Tag: welfare state

Mirror, Mirror, on the Wall, Which Nation Has Increased Welfare Spending the Fastest of All?

There’s an old joke about two guys camping in the woods, when suddenly they see a hungry bear charging over a hill in their direction. One of the guys starts lacing up his sneakers and his friend says, “What are you doing? You can’t outrun a bear.” The other guys says, I don’t have to outrun the bear, I just need to outrun you.”

That’s reasonably amusing, but it also provides some insight into national competitiveness. In the battle for jobs and investments, nations can change policy to impact their attractiveness, but they also can gain ground or lose ground because of what happens in other nations.

The corporate tax rate in the United States hasn’t been changed in decades, for instance, but the United States has fallen further and further behind the rest of the world because other nations have lowered their rates.

Courtesy of a report in the UK-based Telegraph, here’s another example of how relative policy changes can impact growth and competitiveness.

Subsidies and Votes — in India and the United States

When Americans suggest that government transfer programs might affect the way people vote, the mainstream media react with the indignation that greeted Mitt Romney’s “47 percent” comment. Of course, in other contexts the media certainly know that programs like Social Security, Medicare, and farm subsidies impact voting, but Republicans seem to get pounded for making that point.

But when it comes to other democracies, such as India, journalists don’t seem to have any trouble seeing the electoral advantages of government spending. Jim Yardley reports from India for the New York Times:

Frustrated by delays in Parliament, and eager to gain favor with rural voters ahead of national elections, India’s cabinet has approved a sweeping executive order that establishes a legal right to food and will create what is likely to be the world’s largest food subsidy system for the poor….

For the governing Congress Party, the new ordinance fulfills a campaign pledge made by Mrs. Gandhi and provides her party with something tangible to offer voters as the country prepares for national elections next year. The coalition government has been battered by corruption scandals and a sinking economy. With polls suggesting a loss of public support for the Congress Party, the food ordinance is good politics, some analysts say, if uncertain economics.

I noted a few months ago that the Washington Post had made a similar point:

Trying to rekindle the fire of India’s economy, Finance Minister P. Chidambaram promised Thursday to rein in a runaway deficit even as he raised spending on welfare schemes that the government hopes will woo voters in elections scheduled for next year….

“The finance minister faced two counter-veiling pressures: to present a populist, voter-friendly budget and also control the huge fiscal deficit,” said Vir Sanghvi, a political analyst. “What he presented was a ‘this-is-the-best-we-can-manage-under-the-circumstances’ kind of a budget. . . . He is hoping that the economy will improve and prices will come down by the time of the election. That is a big political gamble.”

Chidambaram promised to increase spending on rural welfare schemes, rural roads and jobs, food guarantees for the poor, women’s safety programs, tax breaks on loans for first-time home buyers and a women’s bank.

Is it really so hard to imagine that American politicians might also see transfer programs as measures that would benefit them on election day? Of course, the more fundamental impact of transfer programs may be to make both parties afraid to cut spending. What politician in either party wants to propose cuts in Social Security, Medicare, student loans, or farm subsidies? It’s not that transfer recipients all vote for the same party; it’s just that both parties fear the loss of votes if they interfered with the flow of subsidies. And not just in India.

Heritage Immigration Study and Government Spending

Conservative and libertarian scholars are clashing over the findings and political implications of the new Heritage Foundation immigration study. The study spans 92 pages and is jam-packed full of statistics and detailed calculations.

I’ll leave the immigration policy to my colleagues who are experts in that area. To me, the study provides a very useful exploration into how massive the American welfare state has become. Here are some highlights:

  • “There are over 80 of these [means-tested] programs which, at a cost of nearly $900 billion per year, provide cash, food, housing, medical, and other services to roughly 100 million low-income Americans.”
  • “The governmental system is highly redistributive … For example, in 2010, in the whole U.S. population, households with college-educated heads, on average, received $24,839 in government benefits while paying $54,089 in taxes … [and] households headed by persons without a high school degree, on average, received $46,582 in government benefits while paying only $11,469 in taxes.”
  • “Few lawmakers really understand the current size of government and the scope of redistribution. The fact that the average household gets $31,600 in government benefits each year is a shock.”

Total federal, state, and local government spending in 2010 was $5.4 trillion, or $44,932 per U.S. household. The figure of $31,600 in “benefits” is total spending less spending on public goods, interest, and government pensions.

A useful feature of the Heritage study is a breakdown of the $5.4 trillion in spending into six categories constructed by the authors. “Direct benefits” includes mainly Social Security and Medicare. “Pure public goods” includes programs such as defense and scientific research. “Population-based services” includes programs aimed at whole communities, such as police and highways. (Some of these also seem to be public goods). “Means-tested benefits” includes programs such as food stamps. Education includes both K-12 and college subsidies. “Interest and pensions” is the current costs of past spending, which includes servicing the debt and paying for government pensions. The chart shows spending in 2010.  

This spending breakdown is useful for thinking about the proper size of government. From a libertarian standpoint, governments ought to be spending only on public goods and population-based services, as a first cut. That would be $1.94 trillion, or just 36 percent of the current total of $5.4 trillion. As a percent of GDP in 2010, that would be spending of 14 percent, rather than current spending of 38 percent.

But some of the population-based services mentioned by the authors could be privatized, and spending on some of the public goods could be cut. So a good libertarian target might be less than 36 percent of current spending, or less than 14 percent of GDP.

The Heritage study is sparking a debate about what type of immigration reform the nation should have. But hopefully, it will also spur more discussion about the massive size of the American welfare state. Immigration is partly, or mainly, such a contentious issue because we have such a huge welfare state.

The study includes projections about how many trillions of dollars of government benefits will flow to immigrants and their children in the decades ahead. But conservatives and libertarians agree that we ought to cut trillions of dollars in benefits to immigrants and nonimmigrants alike.

So is there some common ground here? Can we work toward an immigration reform that cuts government dependency in general and downsizes the welfare state?

Buying Votes with Taxpayers’ Money — in India

When it comes to India, Washington Post reporter Rama Lakshmi seems to have no trouble recognizing that government benefits just might attract votes:

Trying to rekindle the fire of India’s economy, Finance Minister P. Chidambaram promised Thursday to rein in a runaway deficit even as he raised spending on welfare schemes that the government hopes will woo voters in elections scheduled for next year….

“The finance minister faced two counter-veiling pressures: to present a populist, voter-friendly budget and also control the huge fiscal deficit,” said Vir Sanghvi, a political analyst. “What he presented was a ‘this-is-the-best-we-can-manage-under-the-circumstances’ kind of a budget. . . . He is hoping that the economy will improve and prices will come down by the time of the election. That is a big political gamble.”

Chidambaram promised to increase spending on rural welfare schemes, rural roads and jobs, food guarantees for the poor, women’s safety programs, tax breaks on loans for first-time home buyers and a women’s bank.

Is it really impossible to suspect that similar programs might have similar effects in the United States?

Federal Spending Has Always Been Wasteful

A new article by Ivan Eland describes how wars have stimulated growth in the American welfare state. I was interested in his discussion regarding the overexpansion of pensions following the Civil War:

In 1879, the Arrears Act caused many veterans, who hadn’t realized they were disabled until the government offered $1,000 or more for finding aches and injuries, to flood the Bureau of Pensions with claims.  Although, according to its commissioner, the bureau was the largest executive bureau in the world, it had few means to detect fraudulent claims, which were rampant. During election years between 1878 and 1899, Republicans used the bureau to dole out pensions rapidly and heavily in key electoral states.

In 1890, a quarter century after the Civil War ended, pension eligibility expanded to include any soldier who had served 90 days or more during the war and was unable to do manual labor—whether or not he was injured during the conflict, or even whether he had seen combat. Similarly, widows of soldiers serving in the war for 90 days or more got pensions, regardless of whether their husbands had died in the conflict.”

Republicans supported lavish pensions to groups in their political constituency (Union veterans) to justify continued high tariff walls to protect Northern industries, which were among the most influential supporters in their political coalition. The interests of such industrialists coincided with those of pensioner lobbies and the bureaucratic empire of the Bureau of Pensions to widen the program over time.

Politically driven overspending and waste is nothing new in Washington. In the 19th Century, there was tons of waste in federal agencies such as the Army Corps of Engineers. The Bureau of Indian Affairs (BIA) was also a very troubled agency:

Fraud, corruption, and bribes were common in the BIA during some periods in the 19th century. One reason was because local BIA officials had substantial discretionary control over cash, goods, trading licenses, and other items handed out by the agency. In the years following the Civil War, “Indian rings” of government agents and contractors colluded to steal funds and supplies from taxpayers and the tribes. The New York Times railed against the “dishonesty which pervades the whole Bureau.” And the newspaper argued that “the condition of the Indian service is simply shameful. It has long been notorious that rascally agents and contractors have connived to cheat the Indians. … It now appears that a ring has long existed in the Indian Bureau at Washington for the express purpose of covering up these frauds and facilitating others.

French Thief Complains that Victims Are Running Away

Atlas is shrugging and Dan Mitchell is laughing.

I predicted back in May that well-to-do French taxpayers weren’t fools who would meekly sit still while the hyenas in the political class confiscated ever-larger shares of their income.

But the new President of France, Francois Hollande, doesn’t seem overly concerned by economic rationality and decided (Obama must be quite envious) that a top tax rate of 75 percent is fair. And patriotic as well!

French Prime Minister: “I’m upset that the wildebeest aren’t remaining still for their disembowelment.”

So I was pleased - but not surprised - when the news leaked out that France’s richest man was saying au revoir and moving to Belgium.

But he’s not the only one. The nation’s top actor also decided that he doesn’t want to be a fatted calf. Indeed, it appears that there are entire communities of French tax exiles living just across the border in Belgium.

Best of all, the greedy politicians are throwing temper tantrums that the geese have found a better place for their golden eggs.

France’s Prime Minister seems particularly agitated about this real-world evidence for the Laffer Curve. Here are some excerpts from a story in the UK-based Telegraph.

France’s prime minister has slammed wealthy citizens fleeing the country’s punitive tax on high incomes as greedy profiteers seeking to “become even richer”. Jean-Marc Ayrault’s outburst came after France’s best-known actor, Gerard Dépardieu, took up legal residence in a small village just over the border in Belgium, alongside hundreds of other wealthy French nationals seeking lower taxes. “Those who are seeking exile abroad are not those who are scared of becoming poor,” the prime minister declared after unveiling sweeping anti-poverty measures to help those hit by the economic crisis. These individuals are leaving “because they want to get even richer,” he said. “We cannot fight poverty if those with the most, and sometimes with a lot, do not show solidarity and a bit of generosity,” he added.

In the interests of accuracy, let’s re-write Monsieur Ayrault’s final quote from the excerpt. What he’s really saying is: “We cannot buy votes and create dependency if those that produce, and sometimes produce a lot, do not act like morons and let us rape and pillage without consequence.”

So what’s going to happen? Well, I wrote in September that France was going to suffer a fiscal crisis, and I followed up in October with a post explaining how a bloated welfare state was a form of economic suicide.

Yet French politicians don’t seem to care. They don’t seem to realize that a high burden of government spending causes economic weakness by misallocating labor and capital. They seem oblivious  to basic tax policy matters, even though there is plenty of evidence that the Laffer Curve works even in France.

So as France gets ever-closer to fiscal collapse, part of me gets a bit of perverse pleasure from the news. Not because of dislike for the French. The people actually are very nice, in my experience, and France is a very pleasant place to visit. And it was even listed as the best place in the world to live, according to one ranking.

But it helps to have bad examples. And just as I’ve used Greece to help educate American lawmakers about the dangers of statism, I’ll also use France as an example of what not to do.

P.S. France actually is much better than the United States in that rich people actually are free to move across the border without getting shaken down with exit taxes that are reminiscent of totalitarian regimes.

P.P.S. This Chuck Asay cartoon seems to capture the mentality of the French government.

Europe’s Crisis on PBS

If you’re looking for something scary to do on Halloween, check out Cato senior fellow Johan Norberg’s documentary, “Europe’s Debt: America’s Crisis?” on PBS stations across the country.

It’s been running for awhile, and will be seen in Maryland and Michigan on Sunday night. But it will be seen in many markets, from Tampa to Fairbanks, next Wednesday, October 31.

The Free to Choose Network, which produced the film, describes it this way:

Four investigative reports, shot on location in Greece, Brussels, California and Washington DC, highlight this in depth examination of Europe’s current debt crisis and its connection to the U.S. economy.  Narrated by Swedish author Johan Norberg, and George Mason University professor, Don Boudreaux, the investigative reports ask:  “Where did Europe go wrong” and “is the United States now repeating the same mistakes?”

Participants include Cato friends Jacob Mchangama and Tanja Stumberger, as well as such key players as former comptroller general David Walker, former European Commissioner Frits Bolkestein, and Ann Johnson, mayor of Stockton, California.

For broadcasts in your area, check the listings here.

For Johan Norberg’s books and articles, click here.

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