Friday, February 15, 2013

Future of the Welfare State -- is there one?

This was the subject of a talk I attended earlier this week. Loosely titled "The Future of the Welfare State", it featured two discussants to address the funding and politics of the redistributive state. I'll give the highlights here for those who weren't lucky enough to attend, along with some of my own thoughts along the way.

Professors Kent Weaver and Kimberly Morgan speaking at Mason Hall.

The first to speak was Professor Kimberly Morgan of George Washington University, whose presentation was titled "The American Welfare State: How We Spend So Much Yet Achieve so Little". A large part of her talk was dedicated to clearing up factual misunderstandings about the welfare state.

Some figures she cites that are worth knowing:

  • Public Social Spending in United States is ~16% of GDP (2007). Closest comparable countries: Australia, Ireland. Largest in this category is France at 28%.
  • In net social expenditure as % of GDP we're in 5th place, next to Sweden and the UK.

Net social expenditure is defined as public social spending, plus tax breaks for social purposes, plus publicly mandated private spending (not done very much in the U.S.) plus voluntary private spending (e.g. employer provided health insurance), minus taxes levied on benefits.

An implication of this net social expenditure measure is that the U.S. implicitly subsidizes many groups through the tax code, e.g. the Earned Income Tax Credit (EITC).

In the private voluntary spending category the U.S. is #1, at above 10% of GDP. Next in line is the Netherlands at ~6%. A big part of this is made up of employment-related benefits; U.S. employers spend about $15,000 per employee in health care.

Comment: I see the logic of including private health care spending as "net social expenditure" because it all goes toward public well-being in some fashion, but I object somewhat to lumping this in with government money as if private employer spending is also a variable of choice for public policy. Admittedly, the entire provision of health care by employers is a rather silly relic of wage controls passed during WW2 which has become the "new normal", but it is still distinct from government provided services and should not be treated as a dollar-for-dollar substitute.

  • In average indirect tax rates, the highest is Denmark at 26% (followed closely by other Northern European countries) lowest is the U.S. at 4%. This is largely money taken in consumption taxes, e.g. VAT. The upshot is that while the U.S. spends less in benefits, we also "claw back" less of that money than Europe does.

Startling fact: Once you count up all these different social spending categories the US is roughly equal with Sweden as % of GDP! Sweden is famous for its generous welfare state, but voluntary spending in the U.S. is what makes up the big difference.

This begs the question, if we spend so much why are the outcomes so unsatisfactory? Dr. Weaver identifies the biggest cause as how those benefits are distributed; namely, they aren't progressive enough.

  • 18% of the U.S. economy goes to health care. Next is the Netherlands, at 12%. In spite of this the American health care system isn't very good in many respects: we're strong on technology, weak on primary care, and nearly worst on "preventable mortality" among developed nations.
  • Distribution of entitlement spending in the U.S by income: the middle 60% gets 58%, bottom 20% gets 32% (from the Center on Budget and Policy Priorities).
  • Distribution of "tax expenditures": Top 20% gets 66%, bottom 20% gets about 4%, the rest goes to the middle.
Comment: describing a tax break as an "expenditure" seems questionable to me. Dr. Morgan defends this by saying that this money is "given" (i.e. not taken) to promote various social goals, so we should be observant of which sectors of society are given back to the most. To me, this distribution of "tax expenditures" seems inherently obvious: the top 20% pays the lions share of federal income taxes, so obviously there's just more to give back in the form of deductions. It's simple arithmetic.

Dedicating more tax expenditures towards the bottom 20%, who pay little if any income taxes, basically implies a negative income tax ala Milton Friedman. That's a worthy proposal to make and can be debated on its own merits, but the tinge of class warfare in this framing seems amiss.

The next to speak was Kent Weaver, Georgetown professor of public policy. His talk was entitled "Future of the Americaan Welfare State: Constraints and Options". I took less detailed notes during this section; partially because the coffee was wearing off, and partially because he made his points more often with editorial cartoons than charts or graphs, which I personally find less engaging.

He noted the demographic change occurring in America: there are increasingly less workers per retiree, a problem that is even more pressing for Japan and much of Europe. Politicians are also caught in a trap: they can only keep promising high benefits when economy is increasing.

The incentive for politicians becomes focused on NOT punishing groups rather than finding ways to benefit them. This is an interesting point, and one that could be explored in more detail through public choice economics.

Overall both speakers were good, although I enjoyed Dr. Morgan's half of the talk much more. The facts she presented were useful regardless of which ideological persuasion you came from, while Dr. Weaver was more focused on how to expand and continue the welfare state, not necessarily just reform it to accomplish its goals at the same (or lower) cost.

What I took away from their presentation is that, regardless of whether you think government redistribution is a good idea or not, the current way we're doing it in the U.S. is far from optimal. I think this provides some common ground for liberals and conservatives on entitlement reform: if the goal is to provide a social safety net without going toward cradle-to-grave coverage, policies need to be better tailored to accomplish that goal instead of the hodge-podge we have now. Of course, how to get there from here is the real struggle.

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