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Welfare: The Cheapest Country

1.

In the early pages of any elementary economics textbook, the beginning student sees a rudimentary plumbing-like diagram that illustrates the “circular flow” in every capitalist market economy. There is a business sector and a household sector, connected by two pipes. Business firms employ workers; and these businesses arrange to use the accumulated wealth of households to finance plant, equipment, inventories, and other productive assets. Through one of the pipes passes a flow of purchasing power from firms to households, in the form of wages, rent, interest, and dividends, payments for factors of production. Households buy the goods and services produced by the business sector; so a return flow of purchasing power goes from households to firms through the other pipe. Later on, the student learns how financial intermediaries, governments, and foreigners can be included in this picture.

The flow from business sector to households represents income, of course. In a schematic picture of the whole economy, it is natural to classify incomes by their functional types, as I just did. (There are borderline cases, often created deliberately to avoid taxes, but they are analytically insignificant.) Within the household sector, however, individual families can have income from several sources, and in widely varying amounts. For some purposes, like the study of poverty, one is more interested in annual family income arrayed from the smallest to the largest amounts.

You can make a “frequency distribution” of family incomes by size, just as you can make one of heights, or weights, or SAT scores. This is a curve or bar graph showing the proportion of families whose yearly income falls between $1,000 and $5,000, between $5,000 and $7,500, and so on. There is a characteristic difference, however. Heights and weights and test scores tend to fall along a symmetrical curve, the “bell curve” of song and story. The proportion of families whose income falls into successive size classes is almost always described by a curve whose bulk and peak lie over to the left (i.e., most incomes, including the commonest, are fairly small), with a long tail stretching far to the right, describing a relatively small number of very high incomes. (See Table A for an example from the US, adapted from the excellent and authoritative book by Frank Levy, The New Dollars and Dreams.1 )

TableA

Just about every capitalist market economy we know generates some very low, often inhumanely low, individual and family incomes. They are at the extreme left of the frequency distribution just described. We say that they fall below the “poverty line.” It is not a logical, or even an economic, necessity that the market process should generate a class of people with very low incomes, but it is a fact.

Obviously, in any year in any society, except in the improbable case of universal equality, someone must have the lowest income, and someone else the next lowest. That says nothing about poverty. The lowest observed income could be fairly high. In the US, standard practice is to calculate an absolute poverty line, an income below which one is “poor” and above which one is not. The calculation is not a miracle of precision; it is built up by pricing a minimal diet and applying rules of thumb to allow for other necessary expenditures. The current poverty line stands at a bit over $16,000 a year for a family of four.

This absolute standard has its problems. In 1952, median family income (in today’s dollars) was about $20,000. If one stuck to the absolute standard, one would have to conclude that almost half of all Americans lived in poverty, no matter that many of them felt themselves to be quite well off. And in another fifty years, when middle-class family incomes might be five or six times $16,000, one would have to say that the lowest-income segment of society, with an income of $20,000 in today’s dollars, say, is not to be thought of as poor, no matter that it is excluded from nearly everything that the society values as part of a decent life.

Most of the rich countries of the world escape this paradox by defining poverty in a relative sense. The median family income—with half of all families having lower income and half higher—surely has a good claim to represent the “typical” family income. Relative poverty is then usually defined by an income less than half the median. And “deep” poverty is sometimes defined by an income less than 40 percent of the median. That is what the book under review does; and it is what has to be done for international comparisons, because there is no good way to define equivalent absolute poverty lines in, say, Denmark and Bulgaria. Clearly the concept of relative poverty mixes together the notions of absolute poverty and gross inequality, but maybe that is appropriate. Most of us would want to describe as “poor” a child whose clothing and diet are regarded as shameful or laughable by ordinary children in the class, even if she gets just enough calories and clothing to survive. Median family income in the US is currently about $45,000. By the relative standard, families would qualify as very poor if their incomes were lower than $18,000, so our poverty line actually represents a lower standard of living than what a European would call deep poverty in the relative sense.

We collect income figures on an annual basis, for administrative reasons, but a year may be too short a period for social and economic analysis of poverty. Persistent poverty is particularly difficult to characterize; very low income has a different meaning if it belongs to a welfare mother of three, an impecunious surgical resident, or to Mike Doonesbury before his IPO. The book by Goodin et al. is able to work around that deficiency, as will be seen.

2.

The persistence of incomes so low as to be incompatible—in the eyes of ordinary people—with full citizenship poses two different problems. Why does it happen? And what, if anything, should public policy do about it? The questions are not completely separable: your view about the appropriate policy will very likely depend on your beliefs about why some people are poor. The Real Worlds of Welfare Capitalism is about the policy question. The authors are, in order, professors of philosophy and political science at Australian National University and the University of Melbourne, professor of labor economics at Tilburg University in the Netherlands, and project manager at the Dutch Central Bureau of Statistics (a famous center of serious economic research, by the way). All have written before about one aspect or another of the welfare state, and theirs is a distinctive and important book.

It is special in two ways. The first is conceptual. The goal is to compare three quite different philosophical and institutional approaches to welfare capitalism: the “liberal” (in the European sense, meaning strongly individualist and free-market oriented); the “social democratic”; and the “corporatist.” These are exemplified by the United States, the Netherlands, and (West) Germany respectively. Admittedly the Netherlands is not the best example of a social-democratic regime; there are “corporatist” elements mixed in. Sweden, say, would have been a better choice, but appropriate data were not available to the authors.

The notion of “corporatism” is not very familiar in the English-speaking, Protestant world. The authors say:

Corporatists cherish, above all else, attachment to one’s community…. Communities…are composed of groups nested within groups…. The fundamental value for the corporatist is for an individual to be integrated into a group, which alongside other groups is integrated in turn into a larger community.

The primary social group is, of course, the family, often patriarchal; but churches and occupational groups, including unions, are also part of the communitarian picture, and are expected to be the main line of protection against poverty. (The notion of “faith-based” provision of social services has surfaced recently on the Republican side of political debate. This has a “corporatist” ring, although the motivation rests less on communitarian principles and more on suspicion of government. Nor would Republicans be happy with the inclusion of labor unions and professional groups among the “social partners,” to use the standard Ger-man phrase.) Corporatism is generally “conservative,” but with one notable difference. Competition between social groups—including workers and employers—is not the preferred mode of interaction. Cooperation is the ideal, under a rough rule of unanimity, so that no group is left out or defeated. The classic phrase in Germany used to be the “social market economy.”

The second source of distinctiveness in this book is that it rests its conclusions on three ten-year panel studies, one for each country. A panel is a fixed sample of individuals that is followed and measured over a period of time. It is not a series of snapshot samples that pick up different people at different moments, but a sustained series of observations on an unchanging sample group. The great advantage of the panel study is that it avoids the trap of designating as poor just those people who happen to be poor in the year they are observed. The data for the US cover the years between 1983 and 1992; those for the other countries refer to the years between 1985 and 1994. It is a pity that more recent data could not be included. Maybe there will be a later supplement. (Eventually the sample dwindles by attrition.)

The authors mean to compare the three welfare systems or “regimes” according to their success in promoting efficiency (meaning two things: getting money to those who need it and not to others, and doing so in a way that does not lower the economy’s productivity); reducing poverty; and promoting equality, integration, stability, and autonomy. Among these criteria, “integration” and “autonomy” are unfamiliar enough to warrant some explanation. Integration is the opposite of isolation or “social exclusion,” to use a common European locution. A person is well integrated if he or she has stable connections with appropriate social groups: family, co-workers, even society at large. Autonomy has something like its normal meaning: the wherewithal to make one’s own decisions about one’s life, subject to the normal limitations felt by everyone.

They comment briefly as well on the extent to which the welfare systems of the US, the Netherlands, and Germany actually embody the stated principles of the liberal, social-democratic, and corporatist approaches to policy. They are not shy about grading each of the systems on its success in achieving each of the significant goals.

Just to sketch a broad picture and fix magnitudes, I include Table B,

TableB

covering a much wider group of rich countries. It is taken not from Real Worlds but from a different source.2 The right-hand column shows for each country in 1991 the proportion of families who would have been in what I earlier called deep poverty, if they had paid no taxes and received no transfers. Crudely speaking, we can say that this is what “the market” produced. The left-hand column gives the deep-poverty rate after taxes and transfers; it shows what the combined tax-and-transfer system does for those at the bottom of the income distribution scale. (Note that these are one-year snapshots, not panel data.)

  1. 1

    Russell Sage Foundation, 1998.

  2. 2

    L. Kenworthy, “Do Social-Welfare Policies Reduce Poverty? A Cross-National Assessment,” Working Paper No. 188, Luxembourg Income Study, 1998.

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