The Welfare State Nobody Knows

Debunking Myths about U.S. Social Policy

Christopher Howard

• Publisher: Princeton University Press
• Year: 2021
• ISBN:
  9780691235226
• Topic: Política y relaciones internacionales
• Subtopic: Política social

The Welfare State Nobody Knows challenges a number of myths and half-truths about U.S. social policy. The American welfare state is supposed to be a pale imitation of "true" welfare states in Europe and Canada. Christopher Howard argues that the American welfare state is in fact larger, more popular, and more dynamic than commonly believed. Nevertheless, poverty and inequality remain high, and this book helps explain why so much effort accomplishes so little. One important reason is that the United States is adept at creating social programs that benefit the middle and upper-middle classes, but less successful in creating programs for those who need the most help.
This book is unusually broad in scope, analyzing the politics of social programs that are well known (such as Social Security and welfare) and less well known but still important (such as workers' compensation, home mortgage interest deduction, and the Americans with Disabilities Act). Although it emphasizes developments in recent decades, the book ranges across the entire twentieth century to identify patterns of policymaking. Methodologically, it weaves together quantitative and qualitative approaches in order to answer fundamental questions about the politics of U.S. social policy. Ambitious and timely, The Welfare State Nobody Knows asks us to rethink the influence of political parties, interest groups, public opinion, federalism, policy design, and race on the American welfare state.

PART I

Basic Tour

CHAPTER 1

She’s So Unusualⁱⁱⁱ

MAKING COMPARISONS IS ONE of the most important ways we make sense of the world, and our tour of the American welfare state begins with some cross-national comparisons. Forty years ago, the distinguished social scientist Harold Wilensky declared the United States a “reluctant welfare state.”¹ In the decades since, many observers have reached essentially the same conclusion: the United States has been called a semi–welfare state, a welfare state laggard, a residual welfare state, an incomplete welfare state, and similar terms denoting inadequacy. Implicitly or explicitly, the American welfare state seems to fall short of European welfare states. For their part, contemporary studies of American exceptionalism routinely note the shortcomings of the American welfare state when highlighting the limited reach of American government. Introductory text-books about American government often convey the same message. Consensus on this point has become so complete that few people have stopped to question its accuracy. The more common pattern has been to assert the existence of an underdeveloped welfare state and then move on quickly to explain why the United States is so different, or to call for a more generous welfare state.²

In this chapter, I challenge the most common claim about the exceptional nature of the American welfare state—that it is unusually small.³ This judgment, in my view, is misleading. It is based on an overstatement of the social benefits received in other nations and an underestimate of the social benefits distributed by the United States. The latter results from a narrow focus on just two tools of government action, social insurance and grants, and from a misleading measure of size. The American welfare state is actually bigger than most people think.

The prevailing wisdom is easy to summarize. Researchers typically measure the size of welfare states by the share of gross domestic product (GDP) devoted to public social spending, which is sometimes called a nation’s welfare state effort. This figure includes spending by all levels of government on retirement and survivors’ pensions, disability, sickness, occupational injury and disease, public health, family allowances,⁴ a wide range of social services, housing, unemployment, job training, and aid to the poor. It reflects primarily the use of social insurance and grants. According to this measure, the United States devoted 15.8 percent of its GDP to public social expenditure in 1997. While that may seem like a lot of effort, Denmark, Sweden, and Finland devoted 33 percent or more of their GDP to public social spending. Several other European nations spent 25 to 30 percent. The obvious conclusion, and the one conveyed in much of the cross-national literature, is that many affluent democracies are putting almost twice as much effort into their welfare states as the United States. Even when compared to Canada (20.7%) and the United Kingdom (23.8%), nations that analysts often categorize as low spenders, it seems clear that the American welfare state is unusually small.⁵

MONEY SPENT, BENEFITS RECEIVED

The source of these figures is the Organization for Economic Cooperation and Development (OECD), whose professional staff collects statistical data from member countries and publishes a steady stream of useful cross-national comparisons. In recent years, the OECD has started to modify its social expenditure figures—though you would be hard-pressed to find the new calculations in studies of the American welfare state.⁶ One important change has been to recognize that social benefits can be taxed, often at quite high rates. Suppose country X gives the average retiree a pension of $1,000 each month but counts the pension as income and taxes it at a rate of 25 percent. The net benefit received is $750. In contrast, country Y gives out a smaller pension, say $800 each month, but does not subject any of it to income taxation. Which country has the larger retirement program? (Hint: it’s not X.) Similarly, many countries impose consumption taxes that vary in size and scope; in Europe they might be called value-added taxes, in the United States sales taxes. These indirect taxes also reduce the amount of money that retirees actually have available to spend; the same logic applies to beneficiaries of other social programs. Normatively, it makes more sense to compare how much money stays with citizens than how much money governments initially distribute.

The extent of direct and indirect taxation varies quite a bit among the OECD nations. Table 1.1 shows that taxation of benefits alters our perception of welfare state laggards and leaders. Column A of the table lists the standard measure of welfare state effort, discussed previously, while column B adjusts that figure for direct and indirect taxation. We now see that social benefits received do not exceed 30 percent of GDP in any of these countries. Spending in Denmark drops from 35.9 to 26.7 percent of GDP, and in Sweden from 35.7 to 28.5 percent. In effect, Scandinavian governments tell their citizens, “I’ll spend a dollar on your social welfare as long as you give me 25 cents right back.” The big spenders in column B would rank as average spenders in column A. The seventeen-country average drops to 21 percent, and countries tend to converge toward the mean.⁷

TABLE 1.1
The Relative Size of the American Welfare State (1997)

Country	A Public social spending/GDP	B Column A minus taxes	C Column B plus tax expenditures
Denmark	35.9%	26.7%	26.7%
Sweden	35.7	28.5	28.5
Finland	33.3	24.8	24.8
Belgium	30.4	25.8	26.3
Norway	30.2	24.4	24.4
Italy	29.4	24.1	24.1
Germany	29.2	25.5	25.5
Austria	28.5	23.0	23.4
Netherlands	27.1	20.2	20.3
United Kingdom	23.8	21.1	21.6
Czech Republic	21.7	19.3	19.3
Canada	20.7	17.8	18.7
New Zealand	20.7	17.0	17.0
Ireland	19.6	16.7	17.1
Australia	18.7	17.6	17.9
United States	15.8	15.0	16.4
Japan	15.1	14.4	14.8
Average	25.6%	21.3%	21.6%

Source: Willem Adema, Net Social Expenditure, 2nd ed. (Paris: OECD, 2001), table 7.

Note: Some tax expenditures have been captured in column B (see text). The OECD refers to the figures in column C as net social spending.

Because we know that taxes in the United States tend to be lower than in Europe, an adjustment for taxation of social benefits should make the American welfare state seem less exceptional. With taxes factored in, the American welfare state shrinks a little, from about 16 to 15 percent of GDP. The United States still ranks at the bottom of the list but is not quite so far from the average nation. Whereas the American welfare state once appeared to be about 60 percent as large as the average OECD welfare state (column A), it now appears to be 70 percent as large. The gap between the United States and the other low-spending countries is also narrower.

OTHER POLICY TOOLS

A second change in the OECD figures has been prompted by a broader, and I think more accurate, perspective on how governments spend money. The normal method has been to count only direct social spending, such as benefits paid on a weekly or monthly basis to retirees, the unemployed, the poor, and the like. Such spending comes either from social insurance programs like Social Security and Medicare or from public assistance programs like TANF and Food Stamps.⁸ One problem with this method is that it misses the ways in which governments spend money indirectly, through special provisions in the tax code. The technical name for this tool is tax expenditures, which are departures from the normal tax system that are designed to promote some socially desirable objective.⁹ The United States, for example, uses tax deductions to promote home ownership and tax credits to subsidize child care expenses. To enhance retirement income, the United States excludes most Social Security benefits from income taxation, which is another kind of tax expenditure.

In some quarters, tax expenditures are not equated with direct spending. They are viewed simply as a way to let taxpayers keep more of their own money. Since the 1970s, however, the U.S. government has formally recognized tax expenditures as a form of spending in its major budget documents, and other OECD governments have followed suit. The tax expenditure concept is widely accepted among public finance experts as well. The rationale is that with tax expenditures, the government is essentially collecting what taxpayers would owe under a “pure” tax system and simultaneously cutting some taxpayers a check for behaving in certain desired ways, such as buying a home. In a pure system, everyone with the same income would pay the same amount of income tax. In the real world, people with the same income often do not pay the same tax, because some are able to take advantage of tax expenditures while others are not.

Although the U.S. tax code has many tax expenditures aimed at specific industries and business in general, most of this spending goes to tax expenditures with social welfare objectives. The big-ticket items are tax subsidies to employers who offer retirement pensions and health insurance to their employees, and a handful of sizable tax breaks for home owners. These tax expenditures serve the same social welfare functions mentioned earlier in the chapter (e.g., retirement income, medical care, housing). In a previous book, I summed up spending on tax expenditures with social welfare objectives and found that they cost roughly $400 billion in 1995. Adding them to more direct forms of social spending increased the size of social spending at the national level by almost 50 percent. Suddenly, the American welfare state did not look so small anymore.¹⁰

At the time, I knew that other welfare states used tax expenditures as well, but I had no fair or accurate way to compare them. Some evidence suggested that the United States relied more heavily on tax expenditures than other nations, which would have made the true size of its welfare state seem less exceptional, but there was no way to know for sure. I am happy to report that comparable figures are now available, care of the OECD.¹¹ Unfortunately, the OECD does not display those figures in one place when calculating net social spending. Some tax expenditures, such as the exclusion of most Social Security benefits from income taxation, have been accounted for in column B (table 1.1). The remaining tax expenditures, such as the Earned Income Tax Credit and, more important, tax expenditures that encourage employers to offer benefits such as retirement pensions and health insurance to their workers, are accounted for in column C. As a result, the figures in column C understate the true impact of tax expenditures. But our main concern here is in developing a more accurate measure of a nation’s welfare state effort, and the net social spending figures in column C are better than the traditional spending figures in column A.

The OECD countries vary in their use of tax expenditures to promote social welfare objectives. In several countries the figures in columns B and C are identical. Most of the increase between columns B and C is due to change at the bottom of the list, which in turn means more convergence among nations. In column C, spending figures in Canada and especially the United States are up. Now it appears that 16.4 percent of GDP in the United States consists of social benefits that are paid directly or indirectly by government and that stay in recipients’ pockets. The overall average in column C increases slightly. The American welfare state is now three-fourths as large as the average for all seventeen nations. Another way to appreciate the change is to compare the United States to the classic big-spending welfare state, Sweden. If you look only at pretax direct spending (column A), you will say that the Swedish welfare state is 2.3 times the size of the American welfare state. If you look instead at net social spending (column C), you will say that the Swedish welfare state is 1.7 times larger.¹²

The evidence so far suggests that we should tone down but not abandon claims about the small size of the American welfare state. Welfare states are actually more alike than they first appear, but as a general rule no matter which column you examin...