Social Democracy and Fiscal Irresponsibility

|Peter Boettke|

In the latest issue of Foreign Affairs, Lane Kenworthy has an article "America's Social Democratic Future: The Arc of Policy is Long But It Bends Towards Justice" -- which is a teaser for his new book, Social Democratic America.

The argument in the article is neither new nor novel, though I would argue that it is wrong-headed even if poetically written --- consider the ending paragraphs:

But by filling in the gaps in the public safety net, the federal government will improve economic security, equal opportunity, and shared prosperity for most Americans in spite of these changes. A social democratic America will be a society with greater economic security and fairness. Its economy will be flexible, dynamic, and innovative. Employment will be high. Liberty will be abundant. Balancing work and family will be easier. Americans will pay higher taxes than they currently do, but the sacrifice will be worth it, because they will receive a lot in return.

The United States has come a long way on the road to becoming a good society, but it still has further to travel. Happily, its history and the experiences of other rich nations show the way forward. One reason the United States is a much better country today than it was a century ago is that the federal government does more to ensure economic security, equal opportunity, and shared prosperity. In the future, it will do more still, and the country will be better for it.

The leftward shift in Amercia's future polity is due to the attractiveness of the Nordic states. But Kenworthy fails to point out that the Nordic countries faced a fiscal crisis in the early 1990s and had to adjust their policies, and that on the Economic Freedom Index, these countries often (not all) rank better than the US.  Furthermore, if you look at this study by the economic historian Price Fishback on social welfare expenditures in the US and the Nordic countries.  As Fishback argues, the common perception about the generiousity of the Nordic countries relative to the US does not fit the facts of the matter.

In short, the US doesn't have a social democratic future, it already is a social democracy.  And, with that were are also in a fiscal mess --- as all the countries of the social democratic west are.   See The Economist feature article from March 17, 2011.  And this is not even doing the fiscal accounting the way that Laurence Kotlikoff suggest we should.

The situation as is, is unsustainable and thus economically precarious and the most vulnerable again will be the least advantaged in society so it is also extremely unjust in final judgement.

For those who work at the intersection of political economy and social philosophy, articles such as Kenworthy's represent an invitation to serious thinking about the institutions of governance and the relationships between, and responsibilities of, citizens in a free society.  The rhetoric of the arc of policy bending toward justice which touches a cord in so many that it often results in a disregard for facts, means those who want to engage this conversation must be cognizant of the power of justice-speak.  In many ways, this is the power behind John Tomasi's Free Market Fairness and the Bleeding Heart Libertarian project.  But it was also the project almost 60 years ago, which James Buchanan initiated with the Thomas Jefferson Center for the Study of Political Economy: "Political economists stress the technical economic principles that one must understand in order to assess alternative arrangements for promoting peaceful cooperation and productive specialization among free men.  Yet political economists go further and frankly try to bring out into the open the philosophical issues that necessarily underlie all discussions of the appropriate functions of government and all proposed policy measures.  They examine philosophical values for consistency among themselves and with the ideal of human freedom."

In contrast to Kenworthy, it is my sincere hope that as we discuss the responsibilities of the state, we also have a serious conversation about the resources that the state will utilize --- the source of those funds, the impact of securing those funds on the incentives of economic actors, and the consequences of "pretend securing and payment" of those funds.  The era of the 'economics of illusion' must come to an end, and once we face those cold hard facts, then we will release that the discussion will have to shift back again to the responsibilities of the state with respects to its citizens, and the responsibilities and obligations of citizens to themselves, their families, their communities.  The futre of America can indeed arc toward justice, but justice entails that we live in a world of free and responsibility individuals, who have the opportunity to prosper in a dynamic and vibrant market economy, and who choose to live in, and be actively engaged with, caring communities.

Lets have a serious public conversation about what that sort of America will look like.

Comments

[Kevin Vallier]

Pete, I also read Kenworthy's piece and I think he'd respond to the fiscal responsibility worries by repeating what he said in the article: we must raise taxes dramatically. There are "public choice" worries here: if we use the government to give us free goodies, we might also use the government to make sure our in-group doesn't pay for them. But I think that is what he would say.

[Per Bylund]

Americans will pay higher taxes than they currently do, but the sacrifice will be Worth it, because they will receive a lot in return.

This sentence is all too revealing. Always the "lots for little" or "something for nothing" hypothesis; if we ignore scarcity, then we can have everything we want. The economically ignorant might buy the argument, but ignorance of economic law does not undo the facts. Kenwrothy's argument is to me analogous to telling a physicist that if government made airplanes we need care about the law of gravity no more--so government planes would indeed be cheaper, better, environmentally friendly!

[Joshmccabe.wordpress.com]

Pete, I think you underestimate Kenworthy's argument. It is more than just pretty words.

The Nordic welfare states, while undergoing some pretty substantial reforms in the 1990s, are still much larger than the US welfare state. More importantly, this shows just how sustainable they are overall. US fiscal issues stem from the disconnect between tax and spending policymaking processes rather than reaching some absolutely upper bound on state size at which we will be thrown into a fiscal crisis. The Nordic welfare states can afford to be so large because they have a much larger tax base made up of less distortive consumption taxes and their top MTR apply to the average worker rather than just the top 1%.

Additionally, you gloss over a key component of Kenworthy's argument. The Fishback study gets a lot of attention (It's also worth checking out work by Adema and Ladaique at the OECD) but it misses the most crucial point that its not about total social spending. In his other book, Kenworthy has a whole chapter titled "The Aim is not Spending Per Se" where he takes on this argument. The hidden welfare state which Fishback measures is mostly made up of tax expenditures which disproportionately go to upper middle and high income earners. They take away is that the US does indeed have a large welfare state but that its very poorly targeted. One can hardly call this social democracy by any definition.

Of course, this doesn't mean I necessarily agree with the idea that the US could or should become a social democracy. But let's be clear. He's not wrong because he doesn't understand economic reasoning. He understands it quite well and has the empirical evidence to back it up.

[Daniel Kuehn]

I agree with some of the other commenters on how he addresses the questions you raise. I think it's also good (1.) not to always treat Kotlikoff like the gold standard on this question, although he's certainly a smart guy (wouldn't a "serious public conversation" cite more than him on the state of the debt?), and (2.) to separate the intergenerational entitlement concerns he spends a lot of time on from some of the other transfers inherent in a social democracy.

Lots of people are worrying and thinking about the sustainability of entitlement programs but that does not mean it's right to copy-and-paste those concerns to other parts of the budget.

Finally - it's a little misleading to use the economic freedom index to assess social democracies, don't you think? I'm not deeply familiar with the data so correct my if I'm wrong but they sort of by definition assume social democracies aren't free based on how they score freedom. You may want to assert that, but you can't really prove the point by citing data defined that way.

[Andrew Garland]

How Government Cutbacks Ended Sweden’s Great Depression
December 2013
=== ===
Since 1992, Sweden has, across the board, seen consistent government cutbacks while increasing restrictions on welfare policies, deregulating markets, and privatizing former government monopolies. The country has instituted an overall new incentive structure in society making it more favorable to work. The national debt tumbled from almost 80 percent of GDP in 1995 to only 35 percent in 2010.

In other words, Sweden successfully rolled back its unsustainable but world-renowned welfare state. Despite Krugman’s wishful thinking, this is the real reason for Sweden’s success in riding out the present financial crisis.
=== ===

EasyOpinions.blogspot.com

[Per Bylund]

I agree with both Josh and Andrew, in a sense. It is true that the Nordic Welfare states are "bigger" (proportionally, I'm guessing) than the US ditto. But counting what, exactly. A majority of the Swedish government's budget, for instance, is pure redistribution--only money circulating. Everybody pays into the system, and everybody gets from the system.

It used to be the case that everybody had "benefits" and gained those without much restrictions (neither in terms of "who" nor longevity). The latter is what has changed over the course of the last two decades: benefits are restricted to only those specifically eligible, and most are for a certain time only. Some Things have also been "privatized," such as the unemployment insurance, which is now mostly run by the labor unions (fees, rules, etc are still government mandated). As the financial situation has improved, taxes have been cut on primarily employment (tax on low-wage labor is still 55-60%, however).

So while it may be true that Sweden's (as an example of the Nordic states; they're all different) welfare state is "bigger" than the United States', they are approaching each other. The US welfare state is expanding toward "old Sweden" and Sweden is cutting back toward the "old US." Interesting times!