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

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


1
Why doesnt 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.

4
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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 (lt 50 of average workers
    wage) and lower for higher levels of income.

6
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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(dYave-
    Y) where d lt 1 represents waste involved in
    redistribution.

11
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.

12
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.

13
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.

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 governments 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).

22
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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.

34
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35
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.

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 incomeleading to smaller
    payments

37
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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 isnt
    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

42
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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 1800s)? 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
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