1 welfare, taxes, and…growth? the scandinavian puzzle
TRANSCRIPT
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Welfare, Taxes, and…
Growth?The Scandinavian
Puzzle
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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
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Poverty Rates
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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?
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II. Scandinavia: The Benefits
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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
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A. Welfare Benefits
Goal = reduce risk through mutual obligation
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1. Health Care
Benefit SWE NOR FIN DEN ICE
Health Care
(% paid by govt)85 86 75 82 83
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1. Health Care
Benefit SWE NOR FIN DEN ICE UK US
Health Care
(% paid by govt)85 86 75 82 83 82 44
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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)
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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)
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High Usage of Day Care
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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)
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5. Retirement: Poverty Rates
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6. Summary: Scandinavian Welfare Programs
a. 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.
b. 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
c. Effect = reduce risk, spread out income over life
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B. Employment Policy
1. Goal = Full Employment. Why is this important?a. Reduces welfare costs
b. Better for workers (security)
c. Helps preserve union solidarity (83% in Sweden!)
2. Mechanismsa. Corporatist bargaining: National unions negotiate with
national employer organizations and the government
b. Job training programs: Also make-work jobs
c. “Stockpile” policy
d. Devaluation (until recently): Make exports cheaper
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C. Income Redistribution?
1. Why is an “incomes policy” needed?a. Inflation: Full employment and strong
unions high prices, high wages. Devaluation makes worse.
b. Promote solidarity: Equality within groups means all rise or fall together
2. Redistribution has fallen from favor: Social Democrats traded progressivity for an end to major loopholes ( serious economic shock)
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III. Scandinavia: The Costs
A. Money: What costs the most? (as % of GDP)1. Retirement and Disability (10%-16%)
2. Health Care and Sick Pay (6% to 9%)
3. Family benefits and services (2% to 4%)
4. Unemployment benefits and training (1% to 3%)
B. Who pays? Taxes in Scandinavia1. 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
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2. Most taxes are high
Wealth Tax (No US equivalent)
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3. Surprise: “Socialism” and Corporate Taxes
a. Old system: High corporate tax rates but reinvestment exemption
b. New system: Low corporate tax rates
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IV. Can social-democratic welfare work?
A. Conventional wisdom: High taxes and social welfare spending reduce growth
1. Taxes reduce incentives to work harder for more money
2. Social welfare spending reduces incentives to work
3. Rent-seeking: If most money passes through the government, then why bother competing in the marketplace? Spend resources on politics, not productivity!
B. Puzzle: Social welfare spending and taxes aren’t correlated with growth!
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Performance: Growth
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IV. Can social-democratic welfare work?
A. Conventional wisdom: High taxes and social welfare spending reduce growth
1. Taxes reduce incentives to work harder for more money
2. Social welfare spending reduces incentives to work
3. Rent-seeking: If most money passes through the government, then why bother competing in the marketplace? Spend resources on politics, not productivity!
B. Puzzle: Social welfare spending and taxes aren’t correlated with growth!
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C. How might welfare spending promote growth?
1. Gender and productivitya. Without aid to families, women leave workforce to take
care of children (large opportunity costs to home care)
b. Without “gaps” in employment, employers invest women’s skills more productive workers
2. Health carea. Universal insurance preventive care lower total
expenditures (US spends twice as much as Sweden, has worse health!)
b. Increases labor mobility, since workers don’t fear losing insurance when changing jobs
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D. The Unemployment Challenge
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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