The “Improving Poverty Reduction in Europe” (ImPRovE) project, funded by the EU, aims to enhance understanding of what works in reducing poverty and increasing social cohesion. Information about the project and slides from the presentations at its first conference, held a short while ago in Brussels, are available here.
Archive for the 'Social policy' Category
An excellent data set, now updated: cwed2.org.
What alternatives to prison might better improve public safety? And what services might most effectively help the formerly incarcerated lead productive lives? This piece and this proposal are worth a read.
At some point, the United States is likely to have universal publicly-funded early education for children aged one to four. But while we led the way in establishing universal elementary and secondary schooling and in expanding access to college, on early education we lag well behind some other rich nations. We should pick up the pace.
WHY EARLY EDUCATION?
Universal early education will have two significant benefits. First, many Americans with prekindergarten children want to combine family with paid work.1 But because good-quality out-of-home care can be prohibitively expensive, too many parents settle for care that is mediocre or poor.2 Others simply forgo employment.3
Denmark and Sweden offer a good model. Beginning in the 1960s, these countries introduced and then steadily expanded paid parental leave and publicly-funded childcare and preschool. Today, Danish and Swedish parents can take a paid year off work following the birth of a child. After that, parents can put the child in a public or licensed private early education center. The quality tends to be high, as early education teachers get training and pay comparable to elementary school teachers. Parents pay a fee, but the cost is capped at less than 10% of a household’s income.4
We can see the impact in employment patterns. Among mothers whose youngest child is six to sixteen years old, and thus eligible for free K-12 schooling, the employment rate in the U.S. is just a few percentage points lower than in Denmark and Sweden. Among mothers with a child younger than six, it’s 15 percentage points lower.5
Second, evidence increasingly suggests that good-quality universal early education helps to equalize opportunity by improving the capabilities of children from less advantaged homes.
Americans are strong believers in equality of opportunity. More than 90% of us think “our society should do what is necessary to make sure that everyone has an equal opportunity to succeed.”6 But family conditions are a huge impediment. Some children have parents who read to them, instill helpful traits such as self-control and persistence, shield them from stress and physical harm, expose them to new information and learning opportunities, assist them with homework, provide connections that help them get out of trouble or into a good job, remain in a stable relationship throughout the childhood years, and so on. Other children are less fortunate.7 As a result, whereas an American born into a family in the top fifth of incomes has roughly an 80% chance of ending up in the middle fifth or higher in adulthood, an American born into the bottom fifth has only a 30% chance of reaching the middle fifth or higher.8
Schools help to offset the massive differences in capabilities caused by families. Children from poor homes tend to have much lower measurable skills than children from affluent homes at kindergarten entry. Given the huge variation in home and neighborhood circumstances, we would expect that gap to widen throughout childhood. But it doesn’t; it’s about the same size at the end of high school.9 This tells us that schools have an equalizing effect. Also, during summer vacations, when children are out of school, those from lower-income families tend to fall farther behind.10
If school began earlier in life, we could reduce some of the disparity that exists when children arrive for kindergarten. Indeed, some analysts conclude that the impact of schooling is larger before kindergarten than after.11
The effects of three high-quality early education programs — the Perry Preschool Program in Michigan in the 1960s, the Abecedarian Project in North Carolina in the 1970s, and the Child-Parent Center Education Program in Chicago in the 1970s — have been tracked into early adulthood or beyond. Each program appears to have had positive effects for low-income children that persist throughout the life course. For the Perry and Chicago Programs, gains in test scores faded away but there were long-term gains in labor market success and other outcomes. The same appears to be true for Head Start. This suggests that the key improvement is in noncognitive skills more than in cognitive ability. On the other hand, the Abecedarian Project yielded better long-term behavioral outcomes along with sustained gains in test scores. A natural experiment in Denmark also found lasting test-score gains. So early education’s benefits for children from less advantaged homes may come via both cognitive and noncognitive skills.12
Skeptics point to findings of little apparent impact of existing universal preschool programs for four-year-olds in Oklahoma and Georgia. But these programs are too new to assess long-run effects.13
The Nordic countries, particularly Denmark and Sweden, have had universal early education systems in place for a generation. This may help account for why opportunity is more equal — children’s cognitive abilities, likelihood of completing high school and college, and labor market success depend less on their parents’ education, income, and parenting practices — in these countries than in others.14
In sum, good-quality universal early education will improve work-family balance and very likely will reduce inequality of opportunity.
A possible third benefit is faster economic growth. If universal early education increases employment by mothers and improves the capabilities of Americans who grow up in less advantaged homes, it may boost the economy’s growth rate. But I’m much less confident about this outcome than the other two. Though the Nordic countries have had universal early education for several decades, their economies don’t grow more rapidly now than they used to. Nor do they (apart from oil-rich Norway) grow faster than other affluent nations. If early education does increase economic growth, its impact probably is small enough that it’s overshadowed by the myriad other determinants of national growth rates.15
So the potential benefit from early education is substantial. Why does government need to step in? Can’t the market handle this?
No, not well enough. A good early education system will combine three features: accessibility, affordability, and quality. For Americans able and willing to pay a lot for childcare, our current system typically delivers all three. But for those with low to moderate incomes, getting access to affordable care too often means sacrificing quality.16 A universal system with public funding and some direct public provision would change this. It would ensure good-quality care to everyone at an affordable price.
But let’s break this down. Should government pay for early education? Yes, to make it affordable for all. That doesn’t mean it should be free, as I’ll explain in a moment, but it does mean taxpayers should bear a significant portion of the cost.
Here government already is involved. The federal government funds Head Start, some special education services, and tax breaks for childcare. Some state governments fund preschool for four-year-olds and subsidize childcare for poor families. Yet this is nowhere near sufficient to ensure that everyone has access to good-quality care and preschool.
Do we also need government to provide early education? Yes. That’s the only way to guarantee universal access to preschool and care that’s above an acceptable quality threshold. But we don’t need government to be the sole provider. Denmark and Sweden allow private providers, as long as they meet quality standards. In many districts across America we allow private providers for publicly-funded K-12 schooling (charter schools). We allow private doctors and hospitals to provide medical care for Medicare and Medicaid recipients. We should do the same for early education.
What’s the ideal mix? I don’t know. Maybe it’s 25% of kids in public early education centers, or perhaps it’s 75%. This depends largely on how many private providers can combine good quality with a reasonable rate of return.
Why should early education be universal? Why not just expand Head Start a bit?
Three reasons. First, it isn’t just low-income parents who struggle to find good-quality care that’s affordable. Middle-class parents do too. Second, family structure and parents’ traits and behaviors are key sources of disadvantage, and they don’t overlap perfectly with family income. If we target low-income households, we’ll miss many children who need help. Third, development of cognitive and especially noncognitive skills is aided by peer interaction. Children from less advantaged homes gain by mixing with kids from middle-class homes, which doesn’t happen in a program that exclusively serves the poor.17
WHY NOT BEGIN AT BIRTH?
If early education is so great, why not encourage parents to start right after birth? The reason is that research suggests children tend to fare best staying with a parent during the first year of life.18
So along with facilitating early education for kids aged one to four, we should make it possible for more parents to stay home with their children during the first year.19 Right now, we require that firms with 50 or more employees grant 12 weeks of unpaid leave to new parents.20 Some large firms offer paid leave, but that’s entirely voluntary. Here too, the Danes and Swedes have it about right. They provide tax-funded paid parental leave for roughly one year. A portion is use-it-or-lose-it for the father; if he chooses not to take any leave, the couple loses that time. Otherwise they are free to split the leave however they like.
HOW MUCH SHOULD PARENTS PAY FOR EARLY EDUCATION?
American parents with a child younger than age five in out-of-home care currently pay, on average, about $9,000 per year for that care. Childcare expenditures amount to 40% of income for families with incomes below $18,000, and 20% for those with incomes between $18,000 and $36,000.21 That’s far too much.
How much should parents pay? A sliding scale, with the user fee rising in proportion to family income and capped at around 10%, seems sensible.
Should it be free for those with low incomes? I think that would be a mistake. Early education differs from services that relatively few people opt out of, such as police protection, healthcare, and even K-12 education. Families that prefer to provide stay-at-home parental care for their young children will elect not to use it. This argues for having parents who do use it pay something — even parents with little income. The fee should be modest, but it shouldn’t be zero.
HOW MUCH WILL IT COST TAXPAYERS?
The bill to taxpayers will depend on specific details, but a rough estimate is 1% of GDP, or $160 billion, per year.
There are two ways to reach this number. First, our public spending on K-12 education is about 4% of GDP, or $600 billion.22 There are 50 million students in our public K-12 schools (the enrollment rate is 85-90%23), so public expenditures come to about $12,000 per student. There are around 16 million children aged one to four. Suppose 75% enroll in early education; that’s 12 million children. If we spend $12,000 per child, the same as for K-12 schools, total spending would be around $145 billion. We’ll want a better teacher-child ratio for early education, which will increase the cost a bit, though user fees will help cover this.
Second, public expenditure on early education in Denmark and Sweden is about 1.5% of GDP.24 We’re likely to end up with more private provision and we have a larger per capita GDP, so 1% of our GDP might well be sufficient to create a system that approximates theirs in quality and accessibility.
Note that my estimate of the cost is far higher than that of recent proposals by the Obama administration and the Center for American Progress.25 That’s because those proposals are for relatively small additions to our current system.
How much will taxes increase for individual households? If the distribution of new tax payments needed to fund early education is the same as for existing tax payments, households in the bottom fifth of incomes will pay $133 more per year, those in the lower-middle fifth $333, those in the middle fifth $666, those in the upper-middle fifth $1,266, and those in the top fifth $4,200.26 These amounts are fairly small — an advantage of spreading the bill across the population.27 And actual increases in tax payments probably would be even smaller, since we already spend some public money on early education.
Over the long run, universal early education may pay for itself via increased employment and productivity.28 Even if it doesn’t, however, it’s well worth doing in order to improve work-family balance and equality of opportunity.
SO WHAT’S NOT TO LIKE?
I see seven principal objections to universal publicly-funded early education for the United States.
First, when someone suggests borrowing a policy or institution from the Nordic countries, skeptics immediately point out that these countries are very different from America. They’re small, they’re more ethnically and racially homogenous, and their cultures and histories are quite distinct from ours. What works there, in other words, won’t necessarily work here.
That’s true. But it doesn’t justify blanket skepticism about borrowing. We need to consider the particulars of the policy in question. There is no reason to think a system of publicly-funded early education centers (schools) can function effectively only in a small homogenous country. France does this, even though it’s a pretty large nation. Belgium does too, despite its diversity.29 And we do a reasonably good job ourselves with kindergartens and elementary schools. Education experts and ordinary Americans routinely profess dissatisfaction with our K-12 public schools. But recall the evidence I mentioned earlier: inequality in capabilities expands when children aren’t in school (before kindergarten and during summers), while K-12 schools hold it at bay. American schools could be better, to be sure, but for less advantaged children they are, even in their current condition, far more helpful than the likely alternative.
A second objection is that we don’t know how large the impact of early education will be in boosting the capabilities of children from less advantaged families. The expectation of a sizeable effect is compelling, and we have supportive evidence from K-12 schooling, from three high-quality early education programs, and from cross-country comparison. But that evidence is limited.30
Though this is a legitimate concern, it shouldn’t dissuade us. Equalizing opportunity is such a prized goal that even a modest improvement would be valuable. And regardless of its impact on opportunity, early education will be of considerable benefit in helping parents balance work and family.
Third, some contend that more government spending and higher taxes will hurt the economy. But the relevant evidence says otherwise. Over the past century the United States has shifted from a country with a small government to one with a medium-sized government, but our long-term rate of economic growth hasn’t slowed. And among the world’s rich nations, those with larger governments have tended to grow just as rapidly as those with smaller governments.31
Fourth, some believe government provision of services and benefits weakens families.32 If parents have access to affordable good-quality childcare and preschool, will they be less likely to stay together or get married in the first place? That’s conceivable, but the historical and comparative evidence suggests reason for skepticism. Enrollment in elementary and secondary schools grew steadily in the United States from the late 1800s until around 1960, but it was in the 1960s, after the rise in school enrollment slowed sharply, that rates of divorce and out-of-wedlock birth shot up.33 And more children grow up with both parents in Denmark, France, and Sweden, each of which has a universal early education system, than in the United States.34
Fifth, some worry about rent-seeking if a substantial amount of early education is publicly provided. Public-sector employees may be able to get above-market pay and benefits, increasing the cost to taxpayers.35 The evidence on this is mixed.36 But suppose we as a collectivity do end up paying more than we need to. The question is whether the outcome is worth it. My judgment is yes. It’s the same with our military, police protection, fire fighting, medical care, K-12 schooling, and others. These services yield immense individual and social benefits, and I’m willing to bear a slightly elevated cost in order to ensure that all Americans have access to them.
A sixth objection suggests that publicly-provided services tend to be of low quality. Yet the evidence from our public K-12 schools offers cause for optimism. While there is lots of room for improvement, they do help to equalize opportunity. They also, of course, facilitate employment by parents. Public early education will do the same.
Finally, why not just give the money to parents and let them choose whether to use it on early education or on something else? The reason is that if early education has individual and social benefits, it makes sense to require that the money be used for that and only that. The same is true of safety (military, police), infrastructure (roads, bridges), health insurance (Medicare, Medicaid), and K-12 schooling, among others. Though paternalism is a dirty word for some, a key purpose of government is precisely to help us do things we might not choose on our own.
It’s worth emphasizing that having a universal early education system doesn’t mean anyone will be forced to use it. Parents who prefer to stay home with their children during the first five years will still be able to do so.
WHAT’S IN IT FOR REPUBLICANS?
In 2012, 20 million Americans with incomes below $50,000 voted Republican in the presidential election. Many in this group who have young children can’t afford good-quality out-of-home care. These parents and their kids would benefit from universal early education. The same is true for some of the 20 million Republican voters with incomes between $50,000 and $100,000.37 Republican leaders who want to improve their constituents’ well-being ought to be interested in early education.
Moreover, many of these Americans would embrace publicly-funded early education, at least after the fact. Yes, a significant share of them dislike the idea of big government, but they nevertheless like a lot of the public insurance and public services that our government provides.38 Many of them happily send their children off to public elementary schools, middle schools, and high schools every day. They would do the same with early education. In Oklahoma, one of the reddest of red states, the enrollment rate in the public preschool program for four-year-olds is 74%.39
PATIENCE IS A VIRTUE, BUT WHY WAIT?
America is a long way from universal early education, and the difficult part is the politics. But that’s often the case. Consider healthcare. We began by creating the Veteran’s Administration after the Civil War. Tax breaks for employer contributions to private health insurance came after World War II. Medicare and Medicaid were created in the 1960s. Medicaid coverage was expanded in the 1980s and 1990s, and Medicare in the 2000s. The Affordable Care Act arrived in 2010, and even when it is fully implemented we’ll still fall short of universal access and affordable cost. Advances in our public insurance and public services tend to come incrementally, and early education may be no exception.
Yet that doesn’t mean it’s best to proceed slowly. The case for universal good-quality publicly-funded early education is strong. For America’s parents and children, sooner would be better than later.
1. Americans used to worry about mothers of young children working outside the home. In the late 1970s, 68% believed “a preschool child is likely to suffer if his or her mother works.” But by 2012, the share had shrunk to 35% (General Social Survey, variable fepresch). Indeed, nowadays support for paid work among mothers of young kids spans the political spectrum. Many conservatives favor strict time limits on receipt of government benefits in order to encourage mothers’ employment, and gender egalitarians point out that four or five years out of the work force (more if there is a second or third child) puts women at a severe disadvantage for later employment and earnings. See Ron Haskins, Work Over Welfare, Brookings Institution Press, 2007; Janet C. Gornick, Marcia K. Meyers, et al, Gender Equality, Verso, 2009.
2. Deborah Lowe Vandell and Barbara Wolfe, “Child Care Quality: Does It Matter and Does It Need to Be Improved?” Special Report 78, Institute for Research on Poverty, University of Wisconsin-Madison, 2000; Jane Waldfogel, What Children Need, Harvard University Press, 2006; W. Steven Barnett et al, The State of Preschool 2012, National Institute for Early Education Research; Jonathan Cohn, “The Hell of American Day Care,” The New Republic, 2013.
3. The labor force participation rate of mothers with children younger than six is just 65%. Bureau of Labor Statistics, “Employment Characteristics of Families — 2012,” using Current Population Survey data.
4. OECD, Starting Strong II: Early Childhood Education and Care, 2006; OECD, Doing Better for Families, 2011; Miriam Nordfors, “Sweden Solves Two Problems at Once,” New York Times: Room for Debate, 2013.
5. OECD, Doing Better for Families, figure 1.9. There is additional U.S.-specific evidence suggesting the employment rate among mothers with young children would be higher if good-quality early education were more accessible; see, for instance, Janice Compton and Robert A. Pollak, “Family Proximity, Childcare, and Women’s Labor Force Attachment,” Working Paper 17678, National Bureau of Economic Research, 2011. Timothy Bartik concludes that the employment benefits of early education are not just in the quantity of jobs but also their quality. See Bartik, Investing in Kids: Early Childhood Programs and Local Economic Development, W.E. Upjohn Institute for Employment Research, 2011.
6. Pew Research Center, 1987-2012.
7. Greg J. Duncan and Richard J. Murnane, eds., Whither Opportunity? Rising Inequality, Schools, and Children’s Life Chances, Russell Sage Foundation and Spencer Foundation, 2011; Annette Lareau, Unequal Childhoods, 2nd edition, University of California Press, 2011.
8. Economic Mobility Project, “Pursuing the American Dream: Economic Mobility Across Generations,” Pew Charitable Trusts, 2012. These numbers are for Americans born between the mid-1960s and the mid-1980s. In a society with perfectly equal opportunity, every person would have a 20% chance of landing on each of the five rungs of the income ladder and a 60% chance of landing on the middle rung or a higher one.
9. James J. Heckman, “Schools, Skills, and Synapses,” Working Paper 14064, National Bureau of Economic Research, 2008; Sean F. Reardon, “The Widening Academic-Achievement Gap Between the Rich and the Poor: New Evidence and Possible Explanations,” in Whither Opportunity?, figure 5.5; John Ermisch, Markus Jäntti, and Timothy Smeeding, eds., From Parents to Children: The Intergenerational Transmission of Advantage, Russell Sage Foundation, 2012, pp. 465-468.
10. Douglas B. Downey, Paul T. von Hippel, and Beckett A. Broh, “Are Schools the Great Equalizer? Cognitive Inequality during the Summer Months and the School Year,” American Sociological Review, 2004; Karl L. Alexander, Doris R. Entwisle, and Linda Steffel Olson, “Lasting Consequences of the Summer Learning Gap,” American Sociological Review, 2007. For discussion of additional findings from natural experiments in which children go without schooling, see Richard E. Nisbett, Intelligence and How to Get It, W.W. Norton, 2009, ch. 3.
11. Jeanne Brooks-Gunn, “What We Can Expect from Early Childhood Intervention Programs,” Society for Research in Child Development, 2003; Heckman, “Schools, Skills, and Synapses”; Douglas Almond and Janet Currie, “Human Capital Development Before Age Five,” Working Paper 15827, National Bureau of Economic Research, 2010.
12. Heckman, “Schools, Skills, and Synapses”; David Deming, “Early Childhood Intervention and Life-Cycle Skill Development: Evidence from Head Start,” American Economic Journal: Applied Economics, 2009; Arthur J. Reynolds et al, “Age 26 Cost-Benefit Analysis of the Child-Parent Center Early Education Program,” Child Development, 2011; Gøsta Esping-Andersen, Irwin Garfinkel, Wen-Jui Han, Katherine Magnuson, Sander Wagner, and Jane Waldfogel, “Child Care and School Performance in Denmark and the United States,” Children and Youth Services Review, 2012; Greg J. Duncan and Katherine Magnuson, “Investing in Preschool Programs,” Journal of Economic Perspectives, 2013.
14. Tarjei Havnes and Magne Mogstad, “Is Universal Child Care Leveling the Playing Field?,” IZA Discussion Paper 4978, 2010; Smeeding, Erickson, and Jäntti, eds., From Parents to Children; Gøsta Esping-Andersen, The Incomplete Revolution, Polity, 2009, ch. 4.
15. A fourth potential benefit is higher fertility. Families that know having a child won’t severely interrupt the work career of either the father or mother are more likely to have the number of children they desire. If we look across Europe, countries with universal early education tend to have higher fertility rates; see Francis G. Castles, “The World Turned Upside Down: Below Replacement Fertility, Changing Preferences, and Family-Friendly Public Policy in 21 OECD Countries,” Journal of European Public Policy, 2003; OECD, Doing Better for Families, ch. 3; Esping-Andersen, The Incomplete Revolution. But this doesn’t seem to be a significant barrier to fertility in the United States.
16. See note 2.
17. Eric A. Hanushek, John F. Kain, Jacob M. Markman, and Steven G. Rivkin, “Does Peer Ability Affect Student Achievement?” Working Paper 8502, National Bureau of Economic Research, 2001; Heckman, “Schools, Skills, and Synapses”; Robert Bauchmüller, Mette Gørtz and Astrid Würtz Rasmussen, “Long-Run Benefits from Universal High-Quality Preschooling,” AKF Working Paper, 2011; Barnett, “Getting the Facts Right on Pre-K.”
18. Waldfogel, What Children Need, ch. 2; Jeanne Brooks-Gunn, Wen-Jui Han, and Jane Waldfogel, “First-Year Maternal Employment and Child Development in the First Seven Years,” Monographs of the Society for Research in Child Development, 2010; Maria del Carmen Huerta et al, “Early Maternal Employment and Child Development in Five OECD Countries,” OECD Social, Employment, and Migration Working Paper 118, 2011.
19. The apparent impact of California’s paid leave program is encouraging. See Maya Rossin-Slater, Christopher J. Ruhm, and Jane Waldfogel, “The Effects of California’s Paid Family Leave Program on Mothers’ Leave-Taking and Subsequent Labor Market Outcomes,” Journal of Public Policy Analysis and Management, 2013.
20. The 1993 Family and Medical Leave Act.
21. Lynda Laughlin, “Who’s Minding the Kids? Child Care Arrangements: Spring 2011,” U.S. Census Bureau, 2013, table 6, using data from the Survey of Income and Program Participation (SIPP). See also Ajay Chaudry et al, “Child Care Choices of Low-Income Working Families,” Urban Institute, 2011; ChildCare Aware of America, “Parents and the High Cost of Child Care,” 2012.
22. OECD, Education at a Glance 2012, table B2.3.
23. The other 10-15% are in private schools, home school, or dropped out.
24. OECD, Doing Better for Families, figure 1.11.
25. Obama Administration 2014 Budget Proposal; Cynthia G. Brown, Donna Cooper, Juliana Herman, Melissa Lazarín, Michael Linden, Sasha Post, and Neera Tanden, “Investing in Our Children: A Plan to Expand Access to Preschool and Child Care,” Center for American Progress, 2013.
26. According to Citizens for Tax Justice (“America’s Tax System Is Not as Progressive as You Think,” 2011), if we take all types of taxes into account — federal, state, and local (personal and corporate income, payroll, property, sales, excise, estate, etc.) — households in the bottom fifth of incomes pay about 2% of the taxes, those in the lower-middle fifth pay 5%, those in the middle fifth pay 10%, those in the upper-middle fifth pay 19%, and those in the top fifth pay 63%. Each fifth has about 24 million households. The amount paid by households in the bottom fifth is calculated as $160 billion (the total tax revenue needed) multiplied by .02 (this group will account for 2% of the revenues) divided by 24 million (the number of households in this group) = $133. The calculation is analogous for the other four groups.
27. The $4,200 tab for those in the top fifth might seem large, but that’s the average for this group. We can break this down further. Those between the 80th and 90th percentiles would pay $2,000 more per year, those between the 90th and 95th percentiles $2,933, those between the 95th and 99th percentiles $5,333, and those in the top 1 percent (average income above $1 million) $29,333.
28. Heckman, “Schools, Skills, and Synapses”; Esping-Andersen, The Incomplete Revolution.
29. Barbara R. Bergmann, Saving Our Children from Poverty: What the United States Can Learn from France, Russell Sage Foundation, 1996; Janet C. Gornick and Marcia K. Meyers, Families That Work, Russell Sage Foundation, 2003; OECD, Doing Better for Families; Claire Lundberg, “Maybe Working Moms Can Have It All — in France,” Slate, 2012.
30. Charles Murray, “Response to Heckman: Weighing the Evidence,” Boston Review, 2012; Grover J. “Russ” Whitehurst, “Can We Be Hard-Headed About Preschool? A Look at Universal and Targeted Pre-K,” Brookings Institution, 2013; Will Wilkinson, “Does Subsidized Preschool Pay Off?” The Economist: Democracy in America, 2013.
31. Lane Kenworthy, Social Democratic America, Oxford University Press, forthcoming 2014.
33. Claudia Goldin and Lawrence F. Katz, The Race between Education and Technology, Harvard University Press, 2008, figure 6.1; Census Bureau; National Center for Health Statistics.
35. Reihan Salam, “The House Budget Committee on the Inequality Landscape,” National Review Online: The Agenda, 2011.
36. Controlling for education and other relevant factors, federal government employees have higher compensation (wages and benefits) than their private-sector counterparts but state and local government employees don’t. Jeffrey Keefe, “Debunking the Myth of the Overcompensated Public Employee: The Evidence,” Economic Policy Institute, 2010; Philipp Bewerunge and Harvey S. Rosen, “Wages, Pensions, and Public-Private Sector Compensation Differentials,” Working Paper 227, Griswold Center for Economic Policy Studies, 2012; Congressional Budget Office, “Comparing the Compensation of Federal and Private-Sector Employees,” 2012.
37. 127 million Americans voted. According to exit polls, 41% had incomes below $50,000, and 39% of them voted Republican; 31% had incomes between $50,000 and $100,000, with 52% of them voting Republican.
39. Barnett et al, The State of Preschool 2012, table 2.
Daron Acemoglu, James Robinson, and Thierry Verdier have a new paper that asks “Can’t We All Be More Like Scandinavians?” Their answer is no. The answer follows from a model they develop in which
- Countries choose between two types of capitalism. “Cutthroat” capitalism provides large financial rewards to successful entrepreneurship. This yields high income inequality, but it stimulates lots of entrepreneurial effort and hence is conducive to innovation. “Cuddly” capitalism features less financial payoff to entrepreneurs and more generous cushions against risk. This yields modest income inequality but less innovation.
- Because of the difference in innovation, economic growth initially is faster in cutthroat-capitalism nations. But technological advance spills over from cutthroat nations to cuddly ones, so growth rates then equalize. Over the long run, GDP per capita is higher in cutthroat-capitalism nations (due to the initial burst) while economic growth rates are similar across the two types.
- Average well-being may be higher in cuddly countries because the more egalitarian distribution of economic output more than compensates for the lower level of output.
- Nevertheless, it would be bad for all countries if cutthroat-capitalism nations switched to cuddly capitalism. That would reduce innovation in the (formerly) cutthroat nations, which would reduce economic growth in all nations.
Acemoglu, Robinson, and Verdier say the model might help us understand patterns of economic growth and well-being in the United States and the Nordic countries — Denmark, Finland, Norway, and Sweden. The United States chose cutthroat capitalism, while the Nordics chose cuddly capitalism. The U.S. grew faster for a short time, but since then all five countries have grown at the roughly same pace. America’s high inequality encourages innovation. The Nordics can be cuddly and still grow rapidly because of technological spillover. If the U.S. were to decide to go cuddly, innovation would slow. Both sets of nations would grow less rapidly.
Incentives, innovation, and economic growth in the U.S. and Sweden
I won’t provide the “detailed empirical study of these issues” that Acemoglu and colleagues say they hope their paper will inspire, but I can offer a little data. To keep things simple, I’ll compare the United States with just one of the Nordic countries: Sweden.
An indicator of financial incentives for entrepreneurs is the top 1%’s share of household income. An indicator of the extent of cushions against risk is government expenditures’ share of GDP. What we see in the data is a lot of similarity between the U.S. and Sweden until the second half of the twentieth century. Government spending begins to diverge in the 1960s, income inequality in the 1970s.
Though Sweden’s top 1% get a smaller share of the total income than their American counterparts, are incentives for entrepreneurs really much weaker in Sweden? Swedish CEOs and financial players don’t pull in American-style paychecks and bonuses in the tens of millions, but there is little to prevent an entrepreneur from accumulating large sums. In the 1990s Sweden undertook a significant tax reform, reducing marginal rates and eliminating loopholes and deductions. Corporate income and capital gains tax rates were lowered to 30%, and the personal income tax rate to 50%. Later the wealth tax was done away with. In the early 2000s a writer for Forbes magazine mused that Sweden had transformed itself from a “bloated welfare state” into a “people’s republic of entrepreneurs.”
But set this aside for the moment. Suppose the incentives for entrepreneurs did begin to differ in the two countries around 1960 or 1970. The model predicts innovation will subsequently diverge. Acemoglu, Robinson, and Verdier refer to one measure of patent applications per capita that has the U.S. leading Sweden beginning in the late 1990s. That timing perhaps is consistent with the model’s prediction if we allow a substantial lag. But they cite another measure that is available starting in 1980 and has the U.S. well ahead of Sweden already by then. This suggests America’s innovation advantage might have preceded rather than followed the two countries’ type-of-capitalism choice.
The final outcome is GDP per capita. Here the model stumbles. The gap between the two countries isn’t recent; it dates back to more than a century ago. Apart from a few hiccups, each country has stayed on its long-run growth path throughout the past 100 years, with Sweden slowly catching up to the United States.
So the U.S. and Sweden have chosen different styles of capitalism, at least as measured by income inequality and public spending. That choice looks to have occurred around 1960 at the earliest. The U.S. may be the more innovative of the two nations, and that advantage may have come after the type-of-capitalism choice. But the model doesn’t seem to help in explaining the gap between the two countries in per capita GDP.
Will American innovation slow if we go “cuddly”?
The really interesting question posed by Acemoglu, Robinson, and Verdier is whether innovation would slow in the United States if we strengthened our safety net and/or reduced the relative financial payoff to entrepreneurial success. I’m skeptical, for three reasons.
The first flows from America’s past experience. According to Acemoglu et al’s logic, incentives for innovation in the U.S. were weakest in the 1960s and 1970s. In 1960 the top 1%’s share of pretax income had been falling steadily for several decades and had nearly reached its low point. Government spending, meanwhile, had been rising steadily and was close to its peak level. Yet there was plenty of innovation in the 1960s and 1970s, including notable advances in computers, medical technology, and other fields.
Second, the Nordic countries, with their low income inequality and generous safety nets, currently are among the world’s most innovative countries. The World Economic Forum’s Global Competitiveness Index has consistently ranked them close to the United States in innovation. The most recent report, for 2012-13, rates Sweden as the world’s most innovative nation, followed by Finland. The U.S. ranks sixth. The 2012 WIPO-Insead Global Innovation Index ranks Sweden second and the United States tenth. Whether or not this lasts, it suggests reason to doubt that modest inequality and generous cushions are significant obstacles to innovation.
Third, if Acemoglu and colleagues are correct about the value of financial incentives in spurring innovation, we should see this reflected not only in the United States but also in other nations with relatively high income inequality and low-to-moderate government spending, such as Australia, Canada, Ireland, New Zealand, and the United Kingdom. But we don’t.
There’s one additional possibility worth considering. If financial incentives truly are critical for spurring innovation, it could be the opportunity for large gains that matters, rather than the absence of cushions. Suppose we were to increase government revenues in the United States via higher taxes on everyone — steeper income taxes on the top 1% or 5% plus a new national consumption tax. And imagine we used those revenues to expand public insurance and services — fully universal health insurance, universal early education, a beefed-up Earned Income Tax Credit, a new wage insurance program, more individualized assistance with training and job placement. These changes wouldn’t alter income inequality much, but they would enhance economic security and opportunity. Would innovation decline? I doubt it.
We may get a test of this moderate-to-high inequality with generous cushions scenario at some point. I suspect this is where America is heading, albeit slowly. Interestingly, the Nordic countries, where the top 1%’s income share has been trending upward (see figure 10 here), might end up there first.
The belief that there is an irreconcilable conflict between government benefits and the freedom to pursue dreams can only arise among those who have never had to worry about the reality of equality of opportunity in America. For most Americans, public schools are a critical piece of the machinery of economic mobility. Things like unemployment insurance and social security, meagre though they are, sometimes mean the difference between destitution and the possibility of a second chance or a non-wretched standard of living. For many Americans, the ability to even contemplate dreams for a better life is down to the small cushion and basic investments provided by governments, provided for precisely that reason, because an economy in which only those born with a comfortable financial position can invest in human capital and take entrepreneurial risks is doomed to class-based calcification.
America’s welfare state is far from perfect. But it is necessary; indeed, it’s hard to imagine a just and sustainable system of free enterprise without a robust social safety net. Republicans need to recognise this and acknowledge that the past three decades have meant rising income inequality and falling economic mobility alongside top marginal tax rates that are among the lowest of the postwar period. A party that can’t come up with a better answer to this dynamic than to conclude that half of America simply isn’t trying hard enough probably isn’t a party destined or deserving of electoral success.
Nicholas Eberstadt’s “A Nation of Takers” argues that too many Americans have become dependent on government benefits. Over the past half-century, he notes, the share who receive a government cash transfer and/or public health insurance — Social Security, Medicare, Medicaid, unemployment compensation, and so on — has grown steadily. The United States, according to Eberstadt, is now “on the verge of a symbolic threshold: the point at which more than half of all American households receive, and accept, transfer benefits from the government.”
Eberstadt doesn’t contend that this has weakened our economy. His concern is moral. He believes reliance on government for help is undermining Americans’ “fierce and principled independence,” our “proud self-reliance.”
In Eberstadt’s way of seeing things, we are either givers or takers — taxpayers or benefit recipients. This is mistaken. Every American who doesn’t live entirely off the grid pays some taxes. Anyone who is an employee pays payroll taxes, and anyone who purchases things at a store pays sales taxes. Likewise, every American receives benefits from government. If you or your kids attended a public school, if you’ve driven on a road, if you’ve had a drink of tap water or taken a shower in your dwelling, if you’ve deducted mortgage interest payments or a business expense from your federal income taxes, if you haven’t been stricken by polio, if you’ve never had a band of thugs remove you from your home at gunpoint, if you’ve visited a park or lounged on a beach or hiked a mountain trail, if you’ve used the internet….
Eberstadt seems to think receipt of a government cash transfer or health insurance somehow renders people less self-reliant than does receipt of the myriad public goods, services, and tax breaks that government provides. But he doesn’t say why.
Once upon a time public safety was ensured by individuals and privately-organized militias. Then we shifted to government police forces and armies. At one point humans got water and disposed of waste individually. Then we created public water and sewage systems. Education of children was once a family responsibility. Then it shifted to schools. There’s a good reason for this: government provision offers economies of scale and scope, which enables the good or service to be provided to many people who either couldn’t or wouldn’t do it on their own. Did Americans’ character or spirit diminish when these changes occurred? Is there something qualitatively different about the more recent shift from individual to government responsibility in how we deal with retirement saving, health care, unemployment, and other risks? Here too Eberstadt is silent.
It’s true that some government policies encourage people to work less than they otherwise would. If we create a public pension program (Social Security) and allow receipt of benefits beginning at age 62, some who could work longer will elect to retire at that age. If we ease eligibility criteria for receipt of disability benefits, some people who could be employed will instead choose to live off that benefit. But this behavior isn’t the product of an “entitlement culture” that has weakened our moral fiber; it’s the result of incentives created by specific programs. The solution is not to “roll back the entitlement state”; it’s to alter the rules and/or generosity of the particular program that is causing the problem (or to increase the financial reward from staying in employment).
At the end of his essay, Eberstadt shifts his concern from the moral cost of government to the financial cost. Rising government expenditures on transfers and health care will require, he says, that we cut military spending, sell off public assets (land, buildings, art), or dump the burden onto future generations by running up government debt. None of these options is attractive. But there is, of course, another option: increases taxes. As we’ve transferred various functions from individuals to government over the course of our nation’s history, we’ve (usually) paid for it by asking Americans to contribute more. In many other rich nations governments provide more services and transfers than ours does, and they (usually) fund this by collecting more in taxes than we do. Perhaps Eberstadt ignores this option because at the moment one of our two political parties opposes any tax increase and the leader of the other favors a tax increase for only 5% of the population. But if history is any guide, this stalemate eventually will pass. Higher taxes, coupled with modest tweaks to Social Security and more significant reforms of our (public and private) health care system, can generate enough revenue to pay for our public goods, services, and transfers.
Growth of government spending is not, for the most part, a consequence of rent-seeking special interests or narrow-minded bureaucrats looking to expand their turf. It’s a product of affluence. As people and nations get richer, they tend to be willing to allocate more money for insurance (protection against risks) and for fairness (extension of opportunity and security to those who are less fortunate). Rather than lamenting an imagined shift from self-reliance to dependence, or claiming that we can’t afford more security and fairness, the American right would do better to focus its energy and creativity on devising alternative ways of pursuing these goals. Government doesn’t always do things best; and even when it does, there almost always is room for improvement. Nicholas Eberstadt’s essay is emblematic of the backward-looking orientation that has dominated America’s right for the past three decades. It’s an orientation that in my view has long since outlived its usefulness. The country will benefit when more smart minds on that side of the spectrum turn their gaze forward.
That’s the title of my new book. In it I try to answer the following questions:
How much does economic growth benefit the poor? When and why does growth fail to trickle down?
How can social policy help? Is more social spending better for the poor?
Can a country have a sizeable low-wage sector yet few poor households?
Are universal programs better than targeted ones?
What role can public services play in antipoverty efforts?
What is the best tax mix?
Does improvement in the living standards of the least well-off require a sacrifice of other desirable outcomes?
America’s health-care system differs from its counterparts in other affluent nations in a number of ways: greater fragmentation among payers and price-setters, stronger incentives for overuse of advanced diagnostic and treatment technology, higher administrative costs, less access to care for some. We might therefore expect it to perform less efficiently — to achieve poorer health outcomes for a given amount of expenditure (see here, here, here).
The following chart is sometimes viewed as evidence in favor of this hypothesis. The chart plots life expectancy at birth by per capita health expenditures as of 2007. Twenty affluent nations are included. Among these countries the U.S. spends by far the most money on health care and yet has the lowest life expectancy.
The inference is problematic, however, because America differs from the other countries in a number of ways that may affect health outcomes. It has a higher murder rate. It has more obesity. The U.S. population is more spatially dispersed than those of most other countries, so rural residents may live farther away from medical providers. Given these and other differences, how confident can we be that health spending is less effective in the U.S. than elsewhere?
Here’s a better way to compare. This chart shows trends in life expectancy by trends in health spending from 1970 to 2008.
The United States still stands out, and in a big way. Our gain in life expectancy per additional health spending is much smaller than in other countries, particularly after the early 1980s when we reached expenditures of about $2,500 per person (in 2005 dollars) and life expectancy of around 74-75 years.
The advantage of analyzing country differences in change is that it takes constant nation-specific factors out of play. It’s not a foolproof analytical strategy, but it reduces the likelihood of mistakenly inferring causation from correlation.
What we need to be wary of is life expectancy depressors that may have increased more or decreased less in the U.S. than in the other countries. Are there any? Not smoking: our rate of decline is in the middle of the pack. Not homicide: it’s decreased more here than elsewhere. Probably not spatial dispersion: Americans began moving back into cities in recent decades. One possibility, though, is obesity. Not only is it more prevalent here; it’s also increased more.
This kind of analysis is by no means conclusive. Life expectancy and total spending are highly aggregated indicators; it’s important to also examine more fine-grained measures of health-care effort and outcomes (see here, here, here). But to the extent we treat the aggregate patterns as informative, a comparison of changes over time, rather than of levels, is likely to be our most valuable guide.
Update: Second chart now corrected, thanks to commenter Roger Chittum.
The Obama administration believes major policy reform is most likely to happen if the president lays out the need for it and a broad set of guidelines but lets Congress come up with the concrete plan. The administration has tried this with health care coverage expansion and now with Medicare and Social Security reform.
Pundits will have their say. Here, for instance, is David Brooks in today’s New York Times:
Obama is following the model of the 1983 Social Security deal. Be patient, the president argued at his press conference this week. If I lead from the front my proposal will get stymied in the partisan circus. Better to lead from the back and have negotiations in private with Republican leaders. Then when the time is ripe, we’ll cut a deal outside the glare of the scream machine.
The president and his aides may really believe in this strategy, but it is wrong. This is not like fixing Social Security in the early 1980s. The current debt problem is of an entirely different scale. It requires a rewrite of the social contract, a new way to think about how the government pays for social insurance.
The president has enormous faith in getting smart people around the table and initiating technocratic reform. But you can’t renegotiate the social contract in private. You have to have public buy-in. You have to spend years out in public educating voters about the size of the problem and what will be required. You have to show voters what a solution looks like.
The New Deal wasn’t passed by a president who led quietly from the back. Neither was the Great Society or the Reagan Revolution. President Obama’s softly, softly approach is a rationalization, not a coherent strategy.
It would be nice to have a more systematic assessment of the historical record.
My suggestion: Start in the 1970s, when the modern polarization in Congress begins. Code each attempt at major policy change as either “president leads” or “president encourages Congress to lead.” Code the outcomes as “policy passes,” “policy passes but so watered down as to make little or no progress toward achieving the goal,” or “policy doesn’t pass.”
After this it would be good to go back further in time, to replace the two-or-three category indicators with more nuanced ones, and to consider context. This last may be particularly important. Underlying the Obama administration’s hypothesis is a belief that the political climate is fundamentally different today, with congressional Republicans committed to categorically rejecting any concrete proposal a Democratic president offers. And some contend that a big budget deal occurs only when international financial markets demand one.
Even the simple version of this analysis would be, to my mind, more helpful than the reasoned reflections of a ream of pundits. Would someone with time and energy please take a crack at this (or if it’s already been done, alert me and others)?
These questions could and should be debated with thousands of pages. But, in the meantime, may I offer my little squib/splat of doubt?
At what wealth level are these protections supposed to arrive? Now? One also wonders which risks are considered to be insurable at the individual and family level, either through insurance proper or through social norms, savings, and other voluntary institutions. What will be the implicit marginal rate of taxation on earning additional income in this new arrangement? Has it been estimated? What will happen to the savings rate? What coercions will accompany these protections? What will the pressures be, legal or otherwise, to send your kid away at one year of age? Will job creation for women go down if there is mandatory paid parental leave? Probably so. Will women end up better off? Quite possibly not. How many people would count as falling under these disabilities? Is this all to be financed by higher taxes on the rich? We probably can’t even pay for our current bills in that manner. If it is all done by VAT, how many people would prefer to have the government spend the money for them, as opposed to spending it themselves? Just asking. What is the likelihood that such benefits will, in the longer run, discourage our willingness to take in immigrants, the most effective form of aid we know?
Let me sidestep some of the specifics for the moment and say something about the big picture.
As people get richer, they tend to be willing to buy more insurance and more services. We observe this both among individuals and among countries. Some insurance and services are provided at good quality and price by private markets. Others less so. That’s the underlying reason why nations have tended to expand social policy as they grow wealthier.
It happens more rapidly where unions are stronger, where social democratic parties hold the government more often, where Christian democratic parties with a Catholic “social market” orientation are influential, and where the government has fewer veto points (separation of powers, filibuster, etc.). But it happens almost everywhere, including here in the U.S.
Because of our large budget deficit, it wouldn’t surprise me if there’s limited further safety net expansion over the next ten years or so, most of it piecemeal alteration of existing programs. But over the long run I suspect we’ll continue to move, in fits and starts, toward an enhanced government role in funding or provision of health care, early education, parental leave, sickness insurance, wage insurance, and services for the disabled.
Yes, this will require higher tax rates. No, it can’t be funded solely via higher taxes on the rich.
Yes, there are potential tradeoffs. But discussion too often ends once the question “Is there a tradeoff?” is answered. We also need to ask “Where is the tipping point?” and “How severe is the tradeoff?” Suppose our government spending were eventually to rise from 35% of GDP up to 40% or 45% — or even to 50%, roughly the level in Denmark, Finland, Sweden, Austria, Belgium, and France. There might be a cost in savings, investment, and economic growth. But maybe not. Or it might be a relatively small cost, one that many citizens in a rich society would feel worth paying in exchange for the added services and protections. One advantage of having a political system that leans toward incremental change is that we’re unlikely to go very far past the tipping point.
That’s the message from Jim Kessler, endorsed here, here, and here. Kessler urges President Obama to say, in his State of the Union address, that “with the passage of health care reform, America’s 85-year quest to weave a strong safety net is now complete.”
We have a safety net, but I wouldn’t call it “strong” by 21st-century standards. Some elements that are inadequate or altogether absent:
The 2010 health care reform, even if fully implemented, likely will leave millions of Americans uninsured.
Early education (preschool, child care), beginning at age one, is a very good idea. Not all states have full-day kindergarten; few have preschool for four-year-olds; none have much in the way of public funding of education for kids age one to three.
Paid parental leave is available in only a few states and covers a relatively short period.
Sickness insurance: ditto.
Unemployment insurance covers too few of us.
Unemployment insurance should be supplemented by or folded into a new wage insurance program.
Social assistance benefits have been decreasing steadily over the past generation.
If markets are now structured in such a way as to severely limit real earnings growth for those in the bottom half of the distribution, we may need to massively expand the EITC.
We ought to do more for children, working-age adults, and elderly persons with assorted physical, cognitive, emotional, and social disabilities.
The aim is not, let me emphasize, to expand government for its own sake. Government should play an integral role in providing these supports and protections because they are underprovided by private markets, and because in some instances government can do so more efficiently than private actors.