Welfare, Taxes, and…Growth?

1. Welfare, Taxes, and…Growth? The Scandinavian Puzzle

2. I. Models of the Welfare State A. Simple Typology of Welfare States

3. Poverty Rates

4. B. The Scandinavian Puzzle • Why work when benefits are universal? • How can an economy grow when more than half of wealth generated is paid to the government? • Can social democracy survive globalization?

5. II. Scandinavia: The Benefits

6. Scandinavian Welfare at Work • Birth: Parental leave, near-free care • Free doctors’ visits, day care, schooling • Free college or university • Young worker hiring programs • High starting wages (but heavy taxes) • Meaningful role at work • Unemployed? Think of it as an opportunity! • Parents? Here’s a monthly check. • Sick or disabled? We’ve got you covered • Pensions, social programs, and a free funeral

7. A. Welfare Benefits • Goal = reduce risk through mutual obligation

8. 1. Health Care

9. 1. Health Care

10. 2. Unemployment Benefits * Single parent with two children, first month of benefits (1999 data)

11. 3. Parental Leave and Child Care * Single parent with two children, first month of benefits (1999 data)

12. High Usage of Day Care

13. 4. Income subsidies for families * Single parent with two children, first month of benefits (1999 data)

14. 5. Retirement: Poverty Rates

15. 6. Summary: Scandinavian Welfare Programs • Many other programs: retirement and pension systems, home or residential care for elderly, disability coverage, sick pay, survivor benefits, job training, housing subsidies, refugee care, etc. • Major differences between Scandinavia and other European countries: • Comprehensiveness – Tend to cover large % or all of population (everyone is “on welfare”) • Generosity – Actual benefits are quite sizeable • Effect = reduce risk, spread out income over life

16. B. Employment Policy • Goal = Full Employment. Why is this important? • Reduces welfare costs • Better for workers (security) • Helps preserve union solidarity (83% in Sweden!) • Mechanisms • Corporatist bargaining: National unions negotiate with national employer organizations and the government • Job training programs: Also make-work jobs • “Stockpile” policy • Devaluation (until recently): Make exports cheaper

17. C. Income Redistribution? • Why is an “incomes policy” needed? • Inflation: Full employment and strong unions  high prices, high wages. Devaluation makes worse. • Promote solidarity: Equality within groups means all rise or fall together • Redistribution has fallen from favor: Social Democrats traded progressivity for an end to major loopholes ( serious economic shock)

18. III. Scandinavia: The Costs • Money: What costs the most? (as % of GDP) • Retirement and Disability (10%-16%) • Health Care and Sick Pay (6% to 9%) • Family benefits and services (2% to 4%) • Unemployment benefits and training (1% to 3%) • Who pays? Taxes in Scandinavia • What is taxed? EVERYTHING • Example: “Churning.” Same households GET money (benefits) and PAY money (taxes). Rather inefficient – and 2-3 times higher in Scandinavia than US

19. 2. Most taxes are high • Wealth Tax (No US equivalent) 

24. 3. Surprise: “Socialism” and Corporate Taxes • Old system: High corporate tax rates but reinvestment exemption • New system: Low corporate tax rates

27. IV. Can social-democratic welfare work? • Conventional wisdom: High taxes and social welfare spending reduce growth • Taxes reduce incentives to work harder for more money • Social welfare spending reduces incentives to work • Rent-seeking: If most money passes through the government, then why bother competing in the marketplace? Spend resources on politics, not productivity! • Puzzle: Social welfare spending and taxes aren’t correlated with growth!

28. Performance: Growth

29. IV. Can social-democratic welfare work? • Conventional wisdom: High taxes and social welfare spending reduce growth • Taxes reduce incentives to work harder for more money • Social welfare spending reduces incentives to work • Rent-seeking: If most money passes through the government, then why bother competing in the marketplace? Spend resources on politics, not productivity! • Puzzle: Social welfare spending and taxes aren’t correlated with growth!

30. C. How might welfare spending promote growth? • Gender and productivity • Without aid to families, women leave workforce to take care of children (large opportunity costs to home care) • Without “gaps” in employment, employers invest women’s skills  more productive workers • Health care • Universal insurance  preventive care  lower total expenditures (US spends twice as much as Sweden, has worse health!) • Increases labor mobility, since workers don’t fear losing insurance when changing jobs

31. D. The Unemployment Challenge

33. E. Conclusions • Limited ability to maneuver: Scandinavian vulnerability  Social risk-sharing • Social democracy ≠ Socialism: Scandinavian model depends on capitalism! • Naïve assumptions about “government intervention” fail to account for society-economy interactions