Ordoliberalism and “The Really Big Trade-off”

First published in jimsresearchnotes 30 December 2009, now substantially updated in the light of the new laissez-faire and the subprime mortgage crisis.

In “Home Ownership and Privatisation” (Kemeny, 1980) I concluded on the basis of preliminary data on 8 OECD countries that countries with high home ownership rates had a poorly developed welfare state, while those with low home ownership rates – despite being among the richest countries in the world – had a highly developed welfare state.

The first table provided an overview, with data on 8 countries. Those with high home ownership rates (Australia, Canada and the USA) had low levels of public welfare provision and expenditure, those with low home ownership rates (Sweden, Germany and The Netherlands) had a highly developed welfare state, while those with middle-range home ownership rates (UK and France) were between these two extremes. The second table looked more closely at the extremes (Australia and Sweden), and the middle (UK) showing that the same pattern applied in terms of social welfare and health, pensions and unemployment benefits (Kemeny, 1980 Tables 1 and 2, also in Kemeny, 2005).

Following the welfare regimes work of Esping-Andersen (1990), Francis Castles decided to conduct an elegant test of my 1980 thesis. The details of how he did this can be read in Castles (1998). Briefly, using two main sources – Choko (1993) and Hedman (1994) – he correlated levels of home ownership in 19 OECD countries with measures of government revenues and expenditures, including separate data for pensions and public health. He did this for four years – 1960, 1970, 1980, and 1990 (Castles, 1998 Table 2 p. 10). This gave him sequential data covering most of the postwar period. He published some of the results in Castles and Ferrera (1996), and the full results and analysis in Castles (1998), summarised in his coining of the phrase “the really big trade-off” (between tenure and public welfare provision). Castles summarises the results of this analysis:

“Although the public health findings contradict a specific aspect of the Kemeny thesis, the overall implications of the findings excluding the Swiss case are extremely supportive of his basic insight. For the past three decades, and dramatically so between 1960 and 1980, high levels of home ownership in Western societies have gone along with weakly developed welfare states, manifested in low aggregates of government revenues and expenditures and in lower levels of pension and other non-health, welfare spending. These relationships now appear to be fading, but that the alternative poles on this trade-off matrix have represented quite distinct configurations of policy outcomes for much of the post-war period is clearly revealed by the evidence examined here.” (Castles, 1998 p. 11)

I agreed entirely with this analysis and here I want to elaborate on why this is so. It has much to do with the changes that took place after 1980: that is the period of the new laissez-faire that followed Reaganomics and Thatcherism. Castles did not, of course, go into this as an explanation. He could perhaps have done so for the USA and Britain for illustrative purposes but the thesis that neoliberalism after 1980 resulted in declines in welfare provision was not the issue he set out to examine. Nor indeed  had I even considered the link between home ownership and privatised welfare, quite simply because in 1980 when I published the article neoliberal revanchism did not exist.

Ordoliberalism versus Neoliberalism in Housing: Since Castles’ analysis we have seen the way the subprime mortgage crisis of 2008/9 has transformed our understanding of home ownership as the key element in boom-slump cycles. Its consequences can still be seen 6 years after the crisis, most noticeably in cities across the USA which are dominated by one industry (Chicago is the best known of these) but also in states where governors have introduced radical and far-reaching neoliberal reforms.

Here I want to look more closely at this. But before doing so, I want to stress that other than implementing long-term and deep structural changes in housing tenure the countries that currently suffer from the subprime mortgage threat are precisely those countries which have monotenural home ownership policies. In the EU this is exacerbated by the ongoing attempt to make all member states conform to the same European Central Bank (ECB) guidelines.

The EU is a peculiar organisation, at the same time highly centralised yet with such a diverse membership that the Council has difficulty making decisions. The ECB reflects all these conflicts and does so while combining them with secrecy. See Wikipedia, http://en.wikipedia.org/wiki/European_Central_Bank “The Governing Council is the main decision-making body of the Euro system.[25] It comprises the members of the Executive Board (6 in total) and the governors of the National Central Banks of the euro area countries (18 as of 2014). The fact that the Council’s minutes are not published has raised controversy in some financial circles. Sweden is the only member state which has so far avoided joining the Euro. See Sweden and the Euro: In addition, outside the EU Iceland is an example of monotenural home ownership, as is Norway.

1. The USA: The USA is still in the position of being able to maintain political global hegemony. Its military expenditure far outstrips that of any other country, it has military bases around the world and uses aircraft carriers and nuclear submarines to pose a credible threat to any potential challenger. America does have fundamental weaknesses. The first is that along with all English-speaking countries it has a long-term political commitment to monotenural home ownership.

There is a certain irony in the fact that thanks to Reaganomics subprime mortgages have become widespread as a means of giving low-income groups the possibility of becoming home owners. This creates the political circumstances that make it a major policy aim to extend cheap finance to allow renters to buy housing. The pressures to do so in periods of housing price boom are very great. Ratcheting to boost subsidies to the poor helps low-income earners to buy their own housing. So Subprime mortgages were invented as a means for banks to lend without expecting repayment of debt until the house is sold: the assumption being that house prices will rise – as they do, except the boom-slump cycle of neoliberalism easily creates a trap for low-income earners to fall into.

What is interesting about this is that lending can be made deviant by calling it predatory lending, as if lenders were preying on low-income households to persuade them to borrow finance on the never-never deferring capital repayment that they otherwise would not be able to afford. This in critical criminology, out of which the symbolic interactionist perspective grew, is a form of negative deviant labelling. It is also the reason for trapping low-income earners in owner occupied housing that when house prices fall in the slump phase of the boom-slump cycle leave the owners with a mortgage debt greater than the price of the house.

References:

Castles, Francis G. and Maurizio Ferrera (1996) “Home Ownership and the Welfare State: Is Southern Europe Different?” South European Society and Politics Vol. 1 No. 2 (Autumn) pp. 163-185

Castles, Francis G. (1998) “The Really Big Trade-Off: Home Ownership and the Welfare State in the New World and the Old.” Acta Politica Vol. 32 pp. 5-19

Choko, M. H. (1993) “Homeownership: from Dream to Materiality” in R. A. Hays (ed) Ownership, Control and the Future of Housing Policy Greenwood Press, Westport, Conn

Esping-Andersen, Gösta (1990) The Three Worlds of Welfare Capitalism Polity Press, Cambridge

Hedman, Eva (ed) (1994) Housing in Sweden in an International Perspective Boverket, Karlskrona

Kemeny (1980) “Home Ownership and privatisation” International Journal of Urban and Regional Research (Sept) Vol.4 No.3 pp.372-88

Kemeny, Jim (2005) “The Really Big Trade-Off’ between Home Ownership and Welfare: Castles’ Evaluation of the 1980 Thesis, and a Reformulation 25 Years on” (Nov) Housing, Theory and Society Vol. 22, No. 2, pp. 595-872

Embedded links: The link to Francis Castles: http://politicsir.cass.anu.edu.au/staff/castles/pdfs/cv.pdf The other links are to summaries of individual publications in my home page: http://www.ibf.uu.se/PERSON/jim/jim.html

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