Economics of the Welfare State

Transcription

1 Economics of the Welfare State Prof. Dr. Christian Holzner Contact Details Room: 308b, Ludwigstr. 28, front building, level 3 christian.holzner@lrz.uni-muenchen.de Office Hours: Monday, pm 1. Introduction Page 1

2 General Information: Lectures: 2 hours on Monday starting at am Exception: 4 hours on Oct. 25 th and Nov. 8 th starting at 8.15 am Courses: 2 hours on Thursday starting at 2.15 am Course exercises: Group work, has to be handed in the following Monday at the beginning of the lecture. One group is selected to present the exercises on Thursday. The selected group meets with Wolfgang Habla on Wednesday at??? (room 316, Ludwigstr. 28, front building, level 4). 1. Introduction Page 2

3 General Information: Literature: Handouts are available online: Main books: o Nicholas Barr: The Economics of the Welfare State o Peter G. Rosner: The Economics of Social Policy o Friedrich Breyer and Wolfgang Buchholz: Ökonomie des Sozialstaats The relevant chapters are available online. The relevant literature is listed at the beginning of each chapter Exam: Monday, 7 th February 2011, from until am 1. Introduction Page 3

4 Chapter 1: Introduction Literature: Barr, Nicholas, 2004, The Economics of the Welfare State, 4 th edition, Oxford University Press, Oxford, Chapter 1-3. Lampert, Heinz and Jörg Althammer,2001, Lehrbuch der Sozialpolitik, 6 th edition, Springer, Berlin, Chapter Introduction Page 4

5 First and Second Fundamental Welfare Theorems: First fundamental welfare theorem: If every relevant good is traded in a market at publicly known prices, and if households and firms act perfectly competitively, then the market outcome is Pareto optimal. Second fundamental welfare theorem: If household preferences and firm production sets are convex, there exists a complete set of markets with publicly known prices, and if every agent acts as a price taker, then any Pareto optimal outcome can be achieved as a competitive equilibrium if appropriate lumpsum transfers of wealth are arranged. 1. Introduction Page 5

6 1.1 The role of the state: Different Views Libertarian view: No state intervention Natural-rights Libertarians: Nozick (1974) 1. Everybody has the right to redistribute the holdings acquired through earnings and inheritance (that was itself justly acquired). 2. Thus, it is unjust on ethical grounds (theft), if the state redistributes holdings. The government may only redistribute holdings acquired illegally. Empirical Libertarians: Hayek (1944) 1. Individual freedom is only possible in a free market economy. 2. The pursuit of equity will reduce or destroy liberty. 3. Any government intervention is unjust, since it reduces welfare. 4. The major function of the government is to protect freedom, to preserve law and order, to enforce private contracts and to foster competitive markets. 1. Introduction Page 6

7 Liberal view: Redistributive role of the state Utilitarianism: 1. The utilitarian aim is to distribute goods so as to maximize the total utility of all members of society, i.e. max n U ( Y ) = u( yi ) 2. If marginal utility is decreasing, u`(y i ) < 0, more weight is given to low incomes. 3. Criticized, because it can justify harm to the least well-off, if this raises total utility. i= 1 Rawlsian thinking: Rawls (1972) 1. A society should decide on the distribution of goods (incl. liberty and opportunity) behind the veil of ignorance (before people know their position in society). 2. Each person has the right to the most extensive basic liberty compatible with a similar liberty for others (equal right to liberty including economic liberty). 3. Any government redistribution must also benefit the least well-off. 1. Introduction Page 7

8 Socialist view: State must enforce equality Democratic socialists: 1. Private property and the market mechanism are useful, because they increase efficiency. Democratic socialists acknowledge that there is an efficiency-equity trade-off. 2. The focus shifted from redistributing wealth to redistributing opportunities. 3. The unjust outcomes of the free market can be corrected by social policy. Marxists: 1. Workers are forced to sell their labor, since they would otherwise starve. The resulting lower market power of workers allows capitalists to extract surplus value. By using the extracted surplus capitalists can control the state. 2. The welfare state was created to avoid revolution and to keep capitalists in power. 3. Since the market mechanism does not achieve equality, Marxists call for public ownership and planning. 1. Introduction Page 8

9 1.3 This lecture addresses two questions: 1. What are the aims of policy? (normative question) 2. By what methods are those aims best achieved? (positive question) 1. Introduction Page 9

10 What are the aims of policy? A) Efficiency Scarce resources should be used efficiently. Market mechanism is neither good nor bad. It is useful in some instances (e.g. private market for food) and works less well in others (e.g. health care). Where institutions are publicly funded, their finance and the structure of their benefits should minimize adverse effects on labor supply, employment and savings. Public provision does not necessarily imply production by the public sector. (e.g. heath insurance in the UK is publicly provided, in Germany privately provided, although health insurance is compulsory) 1. Introduction Page 10

11 B) Supporting living standards Poverty relief: The definition of the poverty line is largely normative. The OECD defines the poverty line as 40 % of median income. Insurance: Unemployment, invalidity, sickness, disability, accidents, Consumption smoothing: Institutions should enable individuals to reallocate consumption over their lifetime, - pension schemes (from young age to old age), - benefits for families with young children (sandwich generation), - student loans (middle years to young age) 1. Introduction Page 11

12 C) Redistribution of inequality Vertical equality: The system should redistribute (from rich individuals) towards individuals or families with lower income: - Means-tested benefits like social assistance, - Progressive income tax, inheritance tax, taxes on wealth - Non-means-tested benefits, whose recipients disproportionately have lower income, e.g. unemployment insurance benefits. Horizontal equality: Individuals with similar ability to contribute to the welfare state should pay similar amounts (e.g. single wage earners should pay higher taxes than single mothers with the same earnings). 1. Introduction Page 12

13 D) Social inclusion Dignity: Benefits should be delivered as to preserve individual dignity and without unnecessary stigma. Compulsory insurance schemes allow individuals to get security not as a charity but as a right. Social solidarity: Benefits should foster social solidarity, i.e. they should be big enough to allow recipients to participate fully in the life of the society (broader aim than poverty relief). 1. Introduction Page 13

14 E) Administrative Feasibility Intelligibility: The system should be simple, easy to understand, and as cheap to administer as possible. Absence of abuse: Benefits should be as little open to abuse as possible. 1. Introduction Page 14

15 Which weights are given to these different objectives of the welfare state is a fundamental normative question that has to be answered by the society itself, i.e. in practice by policy makers. The second question By what methods are those aims best achieved? is a technical question and will be our subject for the rest of the semester. 1. Introduction Page 15

16 1.4 The size of the welfare state 1. Introduction Page 16

17 Social expenditure in % of GDP in selected countries Source: Bundesministerium für Arbeit und Soziales (2009), Sozialbericht 2009, S Introduction Page 17

18 Social expenditure in % of GDP over time in Germany Source: Bundesministerium für Arbeit und Soziales (2009), Sozialbericht 2009, S Introduction Page 18

19 Growth and the size of the welfare state Does the size of the welfare state influence the growth rate? Study Time period Countries Result Landau OECD incl. Japan not significant Korpi OECD excl. Japan 0.9 percentage point reduction Weade OECD incl. Japan 1.0 percentage point increase Sala-i-Martin countries worldwide 0.6 percentage point reduction Nordström OECD 0.6 percentage point increase Hansson and OECD incl. Japan not significant Henrekson 1994 Persson and Tabellini OECD incl. Japan 0.3 percentage point increase Source: Atkinson, Anthony, 1999, The Economic Consequences of Rolling back the Welfare State, MIT Press, Cambridge, Mass. 1. Introduction Page 19

20 Acceptance of the size of the welfare state France Germany Italy Spain Don t know / no answer 19.1 % 6.5 % 16.1 % 27.7 % Of those who answered a) Less transfers / less taxes 35.0 % 26.9 % 42.8 % 15.9 % b) Maintain 51.2 % 59.1 % 39.7 % 53.2 % c) More transfers / more taxes 13.8 % 14.0 % 17.4 % 30.9 % Source: Boeri, Tito, Axel Börsch-Supan und Guido Tabellini, 2001, Would You Like to Shrink the Welfare State? The Opinions of European Citizens, Economic Policy 32, Tabelle The majority of citizens with the exception of Italy support the current size of the welfare state. 1. Introduction Page 20

21 Social expenditure by categories Sozialbudget D 2008 Sonstiges 26,88% Rentenversicherung 32,26% Wohngeld 0,10% Kinder- und Jugendhilfe 2,78% Sozialhilfe 3,06% Erziehungsgeld / Elterngeld 0,66% Kindergeld und Familienleistungsausgleich 4,80% Unfallversicherung 1,47% Pflegeversicherung 2,51% Krankenversicherung 20,97% Arbeitslosenversicherung 4,51% Source: Statistisches Bundesamt (2009), Sozialbudget. 1. Introduction Page 21

22 1.5 Content of the Lecture 1. Introduction 2. Arguments for redistribution and social insurance 3. Consumption smoothing: Old age pensions 4. Health insurance 5. Unemployment insurance 6. Systems competition (Is the welfare state sustainable?) 1. Introduction Page 22

23 1.6 The historical background Pre-industrial period: No welfare state existed Self-insurance through families and communities Poverty relief through Christian charity, churches and monasteries In medieval times people belonged to a Lord It was one of the Lord s duties to care for his villains (poverty relief, insurance). Guilds provided insurance for its members Health insurance, widow s pension, support for job seekers 1. Introduction Page 23

24 The first welfare laws: The 1530 Reich police edict in Germany and the 1601 Poor Law Act United Kingdom: o Each community or town was responsible for its poor. o The old and the sick were accommodated in almshouses. o The able-bodied were given work in houses of correction. The Speenhamland System in the United Kingdom: o 1795 food shortage and inflation lead to working poor. o Aid was extended to people in work (allowance based on bread prices). The Poor Law Amendment Act 1834 in the United Kingdom: o Population growth and escalating costs made a reform necessary. o Eligibility criteria were tightened (the able-bodied had to live in workhouses under repulsive conditions to discourage living on benefits). o Benefits recipients were stigmatized. 1. Introduction Page 24

25 The German welfare reforms under Bismarck: Intention: Bismarck saw the welfare state not only as an act of charity but also as means to fight socialism. 1883: Health insurance for workers o Free medical treatment, sick-pay, and support for women in bed o Financed through mandatory contributions (2/3 employees, 1/3 employer) 1884: Accident insurance for workers o Life annuities for workers, who were unable to work after an accident. o Financed by employers 1899: Retirement and invalidity pension o Retirement: Eligibility at the age of 70 and with 30+ years of contributions o Invalidity: Eligibility after 5 years of contributions o Financed through mandatory contributions (1/2 employees, 1/2 employer) 1. Introduction Page 25

26 The Liberal reform in the UK between : Intention: Working class political pressure and change in attitude ( positive freedom ), Increase the productivity of the workforce German example. 1908: Old Age Pension Act: o 25 pence per week for people over 70, whose income was below 31 per year o Financed through local funds, no contributions. 1911: National insurance Act: Unemployment and Minimum Wage: o Limited scheme of unemployment insurance linked to job search assistance. o Development Fund would finance counter-cyclical public-works expenditure. 1911: National insurance Act: Health insurance o Free medical treatment and sick-pay for breadwinners 1. Introduction Page 26

27 Further welfare reforms in the United Kingdom and Germany 1920/27: Unemployment insurance in the United Kingdom o 1920: Insurance is extended to more workers o 1927: Two-tier system is introduced 1927: Unemployment insurance in Germany o Included insurance for all workers as well as job search assistance 1946: Health insurance in the United Kingdom o Free medical treatment for all financed through taxes 1995: Long-term care insurance in Germany 1. Introduction Page 27