Who Spends More on Social Welfare: the United States or Sweden?

One of our favorite economic historians, Price Fishback,?returns to the Freakonomics blog. In the past, Price’s blog posts have focused on what we can?learn about today’s economic situation from the experiences of?the Great Depression and the New Deal. My personal favorite,?which I quote on a weekly basis, is this post pointing out how categorically different the Great Depression?was from our recent “Great Recession.”

In today’s post, Price tackles the question of who spends more?on social welfare, the U.S. or the Nordic countries? What he?discovers will likely surprise you.

Price Fishback is a Professor of Economics at the University of Arizona.

Who Spends More on Social Welfare: the United States or Sweden?
By Price Fishback

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.


The_Healer

You wrote:

"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."

False and simply absurd!

Just because there are Americans who "make more money" doesn't prove that the bottom 50% of income will have opportunties to move up.

Just because I'm standing in a room with Bill Gates, does not mean I will have "more opportunity" in the future to become richer.

Absurd assumption!

The European Dream: How Europe's Vision of the Future Is Quietly Eclipsing the American Dream
http://en.wikipedia.org/wiki/The_European_Dream

Audrey Feyen

IF the US welfare system is better, why do the Swedes get better child care (paid for by the gov't), and more time off when they have babies, have fewer people who are stuck in the poverty cycle, etc. I think I'd rather benefit from their safety net.

CaptainOblivious

"Just because I'm standing in a room with Bill Gates, does not mean I will have "more opportunity" in the future to become richer."

I have to point out that at one point, Bill Gates was not rich and stood in a room with the largest computer company the world had ever seen (IBM)... the rest is history...

frankenduf

this post seems circular- the US spends more on social welfare, and the US is more stratified, so it spends more on social welfare- the level of stratification alone is enough to answer the question of which country has better social spending- this question is analagous to healthcare- the US far outspends all other countries, but our outcomes are no better

Cory

The Healer -- that is a logical fallacy, but it is the same one that caused you to conclude that the statement that we do not have more opportunity is false.

The only relevant statistic for that is income mobility, which I know that I have seen before. Since you don't post that, you don't have a basis for claiming the statement is false (it, in fact, may be true).

In the interest of bias disclosure, having grown up in a single family home to now enjoying a comfortable income, I tend to believe that the opportunity is there for those who work hard enough to take advantage of it.

Eric M. Jones

@1--The_Healer

Right on brother. Reading this guys stuff makes me suspicious that he is twisting the logic to prove a point. A comparative graph of income distribution would clear up a lot of claims.

The truth is....The US has an upper income distribution that prevents much upward mobility. This was not always true. The US military-industrial complex is basically welfare for warfare. We make advanced weapons that will never be used. Do we NEED another Nuclear Trident-armed submarine? This serves what purpose exactly?

ak

I think what's he's actually saying is that if you "move up" an equal amount in both countries, you are better off in the US.

Stuart Greenfield

What a great relief to know that GB 43's "compassionate conservatism" was a complete success and that we now have social welfare expenditures on par w/ the Nordic countries. Let's hope that the current administration continues w/ the Bush policies.

rich

@Audrey I don't think the author was making the argument that the US welfare system was better. Just proving that we spend an amount that is similar to Nordic countries.

Of course someone will find flaws in what was written, but u have often thought that we would be surprised as to how much welfare the US supplies. Then the next logical question is, "why the hell don't we universal health care!?"

We spend a comparable amount in welfare. We spend way more on health care. Why are we wasting money on via private insurers? I actually think welfare in the United States is superior to other countries... But in other ways we fail terribly.

assumo

The people who are most against government spending fail to account for the means by which Federal, State, and Local governments recover the money that flows from public accounts. We shouldn't equivocate government spending with personal finance: Everything the government spends money on is an investment.

Wonks Anonymous

If I may simplify:

We spend roughly the same amount but we favor elaborate tax breaks and complicated means tested programs over simple universal distribution of services such as child care, health care and family leave.

We do this because we believe that our extremely complex system is better able to measure need and direct funds.

In reality the quality of services and the support for the really needy is worse here than it is in Scandinavia.

We spend more and we get less. Except that we probably support an army of accountants and billing clerks who would not have jobs in those other backward countries.

Kirilius

I think one big difference between the two systems is how the money is applied across the social strata.

In the US it seems the welfare money goes primarily to those who have ALREADY fallen through the cracks, i.e. the poorest. In Nordic countires welfare is available even to the relatively wealthier citizens which allows them to stay away from those cracks.

It looks to me the Nordic system is more effective because with the same (according to the above) amount of spending it is focusing on PREVENTION of poverty instead on keeping the poor from dying (like in the US).

To me it is cheaper to keep someone from becoming poor than supporting him after he becomes poor.

David

Very persuasive article, but insidious as it intellectualizes and glosses over a fundamental point.

"the appropriate measure is net public and private social welfare expenditures per capita"

It is easy to ignore the fact that American's are far and away the most generous people that have ever walked the Earth. It is also easy (and convenient) to ignore the compulsory and confiscitory nature of governmental "generosity" using OPiuM (Other People's Money).
I (and most people) rarely object to people doing what they want with their money, but equating this liberty with governmental largesse is to equate donations and robbery.

Philip Rothman

Excellent piece!

Michael

What I see here is "by juggling the numbers, I can work it so it looks like the US spends more."

I have to give it to you though: you made it wordy enough that the core argument doesn't seem like a high-school debate project.

David Chowes, New York City

TWO IMPORATANT RESONSES:

Sweden is a far more homogeneous nation.

The percent of members of the "underclass" is far smaller in Sweden vis-a-vis the United States -- which seems to be, in the main permanent and growing rather than shrinking.

Alex

Theoretical question:

Would it be so bad if there was a county, or set of countries with drastically differnt economic climates?

With the world being so much smaller, people could choose between a government run by Ron Paul, or one by Obama, or one by Jóhanna Sigurðardóttir (Iceland). Inter-governmental competition has to be a good thing.

Mike L

Here is a piece by an economic historian whose name contains both the words "price" and "back" and there's no mention of name/occupation correlation?

briang

"The best test of a civilized society is the way it treats is weakest members."

"households below the 10th percentile in America fare much worse on average than the lowest group in the Nordic countries"

My vote: Sweden.

@Wonks Anon and @Krilius make good points above: the US has an elaborate system with both federal and state transfer payments that is difficult to understand and allows people in the lowest decile to suffer disproportionately. The Nordic system is easier to use and helps prevent people from reaching this level of poverty.

Balls

The following statement has little merit:

"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. "

If neither group has ever experienced the other system.

If I've only ever had access to vanilla Ice cream, then sure I prefer it, but can you infer anything about chocolate?

I suspect if you ran an experiment, you'd find the results different. Especially if it took into account the various strengths and weaknesses of both systems (ie the average cost to a nord, vs the cutting edge available to an 'mercan).