The Economics of the Welfare State Third edition NICHOLAS BARR Oxford University Press
CONTENTS List of figures xxiii List of tables xxiv Abbreviations xxv PART1. CONCEPTS 1. Introduction 3 2. The historical background 15 3. Political theory: Social justice and the state 44 4. Economic theory 1: State intervention 68 5. Economic theory 2: Insurance 108 6. Problems of definition and measurement 129 PART 2. CASH BENEFITS 7. Financing the welfare state,./ 167 hf 8. Contributory benefits 1: Unemployment, sickness, and disability 183 9. Contributory benefits 2: Retirement pensions 202 10. Non-contributory benefits 232 11. Strategies for reform 254 PART 3. BENEFITS IN KIND 12. Health and health care 277 13. Education 320 14. Housing 362
Contents PART 4. EPILOGUE 15. Conclusion 403 References 416 Glossary 447 Author index 455 Subject index 461 XIV
DETAILED CONTENTS List of figures List of tables Abbreviations xxiii xxiv xxv PART1. CONCEPTS 1. Introduction 1. The approach 3 1.1. The central argument 3 1.2. Organization of the book 5 2. The welfare state and its objectives 6 2.1. Defining the welfare state 6 2.2. The objectives of the welfare state 9 3. A changing world: Challenges and responses 12 Further reading 14 2. The historical background. $ 15 if 1. Early days ' 16 1.1. Poor relief 16 1.2. Other early social legislation 18 2. The Liberal reforms 19 2.1. The origins of the reforms 19 2.2. The new measures 21 3. The First World War and the inter-war period in the UK 24 3.1. Housing 24 3.2. Unemployment insurance 26 4. Inter-war poverty relief in the USA 28 4.1. The roots of the 'New Deal' 28 4.2. The Social Security Act 1935 29
5. The Second World War and its aftermath 31 5.1. Wartime activity 31 5.2. Policies 1946-1948 34 6. Post-war developments in the UK and USA 35 6.1. The UK 35 6.2. The USA 37 6.3. Comparative issues 39 7. Concluding issues: From the past to the present 40 7.1. Interpreting the forces creating the welfare state 40 7.2. What was created? 42 Further reading 43 3. Political theory: Social justice and the state 44 1. Theories of society 44 2. Libertarian views 46 3. Liberal theories of society 48 3.1. Utilitarianism 48 3.2. Rawls on social justice 50 4. Collectivist views 54 4.1. Democratic socialism 54 4.2. Marxists 56 yj 5. Implications for the role of the state! # 59 5.1. Theoretical issues 59 5.2. Policy implications 60 5.3. Attitudes towards the welfare state 61 Further reading 64 Appendix: Non-technical summary of Chapter 3 65 4. Economic theory 1: State intervention 68 1. The formal structure of the problem 68 2. Why economic efficiency is one of the aims of policy 70 2.1. The concept of economic efficiency 70 2.2. The relevance of efficiency to different theories of society 73 XVI
3. Intervention for reasons of efficiency 77 3.1. Types of intervention 77 3.2. The assumptions under which markets are efficient 78 3.3. Policy implications 83 4. Intervention for reasons of social justice 85 4.1. Why does redistribution occur? 85 4.2. Should redistribution be in cash or kind? 88 4.3. Horizontal equity 90 4.4. Is there enough redistribution? 91 5. Public choice and government failure 92 6. From theory towards policy: The issue of privatization 93 7. Conclusion: Economic and political theory 97 7.1. Drawing the borderlines between government and markets 97 7.2. Achieving policy aims: A liberal view 98 7.3. The debate with libertarians 100 Further reading 101 Appendix: Non-technical summary of Chapter 4 103 5. Economic theory 2: Insurance 108 1. Introduction 108 J 2. The demand for insurance tijr 109 2.1. Individual demand 109 2.2. The nature of the product: Insurance as a mechanism for pooling risk 111 2.3. An example: Annuities 112 3. The supply side 113 3.1. The supply of insurance 113 3.2. Asymmetric information 115 4. The insurance market as a whole: Private and social insurance 120 4.1. The existence and efficiency of private insurance markets 120 4.2. Social insurance 124 Further reading, 126 Appendix: Non-technical summary of Chapter 5 127 XVII
6. Problems of definition and measurement 129 1. Measuring welfare 129 1.1. Individual welfare 130 1.2. Social welfare 134 2. Poverty 136 2.1. Defining poverty 136 2.2. Poverty and inequality 139 2."3\ Measuring poverty 140 3. Inequality 1: Individuals and families 143 3.1. Defining equality and inequality 143 3.2. Measuring inequality between individuals 145 3.3. Measuring inequality between families 147 4. Inequality 2: Aggregate measures 148 4.1. The descriptive approach 148 4.2. Inequality measures based on a social-welfare function 153 4.3. Inequality: Some empirical results 156 5. Conclusion 158 Further reading 159 Appendix: Non-technical summary of Chapter 6 161 PART 2. CASH BENEFITS J 7. Financing the welfare state *v 167 1. The structure of the UK government accounts 167 1.1. Conceptual issues 167 1.2. Government revenue and expenditure 168 2. Cash benefits 173 2.1. Individual national-insurance contributions 173 2.2. The National Insurance Fund 175 3. Benefits in kind 177 4. Assessing the welfare state 178 4.1. Incidence considerations 178 4.2. Redistribution: A preliminary discussion " 180 Further reading 182 XVIII
8. Contributory benefits 1: Unemployment, sickness, and disability 183 1. Introduction and institutions 183 1.1. The issues 183 1.2. Institutions. 185 2. Theoretical arguments for state intervention 188 2.1. Efficiency 1: Regulation 188 2.2. Efficiency 2: Public provision 189 2.3. Social justice 193 3. Assessment of the national insurance system 194 3.1. Efficiency and incentives 194 3.2. Equity issues 199 Further reading 200 9. Contributory benefits 2: Retirement pensions 202 1. Introduction and institutions 202 2. Methods of organizing pensions 205 3. Efficiency arguments for state intervention 210 3.1. Public-versus-private provision 210 3.2. Funding versus Pay-As-You-Go: Theoretical arguments 213 4. Social justice 218 4.1. Public-versus-private provision,/ 218 4.2. The redistributive effects of pensions &J 219 5. Assessment of national insurance retirement pensions 221 5.1. Efficiency and incentives 221 5.2. Equity issues 228 5.3. Conclusion 230 Further reading 231 10. Non-contributory benefits 232 1. Introduction and institutions 232 2. Theoretical arguments for state intervention 236 2.1. Arguments for intervention 236 2.2. The simple analytics of targeting 237 XIX
3. Assessment of non-contributory benefits 240 3.1. Income support 240 3.2. Other income-related benefits 243 3.3. Child benefit 247 3.4. Empirical issues and evidence 248 3.5. Conclusion 253 Further reading 253 11. Strategies for reform 254 1. Approaches to income support 254 2. Income-testing: The negative income-tax approach 255 2.1. The idea 255 2.2. An assessment of large-scale negative income-tax schemes 257 2.3. The role of a small-scale negative income tax 265 3. Indicator-targeting:The'Back-to-Beveridge 1 approach 267 3.1. The idea 267 3.2. A practical example 269 4. Mixed strategies 269 5. Conclusion: Cash benefits 271 Further reading 274 PART 3. BENEFITS IN KIND 12. Health and health care Sr 277 1. Introduction to benefits in kind 277 2. Aims 279 2.1. Concepts 279 2.2. Measuring costs and benefits 280 3. Methods 282 3.1. Theoretical arguments for intervention 1: Efficiency 282 3.2. Theoretical arguments for intervention 2: Equity 290 3.3. Types of intervention 292 4. Assessment of the UK system of health care 296 4.1. Institutions 296 4.2. Assessment 1: Efficiency 303 4.3. Assessment 2: Equity 306 XX
5. Reform 310 5.1. Reform in principle 310 5.2. The NHS reforms 313 6. Conclusion: Health and healthcare 316 Further reading 318 13. Education- 320 1. Introduction 320 2. Aims 321 2.1. Concepts 321 2.2. Measuring costs and benefits 322 3. Methods 328 3.1. Theoretical arguments for intervention 1: Efficiency 328 3.2. Theoretical arguments for intervention 2: Equity 329 3.3. Types of intervention 331 4. Assessment of the UK Educational System 333 4.1. Institutions 333 4.2. Assessment 1: Efficiency 339 4.3. Assessment 2: Equity 342 5. Reform 346 5.1. School education,/ 347 5.2. Higher education % 351 6. Conclusion: Education 358 Further reading 360 14. Housing 362 1. Introduction 362 2. Aims 363 3. Methods ~ 367 3.1. The simple theory ofthe housing market 367 3.2. Theoretical arguments for intervention 1: Efficiency 368 3.3. Theoretical arguments for intervention 2: Equity 372 3.4. Types of intervention 373 XXI
4. Assessment of UK housing institutions 375 4.1. Institutions 375 4.2. Problems in individual parts of the housing market 382 4.3. Housing as a whole: Tenure neutrality and the distribution of housing 390 5. Reform 393 5.1. The debate over reform 393 5.2. Designing a system for a brand new country 394 5,,3. How to get from here to there 397 6. Conclusion: Housing 398 Further reading 400 PART 4. EPILOGUE 15. Conclusion 403 1. Arguments for a welfare state 403 1.1. Theory 403 1.2. Policy 405 1.3. Why have a welfare state? 408 2. A changing world: Debates 409 2.1. Is the welfare state desirable? 409 2.2. Is the welfare state sustainable? 411 - Further reading 415 References ^ 416 Glossary 447 Author index 455 Subject index 461 XXII