Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Sunday, October 24, 2010

The Limits of the Welfare State

Hi Everyone,

US West's post about the protests in France provoked a response from me which provoked a response from LTG. All of that got me thinking it would be interesting to open a thread about what the limits of the welfare state are. I'll get things started by saying that there are two limits: a practical limit (i.e. what society can afford), and a philosophical limit (i.e. what society is obligated to provide).

For the purposes of this discussion let's use a really broad definition of the welfare state that includes direct transfer payments, government funded pensions, subsidies, funding for public education, bail outs of big companies to prevent layoffs, public works projects etc. I'm thinking of pretty much everything a government can spend money other than the military.

I'll start with the practical limit first. Obviously this varies by country quite a lot. I think the obvious hard limit is that governments cannot afford to risk ruining their national economies for the sake of providing additional welfare benefits. There is a point at which borrowing to pay for welfare states becomes unsustainable. There is also a point at which taxes become so burdensome that it hinders economic growth significantly. The Tea Party crowd are of the opinion that the US has already reached both of these practical limits. I disagree. We are among the least taxed people in a democracy and we currently pay among the lowest tax rates in modern American history. To the extent that our debt and deficit have become a problem it is largely because of the exceptionally low taxes that we pay (and the military adventures in which the previous administration embroiled us). A marginal increase in our tax rate could solve the other problem. This will be politically controversial but I tend to vote for candidates that advocate this solution.

Countries like France are bumping up against their practical limit. Debt and deficit levels are very high in France and their tax rate is relatively high (especially when you include sales taxes and value added taxes). They have to make adjustments and since they are probably at the point where they get diminishing if not negative returns to raising taxes the best way to make that readjustment is to reduce benefits. This will be political unpopular and people have a right to protest their reduced benefits. But if I was a voter in France I'd vote for a reduction in those benefits for the good of the society and the long term sustainability of the welfare state.

As for the philosophical limit, I think the purpose of the welfare state should be to ensure that being born with the deck stacked against you economically or having made poor decisions should not be a fatal condition. Basic human needs such as shelter, food, access to health care and education should be provided by the state if an individual cannot provide for them themselves. But I do not think that society has an obligation to ensure that everyone has a prosperous life style. We have a right to expect that our basic human needs will be met and it is reasonable to expect society to be willing to invest in our education to make us more productive members of society. But I do not believe we have a right to expect much beyond that.

Unless we are willing to insist that everyone regardless of their effort on their own behalf (or on society's behalf) is entitled to an identical standard of living, we must allow for variance in life style according to the variance of people's luck of birth, decision making in life and their own work effort. I contend that allowing for such variation is desirable because it provides a useful incentive for individuals to work not only on their own behalf but also on behalf of society. But at the very least the practical limit on the welfare state probably makes it necessary. Once we agree that such variation in living standards is desirable or at least necessary, then any debate about the welfare state boils down to where exactly we should draw the line for benefits levels based on what we can afford.


The Law Talking Guy said...

"They have to make adjustments and since they are probably at the point where they get diminishing if not negative returns to raising taxes the best way to make that readjustment is to reduce benefits."

I don't think there is any evidence that this is true. It's a political decision to redistribute or not, not an economic one. In the USA, for instance, all of the "problems" with social security could be solved by (a) raising the cap on incomes taxed for SSI or (b) allowing the SSI expenditures to come from the general fund instead while the baby boomers retire.

Raised By Republicans said...

I don't think we really disagree. The two options you mention for SSI, are both de facto benefit reductions and/or tax increases depending on how one interprets it.

With France, are you suggesting that that France in particular could increase its overall tax rate without significant consequences? Or are you suggesting that there is no such thing as a practical sustainability limit to welfare state spending?

If we agree that there is ultimately a practical limit at some point, then I think reasonable people will disagree about precisely where that limit is. I think generally, it's safe to say that France is closer to their limit (allowing for some subjective political variance in where exactly we might say that limit would be) than the US is.

If you disagree that there is a practical sustainability limit to welfare state spending, then I think the subject of the discussion should move to where the money comes from.

uswest said...

Here! here, LTG! Hit those wealthy suckers with SSI and quit borrowing from it to fund other things. I want Al Gore's Lock Box!

I do agree, however, that they are practical limits to what any state can do for its people- just like there are practical limits on what I can spend for my family. But those limits change over time. Anytime there is a discussion on this topic, there is also a discussion about national priorities.

I have a consistent problem with our national priorities. We place too great an emphasis on fancy weapons systems, a technology looking for a reason when we should be looking at our people or our infrastructure- which is where we are really lacking. The USSR beat us in the space race, but its people were starving. Is that where we want to be? We focus too much on the short term and, worst of all, we think everything has to be about profit. Some public goods, like public transport and the post office, are not meant to be self-sustaining profit centers.

I think we are in a time when the welfare state enjoyed by the super wealthy is also showing diminishing returns. I do not think the state should be asked to pay for someone's lifestyle, which I think we tend to do- by offering tax breaks for the yacht parked at Martha’s Vineyard. So I'd be in favor of reforming the tax code significantly (reclassifying what constitutes "Income' for starters) and adding a small VAT. Why tax capital accumulation rather than capital expenditure? Since we are spending ourselves to death, why not reverse the trend and build in rewards for less consumerism?

"We are among the least taxed people in a democracy and we currently pay among the lowest tax rates in modern American history. " Well, maybe the rich half pay the lowest rates, but rest of us are paying an awful lot. The lowest income tax rates in US history where zero, if you want to get technical. Strictly speaking, yes we are taxed less than other nations on our income. But, as I have said many times, when you add up income taxes, heath insurance premiums payroll taxes, and sales taxes, property taxes, etc., I doubt we would come out as the "least taxed". I think we are the most highly taxed and we get the least for it in return. We don't hold government accountable enough to us in this regard.

In Switzerland, you pay little income tax up until about $400K, then they sock it to you! But for all the VAT taxes you pay, you get full heath care through private-public partnerships, unemployment insurance, quality public schools (not linked to property taxes), some of the best public transport in the world, etc. Oh, and they do have a pretty active military. Which brings me to the next point:

European nations do not maintain vast militaries, so they have more cash for their welfare state. What they spend on entitlements we spend on national defense- ours and theirs.

Raised By Republicans said...

RE: military spending. Actually, many European countries spend a considerable share of their GDPs on the military. France spends 2.6% of its GDP on its military. Greece spends 4.3% of its GDP on its military. The US spends about 4% of its GDP on the military (which is certainly more than we need to stay the biggest dog on the block).

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The Law Talking Guy said...

I told someone not long ago that the marginal tax rate (highest rate) in the USA used to be 94%. He literally could not believe me. He thought that was crazy. I think that laffer-curve mentality is creeping into this blog. Much higher levels of taxation have been practiced. The idea that we are at our limits now is really conservative propaganda, not fact. I don't advocate much higher taxes for a variety of reasons, but not because I think higher taxes will kill the economy. I see no reason to believe that France couldn't solve its problems by raising taxes instead of slashing benefits.

@RBR - this is my point about social security. We can raise taxes for that (which I advocate - and that's saying something because my family would bear that burden heavily) or cut benefits. No reason for the latter unless, as the GOP believes, there is no evil greater than raising taxes.

USWest said...

LTG, that is what the GOP thinks. take note of what has happened in California over the past 10 years- although tax hikes were passed in 2009- hikes on us that is.

My point about wealfare for the rich still stands. Michigan is offering something like $400 million in incentives over the next 15 years to Ford. In return they get a factory that focuses on alternative fuel vehicles and 600 hundred jobs. Do these deals really pan out so well?

Apparently big companies expect, and feel entitled to sizable incentive packages for the privilege of operating in the USA- after being bailed out by the US tax payer (Ford being the exception.)

Prop 24 on the CA ballot calls for the repeal of corporate tax benefits. Many are opposing it because they claim it will be a job killer.

RBR: Thanks for the info. I didn't realize that our DOD spending was only 4%. But yes, it is still too much. Then again, everything is relative. France's GDP is like US$2.7 tril. while the US GDP is like US$14 tril. Little Greece, which probably still thinks the Romans are coming for it considering their relatively high military expenditure, is only $333 bil.

Raised By Republicans said...

LTG, I get the impression you think I think that taxes in the US are their practical limit. I actually said that we are undertaxed both relative to our own past (as you pointed out) and relative to our "peer group" of countries.

Marginal income taxes are one thing. But what I'm pointing to in France is not just their marginal income taxes but their sales taxes and VATs too. Those are especially pernicious ways for governments to raise revenue.

As for the Laffer curve. I'm not 100% sold on it, but there is a certain logic to it that AT EXTREMES an increase in the tax rate could lead to a decrease in revenue because it could reduce economic productivity. The problem with conservatives is that they assume that the US is always at that extreme when it is pretty clear that we are not there. In other words, we are much more likely to be in the situation where raising taxes will raise revenue without imposing any drastic distortions to our economy. France for example has about a 20% VAT. That's huge.

LTG, I don't think you ever directly answered my question about whether you believe that there is any practical limit to the size and generosity of the welfare state. Do you think that there is any practical limit to the size and generosity of the welfare state?

Raised By Republicans said...

US West,

The US economy is so huge that we could easily field the biggest, best trained and best equipped military in the world for half of what we spend now. And when you figure in that most of the other top military spenders are our allies (like France and Greece), we could really scale back our military a lot.

Greece is worried about the Turks by the way, not the Romans but the prospect of a Greco-Turkish war now seems nearly as absurd to me (unless something really nasty happens in Turkey).

uswest said...

I know they are worried about Turkey. But it's laughable on 2 couts. 1) it's highly unlikely. THe joke in Turkey at the moment is that soon, Europe is going to want join Turkey rather the the other way around. Someone has to pay the bills.
2) What the Greeks spend on defense would do little if the Turks were really interested.

Yes, that was my point. We spend too much on Defense. So we could spend much less and help balance the budget. So raising taxes is not absoloutely necessary. There is still plenty of fat. In that regard, conservatives are correct. The difference of opinion between them and me is who they way to redistrubute the savings to. I mean, I don't think we need to really win the competition on who pays more taxes.

Correct on my previous comment about Ford. It will invest $850 mil and create 1200 jobs (900 hourly positions). The incentives haven't been announced yet.

Raised By Republicans said...

Yeah, a Greco-Turkish war is pretty unlikely. But Turkey has attacked both Greece and Cyprus in the past 50 years. And a Turkish military force currently occupies part of Cyprus.

You're right about Greece's chances. Turkey spends about 5.3% of its GDP on its military. So the Greek military could manage to be a deterrent but couldn't really expect to win a war with Turkey - just force intolerable losses on them.

Their economy is not doing really well (along with the rest of us), so I don't think Turkey will be paying anyone else's bills any time soon. Their economy shrank by about 6% at the last measure in the CIA world Factbook. 17% of their population lives in poverty. Their debt and deficit levels are fairly average (i.e. not much better or worse than a typical EU country - but way better than Greece).

The Law Talking Guy said...

"Do you think that there is any practical limit to the size and generosity of the welfare state?"

The laws of physics require such a limit, but it is probably not in sight. As an economic matter, the question is what taxation burden can be put on business before it begins to seriously retard business activity. I think the answer is much, much higher than what we see in the US or France. I will note, for example, that I just learned that in the 1600s, the tax on Chesapeake tobacco levied by the Crown was 75% of the total sales price, and tobacco production boomed. What matters is not so much the tax rate as the ability to make a profit notwithstanding the tax rate. I just don't think this is really a relevant question for France. They aren't bumpign up against any limit except the willingness of the rich and powerful to keep their promises.

Raised By Republicans said...

Well, it also helps to have an addictive product. ;-)

I think you are right that we are far from the limit in the US. But the tax burden in France is much higher than is ours and their usual growth rates tend to be lower. At the same time, the generosity of their benefits are really really high compared to ours.

The Law Talking Guy said...

Is the burden in France "much higher" than ours? I ask because these stats often tend to compare national government to national governments, without taking into account the fact that I pay taxes to - at least - the feds, the state, the county, the city, the water district, and the community college district. The tax burden on my family approaches 50%. 31% fed, 9% state, 6% SSN, etc., plus sales taxes over 10% now in Los Angeles area. My impression is that the French burden is not enormously greater.

Wikipedia has an interesting site comparing different estimates of relative tax burdens.

What's interesting is that if you were to sort it by GDP/person, you would find that the correlation with tax rates is pretty strong: with the exception of the USA and Japan (and the oil-micro-states) all the high GDP states have high rates of taxation.

indeed, if you knew nothign else about tax policy other than this chart, you would argue for higher taxes as a policy correlated with strong economic performance.

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USWest said...

LTG posts, "I pay taxes to . . ." Which was my point . . . ah, about 10 posts ago when I mentioned: "Strictly speaking, yes we are taxed less than other nations on our income. But, as I have said many times, when you add up income taxes, heath insurance premiums payroll taxes, and sales taxes, property taxes, etc.,"

Toss in bond measures- which are tax hikes on Property owners. I have 7 of them on my property taxes for a total of $248- all for the local schools.

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