The real world evidence that a strong welfare state encourages entrepreneurship

Image: A job creator


Walter Frick has a must-read piece on the relationship between welfare and entrepreneurship. A taste:

Pundits and researchers often note the negative correlation between government spending and entrepreneurship, both within the U.S. and internationally, and conclude that growth requires trimming social welfare programs. Jim Manzi of the National Review, for example, a thoughtful commenter on economic policy, wrote last year that, “we must accept some amount of social dislocation in return for innovation.” But correlations can be misleading. A series of more recent studies challenge the view that larger or more activist government necessarily threatens entrepreneurship. In fact, that may get the relationship precisely backwards...

In another paper, Olds looked at the creation of the Children’s Health Insurance Program (CHIP), which offers publicly funded health insurance for kids whose families don’t qualify for Medicaid. By comparing the rate of entrepreneurship of those who just barely qualified for CHIP to those whose incomes just barely exceeded the cutoff, he was able to estimate the program’s impact on new business creation. The rate of incorporated business ownership for those eligible households just below the cutoff was 31 percent greater than for similarly situated families that could not rely on CHIP to care for their children if they needed it... 

A 2010 study by RAND found a similar effect with Medicare. American men were more likely to start a business just after turning 65 and qualifying for Medicare than just before. Here again, government can make entrepreneurship more appealing by making it less risky.

The human case against means testing

Image: A paper food stamp from 1980 (source)


I've already spilled quite a bit of ink (1 2 3) criticizing means testing on administrative grounds. Means testing is an extraordinary waste of resources; it's the reason the administrative costs of TANF are 15 times that of Social Security despite the fact that both programs fundamentally do the same thing (income transfer). And means testing in Obamacare is so irrational that Obamacare essentially spends billions of dollars to prevent millions of people from having health insurance.

But focusing on the administrative issues of means testing ignores the terrible human burden of means testing, which I hope to address now.

Before diving in, a few words about what I'm not writing about. I'm not discussing the cruelty of income or asset tests that are too low;* that injustice is obvious. Nor is this piece about the cruelty of benefits that are too low, or programs that are so poorly funded that the vast majority of eligible individuals don't receive benefits. These injustices are obvious. Less evident, however, are the ways that means testing itself places a burden on individuals and society generally, regardless of where the border between eligible and ineligible lies.

There are an endless number of tragic ways for means testing to destroy people's lives, but they all boil down to two basic issues. First, people who aren't eligible but need benefits must destroy their lives in order to attain and maintain eligibility. Second, means testing is necessarily imperfect. We will never design a perfect means testing bureaucracy, and some eligible people will always be incorrectly found to be ineligible. How many lives are we willing to destroy through imperfect means testing decisions?

"You'll have to get rid of everything"
Go and read this first person account of a family who needed to qualify for Medicaid because a family member became disabled in a horrible car accident in which she was not at fault. Only Medicaid covers the long term care equipment and services mommy needs to live, but Medicaid only covers poor people--so the entire family must live in poverty for the rest of their lives (they have to meet the so-called income and asset tests). The family had to liquidate their 401(k) (and pay the early withdraw tax penalties), sell their cars, empty their bank accounts, and sell all their valuables in order to meet the asset means test. Daddy had to cut his hours at work to 133% of the poverty line to meet the income means test; thereafter, 100% of any wages in excess of this level would be taken by Medicaid. Baby can never attend preschool when she gets older because the family can never earn or possess enough money to pay for tuition; auntie can't pay for baby's preschool because that would be Medicaid fraud. And baby can't have a college fund because any savings would make them ineligible for the Medicaid services that keep mommy alive. The entire story is so totally inane that it doesn't make any sense to blockquote it; it is well worth your time to read in full, even if you think you already understand that cruelty of our welfare system.

This may be an extreme example, but means testing necessarily results in distorted incentives. As the above story makes plain, when people depend on benefits, working more hours or saving any money becomes an impossibility. Thus, at the aggregate level, America's poor are forced to liquidate or forego savings and income in order to remain eligible for programs they depend on. For TANF (more commonly known as "welfare"):

Two of the first states to eliminate asset tests (Ohio and Virginia) actually saw declines in program enrollment and improvements in their overall bottom line.....What our research suggests, [] is that asset limits simply are not necessary to prevent misuse and actually discourage self-sufficiency.

You did not misread that: eliminating asset tests results in lower overall program costs and fewer people in need of benefits. Thus, by preserving asset tests, our political system demonstrates that poverty is a conscious goal: states are willing to pay money to ensure people remain in poverty.

How Vermont could have made single payer work, part 2: Green Frankenstein Care

Image: Frankenstein was grafted together of different parts of different cadavers and reanimated into a sentient being. Since single payer is apparently a political nonstarter in the United States, let's do the social policy equivalent and find a way to stitch together the component pieces of single payer.




This is a follow-up to an earlier post written in response to Vermont's decision to abandon their efforts to create a state-wide single payer health care system, which would have been called Green Mountain Care. I argued that that single payer in the United States isn't dead, though a pure single payer health care system might not be possible in the unique political and legal environment of the United States. That's not a problem, however, because single payer advocates don't care about single payer per se; they are only interested in attaining the universal coverage and mammoth administrative savings offered by a single payer system. Fortunately, there are ways to reach these goals without single payer.

As Vermont's single payer advocates unfortunately found out, any health care reform proposal will end in failure if it doesn't camouflage its cost as well as the current system. Americans generally don't have a good conception of how atrociously expensive the American health care system is--because the cost is well concealed. Since the American system splits the costs of health care so many ways, it's not immediately obvious how much health care truly costs. For example, employer-sponsored insurance premiums are paid for in part by generous federal subsidies most Americans don't even realize exist, and by employer and employee contributions. Further masking cost, private insurance doesn't cover the elderly or long term care. And, private insurers deliberately design cost sharing (deductibles, copays, and coinsurance) to be be difficult to understand and therefore obscure the true out-of-pocket cost of health care.

Due to it's simplicity, Green Mountain Care couldn't provide this level of cost camouflage. The entire program was financed by simple, direct payroll and income taxes. Because the cost of the premiums weren't split up several ways and cost sharing was simple and transparent, the extraordinary cost of health care in America became unbearably obvious.

Thus, Vermont abandoned Green Mountain Care because it was too expensive--even though it was less expensive than the system it was supposed to replace. The irrationality of this decision is impossible to overstate.

Clearly, any attempt to achieve universal health insurance coverage will fail if it doesn't conceal its cost at least as well as the current system.

I suggested that single payer advocates could look for inspiration in the German and Japanese health care systems because--as in the United States--health insurance is heavily linked to employment. Yet with a few straightforward regulations, the German and Japanese systems attain universal coverage and all of the administrative savings of single payer. As I outlined in the previous post, these regulations are:

• Government regulations set prices of all types of office visits and procedures
• Only a single insurance plan can be sold
• All insurers must be not for profit
• Redistribution of medical loss imbalances to spread risk across insurers
• Employer mandate to provide all employees with health insurance (with employee contribution)
• Health insurance companies must continue to cover enrollees who lose their job or stop working for any reason 

Together, these regulations would allow our employer-based system to attain the cost savings and universal coverage of single payer.

It's worth noting that a single payer system isn't automatically better than other systems. Norway, for example, has a single payer health care system, yet per capita health care spending is far higher than Germany and Japan. Clearly, single payer is a great model for health care reform, but it isn't the only model, nor is it necessarily the best model, either.

Of course, this last post was fairly abstract, so here I intend to ground it by explaining how these reforms could be implemented--step by step--at a state (or possibly city/county) level.

Green Mountain Care would have been a pure single payer system. It would have been elegant and simple. This new system would work equally well, but only after boorishly stitching together seemingly unrelated reforms into a functioning--if ungraceful and confusing--whole. Such a system does not deserve the elegant name of Green Mountain Care. Instead, meet Green Frankenstein Care.

No, taxes and transfers do not explain differences in inequality between US and Sweden

(See update below)


At Vox, Dylan Matthews claims that "government is the only reason the US has more inequality than Sweden." He bases this claim on the fact that the United States has a pretax Gini coefficient equal to that of Sweden, Norway, and Denmark; Finland's pretax Gini coefficient is actually higher than that of the United States. But after government taxes and transfers are accounted for, the Gini coefficients of the social democracies drop precipitously, while the United States' decreases far less:

Matthews argues that these data prove that government taxes and transfers are the "only" reasons why Norway, Sweden, Denmark, and Finland have lower inequality than the United States. Nothing else explains why the pretax/pretransfer Gini coefficients would be equal and posttax/posttransfer Gini coefficients so different. Clearly, it's only government intervention that reduces inequality.

This is analysis wrong, however, and makes little sense even at first glance. McDonald's workers in Norway and Denmark make almost three times their American counterparts. With a paucity of the minimum wage McJobs that dominate the American underclass, how can Scandinavian pretax/pretransfer inequality possibly be equivalent to the United States?

Our interpretation of these data matters greatly. If Matthews is correct, then taxes and transfers are the only useful weapons against inequality, and policies that take aim at pretax/pretransfer inequality--like full employment and laws to make unionization easier--are not worth pursuing.

But Matthews is wrong here, and the fault lies with the Gini coefficient.

Does social democracy / a large welfare state kill innovation?

Image: At The Next Web, Brad McCarty documents the history of the smartphone, including this 2001 state-of-the-art Nokia Communicator.



[Updated--see below]


As I often do with viewpoints I don't like, I find the most reputable expression of that idea so I can't be accused of choosing a poor representative for my critique. Enter Daron Acemoglu (MIT), James A. Robinson (Harvard), Thierry Verdier (Paris School of Economics), and their 2012 non-peer-reviewed paper Can't We All Be More Like Scandinavians? People with Big Ideas about welfare states eagerly point to this paper as proof that their evidence-free Big Ideas were right all along. Let's see what this paper really says.

The thrust of the paper is this: it's a well known fact that large welfare states stifle innovation, mostly due to limiting inequality and perhaps also by limiting economic insecurity. These are the "cuddly capitalists" (their term). In the "cutthroat capitalist" (their term) countries, inequality is much greater and economic security more tenuous, and--as a direct result--innovation is greater. Since the rewards are so great for success--and the consequences for failure so severe--incentives line up perfectly to maximize innovation.

So far, this isn't anything new. But Acemoglu, Robinson & Verdier take this logic one step further. Not only is there greater innovation in the cutthroat capitalist countries, they posit, but the innovation of the cutthroat capitalists makes cuddly capitalism possible. Were it not for the greater innovation and resulting economic growth which spills over from the cutthroat to cuddly capitalist countries, the large welfare states of the cuddly capitalist countries would not be possible.

But wait! There is a slight bump in the road to solemnly dismantling the welfare state in the name of innovation. It's always taken as fact that the United States, the most cutthroat of the capitalists of the developed world, handily beats the rest of the world in innovation and technology. But where is the evidence?

Fortunately, Acemoglu, Robinson & Verdier have marshalled the strongest evidence available to demonstrate the superior capacity for innovation in the United States compared to the social democracies:

The United States is also widely viewed as a more innovative economy, providing greater incentives to its entrepreneurs  and workers alike, who tend to respond to these by working longer hours, taking more risks and playing the leading role in many of the transformative technologies of the last several decades ranging from software and hardware to pharmaceuticals and biomedical innovations. Figure 1 shows annual average hours of work in the United States, Denmark, Finland, Norway and Sweden since 1980, and shows the significant gap between the United States and the rest.

Sure enough, in a graph with a y-axis that doesn't begin at zero, Figure 1 indeed shows that people in the United States work more hours than in Scandinavia, except for the weird part in the early 80's (and earlier) where the Finns worked longer, that I guess we're just ignoring:

Some problems should be immediately obvious.

First, Acemoglu, Robinson & Verdier use the United States to represent all of the cutthroat capitalists. Might their conclusions be stronger if they considered other countries with high inequality and a fragile social safety net? This issue will be taken up below, but it shouldn't be too hard to guess why they omitted other cutthroat capitalists, like New Zealand and Ireland, from their analysis.

Second, Acemoglu, Robinson & Verdier assume that more work hours at the aggregate level results in more innovation. It doesn't. Longer aggregate work hours are simply indicative of higher poverty rates. It's well established that people work longer hours in countries with higher poverty rates. Thus, since the United States has such a high poverty rate while the Scandinavian countries have such a low poverty rate, it's no surprise that the average number of hours worked is lower in the Scandinavian countries. Clearly, average hours worked each week isn't a proxy measure of innovation, but a proxy measure for a country's poverty rate.

Third, productivity research is unequivocal that working more hours results in less innovation, not more. For a striking example, productivity experts estimate that if the early Macintosh engineers had worked 40 hours per week instead of 90, the first Macintosh computer would have been ready for release a full year earlier. In short, all available research argues that long hours lead to less innovation--meaning that Acemoglu, Robinson & Verdier could scarcely have chosen a worse proxy measure for innovation.

2014 Detroit is a better candidate for social democracy than 1930's Finland

Image: An MRI machine allows doctors to examine tissues throughout the body from the outside. The technology available today would have seemed like science fiction decades ago. (source)



This short post concludes a series on racist assumptions underlying many debates about social policy. The scope of this series has been very wide, and this post will tie together some of these disparate ideas.

In part 1, focused on the violent, impoverished, and oppressed history of Finland. Finland's blood-soaked history--both in the years immediately preceding their transition to social democracy, as well as hundreds of years prior--demonstrates that a prosperous and harmonious society is in no way a prerequisite for social democracy. Such views are a smokescreen for underlying racism. Part 2 addressed the incredibly racist view that social democracy can only succeed in a racially, culturally or ethnically homogeneous society by focusing on the experiences of Kerala, India, and Sweden. Both places have extremely large minority groups; by most measures, Sweden is more diverse than France, the UK, Germany, and most other European countries. Part 3 took the superior societies vs. superior policies argument head on by looking in detail at the implementation of the first social democratic program in Finland, maternal health care. The superior societies argument holds that any policy will succeed in a superior society; the superior policies argument holds that superior policies can succeed in any society. That Finnish society is inherently superior to the rest of the world is absurd given Finnish society's initial resistance to the maternal health program. Widespread resistance to this policy cost the lives of thousands of infants and mothers.


Part 3 contains the most important argument in the entire series. When we assume that social democratic policies can only work in a society that is already prosperous and harmonious, we rule out the most effective solutions for improving quality of life in the places that most desperately need those policies. In particular, if 1930's Finland were a country today, their infant mortality rate would be the eleventh worst of any country in the entire world.

To conclude this series, part 4 will run with this idea by comparing the current quality of life indicators and resources of Detroit, the American city with the highest poverty rate, to those of Finland on the eve of the election of the first social democratic prime minister in 1927.

If you had nothing else except for data on the resources and quality of life indicators of Finland in 1927 and Detroit in 2014, which place would you expect to eventually lead the world in quality of life indicators? As we shall see--though quality of life indicators are appalling in Detroit--they are actually in a better position than Finland was decades ago. If Finland could transform itself a country with the best quality of life indicators in the entire world, Detroit can make a similar transition. Granted, it took extraordinary efforts over several decades for Finland to achieve these successes, and Detroit can expect a similarly long, difficult struggle. But it can be done.

Comparing 2014 Detroit and 1920's Finland
Detroit's infant mortality rate is a 15 per 1000 live births. That's a national disgrace. But Finland's infant mortality rate peaked at a whopping 90 per 1000 live births in the 1930's, a rate six times higher than Detroit. None of this is to say that an infant mortality rate of 15 per 1000 live births is anything but a catastrophe. Nevertheless, the situation in Finland in the first half of the 1900's was far worse than the situation currently facing Detroit.

How Vermont could have made single payer work

Image: Vermont Governor Peter Shumlin signed Vermont's single payer bill into law in 2011, only to scrap the plan in the final days of 2014. (source)



Vermont's attempt to establish a single payer health care system was killed by irrationality, as Sarah Kliff explains:

Another strike against single-payer systems, compared to other American health-care arrangements: they're financed in an unusually transparent way. And arranging that financing, from scratch, often proves impossible.

Right now, most Americans get their health insurance through an employer. That employer, unbeknownst to us, typically puts thousands of dollars into our policy alongside the money we kick in. According to the Kaiser Family Foundation, employers, on average, pay more than 80 percent of an individual worker's premiums. But Americans usually don't notice their employer subsidy for health insurance; it doesn't show up on their paycheck anywhere.

Or take Obamacare, which is funded partially by taxes on the rich, partially by fees on various players in the medical industry, and partially through cuts to Medicare. The cost is spread across many groups, and many government functions.

But by moving all the financing to the government, a single-payer health plan like the one Vermont considered would lay naked the incredible costs of our health care system. Vermonters would certainly notice the 9 percent income tax hike and 11.5 percent payroll tax that the Shumlin administration concluded would be necessary to raise enough funds.

In so many words, single payer is very expensive. But single payer would have been slightly less expensive than the current system in 2015 and far less expensive in the long run. In other words, single payer was killed because of its cost, even though it would have saved money--and it's difficult to overstate the irrationality of this decision. It would be like spending $100 on a hammer because the $90 hammer is too expensive.

As I've written before, societal resistance to new social policy is inevitable. Even the phenomenally popular Social Security program experienced widespread skepticism and resistance when it was first implemented. Social democratic policy was unpopular even in Scandinavia when it was first implemented. Good social policy anticipates societal resistance and finds a way to work with it. Only policies that can win over a skeptical public survive. And Vermont's single payer--despite its many strengths--was unable to win over enough popular support. In a perfect world, PR wouldn't matter. But we don't live in a perfect world, so having the best policy isn't good enough.

Wikipedia has a useful summary of the efforts of single payer advocates. A bill passed in 2010 provided state funding for a commission to study health care reform. This commission made three recommendations: two of the three explicitly demanded single payer, and one suggested a public option. Then, based on this study, a 2011 bill mandated the creation of Green Mountain Care, single payer health care system for Vermont.

The real problem is that Vermont locked itself into a pure single payer system and didn't allow itself any room to maneuver. The goal of single payer advocates isn't a single payer system, but universal health insurance coverage and cost savings through administrative simplicity. Single payer is the most direct way to accomplish these goals, but it's not the only way.

Obtaining single payer's benefits without single payer
I wrote previously about the many administrative strengths of single payer here and here, and don't need to repeat those arguments on this page. However, throughout those pieces, I kept obliquely referencing a "workaround" used by Germany and Japan to get all the benefits of single payer, even though Germany has over 200 payers and Japan over 2000.

Social democracy / social security is the fiscally responsible choice

Image: The fiscally responsible save for a rainy day. (source)


UPDATED--see below [in brackets]



It should go without saying that budget deficits aren't a result of government spending, but rather the balance of government spending and government income. This becomes obvious when we look at budget deficits of the social democracies, which have far greater government spending per capita than the United States. The United States' budget deficits were 7% of GDP in 2012 (and 10.1% in 2009 at the height of the Great Recession), while Denmark's were 4%, Austria's were 3.1%; Finland's were 2.1%; Iceland, 1.9%; Sweden, 0.3%; and Norway actually ran a surplus of 13.8%. Social democracies are generally very responsible fiscally, historically running fewer budget deficits (chart 4.1) than most other OECD countries, including the United States (Austria being the exception) (click for unobscured graph):

It's important to remember that this 35 year period includes is an incredibly severe recession that affected only Scandinavia in the 1990's; for Finland, this recession was arguably worse than their experiences during the Great Depression. Despite having an extra recession, the social democracies managed to be more fiscally responsible as a whole than the rest of the developed world.

[Update, 02/19/2016: Simply tallying the number of years of budget deficits can be misleading, since a single year may have a greater deficit than the cumulative effect of many years of very small deficits. So, here's a graph of government financial net worth (government assets minus liabilities) with datapoints for 2007, 2009, 2013, and 2014--so before, during, and after the Great Recession. I've marked the social democracies in red and the United States in blue:

Clearly, the social democracies are very fiscally responsible by this measure as well.]

Not only have the Scandinavian social democracies had fewer years of budget deficits, but their rock bottom borrowing costs indicate that investors have utmost confidence in the finances of the social democracies. Markets do err, but the market for the debt of social democratic countries proves that no one seriously thinks that large social democratic welfare states pose a threat to a country's fiscal footing--simply because nobody is willing to bet their money against it.

This adds up to a compelling case that social democracy is fiscally responsible.

Scandinavians don't mind paying taxes, and neither do Tea Partiers

Image: Social democratic activists (source)


The Swedish really love paying taxes:

[A 2012] survey shows that 80 percent of the population thinks the municipal and regional governments should increase the quality of childcare, while only 15 percent think that taxes should be lowered instead. Furthermore, 93 percent believe that the local governments should increase care for the elderly, while only 5 percent favor lowering taxes. Similarly, 91 percent prefer increasing the quality of healthcare rather than lowering taxes.

Since I don't speak a Scandinavian language, more data like these have proven difficult for me to locate. But it's clear that Scandinavians really like paying taxes, and the Swedish even think very highly of their tax collection agency:

Skatteverket, the Swedish Tax Agency, is popular. In fact, it is really popular, with poll after poll showing that it is trusted and respected. A 2013 survey concluded that the Tax Agency has the second-best reputation – beaten only by the Swedish Consumer Agency – of 26 major Swedish public bodies, scoring highly for its customer service and for ‘contributing positively to society’.

‘You don’t have to like taxes, but most people seem confident that things are done fairly’, says Toivo Sjörén of market research institute TNS Sifo, which conducted the poll (link in Swedish).

By contrast its American equivalent, the Internal Revenue Service, is one of the least popular federal agencies in the United States, according to a 2013 poll.

So how has the Swedish Tax Agency managed to pull off what seems like the ultimate confidence trick – taking people’s money but leaving most of them grateful and smiling?

This feat is pulled off very simply. The Guardian wrote a neat story that interviewed the typical Sven on the street about taxes and the welfare system. See if you notice the pattern:

Comparing the administrative costs of Obamacare to single payer

Above: Critics of Obamacare from the right
Below: Critic of Obamacare from the left

Since this is a very long post, I wanted to emphasize at the beginning that we're most interested in two numbers: $5 billion and 27 million. Obamacare is (at least) $5 billion more expensive than single payer. And, Obamacare leaves 27 million people uninsured that would otherwise be covered by single payer. Essentially, our political system chose to pay $5 billion to prevent 27 million people from getting health insurance.
[UPDATE]--The $5 billion number comes from only start-up costs for the Obamacare website and exchanges--so only for the exchanges and only through 2014. Himmelstein and Woolhandler use CMS estimates to calculate the increase in administrative costs caused by Obamacare to the entire health care system (public and private) from 2014 to 2022: over a quarter of a trillion dollars. See full update at the bottom of this page.



This is the third and final post on how the design of social welfare programs affects their administrative cost. The first two posts (part 1, part 2) established the theoretical framework, exploring how various aspects of social policy design, like eligibility, actuarial values, economies of scale, etc, should affect administrative cost and program efficiency. Of course, theory does not always match reality, so a separate series of two posts compared the individual and aggregate costs of the American versus social democratic welfare states using real world data. This demonstrated that the theory behind program design is sound: the theoretical administrative efficiencies of the social democratic model indeed result in enormous cost savings in the real world.

Missing thus far is an example of social policy analysis using the lessons of administrative design on a real world social welfare policy. This post concludes this series on administrative cost by performing such an analysis on Obamacare. We will examine all the areas of administrative cost (and waste) covered in parts 1 and 2: universal eligibility, actuarial values, economies of scale, automatic enrollment, and other, miscellaneous administrative issues. Since we've already established that the social democratic (single payer) system is the most efficient option, we will compare the administrative structure of Obamacare to the single payer model, and how Obamacare's design makes it less efficient than single payer.

Before beginning, it's worth reiterating that Obamacare is basically the law Obama wanted, not something watered down to get conservative votes (see here and here) (and recall that every single Republican in both houses of Congress voted against the bill, minus one abstension).

Obamacare and universal eligibility
Single payer systems derive much of their efficiency from universal eligibility. When everyone is eligible, there is no need to hire legions of bureaucrats to ensure that all applicants meet eligibility requirements, or verify that all current beneficiaries remain eligible. Every step away from universal eligibility means that some system must be created and staffed by bureaucrats to ensure that only eligible applicants are able to participate, and this does not happen for free.

The development of early maternal health policies in Finland

Note: This post was created to supplement a different post on the Finnish welfare state. For clarity, a long blockquote I wanted to include in that post is instead published here.

The book Birth by Design details several countries' transition to a healthcare system in which childbirth occurs in a hospital, instead of in a family's own home. Lacking hospital infrastructure, impoverished Finland had an additional, intermediary step. Before transitioning to birth in hospitals, the Finnish government expended significant effort to provide professional birth attendant services for in-home births. The the innovative strategies to that ultimately overcame the many difficulties of this process make this decades-long event a classic example of social policy design:

Social democracy succeeds on the strength of its policies, not because of cultural superiority

Image: Flickr user Visa Kopu snaps a photo of her maternity benefit (or "baby box"), sent to every pregnant mother in Finland shortly before her delivery. (source)



This series examines commonly held, racist views on social policy. Part 1 examined the racist idea that social democracy can only work in society that is already harmonious, wealthy, and egalitarian. Even a cursory look at the history of Finland in the early 1900's--desperately impoverished, war-torn, oppressed by occupying armies, society shattered by a brutal civil war--quickly makes these arguments untenable. It also exposes them as racist. Part 2 examined the racist claim that social democracy only succeeds in a homogeneous society. This claim is made untenable (in part) by the experiences of Sweden, which is--by many measures--one of the most diverse nations in Europe. Clearly, minorities are not so evil that their mere presence destroys welfare states. Rather, this view reflects our own racism; when we see statistics that the Swedish educational system is among the very best in the entire world, we assume that there cannot be any students there who aren't white.

This post--part 3--begs the question: If racial, cultural, or genetic superiority cannot account for the success of social democracy--what can?

For this post, we will focus on social democratic child welfare policies (especially infant mortality and childbirth attendance) as an instructive example.

Why do these policies work?
As I've written before, there is no question that social democratic policies are successful. The social democracies as a group have led the developed world in all quality of life indicators, particularly infant mortality and life expectancy, while simultaneously (as a group) leading the developed world in low unemployment and high rates of economic growth. There's no question that the policies work. The question is: why?

The "why" question is of the utmost importance because the conditions of the Scandinavian social democracies in the first few decades of the 1900's--especially Finland--resemble underdeveloped countries in Latin America, Africa, and Asia today. Though prosperous now, the Scandinavian social democracies had endemic poverty and catastrophic quality of life indicators in the early 1900's. For example, Finland's infant mortality rate peaked in the 1930's at a staggering 90 deaths per 1000 live births, which is comparable to the worst infant mortality rates in the world today:


At three deaths per 1000 live births, Finland currently has one of the lowest infant mortality rates in the world. Indeed, the Scandinavian social democracies today have some of the best quality of life indicators in the entire world, even though much of the rest of the developed world had a head start. Is there some reason why policies that worked so well in Scandinavia could not work in the Central African Republic or Mali?

Economies of scale, avoiding administrative problems, and automatic eligibility: why social democratic/single payer systems are more efficient

Image: source

Update: Part 3 can be found here

Social democratic programs can provide social welfare services more efficiently--higher quality at a lower cost--than other types of public social welfare programs, as well as the private market. My first post on this issue dealt mostly with actuarial values, and for good reason. For all social welfare services--from health insurance to child care--actuarial values are of primary importance; for disability insurance and defined benefit pensions--a category that includes Social Security--actuarial values are the entire story (much more about retirement benefits in the first post on this issue, as well as here and here).

But in my excitement over actuarial values (I'm not like most people), I failed to elaborate the other factors that make social democratic programs more efficient than other program designs and the private market: economies of scale and other administrative issues, mostly centering around eligibility.

Paul Ryan's new attempt to conceal his attack on the social welfare system

Image: Representative Paul Ryan (R-WI) (source)


Much noise was generated recently about Paul Ryan's supposed evolution on poverty. Every year, Ryan designs his ideal budget for the federal government, always calling for deep cuts to the social welfare system. In more recent iterations of his budget, he focused almost all of his enormous cuts to the social welfare system on antipoverty programs, leaving the parts of the social welfare system used by the nonpoor--like Social Security and Medicare--basically unscathed.

But when Ryan released a poverty plan last week, it featured restructured antipoverty programs--without reduced budgets. Was this an unprecedented change of heart--even a mea culpa--by the Republican wonk-in-chief? Had he reached a new understanding of poverty? Some thought so. Here, for example, is Ezra Klein's gullible write-up of Ryan's poverty plan entitled Democrats should welcome Paul Ryan's poverty plan. At the end, he concludes:

There will be charges of hypocrisy against Ryan's plan, and they're merited: his poverty plan and his budget cannot coexist in the same universe at the same time. Conservatives who spent the last few years cheering Ryan's budget are now cheering his poverty policies need to ask themselves some hard questions.

But more important than the contradictions in Ryan's plans is their progression: Ryan is refocusing himself and, perhaps, the Republican Party on reducing poverty by making the government's anti-poverty programs work better: that's a project that's both more important for the country and more amenable to compromise. Democrats should welcome it.

To his credit, Klein later interviewed a very skeptical Bob Greenstein of the Center for Budget and Policy Priorities, who douses cold water on Klein's hope for an evolution on poverty by Ryan and the Republicans. (Klein should be lauded for his willingness to post interviews with people who convincingly refute each point of his previous columns; most would instead double down.)

Greenstein argues that every word of Paul Ryan's plan is designed to sound like a reform of antipoverty programs--plans to make them work better with the same amount of funding--but are actually designed to create opportunities to gut them in years to come. Ryan's poverty plan is a Trojan horse--a vehicle secretly designed to make a reality the deep cuts to the social welfare state he envisions in his budgets.

Paul Ryan is certainly capable of this type of deceit. As I wrote previously, deceit is utterly foundational to his career. He would be a complete unknown if he hadn't cloaked all of his budget proposals in lies. Each one of the budgets he prepares every year utilizes confusing baselines or incomplete information to hide what he actually wants to do: gut the social welfare state. Ryan's consistent efforts to win support by confusing voters and pundits reveal that even Ryan knows how unpopular his intentions are. His efforts to cloak in his 2010 budget the destruction of Medicare and taxes increases on 95% of all Americans are particularly amusing. Ryan wouldn't be a major figure if he promised budgetary miracles while delivering tax increases on 95% of Americans and a hollowed-out Medicare; he's only a major figure because he promises budgetary miracles while concealing tax increases on 95% of Americans and a hollowed-out Medicare.

Universal Basic Income: a thoroughly researched, evidence-based policy

Image: President Richard Nixon bowling (source)


Poverty--by definition--is a person or family with not enough money. If poverty is simply not having enough money, what if we just gave people free money? Wouldn't that solve the problem of poverty?

Today, this proposition sounds completely absurd. No politician or commentator in the mainstream could even mention it and be taken seriously. This is the kind of proposal that could end a career. Yet, decades ago, this idea was so mainstream that the likes of Richard Nixon and Milton Freeman were in support of it (this is a useful reminder of just how conservative our country has become). Yes, as Nixon was escalating in Vietnam, he represented the political center by advocating a universal basic income.

The idea has many names, among them Universal Basic Income (UBI), Guaranteed Annual Income (GAI), or (as Nixon would have known it) the negative income tax. It also takes several different forms: some proposals would pay everyone the difference between their earnings and a poverty line--for example, if the poverty line was $20,000 in a year and your family only made $16,000, the federal government would write your family a check for $4,000. Others aim to keep things administratively very simple and would direct deposit a set amount of money in the bank accounts of every single citizen* (for most people, these benefits would be offset by increased Social Security taxes to pay for the program). In whatever form, a UBI is a guarantee that you and your family will never be impoverished.

A hallmark of all UBI proposals is unconditional cash transfers--that is, recipients are not expected to do anything in order to receive cash benefits. Again, this makes the program administratively very simple, but it also grants people security. That security has its own rewards (which I will elaborate on in a future post). (Even conditional cash transfers in developing countries are often considered utopian nonsense--yet they work).

It's crazy to think that a UBI would improve health or educational outcomes. And it's equally crazy to think that a UBI would not cause people to stop working. Yet that is exactly what research on UBI's has found. Decades ago, when UBI was a serious policy proposal, extensive research was done. Very well designed studies (randomized controlled trials) found downright incredible results. From a review:

The first experiment was conducted on an urban population in New Jersey and Pennsylvania between 1968 and 1972. A second experiment was conducted in Gary, Indiana to examine the effect of a GAI on single parents. A third experiment was conducted in North Carolina and Iowa to look at the effects on rural populations. The final experiment was the Seattle-Denver Income Maintenance Experiment (SIME-DIME) which had access to a much larger experimental population...

In North Carolina, children in experimental families showed positive results on elementary school test scores. In New Jersey, data on test scores was not collected, but a positive effect on school continuation rates was found. In SIME-DIME there were positive effects on adult continuing education (Levine et al. 2005: 100). These results are all the more remarkable when juxtaposed to the academic literature that shows it is very difficult to affect test scores, dropout rates or educational decisions by direct intervention.

Inconsistent attempts were made to collect health data, specifically on issues such as low birth weight which can be associated with significant deficits in later life. The Gary, Indiana study found positive effects on birth weight in the most at-risk groups (Levine et al. 2005: 100).

Kerala, India, and the moral bankruptcy of the neoliberal development project

Image: Bangladeshi sweatshop workers (image from The Institute for Global Labor and Human Rights must-read report on Bangladesh's sweatshops)


The neoliberal theory of development is that sweatshops are good. Poor countries have to leverage their only comparative advantage--cheap labor--in order to bring foreign investments into their country. Bangladesh is certainly not going to beat the first world at software or aerospace engineering, so they should focus on what they can beat the first world at: providing low skill manufacturing at third world prices. Sweat shops are evil, but they're a necessary evil. Only when enough foreign investment enters a country can countries like Bangladesh lift themselves out of poverty. This generation may not have access to an education, but maybe their children will for their sacrifices. This is the path of industrialization the United States, England, Germany, etc took and it is--regrettably--the only way. The real world doesn't care about morality; it's time for Bangladeshis to roll up their sleeves and do what needs to be done.

The problem with the neoliberal development narrative is that it's entirely wrong. A Worker Rights Consortium report found that most countries pursuing this exact policy have seen their workers get poorer, not richer. If the neoliberal development strategy actually worked, the purchasing power of workers should rise slowly, not fall. But it doesn't work. It never did.

The intentional oversights of the neoliberal model are incredible. Child labor doesn't end by workers allowing themselves to be exploited; it ends when a country's political system is motivated by voters to enact--and enforce--a ban. Occupational health and safety regulations aren't gifts of the free market; they're the result of collective bargaining and direct government intervention. Universal primary public education doesn't happen because of an influx of foreign investment; it's the result of mass movements forcing changes in government policy. What, exactly, is the mechanism by which foreign money, flowing directly into the hands of the factory owners who pay their workers 20% of a living wage, results in widespread improvements in education, utilities, or workplace safety? It's certainly not going to help the next generation get an education--not when 9-year-olds are among massive ranks of child laborers.

Neoliberal development theory conveniently overlooks stories that don't fit the model. The monetary gains of Japan's rapid industrialization was shared equitably among the entire population; they now lead the world in health and quality of life indicators. Japan's rapid industrialization didn't occur by allowing their workers to be exploited by foreign capitalists. Rather--even though rural, backwater Japan had no comparative advantage in technology or manufacturing--they realized the potential and used direct government intervention to target these industries for growth. They didn't wait for the market to take it's "natural" course; they used industrial and trade policy to benefit their high tech industries, rank-and-file workers, and to educate the next generation of engineers and scientists. Japan succeeded because of their flight from the neoliberal model, not in spite of it.

It's difficult to--as Nicholas Kristof of the New York Times does--take the neoliberal model seriously:

But while it shocks Americans to hear it, the central challenge in the poorest countries is not that sweatshops exploit too many people, but that they don’t exploit enough.

Talk to these families in the dump, and a job in a sweatshop is a cherished dream, an escalator out of poverty, the kind of gauzy if probably unrealistic ambition that parents everywhere often have for their children...

Seriously? An "escalator out of poverty"? From the Worker Rights Consortium report cited above:

On average, prevailing straight-time wages—pay before tax deductions and excluding extra pay for overtime work—in the export-apparel sectors of these countries provided barely more than a third—36.8 percent—of the income necessary to provide a living wage...prevailing wages in 2011 for garment workers in China, Vietnam, and Indonesia provided 36 percent, 22 percent, and 29 percent of a living wage, respectively. But in Bangladesh, home to the world’s fastest-growing export-apparel industry, prevailing wages gave workers only 14 percent of a living wage.

The one graph that proves that welfare (AFDC / TANF) is not a work disincentive

Image: Bill Clinton, masquerading as a liberal, signs TANF into law. (source)


TANF--also known as "welfare"--was designed with one thing in mind: laziness. Republicans and Democrats alike couldn't stand the idea of someone capable of working choosing not to work, so they established complicated rules about "work activities" (a polite euphemism for unproductive busywork) to ensure that no one on TANF was idle. They obviously assumed that the majority of people on AFDC, the program TANF replaced in 1996, did not actually need government assistance, as they created time limits: families cannot collect TANF benefits for more than 24 consecutive and 60 total months. And, no childless adult can receive any type of welfare benefit.

TANF rests on the assumption that people who don't work are idle because they want to be; the key challenge of welfare is to motivate unmotivated people into finding gainful employment. After all, anyone can get a job. (not)

But let's look at this another way. The American safety net is designed to keep people in paid employment and off welfare. The work activity requirement means you can't be idle and on welfare (and is designed to frustrate people into leaving welfare to get a job); the time limits mean you can't make a career out of your welfare benefits. This stands in stark contrast to other countries, whose safety nets are more like safety hammocks--so generous they encourage people to avoid work and live high off the government dole.

Stated differently, we must have a stingy safety net or people will become dependent on welfare and choose not to work.

But if this is true, then the United States should have more people working than countries with more generous safety nets. What if we compare the United States' employment-to-population ratio (the number of people ages 15 to 64 who have jobs divided by the total population of people ages 15 to 64) to that of the social democracies? If a stingy safety net really does encourage people to work, then the United States should have a far higher employment-to-population ratio. It does not:

The United States' welfare system is so inefficient that we could become a social democracy without spending another penny

Image: The Ford Pinto was such a poorly designed car that it was literally a death trap. Imagine if you had to choose between a Ford Pinto and a higher quality, safer car, for the same price. (source)


My previous post on the incredible inefficiency of the American welfare state showed how a median income American household must pay about 50% of their income in taxes and private spending for social welfare, while a household with that income in a social democracy would only spend about 40%--and get far more for the money. See the full piece for caveats, but it's clear that social democracy is a better deal; even though the typical citizen pays less, every single citizen gets many benefits--like paid parental leave, a month of paid vacation, a month of sick days, paid extended sick leave, child care, etc--that very few Americans get. Americans love to cry foul at 40% tax rates in Scandinavia, while remaining curiously silent about paying 25% of their income for private employer-sponsored health insurance.

But there is another way to measure the incredible inefficiency of the American social welfare system. It's not just a bad deal at an individual level--it's a bad deal at a national level as well.

The OECD collects data on how much money is spent on social welfare in member countries--both private and public spending. The verdict? The United States is comparable to the social democracies, spending 30% of GDP on social welfare. The social democracies spend 30-33% of GDP on social welfare; Norway only spends 25%. Here is the OECD's graph of their data (which I modified for clarity, underlining the USA and the social democracies (Norway, Finland, Austria, Denmark, and Sweden) in red):

(click to see graph unobscured by side bar)

Yes, we spend just as large a portion of our GDP on social welfare as Finland, more than Norway, and slightly less than Austria, Sweden, and Denmark. This may be difficult to believe, because--as I explained in the previous post--social democracies offer higher service quality and universal coverage. That they provide better services to more people with the same investment is testament to the utter folly of the American welfare system.

[Update 07/07/2014: In case you think that these numbers are some fluke* based on the unprecedentedly high cost of health care in the United States, and that--somehow--the fragmented public-private model we rely upon for health care might somehow work for child care, long term care, or some other social welfare service--a recent study found that the government-run, universal, social democratic long term care systems of Germany and Japan--despite achieving universal coverage--are far less expensive than the long term care system in the United States:

In Germany and Japan, social insurance programs are universal, support family caregivers, and allow individuals considerable flexibility in securing the services they require...when we compared public spending on long-term care, we found that spending in the United States is actually higher than in Germany even now, prior to enactment of the CLASS Act, and is only slightly lower than in Japan.

(The CLASS Act was ultimately repealed). Obviously, once private spending is counted, the American long term care system as a whole is far more expensive than either Germany or Japan's system, despite enormous gaps in the American system. Universal, social democratic systems are very efficient, no matter what the benefit.

*As if the design of the American health care system is somehow not responsible for its own cost inflation.]

Here is a chart I modified from my first post on this issue to show this incredible inefficiency more clearly. Percentages indicate the percentage of citizens covered by each benefit; "universal" indicates 100% coverage.

Even the top tier of America's two-tiered welfare system is a really bad deal

Image: Excuse me, taxpayers--do you get a better deal living in the United States or in a social democracy? (source)
 

One of the most common arguments against social democratic programs is that the taxes needed to finance them are simply too high. But citizens in social democracies get loads of benefits in return for those high taxes. Is it worth it to pay those extra taxes? Let's find out.

This isn't a straightforward question. Many of the services all citizens of social democracies get from the government are available in the American private market--like health insurance, day care, retirement plans, etc. In other words, the United States government doesn't provide (most) people with day care services, but that doesn't mean you can't have them--you just have to pay for them in the private market. Essentially, we're asking: Who gets a better deal? A typical Dane, who gets X, Y, and Z services from the Danish government? Or a typical American, who gets X from the government but purchases Y and Z from the private market?

To start, we'll compare the costs of both systems: How much a typical Finn pays in federal and social security taxes--versus how much a typical Americans pays in federal and social security taxes, plus the cost of social welfare services purchased through the private market (ie, employer-sponsored health insurance, day care, 401(k) contributions, etc). We'll then compare what services are obtained through those investments (whether taxes or private spending), and hopefully be able to see who gets a better deal.

Excited? I hope so. Let's start with what the typical American has to pay for social welfare services.

Abandon the minimum wage! Bring Finnish-style erga omnes unionization laws to America!

I'm rewriting this page so that it fits in better with this project. I'll post a link to the rewrite here once it's done.