Abstract
New technologies and big data have often been linked to inequality. Usually they feature as external shocks to welfare systems. For instance, many economists argue that platform economies can give rise to winner-takes-it-all economies. This, in turn, dramatically increases market (income) inequality. Fewer scholarly attempts address the question of how new technologies affect the ‘inner workings’ of a welfare state and create an ‘internal’ source of higher income inequality. Iversen and Rehm’s Big Data and the Welfare State fills this gap in the literature. They build a parsimonious framework for a large suite of welfare state policies, ranging from health and life insurance, to credit markets and unemployment benefits. Both the scope and analytic rigour of this book will make it an essential reading for political scientists and economists interested in the political effects of new technologies.
The authors use George Akerlof’s (1970) ‘market for lemons’ as the analytic point of departure. Famously, Akerlof showed that asymmetric private information leads to problems of adverse selection and, ultimately, market failure. The market for lemons is a major reason why welfare states created public, compulsory insurance schemes in health, pensions and unemployment protection (p. 7). The central claim of the book is that new technologies have undermined this mechanism of public solidarity.
In their introduction, the authors use the example of health trackers offered by US private health insurers (p. 3). Companies lure customers who are willing to report their health data with lower insurance premiums. It is obvious that only healthy people want to do this and, hence, the insurer pools only good health risks at relatively low prices. People with poor health, who often also happen to be economically poor, will be left out. If private information loses its edge over publicly available information, people and companies will sort good and bad risks more effectively, undermining solidaristic risk pooling. Political consequences include the polarization of policy preferences and the middle class shifting away from welfare state solutions.
The book combines fascinating case studies and historical evidence with quantitative evidence for specific hypotheses of the overall framework. For instance, the authors illustrate how the dearth of information at the origins of the welfare state made public mandatory insurance schemes outcompete the usually very small and selective private mutual aid societies (p. 48). The authors then proceed to the current period and investigate how the information revolution transformed three areas: private markets for health and life, credit markets in their relation to welfare systems and unemployment protection.
For health and life insurance, Iversen and Rehm find that new technologies make private insurers thrive. The outcome also depends on the type of political constellation, with left-wing parties defending public insurance and the regulation of new technologies, and right-wing government pushing for deregulation (p. 39). For credit markets, the authors link similar trends towards more and better information about default risks to higher financial inequality. More and better information not only leads to more polarized risks and income directly, but it also leads to governments pushing for reforms that de-solidarize access to credit. Using a case from Germany, Iversen and Rehm show that tightening social minimum benefits has made banks much more hesitant to give housing loans to low-income employees (pp. 132–133). Even unemployment benefit systems get sucked into the information revolution. Using public opinion data, the authors show that objective (public) indicators of unemployment risks increasingly predict unemployment spells better than the individuals’ own subjective predictions (p. 168). While it is hard to insure unemployment risks in private markets, new technologies still push (conservative) governments to segment and de-solidarize public unemployment benefits, as a case study from Sweden illustrates (p. 177).
The authors conclude that the info revolution will have lasting consequences for the welfare state. Of course, some public insurance schemes will survive. Even in the US, one of the least generous welfare states, support for Medicaid and Medicare among the electorate is high (p. 193). Nonetheless, new technologies will strengthen private, segmented markets and polarize risks as well as policy preferences.
To repeat, this is a parsimonious, elegant and encompassing book combining rigour with interesting, often creative ways of empirical testing. Occasionally, I had the impression that the parsimoniousness comes at a price: for instance, there is a nascent literature on how the institutions of the welfare state filter the shock coming from digitalization (e.g. Busemeyer et al., 2022). One might also argue that the book downplays the efficiency effects of better information. Finally, I thought that the book stops its projections too early and hence underestimates the adverse effects of new technologies. As the authors state in the conclusion, the trend might lead to a new age of private information. However, this time it is big tech companies that will hold the advantage: effectively, Google et al. already know more about individuals than individuals themselves. This will have important consequences not only for issues such as data transparency and regulation, but also it will usher in a new age of corporate domination in which governments as well as voters are takers rather than makers of policy solutions. Perhaps the authors very wisely wanted to save some of this material for a next book, which would, no doubt, be as insightful and important a contribution as this one.
