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.


Tuesday, October 19, 2010

French Protests Are Over the Top

French President Sarkozy wants to raise the minimum retirement age from 60 to 62 and the age for receiving full state pensions from 65 to 67. This would be gradually introduced, adding 4 months to the requirement each year, reaching full implementation by 2018. The reforms he proposes are quite modest and much needed. The government has been borrowing from banks to make pension payments and now, with debt rising, the French government can no longer postpone reforms. Sarkozy, I think is correct to push reform now. With the Greek crisis, attention is mounting about national debt across Europe. The French system is actually quite flexible when it comes to retirement.

In general, the mandatory retirement age in France is 65. However, under current rules, one can opt for retirement at age 60 so long as one has worked 41-42 years. (Civil servants have to have 40 years of service). In 2008, the law changed so that mandatory retirement age is 70. So once one hits 60, retirement is an option. But one can also opt to work longer. In some professions, there are “special retirement regimes” such as public transport, mining, bus driving, etc. where retirement can start at 50-55. Then there are the early retirement programs. For instance, women earn two years for each child. These will remain unaffected by Sarkozy’s reform.

Students are protesting with the workers because they see the increase in age as a threat to their employment. Unemployment among the young is notoriously high, 23% among 15-24 year-olds. So they would like those at the top to cycle out so that they can cycle in.

The French have tinkered with the system for years. In 1981, Mitterrand actually reduced the mandatory retirement age from 65 to 60, something Sarkozy is now criticizing, saying that it postponed the inevitable, making it harder to reform now. In 1993, the government increased the number of years required for private sector employees to work from 37.5 to 40. It wasn’t until 2003 that the government succeeded in extending public sector employees to 40 years.

Currently only 12-15% of French workers between the ages of 60-65 are working (20% in the US). The average age of retirement age in France is 59 years (64 in the US). For those of us born in the US after 1959, the age for full benefits is 67. This change was made with little notice back in 1983. The earliest that Americans can start receiving benefits is 62. Civil servants are eligible for retirement after 30 years of service. There is no mandatory retirement age in America. (For a nice round up on retirement ages in OECD, visit The Society for Human Resources Management page.)

Many French workers received 50-60% of their incomes under state run programs, plus there are the company pensions and union benefits. Civil servants receive up to 75% of their final salary for life. Retirement benefits for American civil servants are based on the last 3 years of their income. In the current economy, this is encouraging many people to stay in the workforce longer so as to increase their last 3 years of income, and thus their benefits.

French students are blockading refineries. They may be arrested for this because under French law, preventing those who wish to from doing is punishable with prison time and possible civil penalties. Some 20 of 219 refinery are blocked. 4000 gas stations of 12,500 are out of gas. Distributors are pooling their reserves for distribution. In the end, the French Senate will approve the reform and the French economy will have taken a hit as a result of fuel shortages. So given the options for protest movements, I'll keep the whacky Tea Partiers.


Monday, October 11, 2010

"The Beats" vs. the "Tea Partiers"

I thought I'd share this rather interesting take on the "Tea Partiers" from the New York Times Book Review .

All protest movements are the same at their base- they are often against some notion of "elitism" and they are often driven by some sense of marginalization. I didn't know much about the "Beats", so I found this article rather interesting.