The ominous uptick in consumer prices that began in the spring of 2021 triggered alarm bells. By fall, the future looked dark to many observers. A market strategist cited by Reuters warned that the surge in inflation would not be transitory, as the Fed and Biden administration were then promising. “Sticky and sustained” inflation when the country was “past peak growth” would constitute “stagflation," he said, reviving a term coined in the 1960s.
Yet there was no stagflation. The 2021-2022 episode turned out to be very different from the economic turmoil that bedeviled the U.S. economy from the 1960s into the early 1980s. Its brevity was one key difference. A second difference was a far greater volatility of relative prices. A third concerned the role of expectations. As this commentary will explain, these three differences, taken together, carry important lessons for policymakers.
In a recent New York Times op-ed, Harvard professor N. Gregory Mankiw asks, “Can America Afford to Become a Major Social Welfare State?” By welfare state, he has in mind the Biden administration’s plan for better child benefits, improved healthcare, extending free public education to preschool and community college, and the rest.
From a “narrow budgetary standpoint,” Mankiw agrees that these things are affordable. But he is concerned about the larger question of whether stronger social protections are consistent with prosperity and with our aspirations for the “kind of nation we want to be.” Let’s take each of those in turn.
Prosperity, for Mankiw, means GDP. Yes, America has lots of that. He points out that as of 2019, GDP per capita was 14 percent lower in Germany than in the United States, 24 percent lower in France, and 26 percent lower in the United Kingdom.
But GDP per capita has its limits as a measure of prosperity. It is, after all, an average whose numerator lumps together the incomes of billionaires and the incomes of the poor. True, the United States does pretty well in the billionaire sweepstakes. It has 19 percent more billionaires per capita than Germany, 2.7 times as many as the UK, and 3.2 times as many as France. But most people don’t count the “prosperity” of their city or town by the number of billionaires who live there. They are more interested in whether their neighbors, the people they stand in line with at their local supermarkets, can maintain a decent standard of living.
For that, median incomes, not averages, provide a better picture. The median is the income that divides the population right down the middle, with half the people doing better and half not as well. Germany’s median per capita income is just 9 percent lower than the United States, while the UK and France are 20 percent below. The fact that European median incomes are closer to U.S. values than European GDPs reflects that U.S. incomes are more concentrated at top, leaving less for those at the bottom. What is more, the European countries that most people think of first when they hear the term “welfare state” – Norway, Sweden, Denmark, and Finland – all have higher median incomes than we do. How can we talk about prosperity without asking, prosperity for whom?
Let’s turn now to the broader question of the kind of nation we want to be. Since the days of its founding, America has striven to be what political scientists call a liberal democracy. The Oxford English Dictionary defines that as “A democratic system of government in which individual rights and freedoms are officially recognized and protected, and the exercise of political power is limited by the rule of law.”
In my own work, I like to break down liberal democracy into five measurable components (see here for the methodology):
Quality of governance, including things like rule of law, judicial independence, and government integrity.
Quality of market institutions, including things like security of property rights, enforcement of contracts, and investor protections.
Personal freedoms, including those enumerated in the Bill of Rights.
Procedural democracy, meaning the rules and institutions that ensure free and fair elections.
Social protections, meaning the things that make “the pursuit of happiness” a real possibility, not just a slogan.
As I see it, these five traits taken together – not just GDP or median income – are what define real prosperity. They are the things for which refugees cross oceans in leaky boats, trek through deserts, and brave hostile checkpoints.
Mankiw’s thesis is that if you want the fifth item on the list – social protections – you will sacrifice the others. He maintains that European countries, “by aiming for more compassionate economies, … have created less prosperous ones.” “Americans”, he goes on to warn, “should be careful to avoid that fate.”
But what have Americans really gained by skimping on social protections? Nothing. Here are the data, in the form of a spider chart: (The scale on the chart is standard deviations above the mean for 112 countries, with zero at the center of the chart.)
The chart shows clearly that (as expected) the United States falls far short of the leading European liberal democracies in terms of its social protections. But we fall short in all the other respects, too. We underperform Mankiw’s favored trio of Germany, France, and the UK, despite the fact that they have substantially lower GDP per capita and lower median incomes. And we underperform the classic Scandinavian welfare states by even more, even in the quality of our market institutions.
Sure, we have to be careful as we go about strengthening our social policies. We don’t need to just expand social programs, but to reform them in fundamental ways that make them more work-friendly and affordable while also offering better income security. (Here is how.) We need to prioritize neither expanding nor shrinking the federal budget, but rather making intelligent changes that keep fiscal policy sustainable. (Here are some rules.) Those are things that I think Prof. Mankiw and I largely agree on. What we disagree on is that in striving to become a “major social welfare state,” or to build a better system of social insurance, or whatever we want to call it, Americans will have to sacrifice everything else they hold dear.
Originally published by Niskanen Center September 21, 2021
On April 12, 2022, the University of British Columbia, Okanagen, sponsored an on-line symposium, "A Wicked Problem: Individual Freedoms and Climate Change." Here is a link to the slideshow of my presentation at the conference, which discusses four perspectives on the problem:
Carbon pollution as a violation of the nonaggression principle
Applying Lockean property rights to the climate problem
Climate change as a coordination problem
A Hayekian perspective: Prices without markets or markets without prices?
The United States spends some $850 billion per year on poverty programs, yet the official poverty rate has not fallen much, if at all, over the past 40 years. What could we do better?
This slideshow, originally presented at a meeting of the Northport MI Lions Club on September 23, 2021, argues that with better policy design, we could greatly reduce the poverty rate without spending any more than we do today. The slideshow is suitable for classroom presentation and may be used without further permission.
The slideshow emphasizes three major problems with the design of current poverty policies:
Spending is fragmented among many separate programs, each designed to help a particular group or meet a particular need.
Programs have high benefit reduction rates, which severely reduce work incentives, especially for families just crossing the line from poverty into self-sufficiency.
Many programs have strict work requirements that have the ostensible objective of encourage poor people to help themselves by getting a job. However, in practice, work requirements don't work and often throw families into deeper poverty than before.
I recommend three broad categories of policy change that could improve the performance of antipoverty efforts even in a baseline case where total spending does not increase:
Consolidate programs and cash out in-kind assistance.
Expand the kind of wage bonuses embodied in the Earned Income Tax Credit.
Introduce a permanent child benefit that is paid monthly to all families with children regardless of employment status.
In a promising contribution to the debate over poverty
policy, the Institute on Race and Political Economy at the New School has
released a major welfare reform proposal that it calls a Guaranteed Income for
the 21st Century. Details of the proposal (abbreviated GI21 in what follows)
are set out in a report written by Naomi Zewde, Kyle Strickland, Kelly
Capatosto, Ari Glogower, and Darrick Hamilton. The proposal makes a full-scale
assault on America’s social protection gap. It includes several features that
the Niskanen Center has long championed, such as an emphasis on cash
assistance, broad eligibility, and payment in monthly installments with
appropriate provisions for the unbanked. Although the proposal is not
budget-neutral, its estimated cost of $876 billion per year is considerably
less than that of several other proposals for a universal basic income.
All proposed reforms of the social safety net face a set of
tradeoffs among the goals of income security, affordability, and work
incentives. This commentary will examine how GI21 deals with those tradeoffs,
beginning with the areas where it is strongest and then turning to aspects of
the plan that could benefit from some further thought.
Anyone who has been following the U.S. monthly economic data
lately has noticed that the rate of inflation has been rising over the past
year as the unemployment rate has fallen. Figure 1 shows the numbers:
To those old enough to remember, this chart looks ominously
like the first inflationary surge of the Kennedy-Johnson years:
Or even more ominously, Figure 1 looks a bit like this chart
from a 1958 article by A. W. Phillips, which later became famous as the
“Phillips curve.”
So, are we in for runaway inflation unless we slam on the
brakes and send unemployment soaring again? You might think so from the
headlines inspired by recent CPI reports, but the answer is “no,” or at least,
“no time soon.”
To see why, we need to understand just what the dreaded
Phillips curve is, why falling unemployment brought soaring inflation in the 1960s
and 1970s, and why it is far less likely to do so now. That will require a
detour into a bit of economic theory, then a review of the history of inflation
and unemployment over the past six decades, and then an analysis of the
psychological underpinnings of economic behavior. Here we go.
Around the world, liberal democracies take pride in the freedom and prosperity of their citizens. And not just prosperity for the prosperous. They also pursue social protection policies that guarantee a minimum standard of prosperity for even the most disadvantaged. In previous writings, I have focused on quality of government in liberal democracies and on policies that engender social and political trust. This commentary turns to social protection policies, entering an area in which the United States struggles to keep up with the standards set by its liberal-democratic peers.
The first section discusses just which countries can be counted among that peer group. The second explores three quantitative indicators of social protection and shows the degree to which the United States lags behind. A conclusion argues that a policy of faster and fairer growth could allow the United States to close its social protection gap.
Who are our liberal democratic peers?
My starting point in classifying countries by their degree of liberal democracy, as in earlier work, is the concept of liberal rights practices. In his book, Trust in a Polarized Age, Kevin Vallier defines liberal rights practices as rights that are “recognized in constitutional law, exercised regularly by the people, and embodied in public policy.” That approach makes it possible to treat liberal rights practices not just as values or aspirations, but as observable characteristics of public policy to which it is possible to assign numerical scores.
Vallier lists five liberal rights practices, namely, democratic constitutionalism, markets and private property rights, freedom of association, electoral democracy, and social protection policies. My approach covers a conceptually similar range of practices, but with modifications to terminology and content as needed to better fit the data. Full definitions and data are presented in an online appendix.
Quality of governancefocuses on government institutions rather than policy outcomes. It includes measures of executive constraints, government integrity, rule of law, and government effectiveness.
Quality of market institutions covers property rights, contract enforcement, investor protections, and quality of regulation.
Personal freedomspertain to policies and institutions that guarantee freedom of association, freedom of speech, freedom from discrimination, and agency, a term that Legatum uses to the ability of people to act in accordance with their own desires, based on indicators such as freedom of movement, women’s rights, and due process in criminal law.
Procedural democracyis democracy in the narrow sense of regular and fair elections with open participation. Procedural democracy is often associated with personal freedoms and quality government, but those outcomes are not part of the definition of democracy in this sense.
Social protection policiesare government policies that ensure that basic needs are met, including cash support and other policies, both on-budget and off-budget, that mitigate extreme inequality and ensure acceptable minimum levels of food, shelter, medical care, and communications.
In what follows, I refer to the first four of these categories as basic liberal rights practices. Each country is assigned a score, LRP*, which is an equally weighted average of the standardized scores for quality of governance, quality of market institutions, personal freedoms, and procedural democracy. Vallier includes the fifth item, social protection policies, in his definition of liberal rights practices, for reasons discussed below. However, this commentary turns his definition into a question: To what extent is it actually true that governments that are liberal democracies in other respects also have strong social protection policies?
