Welfare, Taxes, and

1
Welfare, Taxes, andGrowth?

• The Scandinavian Puzzle

2
I. Models of the Welfare State

• A. Simple Typology of Welfare States

Type Primary Mechanism of Welfare Incentives to Get Off Welfare Examples
Liberal Means-Tested Benefits Low Level of Service US, Canada, UK (Before WW II)
Corporatist Social Insurance Reward for Work Years Germany
Social Democratic Universal Benefits Few Sweden, Denmark
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? Heres a monthly check.
• Sick or disabled? Weve got you covered
• Pensions, social programs, and a free funeral

7
A. Welfare Benefits

• Goal reduce risk through mutual obligation

8
1. Health Care
Benefit SWE NOR FIN DEN ICE
Health Care ( paid by govt) 85 86 75 82 83
9
1. Health Care
Benefit SWE NOR FIN DEN ICE UK US
Health Care ( paid by govt) 85 86 75 82 83 82 44
10
2. Unemployment Benefits
Benefit SWE NOR FIN DEN ICE UK US
Health Care ( paid by govt) 85 86 75 82 83 82 44
Unemployment ( income replaced) 85 83 87 78 68 49 58
Single parent with two children, first month of
benefits (1999 data)
11
3. Parental Leave and Child Care
Benefit SWE NOR FIN DEN ICE UK US
Health Care ( paid by govt) 85 86 75 82 83 82 44
Unemployment ( income replaced) 85 83 87 78 68 49 58
Maternity Leave (Weeks/Payment) 78 80 52 80 18 65 18 90 26 80 6/18 90 12 0
Child Care ( costs covered) 87 n/a 90 70 n/a (10) (24)
Single parent with two children, first month of
benefits (1999 data)
12
High Usage of Day Care
13
4. Income subsidies for families
Benefit SWE NOR FIN DEN ICE UK US
Health Care ( paid by govt) 85 86 75 82 83 82 44
Unemployment ( income replaced) 85 83 87 78 68 49 58
Maternity Leave (Weeks/Payment) 78 80 52 80 18 65 18 90 26 80 6/18 90 12 0
Child Care ( costs covered) 87 n/a 90 70 n/a (10) (24)
Family Allowance? (monthly check) univ univ univ univ inc univ tax
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) ?

20
(No Transcript)
21
(No Transcript)
22
(No Transcript)
23
(No Transcript)
24
3. Surprise Socialism and Corporate Taxes

1. Old system High corporate tax rates but
   reinvestment exemption
2. New system Low corporate tax rates

25
(No Transcript)
26
(No Transcript)
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 arent
  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 arent
  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
  womens 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 dont
  fear losing insurance when changing jobs

31
D. The Unemployment Challenge
32
(No Transcript)
33
E. Conclusions

1. Limited ability to maneuver Scandinavian
   vulnerability ? Social risk-sharing
2. Social democracy ? Socialism Scandinavian model
   depends on capitalism!
3. Naïve assumptions about government intervention
   fail to account for society-economy interactions