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Maybe the U.S. Needs More Entitlement Spending

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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Three years ago, demographer and political scientist Nicholas Eberstadt of the conservative American Enterprise Institute wrote an influential little book on what he called the “entitlement epidemic.”

The book, “A Nation of Takers,” was free of partisan rancor -- Eberstadt pointed out that entitlement spending had grown much faster under Republican presidents than Democrats since 1960 -- and full of indisputable facts. As you can probably tell from the title, though, Eberstadt was taking a stand. Americans, he argued, even once famously self-reliant American men, had become alarmingly comfortable with accepting government aid.

Similar thinking informed former presidential candidate Mitt Romney’s infamous comment about the 47 percent of Americans “who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it.” That turned out to be a public-relations disaster for Romney, of course. But the idea that our nation is plagued by a growing “moocher class” has, as my Bloomberg View colleague Paula Dwyer recently pointed out, regained currency on the Republican campaign trail this year.

I’m not going to go into the loopy things candidates sometimes say, but to return to Eberstadt’s more serious argument there are a few caveats worth mentioning. Many of us wouldn't agree that making use of a government-managed retirement-savings program -- Social Security, the biggest of the entitlement programs that Eberstadt discusses -- really amounts to a debilitating dependence on government.  Medicare is similar to Social Security if not quite so clear-cut, given that dedicated payroll taxes and premiums provide only about half of its funding, with almost all the rest coming out of general government revenue. Between them, Medicare and the means-tested Medicaid account for the vast majority of entitlement spending gains in recent years, which is alarming but may be more indicative of rising health-care costs than rising dependency.

Still, as Eberstadt notes in his book, the percentage of the population living in households that receive government benefits of some kind has risen from less than 30 percent in the early 1980s to about 50 percent now. That’s partly just because the population aged, but the percent of the population in households receiving means-tested benefits rose too during that period, from less than 17 percent to more than 30 percent. Growth in the latter category had halted for most of the 1990s because of welfare reform and the strong economy, but resumed in the early 2000s. Meanwhile, the percentage of working-age American men in the labor force has been falling for decades, and women’s labor force participation rate peaked in the 2000s.

In short, something disturbing is going on -- and of course this week’s news that less-educated middle-aged white Americans (a demographic that’s also been leaving the labor force in large numbers) are dying off at an increasing rate makes it even more disturbing. But are people dropping out of the workforce and taking government aid because the taking is so good, or because their situation has gotten so desperate? Eberstadt figured it was mainly the former: “supply created its own demand,” he wrote. And yes, it’s probably true that social norms about accepting government benefits have changed -- especially in rural America, where the rise in government dependency has been most pronounced in recent years. But if that’s really the main reason why dependence on government programs has increased, you would expect countries with more generous governments to have an even worse problem with people dropping out of the labor force. Well …

Yes, that’s right. These other big Western economies, all of which devote a higher share of gross domestic product to government spending than the U.S., have seen male labor force participation either change little since 2000 or, in Germany’s case, rise a lot. The U.S., meanwhile, has gone from among the leaders in male labor force participation to a laggard. It’s still beating France, with its notoriously rigid labor market, but a few more years at these rates and even those lines will cross.

The levels and trajectories are different for women, but the bottom line for the U.S. is even more disheartening:

In the Financial Times this week, Martin Wolf offered a few possible explanations for the outlier status of the U.S. in labor force participation: For women, lack of affordable child care. For men, mass incarceration. For both, a shift in employment from jobs for prime-age adults to flex-work for teens and senior citizens, plus “low minimum wages and high transport costs for workers living in sprawling US conurbations.” I would add impossibly large distances between the rural areas and small towns where economic conditions are worst and the “conurbations” where the jobs are. Even in gigantic Canada, the population is much more concentrated around a few big cities than in the U.S.

What about the role of entitlement spending? Well, I have a subversive thought. It’s a conjecture, but it’s based at least on as much evidence as Eberstadt’s case for entitlement supply creating entitlement demand. Here goes: Entitlement spending and entitlement dependence have been rising and labor force participation has been falling in the U.S. because we don’t spend enough on entitlements and other government programs.

I’m thinking here mainly of the explanations offered up by economist Peter Lindert in his various examinations of why the welfare state “looks like a free lunch.” Once you toss dictatorships out of the equation, countries with high government-spending-to-GDP ratios grow just as fast per capita as countries with low spending-to-GDP ratios, even though mainstream economic theory says that they shouldn’t. One reason is that they have better-designed tax systems, with relatively low taxes on capital and high taxes on consumption. That is, their tax systems are less progressive than that of the U.S. Their entitlement programs are less progressive, too. These countries do less means testing, and more broad-based spending (on public transportation, on education, on health, on social programs such as child-care). Without means testing there is little reward for turning down work. Overall taxes and spending are higher, but there’s less economic distortion.

Even the targeted entitlement programs in these countries tend to be more carefully designed than in the U.S. One simple example: Social Security disability benefits in the U.S., which Eberstadt and many others have criticized as a creeping form of welfare, are an either/or proposition. With very limited exceptions, you’re either too disabled to work, or you’re not. Many other developed nations offer partial disability benefits for those whose capacity to work is reduced but not gone. As a result, those with disabilities are less likely to drop out of the labor market.

There are surely lots of complications and other factors at work. It could be that the U.S. political system is simply not capable of crafting a tax code and social-spending system as rational as, say, Sweden’s. And Eberstadt's argument was as much about national character as economics -- a bigger welfare state may just not be appropriate for the U.S. Still, it’s an interesting thought to get one’s head around. The cure for America’s entitlement epidemic could be more entitlements, better designed.

  1. Eberstadt’s book came out several months after Romney said the fateful words, so it can’t have directly inspired them.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net