By Price Fishback, Frank & Clara Kramer Professor of Economics
Cross-posted from the New York Times Freakonomics blog.
Ask anyone. Who spends more on social welfare: the U.S. or Sweden and other Nordic countries? Nearly everybody will say Sweden. But the answer, at least as of the mid-2000s, might surprise you. It depends heavily on how you deal with taxation, unfunded mandates, and whether you discuss spending as a share of the country’s output or in absolute dollars. Social welfare expenditures are defined as spending for the poor, the unemployed, the disabled, the elderly, and on health care. The material reported comes from a historical study comparing the U.S. and the Nordic countries between 1920 and 2003.
People’s perceptions are driven by the standard statistic reported in the news and in the OECD database: gross public social welfare spending as a percentage of GDP. In 2003, Sweden spent 37 percent relative to GDP, Denmark 32 percent, Norway 28 percent, Finland 26 percent, and the U.S. lagged behind at 17 percent.
Yet gross transfers do not take into account the dramatic differences in tax structure in the U.S. and the Nordic countries. The Nordic countries collect income taxes on the cash payments made to social welfare recipients at rates that are four to five times the rates paid by American recipients. Then when the Nordic recipients go out to make purchases, they pay consumption tax rates on their purchases that are 4 to 5 times the rate paid by the poor in America. Furthermore, the U.S. government offers a series of tax breaks to promote social welfare that are not found in the Nordic countries. After adjusting for the differences in taxation to get net public social spending relative to GDP, Sweden’s figure falls by 8 percentage points to 29 percent, Denmark falls to 24 percent, Norway to 23 percent and Finland to 20 percent. The U.S. figure rises to 19 percent.
The difference between the U.S. and the Nordic countries is closed further when expenditures per total population are considered. Such international comparisons are more difficult to measure than shares of GDP due to the issues related to measuring purchasing power across countries. If the adjustments for purchasing power are correct, net public social expenditures by government in America in 2003 ranked roughly in the middle of the Nordic countries. Per capita net public social welfare spending in 2003 (in 1990 dollars) in the U.S. was $5,400, while Sweden’s was $6,300, Norway’s $5,900, Denmark’s $5,472, and Finland’s $4,200. Note that all of these countries are very rich — they were spending more on net public social welfare per person in society than the per capita incomes of countries with most of the population in the world.
The U.S. differs from the Nordic countries in that it is a safety-net society. Workers and people with adequate incomes purchase directly, or receive through their employer, private life insurance, health insurance, and pension plans. Many make charitable donations for social welfare purposes. Public benefits are available for the elderly, for the disabled, and for families whose incomes fall below various poverty lines. Meanwhile, the Nordic countries adopt a more universal, government-sponsored approach. If we take into account these differences in style, the appropriate measure is net public and private social welfare expenditures per capita. By this metric, the U.S. then leads the way at $7,800, followed by Sweden at $6,700, Norway at $6,300, Denmark at $5,800, and Finland at $4,900.
Some caveats are worth considering. The U.S. costs of health treatment and administration are likely higher. If we cut all U.S. health care costs by one-third, the U.S. figure falls to $6,700, equal with Sweden. The latest figures I used for comparison in the century-long study I did were from 2003, and there have been adjustments since. Norway’s GDP per person has jumped markedly, and the U.S. recently adopted a health reform designed to cover more people.
The differences in the systems have implications for different parts of the income distribution. In all of the countries, taxes and transfer payments lead to a substantial increase in the equality of income after taxes and transfers are incorporated. Comparisons of incomes after taxes and transfers show that Americans at the 10th percentile of the American income distribution (9 percent have less, 90 percent have more) fare about the same as Nordic people at the 10th percentile of their distribution. Americans have more opportunity to reach higher incomes because Americans in the upper half of the distribution have much higher incomes than Nordic people in the upper half of their income distributions. On the other hand, households below the 10th percentile in America fare much worse on average than the lowest group in the Nordic countries. Despite a large array of poverty programs, people in the U.S. are falling through holes in the safety net. We know that a substantial number of people eligible for a wide range of benefits in the U.S. don’t receive them, either because they don’t apply or the U.S. delivery of services is not that good.
Is the U.S. safety net a better system than the universal Nordic programs? Many Nordic people seem to prefer theirs, and many Americans seem to prefer ours. Despite the difference in approaches, the striking feature here is that the amounts spent per person in the population are not that different. The U.S., like most developed and developing countries, has greatly expanded its demand for security, and thus expenditures on social welfare have risen dramatically throughout the past century.