Why doesnt the U'S' have a Europeanstyle welfare state

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Why doesnt the U.S. have a European-style
welfare state?

• Alberto Alesina, Edward Glaeser and Bruce
  Sacerdote

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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.

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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.

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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 (lt 50 of average workers
  wage) and lower for higher levels of income.

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Historical background

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

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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.

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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.

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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(dYave-
  Y) where d lt 1 represents waste involved in
  redistribution.

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Parameters

• a Altruism, willingness to help the poor
• T Income mobility
• ? Political power
• Altruism per person aY0
• Political power per person ?Y0
• Using this model, the authors derive 3
  propositions.

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Proposition 1

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

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Proposition 2

• d gt Ymed/Yave
• When T 0 (no income mobility), redistribution
  will occur if income distribution is highly
  skewed and losses from redistribution are low.

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Proposition 3

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

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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.

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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 governments involvement
  in the economy in the U.S. 26 of Americans say
  they favor more government ownership against 48
  of Europeans.

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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.

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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.

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Political Aspects of The American Welfare State
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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.

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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).

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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.

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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.

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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.

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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)

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Behavioral explanations for the distinct American
Welfare State
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Behavioral Explanations

• Behavioral Explanations are based on
• 1. Racial Issues
• 2. Altruism

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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.

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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.

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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.

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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.

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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.

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Regressions

• 1. More diverse states should be less likely to
  support welfare.
• -gt Some truth, but not statistically
  significant
• 2. Whites who believe that blacks are lazy are
  less likely to support welfare
• -gtSome 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.

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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 incomeleading to smaller
  payments

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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.

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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 isnt
  a factor

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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

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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

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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.

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Summation and Discussion

• Be Gentle

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Their Summary
Quotation
Do you buy it?
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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?

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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 1800s)? Has this separation
  allowed the wealthy and powerful to ignore and
  distance themselves from plight of the poor?

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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?

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The Solution. A modest proposal

• UTOPIA