Growing Public: Is the Welfare State Mortal or Exportable?siteresources.worldbank.org/SAFETYNETSANDTRANSFERS/Resources/... · Development Economics (DEC) Lectures: April 21, 2005

Growing PublicGrowing Public: : Is the Is the Welfare State Mortal or Welfare State Mortal or

Exportable?Exportable?

Peter H. LindertPeter H. LindertUniversity of California University of California -- DavisDavis

Development Economics (DEC) Lectures: April Development Economics (DEC) Lectures: April 21, 200521, 2005

Six ConclusionsSix Conclusions::

nn The welfare state is not an endangered The welfare state is not an endangered species. No race to the bottom.species. No race to the bottom.

nn The free lunch puzzle: OECD experience The free lunch puzzle: OECD experience shows no negative effect on GDP.shows no negative effect on GDP.

nn There are good reasons for this. HighThere are good reasons for this. High--budget welfare states feature probudget welfare states feature pro--growth growth tax mix, better health care, more tax mix, better health care, more investment in womeninvestment in women’’s careerss careers……


Six conclusions Six conclusions contdcontd::

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


Six Conclusions Six Conclusions contdcontd::

nn The historical keys to creating The historical keys to creating new welfare states were, and new welfare states were, and will be,will be,•• fullfull--voice democracy, voice democracy, •• population aging, population aging, •• income level, income level, •• openness to trade, and openness to trade, and •• social/ethnic cohesion. ....social/ethnic cohesion. ....


Six Conclusions Six Conclusions contdcontd::

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


Some Definitions used hereSome Definitions used here::

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


Some Definitions used hereSome Definitions used herecontdcontd::

Public education excluded here, Public education excluded here, studied separately.studied separately.

Welfare stateWelfare state = these social = these social transfers exceed 20% of GDP.transfers exceed 20% of GDP.


Little change since 1980:Little change since 1980:

Using social transfers/GDP=20% as a crude Using social transfers/GDP=20% as a crude border of the welfare state, the number of border of the welfare state, the number of welfare states has been stable since welfare states has been stable since 1980.1980.

ll Ireland out, Switzerland (somehow) inIreland out, Switzerland (somehow) inll Netherlands slashed some programs Netherlands slashed some programs

after 1995, and is now down near the after 1995, and is now down near the borderborder

ll Many others have stayed near the Many others have stayed near the 20% border20% border

ll In Eastern Europe, the Czech In Eastern Europe, the Czech Republic, Hungary, and Poland are Republic, Hungary, and Poland are preserving their welfare statespreserving their welfare states


The free lunch puzzleThe free lunch puzzle: OECD : OECD experience shows no negative experience shows no negative effective of greater social transfers effective of greater social transfers on GDP.on GDP.

nn So said most past estimatesSo said most past estimatesnn So say the current estimates, which So say the current estimates, which

introduce three improvements introduce three improvements missing from any study that missing from any study that suggested a negative effect on suggested a negative effect on growth:growth:


1.1. Focusing on social transfers, not overall Focusing on social transfers, not overall taxes or taxes or ““government consumptiongovernment consumption””

2.2. Estimating the simultaneous feedbacks Estimating the simultaneous feedbacks between social transfers and GDPbetween social transfers and GDP

3.3. Testing for the nonTesting for the non--linearity of GDP costs linearity of GDP costs that theory predicted.that theory predicted.

(Datasets:(Datasets:http//www.econ.http//www.econ.ucdavisucdavis..eduedu/faculty//faculty/fzlinderfzlinder))

http://www.econ.ucdavis.edu/faculty/fzlinder


There are There are good reasons for this resultgood reasons for this result. .

(1) Real(1) Real--world welfare states did not world welfare states did not commit the blunders we so often imagine. commit the blunders we so often imagine.

(2) High(2) High--budget welfare states feature probudget welfare states feature pro--growth tax mix, better health care, more growth tax mix, better health care, more investment in womeninvestment in women’’s careers.s careers.

To see the role of the tax mix, considerTo see the role of the tax mix, consider……..


Exam Question #1Exam Question #1Which of the following tax rates is Which of the following tax rates is

notnot higher in bighigher in big--government government welfare states than in the US?welfare states than in the US?

(a) tax rate on corporations, (a) tax rate on corporations, capital, and top property incomescapital, and top property incomes(b) tax rate of labor income(b) tax rate of labor income(c) tax rate on general (c) tax rate on general consumption (like sales tax)consumption (like sales tax)(d) sin taxes (on tobacco, (d) sin taxes (on tobacco, alcohol, gasoline)alcohol, gasoline)


DoesnDoesn’’t generous unemployment t generous unemployment compensation cut workcompensation cut work? It does. So ? It does. So said a rich past literature, and the said a rich past literature, and the current estimates agree.current estimates agree.

Yet the effects on GDP are smallYet the effects on GDP are small

nn Past discussions have imagined Past discussions have imagined bigger antibigger anti--work incentives than are work incentives than are practiced. Too much emphasis on practiced. Too much emphasis on simple replacement ratios.simple replacement ratios.


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


nn In addition, the politicized discussion of In addition, the politicized discussion of workwork incentivesincentives at the bottom of the income at the bottom of the income ranks has missed a work disincentive ranks has missed a work disincentive in the in the lowlow--budget countries.budget countries.

Exam Question #2Exam Question #2nn In which case was a poor single mother In which case was a poor single mother

given the given the leastleast incentive to get a job?incentive to get a job?

nn (a) U.S.A. under Reagan(a) U.S.A. under Reagan(b) U.S.A. under Clinton(b) U.S.A. under Clinton(c) Britain under Tony Blair(c) Britain under Tony Blair(d) Sweden(d) Sweden’’s welfare state todays welfare state today


Other GDP effects of social Other GDP effects of social policiespolicies

Advantage welfare states over Advantage welfare states over U.S. U.S. ––

•• public healthpublic health•• career support for motherscareer support for mothers


Advantage U.S. over Western and Advantage U.S. over Western and Southern Europe Southern Europe ––

•• competition in higher educationcompetition in higher education•• other barriers to competition in W & other barriers to competition in W & S Europe, especially worker S Europe, especially worker protection laws, high minimum protection laws, high minimum wages, import barriers, and wages, import barriers, and government regulation or ownership government regulation or ownership of industry.of industry.


Longer Life in the 21st Century: Longer Life in the 21st Century: A Crisis for Social Budgets?A Crisis for Social Budgets?

Three Familiar Sources of Pension TroubleThree Familiar Sources of Pension Trouble

•• Aging too fast (esp. Japan, Italy)Aging too fast (esp. Japan, Italy)

•• Asking for trouble with early Asking for trouble with early retirement policy (Italy, other retirement policy (Italy, other Western and Southern Europe)Western and Southern Europe)

•• Asking for trouble with overall Asking for trouble with overall government deficits (Japan, US)government deficits (Japan, US)


Basic Perspectives on OECD Basic Perspectives on OECD Pension SolutionsPension Solutions

•• As the elderly share rises, something As the elderly share rises, something has to give. Pensions per elderly has to give. Pensions per elderly person person cannotcannot rise as fast as income rise as fast as income per worker.per worker.

•• This fact is This fact is notnot worse for public or worse for public or PAYGO pensions. Switching to PAYGO pensions. Switching to funded and privatized pensions has funded and privatized pensions has no effect on the degree of no effect on the degree of adjustment needed. adjustment needed.


Basic Perspectives on OECD Basic Perspectives on OECD Pension Solutions Pension Solutions contdcontd::

•• Funded systems are no more Funded systems are no more politically stable than PAYGO. politically stable than PAYGO. History shows the ease with which History shows the ease with which PAYGO has replaced funded PAYGO has replaced funded systems (e.g. U.S. Soc Security systems (e.g. U.S. Soc Security 1935).1935).

•• OECD countries in the 1980s and OECD countries in the 1980s and 1990s have already pointed the way 1990s have already pointed the way to the likely political adjustment in to the likely political adjustment in the 21st century: lower support per the 21st century: lower support per elderly, no change in tax share.elderly, no change in tax share.


Basic Perspectives on OECD Basic Perspectives on OECD Pension Solutions Pension Solutions contdcontd::


Will Developing Countries Become Will Developing Countries Become Welfare States? Which Ones?Welfare States? Which Ones?

nn The historical keys to creating new The historical keys to creating new welfare states are fullwelfare states are full--voice voice democracy, population aging, democracy, population aging, income level, openness to trade, and income level, openness to trade, and social/ethnic cohesion.social/ethnic cohesion.

nn Best candidates for welfare states Best candidates for welfare states are in Central and Eastern Europe, are in Central and Eastern Europe, where these forces plus the where these forces plus the communist legacy favor large communist legacy favor large transfers.transfers.


WhatWhat about outside of Europe?about outside of Europe?

•• Robin Hood in Reverse:Robin Hood in Reverse: Largely Largely because political power remains because political power remains concentrated, developing countriesconcentrated, developing countries’’tax and transfer systems often tax and transfer systems often redistribute from poor to rich.redistribute from poor to rich.

•• Many Latin American pension Many Latin American pension systems draw on general taxes to systems draw on general taxes to give subsidize pensions for top give subsidize pensions for top occupational groups, especially occupational groups, especially those in government. those in government.


What about outside of Europe, What about outside of Europe, contdcontd

•• IndiaIndia’’s health and education s health and education systems similarly transfer from systems similarly transfer from the general population to top the general population to top classes. classes.


The Myth of ChileThe Myth of Chile’’s s ““Social Social Security PrivatizationSecurity Privatization””

nn The story agreed on: In 1981 The story agreed on: In 1981 Pinochet replaced an expensive Pinochet replaced an expensive social security system with social security system with private pension accounts private pension accounts ----reducing budget deficits, raising reducing budget deficits, raising national saving, and raising national saving, and raising inequality.inequality.


The Chile myth, The Chile myth, contdcontd::

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



nn Second flaw: Government Second flaw: Government pension budget deficits pension budget deficits grewgrew as as a share of GDP since 1981. No a share of GDP since 1981. No clear gain in national saving. In clear gain in national saving. In Chile, as elsewhere, the Chile, as elsewhere, the transition cost of privatization transition cost of privatization was large. was large.



nn The 1981 The 1981 ““reformreform”” was probably was probably slightly regressive. New slightly regressive. New pensions for the poor, but offset pensions for the poor, but offset by taxpayersby taxpayers’’ buyouts of buyouts of employer contributions to topemployer contributions to top--job private pensions. job private pensions.


Political Voice is CrucialPolitical Voice is Crucial

nn Can egalitarian welfare states Can egalitarian welfare states displace such regressive displace such regressive systems?systems?

nn Cause for pessimism: Power is Cause for pessimism: Power is still concentrated in countries still concentrated in countries with ostensibly full suffragewith ostensibly full suffrage……..


Political Voice is Crucial Political Voice is Crucial contdcontd

nn Causes for optimism: Even within Causes for optimism: Even within India, regions with fullerIndia, regions with fuller--voiced voiced democracy have improved basic democracy have improved basic health and education. And where health and education. And where regressive transfers now loom large, regressive transfers now loom large, they can serve as budgetary they can serve as budgetary ““place place holdersholders””: There: There’’s room to replace s room to replace them with egalitarian systems, them with egalitarian systems, without huge tax increases.without huge tax increases.

Documents

Growing Public: Is the Welfare State Mortal or Exportable?siteresources.worldbank.org/SAFETYNETSANDTRANSFERS/Resources/... · Development Economics (DEC) Lectures: April 21, 2005