“Why doesn’t the U.S. have a European-style welfare state?”

1. “Why doesn’t the U.S. have a European-style welfare state?” Alberto Alesina, Edward Glaeser and Bruce Sacerdote

2. Overview • Authors want to understand the causes of the greater expansion of the welfare state in Europe vs. the U.S. • 3 potential explanations for the differences between American and European welfare state: • Economic • Political • Behavioral • Conclusion: • Economic factors do not explain the differences in government generosity between Europe and the U.S. • The lower welfare provisions in the U.S. are due to: • U.S. political institutions: Limit the political representation of the poor • Racial animosity: Redistribution is mainly geared toward minorities, which is unappealing to many voters.

3. Redistributive policies in US vs. Europe • Government spending comparison (2.1): • U.S. government spending as % of GDP: 35.5% • European government spending as % of GDP: 48% • Largest difference in transfers to households: 11% in U.S. vs. 18% in Europe. • Other countries: Australia (36%), Japan (38%), Canada (52.3%) • Thus U.S. and Europe are extremes in terms of government spending. • Government social spending (2.2): • U.S. government spends less than Europe on average in all categories except for healthcare.

5. Redistributive policies in US vs. Europe • Structure of taxation: • Focus on the progressivity of tax systems across countries, i.e. the tax burden of the rich relative to the poor. • Result: In the U.S., tax brackets are higher for low levels of income (<= 50% of average worker’s wage) and lower for higher levels of income.

7. Historical background • The differences in redistribution by government between the U.S. and Europe have been existent since 19th c.

8. Income support policies and safety nets • Comparison of specific programs for income support between U.S., Germany and Sweden. • We look at a representative household of 4 in each country with parents earning average production worker wage. • Programs: • Family benefits • Healthcare • Sickness benefits • Disability • Poverty relief programs • Labor market policies • How do these programs benefit this household in times of hardship? • Result: The U.S. provides less support in all these programs compared with Germany and Sweden.

9. How did it work? • Consequences of these differences in welfare programs: • Countries with large governments and transfer programs have lower post-tax inequality • Inequality in the U.S. is due to the bottom 10% being particularly poor rather than the top 10% being particulary wealthy. • The bottom 10% in Europe is better off than in the U.S.

10. A different focus • This paper focuses on the redistributive policy of the government rather than on the size of the government. • We are looking at welfare as a schedule of transfers with a single parameter: tax rate on income t. • Each individual receives net transfers: t(δYave- Y) where δ < 1 represents waste involved in redistribution.

11. Parameters • α: Altruism, willingness to help the poor • Θ: Income mobility • λ: Political power • Altruism per person = αY0 • Political power per person = λY0 • Using this model, the authors derive 3 propositions.

12. Proposition 1 • Factors that reduce α (altruism) will reduce redistribution. • Factors that increase λ (political power for the poor) will increase redistribution. • Conclusion: • Since the U.S. has lower redistribution: • The poor must have less political representation (lower λ) than in Europe due to the nature of U.S. political institutions. • There is less altruism in the U.S. (lower α), due to higher racial heterogeneity in the U.S. and association of poverty with laziness.

13. Proposition 2 • δ > Ymed/Yave • When Θ = 0 (no income mobility), redistribution will occur if income distribution is highly skewed and losses from redistribution are low.

14. Proposition 3 • More income mobility will lead to less redistribution if expected income shocks move the median voter up the income distribution.

15. Economic explanations Using these propositions, we can try to explain differences between American and European welfare programs: • Pre-tax income inequality • According to Prop 2 and 3, since Europe has higher redistribution, we would expect higher pre-tax income inequality in Europe. • However the U.S. has much higher pre-tax income inequality than Europe: 38.5 vs. 29.6 Gini coefficient. • This explanation fails. • Possible reasons: • The poor have less political voice in countries with high income inequality. • The pre-tax inequality index used may not be accurate measure and overestimates U.S. inequality.

16. Economic explanations • Costs of redistribution • According to Prop 2, since Europe has a higher redistribution it must mean that it has a less distortionary form of taxation. • However, there is no evidence that Europeans have more efficient taxes • In fact, based on tax evasion, U.S. appears more efficient. • Explanation fails. • Possible reasons for this contradiction : • Higher distrust of the government’s involvement in the economy in the U.S.: 26% of Americans say they favor more government ownership against 48% of Europeans.

17. Economic explanations • Social mobility and income uncertainty • According to Prop. 3, high income mobility in the U.S. can explain low redistribution. • Therefore, the U.S. median voter must be more likely than the European median voter to become rich. • However, evidence shows that there are no strong differences between the U.S. and Europe in mobility for the middle classes. • Potential reason: Americans believe that they live in a country with more upward mobility, which causes voter aversion for redistribution. • 71% of Americans believe the poor can escape from poverty vs. 40% of Europeans.

18. Economic explanations • Income uncertainty: Openness • Open economies are more “unstable” because they are more subject to external shocks. • More open economies will have more redistribution to insure against greater risks. • In this case, since Europe has larger transfers, we expect it to be more volatile than the U.S. • However, the evidence shows that the U.S. has more variability than Europe. • The U.S. is large and less open economy than any European country and yet it has higher variability. • This shows different objectives to the size of the government and cyclical variability.

19. Political Aspects of The American Welfare State

20. The Electoral System • Created to support districts with specific economic interests and smaller populations. • Urban v. Rural • Supports Constitutional ideal that tethered democracy protects minority rights.

21. Electoral System - Effects • Federal and State Government spending more geographically focused. • Strong support for two-party system, diminishing voice to third party interests. • Lack of proportional representation results in lower transfer payments to poorer citizens. • System resistant to change and often cause of frustration (See Al Gore).

23. US “Democracy” • Constitution protects sanctity of property over absolute democracy, and supports business interests. • Courts more powerful than their European counterparts. • US favors contracting private institutions in what would be considered public works.

24. Geographic Idiosyncrasies • Population spread over large area diminishes communication and collaboration between malcontent citizens. • Abundance of space further allows the rich to distance themselves from the poor. • Stability of government: less at risk to riot/revolt.

25. Two Party System • Prevents growth of alternate political ideologies, particularly socialism which has larger impact in European politics. • Forces voters to meld their interests toward one party which may not best suit them. This further increases voter apathy, particularly that of the poor. • Coupled with electoral system, builds significant barriers to entry of third parties (See Ross Perot, Ralph Nader, Lyndon LaRouche, etc.) • e.g. Reform Party, Green Party, Libertarian Party all unable to muster enough votes to gain seats in any major political office. • Conversely, in Europe representation is more centralized, giving the socialist and other smaller parties a voice in state politics.

26. Federalist Society and the Rest • United States emphasizes protection of all against oppression from the democratic majority. • Union of states with modest local sovereignty dilutes the representation of states with poorer population. • Collection of immigrants hinders class distinctions found in Europe. • Belief in “equal opportunity, not equal outcome.” (lead into behavioral aspects)

27. Behavioral explanations for the distinct American Welfare State

28. Behavioral Explanations Behavioral Explanations are based on: 1. Racial Issues 2. Altruism

29. Groups • Generalization: • Americans think of poor as members of a different societal “group” • Europeans think of the poor as members of their own “group” • People more likely to sympathize or help members of their same group.

30. Groups and Race Hypothesis If the poor in the US are more geographically or socially isolated, this might create a situation where non-poor Americans have little sympathy for the poor.

31. Racial Evidence (Luttmer, 2001) • Support for Welfare is higher among people who live near to many welfare recipients of the same race • So geographic isolation may be a cause of “separate-group” thinking. • Support for welfare is lower among people who live near to welfare recipients of another race • So people have a hostile reaction to recipients of another race, but sympathetic reaction to recipients of the same race.

32. Second Hypothesis • The US is more racially diverse than Europe and American minorities are disproportionately represented among the poor • If people dislike transferring money to people of a different race, then this could possibly explain the US-Europe redistribution gap.

33. Testing and Results • Focus on question: “Do you think that the state should spend more on welfare?” • Responses: Spend more, less, or same amount *Responses depend upon the level of welfare at the time. • Results: 1. High school dropouts, and people with graduate degrees support more welfare spending than high school graduates. 2. People in big cities favor welfare 3. African-Americans are much more likely to be pro-welfare than whites.

35. Regressions 1. More diverse states should be less likely to support welfare. -> Some truth, but not statistically significant 2. Whites who believe that blacks are lazy are less likely to support welfare ->Some effect, but weak 3. Is there a correlation between knowing blacks and support for welfare • Question “ Have you had a black person for dinner in your home in the last few years?” Those who have are more likely to support increased welfare.

36. Racial Diversity and Size of Welfare Payments • Theory: States with more African American residents will have less generous programs • Results: Strong negative relationship between generosity of the program and the share of the state that is black • Blacks are a minority and disproportionately represented among the poor. • States may receive less income…leading to smaller payments

38. Reciprocal Altruism • Europe: Poor thought to be unfortunate, but not personally responsible for their condition. Unfortunate but deserving. • US: Poor are thought to be lazy, and can work out of poverty.

39. Possible Causes of Differences • U.S. 1.Connection between effort and income • Extreme: Bill Gates vs. the Queen 2.Importance of hard work • Puritan roots – Laziness is a sin • Working for the sake of working when money isn’t a factor

40. More Possible Causes • US more comfortable with punishing criminals than Europe so Americans might be happier with the idea of punishing welfare recipients by cutting back on welfare • Evidence: • Americans support the death penalty: • Americans spend more on defense • Feelings stem from the frontier and need to protect good • World Wars and experience have lessened vengeful punishment in Europe • Welfare recipients lazy or isolated

41. Evidence #1. Occupational mobility negatively associated with support for welfare - Those who have risen from poverty more likely to think others can do so as well. #2. Most religious Americans are more likely to oppose increased spending on welfare #3.Strong relationship between support for capital punishment and opposing welfare in the US

43. Conclusions for Behavioral Evidence • Race is critically important to understanding US-European differences • Americans generally think that income comes from effort, and that welfare recipients are not pulling their weight.

44. Summation and Discussion Be Gentle

45. Their Summary Quotation Do you buy it?

46. Economic Questions • What other economic factors do you think the authors failed to take into account in determining the reason for the differences between European and welfare state? • How do you think globalization will affect this U.S.-Europe gap in welfare provision?

47. Political QuestionsThe streets are paved with goldto conduct the heat out of the vagrants who sleep on them. • The electoral college – is it antiquated? And if it was created in the interest of protecting minorities why does it not increase benefits to the needy, particularly the African-American minority? • The author argues the nature of the constitution and the power of the courts work against transfer payments, yet by their design they should be helping the poor (particularly the black) minority overcome the vote against benefits; why do they fail? • Geography: do you believe the spread of population over a larger land mass is responsible for the lack of major uprisings (excluding that fight in the 1800’s)? Has this separation allowed the wealthy and powerful to ignore and distance themselves from plight of the poor?

48. Behavioral QuestionsAnd the river card is . . . . the race card. • Does the data convince you of race related voting, why or why not? • Are the poor lazy or unlucky? Where does this attitude come from, the author points to history and Protestants (finally)? Should this mentality be changed? • Are free riding and moral hazard reason enough to mortgage the future of children from poor households?

49. + The Solution.“A modest proposal” + = UTOPIA +