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Archive for the ‘welfare policy’ Category

Last week we received the “good news” about the economy. Unsurprisingly, I was a bit skeptical (here). While jobs are being created—321,000 in November alone—long-term unemployment and workplace participation rates remain abysmal. For those who would like to celebrate the recovery, I recommend Binyamin Appelbaum piece on “The Vanishing Male Worker” (NYT). As Appelbaum notes:

Working, in America, is in decline. The share of prime-age men — those 25 to 54 years old — who are not working has more than tripled since the late 1960s, to 16 percent. More recently, since the turn of the century, the share of women without paying jobs has been rising, too. The United States, which had one of the highest employment rates among developed nations as recently as 2000, has fallen toward the bottom of the list.

And

Many men, in particular, have decided that low-wage work will not improve their lives, in part because deep changes in American society have made it easier for them to live without working. These changes include the availability of federal disability benefits; the decline of marriage, which means fewer men provide for children; and the rise of the Internet, which has reduced the isolation of unemployment.

Welcome to the “New Normal.”

(more…)

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Many people are concerned about income and wealth inequality. I am not concerned about economic inequality as such; I care about absolute poverty (how many people live in misery because of wretched physical conditions), and I care about a broad distribution of opportunity (everyone’s having a “fair shot” at economic success), but I don’t see it as a problem if someone earns vastly more money than someone else, just as I don’t see it as a problem that poorer people tend to have more leisure time than richer people. Only those consumed with envy could see economic (or leisure!) inequality simpliciter as a problem, right?

But I actually don’t think people on the left care about economic inequality or leisure inequality or inequality of looks or appealing personalities or anything else of value, in themselves, either. They care about economic inequality because they think it has negative consequences, particularly for political inequality, and because they think it is a symptom of some deeper problem. I disagree on the first count and agree on the second. Let me explain.

Does Inequality Have Bad Consequences?

The fear of the left is that in an unequal U.S., the rich will “buy” politicians to do what they want. As a result, we will get more pollution and more redistribution that flows from the middle class to the rich. The so-called “oligarchy study” (the term “oligarchy” never actually appears in the paper) went viral recently, showing that the preferences of wealthy Americans (and organized interest groups) matter for policy change in the U.S., while, controlling for the preferences of wealthy Americans, the preferences of other Americans make little difference. But wealthy Americans and average Americans actually have similar views on most issues, and where they diverge, the wealthy often have clearly superior views: less likely to loathe immigrants and gays, to fear free trade, to oppose marijuana legalization, and to be narrowly ideological. In addition, the wealthy tend to be more skeptical of taxation and welfare programs than the non-wealthy — your views on whether that difference is problematic may vary according to your views of the welfare state.

Still, let’s assume that the influence of the wealthy on U.S. politics is baleful; does that mean that growing economic inequality would reinforce that baleful influence? It remains unproven whether more inequality will mean that the rich pay more in campaign contributions and get more out in policy terms. The most likely explanation for why the rich are influential is simply that they have similar levels of education and status to politicians and move in the same social circles and care about the same sorts of things. Studies looking at how campaign contributions “buy access” to legislators generally come up with very weak results. To take just one policy example, federal air pollution regulations have always ratcheted up, and air quality in the U.S. is vastly improved relative to 50 years ago, in part due to regulation and in part to technological changes. Rising inequality certainly doesn’t seem to explain these trends.

A bigger problem with the U.S. political economy (more…)

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In my last post, I said “total net social spending” included net public spending and mandatory private social spending. In fact, it includes voluntary private social expenditures as well. The U.S. has by far the highest voluntary social expenditures in the OECD, so if you subtract those out, the U.S. net public and mandatory private social spending figure is no longer second in the OECD (and thus almost certainly the world, as poorer countries have smaller welfare states), only just about average.

But what does voluntary private social spending include? One big component is employer-provided health insurance. It seems to me that should be included in the size of the U.S. welfare state, even if it is not directly provided by the government, because the government subsidizes it (through the tax code), and because that spending is a substitute for government spending in other countries. If we exclude it for the U.S., we are not comparing like with like, since several other countries provide health insurance mainly or exclusively through the state. Put another way, if the U.S. provides so much social welfare privately, the need for the government to provide it is less. The U.S. welfare state is average-sized in spite of the fact that the private welfare system is enormous.

Now, does that mean the U.S. spends vastly more on the poor than most other OECD countries? Not necessarily. The majority of social spending in the U.S. does not go to the poor – but neither does it anywhere else. The elderly soak up a huge portion of social spending in almost all advanced industrial societies. Indeed, one way to measure how redistributive the U.S. welfare state is is to subtract the “post tax and transfer” Gini ratio from the “pre tax and transfer” Gini ratio. Of course, this is a static measure that does not take into account possibilities for mobility from one income level to another, and the extent to which “poverty traps” can contribute to lost mobility. Still, it’s a suggestive measure.

Using data from World Development Indicators Standardized World Income Inequality Database, I find that the tax and transfer system in the U.S. shaves only 0.08 points off the Gini ratio, a standard measure of income inequality (“1″ means most unequal, “0” perfectly equal). In most other countries, the number is much higher. In Sweden, it is 0.20. In Italy and Germany, is 0.21. Only Switzerland showed (slightly) less progressive redistribution.

So while the U.S. has one of the very largest welfare states in the rich world, it also has one of the least progressive welfare states in the rich world. By the standards of anti-inequality preferences, that’s a terrible record of inefficiency.

Updated with correct source for my data.

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The United States has long had a larger welfare state than most other Western democracies. Surprised? You may not be aware of the new research on “net social spending.”

Net social spending includes not just government expenditures on social programs, but also tax credits for social purposes and, as a debit, government taxation of social benefits. It turns out that many of the so-called “generous” European welfare states tax social benefits at a high rate. Meanwhile, the United States uses the tax code to help the poor, through the Earned Income Tax Credit. We should also include mandatory private social payments, which are not directly paid by the government.

Using the OECD data, I have plotted total net social expenditure over time for 26 rich countries (click the image to zoom in).

the united states has a bigger welfare state than most other democracies

As of 2009, the United States had the second largest welfare state in the world, at 28.8% of GDP. Only France, at 32.1%, had a bigger one. Moreover, while all advanced industrial societies show a growth in the welfare state from 2005 to 2009, due to economic conditions, the U.S. also had a big runup in welfare spending between 1999 and 2007. In 1995, U.S. net social spending stood at just 22.7% of GDP, although even that figure was higher than those for Denmark, Canada, Italy, Norway, Australia, Ireland, and South Korea. So far as we have data, the U.S. has always had a larger-than-average welfare state.

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In the 1986 State of the Union address, Ronald Reagan proclaimed:

“My friends, some years ago, the Federal Government declared war on poverty, and poverty won. …Federal welfare programs have created a massive social problem. With the best of intentions, government created a poverty trap that wreaks havoc on the very support system the poor need most to lift themselves out of poverty: the family. Dependency has become the one enduring heirloom, passed from one generation to the next, of too many fragmented families.”

Many of  welfare reform experiments were initiated at the state and federal level during Reagan’s presidency, and by 1996, Aid to Families with Dependent Children was eliminated and replaced by Temporary Assistance for Needy Families. The number of people on welfare fell dramatically (no surprise, given the time limits) and given the strong economy, the percentage of the population in poverty fell from 13.7 percent (1996) to 11.3 percent (2000). From that point on, the percentage of the population below the poverty rate continued to increase, reaching 12.7 percent in 2004 and exceeding 15.1 percent by 2010. It currently hovers around 16 percent. For those interested in the trendline on poverty, National Journal has a useful infographic on the “War on Poverty 50 Years Later.” A wealth of data can be found in the Census Bureau’s Income, Poverty, and Health Insurance Coverage in the United States. (more…)

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Ezra Klein (Wonkblog) has a brief interview with Georgetown’s David Super on how poorly programs for the poor have functioned (and how good HealthCare.gov appears by comparison).  The alternatives discussed include outsourcing to private contractors (bad) and implicitly providing more resources (good).

One alternative that is not discussed:  providing benefits through a fractional negative income tax (NIT). If one assumes that the government has some responsibility for providing for the poor, the NIT has a number of advantages. It minimizes administrative costs and complexity, government paternalism, and the disincentives to work. Milton Friedman—credited with first bringing the NIT into the policy debates—does an excellent job of explaining the basic features of the proposal in a 1968 episode of Firing Line.

http://www.youtube.com/watch?v=xtpgkX588nM

For those interested in placing Friedman’s fractional negative income tax proposal in the larger context of social policy, a useful resource is a recent intellectual biography of Milton Friedman by William Ruger. Those unacquainted with the negative income tax—and some of the difficulties that are intrinsic in the proposal—might enjoy the overview by Jodie Allen at the Concise Encyclopedia of Economics.

Given that President Obama is emphasizing the issue of income inequality, both parties seem convinced that we need significant tax reform, and there is a fair amount of experience with the Earned Income Tax Credit, perhaps there will be a window of opportunity to revisit the NIT.

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Roger Koppl argues this week at ThinkMarkets that “Income inequality matters.” He thinks it matters so much that he says it twice. He believes “Austrian,” pro-market, economic liberals should be speaking up more on this “central issue.” I think Koppl could not be more wrong. The issue deserves all the inattention we can muster for it.

The problem I think is not Koppl’s motives. He rightly says that we should “watch out for ways the state can be used to create unjust privileges for some at the expense of others.” He is certainly right about that. He argues that unjust state policies may be skewing market results in such a way as to increase inequality. He may be right about that. But he is wrong in suggesting that we ought therefore to be paying attention to income inequality. We ought therefore to be paying attention to those policies. Whether they produce greater inequality is neither here nor there.

Koppl gives four examples: (i) policies that privatize profits and socialize losses, (ii) bad regulation, (iii) collapse of the rule of law, and (iv) public schools. I can certainly join Koppl in a hearty wish that we not only attend to these unwarranted policies, programs, and tendencies, but that we do so with a degree of urgency prompted, in part, by their effects on the poorest and most vulnerable among us. But talking about inequality is precisely a distraction from doing so.

In a great paper of a few years ago, Harry Frankfurt argued that “Egalitarianism is harmful because it tends to distract those who are beguiled by it from their real interests.”* Frankfurt thought that focusing on equality was actually pernicious because it distracted us from attention to real harms, of which inequality is at most an indicator. And he was right. It may well be that, for example, the evisceration of the rule of law results in greater income inequality. But it also might not. Whether or not it does so, however, it is unjust, and it deserves our attention. Similarly for the increase in moral hazard and regulation, to say nothing of the deplorable system of public education. All of these need attention, and one prime reason they do so is because of their effects on those least capable of circumventing their evils. If we care about the poor, what we ought to care about is bad policy, not indicators that may or may not have anything to do with policies that are making people worse off. As long as we are worrying about income inequality, we are worrying about the wrong thing.

* In “The Moral Irrelevance of Equality,” Public Affairs Quarterly, April 2000.

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