Why America managed so well with limited social protections, once upon a time


Raghuram G. Rajan, Professor of Finance at the University of Chicago Booth School of Business, recently offered an excellent answer to the question: How did America once manage so well with limited social protections?

Mr Rajan, whose newest book is titled ‘The Third Pillar: How Markets and the State Leave the Community Behind’, said that the US boasted a “formidable” secondary education system in the immediate post–war era. It “prepared students for work or further study at the world’s best universities”. What this did was to allow students to enter the workforce “with the skills to land good jobs. Rapid economic growth and relatively light regulation encouraged many to start their own enterprises.” Add to that a flexible labour market and “shallow and brief” recessions.

What this actually meant, he explained, was that American didn’t go down the European route. It had “limited social protections against market volatility. Unemployment insurance was modest, while many people had no health-care coverage – even after the introduction of federally-backed insurance schemes for the elderly and the very poor in the 1960s.”

This was all down to the educational skilling of Americans – Mr Rajan calls it “’pre-market’ preparation” as opposed to Europe’s “’post-market’ support”. If Americans lost their job they would a find new one relatively quickly.

But after growth stalled in the early 1970s, and the US stressed more liberalization at home, “’pre-market’ support” became less egalitarian and “growing income segregation” makes it ever harder to upskill widely, as once was the case. So, America’s professionals are heading with their children into successful upper-middle-class communities, and market demands “are creating a meritocracy, but a hereditary one, where the children of the successful are more likely to succeed.”

All of the above seems spot on with one caveat.

At the time that growth was a given in the US, there was little external competition. So, even if some Americans didn’t have much “’pre-market’ support” (ie a good secondary education and high levels of skills), they could still find jobs pretty easily. Someone who left school after eighth-grade could still find a decent job. Now, that’s no longer the case.

That’s where Mr Rajan’s prescription comes in. Communities across America need to find “innovative ways to attract new economic activity, and to make their citizens better able to respond to globalization and technological change.”

In other words, more and better “’pre-market’ support” is needed more widely.