A discussion on Social Democratic Capitalism with Michael Baranowski.
My thoughts at Foreign Affairs.
A discussion on Social Democratic Capitalism at Jim’s “Political Economy” podcast.
If we’re going to improve our healthcare system, it’s worth looking closely at the experiences of other rich democratic countries. There are two principal types. They’re sometimes referred to as the Beveridge model and the Bismarck model. I’ll label them “single payer” and “insurance funds.”1
Single payer systems
In this type of system, the government pays providers (from tax revenues), decides prices, decides what procedures are covered, decides copayments, and more. It also runs some or most of the hospitals and employs some or most of the medical providers. The best-known example of this type of system is the United Kingdom’s National Health Service (NHS).
Health care is paid for via taxes. Britons don’t pay health insurance premiums. There are no copayments for diagnosis and treatment, whether for a visit to the doctor or specialized surgery. There is a small copayment for medicines, but it is waived for the elderly, people with chronic conditions, and other needy groups.
A government agency draws on available research to decide what treatments and medications are sufficiently effective and affordable to justify coverage. Some basic things, like eyeglasses and some types of dental care, aren’t covered. Patients must see their general practitioner first and get a referral in order to see a specialist, much like with HMOs in the United States. Patients can see any general practitioner of their choosing, and once they get a referral they can choose which specialist to see next.
How is cost control achieved? The key is that a single agency decides what tests, procedures, and medicines will be covered and how much providers will be paid. In addition, administrative costs are very low because there are no disputes about eligibility, there is a single set of rules, and there is a single price list.
General practitioners are paid based on the number of patients they have (“capitation”), not the number of patient visits or the number of tests and procedures they perform or the number of referrals they make to specialist doctors. Most general practitioners in the UK aren’t government employees. Formally, they are self-employed doctors who contract with the government. But this is a distinction that makes little difference, as what they can do and how much they can charge are determined by the NHS. Doctors can provide private medical care on the side, charging what they like. But the private market is utilized by a small minority of Britons; 90% use only the NHS for their health care.
Britons pay for health care via their taxes and some small copayments. And if they want to avoid waiting to see a specialist or for a “nonessential” procedure, or if they’d like to get a procedure that isn’t covered by the NHS, they pay out of pocket.
Among the world’s rich longstanding-democratic nations, Australia, Canada, Ireland, New Zealand, Italy, Portugal, Spain, Denmark, Finland, Norway, Sweden, and South Korea have healthcare systems that are broadly similar to the British one. The United States does too; about 40% of Americans get their health care via Medicare (elderly), Medicaid (low income), the Veterans Administration (former military), or the Military Health System (current military). So this is the type of system favored by the English-speaking nations, the southern European countries, the Nordic countries, and most recently South Korea.
There are differences among these countries — whether or not medical providers are formally government employees, what tests and procedures are covered (two out of three nonelderly Canadians have private insurance to supplement the government package), whether patients must see a primary-care physician first or can go straight to a specialist, how much choice patients have about doctors and hospitals, the existence and size of copayments and deductibles, whether the key decisions are made mostly by a central government agency (UK) or by local governments (Canada, Denmark, Italy, Sweden), whether private health insurance can cover the same procedures as the public system (in Canada and Italy it can’t), and more. But the basic structure is the same: government decides what tests, procedures, and medicines are covered, how much providers are paid, and where the money comes from (taxes, copayments, something else).
In this type of system, these matters are political decisions. If citizens aren’t satisfied with their access to medical care, with its quality, with waiting times, or with the amount of taxes they’re paying to fund it, they can lobby the government to make changes or vote in a new government that will do so.
Insurance funds systems
Austria, Belgium, France, Germany, Japan, Netherlands, and Switzerland — the affluent continental European nations plus Japan — organize healthcare differently. Health insurers, usually referred to as insurance funds, are the principal payers. Citizens pick an insurance fund and pay a fee, often supplemented by a payment from their employer. The insurance fund determines what tests, procedures, and medications will be covered. Hospitals and doctors are mostly nonprofit or private; relatively few are administered or employed by the government.
In this respect, things work similarly to the way they do for a majority of working-age Americans who get health insurance through an employer-sponsored plan and get treated by nonprofit or private physicians and hospitals. But there the similarity ends. First, everyone is covered. Individuals typically are required to purchase health insurance through an insurance fund, and those who don’t or can’t are either assigned to a fund or are covered by the government. The insurance funds must accept all applicants; they can’t refuse coverage on grounds of age, risk, preexisting conditions, or for any other reason. Second, there is a basic plan that all insurers must offer at a fixed price. Typically they also can offer better plans, which cover more services or allow more choice among doctors or shorter waits, at a higher price. Third, prices are tightly controlled. Sometimes, as in France and Japan, government sets the prices in consultation with representatives of hospitals and doctors. In other countries, such as Germany and the Netherlands, prices are determined, for the nation as a whole, via bargaining between representatives of the insurance funds and representatives of medical providers. If those negotiations break down, government steps in to impose a resolution. Fourth, insurance funds can’t be for-profit. (They do compete with one another, though.)
There are differences across these countries. The number of funds varies: France has about 15, Germany 120, Japan 3,400. People can choose to join whatever insurance fund they like in most of these nations, but in France they must go with the one set up for their line or work or the region where they live, and they stay with that fund for life, even if they move across the country or lose their job. Japanese must go with their employer’s fund. In some nations people can switch between funds on short notice (Germany, Switzerland), whereas in others switching can only be done once a year (Netherlands). In some countries patients can go to whatever doctor or hospital they like (France, Japan), while in others they must first see a primary-care physician. Copayments and deductibles vary. In some of these countries, lots of people purchase supplementary private insurance to cover things the insurance plan doesn’t (90% of the working-aged in France, 84% of the population in the Netherlands). In Germany, but not in most other countries, the affluent (about 7% of the population) are allowed to opt out of this system and purchase private insurance on their own.
Using employer payments as a major source of financing for health care seems outdated. In a society where people switch jobs frequently, it makes little sense for insurance against a potentially major and very costly risk to be tied to one’s employer. Moreover, providing health insurance is expensive for firms, putting them at a disadvantage relative to foreign competitors. And it likely acts as a brake on wage increases. Nevertheless, employer-based health insurance seems to work reasonably well in these insurance funds countries. An important reason why is that if people quit or lose their job, they are automatically kept with their existing insurance fund or switched into a government health insurance plan. And the cost of health care is contained, so it’s less of a burden for employers.
Which type of system works better?
Figure 1 shows average life expectancy since 1980 in the twelve rich democratic countries that have a single-payer system and the seven countries that have an insurance fund system.2 There is no meaningful difference between them.
Life expectancy is influenced not only by a nation’s healthcare system but also by lifestyle, diet, education, affluence, violence, and more. A measure that more directly gets at the impact of the healthcare system on longevity is “avoidable deaths,” defined as deaths among persons aged 0 to 74 from diseases or conditions that are treatable or that could have been prevented through better public health interventions. Comparable data are available only for European nations and only for recent years. This includes nine countries with a single-payer system (Denmark, Finland, Ireland, Italy, Norway, Portugal, Spain, Sweden, and the United Kingdom) and six countries with an insurance-funds system (Austria, Belgium, France, Germany, the Netherlands, and Switzerland). As we see in figure 2, the avoidable death rate is virtually identical across the two system types.
Figure 3 shows health expenditures as a share of GDP. Here we see a slight advantage for single-payer countries, and that advantage increases a bit over time. It may be that this is due to greater efficiency — for instance, lower administrative costs or less waste. Then again, it could be a result of political choices to cover fewer procedures or medications, which might result in longer wait times or less use of medical care. We lack data that would permit the sort of detailed comparison we need in order to reach a confident conclusion about the sources of this difference in health expenditures.
In 2013 and 2016, the Commonwealth Fund conducted thorough assessments of the healthcare systems of eleven of these countries. They included six countries with a single-payer system (Australia, Canada, New Zealand, Norway, Sweden, and the United Kingdom) and four with an insurance-funds system (France, Germany, the Netherlands, and Switzerland), along with the United States. They scored each nation in five areas — care process (preventive care, safe care, coordinated care, and engagement and patient preferences), access (affordability and timeliness), administrative efficiency, equity, and healthcare outcomes — and they used these scores to determine an overall ranking.
Figure 4 shows the countries’ ranking in each year along with the averages for the two groups. In 2013 the average rank for countries with a single-payer system was exactly the same as the average for countries with an insurance-funds system. In 2016 the average ranking was better for single-payer countries than for insurance-fund countries. But the difference was small — small enough that it easily could disappear if more nations from each group were included. It might also be a product of error; while these assessments are careful and thorough, that doesn’t mean they are perfectly accurate.
Given what we observe in the data, I see little, if any, basis for concluding that one of the two types of healthcare system works better than the other.
For the United States, transitioning to an insurance funds system would seem, at first glance, to be easier, because we could build on our existing employer-based provision of health insurance. But it would be no small matter. Insurers would need to shift from for-profit to nonprofit. Government would need to create a policy whereby the noninsured are assigned to an insurer or covered by a government program. Government would need to ensure that there is a basic plan that everyone can get. Prices paid to providers could be decided by negotiations between insurers, doctors, and hospitals, but government would need to be willing to step in and impose a decision if such negotiations fail to yield an agreement.
A transition to an American single-payer system could be done in one fell swoop, by expanding either Medicare or Medicaid to the entire population. Or it could be done gradually: lower the age at which Americans can get Medicare, raise the income limit for Medicaid eligibility, and add a Medicare-like program (“public option”) that individuals and families can purchase on health insurance exchanges and that firms can purchase for their employees. Or simply allow any employer or individual to buy into Medicaid or Medicare, with subsidies for those who need them. Eventually, much of the population would be covered by these public programs. This would achieve universal coverage, and the government, as the dominant payer, would be in a strong position to control healthcare costs.3
- The following draws heavily from T.R. Reid, The Healing of America: A Global Quest for Better, Cheaper, Fairer Health Care, Penguin, 2009; Elias Mossialos, Ana Djordjevic, Robin Osborn, and Dana Sarnak, eds., International Profiles of Health Care Systems, Commonwealth Fund, 2017. ↩
- South Korea isn’t included in the comparison here because it switched from one type of healthcare system to the other in 2000. ↩
- Jacob S. Hacker, “Stronger Policy, Stronger Politics,” The American Prospect, 2016; Hacker, “The Road to Medicare for Everyone,” The American Prospect, 2018; Dylan Matthews, “Donald Trump Promised ‘Insurance for Everybody’. Here’s How He Can Do It,” Vox, 2016; Sarah Kliff and Ezra Klein, “The Lessons of Obamacare,” Vox, 2017; Paul Starr, “The Next Progressive Health Agenda,” The American Prospect, 2017; Starr, “A New Strategy for Health Care,” The American Prospect, 2018; Michael S. Sparer, “Buying into Medicaid: A Viable Path for Universal Coverage,” The American Prospect, 2018. ↩
In the United States, state and local governments collect a significant share of the taxes. These include consumption taxes (general sales taxes and specialized excise taxes), property taxes (taxes on homes, businesses, and motor vehicles), and income taxes (on individuals and businesses).
The Institute on Taxation and Economic Policy (ITEP) calculates average effective tax rates in each of the US states at various points along the pretax income distribution. As the charts below show, households pay, on average, about 10% of their income in state and local taxes.
State and local taxes tend to be regressive — people with higher incomes pay a smaller share of their pretax income in state and local taxes than do people with lower incomes. (For a good discussion, see Katherine Newman and Rourke O’Brien’s Taxing the Poor.) This is clearly visible in these charts. If the line for a state slopes up to the right, its tax system is progressive, If the line is flat, the tax system is proportional. If the line slopes down to the right, the tax system is regressive.
Sales taxes are almost always regressive, while income taxes tend to be progressive. In most states, the regressive impact of sales taxes outweighs the progressive effect of income taxes. And a handful of states don’t have income taxes.
ITEP calculates a progressivity index, measured as the degree to which state and local taxes make the distribution of income in a state more equal (progressive) or more unequal (regressive). If state and local taxes make a state’s income distribution more equal by more than 2.5%, I’ll call the tax system progressive. If they make the income distribution more unequal by more than 2.5%, I’ll call it regressive. If they change the income distribution in either direction by 2.5% or less, I’ll call the tax system proportional. By this measure, no state has a progressive tax system (California’s comes closest), 19 states have proportional systems (e.g., New York and New Jersey), and 32 have regressive systems (especially states with no income tax, such as Texas, Florida, and Washington).
For nations, as for individuals, it’s good to be rich. Affluent countries are more likely to be democratic, more likely to have government programs that cushion life’s bumps and boost the capabilities and well-being of the less fortunate, and more likely to prioritize personal liberty. Their citizens tend to be more secure, better educated, healthier, freer, and happier.
The world’s twenty or so rich democratic countries aren’t all alike, and they’ve changed a good bit over the past century. Their experiences give us helpful clues about what institutions and policies best promote human flourishing. To this point in history, the most successful societies have been those that feature capitalism, a democratic political system, good elementary and secondary (K–12) schooling, a big welfare state, employment-conducive public services, and moderate regulation of product and labor markets. I call this set of policies and institutions “social democratic capitalism.”
Social democratic capitalism improves living standards for the least well-off, enhances economic security, and very likely boosts equality of opportunity. It does so without sacrificing the many other things we want in a good society, from liberty to economic growth and much more. Its chief practitioners have been the Nordic nations: Denmark, Finland, Norway, and Sweden. Contrary to what some presume, there is no good reason to think social democratic capitalism will work well only in these countries. Its success almost certainly is transferable to other affluent nations. Indeed, all of those nations already are partial adopters of social democratic capitalism.
The United States, the largest of the world’s rich democracies, is one of those partial adopters. If the United States were to expand some of its existing public social programs and add some additional ones, many ordinary Americans would have better lives. Despite formidable political obstacles, there is good reason to think America will move in this direction in coming decades.
Those are my conclusions. This book provides the evidence and the reasoning.
The most prominent forms of employee voice are worker participation, labor unions, works councils, board-level employee representation, and worker control. What do we know about them? My take is here.
What are the prospects for a revitalization of unions in the United States? When asked, many workers say they would like to have a union or union-like organization represent them. We can point to various aspects of US labor policy that, if changed, seemingly would facilitate an increase in union membership — the 1949 Taft-Hartley Act’s permission for states to implement anti-union “right to work” laws, the lack of a Canadian-style card check procedure for forming a union, weak enforcement of labor laws under Republican administrations, and more. And there is no shortage of proposals for how the American labor movement could organize more effectively.
Yet optimism about unions’ future in America must reckon with the story told by the chart below. In a handful of countries, procedures established nearly a century ago require that workers be a member of a labor union in order to have access to unemployment insurance, and unionization rates there have remained fairly high. In virtually every other rich democratic nation, despite policies and governments far less hostile to unions than in the US, union membership has fallen just as sharply as it has here.
What are Americans’ policy preferences? What groups and political parties do they identify with? Who do they vote for and why? Some thoughts and data.
“How to fix capitalism: eight solutions for America’s broken system,” at The Guardian.
Since the 1970s, a variety of developments — technological advance, globalization, heightened product market competition, the shareholder value revolution in corporate governance, and looser labor markets — have increased firms’ incentive to resist wage increases and enhanced their leverage vis-à-vis workers. Things have been particularly bad in the United States, where labor unions are weak and have been getting weaker. Here’s how Elizabeth Warren put it in a recent Wall Street Journal op-ed:
“Corporate profits are booming, but average wages haven’t budged over the past year. The U.S. economy has run this way for decades, partly because of a fundamental change in business practices dating back to the 1980s…. Building on work by conservative economist Milton Friedman, a new theory emerged that corporate directors had only one obligation: to maximize shareholder returns…. Before ‘shareholder value maximization’ ideology took hold, wages and productivity grew at roughly the same rate. But since the early 1980s, real wages have stagnated even as productivity has continued to rise.”
Figure 1 is helpful for assessing wage trends. The data only go back to 1995, but they give us information on wages that includes employer-provided benefits and payroll taxes and they allow us to compare across countries. What we see is that the median American’s compensation has grown much more slowly than the US economy and that compensation growth in the United States has lagged behind that of most other rich democratic nations.
Strengthening unions probably would be the most effective way to ensure regular wage increases for middle- and low-paid workers. But accomplishing that is a very tall order. As figure 2 makes clear, America’s declining unionization rate isn’t a recent phenomenon. Nor is it mainly a function of Reagan administration hostility in the 1980s. Unionization in the US has been falling steadily for more than half a century. Indeed, union decline isn’t a peculiarly American problem. Unionization rates have been falling in almost all affluent nations. Only five still have a rate above 40%, and four of those (Belgium, Denmark, Finland and Sweden) are helped by the fact that access to unemployment insurance hinges on union membership. It’s well and good to wish for bigger, stronger unions, but no one has yet figured out an effective strategy to achieve that.
Are there alternatives to stronger unions? One possibility is “codetermination,” whereby employees elect a portion of their company’s board of directors. Shareholder obsession with short-run profits is one of the key obstacles to wage growth. Giving employees more voice in firms’ decision making might mitigate this.
Opponents of codetermination tend to argue that it will weaken firms’ performance. However, it appears to have had no such adverse effect in the European countries where large firms operate under codetermination rules.
Few companies will opt for codetermination unless they are legally obligated to, so Democratic lawmakers have introduced legislation — the Reward Work Act and the Accountable Capitalism Act — requiring employee election of 33% or 40% of the board of directors in large US corporations. These bills have no hope of becoming law at the moment, but the political environment will shift at some point, perhaps as soon as 2021.
It’s worth noting that even if such a requirement eventually is enacted, codetermination’s reach would be limited. In the Accountable Capitalism Act, the codetermination requirement would apply to companies with annual revenues of $1 billion or more. The roughly 1,300 firms that meet this criterion employ approximately 45 million Americans, or about one-third of the workforce.1
Germany is a helpful test case for gauging codetermination’s impact on wages in a country that doesn’t have especially strong labor unions. While German unions and collective bargaining remain powerful in some manufacturing industries, they have weakened considerably in much of the rest of the economy, as figure 2 shows. But codetermination is solidly entrenched. German workers have been able to elect half of the directors in firms with 2,000 or more employees since the early 1950s and one-third of the directors in firms with 500 to 2,000 employees since the mid-1970s.2
So has Germany had healthy wage growth? No, it hasn’t. As figure 1 above shows, Germany’s record has been similar to that of the United States: growth of median compensation has been much slower than growth of the economy, and it has lagged well behind compensation growth in most other affluent democratic countries.3 Germany’s slow wage growth owes partly to its reunification with the former East Germany in 1990 and its intentional creation of a low-wage (“mini-jobs”) segment of the labor market in the early 2000s. Still, its wage performance gives us little reason for optimism about codetermination’s ability to boost wages in the US.
There are other arguments for codetermination. It might do better at restraining top executives’ pay. It might make firms less likely to downsize during recessions. Perhaps most important, there is a good case on fairness grounds for enhancing employees’ ability to influence decision making in the company they work for. But the evidence supporting codetermination as a remedy for wage stagnation isn’t, in my view, especially strong.
- This is an estimate. The 1,000 companies in the “Fortune 1000” have 34 million employees in total, and the firm at the bottom of the list has revenue of $1.8 billion. ↩
- There is only one other rich democratic nation, the Netherlands, that has strong codetermination and a moderate-to-low unionization rate. But unlike in Germany, in the Netherlands collective bargaining coverage remains very high — 85% as of 2014. ↩
- This is true for household income as well. ↩
Tyler Cowen poses a question:
“There is a Swedish election on Sunday [September 9], and to counter the Sweden Democrats many of the other Swedish parties are moving to the right on immigration, the median voter theorem in slow motion, so to speak. Exactly what kind of institutional failure is this? Political? Intellectual? Democratic? The absence of real democracy? I should stress that I am happy to live near Somali and Yemeni women in hijab (and not) in northern Virginia, and I believe American assimilation continues to work reasonably well, including for Muslims and in fact especially for Muslims overall. But the formula seems to work less well in Sweden, with its tighter social structures and more generous welfare benefits. What exactly went wrong? What is the final equilibrium? Will anyone ever be able to say again ‘if only they had a Nordic-style social welfare state’?”
He’s right that Sweden is struggling with this. If you want to know more, I found James Traub’s “The Death of the Most Generous Nation on Earth” and Sasha Polakow-Suransky’s Go Back to Where You Came From particularly helpful.
Comparison with the United States is problematic. Sweden’s refugee inflow since 2000 has been the largest among the rich democratic countries, and it has dwarfed America’s.
From 2000 to 2016, a total of 1.2 million refugees entered the United States. Had the refugee inflow in the US matched that of Sweden, the number would have been 21.6 million. That’s more than the population of Nevada, New Mexico, Nebraska, West Virginia, Idaho, Hawaii, New Hampshire, Maine, Rhode Island, Montana, Delaware, South Dakota, North Dakota, Alaska, Vermont, and Wyoming combined.
Is Sweden doing badly on immigration? If the benchmark is its own performance in other areas — poverty, employment, health, happiness — or its successful absorption of refugees from World War II through the 1990s, then the answer, at least as of 2018, may be yes. What if the benchmark is US immigration performance? Here are a few relevant indicators:
Employment rate among immigrants with less than secondary education
- Sweden: 53%
- US: 65%
- 2012. Data source: OECD, Indicators of Immigrant Integration 2015, figure 5.2.
Share of immigrants with income below 60% of the country’s median household income
- Sweden: 27%
- US: 37%
- Data source: OECD, Indicators of Immigrant Integration 2015, table 8.1.
Immigrant life satisfaction
- Sweden: 7.2
- US: 6.9
- 2005-2017. Average response to the question “Please imagine a ladder, with steps numbered from 0 at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time?” Data source: Gallup World Poll, via the World Happiness Report 2018, online appendix.
Migrant acceptance index
- Sweden: 7.9
- US: 7.3
- 2016-17. Three questions: “I would like to ask you some questions about foreign immigrants — people who have come to live and work in this country from another country. Please tell me whether you, personally, think each of the following is a good thing or a bad thing? How about: Immigrants living in [country name]? An immigrant becoming your neighbor? An immigrant marrying one of your close relatives?” “Bad thing” response is scored 0, “it depends” or “don’t know” is scored 1, “good thing” is scored 3. The three items are added together, so the index ranges from 0 to 9. Data source: Gallup World Poll, via Neli Esipova, John Fleming and Julie Ray, “New Index Shows Least-, Most-Accepting Countries for Immigrants,” Gallup, 2017.
Vote share for the anti-immigrant party or candidate in the most recent national election
- Sweden: 20% (2018, Sweden Democrats, projected)
- US: 46% (2016, Donald Trump)