HIAS-E-30

Real and Imagined Threats to the Welfare StatePeter H. Lindert

University of California - Davis and NBER

June 2016

Hitotsubashi Institute for Advanced Study, Hitotsubashi University2-1, Naka, Kunitachi, Tokyo 186-8601, Japan

tel:+81 42 580 8604 http://hias.ad.hit-u.ac.jp/

HIAS discussion papers can be downloaded without charge from:http://hdl.handle.net/10086/27202

https://ideas.repec.org/s/hit/hiasdp.html

All rights reserved.

1

“RealandImaginedThreatstotheWelfareState”1

PeterH.Lindert

UniversityofCalifornia–DavisandNBER

ABSTRACT

Thetraditionally,andwrongly,imaginedvulnerabilitiesofthewelfarestate

areeconomic.Thetruethreatsaredemographicandpolitical.

Themostfrequentlyimaginedthreatisthatthewelfarestatepackage

reducesthelevelandgrowthofGDP.Itdoesnot,accordingtobroadhistorical

patternsandnon-experimentalpaneleconometrics.Large-budgetwelfarestates

achieveahostofsocialimprovementswithoutanyclearlossofGDP.Thepaper

elaboratesonhowthis“freelunch”isgainedinpractice.

Otherthreatstothewelfarestatearemorereal,however.Twodemographic-

politicalcloudsloomonthehorizoninthetwenty-firstcentury,thoughneither

cloudrevealsaneconomicflawspecifictothewelfarestate.Onecloudistheriseof

anti-immigrantbacklash.Ifcombinedwithheavyrefugeeinflows,thiscoulddestroy

futurepublicsupportforuniversalistwelfarestateprograms,eventhoughthey

seemtoremaineconomicallysound.Theother,andmorecertainlyrain-bearing,

cloudisthatpopulationagingposesaseriousproblemforfinancingoldage,either

publiclyorprivately.Pensiondeficitsthreatenstocrowdoutmoreproductivesocial

spending.Onlyafewcountrieshavefacedthisissueverywell.

JELcodes:H10,H50,N32,N34

1Thisworkingpaperdrawsinpartontwopreviouspresentations.OneisaLevine

FamilyLectureon“CantheWelfareStateSurviveinaGlobalEconomy?”givenatUC

Davis.TheotherisachapterintheUniversityofCaliforniaPressbookonHowBigShouldGovernmentBe?(Lindert2016).

2

I.Thebigpicture

A.AdamSmithwasontherighttrack

AdamSmithwrotehisfamousdefenseofthefreemarketinanageinwhich

governmentswerestilltinybytoday’sstandards,andtherewasnothingevenclose

toawelfarestate.Yethedevotedconsiderablethoughttotheproperroleof

government.Thosewhocitehimastheultimatechampionoftinygovernmenthave

overlooked,knowinglyornot,muchofwhathewroteonthis.Theymightwantto

givefreshattentiontopassageslikethisonefromthe1766editionofhisLectureson

Jurisprudence--

‘Wemayobservethatthegovernmentinacivilizedcountryismuchmore

expensivethaninabarbarousone;andwhenwesaythatonegovernmentis

moreexpensivethananother,itisthesameasifwesaidthattheonecountry

isfartheradvancedinimprovementthananother.Tosaythatthe

governmentisexpensiveandthepeoplenotoppressedistosaythatthe

peoplearerich.Therearemanyexpencesnecessaryinacivilizedcountryfor

whichthereisnooccasioninonethatisbarbarous.”2

Inthat1766lecture,thenecessaryexpenseshehadinmindwerewhatwewould

callinfrastructure,bothcivilianandmilitary.Withintenyears,however,hisWealth

ofNationshadaddedacasefortax-fundedprimaryeducation.3Hiscaserestedona

basicpointechoedintoday’seconomics:Ifindividualsfailedtocaptureallthesocial

2Smith(1766,pp.530-531).IamindebtedtoBarryWeingastforbringthispassage

tomyattention.

3Smith(1776,130-134,420-434,443).Hewascertainlyprescientontaxpayer

financingofthebulkofprimaryeducation.Everyeducationallyleadingcountry

followedthesameformulaoflaunchingitsriseofmassschoolingprimarilywith

localtaxes.

ThomasJeffersonagreedwithAdamSmithabouttheneedfortaxesto

supportpublicschooling(Butts(1978,26-28).SodidMiltonFriedman,inhis

CapitalismandFreedom(1962).

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gainsfromprovidingthesethings,thenindividualscouldnotberelieduponto

provideenoughofthem:

[Anessential]dutyofthesovereignorcommonwealthisthatoferectingand

maintainingthosepublickinstitutionsandthosepublickworks,which,

thoughtheymaybeinthehighestdegreeadvantageoustoagreatsociety,are,

however,ofsuchanaturethatthe[social]profitcouldneverrepaythe

expencetoanyindividualorsmallnumberofindividuals,andwhichit,

therefore,cannotbeexpectedthatanyindividualorsmallnumberof

individualsshoulderectormaintain….

Whentheinstitutionsorpublickworkswhicharebeneficialtothe

wholesociety,eithercannotbemaintainedaltogether,orarenotmaintained

altogetherbythecontributionofsuchmembersofthesocietyasaremost

immediatelybenefitedbythem,thedeficiencymustinmostcasesbemade

upbythegeneralcontributionofthewholesociety.4

ThisisnottosaythatSmithlikedtaxesandbiggovernmentfortheirown

sake.Onthecontrary,hesawwasteinmuchofthegovernmentspendingofhisday,

especiallyinthesubsidytounproductivehighofficeshandedtopoliticalfavorites.

Herailedatlengthagainsttariffsonimportedgoods,suchasEngland’sinfamous

CornLaws.Yetheclearlyunderstoodthatexternalbenefitscouldjustifytax-based

socialexpenditure.

Remarkably,governmentexpensehasrisenfaraboveanythingthathadbeen

experiencedinhumanhistoryuptoSmith’slifetime.And,asheperceivedeventhen,

theplaceswiththehighestgovernmentspendingwereexactlythose“civilized

countries”thatwere“fartheradvancedinimprovement”.Intheensuingcenturies,

theenormousexpansionofgovernmenthasbeendominatedbyciviliansocial

spending,thekindhebarelytouchedonwhenmakinghiscasefortax-basedfunding

ofuniversalprimaryeducation.Therisingsocialexpendituresaredefendedas

havingthesamebeyond-privatebenefitsastheonesSmithenvisionedfor“those

4Smith(1993(1776),413,443).

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publickinstitutionsandthosepublickworks”.Yettheriseintax-basedsocial

expendituresremainscontroversial,inaworldofclashingself-interests.Thispaper

weighstheevidenceregardingtheireffectsonnationaleconomicgrowth.

B.Apreviewofverdicts

SinceWorldWarII,aboutadozenrichcountrieshavechanneledmorethana

fifthofnationalproductintosocialtransfers,andaboutaquarterofnational

productifweincludepubliceducationaspartofsocialspending.5Thosecountries,

inorderoftheirsocialtransfershareofGDPinthefirstdecadeofthiscentury,are

France,Sweden,Austria,Belgium,Denmark,Germany,Finland,Italy,Portugal,and

Spain,withNorway,Netherlands,andtheUKnearthemargin.Contrastingtheir

experiencewiththatofothercountriesprovidesahistoricaltestcasefortheeffects

oftax-basedsocialspending.Thathistoricalcaseseemstohavedeliveredthesesix

clearverdicts:

(1)Oneimaginedthreatrejectedbythehistoricalfactsisthewidespread

suspicionthatthewelfarestatepackagereducesthelevelandgrowthofGDP.Global

5Thispaperdefines“socialtransfers”astaxpayer-fundedgovernmentexpenditures

onhealthcare,pensions,familyassistance(Americans’“welfare”),unemployment

compensation,activelabor-marketspending(retraining,etc.),andpublichousing

subsidies.MydefinitionofsocialtransfersnearlymatchestheofficialOECD

definitionof“publicsocialexpenditure”.Themaindifferencebetweenthetwois

thatIwould,wheneverthedatapermit,excludethepensionbenefitspaidtopublic

employees.Thesearepartofalaborcontract,comparabletoprivatelaborcontracts,

andnotredistributionsfromtherestofsociety.OECDallowedsuchaseparationin

itssocialexpenditureseriesfor1960-1981,butnotforitscurrentseriesstartingin

1980.

Idefine“socialexpenditures”asthesesocialtransferspluspublicspending

oneducation.ThisbroaderdefinitionmatchesthedefinitionusedbyGarfinkeletal.(2010).

Myarbitrarydefinitionofthe“welfarestate”isanydemocraticcountryfor

whichsocialtransfers,andthetaxesimplicitlypayingforthem,exceed20percentof

GDP.HadIdefinedthewelfarestateasanycountrydevotingmorethan20percent

ofGDPtosocialspending,includingpubliceducationspendingàlaGarfinkeletal.

(2010),itwouldhavebeeneasiertoshow(astheydo)thatthewelfarestateisnot

badforeconomicgrowth.Forrhetoricalpurposes,Ipreferthemorestringenttest

focusingonsocialtransfers,whicharemorecontroversial,andlessobviouslyproductive,thanpublicexpendituresoneducation,whichIseparatefrommy

discussionofthe“welfarestate”.

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historydoesnotshowanyclearoverallnegativeeffectoflargertax-financedsocial

transfersonnationalproduct.ThewidespreadbeliefinlargeGDPcostsofthehigh-

budgetwelfarestateisbasedontheoryandinappropriatetests.Therealworldnever

ranthekindsofexperimentsthatsomanyhavechosentoimagine.Thebeststatistical

testsunderlinea“freelunchpuzzle”:Europe’slargetax-basedsocialbudgetshave

apparentlynotloweredGDP.

(2)That“freelunch”hastakentheformofseveralfundamentalhumangains

reapedbylargewelfarestates.Thelargerwelfarestateshaveachievedlowerincome

inequality,lowergenderinequality,lowerpovertyrates,andlongerlife,againwithout

anyclearlossinGDP.Nordotheysufferanyotheroften-imaginedsideeffects.The

largewelfarestates,particularlyinNorthernEurope,havesomeoftheworld’scleanest

andleastcorruptiongovernments,withlowerbudgetdeficitsthantheUnitedStates,

Japan,andotherrichcountries.And,forwhatitisworth,theirpopulationsexpress

greaterhappinessininternationalsurveysofpublicopinion.

(3)Whatmadethatpossible?The“freelunchpuzzle”ofthewelfarestateiseasily

understoodwhenoneexamineshowactualpracticehasevolved.Bothsidesofthe

Atlantichavemadesomemistakeswhentryingtodrawanefficientborderbetween

governmentsandmarkets.ThemainmistakesontheAmericansiderelatetoinsufficient

anti-povertyprograms,inefficienthealthinsurance,underinvestmentinmothers’

careers,andtheunder-taxationofaddictivegoods(tobacco,alcohol,andgasoline).

(4)Neitherthetimingnorthegeographiclocationofthe“European”economic

crisisstarting2007relatestothewelfarestateassuch.Themaincausesofcrisisinthe

not-so-welfare-stateMediterraneanandIrelandsince2007havebeentherealestate

bubbleandunder-regulationoffinance.Themaininstitutionalmistakesin

MediterraneanEuroperelatetoexcessiveprotectionofvestedinterestsagainst

competitioninproductandlabormarkets,notthewelfarestate.

(5)Otherthreatstothewelfarestatearemorereal,however.Onecansee

twodemographic-politicalcloudsonthehorizoninthetwenty-firstcentury,though

neithercloudrevealsaneconomicflawspecifictothewelfarestate.Thefirstcloud

istheriseofanti-immigrantbacklash.Thiscoulddestroyfuturepublicsupportfor

universalistwelfarestateprograms,eventhoughtheyseemtoremaineconomically

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sound.SucharetreatfromthewelfarestateisathreatmainlytoSwedenand

Germany,i.e.tothosewelfarestatesthatcontinueadmittinglargerefugeeflows

whilerefusingtodiscriminateagainstimmigrantsinprovidingsocialservices.

(6)Theother,moreglobal,cloudisthattherapidaccelerationofpopulation

agingposesaseriousproblemforfinancingoldage,eitherpubliclyorprivately.

Onlyafewcountrieshaveaddressedthisissuewithmajorreformssofar.

Theremainderofthispapersummarizestheevidenceregardingthesesix

verdicts.Weturnfirsttothetraditionalimaginedthreatrelatedtothewelfarestate,

andthentothetworealthreats.Thewronglyimaginedthreatiseconomic.Thereal

threatsaredemographicandpolitical.

II.Animaginedthreat:

Isn’tthewelfarestatebadforgrowth?

Ifhavinggeneroussocialinsuranceprogramsreducesthelevelandgrowthof

GDP,thensoonerorlaterthisnegativeeffectshouldcauseadeclineofthewelfare

state.Suchafearunderliesthemanybooksandarticleswritteninthelate

twentiethcenturyaboutthe“crisis”and“demise”ofthewelfarestate–thatis,about

aneventhathasstillnothappened.Letussurveytheevidenceonthisimagined

threat.

A.No,thedatashowa“free-lunchpuzzle”

(1)Historyshowsnocorrelationspittingthewelfarestateagainstgrowth.For

atleastthreecenturiesmanyconservativeshaveinsistedthattaxed-basedsocial

spendingcutsjobsandoutput.Sostridentistheoppositionthatonewouldexpectit

tohaveresultedfromlookingdirectlyatsomeglaringevidencefromhistory.Ifthe

negativeeffectsofwelfarestateprogramsweresoclear,thenperhapseventheraw

datashouldhaveshownitonahugeI-Maxscreen.

Nosuchglaringevidencehaseverappeared.Anobviousstartingpoint

wouldbetoglanceatthebroadsweepofthehistoryofnationalproduct,which

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shouldhavebeenlowerwheretax-basedsocialspendingwashigher.Theglance,

however,yieldsthebig-screenevidenceshowninFigure1.Mostofworldhistory

haslanguishedinthelowerleft-handcorner,withpovertyandnosocialhelptothe

poor,thesick,ortheelderly.ThisisthedrearyworldthatAdamSmithcalled

“barbarous”.InthetwoandahalfcenturiessinceSmithwrote,afewdozen

countrieshavetakenoffintoprosperity,asillustratedinFigure1byfourofSmith’s

civilizedcountries–theUK,theUS,Sweden,andJapan.Whileprospering,theyalso

channeledagreaterandgreatershareoftheirnationalproductintotaxesspenton

socialprograms.Yettheycontinuedtoprosper.Onewhobelievesthatthesocial

programsdestroyinitiativeandprogressmightclaimreservecausation:Perhapsit

istheprosperitythatbredthewastefulsocialspending.Yetifthesocialspendingis

nothingbutarichcountry’sbadhabit,likeobesityorrecreationaldrugs,whydon’t

weseeanyeasyevidenceofitsdraggingdownGDPperperson?

Onewouldrightlydemandacloserlookthanthisglanceatthebroadscreen.

Stickingtorawcorrelationsforthemoment,wemayaskwhetherlookingatall

countriesandovershorterperiodsoftimeshowsanegativerelationshipbetween

theirgrowthexperiencesandtheiruseofwelfarestateexpenditures.Table1shows

theresultsforasmanydecades(10)andasmanycountries(19)asprovide

systematiclong-termdata.Asreportedthere,historyagainprovidesno

significantlynegativerelationshipbetweenthestart-of-decadesocialspending

shareandeitherthegrowthorthelevelofGDPperperson.Ifwehadincludedthe

manypoorercountriesthatfailedtoreportsocialspendingbecausetheyhadlittle

ornoneofit,therewouldbemorechanceofapositivecorrelationacrosshistory,as

Figure1hasalreadyhinted.Fromallthecorrelationswecannotinfersucha

positivecausalinfluenceofsocialspendingoneconomicgrowth.Yetanyclaimofa

negativehistoricalrelationshipiseveneasiertodoubt.

Withinnations,aswellasbetweenthem,wefindnosecurenegative

correlationbetweenlocalgovernments’socialtransfersandeitherthelevelor

growthofproductpercapita.Foralltheconservativemediaanecdotesabout

companiesfleeinghigh-taxstatesforlow-taxstates,thereisnonetresultshowing

anydamagetothehigher-taxingandhigher-welfarelocalities.Theonlytimethat

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theanti-governmentSouthernstatesintheUnitedStatesrosetowardthenational

averageincomepercapitawasintheperiod1940-1973whentheSouthreaped

disproportionatebenefitsfromgovernmentmilitaryandaerospacespending.Such

spendingnotonlycreatedjobsandincomewithintheSouth,butitalsoraised

SouthernpayratesbyattractingSouthernworkerstoNorthernandPacificCoast

cities.Sincetheriseofwelfarepaymentsandothersocialspendinginthe1960sand

1970s,therehasbeennoerosionintherelativeincomesofsuchlarger-transfer

statesasConnecticutandCalifornia.Thereisnooutwardevidenceofmassivetax

flight,no“racetothebottom.”

(2)NoristhereanyeconometricevidencerevealinganynetGDPcosts.One

shoulddeeperifpossible,intostatisticalteststhatreallyholdotherthingsequal.

Weknowwellthatbothsocialtransfersandnationalproducthavemanyseparate,

thoughoverlapping,causaldeterminants.Surelysocialspendingisnotjustthe

resultofbeingarichcountry,andacountry’sprosperitydependsonmanymore

thingsthanjustsocialspendingandtheincentivesitmaycreate.

Sincearound1990economistshavepouredgreateffortintodevelopingtruly

randomizedtrials,likethosenowproliferatinginmedicalscience.Theseare

statisticallysuperiortotestingfromhistoricalexperience,sincetherandomly

selected“treatment”groupofobservationsissubjecttoinfluencesclearlynot

experiencedbythe“control”group.Thehistoryofentirenationsisnota

randomizedtrial,however.Itdoesnotofferatreatmentgroupofdozensof

societiesthatwerebesetbywelfare-statepoliciesimposedonthembycompletely

outsideforces,forcesnotexperiencedbyalargecontrolgroupofotherwisesimilar

societies.Afeweconometricstudieshavebeenluckyenoughtofind“natural

experiments”,inwhichhistoryimitatestherandom-triallaboratory.Yetforlarge

complexforceslikethewelfarestate,nosuchrandomizedhistoricalexperimentis

available.

Lackingtrulyrandomtrials,economistsareforcedtoextractwhatcausal

insightstheycanfromamessypanelofhumanexperiencesovertimeandspace,a

panelinwhichboththedeterminantsorsocialspendingandthedeterminantsof

GDPmightbedisentangledeventhoughtheyoverlapandareconfoundedbyahost

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ofotherforces.Elsewhere,Ihavesurveyedtheeconometricstudiesavailableasofa

decadeago.Nonehasevenfoundasignificantnegativeeffectofthewholewelfare

statepackageonGDP,atleastnotanythathasusedsoundtechniquesandhasmade

itsunderlyingdataavailabletoothers.6Eventhefewthatannouncednegative

effectsyethidetheirdatahavefailedtoshownegativeeffectslargeenoughtoimply

themajoreconomicdamageimaginedbysometheorists,journalists,andpoliticians.

Thelackofclearlynegativeeffectsoftax-basedsocialtransfersonthelevel

andgrowthofGDPisallthemoreremarkablebecausetheteststypicallyhobblethe

welfarestatevariableswithtwodevicesthatshouldhaveshownanegativeeffect.

Thefirstisahandicapthatthisauthorhasalsoadopted,inordertotoughenthetest:

Excludepublicspendingoneducationfromthe“welfarestate”bundle.Public

expendituresoneducationhavesuchclearlypositiveeffectsthatomittingthem

raisestheoddsoffindingagainstthewelfarestate.7Second,allthetestson

historicaltime-spacepanelshobblethewelfarestatewithareverse-causationbias.

Safetynetprograms,suchasfamilyassistanceorunemploymentcompensation,are

designedsothattheypayoutmorewhenGDPandjobshaveslumped–andpayout

lesswhentheeconomyimproves.Thustransferspendingwillappearguiltyof

causingslumps,andcuttingthatspendingwillbecreditedwithcausingtherecovery,

unlessonesomehowperfectlyidentifiesthemacro-economicshockscausingany

movementinGDP.Thefalseguiltisanalogoustoblaminghospitalsforcausing

deathsbecausesomanypeoplediethere.8Giventhesetwohandicaps,itisallthe

6SeeLindert(2004,Chapters10and18),andthedownloadabledatasetsavailable

eitherfromCambridgeUniversityPress(seethebook’spreface)orfromthe

author’shomepage.

7Forareviewofratesofeconomicreturnoneducationaroundtheworld,see

PsacharapoulosandPatrinos(2004a,2004b),andtheearlierstudiescitedthere.

8Thissecondbiasshowsupeveninthesetofeconometricpanelteststhatseems

thebestcandidateforanobjectivediscoveryofnegativegrowtheffects.

OverlappingstudiesbyKneller,Bleaney,andGemmell(1999)andbyGemmell,

Kneller,andSanz(2011).Theauthorsdidnotputanyweightonthenegativeresult

aboutsocialspending,butthatnegativeimplicationfromtheirstudyshouldbe

takenseriously.Withtheirhelp,Ihavefoundthateventheirbest-practice

econometrictesthastroubleidentifyingtheshocksthatweknowwerethere,given

ourreadingofrecenthistory.Forexample,weknowthatatthestartofthe1990s

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moreremarkablethatsocialtransfersandothermeasuresofthewelfarestatedo

notshowclearlynegativeeffectsonjobsorgrowth.

(3)AchievementsotherthanGDP.Whilenotpayinganyclearnetcostinterms

ofGDP,thelargewelfarestatesachievedmanyotherthingswiththeirsocial

transfers.9Hereisaquicklistofsocialgoalstheyhaveservedatleastaswellas

otherrichcountriesontheaverage:

(1)Theyhaveconsistentlyenjoyedamoreequaldistributionofincomes.10

(2)Theyhavelowersharesoftheirpopulationinpoverty,whetherthe

povertylineisdefinedasashareofmedianincomeorasanabsolutelevelof

consumptionperperson.11

(3)ThewelfarestatestendtohavelongerlifeexpectancythanotherOECD

countriesatsimilarincomelevels.Howthismightrelatetopublichealthcareis

reviewedinSectionIIIbelow.

Finlandsufferedamajormacro-shockfromthecollapseofitsmaintradingpartner

(theSovietUnion)andfrommistakenlykeepingtheFinnishMarkpeggedtothe

soaringGermanmark.Yettheseauthors’testshavenowayofpickingupsuch

idiosyncraticlargemacro-shocksthatareneithertime-fixedeffectsforallcountries

orfixedcountyeffectsforalltimes.Theresultisamisleadingcorrelationbetween

Finland’shugesafetynetexpendituresandtheplummetingofFinland’sGDP.I

thankRichardKnellerformakingtheirunderlyingdatasetavailable.

9Hereisaroughquantificationofthepointslistedinthissection.Datafrom23

countriescirca2007showthattheshareofsocialtransfersinGDP,ourwelfarestate

indicator,hasthesecorrelationswithsocialachievements:(a.)anegative0.56with

theshareofhouseholdshavinglessthan40percentofmedianhouseholdincome;

(b.)+0.39withlifeexpectancy,(c.)+0.21withTransparencyInternational’sclean

governmentindicator,and(d.)nooverallcorrelation(0.01)withgovernment

budgetsurplusin2007-2009.Correlations(a.)through(c.)werestatistically

significantatthe5percentlevel.Thesourcesarethosecitedelsewhereinthis

section.

10SeeWangetal.(2012)onOECDcountries’inequalityin2004.Forareadableandbalancedsummaryofthedefinitionofequalityintermsof“verticalequity”andthe

caseforprogressivityinredistribution,seeSlemrodandBakija(2004),especially

Chapter3.

11Onthepovertysharesrelativetomedianincomes,seeOECD,GrowingUnequal(2008,p.127).Internationalcomparisonsofabsolutepovertyarefoundinstudies

bytheLuxembourgIncomeStudy:SeeSmeedingetal.(2000),andScruggsandAllan(2005).

11

(4)Thewelfarestateshavesomeoftheworld’scleanestandleastcorrupt

governments,despitewhatsomemighthavepredictedfromthelargeamounts

passingthroughgovernmenthands.12

(5)Welfarestatesdonotrunlargebudgetdeficits.Thereisnocorrelationat

allbetweentheGDPsharesofsocialtransfersandthenetbudgetdeficit.13

(6)Finally,forwhattheyareworth,internationalpollsofpublicopinionfind

highaverageexpressionsofpersonalhappinessinthehigh-spendingwelfare

states.14

B.Somereasonswhy

Whathasmadethispossible?Howcouldthelargewelfarestateshave

avoidedanyoftheimaginednetcostintermsofGDP,whilemakingprogressonso

manysocialconcerns?Abalancedtentativeanswerseemstobethatthefewwaysin

whichlargetax-basedsocialtransferprogramsreduceGDParebalancedbywaysin

whichtheyraiseGDP.Theheaviestweightonthenegativesideofthescalesseems

tobeunemploymentcompensation.Evenallowingforsomestatisticalbiases

againstsuchprograms,theempiricalliteratureseemstosaythatmoregenerous

unemploymentcompensationdoesindeedreducejobsandoutputsomewhat.This

negativeeffect,however,isoffsetbyseveralGDP-enhancingeffectsofthewayin

whichthewelfarestatehasworkedinpractice.Weturnnexttothreesucheffects.

(1)Anefficienttaxandtransfermix.Whileacriticmightchoosetoimaginea

foolishhypotheticalwelfarestateriddledwithbureaucracy,initiative-discouraging

taxes,andtransfersthatsubsidizealifetimeoflaziness,nosuchfiscalsystemhas

everprevailedinawelfarestate.Onthecontrary,real-worldwelfarestateshave

featuresthatmaketheirtax-basedsocialprogramslessbureaucratic,lessexpensive

12ForTransparencyInternational’sindexofcleangovernment,calledits

“CorruptionPerceptionsIndex”,http://www.infoplease.com/world/statistics

/2007-transparency-international-corruption-perceptions.html.

13OngovernmentbudgetsurplusesassharesofGDP,2007and2009,seeIMF

eLibrary.

14Oninternationaldifferencesinexpressionsofhappiness,seetheWorldValues

Survey;e.g.http://www.nationmaster.com/graph/lif_hap_net-lifestyle-happiness-

net.

12

inadministrativeterms,andlessinconflictwitheconomictheorythanmanyhave

imagined.

Onesuchfeatureisthatuniversalismisefficientontheexpenditureside.

Universalistexpenditureprograms,towhicheverybodyisentitled,arecheaperto

administerbecausethereislessbureaucraticneedtoinvestigatewhoshouldbe

excludedfromthebenefits.15

Inthecaseofhealthinsuranceandhealthcare,forexample,comparative

studieshaveconsistentlyfoundthatadministrativecostsarealowershareofthe

healthcaredeliveryexpendituresinthemorepublicprogramsofCanadaand

Europe.16Universalistpublicinsuranceandpublicprovisionislessbureaucratic

becauseitdoesnotneedtospendsomuchresourcesdenyingcoveragetopatients

thatmightproveexpensiveforonereasonoranother.Universalisthealthcoverage

isalsocheaperthanmeans-testedcoverageforthepoorbecauseitavoidshavingto

investigatethelegitimacyofpovertypleas.Similarly,tax-basedpublicassistanceto

thepoorisinturncheaperthanprivatecharities’administrativeexpensesfor

raisingdonations.17

Similarly,onthetaxside,broadertaxesarealsocheapertoadminister.As

countriesdevelopandprosper,theytendtoshifttowardthebroaderkindsoftaxes

thateconomistsconsidermoreefficient.Thetypicalshiftwasawayfromcustoms

dutiesandothernarrowtaxesthatmightgreatlydisruptchoices(taxesonhigh-

elasticityactivities)towardbroadtaxesonallofaperson’sincomeorconsumption.

Acrossthefirsthalfofthetwentiethcentury,theshiftwastowardbroadincome

taxation;afterthat,theshifthasbeenmoretowardVAT(valueaddedtaxation,aflat

consumptiontax)andsintaxesonaddictiveproductscausingexternaldamages.

Thesametaxshiftaffectedallprosperingcountries,whethertheybecame

welfarestatesornot.Itissomethingthathappenedasgovernmentgotbigger.

Indeed,thetaxshifthelpedthembecomebigger.Settingasideforthemomentthe

15Forageneraldiscussionofthispoint,seeLindert(2004,Chapters4,10and12)

andPestieau(2006,pp.81-83).

16See,forexample,thestudiesbyReinhardt(2000),Woodlanderetal.(2003),and

KotlikoffandHagist(2005).

17Lindert(2004,Ch.3;and2014).

13

incentiveeffectsofthisshift,wemerelynoteherethatabroadtaxtreating

everybodysimilarly,andeverysourceofincomesimilarly,iseasierandcheaperto

administer.Figure2showsthedramaticdeclineintheadministrativecostsof

collectingtaxesinBritainsincethe18thcenturyandtheUnitedStatessincethe19th.

BroadertaxationreapseconomiesofscaletosuchadegreethattodaytheInternal

RevenueServicespendsonadministrationonlyhalfapercentoftheamount

collected.18Welfarestateshavereapedsimilareconomiesastheirbudgets

expandedonthebasisofbroaderformsoftaxation.

Inaddition,thetaxmixusedbywelfarestateslooksmoreefficientevenin

conventionaltheory.Relativetothesmaller–governmentricheconomies,suchas

Canada,theUnitedStates,andJapan,thelarge-budgetwelfarestatesofNorthern

Europegetagreatershareoftheirtaxrevenuefrombroadconsumptiontaxesand

sintaxesonharmful-addictionproductssuchastobacco,alcohol,andgasoline.19

Canada,Japan,andtheUnitedStates,bycontrast,getagreatershareoftheirtax

revenuefromdirecttaxesonincomeandwealth.Conventionaleconomicsfavors

broadsalestaxationandsintaxes,andthesintaxesdrawaddedsupportfromthose

concernedwithpublichealthandenvironmentalquality.Whilewelackreliable

econometricevidencethatthiskindoftaxmixisreallybetterforeconomic

growth,20conventionaleconomistsandeconomicconservativesbelievethatitis

better.Ironically,then,conventionaltheoryfavorsthekindsoftaxationusedasa

moneymachineforlargewelfarestates.

(2)Moreefficienthealthcare.Moreefficientpublichealthcaresystemsof

healthinsuranceandhealthcareprovisionmighthavemadepeoplelivelongerin

othercountriesthanintheUnitedStates.Threeinternationalcontrastsabout

healthinsuranceandhealthcaredeliveryprovidesomecircumstantialevidence

favoringtheperformanceoncountrieshavingamoreuniversalandpublically

18Thisomits,ofcourse,theresourcecosttotaxpayersthemselvesofpreparingtheir

taxreturns.

19SeeKato(2003)andLindert(2004,Chapter10).

20Theclosestthingtoeconometricsupportforthisconventionalhunchistheresult

ofKnellerandco-authors(1999,2011)totheeffectthatindirecttaxesarebetterfor

growththandirecttaxes.

14

fundedhealthsystem.TwoofthesethreefactsareunknowntotheAmerican

generalpublic,whilethethirdhasreceivedagreatdealofmediaattention.The

firstfact,generallyunappreciated,isonealreadycitedabove:America’smixed

private-publichealthinsurancehashigherbureaucraticadministrativecoststhata

universalgovernment“singlepayer”schemeofhealthinsurance(e.g.Canada,

Germany)orasystemdominatedbygovernmentprovisionofhealthservices(e.g.

EnglandandWales).Thesecondunder-appreciatedfactisaboutpopularbeliefs

themselves.Whilepeopleinallcountrieshavecomplaintsandfearsabouttheir

healthcaresystems,Americansfordecadeshavehadaloweropinionoftheir

systemthandopeoplesurveyedinothercountries.

Thethirdfact,givenmoremediaattention,isthattheUnitedStatesranks

behindatleastadozenothercountriesinlifeexpectancy.Thepatternisnota

simpleonerelatingtosocialspending.TheworldleaderinlifeexpectancyisJapan,

acountrywithrelativelymodestsocialspending,thoughJapan’ssocialspending

doestendtotilttowardpublichealth.Still,itistruethatpeopletendtoliveabit

longerintheaveragewelfarestatethanintheUnitedStates.Themediahavesaidso

repeatedly,andhavepointedoutthatasignificantpartofthedifferenceinlife

expectancycomesinthefirstyearoflife:Americanbabiesdonotsurviveaswellas

thoseinoveradozenothercountries.

BeforereviewingthetroubledhistoryofAmericanhealthcare,weneedto

stresstwocautionarypointsabouttheinternationalcontrastsinlifeexpectancy.

Thefirstisthattheydonotjustreflecttheperformanceofthehealthcaresystem.

Asbestonecantell,thedifferencesinsurvivalarenotdueasmuchtodifferencesin

healthcaresystemsastodifferencesinlifestyle.Theslightshorteningoflifein

Americaversusotherrichcountriesisdueprimarytosedentarylifestyleanddiet.

Second,theinternationalcontrastsarenotbetweenpublicandprivatesystems,or

betweenlarge-spendingandsmall-spendingcountries.Rathertheyrelatetoa

peculiarlyvexedhistoryofhealthinsuranceintheUnitedStates,acountrythat

actuallyspendsaboutasmuchpublically,andspendsmuchmoreprivately,on

healthcarethanotherrichcountries.

15

AtthecenterofAmerica’shealthinsuranceproblemsisapairofhistorical

wrongturnsthatlefttheUnitedStateswithtoostrongarelianceonvoluntary

employer-basedhealthinsurance.ThefirstwrongturncameinWorldWarIIand

the1950s.Employer-basedplansgainedpopularityinWorldWarII,whenwage

controlspreventedemployers’competingforscarceworkersbyofferinghigher

straightpay,butallowedthemtoofferattractivefringes.Thencameataxpolicy,

enactedin1943andsolidifiedina1954SupremeCourtruling,thatexempts

employercontributionstoemployeehealthplansfromtaxation,eitherascorporate

incomeorasemployeeincome.Thusonemajorreformleftundonebythe

Congressionalfightof2010istoremovethespecialsubsidiesonemployer-based

healthcoverage,andtopushtheindustrytowardofferingplansthataremore

portablefromjobtojob.21

Oursecondcostlywrongturnwastakenin1965,whenthepassageof

Medicareconfinedpublic(alias“socialized”)healthinsurancetothoseover65(plus

themilitary).Thesecondwrongturnwascausedinpartbythefirst.Thepassageof

Medicarein1965wastargetedattheelderlybecausetheyrightlyfearedfacing

costlierhealthcarewithnojobtoofferthemcoverage.Somehavetriedtoreduce

thiselderlybiasbyextendingMedicaretoallagegroups.In2010,TheAffordable

CareActsucceededinextendinginsurancetowardtheyoung,withextensionsof

MedicaidandtheStateChildren'sHealthInsuranceProgram.Itthusmadepartial

stepstowardmakingcoveragemoreuniversal,whileproceedingslowlyenoughto

honor(to“grandfather”)existinginsurancearrangements.Yetone’s65thbirthday

stillbringsajumpincoverage,andthiscountry’sdeficitinlifeexpectancyamong

OECDcountriesisstillworsebeforetheageof65thanafterthatbirthday22.The

healthinsurancetrap,then,wasspecifictotheUnitedStates,andnottoallcountries

withsmallersocialbudgets.

(3)Betterdevelopmentofmothers’humancapital.Thewelfarestatesalso

gainjobsandproductivitythroughpublicpoliciesthatinvestincareercontinuity

andskillsaccumulationformothers.Thismattersalot,nowthatsuchalargeshare

21Thomasson(2002,2003).

22EgglestonandFuchs(2012).

16

ofwomen’sadulthoodiscareer-oriented.Welfarestatesprovidepaidparental

leavesandpublicdaycarewithqualifiedproviders.Whiletheunderlyingrulesare

complexandhardtosummarize,thepolicydifferencesamongOECDcountriesare

apparentinthefiscaleffortstowork-lifebalanceforparents,especiallymothers,of

newbornsandinfants.Welfarestatesspent3-4percentofGDPonsupportingwork-

lifebalancefornewmothers,whereastheUnitedStates,Japan,andothersspend

lessthanhalfthisshare.23

Doestheextrasupportformotherspayoff?Whileitisnoteasytoestimate

thegainsinproductivityfrommicro-data,thereisatleastoneaggregatesignof

stronggains:Womeninsuchcountrieshavemarketwageratesthataremuchcloser

tomalewageratesthandowomenintheUnitedStatesorJapan,asshownfor1967-

2006inFigure3.Whileitispossibleinprinciplethatthehigherfemale/malewage

ratiointheNordiccountriesandAustraliamighthavereflectedforcesthatlower

maleearnings,thisseemsveryunlikely.Ratherthedifferencesappeartobein

policiesthatgavemotherstheextrahumancapitalthatcomesfromnotlosinga

careerwhenababyarrives.Indeed,otherdatashowthatthewagegapbetween

malesandfemalesisspecifictopolicyenvironmentsandtomaritalstatus:Single

womenareveryclosetosinglemenintheirratesofpay,whereasmarriedwomen,

mostlymothers,arepaidlessincountriesthatsupportthemless.

Thebenefitsofreal-worldgovernmentinterventionsonthesewelfare-state

fronts,combinedwiththebettertaxmixofthehigh-budgetwelfarestates,mayhelp

toexplainwhythestatisticalevidencehasnotturnedupanynegativeeffectofsocial

transfersonGDP.

III.Animaginedthreat:

Whatabout“Europe’s”economiccrisissince2007?

23See,forexample,theinternationaldataintheOECDFamilyDatabase,

http://www.oecd.org/social/family/oecdfamilydatabase.htm#public_policy.For

othersummariesofdifferencesinparentalleavelawsandpublicinfantcare,see

Lindert(2004,vol.1,252-257and282-287).

17

Sincetoday’shigh-budgetwelfarestatesareEuropean,anaturalmistake

wouldbetoattributeanysuccessorfailureofanyEuropeancountrytothe

“Europeanwelfarestate”.Suchsloppinessintheuseofcorrelationsoftenoccurs.

ThuswhenseveralEuropeaneconomieshaveslumpedseriouslysincethe

American-ledrecessionsince2007,somecommentatorstiedtheproblemstothe

welfarestate.Weshouldthereforequicklynotesomewaysinwhichtherecession

seemstohavebeenquitedetachedfromwelfarestatespending.

TherecessionburstuponEuropeaftertheprivaterealestatemarketbubble

burstloudlyintheUS,Iceland,Ireland,Spain,andPortugal.Nothingaboutthe

welfarestatecausedthis.Theburstingoftherealestatebubbleexposedsystemic

risksthathadbeenbuildinginfinancialmarketssincethelate1990s.24Under-

regulatedprivatefinancialmarketscrashedfirstintheUSandIceland,laterin

Cyprus.Thespreadoftherecessionpoppedrealestatebubbles,especiallyin

IrelandandSpain,andtriggeredlargedeficitsinMediterraneancountries.The

leadingwelfarestatessuchastheNordiccountriesandGermany,however,kept

theirbudgetsundercontrol,helpedbythefactthattheirfinancialsectorshadnot

lungedintothesamefinancial-derivative-basedsystemicriskstakenonbyothers.

Theclosestapproximationtoalinkbetweenfinancialdisasterandawelfare

statehasbeenapparentinthecaseofGreece.ForGreece,theproblemhasindeed

centeredonthepublicsector,whichspentunwiselyonpensionsandtheAthens

Olympics.YetGreece,likebankruptIceland,hasneverhadawelfarestateanddoes

littleforthepoor,asweshallnoteagainbelow.

ThespreadoftherecessionthroughouttheMediterraneanraisesanother

pointoftenmissed.ThereisaseparatereasonwhytheMediterraneancountries

havesuchhighratesofunemployment.AllMediterraneancountries,hereincluding

France,haveover-protectedtheirestablishedseniorworkerswithtoughanti-firing

lawssincethe1960s.Initially,inthelate1960sandthe1970s,theseemployee

protectionlaws(EPLs)mayhavepreventedunemploymentbyprotecting

24SeeMadrick(2011,esp.pp.286-404).

18

establishedworkersagainstdismissals,andmayevenhaveinducedfirmstoinvest

moreinthefurthertrainingofthe“insider”workerstheywerecommittedtoretain.

Yetsoonthefiringproblembecameahiringproblem.Firmsbecameincreasingly

reluctanttohirenewworkerswhomightnotprovesoproductive,orwhomthey

couldnotdismissinaslump.Overthelastquarterofthetwentiethcenturyandinto

thiscentury,theshareof“outsiders”inthepopulationoflabor-forceagekeptrising.

Moreandmoreofthatpopulationlackedtheinsiders’careersandtheir

improvementsinpayandtraining.Moreunemployment,lessinvestmentinhuman

productivity.ThisproblemhasloomedlargerintheMediterraneanthanin

NorthernEurope,wheresimilar-lookingworkerrightsaremodifiedintomore

flexibilityinjobturnoverandretraining.25Yetagain,thedefectsofEPLsarequite

separatefromthelevelofgovernmentspending.

IV.Realdemographic-politicalthreat#1:

Risingimmigrationandpoliticalbacklash

Toseetherealthreatstothefutureofthewelfarestate,weneedtolookat

demographictrendsandtheirrelationshiptopolitics.Oneominousdemographic

trendisthecontinuedinflowofimmigrants.Thissectionbeginswithafrequently

assertedeconomiceffect,namelythatimmigrantsareafiscalburden,forwhichthe

already-arrived“native”populationmustpay.Suchafiscalburdenisnotentirely

absent.

Thenetfiscaleffectsofextraimmigrantsdependontimehorizon.Table2

summarizesthisdependenceconceptually,andFigure4quantifiesthedependence

usingaplausiblesimulationrunbyRonaldD.LeeandTimothyMillerin2000.

Supposewetakeaveryshort-runview,inthetoprowofTable2,asking“Are

today’sextraimmigrantsanetdrainongovernmentbudgetsinthissameyear?”

Theycouldbe,sinceextraimmigrants’familiestypicallyareanetdrainthroughthe

25LindbeckandSnower(1988,2001),Flanagan(1988,1999),AllardandLindert

2007.

19

hostcountry’schild-relatedsocialprogramssuchaseducation.Ifthisdrainis

greaterthanthetaxrevenuescollectedfromadultimmigrants,helpingtopayfor

pensionsandotherpublicprograms,thenimmigrantsdoindeedcauseanetfiscal

drainthisyear.TheLee-MillersimulationinFigure4showsthattheshort-runfiscal

effectisindeednegative,assummarizedbythethickblack“Total”line.Atypical

mixofimmigrantagegroupsissotiltedtowardtheyoungthatthecostsofchild-

centeredsocialprogramsyieldanegativenetresultforthefirst12-15yearsafteran

immigrantarrival.

Ifonethentakesasomewhatlongerview,askingaboutthenetfiscaleffects

overthewholelifetimesofthefirstgenerationofnewimmigrants,theansweris

positiveoverall,asshownagainbyFigure4’sthickblackline.True,theimmigrants

inoldageprobablygetanettransferfromothers,becausetheU.S.SocialSecurity

Systemisdesignedtobeprogressive,givingahighrateofreturntolower-income

earners,suchasfirst-generationimmigrants.Yetwhilethatfirstgenerationisaging,

itschildrenhavealreadybecomeproductiveadults,payingpositivetaxesinsteadof

needingschoolmoney.

Finally,whenweconsiderthewholelifetimesofnotonlytheextra

immigrantsbutalsotheirchildrenandgrandchildren,thenetfiscaleffectsbecome

clearlypositive,asagainsuggestedinTable2andquantifiedinFigure4.Weknow

thattheeventualfiscalresultsareclearlypositive,becauseinthelongrunthe

immigrantsandtheirdescendantspaymoreintaxesthantheygetintargeted

transfers,justliketherestofsociety.Sothelong-runfiscaleffectofextra

immigrationisclearlypositive.26

Nonetheless,thesepositivefiscaleffectsmaybepoliticallytrumpedby

negativeperceptions,especiallyinthewakeofalargeinfluxofrefugees.Prevailing

opinionscanstillbenegativeaboutthesamefiscaleffects,andaboutthetruly

negativeeffectsonsomenativeworkers’earningpower,nottomentioncultural

26Estimatesbasedondatafromseveralcountriesaroundtheturnofthecentury

yieldnetfiscalbenefitsfrommigrantsthattendtobenearzero,withmorepositive

netresultsthannegativeones.SeeOECD(2013,Chapter3)fortheassumptionsand

timehorizonsused.NotethatthesimulationsrunbyLeeandMillerdonotrefertoa

largerefugeeinflux,sincetheirparametersweredrawnfromcalmtimeperiods.

20

phobiasandfearsofterrorism.Thatkindofbacklashhasbeenincreasinglyevident

inEuropeandtheUnitedStates,wherethenewnativismridesthewaveofanti-

immigrantsentiment.Figure5showstherecentriseintheirvotesharesinEurope

sincetheturnofthecentury.Thereisafairchancethatcoalitionsofsuchnativist

partiesandmoreestablishedconservativepartiescouldtakepowerinseveral

countries.

Willimmigrationbacklashunderminethewelfarestates?Thethreatseems

real,yetthemechanismisnotsoobvious.Theoutcomewillsurelydependonthe

formthatthebacklashtakes.Letusfirstconsiderthreekindsofcasesinwhichthere

wouldbelittlethreattosocialspendingonnatives.Considerfirstthepossibilitythat

immigrationissimplyblocked.Insuchacase,immigrantswillceasetobea

budgetaryburden,asidefromthecostofenforcingthebarriersattheborder.In

suchacase,socialspendingonthenativepopulationcancontinueasbefore.A

second,andnearlyequivalent,possibilityisthatthegovernmentreactstotheanti-

immigrantspiritwithacombinationofblockingboatpeopleandover-border

refugees,yetcontinuestoadmitthehighlyskilled.Suchacombinationisbeing

practicedbysuchnon-welfare-statesasAustraliaandSwitzerland.Hereagain,

thereislittlethreattosocialprogramsforestablishedcitizens,sincetheskilled

immigrantspassingthroughthefilterwillquicklybecomenettaxpayers.Athird

possibilityisthatimmigrantsarestillallowedtoenter,butthegovernment

discriminatesagainsttheminitsprovisionofsocialservices.Ifsuchdiscrimination

werepracticed,thensocialservicescouldresembleJimCrowschoolingbyracein

theUSSouth,orschoolingbyraceunderSouthAfrica’sapartheid,--orChina’s

hukoupassportsystem,aspracticedinthemajoreasterncities.Thediscrimination

wouldmakeiteasiertoavoiddilutionofbenefitsfornatives.Thusfar,however,

countriesacceptingimmigrantshavebeenunwillingtosaddlethemselveswith

immigrantswhoarenotentitledtobasicsocialservices.27

27Anearapproachtothiscaseofreceivingimmigrantswhiledenyingthembasic

servicesthreatenedtoarisewhenCalifornianspassedProposition187in1994.The

propositioncalledfordenyingpublicK-12educationandotherpublicservicesto

thefamiliesofthosenon-US-citizenswhohadenteredthestatewithoutlegal

21

Thecountriesmostlikelytotranslateheavyimmigration,plusstrong

oppositiontothatimmigration,intoareductionofuniversalsocialentitlements

wouldbethewelfare-statecountriesthatabsorblargenumbersofrefugees,without

skillrequirements,yetremainunwillingtodiscriminateagainsttheminthe

provisionofbasicsocialservices.Thehighestlikelihoodofsuchadilutionof

welfarestatebenefitsseemstofaceSwedenandGermanysincethemassinfluxof

Syrian,Iraqi,Afghan,andotherrefugeesinthisdecade,especiallysince2014.In

thesetwoprime-targetcountries,avisiblestrainonsocialentitlementstandards

maysoonappear.

TheissuehasalreadyachievedprominenceinSweden.Ontheonehand,

Sweden’sconservativesdenythatcuttingthewelfarestateistheirobject,knowing

thatthewelfarestateremainspopular.InFebruary2011theleaderofSweden’s

Right-Wing“SwedenDemocrats”Party,nottobeconfusedwiththeSocial

DemocraticPartythathasgovernedSwedenmostofthetimesince1932,was

explicitaboutthis:“Webelieveinthewelfarestate”,whilealsovoicingsuspicions

aboutSweden’smosquesandIslamiccommunitygroups.Still,therearehintsthat

beingimpactedbylocalimmigrationundercutspeople’ssupportforuniversalsocial

insurance.InSweden,communitiesreceivingalargeexogenousimmigrantshock

havebecomemoreinclinedtodoubttheviabilityofuniversalsafetynets(Dahlberg

etal.2012).Thusthethreatisreal,thoughnoreductionofuniversalbenefitshas

yetoccurred.

V.Realdemographic-politicalthreat#2:Agingand“graypower”

A.Thecurseoflonglife:Somethinghastogive

Somethinghastogiveinpensionpolicyinthetwenty-firstcentury,asmany

havelongwarned.Thoseovertheageof65willgoonrisingasashareoftheadult

population,justastheyhavedoneoverrecentcenturies.Theratiosoftheelderlyto

thoseofworkingagearerisingmostominouslyinEastAsiaandItaly,butno

documentation.However,Proposition187wasstruckdownbythestate’sSupreme

Court,andhasneverbeenimplemented.

22

countryisexempt.Themaincauseissimplytheupwardmarchofseniorlife

expectancy.Thenaturalsolutionofhavingpeopleworktolaterages,toholdfixed

theshareoftheiradultlivesspentatwork,hasbeenunderminedbyadeclineinthe

averageageofmaleretirement,thoughthishashistoricallycontributedlesstothe

lengtheningofretirementthanhastheimprovementinlifeexpectancy.28

Todayforevery100Americansofworkingage(18-64years)thereare21

elderlyAmericans(65andup),mostofthemretired.Bytheyear2050therewillbe

36elderlyforeach100Americansofworkingage,assumingtoday’sratesofbirth,

migration,andsurvival.Thebalancebetweenpeoplepayingintoretirementand

peopledrawingonitisshifting.Sowearewarnedinthemediaeveryweek.Inthe

contextofSocialSecurity,85percentofeconomicexpertsagreedin2009withthe

statement“ThegapbetweenSocialSecurityfundsandexpenditureswillbecome

unsustainablylargewithinthenextfiftyyearsifcurrentpoliciesremainunchanged”.

Actually,theratioislikelytoshiftevenfasterthanthat,becauseofanewly

documented“longevitytransition”:Thelifeexpectancyofseniorsisshootingup

rapidly,presentingallpensioncalculationswithapossiblecurseofunexpectedly

longlife.29

Thisdemographicfactoflifehasaclearimplicationforsettingpensions:

Astheshareofelderlyrises,theirannualbenefitspasttheageof65absolutely

cannotriseasfastastheaverageincomesofthoseofworkingage.30

Thisclearwarningisbothsofterandlouderthanitmaysoundatfirst.Softer,inthe

sensethatitdoesnotmeanyourpensionshavetodropinrealpurchasingpower.

Pensionsshouldstillkeepupaheadofthecostofliving–it’sjustthattheycannot

28ForhistoricalretirementtrendsfromtheUnitedStatessee,forexample,Costa

(1998)andLee(1998,2001).Oneshouldalsonotethatthetrendtowardearlier

maleretirementhasreverseditselfinmanyOECDcountriessince2000.

29Ontherecentaccelerationofseniorsurvivalrates,seeEgglestonandFuchs

(2012).

30ThisresultisderivedfromabudgetbalancingequationinLindert(2004,vol.1,

pp.195-196).

23

growasfastasearnedincomesperpersonofworkingage,whichhistoricallygrow

atabout1.8percentayear,adjustingforinflation.

Yetthewarningshouldsoundlouderwhenonerealizesthatitappliestothe

futureofanykindofprovisionforoldage,nomatterhowprivateorpublic.The

curseoflongerlifeisnotspecifictoSocialSecurityorotherpublicpensions.Itisthe

sameevenifyourelyonlyonyourownsavingsforoldage.Toplanahead,ifyou

livetoage65,youarelikelytoliveto85evenattoday’ssurvivalrates.Your

grandfatheronlyhadtoplanonlivingabout14yearsmore,ifheweretoreachage

65.Eveninsuchanindividualistcalculation,yourannualconsumptionin

retirementhastobealowershareofannualearningsthaninthepast,because

you’lllivemoreyears.Soit’snotaproblemofgovernmentpensions,butaproblem

facinganypensionplans,betheyindividualsavings,privatejob-basedpensions,or

SocialSecurity.

Thusaslongaspensionsubsidiesperelderlypersonkeepinstepwithwage

andsalaryrates,populationagingthreatenstoraisetheshareofGDPdevotedto

subsidizingtheelderly.Toavoidpayingforthiswithanupwardmarchintaxrates,

orwithcutbacksinpublicspendingonmoreproductivityinvestmentsintheyoung,

societyneedstotrimtherelativegenerosityofpensionsubsidies.That,however,is

notthecurrentdirectionofmovement.

B.Missiondrifttowardanelderlybias

Sinceaboutthe1960s,thefurtherexpansionofgovernmentsocialbudgets

haschangedfocus,driftingawayfromthosehumaninvestmentshavingthegreatest

GDPgainsandtowardsupportfortheelderlyandthemiddleclasses.31Curiously,

theshifthasoccurredmainlyincountriesthatarenotwelfarestates.Thissection

chartsthemissionshift,firstviewingwhereitoccurred,thenexaminingits

fingerprintsintermsofsocialexpenditurebehavior,andfinallyconjecturingabout

itsefficiencyconsequencesandimplicationsforthefuture.

31Foranin-depthhistoryofthepoliticsofthepostwardrifttowardtheelderlyand

towardlessprogressivesocialspending,seeBaldwin(1990).

24

Sincethe1960s,povertyrateshavebeenreducedmuchmoresuccessfully

fortheelderlythanforchildrenorpersonsofworkingage.Sosaytheaveragesover

groupsofOECDcountries.32InlargegroupingsofOECDcountries,weseeaclear

dividearoundage50.Allagegroupsupto50yearsofageexperiencedanincreased

povertysharerelativetothepopulationasawhole,whilethoseabove50shiftedout

ofpovertyfasterthanthewholepopulation.IntheUnitedStates,forexample,

povertydeclineddramaticallyforthoseover65butnotforchildrenbetween1959

and2010.Overthishalf-century,thepovertysharefellfromabout34percentofthe

elderlypopulationto9percent,whereasitfellonlyfrom28percentto22percent

amongchildren.33

Thedrifttowardloweringpovertyratesmorefortheelderlythanfor

childrenandthoseinworkingageisclearlytiedtoabiasinexpenditurepolicy,

particularlyincertaincountries.Toshowthis,oneneedstoavoidjustexamining

socialexpendituresassharesofGDP,whichcanbedrivenbytheagegroupsharesof

totalpopulation.Amoretellingkindofexpendituremeasureisthepercentageby

whichpovertyforeachagegrouphasbeenreducedbynettransfersfrom

government.Figure6contraststheinternationalpatternsinsuchnettransfersby

agegroup.34

Asfarasaidingtheelderlyisconcerned,OECDcountrieshavegenerallydone

theirjob,cuttingthepovertysharesoftheirelderlypopulationsbybetterthanhalf

inalmostallcountries,asshowninPanelAofFigure6.SosaytheOECDestimates

formostcountriesinboth1995and2005,theexceptionsbeingthereported

retreatsfrompensionsubsidiesinIrelandandFinlandbetweenthesetwoyears.

32OECD,(2008,chapter5,Figure5.5),updated12September2008.Inallthat

follows,theconceptoftransferstowardtheelderly,or“pensionsubsidies,”should

bethoughtofasbeingmeasuredbyonlythenon-contributorypartofpension

benefits.

33Seehttp://www.census.gov/hhes/www/poverty/data/historical/people.html,

asaccessed31December2011.

34Foralternativemeasuresoftheelderlybiasinsocialexpenditures,1985-2000,

seeLynch(2001,2006).Hermeasurescomparesupportratiosintheformof(social

expenditurebenefits/personintheagerange)fortheelderlyversusthoseof

workingage.

25

Countriesdifferedfarmoreintheirwillingnesstocutpovertyamong

youngergroups,bothin1995andagainin2005,accordingtotheremainingpanels

ofFigure6.UnlikethesimilarofallOECDcountriesintheirpensionsubsidies

(again,Figure6A),theagepatternrevealsthewidegapinpovertyreductionfor

thoseofworkingage(Figure6B)andforchildren(Figure6C).Bytheturnofthe

century,thepoverty-cuttingresultsweredramaticallylowerforJapan,theUnited

States,andothernon-welfare-statesthanfortheNordicsandtheCzechRepublic.

ParticularlystrikingisthatItaly,whoselargeshareofsocialspendinginGDPwould

qualifyforwelfare-statestatusunderthe20-percentrule,hasdirectedsolittleofits

socialbudgetstowardcuttingpoverty.Again,aselsewhereintheMediterranean

(andinSouthAmerica’sSouthernCone),socialtransfersgototheelderly,largely

thosewithprivilegedoccupationsintheirearliercareers.

Hasfavoringthesupportoftheelderly,andinvestinglessinthoseunderthe

ageof65,beensomethingcostlyintermsofGDP?Theanswerdependsonthe

social-budgetcounterfactualonechoosestopose.Herearethetwoleading

candidates:

CounterfactualA:Takesomeofthegovernmentmoneyspentontheelderly,

andshiftittowardtheleadingkindsofsocialprogramsforchildrenandthoseof

workingage(education,preventiveout-patienthealthcareforthechildren,worker

retraining,etc.).

CounterfactualB:Privatizepensions,reducingtaxesandmandating

individualsavingsaccountsforoldage.

Thusfar,thetexthasimpliedthatwearecomparingactualpracticewith

CounterfactualA,andforthiscomparisontheanswerisclearlyyes,thebiasinfavor

oftheelderlyisclearlycostlyintermsofGDP.Thatisevidentfromthesimplefact

thatinvestinginhumandevelopmentbringsahigherreturn,theearlierthestageof

cognitiveandcareerdevelopment.Theimportanceofthispointhasrecentlybeen

underlinedinthewritingsofPedroCarneiroandJamesHeckman,amongothers,

26

findingthatevenamongchildren,therateofreturnseemshigher,theearlierthe

childageatwhichparentsandsocietyintervene.35

Bycontrast,comparisonofactualpracticewithCounterfactualBsuggestsno

cleardifferenceinGDP.Forallwecantellfromtwentieth-centurydata,individual

savingandtax-financedsavingcanyieldthesameGDPresultwithappropriate

adjustmentsofparametersinprogramstargetingtheelderly.Onemightnotethat

universalprogramslikeSocialSecurityintheUnitedStatesareadministeredwith

lowerbureaucraticcostsandlowerdefaultriskthanprivatepensionplansor

individualinvestments.Ontheotherhand,thereisreasontofearthatthepolitical

processwouldunderfundpublicpensions.Twentieth-centurypaneldatahavenot

allowedustodenythatthereisazeroneteffectonGDPfromchoosingpublic

pensionsovermandatedprivateindividualpensions.Thusthehistoricdrifttoward

funnelingtaxmoneytotheelderlyeitherhascostGDPornot,dependingon

whetheronewantstoconsiderCounterfactualAorCounterfactualB.

IfthereisnocleargaininGDPfromshiftingsocialinsuranceandassistance

towardtheelderly,whyhavesomanysocietiesdoneit?Theanswerseemstobe

graypower.Inthepostwardemocracies,anever-greaterpopulationshareconsists

oftheelderlyplusthoseapproachingoldage,andtheelderlyhavearelativelyhigh

participationrateinpolitics.Theyhavesucceededingainingintergenerational

transfers,withorwithoutaneteffectonGDP.

C.FormulasthathaveworkedforSocialSecurity

Fortunately,therearebroadformulasthatcanadjustourpensionstolonger

lifespans.HerearethreeformulasthatwouldmakeSocialSecuritysustainable

indefinitely,formulasthatprivatesavingsplansshouldalsotrytoemulate.

ThefirstformulaisoneonwhichtheUnitedStateshasalreadydoneits

homeworkquitewell,andjustneedstofollowthrough.Theformulaisthis:

35CarneiroandHeckman(2003),andthesourcescitedthere.

27

KeeptheshareofadultlifespentonSocialSecurityfromrising,byextending

theworkingageforeachbenefitrateinproportiontoadultlifeexpectancy.

TheUnitedStateshasalreadytakenstepsdownthispath,thankstothe1983

GreenspanCommissiononSocialSecurityReform.Wehaveadvancedtheageof

“full”retirementbenefitsfrom65to67forthosebornafter1960.Thegradual

formulaadoptedin1983wiselyfollowsthestrategyof“grandfathering”,bynot

hittingthoseofmiddleagewithashocktotheirlifeplans.

Yetthenewsaboutacceleratingseniorlongevitymeanswemustcontinue.

Seniorsareincreasinglyhealthy,andtheshareoftheminpovertyhasdeclined,soit

isnotunreasonableforthemtoreceivefullSocialSecuritybenefitsonlyiftheywork

thesameshareoftheiradultlivesasdidtheirparents.Fixingtheshareofadultlife

atworkwouldmeansomethinglikethis:Toreceivetheyear2007’sretirement

benefitasapercentageofaverageearningsatanygivenage,onemustwork51.6

percentofone’slifeexpectancyformales,and41.5percentforfemales,aswedidin

2007.America’sprogressalongthispathneedstocontinue,withmoreage

adjustments.

Thesecondformulabuildsinanautomaticadjustmentofthework-

retirementbalancetothelongevitytrend.Borrowingfromthe“notionaldefined

contribution”pensionreformthatSwedensetupinthe1990s,theformulaisthis:

Indextheretirementbenefitsforeachcohorttolifeexpectancyatage60.

Thatis,whileeveryindividual’sannualpensionbenefitsarestilltiedtohisorher

lifetimeearningshistory,theyareindexedtotheseniorsurvivaloddsofeverybody

inhisorherbirthcohort.Thusifyouwerebornin1980,andyouworkedfrom

2000to2045,yourannualSocialSecuritybenefitswouldbetiedtoyourearnings

overthoseyearsdividedbyanindexthatistiedtotheage-60lifeexpectancy

calculatedfromsurvivaloutcomesaroundtheyear2040.Thelongeryourcohortof

peopleisexpectedtolive,thelessyourbenefitseachyear,thoughofcourseyour

28

benefitsarelikelytocontinueformoreyears.Thishelpsmaintainaggregate

balanceinthepensionbudget.

ThethirdformulaisalsopatternedafterSwedishpracticesincethe1990s:

IndexannualpensionpayoutstorecentGDPperworking-ageperson.36

Pensioners’benefitsfromSocialSecurityshouldshareinthefortunesofthe

economy.Whenthereisaboom,pensionersshareinit,byautomaticformula.By

thesameformula,pensionssharethepainofarecessionasmuchasothers.Inan

unlikelyGreatDepressionextreme,theirultimatesafetynetwouldbethesameas

fortheyoung:Publicsupportforthepoorplusmedicalcare.

Pre-commitmenttosuchpre-determinedformulaecouldremovethepension

parametersfromthepoliticalarena.Ofcourse,socialcontractscanonlymake

politicalpre-commitmenteasier.Theycannotguaranteeit.EvenSwedensoftened

itspre-setformulaveryslightlyinresponsetothe2008-2009slump.Underthe

originalformula,thegovernmentwasobligatedtocutbenefitsforthetwoyears

2010-2011.Afraidtofollowthroughonthecutsin2010,anelectionyearfor

Parliament,officialschangedtheformulatostretchthereductionsoutovermore

years.Yetthesystemremainsintact,anditstillworks.

Nonetheless,inpensionsasinhumaninvestmentsinhealthandmothers’

careers,welfarestateSwedenstandsoutasaleaderinrationalsolutionstosocial

concerns.

VI.Conclusion

36IhaveoversimplifiedSweden’ssystem,whichiswelldescribedinKnuse(2010).

InsteadofanindextiedtoGDPperworking-ageadult,Swedenusestwootherindex

factorsthatyieldasimilarresult.Theeconomicaggregateiswagesandsalariesper

employedperson,notGDPperperson18-64.AndSwedenbacksupitspension

stabilitywithanadditionaltriggerthatgoesoffwheneverthepensionfund’s

“Balanceratio”BR=capitalizedassets/capitalizedobligationsdropsbelow1.

29

Theimaginedeconomicthreatstothewelfarestatehavenotmaterialized.No

welfarestatehasbecomepoor.Norhastherebeenanyinternational“racetothe

bottom”intaxesandsocialspending.Productivepeopleandtheirwealthdidnot

fleefromthewelfarestate,anymorethanproductivepeoplepreferalow-tax

neighborhoodoveronewithhighertaxes,betterschools,andmorepublicservices.

ThewelfarestatelookslikeaDarwiniansurvivorintheglobaleconomy.

Aswehaveseen,thisfavorableeconomicoutcomedidnotjustemergefroma

statisticalblackbox.Thereareplausiblereasonsforexpectingsuchanoutcome,

andreal-worldgovernmentshaveappreciatedthatbroadsafetynetsandinvesting

taxpayers’moneyinhumandevelopmentwillraisehumanproductivity.Theyhave

financedtheuniversalsocialprogramswithbroadtaxes,atlowadministrativecost,

usingamixoftaxesthatconventionaleconomicswouldhavepreferred.

Intheprocess,thelarge-budgetwelfarestatesareworldleadersinachieving

anegalitariansocietywithlowerincomeinequalityandlowerpoverty,while

maintainingsocialpeace.Perhapsonekeytothispeacefulegalitarianachievement

isthefactthattheirprogressivitywasachievednotthroughfriction-causingsteeply

progressivetaxesbutthroughuniversalismintheirsocialexpenditures.Thelower-

andmiddle-incomeclassesthatmostfavoredsocialinsuranceinfactpaidformuch

ofitbythemselves.

Therealthreatstothewelfarestatearenoteconomic,butratherariseas

politicalresponsestodemographicmovements.Onerealthreatisthatpolitical

backlashagainstarisinginfluxofrefugeescouldbringaretreatfromuniversalist

welfareprograms.ThisthreatisprobablyconfinedtocountrieslikeSwedenand

Germany,i.e.countriesthatarewelfarestatesandacceptlargerefugeeinflowsand

refusetodiscriminateagainstimmigrantsintheprovisionofsocialservices.

Theother,moreglobal,threatisonethatismovingtowardalldeveloped

countries,whethertheyhavelargeorminimalgovernmentbudgets.The

acceleratedagingoftheadultpopulationinallOECDcountriesmeansastrainon

planningforoldage,withorwithouttherelianceontax-basedpensionsandlong-

termcare.TheNordicwelfarestates,liketheUnitedStatessincethe1980s,are

30

worldleadersthathavealreadybegundoingtheirsocialhomeworktomeetthe

elderlytidalwave.

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33

Figure1.TheWelfareStateisYoungandRich

34

Figure2.TaxCollectionCostsasaPercentageoftheAmountsCollected

ByCentralGovernments,USandUK1787/96-2011

35

Figure3.Female-MaleWageRatiosinSelectedCountries,1967–2006

36

Figure4.ThePresentValueofAnnualFiscalImpactsofOneImmigrant,

AdmittedtotheUnitedStatesin1998

(Theimmigrantin1998isacompositeofdifferentageandeducationgroups.)

37

Figure5.VoteSharesReceivedbyNativistPoliticalPartiessincec2000

38

Figure6.PovertyReductionAchievedthroughFiscalNettransfers,1995and2005

A.Fortheelderly(ages66andup)

39

(Figure6,continued)

B.ForthoseofWorkingAge(18-65years)

40

(Figure6,continued)

C.ForChildren(0-17years)

41

Sourcesandnotestofigures:

Figure1:TherealGDPpercapitaseriesupto2007isfromtheAngusMaddison

internetsite:http://www.worldeconomics.com/Data/MadisonHistoricalGDP/

Madison%20Historical%20GDP%20Data.efp.ThesocialtransfersharesofGDPon

theverticalaxisfor1880-1930arefromLindert(1994),andthosefor1960-2007

arefromtheOECD’sSocexpseriesdownloadablefromOECDiLibrary.

Figure2:

TheadministrativecostshareoftaxcollectionsaredocumentedinLindert,Growing

Public(2004,Volume1,Chapter12),andupdatedintheIRSDataBook

(http://www.irs.gov/uac/Tax-Stats-2).IamindebtedtoJoelSlemrodforhis

directingmetotheupdatedIRSseries.

Figure3:

ThesourceisBlau(2012,p.372),citingInternationalLabourOrganization,

LABORSTAInternetdatabase,http://laborsta.ilo.org.

Note:ForDenmark,Finland,Norway,andSweden,figuresfor1990andbeforeare

forthemanufacturingsector.ForGermany,figurespriorto2000areforWest

Germany.DataforGermanyfor2000andonareforthemanufacturingsector.

AnewseriesstartsforFrance,Japan,andSwitzerlandin2000.

Figure4:ThesourceisLeeandMiller,2000.

Figure5:SeeMilanovic(2016),Figure4.11andthesourcescitedthere.

Figure6:

42

Table1. HowSocialTransfersasaShareofGDPCorrelatewith GrowthandProsperityin19OECDCountries,1880-2000

Thecoefficientofcorrelationbetweenthe

initialshareofsocialtransfersinGDPand

Time (a)thegrowth (b)thelevel

period ofGDP/capita ofGDP/capita

1880-1890 0.10 -0.18

1890-1900 0.34 -0.05

1900-1910 -0.23 0.09

1910-1920 0.12 0.31

1920-1930 -0.24 0.49

1960-1970 -0.16 -0.24

1970-1980 0.34 -0.09

1980-1990 -0.07 0.09

1990-2000 -0.11 -0.04

2000-2010 0.12 -0.19

Simpleaverage

ofthesecorrelations 0.02 0.02

Noneofthecorrelationsisstatisticallysignificant.

NotesandsourcesforTable1:

Socialtransfers/GDPfor1880-1930:Welfare,unemployment,pensions,health,and

housingsubsidies,asgiveninLindert(1994,Table1).

Socialtransfers/GDPfor1960-1980:OECDoldseries(OECD1985);1980-present:

OECDnewseries(OECD1998).

RealGDPpercapita:PennWorldTable7.1,downloaded1April2013.

The19countriesareAustralia,Austria,Belgium,Canada,Denmark,Finland,France,

Germany,Greece(1960son),Ireland(1960son),Italy,Japan,Netherlands,New

Zealand,Norway,Sweden,Switzerland,theUnitedKingdom,andtheUnitedStates.

43

Table2.TheFiscalEffectsofanExtra(U.S.)Immigrant DependontheQuestionYouAskaboutThem

Thequestion SocialSecurity Public-schooling

youask effects effects

The“payasyougo”question:

Aretoday’simmigrantsanet No,immigrants Yes,immigrantburdenonnativetaxpayers, payfornatives’ childrensubsidized

rightnow,“pay-as-you-go”? SocSec.since bynativetaxpayers

about1980. sinceabout1980.

The“onelifetime”question:

Isonewaveofimmigrantsanet Yes,ifimmigrants No,immigrants’kidsburdenonnativetaxpayersover havelowerlifetime repaytherestofsociety

thelifespanoftheimmigrants earnings,theyget inproductivity

andtheirdescendents? anabove-average andtaxes.

rateofreturnonthe

SocSec,atexpense

ofothertaxpayers.

The“manygenerations”question: No,theybecome No,theybecomeAretoday’simmigrants,plustheir heavynettaxpayers, heavynettaxpayers,

childrenandgrandchildrento2100, likeothers. likeothers.

anetfiscalburden?