Guarding Obama’s welfare state

by The City Wire staff ( 0 views 

For most of the past century, the U.S. and continental Europe have followed different paths. Social Democrats often ran European governments, which typically taxed and spent a greater share of their national incomes on social programs, such as public health care. The U.S. has been far more conservative.

Our last Democratic president, Bill Clinton, accepted this fact, and won re-election as the triangulator who declared that “the era of big government is over.” But President Barack Obama was re-elected on an aggressively progressive program. Is the U.S. finally converging toward the European model?

In 2004, my colleague Alberto Alesina and I wrote a book titled “Fighting Poverty in the U.S. and Europe: A World of Difference,” which tried to document and explain America’s exceptional politics.

We noted that governments in the U.S. in 1998 spent 14.6% of gross domestic product on social-welfare programs, such as unemployment insurance and Social Security. The European average was 25.5% of GDP. The Swedes and the French spent 3.9 and 3.1% of GDP respectively on unemployment and other labor-market programs; Americans spent four-tenths of 1% on them. U.S. tax rates compared with Europe’s were higher for poorer workers and lower for richer workers.

The Europeans also regulated their labor markets more extensively, with many mandated vacation days, strong restrictions on firing and higher minimum wages relative to average earnings.

We didn’t judge the two systems. (Why alienate half our potential readership?) We sought only to understand why U.S. and European social policies diverged so sharply.

Political-economy theories suggested that a nation will have a smaller welfare state if it has less innate inequality, less economic volatility or more social mobility. Yet pretax, pre-social-spending inequality is higher in the U.S. than in Europe, and the American economy is more volatile. Studies looking at Italy, France and Germany often find that more Europeans than Americans escape from the bottom rungs of income distribution.

These findings don’t mean that the U.S. lacks opportunity or that its rising inequality has created an ossified, closed upper class. Moving from the middle to the top of society in the U.S. is often easier than it is in Europe. An astonishing share of students at top colleges receive financial aid. At Harvard, I meet far more hardworking, gifted first-generation undergraduates than trust-fund kids. But European public education is more uniform in quality than it is in the U.S., and America leaves far too many children of the disadvantaged trapped in poverty.

If economic fundamentals don’t explain the differences between the U.S. and Europe, then what does? Two forces are paramount – political institutions and racial heterogeneity. Evidence supports the view that more racially fragmented societies, such as the U.S., give less to their poorer citizens, especially when racial minorities are disproportionately poor.

Around the world, more racially fragmented countries have smaller welfare states. In the U.S., before the welfare reform of 1996 created more national uniformity, there was a powerful negative correlation across the states between welfare generosity and the black population, even controlling for state income levels. A rich historical literature – C. Vann Woodward’s “The Strange Career of Jim Crow” may be the most prominent example – demonstrates how racial and ethnic divisions often divided progressive alliances within the U.S.

The strong connection between ethnic fractionalization and less redistribution doesn’t mean that people who oppose welfare are racist. There are good reasons to be skeptical about a more- generous welfare state. But the historical and international track record suggests it is easier to convince wealthy Swedes that poor Swedes deserve a helping hand than to persuade people in any nation to sacrifice their hard-earned prosperity for the well-being of people who seem culturally alien.

We estimate that about one-half of the difference between the U.S. and Europe can be explained by greater American ethnic heterogeneity. The remaining gap reflects the exceptionalism of American political institutions. The U.S. has a majoritarian system that favors senators and presidents who appeal to the middle; many European countries have proportional representation that makes it easy for fringe parties, including Socialists and Communists, to get a seat at the table.

The American separation of powers creates plenty of checks and balances; many European countries allow a popularly elected government to swiftly carry out huge changes.

The property-owning, prosperous American founders feared ochlocracy and wanted a system that would limit the power of temporary popular sentiment. Only a century ago, most of Europe had more conservative political institutions than those in America. Kings and emperors still ruled, and popular government was limited. But in the rebuilding after the horrors, wars and devastation of the 20th century, many Western European constitutions were rewritten, often by the left, who crafted institutions made for social democracy. The U.S. enjoyed safety and stability – no rewriting of James Madison’s Constitution was necessary.

Does Obama’s victory, which was convincing but not overwhelming, represent a change in the U.S.-European divide? He is the first president since Lyndon Johnson to win election after aggressively expanding the welfare state.

U.S. institutions will continue to be a formidable check on Obama. While the growing diversity of the population favors the Democrats, Republicans have plenty of room to reinvent themselves as supporters of smarter, less-wasteful government.

Mitt Romney received 59% of the white vote, more than the 56% Ronald Reagan received in 1980. Changing demographics means that Republicans now face a less-conservative political environment: The majority of Hispanics see more, not less, need for government programs that aid the poor.

Yet a more liberal nation still needs budgetary sanity. The next year’s political discussion is far more likely to be dominated by fiscal cliffs than by expanded social-safety spending. If the Republicans become the party of smart financial probity, they will have a decent chance of convincing Americans of every race that they will be better guardians of the nation’s finances.

Although diversity may be breaking down America’s anti-welfare consensus, there is little reason to think that a more-diverse country naturally leads to a larger central government.

The more standard view is that diversity reduces the demand for central control, which can never produce the diversity of policies to accommodate extremely different preferences. The Republican penchant for localism, at least if it is intelligently managed and linked to a competently run centralized safety net, might appeal to a diverse America.

A Republicanism for a more diverse America can’t be seen as solely anti-Washington rhetoric but as providing sensible tools and delivering diverse policies for a diverse nation.