2014 Government Regulations & Business Summit
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For most of the past century, the United States and continental Europe have followed different paths. Social Democrats often ran European governments, which typically taxed and spent a greater share of their national incomes on social programs, such as public health care.
Our last Democratic president, Bill Clinton, accepted this fact, and won re-election as the triangulator who declared that “the era of big government is over.” But President Barack Obama was re-elected on an aggressively progressive program. Is the U.S. finally converging toward the European model?
In 2004, my colleague Alberto Alesina and I wrote a book titled “Fighting Poverty in the U.S. and Europe: A World of Difference,” which tried to document and explain America’s exceptional politics.
We noted that governments in the U.S. in 1998 spent 14.6 percent of gross domestic product on social-welfare programs, such as unemployment insurance and Social Security. The European average was 25.5 percent of GDP. U.S. tax rates compared with Europe’s were higher for poorer workers and lower for richer workers.
Political-economy theories suggested that a nation will have a smaller welfare state if it has less innate inequality, less economic volatility or more social mobility. Yet pretax, pre-social-spending inequality is higher in the U.S. than in Europe, and the American economy is more volatile. Studies looking at Italy, France and Germany often find that more Europeans than Americans escape from the bottom rungs of income distribution.
If economic fundamentals don’t explain the differences between the U.S. and Europe, then what does? Two forces are paramount – political institutions and racial heterogeneity. Evidence supports the view that more racially fragmented societies, such as the U.S., give less to their poorer citizens, especially when racial minorities are disproportionately poor.
Around the world, more racially fragmented countries have smaller welfare states. In the U.S., before the welfare reform of 1996 created more national uniformity, there was a powerful negative correlation across the states between welfare generosity and the black population, even controlling for state income levels.