# Presentation: 076854

## A Re-examination of Welfare States and Inequality in Rich Nations: How In-Kind Transfers Indirect Taxes and Income from Wealth Change the Story

**Timothy M. Smeeding**
**(with Irv Garfinkel and Lee Rainwater)**
**Center for Policy Research, Syracuse University**
- _[tmsmeed@maxwell.syr.edu](mailto:tmsmeed@maxwell.syr.edu)_
- _[http://www-cpr.maxwell.syr.edu/faculty/smeeding/index.htm](http://www-cpr.maxwell.syr.edu/faculty/smeeding/index.htm)_
**For the ACF 10****th**** Annual Research Conference **
**Crystal City, VA**
**June 5, 2007**

## Garfinkel, I., L. Rainwater, and T.M. Smeeding.  2006.  “A Reexamination of Welfare State and Inequality in Rich Nations: How In-Kind Transfers and Indirect Taxes Change the Story.” Journal of Policy Analysis and Management 25(4)(Fall):855-919.

Garfinkel, I., T.M. Smeeding and L. Rainwater.  2007.  “The American Welfare State: Laggard or Leader.” Unpublished manuscript. January.

Thompson, J., and T.M. Smeeding.  2007.  “Income from Wealth and Income from Labor: Stocks, Flows and More Complete Measures of Well Being.” Unpublished manuscript. May.

- Garfinkel, I., T.M. Smeeding and L. Rainwater.  2007.  “*The American Welfare State: Laggard or Leader.*” Unpublished manuscript. January.
- Thompson, J., and T.M. Smeeding.  2007.  “Income from Wealth and Income from Labor: Stocks, Flows and More Complete Measures of Well Being.” Unpublished manuscript. May.

- Reference Material

## Introduction:

- Half Truths/Nonsense Spouted by Very Smart People
- The United States has a small or no welfare state.
- 		The United States is and always has been a welfare state laggard.	The welfare state is a drag on productivity and saps and strangles 	capitalism.
- The Truth
- The US welfare state exists and is large.
- 		For most of the 19th & 20th Century, US was a leader in education, 	the most productive part of the welfare state.  We no longer lead.  	Welfare states, on balance, nourish rather than sap or strangle 	capitalism.
- Further
- 		Noncash Benefits Reduce income Inequality  (if valued at 	government cost), even after accounting for indirect taxes. But 	income from wealth, properly accounted for, increases the gap again.

**The Argument**

## What Are Welfare States?

- Predominantly capitalist nations with large selected doses of “socialism”
- 	  Consumption and Income Replacement (Cash)
- 	   Education and Health (Production of Human Capital)
-   Social Insurance
- Socialization occurs through ***transfers*** of resources from one to another part of population
-   Transfers occur through welfare state programs (socialized portions)

## What Do Welfare States Do?

- Welfare state transfers mimic, extend,  and socialize family transfers
- Families redistribute both across and within life cycle from the strong to weak
- Within family, transfers promote survival/success
- The same is true for nations

## Multiple Objectives of Welfare State Programs

- Relieve Poverty
- Increase Economic Security
- Increase Equality of Opportunity
- Increase Equality
- Increase Solidarity
- Increase Stability
- Increase Education and Health

## II. Our Work: Departures from Most Comparative Studies

- Include education
- Clearly involves public transfers and taxes
- Conceptually fits everyone’s definition
- US was leader, now laggard
- Include employer-provided health insurance and pensions
- 		Publicly subsidized and regulated
- 		Health insurance transfers from healthy to sick
- Pensions more complicated, at least tax subsidy
- US biggest spender on health care
- Include tax benefits: Implicit in taxes paid, but not separated

## Limitations 

- Leaves out regulations
- Leaves out full employment
- Leaves out income from wealth (for now)

## III. FACT:All Rich Nations Have Large Welfare States

## Social Welfare Expenditures as a Percent of GDP, by GDP per capita in the World

- Source: WDI ,162 countries, FY1998

## Why All Rich Nations HaveLarge Welfare States

- Capitalism makes countries rich
- 		“Creative Destruction” leads to “most productive system 	known to mankind”  But.....
- 		Economic Insecurity and Inequality are the Downside
- Welfare state programs further enrich
- 		Market under-produces education and insurance, but each
- 		produces riches and security
- 		The case for education and public health is overwhelming
- 		The case for insurance is very strong
- Democracy promotes welfare state programs via learning and redistribution

## Education

- Education reduces insecurity and increases overall productivity in consumption as well as earnings
- Externalities lead to market under-production
- The returns to education range from it’s a very good investment to its an unbelievably good investment
- But USA slow to adapt re: Early Childhood Educaiton and slow to react, re: Higher Education

## Public Health and Health Care

- Externalities lead to under-investment
- The productivity of public health investments in terms of mortality reduction is huge (Fogel and Cutler, Deaton; Cutler and Lleares-Muney)
- No study on GDP levels or growth vis a vis health care, but it must be large given Fogel’s description of how unproductive most adults were in the 19th Century; and Cutler’s estimators of benefits of health care.

## Insurance 

- Under-produced because of uncertainty and adverse selection (Arrow and Akerloff)
- Insurance leads to increases in utility so long as we are risk adverse (and in this sense enriches us)
- But does insurance increase productivity and growth????
- Why it reduces growth—taxes, distortions of provision,
- Why it might increase growth—social stability and risk taking (Bismarck and Alesina)
- Empirical Evidence—Insurance plus all other cash
- Atkinson review close to zero
- Lindert-positive in early 20th century, now close to zero
- Implication: public insurance effect is becoming more negative in general (“leaky bucket”) and growing tax subsidies for rich produce little economic and no distributive benefit

## Bottom Line effects on Productivity and Growth

- Education and public health large positive
- Insurance and other cash close to zero
- Net effect is positive

## IV. Details:Size, Nature, and Universalityin Rich Nations

- Overall size far more similar than most believe
- Domains are similar & mostly similarly sized
- Notable US exceptions
- Exceptionally big spender in health care arena
- Low spender on cash & early education
- Degree of Universality is other key difference
- US relies on safety nets & platforms (contribution related benefits)  rather than floors (universal benefits )

## Social Welfare Transfers as a Percent of GDP (with and without employer-provided benefits)

- Source: OECD, FY2001

**Notes:**
Delete “in 14 rich nations” – change FY01 to a footnote, and add source

## Social Welfare Transfers in US $ Per Person(with and without employer-provided benefits)

**Social Welfare Transfers ****in US $ Per Person****(with and without employer-provided benefits)**

**Notes:**
Delete “in 14 rich nations” – put year and source in footnote – keep 
social welfare transfers in US$ per person
(with and W/O employer-provided benefits)

##  The Shares of Cash and In Kind Transfers (Gross and Net) 

** ****The Shares of Cash and In Kind Transfers (Gross and Net) **

**Notes:**
As is, but put FY 2001 in footnote with source

## Percentage of 25-34 Year Olds Completing High School and College

- Source: OECD Education at a Glance (2002)

**Notes:**
“% of population completing HS and college, by age group and country”
Columns should look like previous table – 1970 and 2001
Countries down the side
Each country has two bars – top is college, bottom is HS.
“HS defined as at least upper secondary, college by upper tertiary” footnote
Combine 4.6.a-4.6.b
Top bar college, bottom bar HS.
Format like in 4.1 and 4.3
1970 (25-34 y/o)			2001 

## Growth in Welfare States(1960, 1970, 1980, 1990, and 2001)

**Growth in Welfare States****(1960, 1970, 1980, 1990, and 2001)**

**Notes:**
Growth in welfare states
(1960, ..., and 2001)

## Distribution Effects of Welfare States onPoverty and Inequality

- Large Differences in Cash Transfers Account for Large Differences in Relative Poverty Rates
- Counting in Kind Transfers Narrows the Difference in Inequality
- Also raises policy question of whether US is spending too much on health care

## Effects of Cash Transfers on Relative Poverty 

**Effects of Cash Transfers ****on Relative Poverty **

##  Relative Economic Well-being:Disposable Cash Income 

- Source: Authors’ calculations from the Luxembourg Income Study

- Percent of Median Income

## Relative Economic Well-being:Full Income  

- Source: Authors’ calculations from the Luxembourg Income Study

-  Percent of Median Income

## Sensitivities and Key Assumptions

 Valuation of Noncash Benefits

 Cross-National Differences in  “Outlays” vs. “Consumption” (Education, Health) and PPP Issues

 No Adjust for Unmet Needs or Quality   of Services

-  Valuation of Noncash Benefits
-  Cross-National Differences in  “Outlays” vs. “Consumption” (Education, Health) and PPP Issues
-  No Adjust for Unmet Needs or Quality   of Services

## VI. OKAY, Is That It?

NO.........!!!

- NO.........!!!

## Canberra Report: DPI is “current gold standard” but:

- Noncash Benefits (alone)
- Indirect Taxes
- ---both now incorporated, but what about
- Noncash Income from Own Home ?
- 4. Income from Capital ?

## How about Income from Wealth

- Consumption +/- change in Net Worth=Income , and we do not record change in net worth
- 2. Income from Wealth: Reported vs. Complete (all assets and debts: home, business, financial, trusts , pensions, etc.)

## Procedures In Smeeding-Thompson(2007) :

- Start with SCF cash income and take out reported interest, rent, dividends, but keep capital gains.
- Impute returns to wealth:
- Financial and Businesses: 4 percent real
- Housing: 3 percent real
- Bonds, other Investments: 2 percent real

## Results:

## Bottom Line:Left Out Items Work in Opposite Directions!

- Noncash equalizes, but, wealth is as, or more, disequalizing and its effects are growing

## VII. But isn’t there a crisis in the welfare state?

- Financing of Social Security not a crisis
- Financing of health insurance is a crisis
- But tax expenditures for increasing wealth are growing rapidly

## Medicare, Medicaid (federal only) and Social Security Outlays(percent of GDP)

- 0%

- 5%

- 10%

- 15%

- 20%

- 25%

- 30%

- 1962

- 1969

- 1976

- 1983

- 1990

- 1997

- 2004

- 2011

- 2018

- 2025

- 2032

- 2039

- 2046

- 2053

- 2060

- 2067

- 2074

- Social Security

- Medicare

- Medicaid

- Source: 2004 Annual Report of the Social Security and Medicare Boards of Trustees and data underlying the Congressional Budget Office*. *2003. *The Long-Term Budget Outlook. *CBO*: *Washington, D.C

## VIII. Summary and Policy Recommendations

- Rich nations have large welfare states because the combination of capitalism and socialism enriches nations
- US was leader in most wealth producing area, education, but we now lag
- US spends more than enough on health care
- What Should We Do? States should not wait for federal government for health or education
- 1. Recapture lead in education via early childhood education,and paid parental leave
- 2. Halt, or at least slow the increase in health spending and promote equal access to health by adopting single payer health insurance
- 3. Balance needs of aged vs. taxes on working population
- 4. Move towards equitable home ownership subsidies
- 5. Move to greater sharing of financial and business wealth by means of mandatory add-on for OASI, plus wider profit sharing with firms

## Thank You