Blog Post

AEIdeas

A new OECD study helps answer two questions: Just how big is the US welfare state, and how does it compare to that of other nations? As Robert Samuelson points out, what you count as welfare matters:

Covered is unemployment insurance, disability payments, old-age assistance, government-provided health care, family allowances and the like. By this measure [of government social spending] alone, the United States is hardly a leader. It ranks 23rd in the world with social spending of roughly 19 percent of gross domestic product (GDP). This is slightly below the OECD average of 22 percent. France is the champ at nearly 32 percent. (The data are generally the latest available, including some estimates for 2014.) But wait. Direct government spending isn’t the only way that societies provide social services. They also channel payments through private companies, encouraged, regulated and subsidized by government. This is what the United States does, notably with employer-provided health insurance (which is subsidized by government by not counting employer contributions as taxable income) and tax-favored retirement savings accounts. When these are added to government’s direct payments, rankings shift. France remains at the top, but the United States vaults into second position with roughly 30 percent of its GDP spent on social services, including health care. We have a hybrid welfare state, partly run by the government and partly outsourced to private markets.

And this chart illustrates the comparison:

As I have written before, one big difference between the US and other social democracies is America’s more vibrant entrepreneurial culture. But sticking to the safety net issue, another OECD chart illustrates just where all those welfare dollars are going. As far as direct social spending goes, the US spends a greater share on the upper-middle class than countries such as Australia, Canada, Sweden, and Norway:

And that chart reminds me of this one from CBO which shows where flow the top ten US tax expenditures, including the employer-sponsored health insurance exclusion, mortgage interest deduction, and preferential rates on capital gains and dividends:

So the US runs a good chunk of its “hybrid welfare state” through the tax code and the private sector, mostly to the benefit of the non-poor. And why is that? An observation by Monica Prasad: