Social Democratic America (20 page)

FIGURE
4.20 Social policy generosity and material deprivation, mid-2000s

Australia is “Asl.” The line is a linear regression line, calculated with Italy omitted. Material deprivation: share of households experiencing one or more of the following: inability to adequately heat home, constrained food choices, overcrowding, poor environmental conditions (e.g., noise, pollution), arrears in payment of utility bills, arrears in mortgage or rent payment, difficulty in making ends meet. Measured in 2005.
Data source
: OECD,
Growing Unequal?
, 2008,
pp. 186
–
188
, using data from the Survey on Income and Living Conditions (EU-SILC) for European countries, the Household Income and Labour Dynamics in Australia (HILDA) survey for Australia, and the Survey of Income and Program Participation (SIPP) for the United States. Social policy generosity: public social transfers and services as a share of GDP, adjusted for the share of the population age 65 and over and for the unemployment rate (see Lane Kenworthy,
Progress for the Poor
, Oxford University Press, 2011,
pp. 116
–
117
), measured as an average over 2000–2005.
Data source
: OECD, Social Expenditure Database, stats.oecd.org.

The total quantity of “social” expenditures is larger in the United States than in social democratic archetypes Denmark and Sweden. A key reason is that in the United States there is a lot of private spending on transfers and social services, mainly by employers.
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Could we address America's problems of economic insecurity, inadequate opportunity, and slow income growth by expanding our private safety net?

There are two drawbacks to this approach. First, it tends to be of less help to the poor than a public safety net.
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Second, it is ill-suited to a modern economy that relies on flexibility and mobility.

Let me back up. How can it be that social expenditures are larger in America than in Denmark and Sweden? The standard measure is gross public social expenditures as a share of GDP. The first row in
figure 4.21
shows that on this measure Denmark and Sweden are much higher than the United States. But this leaves out some important things. Private social expenditures, such as those on employment-based health insurance and pensions, are greater in the United States. Also, the US government distributes more social benefits in the form of tax reductions than do Denmark and Sweden, those two countries tax back a larger portion of public transfers than the United States does, and America's per capita GDP is larger than Denmark's or Sweden's.

If we shift to net (rather than gross) public and private (rather than public alone) expenditures per person (rather than as a percentage of GDP), we get a different picture. According to the calculations of OECD researchers Willem Adema and Maxime Ladaique, by this measure the United States is the biggest spender of the three.
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These numbers are in the second row in
figure 4.21
.

This seems like good news for America's poor. Unfortunately, it isn't. Private social spending accounts for roughly two-fifths of the US social expenditure total shown in row 2 of
figure 4.21
. It consists mainly of employer contributions to health insurance and employment-based pension benefits. These expenditures are encouraged by government tax advantages.
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But they do little to help people at the bottom of the ladder, who often work for employers that don't provide retirement or health benefits. Another version of the private safety net approach is tax-advantaged individual accounts, such as individual retirement accounts (IRAs) and health savings accounts (HSAs). These rely heavily on individual capacity and initiative to contribute, so the poor end up with inadequate protection.
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FIGURE
4.21 Social expenditures and living standards of the least well-off in Denmark, Sweden, and the United States, mid-2000s

Row 1: From OECD, Social Expenditure Database, stats.oecd.org. Row 2: 2000 US dollars. From Willem Adema and Maxime Ladaique, “How Expensive Is the Welfare State? Gross and Net Indicators in the OECD Social Expenditure Database (SOCX),” OECD Social, Employment, and Migration Working Paper 92, 2009, table 5.5. Rows 3 and 4: 2000 US dollars per equivalent person. The numbers refer to a household with a single adult; for a family of four, multiply by two. Danish and Swedish kroner are converted into US dollars using purchasing power parities (PPPs). Luxembourg Income Study data. Row 5: From OECD,
Growing Unequal?
, 2008,
pp. 186
–
188
.

What about tax “clawbacks”? Public transfer programs in Denmark and Sweden tend to be “universal” in design: a large share of the population is eligible for the benefit. While this boosts public support, it makes the programs very expensive. To make them more affordable, the government claws back some of the benefit by taxing it as though it were regular income. All countries do this, including the United States, but the Nordic countries do it more extensively. Does that hurt their poor? Not much. The tax rates increase with household income, so much of the tax clawback hits middle- and upper-income households.

So how well-off are the poor in the United States, with its private welfare state, relative to their counterparts in social democratic Denmark and Sweden? One measure is average posttransfer-posttax income among households in the bottom income decile. The third row in
figure 4.21
shows my calculations using the best available comparative data, from the Luxembourg Income Study (LIS).
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There is a sizable difference, not in America's favor.
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This cross-country difference in the incomes of low-end households is a function of government transfers. I've calculated averages among households in the bottom income decile for the three chief sources of household income: earnings, net government transfers (transfers received minus taxes paid), and “other” income (money from family or friends, alimony, etc.). Average earnings are virtually identical across the three countries, at about $2,500. The same is true for “other” income, which averages around $500 in each of the three. Where bottom-decile Danish and Swedish households fare much better than their American counterparts is in net government transfers, as shown in the fourth row of
figure 4.21
.

Not only are incomes in the bottom decile higher in Denmark and Sweden; they also have increased more rapidly over the past generation. That's because in those two countries net government transfers have risen more or less in line with economic growth. Not so in the United States.
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Another difference is that public services such as schooling, childcare, medical care, housing, and transportation are more plentiful and of better quality for the poor in the Nordic countries. Public services reduce deprivation and free up income to be spent on other needs. It's difficult to measure the impact of services on living standards, but one indirect way is to look at indicators of material deprivation, such as the OECD measure I described in
chapter 3
. The material deprivation rates for Denmark, Sweden, and the United States are shown in the fifth row of
figure 4.21
.
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The gap between the countries in material deprivation is larger than the gap in low-end incomes, which is what we would expect
to see if public services help the poor more in the Nordic countries than in the United States.

So while we spend more money on social protection than is often thought, that spending doesn't do nearly as much to help America's poor as we might like. The private-safety-net model has another important weakness: it fits poorly with employers' need for flexibility and workers' need for mobility. Tying a person's health insurance and pension to a job doesn't make much sense in a modern economy.
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Either is fine as a supplement, but people's main health insurance and retirement pension should be independent of their employer.

Not so long ago, many political parties on the left believed government should be the producer of key manufactured goods, such as steel, cars, and chemicals. But it's now widely agreed that private ownership and market competition are more effective at delivering innovation, good quality, and low cost in manufacturing.

Services are different in that we often want not just innovation, quality, and low cost but also universal access. It isn't necessary that all citizens have a car. But everyone should have physical safety, schooling, healthcare, basic transportation (roads, buses, subways, trains), clean water, sewage, electricity, mail delivery (yes, still), and Internet access.

That doesn't mean government must be the provider, however. We could rely on private providers, regulating them to ensure that they extend service to all. Broadly speaking, we have three options: monopoly public provision, a mix of public and private provision, and fully private provision with regulation. Which should we choose when universal access to a service is critical? That will depend on particularities of the service and national or local circumstances.
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The world's rich nations vary widely in provision of
education, healthcare, transportation, policing, mail delivery, utilities, and other services. There is no reason to presume that fully public or fully private provision will always be the best option. The choice should be dictated by the goals—universal access, quality of provision, cost control, and innovation.

Service provision tends to be a blind spot for the political left. The public sector is a source of stable, decent-paying jobs, and for some that becomes the goal rather than a side benefit. Where public employees are unionized, concerns about the quality of service provision are often interpreted by the left as veiled attacks on unions.

This is the wrong approach. Our focus should be on the users of services, not the producers. A society isn't fairer when some people enjoy better job protection or working conditions or pay simply because they happen to be employed by government. Here Tony Blair got it right: “The end is quality services irrespective of wealth. … The end is utterly progressive in its values. But the only progressive means are those that deliver the progressive ends.”
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Or, as Ezekiel Emanuel has said about medical care: “Health care is about keeping people healthy or fixing them up. It is not a jobs program.”
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We should expect public services to perform as well as private-sector counterparts. They ought to be responsive, accountable to consumers, and innovative.

In many instances, this requires embracing competition from private providers. Service users should be allowed to choose among providers, including private ones. That doesn't mean taxpayers must bear the full cost of a private provider if it exceeds that of a public one. What it means, in most cases, is allowing users to choose between public and private providers.

There are two potential drawbacks. The first is that if enough users switch to private providers, the public provider may no longer be able to offer high quality at low cost. If enough students in an area choose to attend a private school (or a public school in another area), the local public school may not be able to effectively
serve its remaining students. But this shouldn't cause us to shy away from allowing private alternatives. It simply requires extra effort, including providing extra resources, to ensure that public provision to the remaining students in the local school is as good as possible or to help those students move to other schools.

The second (related) problem is social division. When people with greater means choose private service providers and those with less use public providers, inequality of income and assets spills over into other realms of life. Economic inequality becomes social inequality. Arguably, societies function better—they achieve a greater sense of common purpose—when there are elements of life in which the rich, middle, and poor share the same space or experience.
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