“Risk” may be a central idea of the early 21st century, just as “globalisation” was the dominant idea of the 1990s. The fact that individuals and families are vulnerable to a wide range of social, economic and other risks — and that collective action is needed to help reduce and manage these risks — has long been an important theme in social-democratic thinking. In the first part of a serialised paper first published by the Centre for Policy Development, University of Queensland economist John Quiggin writes that an improved understanding of risk can contribute to the development of a modernised social democratic model.

Social democracy is built on the idea that as members of a society, we have an obligation to look out for each other. We also have a legitimate expectation of help from society when we are in need of it. In an increasingly diverse society, this kind of social solidarity cannot be assumed to exist automatically. Instead, it must be asserted through political choices, by which governments help reduce, share and manage the risks we face.

By contrast, the neoliberal alternative is based on the idea that individuals, households and businesses should manage all risks by themselves through market transactions. In practice, this means that most risk is borne by those least able to manage it.

Risk and the welfare state

The growing social salience of risk and uncertainty suggests the possibility of a more general reorientation of views about the welfare state, its role and significance. One way of approaching this reorientation is in terms of Nicholas Barr’s distinction between the ‘Piggy Bank’ and ‘Robin Hood’ functions of the welfare state.1 In Barr’s terminology, the Robin Hood function refers to the redistribution of wealth (either in lump sums or as flows of transfer payments) from the ‘lifetime rich’ to the ‘lifetime poor’. In a society where endowments of physical wealth and earning capacity were equal, the Robin Hood function would be unnecessary.

By contrast, the ‘Piggy Bank’ function of the state involves the smoothing of individual consumption over time and over a range of risky outcomes. This function would be relevant even in a society where lifetime incomes were equal. It is just as relevant, (perhaps more so) for those on middle incomes as for those lower down the scale.

In traditional presentations of the case for social democracy, these ‘smoothing’ functions were commonly seen as peripheral. Advocates of a targeted welfare system saw the provision of services to households that could afford to provide for themselves as an undesirable side-effect of provision for the poor – in other words, ‘middle class welfare’. On the other hand, advocates of universal provision saw it as politically necessary to build support for redistribution.

The welfare state as Piggy Bank

Traditionally, more attention has been focused on the Robin Hood function of the welfare state than its role as a Piggy Bank. Opponents of universalism have argued that ‘middle-class welfare’ constitutes wasteful churning and leads to an excessively large state that nevertheless does a poor job in equalising income. Supporters argue that universal programs build social solidarity and cement support for the Robin Hood function, even among those who are net contributors.

But Nicholas Barr persuasively argues that both sides miss the point. Consumption smoothing and risk-pooling are valuable in themselves, and the role of the state in these activities needs to be assessed independently of distributional issues.

In fact, there is a strong case that redistribution plays a vital role because it pools risks that arise within individual lifetimes. In other words, redistribution deals with the risk of being born into a poor family instead of a rich one, possessing the wrong type of job skills for a particular labour market, or living through a sustained economic downturn. On this analysis, the primary role of the welfare state is managing risk, not redistributing income.

Given the central role of risk, we need to ask why the government should be involved in risk management. Barr argues that information-related market failures provide a more robust case for government intervention than do the traditional categories of market failure under certainty (imperfect competition, externality, natural monopoly and so on).

Barr focuses on adverse selection, moral hazard and unquantifiable uncertainty as the key issues. Embarking on a systematic treatment of the main functions of the modern welfare state, assessed in terms of risk management, he examines unemployment insurance, pensions, health care and education, in each case considering the option of private provision against a range of government interventions.

Tomorrow: Risk and the functions of the welfare state