Growing Public: Is the Welfare State Mortal or Exportable? Peter H. Lindert University of California - Davis

Transcription

1 Growing Public: Is the Welfare State Mortal or Exportable? Peter H. Lindert University of California - Davis

2 Six Conclusions: The welfare state is not an endangered species. No race to the bottom. The free lunch puzzle: OECD experience shows no negative effect on GDP. There are good reasons for this. High- budget welfare states feature pro-growth tax mix, better health care, more investment in women s s careers

3 Six conclusions contd: OECD experience in 1980s and 1990s showed how PAYGO programs will probably be adjusted in the 21st century. Less support per elderly person, but no change in tax share and no cuts in real absolute pensions. The hardest transitions: Pensions in Italy and Japan, health care in US....

4 Six Conclusions contd: The historical keys to creating new welfare states were, and will be, full-voice democracy, population aging, income level, openness to trade, and social/ethnic cohesion....

5 Six Conclusions contd: Among developing countries, the leading welfare states will be in Central-Eastern Europe. Few will emerge outside of Europe until the current regressive transfers are made more egalitarian. This awaits the shift to full-voice democracy.

6 Some Definitions used here: Social transfers = these kinds of tax- based government spending: basic assistance to poor families; unemployment compensation; public pensions, excluding those for government and military employees; public health expenditures; and housing subsidies.

7 Some Definitions used here contd: Public education excluded here, studied separately. Welfare state = these social transfers exceed 20% of GDP.

8 Little change since 1980: Using social transfers/gdp=20% as a crude border of the welfare state, the number of welfare states has been stable since Ireland out, Switzerland (somehow) in Netherlands slashed some programs after 1995, and is now down near the border Many others have stayed near the 20% border In Eastern Europe, the Czech Republic, Hungary, and Poland are preserving their welfare states

9 The free lunch puzzle: : OECD experience shows no negative effective of greater social transfers on GDP. So said most past estimates So say the current estimates, which introduce three improvements missing from any study that suggested a negative effect on growth:

10 1. Focusing on social transfers, not overall taxes or government consumption 2. Estimating the simultaneous feedbacks between social transfers and GDP 3. Testing for the non-linearity of GDP costs that theory predicted. (Datasets: http// ucdavis.edu/faculty/ /faculty/fzlinder)

11 There are good reasons for this result. (1) Real-world welfare states did not commit the blunders we so often imagine. (2) High-budget welfare states feature pro- growth tax mix, better health care, more investment in women s s careers. To see the role of the tax mix, consider.

12 Exam Question #1 Which of the following tax rates is not higher in big-government government welfare states than in the US? (a) tax rate on corporations, capital, and top property incomes (b) tax rate of labor income (c) tax rate on general consumption (like sales tax) (d) sin taxes (on tobacco, alcohol, gasoline)

13 Doesn t t generous unemployment compensation cut work?? It does. So said a rich past literature, and the current estimates agree. Yet the effects on GDP are small Past discussions have imagined bigger anti-work incentives than are practiced. Too much emphasis on simple replacement ratios.

14 GDP effects are smaller than the work effects, because unemployment compensation raises labor productivity. Positive effects of other social transfers, such as public health, easily offset these small GDP losses...

15 In addition, the politicized discussion of work incentives at the bottom of the income ranks has missed a work disincentive in the low-budget countries. Exam Question #2 In which case was a poor single mother given the least incentive to get a job? (a) U.S.A. under Reagan (b) U.S.A. under Clinton (c) Britain under Tony Blair (d) Sweden s s welfare state today

16 Other GDP effects of social policies Advantage welfare states over U.S. public health career support for mothers

17 Advantage U.S. over Western and Southern Europe competition in higher education other barriers to competition in W & S Europe, especially worker protection laws, high minimum wages, import barriers, and government regulation or ownership of industry.

18 Longer Life in the 21st Century: A Crisis for Social Budgets? Three Familiar Sources of Pension Trouble Aging too fast (esp. Japan, Italy) Asking for trouble with early retirement policy (Italy, other Western and Southern Europe) Asking for trouble with overall government deficits (Japan, US)

19 Basic Perspectives on OECD Pension Solutions As the elderly share rises, something has to give. Pensions per elderly person cannot rise as fast as income per worker. This fact is not worse for public or PAYGO pensions. Switching to funded and privatized pensions has no effect on the degree of adjustment needed.

20 Basic Perspectives on OECD Pension Solutions contd: Funded systems are no more politically stable than PAYGO. History shows the ease with which PAYGO has replaced funded systems (e.g. U.S. Soc Security 1935). OECD countries in the 1980s and 1990s have already pointed the way to the likely political adjustment in the 21st century: lower support per elderly, no change in tax share.

21 Basic Perspectives on OECD Pension Solutions contd:

22 Will Developing Countries Become Welfare States? Which Ones? The historical keys to creating new welfare states are full-voice democracy, population aging, income level, openness to trade, and social/ethnic cohesion. Best candidates for welfare states are in Central and Eastern Europe, where these forces plus the communist legacy favor large transfers.

23 What about outside of Europe? Robin Hood in Reverse: Largely because political power remains concentrated, developing countries tax and transfer systems often redistribute from poor to rich. Many Latin American pension systems draw on general taxes to give subsidize pensions for top occupational groups, especially those in government.

24 What about outside of Europe, contd India s s health and education systems similarly transfer from the general population to top classes.

25 The Myth of Chile s Social Security Privatization The story agreed on: In 1981 Pinochet replaced an expensive social security system with private pension accounts -- reducing budget deficits, raising national saving, and raising inequality.

26 The Chile myth, contd: First flaw in the story: Chile had no social security system to privatize in the first place. Only an occupational pension system for top half of the occupational ladder. It had only just begun to show deficits, due to cheating.

27 The Chile myth, contd: Second flaw: Government pension budget deficits grew as a share of GDP since No clear gain in national saving. In Chile, as elsewhere, the transition cost of privatization was large.

28 The Chile myth, contd: The 1981 reform was probably slightly regressive. New pensions for the poor, but offset by taxpayers buyouts of employer contributions to top- job private pensions.

29 Political Voice is Crucial Can egalitarian welfare states displace such regressive systems? Cause for pessimism: Power is still concentrated in countries with ostensibly full suffrage.

30 Political Voice is Crucial contd Causes for optimism: Even within India, regions with fuller-voiced democracy have improved basic health and education. And where regressive transfers now loom large, they can serve as budgetary place holders : : There s s room to replace them with egalitarian systems, without huge tax increases.