Racial Divisions vs. Public Social Spending

by: Paul Rosenberg

Sun Aug 09, 2009 at 12:00

In his diary "The Public Option and The Grand Arc Of American Politics", Chris presented data showing US social spending is roughly comparable to most other advanced industrial nations, but that a good chunk of ours is private, rather than public.  He went on to write [emphasis added is mine]:

It is not a coincidence that United States public sector social spending stalled at around the same time that the modern conservative coalition came together under Richard Nixon in 1968 and 1972 (we are still living under this coalition even now, but forty years of demographic changes have made the Nixon coalition a national minority). While we wanted more social services, we eschewed increasing our public sector social spending over the last 30-35 years because we didn't want that social spending to go to everyone. More specifically, the majority of the country wanted more social services, but the white majority didn't want to pay for social services for racial and ethnic minorities. As such, we continued to increase social spending, but we did so in the private sector, where people had to pay on their own, rather than in the public sector, where people collectively paid for each other.

Although a bit over-simplified--since another factor was our WWII-vintage system of health-care, retirement and other fringe benefits in the industrial sector, the point Chris makes here is an important one, which deserves to be backed up with additional information about the extent to which racial & ethinc divisions undercut social solidarity & thus, support for an inclusive welfare state.

I've actually written about this before, in passing, with less than a month to go during the election last year, in a diary, "It's The Democracy, Stupid!", where the main thrust was the difference in composition and attitudes between voters and non-voters--a difference that's one of the main reason for conservative hatred of ACORN.  However, I did quote from a story I'd written for Random Lengths News in the run-up to the 2006 elections, which included this passage:

A 2001 paper from the Brookings Institute, "Why Doesn't the United States Have a European-Style Welfare State?" found a direct correlation between welfare state spending and the size of minority populations-the more minorities, the lower the levels of spending. This held true both internationally (comparing more then 60 different countries) and nationally (comparing all 50 states).

I'll expand on that on flip, and reproduce the charts showing the national and international relationships I just mentioned.  

European countries are much more generous to the poor relative to the US level of generosity. Economic models suggest that redistribution is a function of the variance and skewness of the pre-tax income distribution, the volatility of income (perhaps because of trade shocks), the social costs of taxation and the expected income mobility of the median voter. None of these factors appear to explain the differences between the US and Europe. Instead, the differences appear to be the result of racial heterogeneity in the US and American political institutions. Racial animosity in the US makes redistribution to the poor, who are disproportionately black, unappealing to many voters. American political institutions limited the growth of a socialist party, and more generally limited the political power of the poor.

The paper itself quickly makes it clear that the authors are not advancing a simplistic single-cause argument.  None-the-less the role of race is a crucial one.

First they discuss the role of political institutions:

Political explanations for the observed level of redistribution focus on institutions that prevent minorities from gaining political power or that strictly protect individuals' private property. Cross-country comparisons indicate the importance of these institutions in limiting redistribution. For instance, at the federal level, the United States do not have proportional representation, which played an important role in facilitating the growth of socialist parties in many European countries. America has strong courts that have routinely rejected popular attempts at redistribution, such as the income tax or labor regulation. The European equivalents of these courts were swept away as democracy replaced monarchy and aristocracy. The federal structure of the United States may have also contributed to constraining the role of the central government in redistribution.

Then history and geography:

These political institutions result from particular features of U.S. history and geography. The formation of the United States as a federation of independent territories led to a structure that often creates obstacles to centralized redistributive policies. The relative political stability of the United States over more than two centuries means that it is still governed by an eighteenth-century constitution designed to protect property. As world war and revolution uprooted the old European monarchies, the twentieth century constitutions that replaced them were more oriented toward majority rule, and less toward protection of private property. Moreover, the spatial organization of the United States-in particular, its low population density-meant that the U.S. government was much less threatened by socialist revolution. In contrast, many of Europe's institutions were either established by revolutionary groups directly or by elites in response to the threat of violence.

Then "reciprocal altruism", which gets us to the doorstep...

Finally, we discuss reciprocal altruism as a possible behavioral explanation for redistribution. Reciprocal altruism implies that voters will dislike giving money to the poor if, as in the United States, the poor are perceived as lazy. In contrast, Europeans overwhelmingly believe that the poor are poor because they have been unfortunate. This difference in views is part of what is sometimes referred to as "American exceptionalism."1

...of race:

Racial discord plays a critical role in determining beliefs about the poor. Since racial minorities are highly overrepresented among the poorest Americans, any income-based redistribution measures will redistribute disproportionately to these minorities. Opponents of redistribution in the United States have regularly used race-based rhetoric to resist left-wing policies. Across countries, racial fragmentation is a powerful predictor of redistribution. Within the United States, race is the single most important predictor of support for welfare. America's troubled race relations are clearly a major reason for the absence of an American welfare state.

Which naturally throws an interesting light on the inchoate rage now being seen on right.  What Obama is proposing may be exceedingly minimal, but the hostility is not, precisely because that hostility has always paid a major role in keeping people like him "in their place".

General Government Expenditure

First the authors look at the broad level of general government spending, and its decomposition into the largest sub-divisions: goods & services, wages & salaries, subsidies, transfers & other social benefits, and gross investments.  The authors note how the US diverges from the European norm:

Table 1 summarizes the magnitude and composition of government spending in Europe and in the United States, using data from the Organization for Economic Cooperation and Development (OECD). In addition to reporting averages for the countries in the European Union, we provide separate data on the United Kingdom (the one EU country with a relatively small government), Germany (the largest EU country), and Sweden (as the prototype of a country with an especially large welfare state), and France.

General government spending in the countries in the European Union averages 48 percent of GDP; it is 38 percent in the United Kingdom and 60 percent in Sweden. General government spending in the United States is smaller than any of these, at 36 percent of GDP. The composition of spending is also instructive. The largest differences between the United States and Europe are in transfers to households (including social security) and subsidies. In fact, the sum of these two categories of spending is almost twice as large, as a share of GDP, in Europe as in the United States (20 percent versus 11 percent). The difference in transfers and subsidies accounts for 8 percentage points of the 12-percentage-point difference in total spending. Consumption of goods and services and government wages are also higher in Europe, but the difference relative to the United States is much smaller than that for transfers. Public investment is actually higher in the United States than in the average EU country.

Note that Great Britain is by far the closest to the United States.  This is consistent with Gosta Esping-Andersen's typology of welfare states in The Three Worlds of Welfare Capitalism.  The US and UK are both liberal welfare states, ones designed primarily to facilitate the functioning of the market economy.  They are the smallest welfare states across the board, but the US is particularly small.  The differences become particularly apparent in the next section.

Government Social Spending

The OECD offers a different breakdown of government social spending; these data are presented in table 2 for 1995, the latest year for which they are available. In all categories except health, the United States spends a smaller proportion of GDP than the European average. The differences are particularly large in family allowances and unemployment compensation and other labor market programs. By this accounting, social spending in the United States was about 16 percent of GDP in 1995, whereas the European average was about 25 percent

Note that UK social spending is almost 50% higher than the US (22.5% compared to 15.8%), whereas they were only about 10% higher in terms of general government spending (38.3% compared to 35.5%).

Comparing Tax Rate Progressivity

To calculate a precise measure of the progressivity of the tax system across all these countries would require an entire paper (at least) devoted to unraveling the intricacies of the different tax codes. Although such a task is beyond the scope of this paper, a simple attempt is made in figure 1. We assembled data on the different income tax brackets of the European countries and took a cross-country average. We then subtracted this average from the corresponding federal income tax brackets in the United States; figure 1 plots that difference. Thus, for a given level of income, a positive value in the figure implies that the marginal tax rate in the United States exceeds the European average, and a negative value indicates the opposite. The figure shows that marginal tax rates in the United States are higher than in Europe for low levels of income (up to about 50 percent of the average worker's wage) and lower for higher levels of income. Also, the difference between the United States and Europe becomes larger in absolute value as income rises. In short, the income tax system is much more progressive  in Europe than in the United States.4

Of course, the federal income tax is one of our most progressive taxes in the US.  State and local taxes tend to be much more regressive.

History of Spending

Next, the authors show that current differences in welfare-state size have deep historical roots:

Historical Trends in the Size of Government

Understanding the reasons for these striking differences between the United States and Europe requires that we know something of the history of redistribution in both regions. In particular, we want to know when the size of government, and especially the size of the welfare state in Europe, diverged from that in the United States. Did the two share a similar size of government for a while and then diverge, or has the difference always been present?

Table 4 provide a clear answer: from the very beginning of the expansion of the public sector in the late nineteenth century, the United States and Europe show very distinct patterns. Although the ratio of welfare spending was already high at the end of the nineteenth century, the absolute difference grew as the welfare state expanded both in Europe and in the United States, especially in the 1960s and 1970s. This observation that the difference is of long standing is important, because it allows us to exclude explanations of the difference that are specific to a certain period or event.

This concludes the presentation of big-picture data from the paper.  Skipping over a good deal of more detailed discussion, we come to the main point of the paper, the elucidation of the relationship between social spending & racial diversity.

Social Spending & Racial Diversity

First, the authors present international data:

We can see that the US (at 0.5 in the racial fractionalization scale) is far away from the cluster of European nations at the left-hand side with much larger welfare states and racial fractionalization scores of under 0.1.

Then there is the data from US states,showing the same broad relationship:

The evidence here is unmistakable.  It's not just a matter of the extremes, where the differences are most visible.  It is a relationship that holds across countries and across states--the more racially diverse a population is within a given jurisdiction, the less generous the transfer payments are.

This is not to say that this can never be challenged or changed.  But it certainly won't change unless it is challenged.