AEA DISTINGUISHED LECTURE - Public Economics and Inequality: Uncovering Our Social Nature

Page created by Denise Goodwin
 
CONTINUE READING
AEA Papers and Proceedings 2021, 111: 1–26
https://doi.org/10.1257/pandp.20211098

                                         AEA DISTINGUISHED LECTURE

      Public Economics and Inequality: Uncovering Our Social Nature†

                                                      By Emmanuel Saez*

         The standard economic model is based on                           people.2 Indeed, the large increase in income
      rational and ­  self-interested individuals who                     concentration in the United States and a num-
      interact through markets, yet it is obvious that                    ber of other advanced economies since 1980
      humans are also social beings who care about                        has attracted a lot of attention (see for example,
      and act within groups such as families, work-                       Piketty 2014’s best-seller success) and figures
      places, communities, or nations.                                    prominently in the policy debate.
         In the standard model, individuals care about                        The evolution of inequality is illustrated on
      only their own consumption independently of                         panel A of Figure 1, which depicts the share of
      social context. Taken literally, the model says                     income earned by the top 10 percent of adults
      that a person struggling at the poverty thresh-                     since the early twentieth century in the United
      old today gets as much utility as a successful                      States and France using comparable method-
      professional two centuries ago when income                          ology. In this paper, I will contrast the United
      per capita was less than one-tenth of what it is                    States (often described as a small government
      today.1 Therefore, economic growth should beat                      ­free-market economy) with France (with a larger
      inequality concerns in the ­long run. As Robert                      government and more regulated economy). Let
      Lucas once put it, “Of the tendencies that are                       us focus first on t­he pretax series before taxes
      harmful to sound economics, the most seduc-                          and transfers. Both countries show dramatic
      tive, and in my opinion the most poisonous, is                       variations over the century. The United States
      to focus on questions of distribution” (Lucas                        experienced a sharp—and lasting—compres-
      2004). Yet, in spite of this extraordinary income                    sion in inequality exactly during World War II
      growth, concerns about inequality and poverty                        at a time of deep government involvement in the
      remain alive and well in our advanced econo-                         war economy. Around 1980, coinciding with the
      mies, implying that relative positions matter to                     Reagan revolution, inequality started to increase
                                                                           and has now reverted back to its ­       pre-World
                                                                           War II levels. France also experienced a sharp
                                                                           reduction in inequality during the first half of
                                                                           the ­twentieth century but did not embrace the
                                                                           Reaganian revolution and experienced only
          * University of California, Berkeley (email: saez@               a much more modest increase in inequality in
      econ.berkeley.edu). This paper was presented as the AEA              recent decades. This figure strongly suggests
      Distinguished Lecture in January 2021, available online
      at     https://www.aeaweb.org/conference/2021-live-stream.           that political developments play a large role in
      I thank Ulrike Malmendier, Pascal Michaillat, Thomas                 shaping ­pretax inequality, over and above tradi-
      Piketty, Stefanie Stantcheva, and Gabriel Zucman for help-           tional economic forces of technology or global-
      ful comments and discussions. Akcan Balkir provided out-             ization (Alvaredo et al. 2018).
      standing research assistance. I acknowledge funding from
      the Berkeley Center for Equitable Growth and the Berkeley
                                                                              Perhaps the most striking fact in modern
      Stone Center on Wealth and Income Inequality.                        economies illustrating both our social nature and
          †
            Go to https://doi.org/10.1257/pandp.20211098 to visit          concerns for inequality is the size of ­government
      the article page for additional materials and author disclo-
      sure statement.
          1
            The Maddison Project gathers ­long-term growth statis-
                                                                             2
      tics and shows that advanced economies experienced a more                A wide literature has documented relative ­well-being
      than t­enfold increase in GDP per capita since the industrial       effects (see, e.g., Luttmer 2005 and most recently Hvidberg,
                        ­ id-nineteenth century (Maddison 2007).
      revolution of the m                                                 Kreiner, and Stantcheva 2020 for systematic surveys).
                                                                      1
2                                         AEA PAPERS AND PROCEEDINGS                                          MAY 2021

Panel A. Top 10 percent income shares in the                      income and are used to fund not only public
United States and France, 1910–2018                               goods needed for the functioning of the economy
50%                                                               but also a wide array of transfers back to indi-
                                                                  viduals, both in cash and ­in kind. Even though
45%
                                                                  modern economies generally allocate the fruits
40%                                                               of production to workers and owners through
35%                                                               a capitalistic market system with ­well-defined
30%
                                                                  property rights, as societies, a significant frac-
                                                                  tion of market incomes, typically between one-
25%
                                                                  third and one-half, is shared (that is, effectively
20%                                                               “socialized”) through government. Panel B in
                                                                  Figure 1 shows how the tax burden (including
       10

       20

       30

       40

       50

       60

       70

       80

       90

       00

       10

      20
    20
    19

    19

    19

    19

    19

    19

    19

    19

    19

    20

    20
                      US pretax     France pretax
                                                                  all taxes at all levels of government) is dis-
                      US posttax    France posttax                tributed across income groups in 2018 in the
                                                                  United States and France. In both countries, the
Panel B. Average tax rates by income group in                     tax system is approximately a proportional tax
2018: United States versus France
                                                                  that takes the same percentage of ­pretax income
 60%
             France                                               from each group, with some progressivity over
 50%
                                                                  most of the distribution and some regressivity at
 40%                                                              the top. In France, tax rates are almost 20 points
             United States
 30%                                                              higher than in the United States throughout the
 20%                                                              distribution, but it is worth ­reemphasizing that a
    10%                                                           tax rate of almost 30 percent in the United States
    0%                                                            is still a significant share of the economy.
                                                                      While a proportional tax does not affect
            P1 –10
            P2 –20
            P3 –30
            P4 –40

              0 0
            P6 –60
            P7 –70
            P8 –80

              0 0
          P9 95– 5
     P9 99. –99 9
       9. 9– .9

         9. 9.9 9
             9– 9
                   0
            P5 –5

            P9 –9
            P –9
       P 9 9

      P9 9–9 9.9
           99 9
                10

                                                                  inequality, government spending does reduce
             P0

              0
              0
              0
              0

              0
              0
              0

         9 9

                                                                  inequality substantially. Many government
                                                                  transfers, such as universal health insurance or
                                                                  public education, are allocated on a ­per-person
          Figure 1. Inequality and Government                     basis. Others are targeted to lower earners (such
                                                                  as Medicaid health insurance in the United
Notes: This figure illustrates the evolution of inequality and    States). Panel A in Figure 1 illustrates the direct
the direct impact of government through taxes and transfers
in the United States and France. Panel A depicts the share
                                                                  equalizing impact of taxes and government
of total national income earned by the top 10 percent of          spending on inequality by depicting the top 10
adults (aged 20 and above) from 1910 to 2018 on a p­ retax        percent income share after subtracting all taxes
and ­posttax basis. Income within married couples is equally      and adding all transfers. This share is substan-
split. P
       ­ retax income is before taxes and excluding govern-       tially below the ­pretax income share, especially
ment transfers. ­Posttax income is after subtracting all taxes
and including all government transfers and spending. Panel        over the past 50 years when government is big-
B depicts the average tax rate (as a percent of ­pretax income)   ger. Even though US inequality is almost as high
in 2018 by decile (­P0–10 is the bottom decile, etc.), with       now as it was in the early twentieth century on
a finer breakdown within the top decile. It includes taxes        a ­pretax basis, it is still substantially lower on a
at all levels of government. Series for both countries fol-
low the same distributional national account methodology
                                                                  ­posttax basis. For France, inequality on a p­ osttax
(Alvaredo et al. 2020).                                            basis today is close to its a­ ll-time low. The total
                                                                   equalizing effect of government is much wider
Sources: Piketty, Saez, and Zucman (2018), September 2020
update for the United States; Bozio et al. (2020) for France
                                                                   than depicted in the figure, as public policies
                                                                   such as universal public education also have a
                                                                   large positive and equalizing impact on p­ retax
and the large direct impact it has on the distribu-                incomes.
tion of economic resources. In advanced modern                        The standard economic model of s­elf-
economies, we pool a large fraction of the eco-                    interested agents who interact through markets
nomic output we produce through government.                        generates efficiency under classical competitive
In the richest countries today, taxes generally                    assumptions. Given the technology and resource
raise between 30 and 50 percent of national                        constraints, there is no way to reorganize from
VOL. 111                                  AEA DISTINGUISHED LECTURE                                    3

a market equilibrium to make everybody bet-            before knowing your position on the economic
ter off. The economy that arises from such a           ladder—behind the veil of ignorance, as Rawls
complex web of market interactions generates           (1971) famously put it. The tax and transfer
the illusion of sociality even though sociality        system effectively provides such insurance.
is not part of the model. As Margaret Thatcher         However, as we shall see, the redistribution done
(1987) put it for a wide audience, “Who is soci-       by government is primarily ­in kind or targeted
ety? There is no such thing! There are individ-        to specific groups and therefore quite different
ual men and women, and there are families, and         from the across-the-board redistribution pre-
no government can do anything except through           dicted by standard utilitarian optimal tax theory.
people, and people look to themselves first.”             In this paper, I want to argue that the social
Public economists have worked primarily within         nature of humans, absent from the standard eco-
this standard framework to explain (or criticize)      nomic model, is crucial for understanding our
why we nonetheless observe such large govern-          large modern governments and why concerns
ments in practice. Government intervention is          about inequality are so pervasive. A social solu-
traditionally justified in two domains.                tion arises when a situation is resolved at the
    First, there can be market failures if the stan-   group level—rather than the individual level.
dard competitive assumptions do not hold, for          For example, providing classical public goods
example, because of externalities, market power,       such as national defense funded through tax-
or asymmetric information. Such situations can         ation of private incomes is a social solution.
often be addressed with a government interven-         Generally, a social solution requires coopera-
tion that can restore efficiency and sometimes         tion (such as obeying tax laws) and fair distri-
even create a Pareto improvement. For exam-            bution of the resulting surplus (accepting how
ple, corrective taxation can be used to properly       the public good will be financed through taxes).
price externalities and get the economy back to        Humans have been shaped, through many mil-
market efficiency. While such government inter-        lennia of evolution, to work together for the
ventions to address market failures are broadly        benefit of the group. This extraordinary ability
supported by economists, they can hardly justify       to cooperate and find social solutions is perva-
the very large size of governments we observe.         sive even outside government, which is just the
    Second, public economists justify direct           most obviously visible form of social coopera-
redistribution with taxes and transfers as a way       tion in our modern economies. I will illustrate
to increase social welfare, generally measured         this through a number of examples taken from
as the straight sum of individual utilities—the        various fields of economics: public economics,
famous utilitarian criterion. Because marginal         labor economics, behavioral economics, and
utility of consumption decreases with income,          lab experiments. The ideas presented here draw
redistributing resources from high earners to          upon large academic literatures in many fields
low earners increases total utility, a point orig-     of economics and the social sciences, of which
inally made by Edgeworth (1897). But because           I know and have cited but a small subset, pri-
individuals care about only themselves, they           marily the readings that have influenced me the
view taxes as reducing their gain from work            most. The empirical evidence shown is volun-
and hence might work less. This creates an             tarily illustrative rather than comprehensive so
­equity-efficiency trade-off that is resolved by the   as to present ideas in the simplest way.
 optimal income tax analysis that Mirrlees (1971)         In human societies, childcare and education
 launched. This second aspect is more controver-       for the young, retirement benefits for the old,
 sial among economists because it requires intro-      health care for the sick, and income support for
 ducing a social welfare function that is outside      those in need are to a large extent resolved at
 the standard framework. In most interpretations,      the social level rather than the individual level.
 this social welfare function reflects the views       This was traditionally done informally through
 of society embodied into a government that            the community and family and is now achieved
 chooses the tax system. Another interpretation,       through the modern social state in advanced
 easier to embed in the standard framework, is         economies. Even though an individual solu-
 that ­self-interested individuals would want some     tion through markets is theoretically possible, it
 redistribution as insurance against the risk of       does not work well in practice ­without signif-
 being poor if such insurance could be obtained        icant institutional or government help. Human
4                                  AEA PAPERS AND PROCEEDINGS                                            MAY 2021

societies are good at providing education, health      through history to what it is today, revealing
care, and retirement and income support even           our social nature. In Section II, I describe how
though individuals are not. However, such              the modern social state works. In Section III, I
social aspects are quite different from a gen-         emphasize that labor supply choices have a very
eral willingness to redistribute out of utilitarian    large social component through social state reg-
principles. In all advanced economies, income          ulations. In Section IV, I show that this social
support is primarily targeted to groups unable to      nature permeates beyond government and helps
work and delivered ­in kind rather than in cash.       explain why inequality concerns are so perva-
Income support to groups expected to work and          sive. Section V concludes.
support themselves always raises concerns and
hence is generally paired with help or a push to       I. How Social Redistribution Evolved to What It
find work. Societies dislike having to face the                           Is Today
­equity-efficiency trade-off and hence try to cir-
 cumvent it rather than embrace it, as standard                 A. ­Prehistory: ­Hunter-Gatherers
 optimal tax theory posits.
    The standard concern is that the social state         Homo sapiens is 200,000 years old, and up
 with its large taxes and transfers might discour-     to 12,000 years ago, humans have been orga-
 age labor supply. However, the social state also      nized in ­hunter-gatherer societies (Harari 2014).
 intentionally reduces labor supply by design          Therefore, the ­ hunter-gatherer form of social
 through various regulations: child labor prohi-       organization covers 94 percent of human his-
 bitions and compulsory education limit work by        tory and over 99.4 percent of homo history
 the young, retirement benefits sharply reduce         if one considers our hominin ­     hunter-gatherer
 work in old age, and overtime hours-of-work           ancestors that go back at least two million years
 regulations and mandated paid vacation (for           (Tattersall 2012). A handful of ­hunter-gatherer
 example, five weeks in France) reduce work            societies remain to this day and have been stud-
 across the board. This implies that labor supply      ied extensively by anthropologists, with various
 should be seen partly as a social choice, with        studies analyzing specifically their economic
 society having disutility of labor for the very       organization.3
 young, the old, and very long hours with no              Hunter-gatherer societies are generally
                                                          ­
 vacation break.                                       small—typically less than 100 people. They
    Social solutions are common even outside           are also fairly egalitarian, as they have minimal
 government, including within private firms,           private wealth and leaders with limited power.
 and play a significant role in the distribution       Private wealth is minimal because the land
 of ­pretax market incomes. Almost any work            and its natural resources—animals for hunting
 activity requires cooperation in production that      and plants for gathering—is communally held.
 cannot be mediated solely through markets.            Furthermore, nomadism drastically limits the
 Situations with cooperation in production and         accumulation of private housing, goods, and
 ensuing distribution of surplus are common in         tools (Woodburn 1982). Leaders have lim-
 all human societies. This has shaped us to be         ited power because the rank and file vigilantly
 both good at cooperation and very sensitive to        keep leaders from becoming despotic through
 inequality. Even in modern economies, rigid           a reverse dominance strategy, as hypothesized
 compensation rules for distributing the fruits of     by Boehm (1999, p. 105). As he summarizes it,
 production are a pervasive way to resolve the         “All men seek to rule, but if they cannot rule they
 distributional issue. This also means that there      prefer to be equal.” A good analogy familiar to
 is more scope to address inequality at the p­ retax   the reader is the modern academic department
 level than economists generally believe. ­Pretax
 distribution of production between workers and
 owners has indeed been historically the place            3
                                                            Malinowski (1922), Mauss (1925), and Firth (1939)
 where inequality is shaped, with government           are classic studies. Economic anthropology is an active field
 setting the rules of the game and hence having a      of research within anthropology/sociology but with a mod-
                                                       est impact (so far) on mainstream economics. Thurnwald
 very large but indirect impact.                       (1932) and Sahlins (1972) are influential economic studies
    The paper is organized as follows. In Section I,   of early societies; see Wilk and Cliggett (2007) for a modern
 I discuss how government redistribution evolved       textbook on economic anthropology.
VOL. 111                                         AEA DISTINGUISHED LECTURE                                                 5

in universities: faculty are protective of their               c­ ollection, and cooking. Assuming that one-third
independence and do not tolerate a chair with                   of work is hunting, where product is pooled,
excessive power.                                                this adds 25 percent of output to the shared
     Community cooperation and sharing is com-                  pool.6 Similar to nations today, there is pool-
mon for many tasks. As is well known, humans                    ing of resources within the group but not across
were able to hunt (sometimes to extinction) big                 groups. Instead of pooling resources, different
and dangerous game through group cooperation                    groups trade goods and sometimes fight over the
(Diamond 1997). There are sharing norms for                     control of natural resources (Thurnwald 1932).
the produce of hunting through customs and rec-                    How are hunters motivated to hunt if the
iprocity rather than markets. The rationale for                 produce is communally shared? From an evo-
such norms is that this avoids distributional con-              lutionary perspective, if cooperation gave hom-
flicts. Distribution among the full community is                inids and then humans an edge, it makes sense
common and also makes sense in a setting with                   that motivation cannot be solely ­self-interested
limited storage. In contrast, gathering is an indi-             and that individuals value working for the
vidual task and is typically only shared within                 group (Gintis et al. 2003, Henrich et al. 2004).7
the family, not the community (Thurnwald                        Laziness is indeed seen as an a­ ntisocial behav-
1932, p. 266). Therefore, there is generally                    ior (Thurnwald 1932). As Polanyi (1944,
­norm-based sharing for cooperative work but                    p. 270) summarized the anthropological work of
 not for individual work.                                       Malinowski, Thurnwald, and Firth on primitive
     Humans’ life cycle means that the young, old,              societies, “The usual incentives to labor are not
 and sick cannot support themselves and hence                   [individual] gain but reciprocity, competition,
 need support from others. In ­     hunter-gatherer             joy of work, and social approbation.” Again,
 societies, they are taken care of through a mix                these motivations for work are familiar to the
 of family and community support. Presence of                   modern academic researcher. Monetary gain is
 the elderly has been documented in the fossil                  not our immediate motivation, while reciprocity
 record among ancestors of Homo sapiens and                     when working in a team with ­coauthors often
 exploded over the last 30,000 years (Caspari                   is. Competition with other teams to produce the
 and Lee 2004). This implies that the old were                  most influential research is clearly a motivator.
 cared for in prehistorical human societies.                    Joy of work is needed to be able to sustain long
 They also helped with child-rearing (the grand-                hours of work for many years. Social appro-
 mother hypothesis proposed by Williams 1957).                  bation in the form of reputation among peers
 Children are generally raised in village groups.               clearly matters to us as well.
 Children play and learn and do not start working
 until adolescence.4                                                      B. History: The Coercive State
     Therefore, the pooling of economic resources
 among ­hunter-gatherers is fairly high, proba-                   About 12,000 years ago, agriculture trans-
 bly around 50 percent. This rough estimate can                formed human societies into sedentary com-
 be obtained as follows. Wealth in the form of                 munities that sometimes became socially
 land and its natural resources is communal and                stratified, as a ruling class could take control
 hence so is the implicit capital income, esti-                (Thurnwald 1932). In the most fertile areas—
 mated to be 25 percent of output by analogy to                Mesopotamia, the Nile Valley, the Yangtze River
 ­preindustrial economies.5 Labor income, 75 per-              in China—formal city-states arose about 6,000
  cent of the remaining output, is generally pooled            years ago. They were organized as despotic
  for hunting but typically not gathering, firewood
                                                                   6
                                                                     This is naturally a very rough approximation in such
                                                               a vast anthropological context. Besides food production,
   4
     For example, Biesele and Howell (1981) analyze the        there are other labor tasks, some of which are communal
contemporaneous !Kung ­hunter-gatherers from South West        like warfare and some of which are private such as making
Africa and discuss aging and child-rearing aspects.            household artifacts.
   5
     Piketty and Zucman (2014) and Piketty (2014) show             7
                                                                     Social species have evolved to cooperate in production.
that capital income and wealth were mostly derived from        In the most extreme cases, such as ants or bees, each individ-
land but were quantitatively as important as in our advanced   ual works for the group, implying an almost 100 percent tax
economies in eighteenth-century France and the United          rate. Humans are in between purely social species and purely
Kingdom (relative to the size of the economy).                 individualistic species (Wilson 2012).
6                                      AEA PAPERS AND PROCEEDINGS                                      MAY 2021

kingdoms, and they invented taxes and writing                   In coercive states, social support for the
as administrative tools for the new formal state.            young, elderly, and sick shrunk down to the
Writing defines the beginning of history and was             family rather than the community, although
initially invented for the administration and, in            some institutions, most notably the church, did
particular, the tax administration of the state.             provide some education, health care, and indi-
They also used forced labor, with various grada-             gent support for those with no family support.
tions from serfdom to slavery. The goal was to               For the vast majority of the population, educa-
serve and enhance the power of the state—often               tion was minimal. For the wealthy few, educa-
identified with the ruler or ruling family—rather            tion was generally paid for by parents. Child
than the welfare of the community. Taxes and                 labor became very common. People usually kept
forced labor funded the construction of mon-                 working in old age, even when their productiv-
umental cities and infrastructure, defense and               ity—and hence earnings—fell (Minois 1989).
warfare, law and order, and the other functions              When they could no longer support themselves,
of the administrative state, that is, the regalian           they were generally supported by their children,
public goods. Health declined due to the risk of             as savings and accumulation of wealth was lim-
relying on a single crop and infectious diseases             ited to a small elite. For the few countries for
in dense populations. This made the early city-              which we have data, the bottom 90 percent of
states fragile (Scott 2017).                                 the population owned very little (Piketty 2020).
   These despotic communities are much more                  Health care was rudimentary, and the sick gen-
unequal both politically and economically than               erally relied on their families to support them
earlier ­hunter-gatherer communities (Boehm                  while they could not work.
1999). Indeed, wealth and political power are                   Forced labor slowly decreased and was abol-
closely correlated, as chiefs or kings rule and              ished in most Western countries a few centuries
have control of the land and infrastructure.8                ago, although slavery lasted into the nineteenth
   Coercive states slowly overtook the                       century in their colonies and in the newly inde-
hunter-gatherer and sedentary agricultural
­                                                            pendent United States.
communities in the Western world as well as                     The level of taxes—even when including
in many parts of Asia and South America and                  local taxes—was typically low, less than 10 per-
became the most common form of social orga-                  cent of output in all western countries for which
nization up until modern democracies started                 we have data all the way until the beginning
emerging a few centuries ago, such as the United             of the twentieth century (Piketty 2020, chapter
States and France in the late eighteenth cen-                9). Such a low level of taxation can only fund
tury. Democratization itself is a slow process,              regalian public goods (administration, law and
as many groups are initially excluded. Women                 order, defense, infrastructure) but not the social
could not vote until 1920 in the United States               state. Furthermore, the tax system was typically
and 1945 in France. Many countries excluded                  regressive, as taxes were either taxes on con-
the poor from voting with poll taxes or literacy             sumption, rudimentary poll taxes and property
or property ownership requirements. Emerging                 taxes on real estate, or flat taxes on agricultural
democracies could also be extremely coercive                 output (Ardant 1971).
against specific groups, either internally, such                Throughout this long history, the challenge of
as Native Americans as the frontier expanded                 despotic states is to extract revenue to enhance
or enslaved ­African-Americans until 1865, or                the power of the state without generating tax
externally through colonies—the French and                   revolts (Webber and Wildavsky 1986). As Jean-
British empires undemocratically ruled over                  Baptiste Colbert, the finance minister of Louis
about 30 percent of the world population in the              the XIV of France, put it, “The art of taxation
early twentieth century (see Piketty 2020 for an             consists in so plucking the goose as to procure
extended analysis).                                          the largest quantity of feathers with the least
                                                             possible amount of hissing.” Taxes were low
                                                             because enforcement was difficult in a mostly
  8                                                          informal economy, and tough enforcement could
    To this day in autocratic states, wealth and political
power are often closely aligned, as the autocrat has the     backfire in the form of tax revolts. This view of
power to redistribute wealth toward himself and his family   taxes funding a coercive state still has resonance
(Acemoglu and Robinson 2012).                                today among libertarians, particularly in the
VOL. 111                                          AEA DISTINGUISHED LECTURE                                                                                   7

United States, which they view as a democracy                        Panel A. The rise of the fiscal state
founded through a tax revolt against the British                                               60

                                                                 Tax revenue/national
crown: “no taxation without representation.”9

                                                                   income (percent)
                                                                                               50

                                                                                               40
       C. The Rise of the Social State in the
                                                                                               30
               Twentieth Century
                                                                                               20
   An extraordinary transformation of our soci-                                                10
eties took place during the twentieth century.                                                     0
In advanced economies, the size of the gov-

                                                                                              18 0
                                                                                                 80

                                                                                              19 0
                                                                                              19 0
                                                                                                 10
                                                                                                 20

                                                                                              19 0
                                                                                              19 0
                                                                                              19 0
                                                                                              19 0
                                                                                              19 0
                                                                                                 80

                                                                                              20 0
                                                                                              20 0
                                                                                                 10
                                                                                                 18
                                                                                                 7

                                                                                                 9
                                                                                                 0

                                                                                                 3
                                                                                                 4
                                                                                                 5
                                                                                                 6
                                                                                                 7

                                                                                                 9
                                                                                                 0

                                                                                              20
                                                                                              18

                                                                                              18

                                                                                              19
                                                                                              19

                                                                                              19
ernment measured by tax revenue to national
                                                                                                             Sweden    Germany         United States
income increased from less than 10 percent to
                                                                                                             France    Britain
levels between 30 and 50 percent.10 Panel A in
Figure 2 (taken from Piketty 2020) illustrates                       Panel B. The rise of the social state in Europe
this for a few countries­—the United States, the                                              50

                                                                 Percent of national income
United Kingdom, France, and Sweden. In all                                                                                                             6%
these countries, the tax ratio was low (below 10                                              40                                                       5%
percent) and flat until World War I, increased                                                                                                         9%
                                                                                              30
until around the late 1970s, and then has been
roughly stable thereafter. The exact timing of the                                            20
                                                                                                                                                       11%
tax increases and the final level of the ratio differ                                                                                                  6%
across countries, with France and Sweden stabi-                                               10
                                                                                                       1%         2%
                                                                                                                                                       10%
lizing around 50 percent and the United States                                                         6%         8%
around 30 percent (and the United Kindgom
                                                                                               0
                                                                                              18 0
                                                                                              18 0
                                                                                              19 0
                                                                                                 00
                                                                                                 10
                                                                                                 20
                                                                                                 30

                                                                                              19 0
                                                                                              19 0
                                                                                                 60
                                                                                                 70

                                                                                              19 0
                                                                                                 90
                                                                                                 00
                                                                                                 10
around 40 percent).
                                                                                                 7
                                                                                                 8
                                                                                                 9

                                                                                                 4
                                                                                                 5

                                                                                                 8

                                                                                              20
                                                                                              19
                                                                                              18

                                                                                              19
                                                                                              19
                                                                                              19

                                                                                              19
                                                                                              19

                                                                                              20
   Panel B in Figure 2 (also created in Piketty                                                Other social spending       Retirement + disability benefits
2020) depicts the evolution of the composition                                                 Cash social transfers       Education
of government spending (relative to national                                                   Health care                 Regalian public goods
income) in Europe (the average of France,
Germany, Sweden, and the United Kingdom)                                                  Figure 2. The Rise of Government in the Twentieth
since 1880. Up to the early twentieth century,                                                                  Century
the bulk of government spending was devoted to
regalian public goods, as discussed previously.                         Notes: Panel A depicts total tax revenue as a percent of
                                                                        national income by decade in five countries. Taxes at all
The growth of government over the twentieth                             levels of government are included. This is reproduced
century is almost entirely due to the growth                            from Piketty (2020, figure 10.14) and updated so the last
in the social state that provides education and                         point is 2018. Panel B depicts the composition of govern-
childcare support for the young, health care for                        ment spending by decade in Europe (average for Germany,
                                                                        France, Britain, and Sweden). This is reproduced from
the sick, retirement benefits for the old, and an                       Piketty (2020, figure 10.15). Regalian public goods include
array of income support programs for groups in                          defense, law and order, administration, and infrastructure.
need, such as the disabled, unemployed, or poor.                        Cash social transfers include unemployment benefits, family
Essentially, the social state provides support                          benefits, and m­ eans-tested benefits. Other social spending
for those who cannot provide for themselves                             includes i­n-kind spending such as public housing.
because they are young, old, sick, or otherwise                         Sources: Piketty (2020, figures 10.14 and 10.15), created
                                                                        from OECD statistics and earlier historical statistics

    9
      As we mentioned above, America was at first an incom-             unable to earn a living. Let us review the histori-
plete democracy. Before then, American colonies had a lot               cal development of each pillar in turn.
of autonomy in setting their tax systems with regressive
taxes in the South but incredibly progressive taxes—for the               Education.—Tax-funded and compulsory
time—in the North (Einhorn 2006).
    10
       Flora (1983) gathers the most extensive historical sta-          education is the pillar of the social state that
tistics, and OECD (2020c) covers the contemporary period                develops first. The motivation is in part nation
since 1965.                                                             building and hence fits within the framework
8                                AEA PAPERS AND PROCEEDINGS                                                       MAY 2021

 of the coercive state building its power. But the   Panel A. School enrollment at ages 5–14, 1830–1930
 social aspect of universal human development        100%
 and opportunity is also part of the motivation.
    Prussia and Austria were the first to adopt      80%

 compulsory schooling in the ­      mid-eighteenth   60%
 century (Van Horn Melton 1988). America was                                                                    United States

 also a precursor in mass education but follow-      40%        Slavery and school                              US Blacks

 ing a decentralized process (instead of nation      20%
                                                                  prohibition end                               Prussia
                                                                                                                France
 building). Massachusetts was the first US state
 to enact compulsory education in 1852 (and had       0%

                                                         0

                                                                 0

                                                                       0

                                                                              0

                                                                                     0

                                                                                            0

                                                                                                   0

                                                                                                          0

                                                                                                                  10

                                                                                                                  20

                                                                                                                  30
 already achieved a high level of schooling when

                                                         3

                                                                 4

                                                                        5

                                                                               6

                                                                                      7

                                                                                             8

                                                                                                    9

                                                                                                           0
                                                                                                               19
                                                      18

                                                              18

                                                                     18

                                                                            18

                                                                                   18

                                                                                          18

                                                                                                 18

                                                                                                        19

                                                                                                               19

                                                                                                               19
 it was still a British colony). Mississippi was
 the last state to adopt compulsory schooling in     Panel B. Primary school enrollment in Russia,
 1917.                                               Korea, and Indonesia                 Korea compulsory
    Historically, mass education is always gov-                                                           primary education
                                                     100%
 ernment driven through a combination of gov-
 ernment funding (at all levels including higher      80%       Russia compulsory

 education) and compulsory schooling (for pri-
                                                                primary education
                                                      60%
 mary and then secondary education). Meyer,
 Ramirez, and Soysal (1992) provide an empir-         40%                                                      Indonesia
                                                                                                              compulsory
ical analysis of the development of mass educa-       20%                                                  primary education
tion through nation-states.
    Let us illustrate this in Figure 3. Panel A in     0%
Figure 3 shows that in the early nineteenth cen-
                                                            0

                                                                     0

                                                                    10

                                                                    20

                                                                    30

                                                                    40

                                                                    50

                                                                    60

                                                                    70

                                                                    80

                                                                    90
                                                          9

                                                                 0
                                                                 19
                                                       18

                                                              19

                                                                 19

                                                                 19

                                                                 19

                                                                 19

                                                                 19

                                                                 19

                                                                 19

                                                                 19
tury, Prussia and the United States already had
school enrollment rates at age ­5–14 of around                   Figure 3. The Rise of Mass Education
two-thirds, substantially higher than other coun-
tries. France caught up slowly over the nine-        Notes: Panel A depicts the fraction of children aged ­5–14
teenth century. Slavery in America also imposed      enrolled in school (public or private) in the United States,
school prohibitions on the enslaved so that the      among Blacks in the United States, in Prussia, and in France
                                                     from 1830 to 1930. Enslaved children in the United States
school enrollment rate of Black children was         were prohibited from attending schools. Panel B depicts the
minuscule before the Civil War. After the Civil      fraction of children enrolled in primary school (public or pri-
War ended, Black children enrollment rates shot      vate) in Russia, Korea, and Indonesia from 1890 to 1990 and
up to over 50 percent by 1880, one of the fast-      flags when compulsory primary education was introduced in
                                                     each country. In each of these three countries, compulsory
est increases ever seen, showing the enormous        schooling leads to a large increase in primary school enroll-
power of the state in restricting or promoting       ment in the following years.
education. Black children enrollment increased
                                                     Sources: Panel A: Lindert (2004) and US Census Bureau
more slowly in the Jim Crow period of discrim-       (1975, series H435); panel B: Lee and Lee (2016)
ination after 1880 and did not catch up to white
enrollment until after World War II.
    Panel B depicts various twentieth century
experiences showing that compulsory schooling
can have dramatic impacts quickly. The most          century, also had very proactive education pol-
extreme case is Soviet Russia, which achieved        icies (with mass education likely fueling eco-
­quasi-universal enrollment by 1940 from a level     nomic growth, Easterlin 1981). Panel B shows
 of around 40 percent in 1920. Education was         a sharp increase for Korea in the late 1940s and
 a way to both indoctrinate young minds and          Indonesia in the 1970s after they finally adopted
 develop the economy. The communist expe-            universal compulsory schooling (but starting
 riences mix the coercive state—perhaps in its       from ­preexisting high bases of 60 percent). Mass
 most extreme form under Stalin in the Soviet        education requires mobilization to build schools
 Union and in North Korea still today—and            and train new teachers, a process that takes years
 the social state. Asian countries, which experi-    if not decades after enactment (see Duflo 2001
 enced fast ­economic growth over the twentieth      for an analysis of the Indonesian experience).
VOL. 111                                     AEA DISTINGUISHED LECTURE                                        9

    Retirement.—Retirement support is the pil-                 Income Support.—Income support pro-
 lar of the social state that generally develops           grams have a long history of tension between
 second. Retirement programs first developed               offering support to those in need and concerns
 privately through negotiations between large              about discouraging work. As a result, many
 employers and unions, an indication that work-            programs start as narrow programs, targeting
 ers need institutional help to provide for their          groups deemed unable to support themselves
 retirement.11 Public retirement programs some-            such as widows with children (at a time when
times grew out of such private retirement pro-             mothers were not expected to work outside the
grams through a general mandate. Germany                   household), the elderly or the disabled (before
was the first country to introduce such a general          retirement programs existed), or the unem-
mandatory public retirement system in 1889                 ployed. Programs supporting those ­out of work
under Otto von Bismarck. Public retirement                 often had a “workfare” component, requiring
programs sometimes developed as a retirement               recipients to do some work for the government
benefit aside from or on top of private retirement         to receive support, such as in the Poor Laws in
programs such as Social Security in 1935 in the            England (Lindert 2004).
United States (Costa 1998).                                    A large literature has discussed why the social
    Before public retirement programs existed,             state emerged in the twentieth century. It is likely
a large fraction of the elderly was working (80            that democratization replacing earlier coercive
percent of men aged 65 or older were gainfully             authoritarian states led the population to demand
employed in the United States in the late nine-            help through the social state (see for example,
teenth century, see Figure 5). The elderly who             Acemoglu and Robinson 2000 and Lindert
could no longer work enough to support them-               2004). Looking at history (since the beginning
selves had to rely on family support. Public               of writing), the modern social state appears as
retirement systems were a way to provide social            a unique and very recent historical develop-
insurance through the state instead of relying on          ment (150 years old), while the coercive state
­self-insurance or family insurance.                       is the norm throughout history (the preceding
                                                           ­3,000–5,000 years), with a number of autocratic
   Health Care.—Like retirement benefits,                   states still existing to this day. However, extend-
health-care benefits start with private arrange-            ing the time frame back into our long ­prehistory
ments between employers and employees                       and its social communities, the modern social
that then get mandated by the state. The ear-               state starts to look more like a homecoming—
liest program started again in Germany in                   adapted to the modern world and economy, to
1883 under Bismarck to cover workers. Such                  be sure—rather than a radically new, and hence
employer-related systems developed in most                  perhaps fragile, development.
Western countries in the early twentieth century.
Universal health insurance expanding coverage                II. The Four Pillars of the Social State Today
to ­nonworkers started after World War II, first
with the United Kingdom launching its National                The social state raises a puzzle for the stan-
Health Service in 1948, then spreading quickly             dard economic model. Rational individuals in a
among almost all advanced economies, the                   market economy with functioning credit markets
United States being the notable exception. In the          should be able to largely manage on their own.
early twentieth century, health care was a small           The young (or their parents) can borrow to pay
fraction of the economy. But today, health care            for their education if this is a worthy investment.
is about 10 percent of the economy in OECD                 Health care is largely a private good for which
countries and about 18 percent in the United               people can buy insurance. Workers can save
States (OECD 2020b). Therefore, health care is             for their retirement, anticipating that their work
now a very large component of the social state             ability will decline with age. Finally, people can
(Figure 2, panel B).                                       also dip into their savings whenever they face a
                                                           temporary income loss such as unemployment.
                                                              Economists traditionally justify social insur-
   11
      The Laibson (2018) AEA Richard T. Ely Lecture
was devoted to this phenomenon of private paternalism of   ance by focusing on market failures such as
employers on behalf of their employees from a behavioral   asymmetric information leading to credit fail-
economics perspective.                                     ure or insurance failure. However, the r­esulting
10                                  AEA PAPERS AND PROCEEDINGS                                    MAY 2021

s­olutions—guaranteed student loans so that             tax ­funding is approximately proportional to
 anybody can borrow for education, mandates             income. Education also has enormous indirect
 for health insurance to deal with adverse-selec-       redistributive effects by giving opportunities to
 tion death spirals, or mandatory annuitization of      succeed economically to children from disad-
 retirement savings to make sure retirees never         vantaged backgrounds.
 run out of savings—are much lighter interven-             Higher education is not (yet) compulsory, but
 tions than what actual social states do. More          its capacity is built through public universities,
 radically, the field of behavioral economics has       as private universities serve only a small frac-
 shown that individuals fail to behave as in the        tion of students in advanced economies (OECD
 standard model, particularly in circumstances          2020a). Even in the United States, where private
 that involve the time dimensions that are crucial      higher education is large, three quarters of stu-
 for education investment, health insurance, or         dents attend public institutions (National Center
 old-age or buffer stock savings (see Thaler 2015       for Education Statistics 2020). Therefore, the
 for a description of the emergence of this young       government essentially controls the supply side.
 field).                                                Higher education is also highly subsidized, as
    Looking back at the deep history we have            tuition costs paid by students are only a fraction
 sketched in the previous section, it is easy to see    of the real costs of higher education (and in many
 the common theme between community support             countries in Europe such as France, tuition costs
 of ­hunter-gatherer societies, family support in       are almost zero). Even though higher education
 coercive state societies, and the social state of      is an individual choice, at the aggregate level,
 modern social democracies. It is worth review-         it looks like a government choice. One striking
 ing briefly the current structure of the four pil-     example comes from the US GI Bill after World
 lars of the social state to understand its logic and   War II, which paid for the higher education of
 why the standard economic model solution does          veterans and dramatically boosted college edu-
 not work well in practice.                             cation of men (using women as a control group)
                                                        (Stanley 2003).
                   A. Education                            Why not have students or their families pay
                                                        directly for education or borrow with student
    As discussed above, mass education of mod-          loans as a standard economic model would rec-
ern times is always government driven through           ommend? The experience of student loans in
a combination of compulsory schooling (for              the United States shows that they become an
primary and then secondary education) and gov-          unbearable burden for a significant fraction of
ernment funding (at all levels including higher         borrowers. There are several reasons for this.
education), generally taking the form of direct         Attending college is not a guarantee to get a
government provision of schools and teachers.           degree, let alone a well-paying job afterward.
In OECD countries, education is always primar-          Furthermore, handling debt is challenging for
ily government funded and often overwhelm-              many, as behavioral economics has shown. This
ingly so (OECD 2020a).                                  forces the government to provide relief e­ x post
    If education is compulsory, government              (Baum 2016).
funding must follow, as ­     low-income families          Aside from funding, why not have f­or-profit
would not be able to afford it at full cost. This       education instead of having public institutions
is because education requires highly qualified          provide education? The United States has
labor—teachers. This remains the case today             indeed experienced a surge in f­or-profit higher
as it was in the nineteenth century, as teachers        education institutions as state funding for pub-
are always skilled workers and the technology           lic institutions has retreated. The evidence sug-
of education has not changed much. If a teacher         gests that students can be lured into high-cost,
is paid three times the average ­working-class          low-quality ­for-profit schools (Deming, Goldin,
earnings and can teach 20 students, the cost            and Katz 2012). This problem is exacerbated
per school-age child is 300/20 = 15 percent of          when f­ or-profit schools put more weight on prof-
­working-class earnings, which is prohibitive for       its than service after ­take-up by private equity
 many families, especially large ones. Therefore,       (Eaton, Howell, and Yannelis 2020). This is a
 mass education is highly redistributive on a           striking failure of the market that arises because
 direct basis: every child gets an education, while     students are not able to assess perfectly the value
VOL. 111                                   AEA DISTINGUISHED LECTURE                                                11

and cost of education offers (Akerlof and Shiller       standard ­life cycle savings model, need a heavy
2015 develop this aspect of “consumer failures”         institutional hand to steer individuals in the right
more generally).                                        direction.
  In sum, education is largely decided at the              Therefore, the problem of retirement is also
social level, not the individual level.                 resolved at the social level, not the individual
                                                        level.
              B. Retirement Benefits
                                                                             C. Health Care
     The elderly lose their ability to work and
hence support themselves with their earnings.              All advanced economies provide universal
The standard economic solution is that workers          health insurance, with the United States being
should save for retirement (the famous life cycle       the unique exception in leaving about 10 per-
model of Modigliani). A large body of work in           cent of its population uninsured. Health-care
behavioral economics shows that, in contrast            costs have become large (10 percent of national
to what the standard model posits, individu-            income on average in the richest countries)
als are not able to save on their own and invest        due to enormous progress in medicine (OECD
wisely (see Thaler and Sunstein 2009 for an             2020b). Hence, tax funding is the norm, as low-
overview). Indeed, before retirement programs           er-income families would not be able to afford
existed, family (or community) support—not              the full cost. Therefore, universal health insur-
saving—was the main source of support, as dis-          ance creates significant redistribution by income
cussed previously.                                      and also, of course, by health and health-risk
     Public retirement programs are mandatory           status.
and funded by taxes. They are typically intro-             One important question is why health-care
duced as p­ay-as-you-go systems where taxes             quality is the same for all in such universal
on workers immediately pay for the pensions             health-care systems (at least as a principle, not
of retirees, replacing the former p­ ay-as-you-go       always realized in practice). Why isn’t health
­family-based system where children take care           insurance offered in grades, with cheap insur-
 of their elderly parents. Instead of having to         ance covering only the most ­cost-effective treat-
 support their elderly parents, adult children pay      ments? Probably because humans are willing to
 taxes to fund retirement benefits. Social insur-       spend a lot of resources to save a specific life,
 ance also allows for pooling risk much more            that is, an actual person with a condition that can
 effectively than family insurance.                     be treated.12 This is likely a consequence of our
     Benefits are generally related to lifetime         social nature shaped by evolution: taking care
 earnings so that the public retirement system          of the sick or injured was helpful for group sur-
 is generally not highly redistributive from a          vival. This makes withholding treatment to the
 ­lifetime perspective (see Brown, Coronado,            poorly insured socially unbearable. In the United
  and Fullerton 2009 for a US analysis), but it is      States, hospitals are obliged to offer emergency
  highly redistributive from a c­ ross-sectional per-   care to all patients, even those without insurance
  spective: elderly retirees with no earnings get       and unable to pay. 13 Of course, on top of this,
  support from workers with earnings.                   adverse selection provides a strong standard
     Even the most radical privatization                rationale for mandating health insurance.
  reforms—as in Chile—maintain mandatory                   Even in the United States, where private insur-
  contributions. Even private employer pension          ance covers slight more than half of the popula-
  plans are either mandatory (such as the tradi-        tion, it is primarily offered through employers,
  tional defined-benefit employer pension plans         which are now mandated to offer it (if they have
  in the United States) or highly encouraged
  through enormous price incentives (such as the
  401(k) employer matches in the United States)             12
                                                               Economists have noted that societies are willing to
  or defaults (automatic 401(k) plan enrollment         spend a lot more resources to save an actual life than to save
  upon hiring, which has an enormous impact on          a statistical life (such as reducing accident risk through bet-
                                                        ter safety). See, e.g., Gruber (2016, chapter 12).
  participation even in the medium term, Madrian            13
                                                               In practice, health insurance cost in US private insur-
  and Shea 2001). Therefore, retirement programs,       ance varies primarily based on deductibles and copays and
  even when they come closest to ­mimicking the         not quality of care.
12                                      AEA PAPERS AND PROCEEDINGS                                      MAY 2021

50 or more full-time employees). This man-                     (formerly food stamps) benefits a single adult
date is economically equivalent to forcing each                with no dependent in the United States can get
insured worker to pay the full cost of the insur-              (the only form of ­quasi-cash ­means-tested trans-
ance regardless of earnings. This is a crushing               fer available to this group).
and unbearable burden for low-paid and insured                     Therefore, there is a widespread social view
workers (Saez and Zucman 2019 describe it as                  that people who are expected to work and sup-
a privatized poll tax, and Case and Deaton 2020               port themselves should not be supported by the
discuss the labor market impacts).                            community. Everywhere, there is strong social
   A recent literature has also shown strong                  reprobation against “free loaders” who could
evidence of behavioral effects in health-care                 work and support themselves but decide to live
choices, particularly in the US context where                 off government support (Lindert 2004 provides
choice is most extensive (see Chandra, Handel,                historical context; Saez and Stantcheva 2016
and Schwartzstein 2019 for a recent survey).                  present survey evidence). This is why income
People make mistakes in h­ealth-care utiliza-                 support is concentrated among groups unable
tion and treatment choices. Copayments and                    or unexpected to work, such as the unemployed,
deductibles lead consumers to reduce demand                   the disabled, and the elderly.
for ­high-value care. This may explain why uni-                    This feels very different from a utilitarian
versal health-care systems have low copays                    optimal tax and transfer system that explicitly
and deductibles and why health-care decisions                 trades off equity (redistribution to the poor) with
for patients are made primarily by health-care                efficiency (some loss of output due to reduced
professionals. Like for education, the difficulty             incentives to earn; see Piketty and Saez 2013 for
for users to understand and navigate health-care              a survey). Instead, income support tags recipi-
choices implies that the market does not nec-                 ents who are not expected to work to avoid the
essarily deliver efficiency. In sum, the problem              ­equity-efficiency trade-off (Akerlof 1978).
of health care is also primarily resolved at the                   But our innate aversion to ­free loaders can
social level rather than the individual level.                 be interpreted as a way to detect the presence
                                                               of behavioral responses and adjust redistribution
                 D. Income Support                             with better targeting or a better design (more
                                                               incentives to work, help finding work, or less
   Income support programs are obviously a                     generous benefits). In other words, the public
social-level form of help for people in need.                  processes efficiency costs through a fairness lens
They are targeted to specific groups such as                   (“­free loaders take advantage of the system,”
the unemployed with unemployment benefits,                     “beneficiaries would be destitute without help”).
the disabled with disability benefits, the elderly             Stantcheva (2020) shows, indeed, that distri-
poor with minimum o­ ld-age benefits, and chil-                butional and fairness considerations are more
dren in poor families (with family benefits such               important than efficiency considerations when
as the refundable tax credits and traditional                  the public reasons about taxes and transfers.
welfare for single parents in the United States).
Unconditional ­means-tested support is generally                           E. Social Group Scope
modest and most often ­in kind (such as hous-
ing or nutrition support) and combined with                      While we have seen that pooling of resources
job-training help. For example, even in France,               through taxes and transfers is very large at the
with its generous social state, a single adult with           level of the nation (and ­    subnational govern-
no resources would receive €560/month in cash                 ments in decentralized countries), it is striking
as of 2020 (Revenu de Solidarité Active).14 This              how small transfers are across countries. Direct
cash amount is only about 17 percent of average               foreign aid from rich countries toward develop-
income per adult in France. But it is still over              ing countries is modest (around 0 .2 percent of
three times as high as the meager $200/month                  GDP in the United States and always below 1
in Supplemental Nutrition Assistance Program                  percent anywhere else). It is targeted to crises
                                                              (such as disaster relief), security (defense spend-
                                                              ing in the context of alliances), and development
  14
     This can be combined with various i­n-kind support for   aid (a substantial portion of which runs through
housing, utility costs, or public transportation.             international organizations such as the World
VOL. 111                                 AEA DISTINGUISHED LECTURE                                           13

Bank or the International Monetary Fund). In          groups less attached, such as the elderly (Gruber
US public opinion polls, foreign aid is often the     and Wise 1999), secondary earners—especially
least popular item of government spending (for        when women were less attached to the labor
example, Pew Research Center 2019). Even in           force (Blau and Kahn 2007)—or single parents
the European Union, an old and deep commu-            (Meyer and Rosenbaum 2001).
nity of independent nations, the common bud-             Taking a broader view though, social deter-
get is only 1 percent of the EU economy (and          minants of labor supply become readily visible.
hence minuscule relative to the government            First, the social state has indeed reduced labor
budgets of each nation member). Direct trans-         supply along various dimensions (youth labor,
fers across EU countries—even in the context of       old-age labor, and long hours), but it has done
severe crisis, such as the financial crisis of 2009   so intentionally by design and regulation and
when Germany directly bought Greek public             not as an unintended consequence. Second,
debt—quickly become controversial.                    social norms also affect labor supply (for exam-
   It has also been noted that the social state is    ple, whether mothers should work outside the
smaller in countries fractionalized along ethnic      household).
or religious lines (see Alesina and La Ferrara           To give a broad-level view, Figure 4 depicts
2005 for a survey on the economic effects of          the employment rate (people working divided
fractionalization). For example, Alesina and          by population) by ­    five-year age bins in the
Glaeser (2004) argue that this is the main reason     United States and France in 2019 using OECD
why the United States has a smaller social state      statistics for men in panel A and women in panel
than European countries. Alesina, Miano, and          B.15 Employment rates are similarly high in
Stantcheva (2018) show through surveys that           both countries in prime age (­25–59) and actu-
the public dislikes redistribution toward immi-       ally slightly higher in France for women. But
grants and that emphasizing the presence of           employment rates are substantially lower among
immigrants reduces support for redistribution.        the young and old in France. This strongly sug-
   All this evidence shows that the scope of the      gests that differences in labor supply along the
social group matters greatly. Humans are will-        extensive margin in France versus the United
ing to pool resources with the social group they      States are driven by education and labor regu-
identify with but typically not others, another       lations or social norms regarding work among
striking piece of evidence demonstrating our          the young, retirement decisions for the old, and
social nature (as opposed to universal utilitarian    perhaps differences in family norms or policies
principles). The nature of the group can vary         regarding female market work, not by the taxes
depending on situations and is also malleable.        needed to fund the larger social state in France.
For example, the rise of the social state was in      Let us examine each in turn.
large part replacing family support by nation-
state support in specific domains.                       Youth Labor.—Child labor was prevalent
                                                      before the rise of the social state and mass
     III. The Social State and Labor Supply           education (Basu 1999 provides a survey from
                                                      a developing country perspective). It was
   The main critique leveled at the large mod-        common in most US states up until the Great
ern social state is that it might discourage work     Depression (Moehling 1999). US census data
and hence depress economic activity. Indeed,          show that almost 20 percent of children ages 10
in the standard economic model, labor sup-            to 15 worked for pay at the end of the nineteenth
ply reduces utility, and the sole motivation for      century, and this declined in the early part of
work is individual gain. Therefore, taxes and         the twentieth century (US Census Bureau 1975,
transfers can reduce labor supply. An enormous        series D80). Compulsory education mechani-
empirical literature has shown that this model        cally reduced child labor supply. But labor reg-
has indeed some relevance (see Pencavel 1986          ulations were also enacted to further reduce and
and Blundell and Macurdy 1999 for classic
surveys). Estimated labor supply responses are           15
                                                            This follows Blundell, Bozio, and Laroque (2013),
generally—but not uniformly—fairly modest             who present such highly insightful graphs for the United
for groups strongly attached to the labor force       States, the United Kingdom, and France at the annual level
(such a prime-age males) but can be large for         (instead of ­five-year age bins).
You can also read