Welfare in the US and Europe

Brian Frederking

July 5, 2006

            Western European countries redistribute more wealth from the rich to the poor than the United States. The numbers are overwhelming. One way to measure the influence of redistribution policies is the extent to which those policies reduce the percentage of the population below the poverty line.

            Welfare policies in Sweden, Norway, Denmark, and the Netherlands reduce the poverty rate over 30%. In Spain, Finland, and even Great Britain, they reduce the poverty rate over 20%. In Denmark, for example, prior to redistribution policies about 40% of the population is below the poverty line. After Danish redistribution policies, only about 5% of the country is below the poverty line.

In the US, this measure is around 10%. Prior to government redistribution, about 30% of Americans are below the poverty line; after US redistribution policies, about 20% remain in poverty. Compared to the Europeans, we do not use government policy to get people out of poverty. We have a relatively small welfare state.

Such policies of course require higher taxes. Here in the US we tax about a third of our economy; the Scandinavian countries tax around 60% of their economy. In France it is over 50%, in Germany and Britain it is around 45%.

An obvious question is why the Europeans have pursued such different welfare policies than the US. A recent book by Alberto Alesina and Edward Glaeser called Fighting Poverty in the US and Europe provides intriguing explanations.

One explanation is citizen beliefs about poverty and mobility. Over 60% of EU citizens believe that the poor are trapped in poverty; only 29% of Americans share this view. Conversely, over 60% of Americans believe that the poor are lazy and make bad decisions; only 26% of EU citizens believe this. Interestingly, different economic realities are not driving these divergent cultural beliefs: upward economic mobility is about the same in both the US and Europe.

Alesina and Glaeser also point to two other factors to explain the smaller American welfare state. The first is the nature of political institutions in both the US and Europe. Federalism inherently thwarts redistribution efforts. Having 50 different state policies restricts the scope of redistribution efforts; it is easier to make one decision in the national legislature, as is possible in the unitary systems of most European states.

The separation of powers and checks and balances in the US system are intended to protect property rights and thus hinder redistribution efforts. The Senate and a strong judiciary are important institutions not based on majority rule. European states have parliamentary systems where majorities can rule without separation of powers and checks and balances. There is also a strong correlation between proportional representation electoral systems, which many European states have, and higher levels of welfare spending.

            The second explanation for Alesina and Glaeser is racial and ethnic heterogeneity. Countries that have significant number of minorities among their poor are less likely to redistribute wealth. While this may be controversial, it is also overwhelmingly supported by the evidence. One recent study shows a strong correlation between racial homogeneity and welfare spending across 53 countries around the world. Another study shows that European states with significant numbers of Muslim and African immigrants are reducing their welfare benefits at the fastest rate.

This trend is also true within the US: those states with the highest percentage of blacks are the states with the least generous welfare systems. And we have mountains of survey data showing that racial attitudes are important indicators of support for redistributive policy in the US.

These findings are consistent with all other areas of political science. Institutions matter. Rules matter. How we make decisions is important because the process of decision making inevitably influences the substance of those decisions. US political institutions are intended to thwart majority rule and make limited government the likely outcome. European political institutions are intended to facilitate majority rule.

 Identity and group conflict also matters. Think of how difficult it would be to get white suburbia to agree to send some of their local property taxes to inner city schools so that we would spend the same amount of money on every child. In this example, both racial difference and political institutions (local control of education) thwart redistribution.

But such is the stuff of politics. It is both substance and process. How should we treat each other? How should we make decisions? We need to understand how each influences the other.