1. Welfare, Taxes, and…Growth?
The Scandinavian Puzzle

2. I. Models of the Welfare State
A. Simple Typology of Welfare States
Type
Primary Mechanism of Welfare
Incentives to Get Off Welfare
Examples
Liberal
Means-Tested Benefits
Low Level of Service
US, Canada, UK (Before WW II)
Corporatist
Social Insurance
Reward for Work Years
Germany
Social Democratic
Universal Benefits
Few
Sweden, Denmark

3. Poverty Rates

4. B. The Scandinavian Puzzle
Why work when benefits are universal?
How can an economy grow when more than half of wealth generated is paid to the government?
Can social democracy survive globalization?

5. II. Scandinavia: The Benefits
Sources = OECD in Figures 2003, OECD Net Replacement Rates 1999, The Clearinghouse on International Developments in Child, Youth and Family Policies at COLUMBIA UNIVERSITY,

6. Scandinavian Welfare at Work
Birth: Parental leave, near-free care
Free doctors’ visits, day care, schooling
Free college or university
Young worker hiring programs
High starting wages (but heavy taxes)
Meaningful role at work
Unemployed? Think of it as an opportunity!
Parents? Here’s a monthly check.
Sick or disabled? We’ve got you covered
Pensions, social programs, and a free funeral

7. A. Welfare Benefits
Goal = reduce risk through mutual obligation

8. 1. Health Care Benefit 85 86 75 82 83 SWE NOR FIN DEN ICE Health Care
(% paid by govt) 85 86 75 82 83
Sources = OECD in Figures 2003, OECD Net Replacement Rates 1999, The Clearinghouse on International Developments in Child, Youth and Family Policies at COLUMBIA UNIVERSITY,

9. 1. Health Care Benefit 85 86 75 82 83 44 SWE NOR FIN DEN ICE UK US
(% paid by govt) 85 86 75 82 83 44
Sources = OECD in Figures 2003, OECD Net Replacement Rates 1999, The Clearinghouse on International Developments in Child, Youth and Family Policies at COLUMBIA UNIVERSITY,

10. 2. Unemployment Benefits
SWE
NOR
FIN
DEN
ICE UK US
Health Care
(% paid by govt) 85 86 75 82 83 44
Unemployment (% income replaced) * 87 78 68 49 58
Sources = OECD in Figures 2003, OECD Net Replacement Rates 1999, The Clearinghouse on International Developments in Child, Youth and Family Policies at COLUMBIA UNIVERSITY,
* Single parent with two children, first month of benefits (1999 data)

11. 3. Parental Leave and Child Care
Benefit
SWE
NOR
FIN
DEN
ICE UK US
Health Care
(% paid by govt) 85 86 75 82 83 44
Unemployment (% income replaced) * 87 78 68 49 58
Maternity Leave (Weeks/Payment)
80% 52 18
65%
90% 26
6/18 12 0%
Child Care (% costs covered)
n/a 90 70
(10)
(24)
Sources = OECD in Figures 2003, OECD Net Replacement Rates 1999, The Clearinghouse on International Developments in Child, Youth and Family Policies at COLUMBIA UNIVERSITY,
* Single parent with two children, first month of benefits (1999 data)

12. High Usage of Day Care
Source = Nordic Council

13. 4. Income subsidies for families
Benefit
SWE
NOR
FIN
DEN
ICE UK US
Health Care
(% paid by govt) 85 86 75 82 83 44
Unemployment (% income replaced) * 87 78 68 49 58
Maternity Leave (Weeks/Payment)
80% 52 18
65%
90% 26
6/18 12 0%
Child Care (% costs covered)
n/a 90 70
(10)
(24)
Family Allowance? (monthly check)
univ
inc
tax
Sources = OECD in Figures 2003, OECD Net Replacement Rates 1999, The Clearinghouse on International Developments in Child, Youth and Family Policies at COLUMBIA UNIVERSITY,
* Single parent with two children, first month of benefits (1999 data)

14. 5. Retirement: Poverty Rates

15. 6. Summary: Scandinavian Welfare Programs
Many other programs: retirement and pension systems, home or residential care for elderly, disability coverage, sick pay, survivor benefits, job training, housing subsidies, refugee care, etc.
Major differences between Scandinavia and other European countries:
Comprehensiveness – Tend to cover large % or all of population (everyone is “on welfare”)
Generosity – Actual benefits are quite sizeable
Effect = reduce risk, spread out income over life

16. B. Employment Policy Goal = Full Employment. Why is this important?
Reduces welfare costs
Better for workers (security)
Helps preserve union solidarity (83% in Sweden!)
Mechanisms
Corporatist bargaining: National unions negotiate with national employer organizations and the government
Job training programs: Also make-work jobs
“Stockpile” policy
Devaluation (until recently): Make exports cheaper

17. C. Income Redistribution?
Why is an “incomes policy” needed?
Inflation: Full employment and strong unions  high prices, high wages. Devaluation makes worse.
Promote solidarity: Equality within groups means all rise or fall together
Redistribution has fallen from favor: Social Democrats traded progressivity for an end to major loopholes ( serious economic shock)

18. III. Scandinavia: The Costs
Money: What costs the most? (as % of GDP)
Retirement and Disability (10%-16%)
Health Care and Sick Pay (6% to 9%)
Family benefits and services (2% to 4%)
Unemployment benefits and training (1% to 3%)
Who pays? Taxes in Scandinavia
What is taxed? EVERYTHING
Example: “Churning.” Same households GET money (benefits) and PAY money (taxes). Rather inefficient – and 2-3 times higher in Scandinavia than US
Source = Nordic Council

19. 2. Most taxes are high
Wealth Tax (No US equivalent) 

24. 3. Surprise: “Socialism” and Corporate Taxes
Old system: High corporate tax rates but reinvestment exemption
New system: Low corporate tax rates

25. Source = Lindert 2002 draft

27. IV. Can social-democratic welfare work?
Conventional wisdom: High taxes and social welfare spending reduce growth
Taxes reduce incentives to work harder for more money
Social welfare spending reduces incentives to work
Rent-seeking: If most money passes through the government, then why bother competing in the marketplace? Spend resources on politics, not productivity!
Puzzle: Social welfare spending and taxes aren’t correlated with growth!

28. Performance: Growth
Source = OECD

29. IV. Can social-democratic welfare work?
Conventional wisdom: High taxes and social welfare spending reduce growth
Taxes reduce incentives to work harder for more money
Social welfare spending reduces incentives to work
Rent-seeking: If most money passes through the government, then why bother competing in the marketplace? Spend resources on politics, not productivity!
Puzzle: Social welfare spending and taxes aren’t correlated with growth!

30. C. How might welfare spending promote growth?
Gender and productivity
Without aid to families, women leave workforce to take care of children (large opportunity costs to home care)
Without “gaps” in employment, employers invest women’s skills  more productive workers
Health care
Universal insurance  preventive care  lower total expenditures (US spends twice as much as Sweden, has worse health!)
Increases labor mobility, since workers don’t fear losing insurance when changing jobs

31. D. The Unemployment Challenge
Source = Nordic Council

33. E. Conclusions
Limited ability to maneuver: Scandinavian vulnerability  Social risk-sharing
Social democracy ≠ Socialism: Scandinavian model depends on capitalism!
Naïve assumptions about “government intervention” fail to account for society-economy interactions