Tuesday, June 19, 2007

The Welfare State-- Right and Wrong Reasons

(Cross-posted from Vox Nova).

It is a well-observed fact that the US eschews the kind of welfare states popular in Europe. Favoring low taxes, and hence a smaller government, the US offers fewer benefits (unemployment insurance, pensions, disability payments, childcare subsidies etc.) and less income security. The ratio of social spending to GDP remains low.

What accounts for the differences in preferences? According to a triumvirate of top economists (Alberto Alesina, Edward Glaeser, and Bruce Sacerdote), the reasons are largely cultural. For a start, the US is a curiosity among advanced economies in that it is governed by 18th century principals that were designed to, first and foremost, protect private property rights. With much upheaval caused by war in Europe, the old system was largely swept away, and a more democratic one arose to take its place. The US also never faced a major socialist threat that prompted center-right politicians to embrace the welfare state, as occurred in Europe. Again, part of this is cultural, with entrenched individualism (abetted by low population density), and part of it reflects the majoritarian electoral system that makes it hard for the rise of other parties.

But these authors pinpoint two specific factors that they believes explains a lot of the US-Europe difference on this matter. The first is ethnic or racial heterogeneity. The basic argument is that people are more comfortable redistributing income to those of the same race or ethnic group. Americans are inherently opposed to "welfare" because a disproportionate amount goes (or is perceived to go) to minority races. On the contrary, a country like Sweden has been historically quite homogeneous (although this is changing rapidly). The second argument relates to attitudes toward the poor. The authors quote the World Values Survey to show that 60 percent of Americans, but only a quarter of Europeans, believe the poor are lazy. In contrast, the numbers are almost reversed when it comes to believing the poor are trapped, and whether luck determines income. They show that the more people believe luck drives success, the larger the social spending.

If these indeed are the two key arguments that explain the cross-country differences in welfare spending (and they use statistical techniques to come to this conclusion, not mere conjecture), then this is highly problematic from a Catholic point of view. Opposing redistribution on the grounds of "hostility between the races" is not in accord with recognizing the dignity or intrinsic worth of the human person, and it deviates from an appropriate sense of "catholicity" (not placing boundaries on who our neighbor should be). Believing the poor are lazy comes directly out of Calvinism, through the belief that God rewards the elect with earthly success. Quite clearly, this is not how Catholic social teaching treats the poor.

Therefore, from a Catholic point of view, the main reasons for the small size of the welfare state in the US seem to violate Catholic social teaching. Does this mean the US is impelled to move toward European-style welfare-state policies? Not at all. It is quite possible to argue that some welfare-state policies create a culture of dependency that in itself violates the dignity of the human person. And there is no doubt that this became an issue in many European countries, leading to low labor market participation, marginalization, and ghettoization, prompting reform.

But at the same time, this is not a license to ignore the plight of the poor altogether. Just look at some basic statistics. In 2000, the poverty rate in the US was 17 percent, against an EU-average of around 9 percent. Moreover, the countries with the largest social spending ratios have the best poverty outcomes-- Denmark (4 percent), Sweden (5 percent), Netherlands (6 percent).

The key then, is to reduce poverty without creating a culture of dependency. The Nordics have one solution. They offer generous replacement rates (if you are unemployed, you get paid a lot) but for limited periods and on the condition you enter training programs and other active labor market policies. Also, it is easy to hire and fire, meaning that you don't see the kind of dual labor markets that exist in France, leading to the disenfranchisement of large classes of people (including Muslim immigrants). In other words, the Nordics subsidize income loss, but not job loss. The economy retains sufficient flexibility, but the worker is not forced to bear excessive risk. It works.

Of course, it is expensive, and Americans are notoriously averse to higher taxes. But I'm not sure it is really possible to tackle poverty on the cheap. There are a few things that can alleviate the pressures without adopting a full Nordic model. First, in-work benefits such as the earned income tax credit can be expanded-- this is a great boon to the working poor. Second, childcare should be subsidized to alleviate the pressure on working mothers. And third, we need to move to a system of universal health insurance (of course, to be truly cost effective, this should ideally be a single-payer system, but this is an argument for another day).

Sadly, too many in the US dismiss the welfare state as an outdated relic from socialist Europe, often for the reasons enunciated by Alesina-Glaeser-Sacerdote, ignoring the plight of the poor in their own country. And Catholics will routinely dismiss a core aspect of Catholic social teaching as mere prudential judgment. As I've said a million times by now, prudential judgment is not a license to ignore, but the application of Catholic teaching to changing concrete facts and circumstances. In terms of addressing poverty, there is more than one solution, but there needs to be some solution.

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