S4 - Alesina Glaeser Introduction PDF

List of Tables Chapter 1 Introduction 2.1. Composition of General Government Expenditure (as % of GDP) in 2000...

List of Tables Chapter 1 Introduction 2.1. Composition of General Government Expenditure (as % of GDP) in 2000 17 2.2. Government Expenditure on Social Programs (as % of GDP) in 1998 19 2.3. Public Pension Expenditure, 1985-95 25 2.4. Annual Public Pension for a Single Male 27 2.5. Mean Social Transfers for Four-person Households with Two Children, According to Pre-tax Income 31 In the United States, public policies that redistribute from the rich Distribution to the poor are much more limited than in continental Western 2.6. Mean Social Transfers for All Households, According to Pre-tax Income Distribution 32 Europe. Both the United States and Europe are democratic societies. 2.7. Mean Social Transfers for One-person Households (Age Both have common cultural and religious roots. Both are wealthy. Above 65), According to Pre-tax Income Distribution 34 Why did Europe develop such a different attitude toward redistribu- tion than the United States? 2.8. Composition of General Government Revenue (as % GDP) in 2000 36 This question is intrinsically important. After all, the European 2.9. Minimum Wages in the United States and Europe 39 welfare state touches almost every aspect of its economy and society. 2.10. Labor Markets in the United States and in Europe 40 But trying to understand the transatlantic differences in this area 70 can also shed light on other U.S.—Europe differences. Recent conflict 3.1. Economic Variability in the United States and Europe 4.1. Effect of Political Variables on Soda! Spending: between the United States and several European countries, espe- Cross-country Regressions 84 cially France and Germany, has suggested again that there is an 6.1. Fractionalization Indices 139 Atlantic divide which is often summarized by the term "American 6.2. Effect of Race and Beliefs About Race 151 exceptionalism," a term made famous by Upset (1996). But, is this 7.1. Beliefs About Poverty in the United States and Europe 184 divide grounded in economic realities, political institutions, or 7.2. Beliefs About Poverty 189 national psyches? Is it permanent and immutable or the result of 7.3. Median (Mean) Hours Worked by Income Quintile 193 changing political or economic forces? In this volume, we follow in the footsteps of Friedrich Engels, Werner Sombart, and more recently Seymour Martin Upset, and try to understand the roots of American exceptionalism by focusing on the welfare state. More precisely, our focus is on why Americans are Fighting Poverty in the US and Europe introduction much less willing to redistribute from the rich to the poor than Europeans. 1.1. Economic explanations Redistribution can occur by means of certain types of government After a description of the differences in public policies concerning spending that favor the poor and disadvantaged (health, unemploy- redistribution in Chapter 2, in Chapter 3 we begin our explora- ment subsidies, transfers to low income families, disability, etc.), by tion of possible reasons for cross-Atlantic differences by looking at means of progressive taxation to collect revenues for the govern- economic variables. In particular, we focus on those variables that ment, and also by certain types of labor and goods market regulation. economists believe "should" create more redistribution. We conclude We begin in the next chapter by documenting the remarkable that economic considerations alone do not go very far in explaining differences between the United States and Europe in many aspects of American exceptionalism. government spending, tax policy, and regulation. As a whole, govern- One natural explanation of differences across democracies in the ment spending in the United States is about 30 percent of Gross level of redistribution is the pre-tax distribution of income. It would Domestic Product (GDP). In continental Europe, government spend- seem natural that places that start off with more pre-tax inequality ing is about 45 percent of GDP and in Scandinavia is more than 50 per- should redistribute more. If democracies desire equality, then more cent of GDP. Almost two-thirds of this difference comes from spending intrinsic inequality should lead to more aggressive government on welfare. Therefore, if we want to understand why Europe has big redistribution. Furthermore, high levels of inequality might be governments and the United States appears more laissez-faire, we expected to change the political situation, as a large majority of the must understand why the Europeans have a welfare state. relatively poor will vote to tax the few rich. Not only does government spending in Europe favor the poor This theory cannot explain the differences in redistribution between much more than in the United States, but government tax policy as the United States and Europe. Pre-tax income inequality is higher in well is much more redistributive. Income tax rates are more pro- the United States than in Europe. Both aggregate indices of inequality, gressive in Europe than in the United States. Labor market regula- such as the Gini coefficient, and more specific measures of wage tions, which are at least presented as being pro-poor and are dispersion, indicate higher levels of inequality in the U.S. Recent dis- certainly strongly supported by labor unions, are more favorable to cussions of "excessive" compensation for CEOs and of the "winners workers in Europe than in the United States. If one were born (and take all" society are highly publicized examples of wage dispersion in remained) at the bottom end of the income distribution, one would America. As Europe is more equal than the United States before taxes be much better taken care of by government policies in Europe than and redistribution, the European welfare states widen the gull in the by those in the United States. level of inequality between the United States and Europe. The welfare state, of course, comes at a price. It requires high taxes A variation on this theory is that the data on American inequality and extensive regulation, which may discourage work and reduce overstate the true level of inequality within the United States, because economic growth. This is important, but it is not, we repeat, not, the they don't consider the high levels of American social mobility. point of this book. Our interest is in the explanation of why the wel- This variant suggests that the United States is actually an egalitarian fare state, not in its costs and benefits. We hope free marketeers can society, because the poor will be rich tomorrow and the rich will read this book and understand how America avoided (what they be poor. Conversely, according to this theory, at a point in time perceive as) the creeping, intruding socialism of the European con- Europe looks more equal, but since European society is so immobile, tinent. We also hope that social democrats can read this book and lifetime inequality is greater. This theory suggests that in the United understand how Europe managed to avoid (what they perceive to States, the poor can more easily escape from poverty and therefore be) the shamefully unjust American system. they do not need help from the government. 2 3 Fighting Poverty in the US and Europe Introduction Indeed, there is no doubt that, according to many surveys, We cannot say whether the American survey respondents or the Americans believe that their society is mobile and Europeans believe Europeans are correct (after all, we can't figure out what trapped or that the poor are "trapped." According to the World Values Survey lazy means in terms of hours worked or social mobility), but we can (an attitudinal survey conducted on about forty countries in the say that these differences in opinion do not reflect differences in world), 71 percent of Americans believe that the poor could escape economic reality across countries. poverty if they worked hard enough, and only 40 percent of Another simple explanation of U.S.—Europe differences in redistri- 1 Europeans think the same. While these surveys provide us with bution is that tax collection is more efficient in Europe. If European a fascinating glimpse at the differences in attitudes and ideology, tax collection involved fewer social losses, then the cost of the welfare their differences across countries do not seem to have much to do state would be lower in Europe. Indeed, the efficiency of tax collection with any real differences in social mobility. is an important determinant of the size of government. For example, Certainly, there are enormous difficulties in making mobility improvement in tax collection may explain part of the secular growth comparisons across countries, but a fair reading of the technical in the size of government in industrial countries. Before the twentieth literature suggests that social mobility (i.e. movement up and down century, the only large-scale taxes that could be efficiently collected the income ladder) is quite similar in the United States and Europe. were taxes on visible, immobile property (especially real estate) and The tendency of middle-income individuals to move upwards is import taxes at ports. In the twentieth century, as the ability of the slightly higher in the United States than in Europe. But the mobility state to monitor private activity has risen, a much larger range of tax of the poor (the bottom fifth, for example) is lower in the United options has emerged and these new taxes have provided the revenues States than in Europe. If anything, the American poor seem to be needed for expanding the size of government. Naturally, there is two- much more "trapped" than their European counterparts. Even the sided causality here as well, where the increasing size of government most pro-American reading of the evidence cannot conclude that has also led to a wider range of tax instruments. the strong differences in opinions across continents reflect equally However, it is quite unlikely that differences in the efficiency of strong differences in mobility. As such, we are led to believe that the the tax system can explain the large transatlantic differences in the differences between the United States and Europe are not the result size of the welfare state. Even the most casual consideration of this of greater American mobility (although conceptions of mobility hypothesis suggests its implausibility. Could it really be possible that might have something to do with it, and we will discuss that later). the tax collectors in Italy are so much more effective than the The truly die-hard advocate of the view that America is the land of American Internal Revenue Service? In addition, the tax systems equal economic opportunity has one last argument. It might be that within Europe are very different from each other. Despite those dif- the observed measures of mobility do not reflect opportunity but ferences, everywhere in continental Europe redistributive policies rather the initiative taken by the poor. According to this view, the are larger than in the United States. Furthermore, the available evi- poor in Europe strive and climb out of poverty (despite notable dence on the efficiency of tax collection confirms casual observa- barriers), while the poor in the United States stay poor out of laziness tion: Tax evasion is much higher in continental Europe than in the (despite abundant opportunity). Indeed, a majority of Americans do United States. Higher levels of tax evasion suggest that it is more dif- indeed believe that the poor are lazy. However, the American poor ficult to collect taxes in many countries in Europe than in America. work just as much or more than their European counterparts. Another theory is that European countries may be more redistrib- utive because they are inherently more unstable. After all, one view The World Value Survey, which we will use extensively in this volume is a collection of surveys conducted in about 40 countries in the world. Between 600 is that the welfare state basically exists to provide insurance for citi- and 2,000 individuals are interviewed in each country. zens buffeted by the changing economy. As such, if the small size of 4 5 Fighting Poverty in the US and Europe Introduction European economies and their openness to external shocks made After all, while the United States and the countries of western Europe them more volatile, we would expect a larger welfare state to cushion are all democracies, they have very different rules for implementing workers from these shocks. The evidence does not support this view. the desires of the populace. One particularly striking difference is that The U.S. economy has been less stable than the European ones in almost all European countries have proportional representation sys- terms of variability of GDP growth and unemployment rates. tems (England and, currently, France are notable exceptions). These Furthermore, if this argument were important, then as European systems have generally facilitated the growth of left-wing parties economies became more and more integrated in one big common (socialists and communists) that are primarily oriented towards market economy, the European welfare state should have shrunk increased redistribution and an enlarged welfare state. One very quickly to an American level since the U.S. economy is about as open plausible explanation for why socialism succeeded in Europe but as Europe as a whole. This contraction of the welfare state has not failed in the United States is that the American majoritarian system happened and we see no evidence that European integration is made it difficult for a new, fringe party to elect any representatives. leading towards a decline in redistribution. A second difference between the United States and Europe is that One last "economic" explanation is simply that Americans are less the U.S. Constitution places heavy emphasis on checks and balances, generous and altruistic than Europeans, and as a result they want to which deter large changes in all government policies, and in particu- redistribute less. This view does not square well with two other lar have limited large increases in the level of redistribution. In observations. When it comes to private charity Americans are much different time periods, the American Supreme Court and Senate more generous than Europeans. As we discuss below, we do not stopped the expansion of the welfare state. think that this has to do with tax deductibility rules, but it may be A third difference is American federalism. The United States is related to the fact that Europeans, feeling highly taxed, do not more decentralized than all of Europe, except for Switzerland. Small have a stronger incentive for charity. Also, Americans are much jurisdictions within a mobile society have strong incentives not to more likely than Europeans to participate in social activities in redistribute, since such redistribution tends to push away industry groups, an observation that questions the view of extreme American and the rich. individualism. One interesting possibility is that Americans may There. is broad empirical support for the idea that proportional prefer private charity to public redistribution because with the representation leads to greater levels of redistribution. We find that former they can choose the beneficiary. Aversion to public redistrib- the difference between welfare spending in majoritarian and propor- ution in the United States may not be a result of general stinginess, tional systems is large, and this institutional feature may "explain" in but rather a reduced desire to contribute to some disadvantaged our estimation about half of the difference between the United States American. Perhaps Americans dislike government transfers because and Europe in welfare spending. Of course this explanation begs the they (like most people) prefer giving money to people of their own question of why electoral systems are different, an issue which we race, religion, and ethnicity. address later. Checks and balances also matter. Countries with judicial review of legislature spend less of their GDP on social services than countries without judicial review. But, these institutions are often of recent vin- 1.2. Political institutions and the welfare state tage, and in some ways they are more a result than a cause of Given that economic factors cannot solve our puzzle, we turn to U. S.—Europe differences. politics and institutions in Chapter 4. Perhaps the differences in the In Chapter 5, we turn to the causes and history of institutional dif- degree of redistribution reflect differences in political structure. ferences between the United States and Europe. In a number of 6 7 Fighting Poverty in the US and Europe Introduction smaller European countries (Belgium, Finland, Sweden, the not rattle the U.S. Senate in far off Washington. Even in Sweden, the Netherlands, and Switzerland), before the World War I, the labor population is concentrated over a small area, and as such, it was movement was able to use general strikes to hobble the country. possible for general strikes to impact the entire nation. Density also Electoral reform was a direct response to these strikes, and in most mattered because poor American workers in the cities of the east could cases proportional representation was a specific demand of the strik- search for fortune in the vast and almost unexplored west. ers. These smaller countries had tiny armies and were sufficiently Furthermore, while Swedes are remarkably homogeneous and small so that concentrated labor uprisings effectively threatened the can't be split along ethnic, racial, or religious lines, in the United entire nation. States, the white majority was afraid that proportional systems In the larger European countries (Germany, Austria, and Italy), would give more representation, and thus political power, to racial proportional representation was implemented in the period after minorities (especially blacks). The U.S. polity is still shaped by the World War I when the army was in disarray and labor uprisings impact of slavery and immigration. Successive waves of immigration dominated the country. Amidst the chaos of defeat or withdrawal, to the United States of ethnically diverse members of the working class socialist and communist groups were able to impose constitutions created cleavages across racial and ethnic lines, which "confused" and that favored their needs. France introduced proportional represen- diluted the classic class line of Marxism. An Irish worker in Boston, say, tation after World War II, when the right was tarred by its connec- felt Irish first and then "worker" and often viewed, say, the new Italian tion with Vichy and the left was triumphant. immigrant workers with just as much animosity as he viewed capital- The history of Europe helps us to understand why proportional ists. Marx and Engels were aware of this problem in the United States representation never made much headway in the United States. In and considered it a critical obstacle for the formation of an American the United States, the socialist and communist movements were Communist Party. never able to push their desired constitutional reforms. The majori- Another possible impact of immigration is the self-selection of tarian, American constitution with its manifold checks and balances those who choose to leave Europe to move to the United States. was stacked against any fringe parties pushing major change. But, These immigrants may have had a propensity to find an individual we could say the same thing about the political rules of the Kaiser's (or individualistic) solution to adversity rather than fomenting Germany. The difference between the United States and Germany is a social revolution at home. that the United States was never defeated on its own territory. The American political stability (which is itself the result of American devastation of World War I, and the large number of desperate men isolation, military strength, and size) implies that the U.S. Consti- in dose contact for years in fighting armies, was a fertile ground for tution is of much older vintage than those of European countries. the diffusion of communist ideas concerning redistribution from Many European countries have relatively recent constitutions, which capitalists to workers. This did not happen in the United States. As are often the result of revolutionary periods in which the large mass a result, the generally victorious U.S. army was a much more reliable of workers had a voice in the political arena. The American Consti- tool against leftist uprisings than the more dispirited armies of main- tution has obviously been amended, but it is still the same document land Europe. approved by a minority of wealthy white men in 1787. In his famous Of course, Sweden has not lost a war on its home territory either, "Economic Interpretation of the Constitution" Charles Beard shows because of her long tradition of neutrality. America's large size and how one motivation of the Constitutional Convention was to write a ethnic diversity provides the explanation for why the Constitution document that managed to protect wealth against expropriation. was not changed lacking a military defeat. While strikes in Liege Historically, the Supreme Court was a major obstacle to progressive could threaten the government in Brussels, strikes in Chicago could policies and was a bastion of the defense of property. In some ways, 8 9 Fighting Poverty in the US and Europe Introduction the role of the Supreme Court in the United States (an issue to which Places with natural ethnic, religious, or racial divisions facilitate this we devote considerable attention) can be compared with that of the sort of divide and conquer strategy. It therefore follows that redis- House of Lords in England, until the latter lost its political power. tributive policies should be more limited in more fragmented soci- eties where generosity across people is limited by racial cleavages. This effect is likely to be much more important when minority 1.3. Race and redistribution groups are over-represented among the poor. Empirical evidence across countries and within the United States Our evidence suggests that European institutions can explain shows that racial heterogeneity tends to support the political approximately one-half of the difference in social spending between importance of fractionalization. Research on American cities shows the United States and Europe. Thus, we do not believe that even if that participation in social activities, interpersonal trust, redistribu- Europe had the same political institutions as the United States, atti- tive policies, and provision of public goods are lower in more racially tudes towards redistribution and welfare policies would be identical. fragmented communities. Within the United States, we find that In Chapter 6, we argue that one important reason for the differences states with a lower share of African-Americans offer more generous between the United States and Europe that cannot be explained by welfare benefits. Across countries, racial fractionalization is a strong institutions is racial and ethnic fractionalization. America's immi- predictor of the degree of redistribution. Indeed, our estimates grants and the descendants of its slave population ensure that the suggest that racial fractionalization can also explain about half of United States is a much more racially fragmented society than the difference in redistribution between the United States and anywhere in western Europe. Europe. Moreover, while European governments strove to eradicate One natural implication of our conclusion that fractionalization ethnic and cultural differences over the past four centuries (with dif- reduces redistribution is that if Europe becomes more heterogeneous fering levels of success; compare homogeneous France and ethni- due to immigration, ethnic divisions will be used to challenge the gen- cally diverse Spain), American governments put much less effort erous welfare state. We have already seen some of this happen in the into this task, which would have surely been impossible in such political success of Joerg Haidar, Jean-Marie LePen, Umberto Bossi, a diverse country. As a result, it is much easier to convince a white and Pim Fortuyn. All of these politicians (and there are many others) middle class person in the United States to think that the poor are both favor less redistribution and emphasize the flaws of recent "different" (read black) than to convince a white middle class immigrants. The rhetoric of many of these politicians has already person, say, in Sweden. emphasized that immigrants become citizens of European countries Racial divisions and racial preferences appear to deter redistribu- to take advantage of the generous European welfare system. tion, especially when poverty is concentrated in minority groups. A vast body of experimental and survey evidence shows that indivi- duals are more generous towards members of their own racial 1.4. Culture and attitudes or ethnic group than to members of other groups. Of course, these attitudes are not innate, instead they reflect cultural and political In Chapter 7, we turn to the cultural differences across the Atlantic conditioning. Race hatred is often used strategically by politicians regarding the perception of the poor. Survey evidence shows that whose main objective is to avoid redistributive policies; precisely by Americans think that the poor are lazy and Europeans think using the racial animosity of distrust, political entrepreneurs can that the poor are unfortunate. A larger fraction of Americans than gain support from even relatively poor whites against redistribution. Europeans think that one can escape poverty with hard work; 10 11 Fighting Poverty in the US and Europe Introduction those who think that poverty is due to lack of effort will be less that they see as a result of different abilities and different comfort sympathetic to redistributive policies. This impression is confirmed levels in risk taking than Europeans. by the analysis of survey responses in the United States: Americans who are more firmly convinced that poverty is due to lack of effort are also more strongly opposed to redistribution. The same applies to L5. Summary other countries: The larger the proportion of respondents to surveys who believe that poverty is due to lack of effort, the lower the redis- The reasons why Americans and Europeans differ on their choices tributive role of government. over the welfare state and redistribution run very deep into their While we believe that these opinions are an important influence different history and culture. No simple economic theory provides on the level of welfare spending, we also believe that they are fun- a one-line answer. damentally a result of American politics, not a cause. American Instead, we have to touch upon a wide range of considerations, institutions have strengthened the political right and given anti- involving economic, political, social, and attitudinal variables, and, redistribution politicians the ability to push their world view—and of course, history. In particular, ethnic heterogeneity and political this world view emphasizes economic opportunity. European insti- institutions seem to explain most of the differences, and these polit- tutions, to the contrary, have empowered the left; as a result, leftist ical institutions are themselves the legacy of the chaotic first half of leaders have been able to indoctrinate Europeans with Marxist ideas the twentieth century. about class solidarity and the capriciousness of the capitalist system. As we have been pondering our question, we have come to the Moreover, racial heterogeneity in the United States has been an view that the differences across the two sides of the Atlantic are important factor enabling American politicians to emphasize the quite deeply ingrained in culture and attitudes. It is therefore unsur- moral failings of the poor. As such, we think beliefs about the nature prising that tensions and animosity between the two sides of the of poverty are important because they reflect deeper forces, which Atlantic occasionally reach the surface. Most recently, we have seen have ensured the relatively greater strength of the right in the these tensions in the debate surrounding war with Iraq. These divi- United States and the left in Europe. sions are unfortunate, but if our analysis is correct, this divide Our work emphasizes the importance of institutions and race, but has deep roots. However, sometimes friendships work best when we do not mean to rule out other factors, which may also have had group members use their different strengths to compensate for one a lesser influence on the development of the United States and another's weaknesses. Let us hope that this applies to America and Europe. The Calvinist, Protestant ethic is also a strong cultural force urope. that leads Americans to view success as a sign of "goodness," at least more so than Catholic Europe. Indeed, Catholic parties in Europe have been (together with Socialist parties) strongly supportive of redistributive policies. Immigrants who left the old continent to travel to the new continent might have been those less prone to worry about risks, and more likely to believe in the value of indivi- dual initiative. Less aversion to risk implies lower demand for social insurance and redistribution. Once again, survey evidence suggests that individual risk aversion is indeed related to demand for redistri- bution. Americans may, therefore, be less averse to the inequality 12 13