StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Have We Reached the Limit to the Welfare State?

14 Jul 2010
Posted by Bruce Bartlett

Today, Harris released an extraordinarily interesting poll on attitudes toward taxes, spending and deficits in several European countries and the US. In this post I am going to just discuss the US data, but the European data are in many ways more interesting; more than any other research I have ever seen they show the limit of the welfare state has been reached. When asked whether large budget deficits require a re-examination of the welfare state in Europe, the following percentages of people agreed: France and Italy, 68 percent; Spain, 70 percent; Germany, 73 percent; and in both the US and UK, 77 percent.

The principal lesson of the US responses appears to be that support for spending cuts and government downsizing is broad and deep. But at the same time, there is strong support for soaking the rich through the tax system. Also, Americans continue to have unrealistic expectations about how easy it will be to balance the budget without cuts in programs that affect them. This suggests that if forced to choose between spending cuts that affect them and higher taxes that don’t affect them, the latter could quickly become the dominant position.
Question 1: "Most Western European governments are taking major steps to reduce their budget deficits and public debts. Generally, there are two ways (and multiple variations of these ways) for governments to reduce deficits: cutting public spending and raising taxes. Which one of the following options would you prefer to see [insert country] take?"
US response: 37 percent prefer spending cuts to tax increases, 39 percent favor a mixture of the two but with spending cuts bearing most of the burden, 19 percent favor a mixture but with tax increases bearing most of the burden, and 5 percent would prefer tax increases to spending cuts.
Question 2: "Some argue that governments should make the rich contribute more than the less well-off, e.g. by paying more taxes. How much do you agree or disagree with this idea?"
US response: 71 percent agree (40 percent strongly, 31 percent somewhat) and 25 percent disagree (14 percent strongly, 11 percent somewhat).
Question 3: "Some argue that public spending cuts will harm the economic recovery in Europe whilst others claim that these cuts are necessary to tackle the budget deficits. If you had to say, which of the following statements would you agree most with?"
US response: 73 percent agree that spending cuts are necessary for long-term recovery, 27 percent think that spending cuts will harm the recovery.
Question 4: "If your country were to decide to cut public spending, how much, if at all, do you think the cuts will affect you and your family?"
US response: 9 percent believe they will not be affected at all, 35 percent think they will only be affected a little, 40 percent expect a moderate impact, and 16 percent believe they will be affected a lot.
Question 5: "Which of the following policy areas do you think should bear the biggest part of the spending cuts burden?"
US response: foreign aid, 72 percent; national defense, 31 percent; unemployment benefits, 22 percent; health care, 18 percent; education, 11 percent; police protection, 7 percent; and 26 percent chose other.
Question 6: "Many European countries have let their budget deficits rise in order to fight the financial crisis. Thinking of [insert country] how much do you agree or disagree that this was the right thing to do?"
US response: 59 percent disagreed (36 percent somewhat, 23 percent strongly) and 41 percent agreed (35 percent somewhat, 6 percent strongly).
Question 7: "Some argue that the large budget deficits and the spending cuts that have happened or been proposed call for a re-examination of Europe's welfare states. How much do you agree or disagree with this view?"
US response: 77 percent agree (57 percent somewhat, 21 percent strongly) and 23 percent disagree (17 percent somewhat, 5 percent strongly).
Note: The Financial Times analyzed the European results in a July 11 report.

No Surprise

People prefer spending cuts to tax increases? Obvious: I don't know if I am a beneficiary (or will ever be a beneficiary) of the program you are cutting, but "tax increases" sounds like it will affect me. So I'm against the latter, and for the former. Soak the rich popular? Sure. Few people actually think of themselves as rich. See former explanation for popularity. The foreign aid cut popularity fits in that mold as well.

Everyone wants to reduce foreign aid

And no one seems to realize it accounts for less than 1% of the federal budget

Are These Polls Worth Anything?

I don't want to sound like an elitist, as we all know there is nothing worse than an elitist, but exactly how does anyone govern a populace that is misinformed about every issue.

As this poll, and others, have repeatedly shown, the American public has no idea what constitutes the lion's share of government spending. This is why seventy plus percent of people think cutting foreign aid and welfare, which are an insignificant part of the total budget, is all that's needed to balance the budget.

And it's not just the budget. Bloomberg had a poll out today in which a majority of respondents said Obama had increased their federal taxes. This is clearly nonsense. Several studies have indicated the tax reductions included in the stimulus package lowered taxes for over ninety percent of Americans. I can understand how someone could be confused about the intricacies of the budget, but how does one not know what they are paying in taxes. Don't they ever look at the paper that accompanies their paycheck?

And let's not forget that a significant number of Americans still think Saddam Hussein was behind the attacks on September 11.

A nice response to a good

A nice response to a good column. It is very hard to see how good (or even bad but coherent) policy can be made when voters are both ignorant and highly opinionated. "Elitism" as an insult, what have we come to?

One thought I've had for "fixing" Medicare is to have an income- or wealth-based copay system. If you need a coronary bypass, Medicare will pay for most of it, but you need to co-pay 3% of your average income over the last 5 years. If you need your bunions off, your copay is 0.002% or whatever. Every diagnostic code would have its own % copay, just as it currently has its own reimbursement rate for the healthcare provider (doctor or hospital) that performs it.

Such a system would both generate some revenue (flat rate, but higher-income or higher-wealth people would pay more in absolute $'s) for the system, and would serve as some kind of deterrent to frivolous visits that are really just social calls for bored old people in South Florida (sorry but that's a reality in a modest percent of cases).

It does seem crazy that children or young adults, with a whole productive life ahead, can be left with few options for preventative or routine health care, but old people get the entire tab picked up for whatever procedure their physician suggests could be helpful. A lot more important for our budgetary future than worrying about foreign aid!

One reason

>how does one not know what they are paying in taxes. Don't they ever look at the paper that accompanies their paycheck?

I may be in the minority, but my company tells me that if I want a paper check it has to be mailed from corporate HQ. That can take up to a week.

Needless to say, I chose direct deposit and so I do not get a pay stub. I only see the end result that ends up in my bank.

If I get less money from my paycheck deposited into the bank, it could be taxes or it could be my health insurance. I have no way of knowing, other than, I suppose, calling corporate and have them send a paystub.

The Public Sucks

The most interesting poll (yes, still) that I've read in a long time was about the health care debate - which remains at about a 50/50 split in terms of popularity. However, when one reads down into the crosstabs about the popularity of specific previsions in the bill itself, %80+ were in favor of them. This would seem to be statistically impossible without many people being defacto against the bill, while completely ignoring the content. Chris has it right above, "The public" is, even in our modern era, a bunch of petulant children who want the government to do good things for them, ask nothing in return and not do good things that help people outside of our own Monkeysphere ("Inside the Monkeysphere" by David Wong explains a lot about public opinion polling, by the way).

"The Public Sucks" is from the great George Carlin routine in which he details why he doesn't talk about politics.

Foreign Aid, etc.

Foreign Aid takes up such a minor part of the budget, though. The only cuts that will really make any significant difference whatsoever are Defense, Social Security, and Medicare; each of those has political challenges.

Silly poll. The welfare

Silly poll. The welfare states in different European countries are very different and even more different from the U.S.

Entitlement Reform


Do you think it would be realistic and beneficial to our long-term fiscal sustainability to raise the eligibility age of Social Security and Medicare to 70 for people born after, say, 1975, then pegging it to life expectancy? I think in the case of Social Security that it would return the program to its original intent of insuring against old age and not just providing retirement income. I'm sure this would cause a huge political backlash from AARP. However, this sounds reasonable given rising life expectancy.

Additionally, why aren't agricultural subsidies seen as welfare? It's always reported as being part of our "agricultural policy". This is something that both Republicans and Democrats should be for cutting (at least when we get out of the recession). Obama promised to cut them during his campaign. It's an antiquated policy which we should phase out.

Retirement age

The problem is that the vast bulk of people these days start taking benefits at age 62. Therefore raising the normal retirement age would have very little impact. We really have to raise the early retirement age to both save money and keep workers working longer. 

Early Retirement Age

To what threshold should we move the early retirement age? 65 seems reasonable, but even pushing it up to 63 would be beneficial. We should certainly make provisions for those with physically demanding jobs. What about lightly means testing this benefit? Not sure it would be a lot, but we could save on the margin in the long-term. Also, I'm not sure what the income and asset thresholds would be for the means testing.

I think the federal budget could also be helped by having Medicare recipients pay a little more out-of-pocket for routine and elective care. This change could help seniors make better decisions regarding the amount of care they receive and ultimately drive down costs.

I'm a big believer that there is a middle way out of this economic calamity. We can extend unemployment insurance to those who need it (with some incentives - those unemployed longer than 6 months are given 90% of the benefit, longer than 12 months 80% of the benefit, etc.) and spend on energy modernization and infrastructure revitalization, while stabilizing our debt by reforming our entitlement programs in the out years for the younger generations who are expected to live longer lives. Yes, we can do this!!

Subsidies are not welfare they are . . .

bailouts. They should be ended for agriculture and all other industries including oil and defense.

U.S. not prepared to consider any positions on butter

I don't think the U.S. has encountered and considered a sufficient number of alternative budgets to evaluate our limits regarding the welfare state. I'm certainly not adequately prepared to answer such a question nor have I seen empirical or theoretical findings available to sufficiently illuminate the public.

For example, I've yet to see a model where we've slowly but significantly cut our defense budget and then model the affordability of different social program scenarios and their impact on economic growth and the tax burden. I therefore have no idea how to answer the question on butter since we never consider the cost of guns, especially in the context of different effective taxation and growth rates.

It is concerning that while the U.S. continues to add more butter on top of our guns and continue to subsidize Europe's and the Far East's guns, we see Europe suffering from high taxation rates and massive debt from their butter programs.

Currently the U.S.'s effective tax rates on individuals are historically low while we have punitive taxes in areas that limit overall economic growth and immigration by the professional class (business taxes and taxes on income & wealth rather than consumption). We also don't adequately invest in education and research to provide higher growth rates in the future, we subsidize defense for Europe and the Far East, and we don't model the incorporation of low-cost universal single-payer healthcare or other lower cost healthcare scenarios into these various models.

Therefore I'd argue people are merely reacting to how politicians and the media who have access to the public square's bully pulpit frame our challenges where at least in the U.S., the media and our politicians are in no way literate on this topic.

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