US could do with more and better entitlement spending

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 rancour - Professor 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, Prof Eberstadt was taking a stand. Americans, he argued, even once famously self-reliant American men, had become alarmingly comfortable with accepting government aid.

There are a few caveats worth mentioning. Many of us wouldn't agree that making use of a government-managed retirement savings programme - Social Security, the biggest of the entitlement programmes that Prof 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 healthcare costs than rising dependency.

Still, as Prof 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 per cent in the early 1980s to about 50 per cent now.

Medicare and the means-tested Medicaid in the US account for the vast majority of entitlement spending gains in recent years, which is alarming but may be more indicative of rising healthcare costs than rising dependency.
Medicare and the means-tested Medicaid in the US account for the vast majority of entitlement spending gains in recent years, which is alarming but may be more indicative of rising healthcare costs than rising dependency. PHOTO: REUTERS

That's partly just because the population aged, but the percentage of the population in households receiving means-tested benefits rose too during that period, from less than 17 per cent to more than 30 per cent.

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 labour force has been falling for decades, and women's labour force participation rate peaked in the 2000s.

In short, something disturbing is going on. But are people dropping out of the workforce and taking government aid because the taking is so good, or because their situation has got so desperate?

Prof 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 that dependence on government programmes has increased, you would expect countries with more generous governments to have an even worse problem with people dropping out of the labour 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 United States, have seen male labour force participation either change little since 2000 or, in Germany's case, rise a lot. The US, meanwhile, has gone from among the leaders in male labour force participation to a laggard. It's still beating France, with its notoriously rigid labour 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 US is even more disheartening. In the Financial Times this week, Martin Wolf offered a few possible explanations for the outlier status of the US in labour force participation: For women, lack of affordable childcare. For men, mass incarceration. For both, a shift in employment from jobs for prime-age adults to flexi-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 US.

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 Prof Eberstadt's case for entitlement supply creating entitlement demand. Here goes: Entitlement spending and entitlement dependence have been rising and labour force participation has been falling in the US because we don't spend enough on entitlements and other government programmes.

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 US. Their entitlement programmes are less progressive, too. These countries do less

means testing and more broad-based spending (on public transportation, on education, on health, on social programmes such as childcare). 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 programmes in these countries tend to be more carefully designed than in the US. One simple example: Social Security disability benefits in the US, which Prof Eberhardt and many others have criticised 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 labour market.

The cure for America's entitlement epidemic could be more entitlements, but better designed.

BLOOMBERG VIEW

A version of this article appeared in the print edition of The Straits Times on November 07, 2015, with the headline 'US could do with more and better entitlement spending'. Print Edition | Subscribe