Friday, December 9, 2011

True facts - "A larger welfare state can mean a lower deficit"

Robert Samuelson
Ezra Klein debunks the stunning ignorance of "his colleague" - the modestly endowed Washington Post business writer Robert Samuelson (no relation to noted economist Paul Samuelson) - who true to form spouts the tired and untrue "conventional wisdom" regarding Eurozone troubles being rooted in social spending as % of GDP  and the European model of a robust welfare state:
Speaking of things that the European crisis is not about (debt and deficits), while I was in Germany, my colleague Robert Samuelson wrote that “Europe’s turmoil is more than a currency crisis and was inevitable, in some form, even if the euro had never been created. It’s ultimately a crisis of the welfare state, which has grown too large to be easily supported economically.”

I don’t think that quite works. Take Germany. They have a pretty big welfare state: pensions, health care, paid vacations, unemployment benefits equal to two-thirds of one’s income. Indeed, the Organization for Economic Cooperation and Development keeps track of social spending — unemployment, old-age pensions, health care, etc — as a percentage of GDP. In 2007, Germany spent 25.2 percent of their GDP on such things. Greece spent 21.3 percent on social policies. Yet Greece is in crisis, and Germany is fine.

To bring this across the Atlantic, you could argue that the United States’s debt burden is the product of an insufficiently large welfare state — at least with regard to health care.
To see a stark illustration of that thesis, head to the Web site of the Organization of Economic Cooperation and Development and download their health-care statistics for Canada and the United States.

(OECD data)

As recently as 1965, the cost of those two systems competed neck-and-neck. That year, Canada spent 5.9 percent of its GDP on health care. The United States spent 5.7 percent. But around that time, Canada was transitioning to its current single-payer system. Over the next four decades, the growth of health-care costs slowed in Canada while it accelerated in the United States. By 2009, Canada was spending 11 percent of its GDP on health care — and covering everyone. The United States was spending 17.4 percent of its GDP and leaving 45 million uninsured. In dollar terms, we’re spending $3,600 more per person, per year, than Canada.

If the United States had Canada’s health-care system, and Canada’s per capita health-care costs, we would have a much “larger” welfare state, but we wouldn’t have a deficit problem. Assuming we weren’t spending that money elsewhere, we wouldn’t even have a deficit. Likewise, if any country in the euro zone maintained the United States’s health-care system and our health-care spending, it would have a smaller welfare state, but it would be sagging beneath a debt burden far more onerous than anything anyone in Europe is facing today.

In a broad sense, I don’t think the crisis in Europe is really even about debt. It’s about the interplay of slow growth, heavy debts and weak institutions. But it’s really not about welfare states.

1 comment:

  1. When talking heads make statements like that they are twisting the conversation. Obviously you can have a large welfare state if your tax rates support it and you can't have a large welfare state if your tax rates don't support it. That is as simple as 1+1. The implicit message is that it is inconceivable to have higher tax rates in the US. Two facts seem to run against this "common wisdom": the majority of Americans support higher tax rates for the very wealthy and, if Congress does nothing at all (which seems like their current forte) we will have higher tax rates.

    The more pernicious assumption within this "common widsom" is that we shouldn't have higher tax rates because it is damaging to the economy. This makes a certain sense broadly speaking, but if you consider a number of details in our current situation, the logic is much less obvious:

    1) The only rates in question are the top rates, so it mostly effects people who don't immediately spend most of the money they make. Rich people aren't "job creators", the alrge companies they run are. If someone was talking about raising the corporate tax rate, maybe conservatives would have a point. In fact the GOP is balking at lowering the payroll tax (does anyone have a handkerchief for David Frum?), the most direct "supply-side" policy factor in hiring.

    2) The employment, infrastructure investment and social services that the government buys with tax revenue can have a very positive impact on the economy. All spending is not created equal, but during a recession, when physical infrastructure is aging, when government employment is falling while private employment is finally rising, when a larger than normal slice of the populace is in need of social services like medicaid, AFDC, mortgage modifications, etc., when interest rates are historically low, and when, Merriam Webster aside, capital gains income is not taxed at he same rate as "income", everything seems to be pointing in one direction.

    Anyone with eyes and a brain should be able to see this. And there may be some cogent arguments that a conservative could make in response, but instead of this conversation being at the center of current political debate, it is swept aside, hidden behind a simple-minded obsession with "deficits", as if they existed outside all other government policies.