss and can safely return to their jobs following childbirth. In addition, social investment enhances participation by enabling large numbers of individuals to be active for a long period over their lifetime. Women, especially mothers, can pursue strong, increasingly full-time, careers, while adequately balancing their caring and earning responsibilities. Older workers can be retrained to the extent that they have had opportunities for continued training on the job and occupational and other health problems have been prevented (Hicks, 2002). Young workers are also best integrated in careers that do not compromise on their education.

In an ageing economy with widening inequalities, raising the quality and quantity of human capital is imperative to sustain generous and effective welfare states, beginning in early childhood. One period of education at the beginning of one's life is no longer a good enough basis for a successful career. In economics, the case for human capital enhancement goes back to endogenous growth theory of the 1980s, suggesting that long-term growth is determined more by human capital investment decisions than by external shocks and demographic change (Lucas, 1988; Agell, Lindh, and Ohlsson, 1997). It should, however, be emphasized that education and training as a means of raising the quality of the workforce takes many years. The case of high-quality early childhood intervention is most powerfully argued by the economic Nobel laureate James Heckman. Since cognitive and non-cognitive abilities influence school success and, subsequently, adult chances in working life, the policy imperative is to ensure a 'strong start', i.e. investment in the training of young children (Heckman, 2000; Heckman and Lochner, 2000).

As female employability is paramount to sustainable welfare states and parenting is crucial to child development, and thus to the shape of future life chances, policymakers have many reasons to want to support robust families, which, under post-industrial economic conditions, implies helping parents to find a better balance between work and family life (Waldfogel, 2002). In the absence of affordable childcare, women tend to cut back on their working hours or stop working altogether when children are young. Short periods on well-paid leave schemes are particularly favourable to longterm female employment (Van Lancker and Ghysels, 2012). The economic reasoning of the OECD in their Babies and Bosses (2007a) studies is that when parents cannot realize their aspiration in work and family life, including the number of children they aspire to, not only is their wellbeing impaired, but also economic progress is curtailed through reduced labour supply and lower productivity, which ultimately undermines the long-term fiscal sustainability of universal welfare systems. To the extent that low levels of education in less well-off groups depress productivity, underinvestment in education will engender stunted economic growth and decreased tax revenue. Overinvestment by work-rich families in their offspring offers little compensation for this fundamental market failure.

In the post-industrial context of new social risks and flexible careers, the goal of full employment has come to require far more differentiated employment patterns over the life course. In the aggregate, maximizing employment rather than fighting formal unemployment should be the prime policy objective. A new model of employment relations is in the making whereby both men and women share working time, which enable them to keep enough time for catering to their families. Higher employment of women typically raises the demand for regular jobs in the areas of care for children and other dependants as well as for consumer-oriented services in general. If part-time work is recognized as a normal job, supported by access to basic social security, and allows for normal career development and basic economic independence, part-time jobs can generate gender equality and active security of working families. Accommodating critical life-course transitions thus reduces the probability of being trapped into inactivity and welfare dependency and thus harbours both individual and economic gains (Kok, 2003; European Commission, 2006, 2008a). Gunther Schmid (2006, 2008) advocates that in an environment where workers experience more frequent labour market transitions, not only between employment and unemployment, but across a far wider set of opportunities and contingencies, including full and part-time work, selfemployment, training, family care, parental leave, child rearing, and gradual retirement, policy supports are needed for individuals successfully to manage these transitions, preferably in accordance with productivity enhancing flexibility and higher employment levels. The issue is not maximum labour market flexibility or the neoliberal mantra of 'making work pay'. Instead, the policy imperative is for 'making transitions pay' over the life cycle through the provision of 'active securities' or embedding 'social bridges', ensuring that non-standardized employment relations become 'stepping stones' to sustainable careers (see also Schmid and Gazier, 2002). By December 2010, the European Council agreed on eight common principles of 'flexicurity', stipulating social policies and labour market regulation to augment simultaneously the flexibility of the labour market, work organization, and industrial relations, so as to address the needs of firms while at the same time expanding reconfiguring social policies to enhance social security and support workers in finding employment, notably for vulnerable groups both within and outside the labour market (Supiot, 2001; Wilthagen, Tros, and van Lieshout, 2004; European Commission, 2007b).

There is an obvious positive interaction effect between productivity and participation: the higher the productivity, the higher the participation rates (see Chapter 7). Inequality is reduced by diminishing the human capital gap between high- and low-wage individuals. Universal and high-quality care increases equity, in labour force participation and earnings, while mitigating the risk of poverty, especially for women and children. To the extent that social investments policies are coordinated in a life-course perspective, they, in turn, produce the highest pay-offs in participation and productivity. Having high numbers of productive men and women gainfully employed on a full-time basis reinforces the economic sustainability of the welfare state. In addition, socialized welfare servicing not only enables women to work on a full-time basis, it also allows them and partners to have the number of children they want, which in turn serves to mitigate the social and financial pressures of demographic ageing. By contrast, social policy systems that employ fewer workers, but that are nevertheless financially responsible for high numbers of pensioners, will experience increasing difficulties in financing social policy provisions with a declining workforce. To be sure, social investment does not come cheaply. High social spending has to be matched by high taxes or social contributions to which many people contribute (Bernard and Boucher, 2007). For this, fiscal and transfer policies need to be finely tuned and closely monitored, in a way that minimizes employment and economic growth (Lindert, 2004). High social spending can thus help promote productive capacity, reconciling workers and citizens to the social and economic challenges of the twenty-first century of ageing populations, changing households, and the rise of internationally competitive knowledge economies (Ferrera, Hemerijck, and Rhodes, 2000). In the long run, social investments yield high returns on investments that are efficiency optimal not only in Paretian, but also in Rawlsean terms of improving the plight of the most vulnerable (Esping-Andersen, 2009).

A fundamental unifying tenet of the economics of the social investment perspective bears on its theory of the state. Distancing themselves from the neoliberal 'negative' economic theory of the state, social investment advocates view public policy as a key provider for families and labour markets. They do so on the basis of a far less sanguine understanding of efficient markets. Two economic rationales are at work here. The first relates to imperfect information (including important information asymmetries) and the capacity of citizens to make adequate choices on the basis of the information that is available. Therefore, the first rationale for public intervention harks back to the original economic rationale for collective social insurance, countering market inefficiencies caused by asymmetric information, and to the economic rationale for social policy interventions related to the problems of imperfect information and the framing of choice in a more general sense (see Barr, 2004). This is what Nicholas Barr (2001) has called the 'piggy-bank' function of the welfare state. Because citizens often lack the requisite information and capabilities to make enlightened choices, many post-industrial life-course needs remain unmet because of the market's underprovision and overpricing of services.

But the economics of social investment and its reaffirmation of the role of the state do not stop with piggy-bank rationality. The more fundamental reason why the welfare state today must be 'active' and provide enabling social services is inherently bound up with the declining effectiveness of the logic of social insurance since the 1980s. When the risk of industrial unemployment was still largely cyclical, it made perfect sense to administer collective social insurance funds for consumption smoothing during spells of Keynesian demand-deficient unemployment. However, when unemployment becomes structural, caused by radical shifts in labour demand and supply, intensified international competition, skill-biased technological change, the feminization of the labour market, family transformation, and social and economic preferences for more flexible employment relations, traditional unemployment insurance no longer functions as an effective reserve income buffer between jobs in the same industry. Basic public income guarantees, therefore, have to be complemented with capacitating public services, a term coined by Charles Sabel, tailored to particular social needs caused by life- course contingencies (Sabel etal., 2010). In addition, while in the 1960s the most effective antidote to poverty was a solid male breadwinner, today dualearner families have become the most effective bulwark against poverty.

Single-parent family poverty, moreover, has as much to with access to a broader array of services than mere social assistance. According to Esping- Andersen (2001), daycare is vastly superior in mitigating child poverty than is standard passive family support. Therefore, microeconomic incentive debates must be systematically connected with capacitating services. Where mothers are able to harmonize work and children, fertility will rise, the pensioner-employed ratio will improve, and household poverty will decline. Because it is difficult privately and/or collectively to insure new social risks, and as capacitating social services are not self-evidently supplied by private markets, it becomes imperative for public policy to step in for effective protection against such risks. At the same time, however, capacitating services must be customized to individual needs across the life cycle to be effective (Sabel etal., 2011).

Social services, organized so as to make adult family members more employable and productive (through public education, support for childcare and parental leave, and public health), and universal programmes to minimize administrative costs and work incentive problems, require highly professional institutional capabilities in terms not only of policymaking, but also of policy implementation and evaluation. The importance of institutional capacities so as to make social investments work cannot be overstated. At the policymaking level what matters are coordinated and mutually reinforcing complementary policy packages affecting all market welfare and labour market institutions, many of which have to be negotiated with various stakeholders, such as social partners and care professionals. At the policy implementation level what matters is that, as welfare states become ever more service-oriented, local service provision has highly qualified professional care workers, able to help clients make timely choices in areas of childcare placement, job search and training, and elder and family care. Finally, in terms of policy analysis, as the devil of social investment is in the details of policy interdependencies between passive and active social policies over the life cycle, there is constant need for reliable ex post and ex ante policy evaluation of the strength and weakness of various policy options and interdependencies in the light of variegated social and economic contexts, with appropriate and independent monitoring functions.

The explicit reappraisal of the role of the state as a necessary social investor is, finally, confronted with some disconcerting constraints. In an age of globalization, transnational companies show little interest in the long-term quality of the workforce and infrastructure of domestic economies in which they operate. If they can, they use the threat of relocation as a lever to extract concessions on taxes, wages, and employment regulation from national governments. This puts pressure on governments to sustain the public goods needed for the knowledge-based economy and that best serve to mitigate the adverse effects of economic internationalization ex ante. Then there is the overriding public finance limitation, anchored in the Maastricht criteria and the Stability and Growth Pact. As long as the neoliberal doctrine of balanced budgets and price stability continues to be viewed as a sufficient condition for overall macro-economic stability, the shift towards social investment remains heavily constrained. While all the available evidence suggests that investments in childcare and education will, in the long run, pay for themselves, existing public finance practices consider any form of social policy spending only as pure consumption. This may be true for the modus operandi of the post-war welfare state, which was indeed income-transfer biased. Today, as the welfare state is in the process of becoming more service-based, there is a clear need to distinguish social investments from consumption spending. A new regime of public finance that would allow finance ministers to (a) identify real public investments with estimated real return, and (b) examine the joint expenditure trends in markets and governments alike, has become imperative. This would be akin to distinguishing between current and capital accounts in welfare state spending, just as private companies do, as Esping-Andersen argues (2006, 2009). Social investments harbour a reliable positive impact on the economy, although it would take considerable time for them to pay off. The new public accounting regime suggested here complies with fiscal orthodoxy, suggesting tightening of current spending while allowing for more leeway for social investment spending with the effect of improving health of the economy and its growth potential. From this perspective on public finances, there is an argument to be made that public deficits and debt, wisely spent on social investment in education and family support, can stabilize the economy by depriving financial institutions of excess liquidity for short-term speculation, while nourishing sustained employability gains.

As long as real social investments continue to be ignored, fiscal austerity stands in the way of economically sound public policy. Strong capacitating services, especially human capital, can accelerate industrial change. This is the demand side of knowledge economy. But there needs to be an ample supply side to make it happen. Well-designed social policies can promote productive employment, gender equality, social cohesion, and sound economic growth as they reduce poverty, encourage school enrolment and early childhood education and development, and empower individuals to seize market opportunities and enhance their productivity. Moreover, they can act as strong automatic stabilizers, a role powerfully illustrated during the recent crisis.

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