Tino Sanandaji on the U.S. and Europe

by Reihan Salam

In the new issue of Critical Review, Tino Sanandaji, a post-doctoral fellow at the University of Chicago and my erstwhile co-author, has a review essay on European poverty rates that draws on the work of Geranda Notten and Chris de Neuborg on absolute and relative poverty in comparative perspective, which was published (and gated) by the Review of Income and Wealth last year. 

[Geranda Notten and Chris de Neuborg] calculate the poverty rate in fifteen Western European Union member states [Germany, France, U.K., Italy, Spain, Netherlands, Belgium, Luxembourg, Austria, Ireland, Greece, Portugal, Sweden, Denmark, and Finland] using the American poverty threshold. This poverty threshold is the figure used by the Census Bureau to calculate poverty rates in the United States, based on household size. (Currently for a four-person family this threshold is approximately $22,000.) Notten and de Neuborg find that as a of 2000, 18 percent of the population of Western Europe was “poor” by the American standard, which is considerably higher than the 12-percent level around which the American poverty rate has fluctuated during the last decade. France, Britain, and Italy are among the countries with higher poverty rates than the United States. Meanwhile Germany and a number of small northern-European countries — notably Sweden, Denmark, Belgium, and the Netherlands — have lower poverty rates than the United States (also in absolute terms).

Granted, 2000 may have represented a relative high point for the United States in comparison to Western Europe, as a combination of healthy productivity gains and tight labor markets had swelled household incomes for much of the latter part of the previous decade. One assumes that the comparative picture has changed somewhat over the intervening years. As of 2011, for example, the official U.S. poverty rate has climbed to 15.7 percent. It is also true, however, that material deprivation has increased in several Western European countries as well in the post-crisis years, particularly in southern Europe. 

The significance of these comparisons is undermined by hard-to-measure differences in the quality of public services. It is easy to imagine that market income in Country A is higher than in Country B, yet that the superior quality of public services in Country B helps close the gap in terms of lived experience. 

Tino explored these themes in February in an essay for The American on the divergence in outcomes between northern European and southern European welfare states:

Northern Europe consistently outperforms southern Europe. Per capita income is 16 percent higher. Unemployment in 2008 was 6 percent, compared to 8 percent in southern Europe. Differences in poverty rates are remarkable. If calculated using the American poverty threshold, 8 percent of northern European citizens were poor prior to the crisis, compared to 25 percent of southern Europe.

The conventional wisdom is that differences in outcomes must be due to differences in policy, most importantly the size of government. Yet, it is today difficult to find fundamental policy differences between the two Europes, as the welfare state in northern Europe has shrunk a bit while the state has expanded in southern Europe. Government spending as a share of GDP is the most commonly used and most straightforward measure of the size of the welfare state. In the United States prior to the crisis, government spending was around a third of GDP. In northern Europe, the government in 2008 constituted 46 percent of the economy, while it made up 48 percent of the economy of Southern Europe. This is strong evidence against the notion that southern Europe should be excluded when evaluating welfare states.

Top marginal taxes on higher labor incomes are still somewhat higher in northern Europe, but the gap is now minor: an average of 62 percent in northern Europe versus 60 percent in the south. The highest effective marginal tax is 74 percent in Sweden and 70 percent in Denmark, but next is Portugal at 65 percent followed closely by France at 61 percent. Corporate tax rates are similar in north and south, as are rates of compensation in unemployment insurance and the generosity of public pensions. Indeed, on all three measures, southern European policies are slightly more welfare-state oriented than in northern Europe. The share of the workforce covered by union collective bargaining agreements is today higher in southern Europe than northern Europe. According to various OECD and World Bank indices, the regulatory burden of government is again if anything larger in southern than northern Europe, both regarding labor regulation and regulation of businesses.

Tino argues that the divergence between northern and southern Europe is best explained by “soft” factors:

A more likely explanation is that outcomes from welfare state policies are mediated through the deeper structures of society: culture, norms, social capital, etc. so that similar policies produce different outcomes in different countries. These “soft” factors are hard to measure, but the fact that a concept is hard to measure or to perfectly define does not mean that it is not important.

Tino notes that differences in the size of the so-called shadow economy help illustrate deeper differences between rule-compliant societies and weak-compliance societies like Italy and Greece:

It is easier to lower poverty through social insurance programs in countries where pro-societal norms limit abuse. When a generous welfare state was initially built in Scandinavia, the rates of welfare dependency remained low. In cultures with strong social control it was a stigma to exploit the public. Over time, however, ever more generous benefits and lax controls undermined the foundation of the welfare state even in Scandinavia. Thus, in 1970, an estimated 11 percent of Swedes lived off government welfare rather than working, while in the mid-2000s the figure had doubled to 22 percent. Norms for work and against exploiting public programs were taken for granted by social scientists from both Marxist and liberal traditions. They therefore did not anticipate that generous entitlements would eventually eat away at social capital accumulated over centuries. More than globalization, I suspect it was the gradual erosion of norms that eventually forced the welfare state in northern Europe to retreat. The challenge of redistributing income without disincentivizing work was even greater in southern Europe. Employment and hours worked appear to have reacted more aversely to the expansion of the welfare state and rising taxes in southern than northern Europe. Today in southern Italy, half the working age population doesn’t work.

And so Tino concludes his essay by noting that the expansion of the welfare state does not occur in a “cultural vacuum,” leaving us with the implicit question of whether we should of ourselves as more northern European or more southern European. Evidence on trust and social cohesion suggests that the United States is a hybrid, in which northern European norms prevail in some regions and in some groups while southern European norms prevail in others. This suggests that large-scale policy shifts will have a highly variegated impact.