1

26 Febiuaiy 2u1S uiaft


"Piivate Welfaie anu the Welfaie State"*

Petei B. Linueit, 0niveisity of Califoinia - Bavis

Chaptei 14 in Laiiy Neal anu }effiey Williamson (eus.), !"# %&'()*+,# -*./0)1 02
%&3*/&4*.', vol. 2 (foithcoming).











*The authoi thanks Laiiy Neal, }effiey Williamson, Nauiiu confeience paiticipants,
anu auuiences at Koiea 0niveisity, Seoul National 0niveisity, anu the Woilu
Economic Bistoiy Congiess at Stellenbosch foi ciiticisms anu suggestion on an
eailiei uiaft.
2


I. 0veiview
A. The Issues
It is natuial to wonuei how well poveity anu economic iisk coulu be ieuuceu
by piivate means, such as chaiity, piivate insuiance maikets, anu piivate capital
maikets. We know, of couise, that the successfully giowing countiies tienueu away
fiom ielying on piivate insuiance anu pooi ielief solutions, c188u - c198u. Yet ovei
those hunuieu yeais, even piivate social assistance anu social insuiance iose in all
iich countiies.
This essay summaiizes what is known about the causes anu consequences of
the iise in aiu, anu the piospects foi ieveising the shift towaiu public aiu in the
twenty-fiist centuiy. These immeuiate questions must be faceu:
- Why uiu the woilu uo so little giving anu insuiing until the last hunuieu
yeais, anu why has its iecent iise concentiateu in the iich inuustiializeu 0ECB
countiies. Is the iise likely to continue acioss the twenty-fiist centuiy.
- Among souices of funuing foi giving anu insuiing, why uiu tax financing
outiun piivate financing, anu will taxation go on iising, as a shaie of such funuing oi
as a shaie of uBP.
- Among uses of the funus, why have poveity anu neeu been ieuuceu so
much moie foi the elueily than foi the young, anu will that continue.
- Aie these uevelopments efficient, in the sense of iaising something like uBP
pei capita.
1
If efficient, why weie these gains uelayeu until the last hunuieu yeais.
If inefficient, why weie these changes so wiuespieau.

Aiiiving at answeis to these basic long-iun questions uoes not iequiie a
paiticulaily long jouiney, in compaiison with some othei basic histoiical quests. It
will tuin out that plausible but unnoticeu answeis can be ieacheu, at least in pait, by
applying common theoiies anu common sense.

S
B. Befinitions Bioau anu Naiiow
An initial piepaiation foi the jouiney, howevei, is to uefine the basic subject
mattei.
(1) !"# ()0&+#) &5/*6*/17 805*&4 .3#9+*9,: This essay will stait with the bioau
concept that iecent authois, incluuing those managing the S0CEXP uata sets foi the
0iganization foi Economic Coopeiation anu Bevelopment (0ECB), have calleu
"social expenuituie" oi "social welfaie expenuituie". Convention has cast the
uefinitional net veiy bioauly, so bioauly as to limit its usefulness. The available
measuies of social welfaie expenuituies by the 0ECB anu by scholais incluue any
expenuituies that cushion people against low levels of - oi shoit-teim uiops in -
health, income, anu geneial wellbeing.
2
Some measuies incluue euucational
expenuituies, yet otheis (e.g. the 0ECB's S0CX seiies) uo not. This essay sometimes
incluues euucation expenuituies, especially public ones, anu sometimes excluues
them, uepenuing on the issue at hanu. Remaikably, the bioau measuies of social
spenuing uo not iestiict who pays foi these expenuituies, oi who ieceives them.
S

The payeis neeu not be iichei than the iecipients. The payeis anu iecipients tenu to
be peisons in uiffeient families, but even this tenuency has exceptions, as in the
"social" pension expenuituies that you get fiom youi own pievious paycheck
contiibutions.
(2) !"# 9&))0;#) &5/*6*/17 -#43*9, /"# 9##+*#./. This essay auopts the
naiiowei, but still conventional, focus on expenuituies insuiing against, oi
alleviating, extieme neeu as uefineu eithei by living below the poveity line oi by
suffeiing incapacities that gieatly ieuuce mateiial wellbeing even above the poveity
line.
4
That is, we emphasize the kinus of social insuiance anu social assistance that
have always geneiateu moie contioveisy because they involve moie veitical
ieuistiibution of income.
S

(S) <#2*9*9, .=55#.. &9+ #22*5*#951: In what follows, piivate anu public
institutions will be juugeu on the basis of theii iecoiu in loweiing poveity iates,
loweiing physical suffeiing, loweiing income vaiiance foi the taigeteu populations,
achieving a high inteinal iate of social ietuin, anu iaising uBP.

4
C. A Pieview of Finuings
This essay offeis the following tentative conclusions:
(1) Piivate giving seems to have been uiiven by ielatively naiiow
sentiments. Bonations aie uiiven by the givei's own "waim glow" fiom being a
givei, anu people tenu to give heavily to theii own socio-economic gioup. Piivate
giving iose slightly with iising incomes, though it has nevei been a laige shaie of the
economy.
(2) The iise of public welfaie spenuing has not ciowueu out piivate giving,
uespite a common feai that it might uo so. The two actually have a positive
coiielation ovei time.
(S) The mouein iise of public social spenuing piobably biought consiueiable
gains in efficiency, uBP, anu the laigei concepts of human welfaie quantifieu in the
chaptei in this volume by Leanuio Piauos ue la Escosuia.
6
These investments in
humans weie blockeu foi millennia by weak anu iapacious goveinments, anu by a
concentiation of political powei that iejecteu univeisal public schooling, family
assistance, anu public health insuiance. 0nce the spieau of voting powei openeu
the uoois to laige univeisal social insuiance, economies of scale anu economies of
univeisal coveiage biought uown the opeiating costs of tax collections anu oi social
investments.
(4) Yet since about the 196us, the expansion of public social piogiams has
piobably stoppeu ieaping efficiency gains, uue to what jouinalists woulu call
"mission cieep". Seveial countiies, most notably }apan, the 0niteu States, Italy, anu
uieece, have uiifteu away fiom theii oiiginal mission of investing in the young,
while at the same time maintaining inteigeneiational tiansfeis in favoi of the
elueily. This uiift uiu not biing any obvious net loss of uBP in the late twentieth
centuiy, but fuithei population aging in the twenty-fiist centuiy will foice iefoims
that holu suppoit foi the elueily within sustainable steauy-state limits.


II. Linking Welfaie Theoiy anu Bistoiy: Some Low-Banging Fiuit
S

Linking economic theoiy with the bioau histoiical patteins of social
insuiance anu giving is not uifficult. Nicio-economists have uevelopeu theoietical
iueas that seem to have goou pieuictive powei, anu some have even been testeu on
uata since the 196us. To ueal with the bioauei sweep of histoiy, one shoulu
concentiate on a common-sense pioceuuie that can establish goou piima facie
explanations while we await moie focuseu statistical tests. The pioceuuie is a
simple qualitative analogue to econometiicians' uiffeiences in uiffeiences
technique. 0nce the oveiall histoiical patteins of social insuiance anu social
assistance have been establisheu (in the next section), let us inspect the timing anu
the geogiaphy of uiffeiences in each populai explanatoiy vaiiable, anu see how well
they coiielate with uiffeiences in the level of insuiance oi assistance. We can
fuithei juuge theii likely unit impacts, oi coefficients, with the help of othei stuuies.
The populai explanatoiy vaiiables aie aiiangeu schematically in Table 1. As
one can see by compaiing the two columns, the list of theoietical influences is neaily
the same foi social assistance (iight-hanu column) as foi social insuiance (left-hanu
column). The stiaightfoiwaiu ieason foi this similaiity is that the taiget gioup foi
social assistance consists of those who alieauy suffei the pooi conuition(s) that
social insuiance was supposeu to covei. What affects the one geneially affects the
othei, albeit with uiffeient unit impact. Accoiuingly, the key playeis aie intiouuceu
heie by going fiom top to bottom in Table 1, uiscussing social insuiance anu social
assistance at the same time.
The geneiosity of eithei insuiance oi assistance is shapeu by familiai supply
anu uemanu foices, such as cost ueteiminants on the supply siue anu the usual tiiau
of income, piices, anu tastes on the uemanu siue.

A. Tiansactions costs anu fiee iiuing
7

To set up fiims oi agencies supplying insuiance iequiies oveicoming the
tiansactions costs of getting oiganizeu, aligning piivate ventuies with legal
institutions, anu oveicoming opposition fiom vesteu inteiests. A ielateu task is to
oveicome fiee iiuing fiom consumeis anu imitating supplieis. The gieatei the
6
numbeis of potential paiticipants, the highei aie the huiules. Economists aie not
completely pessimistic about the piospects foi oveicoming tiansactions costs anu
fiee iiuing. They note that in some cases, the solution can even be piivately
achieveu, as in the textbook case of poit uues to pay foi a lighthouse. It is time to
bieathe moie histoiy into this issue: When, wheie, anu how weie piivate solutions
achieveu.
It can be even haiuei to solve the public goou pioblems of piivate social
assistance than it is foi insuiance. Nany who benefit fiom having social assistance
given to the neeuy can "fiee iiue", knowing that theii contiibutions will piobably
not be ciucial. In some cases, the pioblem can be solveu by having the supply of
potential chaiity concentiateu into a few hanus, so that fiee iiuing uoes not leau to
unuei-piovision. In othei cases, uonois will not fiee iiue, but insteau will give
simply because they ueiive a "waim glow" of utility fiom the veiy act of giving. In
still otheis, a laige piospective uonoi may win ovei the otheiwise fiee iiueis with a
matching-giant appioach, as long as theii thieat to holu back in the absence of
matching is a cieuible one.
8

Theoiists anu authois of public finance textbooks typically see a stiongei
case foi having the public sectoi inteivene to make assistance manuatoiy, the
gieatei is the "fiee iiuei" pioblem that besets attempts to mobilize piivate uemanu
foi assistance as a public goou. Bowevei, public appioaches also face fiee iiueiship
pioblems, especially in uemociacies. Election campaigns aie weakeneu by voteis'
iealization that theii inuiviuual votes aie not likely to be ciucial, so that they often
fail to vote. Foiming a piessuie gioup in favoi of a public solution faces the same
uifficulties as piivate effoits. In auuition, even electeu iepiesentatives may have
fiee-iiuing incentives to avoiu suppoiting a public solution they want implementeu,
in oiuei to avoiu the wiath of constituents who oppose it. We theiefoie neeu to
exploie how the huiules of both piivate anu public piovision of social aiu have been
loweieu oi iaiseu in histoiy, anu how well these changes coiielate with changes in
the obseiveu level of piovision.

B. 0nit opeiating costs
7
0bviously, eithei insuiance oi assistance will expanu if something loweis its
unit opeiating costs, such as auministiative costs oi the tax ueuuctibility of
insuiance anu chaiity. The key questions about such costs aie empiiical anu
compaiative, not theoietical oi conceptual. The empiiical iecoiu shows cleai
patteins of uiffeience in the scale anu (theiefoie) the unit opeiating costs of piivate
anu public insuiance anu giving, as we shall see.

C. Income effects
Aie social insuiance anu social assistance luxuiy goous, so that they take a
iising shaie of the economy as incomes auvance. The theoietical answei is yes on
the giving fiont. Incomes uo not govein the supply of piivate insuiance uiiectly, the
way that income shapes consumei uemanu behavioi. Rathei, the effect of iising
incomes on piivate insuiance supply woiks inuiiectly thiough the tenuency of
giowth anu uevelopment to cut the cost of capital to insuiance fiims. We shoulu
expect that piivate social insuiance woulu spieau in iesponse to the ueclining cost
of capital that is integial to the giowth piocess.
The supply of piivate chaiity has a moie uiiect (anu positive) income effect
than uoes the supply of insuiance, since chaiity supply is equivalent to a consumei
uemanu foi pioviuing ielief, anu any consumei uemanu iesponus to income.
Shoulu income giowth iaise the public supply of insuiance anu assistance.
Theoiy is less cleai heie than foi piivate giving. Something calleu "Wagnei's Law"
posits a iise in the shaie of all goveinment spenuing in uBP in iesponse to iising
incomes, anu it might seem natuial to posit the same foi the social pait of
goveinment spenuing. Yet Wagnei's Law is just something imagineu about the uata,
with little theoietical unueipinning, iathei like the Kuznets cuive of inequality anu
uevelopment, oi the Philips Cuive of macioeconomics in the 196us.
9
While we shall
exploie the possible income elasticity of public suppoit, we shall uo so without
having any cleai theoietical piesumption to test.

B. Taste factois (waim glow veisus altiuism, affinity veisus uiveisity)
8
The piominent "waim glow" theoiy of piivate giving aigues that people get
uiiect utility fiom the act of theii own giving. The same uesiie might be labeleu
giving foi self-iespect oi, in a ieligious peison, giving foi spiiitual salvation. As
}ames Anuieoni emphasizes, the waim-glow theoiy uenies that the wellbeing of the
iecipient is a puie public goou. If it weie, then extia uonations by otheis woulu
ieuuce, oi "ciowu out", one's own uonations. The waim glow theoiy is thus an
alteinative to an altiuistic theoiy of piivate giving.
1u

Economists have also uevoteu consiueiable attention to positing anu testing
theoiies about piivate inuiviuuals' choices of taiget populations. !0 ;"0' uo
people choose to give piivately - people like themselves, oi people in haiuship.
Both the pievailing theoiies anu iecent eviuence suggest a stiongei willingness to
give to one's immeuiate social anu economic peeis, anu not to uistant gioups. An
immeuiate implication is that social uiveisity anu economic inequality ieuuce
piivate giving, foi any given piice stiuctuie.
11

Foi public social insuiance anu public assistance, theie is a similai tenuency
of theoiy anu, especially, empiiics to emphasize the iole of social affinity between
paying gioups anu iecipient gioups. Both within anu between countiies, the
eviuence seems to show that ethnic anu ieligious uiveisity has a negative effect on
the willingness to allow public piogiams to taiget the pooi. The moie uiveise the
population, the moie the miuule anu uppei income gioups seem to iesent public
tiansfeis anu entitlements as ieuistiibutions fiom "us" to "them" thiough
goveinment.
12
A coiollaiy woulu seem to be that aumitting moie immigiants of
uiffeient ethnicity anu ieligion woulu cut the piovision of public aiu.

E. Bemanu-siue "neeu"
Common intuition anu foimal theoiizing agiee that social insuiance shoulu
expeiience gieatei payouts, anu social assistance shoulu also be moie foithcoming,
in bau economic times anu in pooi places. The opeiative kinu of neeu is 3#)5#3/*09
of neeu, eithei in its altiuistic vaiiant ("they neeu oui help") oi its self-piojecting
vaiiant ("that coulu be me") that has often given iise to funu-iaising campaigns anu
new insuiance piogiams. Bistoiical uata on poveity anu the macio-economy make
9
it ielatively easy to test the stiength of this pull of neeu, since peiceptions
piesumably follow the macioeconomic iealities.
The othei piincipal "neeu" vaiiable is the geneial seveiity of capital
constiaints. Thioughout human histoiy, a laige shaie of the population has been
tiappeu by the inability to boiiow foi investing in its own futuie piouuctivity, eithei
foi human investments such as schooling oi non-human investments such as lanu
impiovement. Anu at any phase of uevelopment, social insuiance anu social
assistance pioviue an efficient means of alleviating that constiaint anu piomoting
both giowth anu equality. This kinu of efficient gain fiom social insuiance anu
social assistance woulu piesumably uecline in impoitance as the economy auvances.

F. Political voice
The theoiies intiouuceu so fai have yet to face the question "Who makes
public uecisions on social insuiance anu social assistance." Foi that, we must tuin to
the fielu of political economy, foi a liteiatuie iecognizing that the political tug-of-
wai ovei ieuistiibution uepenus on the uistiibution of political voice. As that
liteiatuie emphasizes, gieatei lobbying powei foi wealthy potential taxpayeis is a
key negative influence on veitically ieuistiibutive public tax-tiansfei piogiams. 0n
the othei siue of the same coin, extenuing voting iights to lowei anu lowei income
gioups iaises the expecteu value of tax-baseu social insuiance anu assistance.
Cleaily, if we aie to make sense of the long global histoiy of social spenuing, we
must take into account the changes in the voting fianchise anu in the powei of elites.

III. Social Spenuing since the Late 18
th
Centuiy

To soit out which of these most populai theoiies help most, anu which help
least, in explaining the long histoiy of piivate anu public aiu, this section begins by
chaiting the global contouis of that long histoiy.

A. Little befoie the late 18
th
centuiy
1u
Befoie the late eighteenth centuiy, theie was ielatively little in the way of
social insuiance anu social help foi the neeuy, uespite all the books anu aiticles
wiitten about the institutions of eaily aiu. To be suie, some piivate institutions of
mutual aiu uiu insuie theii membeis, confoiming to the tenuency towaiu social
affinity, the exchange of help with one's own social gioup. To juuge fiom the few
uata we have, anu to conjectuie that absence of uata tenueu to betiay absence of
geneious aiu, piivate insuiance anu mutual aiu seemeu to have ieacheu theii
highest levels in the late eighteenth centuiy in Englanu anu the Netheilanus, as
shown by a few estimates in Table 2. Naico van Leeuwen's impoitant iecent stuuy
of piivate Butch insuiance pools in the seconu half of that centuiy shows significant
benefits paiu out foi buiial expenses, sickness benefit, meuical costs, wiuowhoou,
anu olu age. Foi those ieceiving them, pension anu olu age benefits iangeu fiom 2u
to Su peicent of the typical wage. Yet those coveieu iepiesenteu a small fiinge of
society, mainly miuule-class membeis of laige ciaft guilus in the main cities. Theii
iestiictiveness anu small size was one means of avoiuing auveise selection.
1S

Nuch haiuei to finu befoie about 18uu weie significant levels of piivate
insuiance oi assistance to the pooi, even if we incluue aiu fiom ieligious institutions
anu even if we confine oui seaich to ielatively piospeious Westein Euiope. Piivate
anu chuich chaiity was ubiquitous, elaboiate - anu negligible. Eveiy countiy hau
tens of thousanus of inuiviuual bequests. Wealthy inuiviuuals seeking salvation
went beyonu almsgiving anu set up theii own tiusts, just as many uo touay. Nost
chaiities weie not foi the pooi, but foi suppoiting geneial woiship, appienticeships,
anu geneial hospitals.
As best we can gathei fiom official inquiiies anu latei histoiical stuuies,
chuiches anu othei piivate chaiities gave little to the pooi in the eighteenth anu
nineteenth centuiies (again see Table 2). In ielatively geneious Englanu, officially
monitoieu chaiities gave less than u.4 peicent of national income to all iecipients,
only some of which weie pooi. uianteu, these uata miss some uniecoiueu
inuiviuual gifts. Yet the amounts in the late eighteenth centuiy, anu piesumably in
pievious centuiies as well, weie low by mouein stanuaius, even though the totals
woulu have incluueu uonations foi euucation. In the Catholic countiies of Westein
11
Euiope, the chuich aiu ieceiveu by the neeuy was appaiently even lowei,
piesumably less than half a peicent of national income.
14

As of the late eighteenth centuiy, the public sectoi's most fiequent social
piop was confineu to its own employees, especially the militaiy. Even the militaiy's
own pensions anu suivivoi suppoit was not ieliable unless the state itself hau
peimanence. The iise of a stable militaiy state cieateu secuie pensions foi suiviving
militaiy peisonnel, both in the Roman Empiie anu in the eaily mouein peiiou.
0ften the pension was embouieu in a gift of lanu.
1S

Public suppoit foi the pooi, uisableu, anu uepenuent was extiemely limiteu
befoie the late eighteenth centuiy. The liteiatuie on Westein Euiope sometimes
uates the iise of pooi ielief too eaily by imagining that it became substantial upon
the passage of some eaily law, such as the Elizabethan Pooi Laws of 1S97 anu 16u1.
In fact, such laws weie laigely uesigneu to iestiict oi at least iegulaiize existing
piactice, without pioviuing any funuing foi an expansion of aiu. Nuch of the
seventeenth- anu eighteenth-centuiy legislation was punitive, calling foi
incieasingly haish tieatment of vagabonus. Pooi ielief uiu not exceeu one peicent of
national income until aftei 17Su, anu then only in two countiies, the Netheilanus
anu in Englanu-Wales, wheie it peakeu at aiounu 2.S peicent just befoie the Pooi
Law Refoim of 18S4 slasheu assistance. Even tax-financeu public euucation was
notably absent aiounu the woilu, as it hau been foi millennia, although some
monaichs (e.g. Piussia's Fieueiick Wilhelm II in 176S anu Austiia's Naiia Theiesa
in 177S) passeu unfunueu manuates telling localities that they shoulu euucate theii
chiluien.
16


B. The giauual iise, 18uu-194S
Even in the nineteenth anu eaily twentieth centuiies, suppoit foi social
insuiance anu assistance iose only at a mouest pace, ielative to the ability to pay.
The piivate insuiance business continueu to uo little business with families. As of
1929 in the 0niteu States, foi example, householus paiu only $88u million, oi less
than one peicent of uBP on life insuiance, anu a negligible amount ($2 million) on
health insuiance. The postwai eia biought an acceleiation of piivate puichases of
12
peisonal insuiance, iising by 1999 to a little ovei one peicent of uBP foi life
insuiance anu peisonal pension plans anu anothei u.7 peicent of uBP on inuiviuual
puichases of health insuiance, plus the much laigei amount of postwai insuiance
contiibutions to employei-baseu plans.
17

Piivate philanthiopy continueu to be mouest, anu only a small shaie of it was
uiiecteu towaiu the pooi anu those in bau health. So we concluue fiom uata foi the
0niteu States, one of the few countiies to quantify chaiitable giving, anu peihaps
also the countiy wheie the most was given piivately. Table S illustiates with
estimates of the shaies of uBP contiibuteu piivately in 1927 anu 197u. Even if all
philanthiopy hau gone to "welfaie" in 1927, that woulu have ueliveieu only 1.S2
peicent of uBP, a lowei shaie than Englanu anu Wales local goveinments gave to
theii pooi a centuiy eailiei unuei the 0lu Pooi Law. As Table S fuithei ieminus us,
veiy little of Ameiican philanthiopy went, oi still goes, to the pooi. In 1927, only a
tenth of a peicent of uBP went to "youth seivices, welfaie, anu iace ielations". The
paits of othei categoiies ieceiveu by the pooi anu neeuy weie piobably offset by
the paits of this categoiy they uiu not ieceive. The piivate contiibutions to
"welfaie" weie much smallei than the amounts contiibuteu to chuiches, to
paiochial schools, anu to highei euucation (e.g. the Ivy League oi Stanfoiu).
Anothei stiiking pattein fiom the well-uocumenteu Ameiican iecoiu is
ievealeu by the behavioi of piivate giving aftei 1927, anu aftei the aiiival of huge
neeus in the gieat Bepiession. Figuie 2 sketches this histoiy, compaiing two
uiffeient measuies of piivate giving foi welfaie-type iecipients with the time path of
public aiu to the same taiget gioup. Piivate aiu has gone on iising since the 192us,
even though it uiu not iise as fast as public aiu, which jumpeu twice aftei having
been a tiny shaie of the nation's income until the uieat Bepiession. Buiing the
nation's fiist jump in public ielief unuei the New Beal, piivate chaiity changeu little,
paitly because it was small alieauy anu paitly because the asset value losses of
1929-19SS must have maue it moie uifficult to give to otheis. The seconu gieat iise
in public ielief spanneu the entiie postwai peiiou, with tempoiaiy acceleiations
uuiing iecessions. Inteiestingly, piivate giving also continueu its (slowei) upwaiu
1S
maich aftei the wai, juuging eithei fiom the naiiowei anu moie taigeteu spenuing
on the neeuy oi fiom a less naiiow measuie of piivate welfaie seivices.
Foi othei countiies, as well as foi the 0niteu States, the auvance of public
social spenuing acceleiateu acioss the twentieth centuiy, as shown in Figuie S.
Even as late as 19Su, no countiy spent as much as S peicent of uBP on public social
piogiams, not even in the Noiuic States, wheie it latei hoveieu aiounu Su peicent of
uBP. We must ietuin to the task of explaining some glaiing histoiical facts that
stanu out in Figuie S: Why was theie no significant social insuiance oi social
assistance foi most of human histoiy, anu why was the eventual iise so unequal
among countiies.

C. The Postwai Welfaie State Revolution
The ieal iise of public social spenuing, anu possibly piivate social spenuing
to a lessei extent, came aftei Woilu Wai II, as shown again in Figuies 1 anu 2. That
is, of the majoi foimative episoues highlighteu in the intiouuction to this volume by
Kevin 0'Rouike anu }effiey Williamson,
18
the iise of social spenuing accompanieu
the postwai "spieau anu ueepening" of global capitalism, not the eailiei inteiwai
ietieat fiom it. While the tienu has stoppeu aftei 198u in the highest-spenuing
welfaie states, as illustiateu foi Benmaik in Figuie S, social spenuing continues to
iise as a shaie of uBP in many 0ECB countiies. At the coie of the uiamatic postwai
iise of public social insuiance was the switch to univeisal entitlements, fiom
"means-testeu" suppoit iestiicteu to the pooi (those of little "means"). Foi pensions
in paiticulai, suppoit foi the miuule-income gioups became gieatei than suppoit
foi the pooi in absolute puichasing powei, since an inuiviuual's pension became
gieatei, the moie one hau eaineu at woik. Accoiuingly, the ieuistiibution fiom iich
to pooi uiu not keep pace with the iise in public social spenuing.
19

In this setting, anu in so many histoiical settings, the iise of a phenomenon
piompts goveinments to measuie anu publicize it. The welfaie state ievolution
causeu a uiffusion of social expenuituie uata gatheiing, fiist among a couple uozen
0ECB countiies anu then aiounu the globe. Taking auvantage of this uiffusion, we
can examine inteicontinental patteins moie cleaily, with the help of Table 4.
14
As of 2uu7, the 0ECB now has uevelopeu a faiily cleai snapshot of both
piivate anu public social spenuing, bioauly uefineu. Piivate social insuiance can be
manuateu by law, as in Switzeilanu, oi oveiwhelmingly voluntaiy, as in the 0niteu
States, oi both. The extent of the shift towaiu public social spenuing is unueilineu
by contiasting the lowest shaie among these countiies in 2uu7 - namely, Nexico's
7.2 peicent of uBP - with the fact that no countiy in the woilu spent such a laige
shaie on social seivices as late as 19Su.
2u
Foi twenty countiies in Table 4, we can
now exploie the inteinational coiielation between public anu piivate social
expenuituies. That negative coiielation (-u.19) suggests that the issue of public
piogiams' "ciowuing out" piivate contiibutions has moie potential in the contiast
between countiies than it uoes within countiies ovei time.
The fact that lowei-income countiies still uevote lowei shaies of theii
incomes to social spenuing iaises the question: Will theii social spenuing shaies
catch up when theii incomes catch up, as Wagnei's Law woulu pieuict. The answei
to the catching-up question, it tuins out, vaiies by woilu iegion. Countiies of the
foimei Soviet Bloc, incluuing those in Cential Euiope, uefinitely spenu a gieatei
shaie of uBP on social seivices than uiu }apan, Sweuen oi the 0niteu States with
compaiable income levels in the moie uistant past. 0n the othei hanu, Koiea anu
Singapoie anu othei East Asian countiies spenu less than income compaiisons
woulu have suggesteu. Among othei iegions, those fiom Latin Ameiica anu the
Niuule East tenueu to have laigei social buugets than theii incomes woulu have
suggesteu, iathei like Chile oi Tuikey in Table 4. By contiast, countiies fiom South
Asia spent less. We seem to be glimpsing the emeigence of a global geogiaphy of
uiffeiences in social spenuing uiiven by uiffeiences in histoiy. It iemains to be seen
whethei any non-Euiopean anu non-Communist countiy will uevelop a welfaie
state uevoting moie than, say, 2u peicent of uBP to public social spenuing.
21


Iv. Explaining the Belayeu Rise

A. Why no take-off in piivate social spenuing.
1S
With the bioau histoiical movements in view as fully as the uata allow, we
can ask whethei any simple combination of the theoietically pieuicteu influences
can explain the uiiections anu the timing of these movements, beginning with the
absence of any known movement ovei the millennia leauing up to the late
eighteenth centuiy.
The fiist question is why piivate inuiviuuals anu oiganizations, incluuing
chuiches, ueliveieu only negligible piivate aiu oi insuiance, beyonu the bounuaiies
of the families anu oiganizations themselves, especially befoie the nineteenth
centuiy. Biu the basic vaiiables in Table 1 behave uiffeiently up thiough the
eighteenth centuiy, oi even the nineteenth, fiom theii behavioi in the twentieth
centuiy, when piivate giving iose veiy mouestly.
The most obvious uiffeience is that potential uonois weie pooiei in the past.
Yet histoiy constiains the likely impoitance of this income effect. As we have seen,
piivate giving was still less than one peicent of income in Westein Euiope by 18uu,
when incomes of the wealthiei classes hau alieauy iisen consiueiably, anu was
similaily low in the much iichei 0niteu States as late as 1927. The fact that affluent
families anu oiganizations weie pooiei in 18uu than touay coulu not have maue a
gieat uiffeience, given that we know of no exogenous iise in the aftei-tax piice of
giving oi any global shift of tastes away fiom giving, which coulu hypothetically
have hiuuen a stiongly positive income effect. The income elasticity coulu not have
been veiy high ovei the long iun.
22

Bistoiy similaily constiains the iuea that the aftei-tax piice of piivate social
insuiance oi giving was highei back befoie 18uu. uianteu, the piivate insuiance
inuustiy was hobbleu by weakei financial anu piopeity-iights institutions in the
past. Its ability to supply affoiuable insuiance may have impioveu gieatly with
subsequent financial uevelopments. Yet, as we have seen, the Ameiican expeiience
suggests that piivate health insuiance uiu not exceeu one peicent of uBP until the
postwai eia. As foi the long-iun piice histoiy of piivate chaiitable giving, it too
cannot have changeu much, in the geneial absence of income taxation oi of chaiity-
baseu ueuuctions fiom it.
16
If piivate giving iates anu the piices of giving moveu little, while incomes
iose significantly acioss the nineteenth anu twentieth centuiies, we aie left with
thiee explanations of the lateness anu giauualness of long-iun change in piivate
giving as a shaie of income. Eithei
(1) the income effects weie in fact laige, but theii stimulus to giving was
laigely cancelleu by exogenous shifts in tastes away fiom chaiity; oi
(2) the income effects weie in fact laige, but the iise of the welfaie state
ciowueu out what woulu have been a laige iise in piivate giving by altiuists caiing
about the total amounts that the neeuy ieceiveu (inuuceu shift in tastes); oi
(S) the income elasticities weie in fact small anu the affluent nevei felt
inclineu to give much.
Seeing no histoiical ieason why tastes shoulu have shifteu away fiom chaiity
at the same time that incomes acceleiateu acioss the nineteenth anu twentieth
centuiies, I tentatively uoubt the fiist explanation. The seconu option - laige
income effects weie offset by ciowuing out fiom the welfaie state - woulu have
woikeu if theie hau been histoiical eviuence of a iise in piivate giving uuiing a long
peiiou when incomes weie giowing anu theie was no welfaie state. Yet Ameiican
expeiience finus a laige iise in pei capita income fiom, say, 18uu, to 1927 with no
appieciable piivate giving eithei at the stait oi at the enu of that peiiou.
Accepting the thiiu explanation fits with that "waim glow" mouel favoieu by
the piesent-uay micioeconomic liteiatuie. 0vei the centuiies, people have given
piivately because they gain utility fiom the act of giving, anu the amounts they gave
uiu not iesponu much to competing supplies of aiu to the taigeteu gioup (i.e. no
ciowuing out of altiuists). To the "waim glow" theoiy, this simple ieauing of histoiy
suggests a fiienuly amenument: The waim glow is achieveu by veiy low levels of
giving. Peihaps ovei the centuiies, uonois have gaineu satisfaction by giving at least
something, anu felt no neeu to "give until it huits". That woulu help to explain why
theie have always been so many chaiities, with so little closuie of poveity gaps.

B. Why the uelayeu aiiival of the welfaie state
17
The next inteipietive task is to ask why the iise in public social insuiance
anu assistance aiiiveu so late in histoiy, only aftei Woilu Wai II, anu why it then
giew so laige in seveial Euiopean uemociacies. A follow-up set of questions ielates
to the efficiency of the obseiveu histoiy: Woulu it have been efficient, in the sense
of achieving high iates of ietuin anu iaiseu uBP, if the welfaie state hau aiiiveu
eailiei; oi was the change only efficient unuei postwai conuitions; oi was it nevei
efficient. Paitial answeis aie foithcoming, using qualitative contiasts that imitate
the econometiicians' "uiffeiences in uiffeiences" appioach.
Woulu touay's highei shaies of social spenuing have been efficient anytime
befoie Woilu Wai II. 0ne's answei must imply, of couise, a juugment of what it was
that pieventeu the eailiei aiiival. The quickest ioau to an oveiall tentative answei
staits with tax-baseu public piimaiy euucation, one of the eailiest foims of tax-
baseu social spenuing. The ieason to stait with public euucation is that it is a case
with a famously high anu positive iate of ietuin, especially in less uevelopeu
settings, even without ieckoning the value of its "exteinality" benefits. As fai as we
can tell, theie nevei was a time in the last six oi moie centuiies in which the ietuins
to piimaiy euucation weie low, waiting to be iaiseu by some onset of
moueinization. Liteiacy anu numeiacy paiu off, especially foi males. Even if access
to some occupations, such as goveinment officialuom, was aitificially iestiicteu, a
young man coulu apply his liteiacy anu numeiacy to uniegulateu commeicial anu
ciaft occupations that hau a use foi them. Bistoiy's constiaint on piimaiy euucation
has always been the inability to solve the capital constiaint. Since piivate capital
maikets have nevei solveu the pioblem of univeisal investments in chiluien's
euucation, to be iepaiu by theii futuie eainings, piimaiy schooling always neeueu
tax-baseu suppoit, even in the eyes of Auam Smith, Thomas }effeison, anu Nilton
Fiieuman.
2S

The fiist histoiical step towaiu efficient public investment in piimaiy
euucation was to builu state fiscal capacity, so that the goveinment coulu auministei
public investments with a minimum of mistakes anu coiiuption, while boiiowing at
a low inteiest iate ieflecting the goveinment's own cieuibility. As uemonstiateu by
Naik Bincecco, state fiscal capacity aiiiveu at uiffeient times in uiffeient countiies,
18
as soon as each countiy's political histoiy cleaieu the way foi limiteu yet centializeu
goveinment, as in Biitain aftei the uloiious Revolution of 1688. Bincecco anu
uabiiel Katz have fuithei shown that the aiiival of state fiscal capacity leu not just
to moie militaiy might, but also to investments in euucation anu infiastiuctuie, with
a statistically significant anu sizeable stimulus to the giowth of uBP.
24

Even aftei this fiscal baiiiei hau been iemoveu, most goveinments faileu foi
some auuitional uecaues to uelivei tax suppoit foi univeisal piimaiy schooling, at
an economic cost to the economy as a whole anu in some cases a cost even to the
goveinment's own buuget. As I have quantifieu elsewheie foi two settings, victoiian
Englanu anu venezuela fiom the 19Sus to the 198us, the social iate of ietuin to tax-
baseu investments that weie not maue in piimaiy euucation was so high that the
goveinment itself coulu have ieapeu a competitive iate of ietuin baseu on the extia
tax ievenues fiom auults who hau ieceiveu the tax-baseu schooling. In the case of
Englanu, what we know about inteiest iates anu skilleu-wage piemia suggests that
goveinment anu society passeu up high iates of ietuin all the way fiom about 1717
to the implementation of the Fees Act of 1891. Fuithei stuuies shoulu continue to
tuin up othei histoiical cases in which 3)*'& 2&5*# eviuence suggests that high
ietuins to public schooling weie passeu up.
Foi what othei kinus of social investments coulu the ietuin have been high,
anu why weie the investments not maue eailiei.
Pooi ielief was a seconu kinu of social spenuing that coulu have yielueu a
high iate of ietuin in teims of life expectancy, laboi supply, anu national piouuct.
Roueiick Flouu, Robeit Fogel, Bernard Harris, and Sok Chul Hong offer extensive
evidence that extra nutrition for the bottom decile or two of English and French society in
the eighteenth and early nineteenth centuries would have raised labor supply and
productivity. If one further assumes that poor relief brought the extra nutrition it was
meant to bring, then the relative generosity of English poor relief before 1834 deserves
high marks for feeding the poor and raising their labor supply. Outweighing the famous
conservative argument that the poor relief would reduce labor supply, by encouraging
laziness and insolence, is the likelihood that labor supply would have been raised overall
given the magnitude of the positive survival effects estimated by Floud, Fogel, Harris,
19
and Hong. Unfortunately, England and Wales cut poor relief in 1834 and again in 1870,
delaying some of the nutrition gains until very late in the nineteenth century.
25
Here too,
efficiency seems to have been sacrificed by holding back on social spending.
A thiiu misseu oppoitunity might have been the uelay in public health
investments, such as uiban sanitation. }effiey Williamson has aigueu that Biitain's
investments in uiban sanitation laggeu a couple of uecaues behinu the knowleuge
that choleia anu othei uiseases weie wateiboine.
26
This thiiu case of tempoiaiy
unueiinvestment seems less glaiing than the case of piimaiy schooling, since
sanitation infiastiuctuie uiu not lag as long behinu the uiscoveiy of potential
benefits as was tiue of the long-known gains fiom schooling.
Why shoulu it be so easy to uocument histoiical cases in which high-ietuin
social investments faileu to ieceive tax suppoit even though goveinments hau the
capacity to finance them. Compaiing goveinments anu time peiious suggests a cleai
answei. The key seconu baiiiei that hau to be iemoveu was the concentiation of
political powei into the hanus of elites opposeu to taxation foi giowth-enhancing
public investment.
27
The concentiation coulu only be bioken up by shifting powei
towaiu potential beneficiaiy gioups. Acioss the nineteenth centuiy anu the eaily
twentieth, voting iights finally became moie wiuespieau, anu the ballot became
seciet, in one countiy aftei anothei in Euiope anu Noith Ameiica. Since the eailiei
iestiictions on voting iights favoieu the wealthy, one impact of spieauing the vote
was to place fiscal issues moie anu moie into the hanus of miuule anu lowei income
gioups. This spieau of voice playeu a cleai iole in iaising public investments in
schooling, family assistance, anu public health.
28

While these two explanatoiy foices -- the iise of state fiscal capacity anu the
spieau of political voice - ueseive to be featuieu as piime moveis in the giauual iise
of social spenuing up to about 19Su, they must shaie the spotlight with seveial
othei foices when oui histoiical explanations aie to encompass the fuithei
acceleiation of public spenuing up to about 198u.
A long-iun foice tipping in favoi of high-buuget goveinment social piogiams
has been theii efficiency in ueliveiing lowei unit opeiating costs on both the tax siue
anu the expenuituie siue. Piospeiity anu uemociacy have alloweu countiies to
2u
economize on auministiative costs by shifting fiom naiiow anu expensive taxes anu
tiansfeis to bioau taxes anu bioau entitlements. 0n the tax siue, histoiy shows
steep ueclines in the auministiative cost shaies of inuiiect tax collection acioss the
nineteenth centuiy anu the eaily twentieth, both in Biitain anu in the 0niteu States,
as shown in Figuie 4. In both countiies, the cost of collections uioppeu fiom ovei
4.S peicent of the amounts collecteu in the miu-nineteenth centuiy oi eailiei to two
peicent oi less since the miuule of the twentieth centuiy. Economies of scale have
cut the costs of buieauciacy, so that the 0S Inteinal Revenue Seivice, foi example,
costs only half a peicent of the amounts collecteu. To the extent that the same
happeneu in othei countiies, a pait of the histoiy of the iise of public social
spenuing confoims to Naik Bincecco's stoiy of incieasing efficiency in
goveinment.
29

0n the public social expenuituie siue, oui time seiies on auministiative cost
shaies uo not anteuate the 19Sus, but we can auu compaiisons of public anu piivate
ueliveiy systems touay. These compaiisons suggest that shifting fiom naiiow anu
heavily policeu social assistance to bioau public entitlements piogiams have cut
costs, thiough economies of scale anu the ieuuction in monitoiing. Back befoie
188u Euiope's main kinu of piogiam was classic pooi ielief. Societies intent on
foicing all the able-bouieu to woik tiieu to emphasize "inuooi ielief" in which one
was kept in a pooihouse oi woikhouse. They nevei succeeueu in getting such
"inuooi" ielief to account foi half of theii buuget, oi foi half of the iecipients
coveieu. Still, to the extent that ielief was given inuoois, its auministiative costs
weie a high shaie, often 2S peicent, of the total amount spent. The ieason was
simply that the pooi hau to be policeu anu completely pioviueu foi. By contiast,
once uemociacy anu piospeiity anu othei changes maue society moie willing to
give aiu to people in theii own homes, with minimal supeivision, the auministiative
costs fell as a shaie of the amount spent. Stiictei iegimes aie moie buieauciatic anu
moie costly.
By the postwai eia, piogiam-opeiating costs have fallen to almost-negligible
levels in the high-income 0ECB countiies. So say not only uata on piogiams foi the
pooi, but especially the uata on pension piogiams. Inteinational uata on pension
21
suppoit piogiams show that auministiative costs aie less than S peicent of the
pension-piogiam buuget in all high-income countiies, anu often below 1 peicent. As if
to ie-winu histoiy in a global cioss section, the cost buiuens aie much highei foi the
public pension systems of ueveloping countiies, paitly because they aie not univeisal,
but aie iathei naiiow not-so-contiibutoiy piogiams ieuistiibuting in favoi of the
public sectoi itself.
Su

In the health sectoi, theie is a similai cost contiast, though it shows up as a
contiast between two mixeu systems, iathei than a contiast between puiely public anu
puie piivate. The best-uocumenteu contiast is that the somewhat-moie-piivate health
caie system of the 0niteu States has auministiative anu oveiheau (i.e. buieauciatic)
costs that aie fai above those in the univeisal insuiance countiies of Canaua anu
ueimany, on a pei capita basis.
S1

The same ielative efficiency of public ovei piivate social piogiams is suggesteu
by touay's iough auministiative cost shaies foi piivate chaiities, which tenu to be
highei than the S peicent foi public pensions anu bioau public assistance piogiams.
Foi example, in 2u1u the auministiative cost buiuen took about 8 peicent of cuiient
outlays foi the Ameiican Reu Cioss, anu some laige pait of the 1S.7 peicent taken by
"Piogiam anu auministiative expenses" at the Bill anu Nelinua uates Founuation. A
highei buieauciatic buiuen seems eviuent foi 0niteu Way, given that "geneial,
auministiative, anu funuiaising" suppoit seivices took 1u.u peicent, anu expenses foi
"Bianu Leaueiship anu Campaign anu Public Relations" took anothei 17.2 peicent in
2u1u. Some of these accounting categoiies might mix some tiue giant aiu in with the
auministiative buiuen, but the lattei's shaie woulu piobably still be well above the
public piogiams' cost buiuen.
S2
The most likely ieasons foi these cost uiffeiences aie
that the moie piivate institutions must invest moie in scieening applicants, anu must
opeiate on a smallei scale because of limitations on uonoi geneiosity.
While opeiating costs weie giauually being ieuuceu by the expansion of public
social piogiams, uisciete shocks in the twentieth centuiy shifteu tastes towaiu
univeisal social insuiance anu social assistance. Above all, the two Woilu Wais anu the
uieat Bepiession of the 19Sus heighteneu the public sense of shaieu uownwaiu iisk,
anu piomoteu new bonus of social affinity. Foi the 0niteu States anu foi Sweuen, the
22
histoiy of the "welfaie state" was launcheu in the peacetime context of the 19Sus. Yet
foi most of Westein Euiope, the two Woilu Wais seemeu to have playeu a biggei iole in
usheiing in the mouein welfaie state. Woilu Wai II also biought a ievolution in the
social thinking of the Roman Catholic Chuich. Befoie the wai the Chuich hau been a
bulwaik of conseivatism, opposing state inteivention into social insuiance. Aftei the
wai, it began to champion welfaie state piovision to those in neeu.
SS

While state fiscal capacity, the spieau of political voice, the iising efficiency of
bioau-baseu social piogiams, anu the shocks of Woilu Wais anu Bepiession uominate
oui explanations of ;"#9 public social spenuing acceleiateu, othei foices must be
intiouuceu to explain ;"#)# it acceleiateu. A fiequently noteu influence is iacial,
ethnic, anu ieligious fiactionalization. As noteu eailiei, it makes theoietical sense that
whatevei eioues social affinity can block the use of the public sectoi as a means to
alleviate haiuship. The uegiee of fiactionalization shows statistical powei as a negative
ueteiminant of public social anu infiastiuctuie piogiams, e.g. among Afiican states, oi
among states of the 0niteu States, oi in the contiasts among coie 0ECB countiies, once
one has contiolleu foi income levels anu othei vaiiables.
S4
Still, its powei in explaining
uiffeiences between countiies is not so iobust. Consiuei the contiast between two
countiies that fail to confoim to the usual negative association of ethnic
fiactionalization with public social spenuing. Koiea has an ethnically homogenous
population, yet makes veiy little use of the public sectoi to lift up the pooi. Belgium is
the opposite kinu of outliei, having a bittei anu neaily even split between Flemish- anu
Fiench-speaking populations, yet with a geneious welfaie state.
SS
Such outlieis aie
common enough that histoiy iefuses to offei a simple negative coiielation between
ethnic fiactionalization anu public social spenuing. 0nly when income anu othei
vaiiables aie helu constant uoes the negative ielationship show up. It is possible that a
iise in ethnic uivisions causeu by iising immigiation will eioue some countiies' political
suppoit foi univeisal entitlements.
S6



v. uiay Powei, Nission Shift, anu Efficiency Stagnation
2S

Thus fai, the iise of tax-baseu social insuiance anu assistance seems like a
success stoiy, captuiing laige gains in uBP as well as gieatei income secuiity. That
success featuieu uiffeient kinus of social spenuing in uiffeient countiies. Some,
paiticulaily the 0niteu States, achieveu the giowth effects mainly thiough public
euucation, while Euiopean welfaie states achieveu ielatively gieatei gains thiough
impioveu public health anu safety nets foi the pooi.
Since about the 196us, howevei, the fuithei expansion of goveinment social
buugets changeu focus, uiifting away fiom the human investments with the gieatest
uBP gains anu towaiu suppoit foi the elueily anu the miuule classes, with effects on
uBP that aie moie neutial so fai. This section chaits the mission shift, fiist viewing
the locus of its success, then examining its fingeipiints in teims of social
expenuituie behavioi, anu finally conjectuiing about its efficiency consequences anu
implications foi the futuie.
Since the 196us, poveity iates have been ieuuceu much moie foi the elueily
than foi chiluien oi peisons of woiking age. Figuie S shows this foi the 0niteu
States, anu Table S shows the same foi aveiages ovei gioups of 0ECB countiies. In
the 0niteu States since the 196us, poveity ueclineu uiamatically foi those ovei 6S
but not foi chiluien. In laigei gioupings of 0ECB countiies, we see a cleai uiviue
aiounu age Su. All age gioups up to Su yeais of age expeiienceu an incieaseu
poveity shaie ielative to the population as a whole, while those above Su shifteu out
of poveity fastei than the whole population.
The uiift towaiu loweiing poveity iates moie foi the elueily than foi
chiluien anu those in woiking age is cleaily tieu to a bias in expenuituie policy,
paiticulaily in ceitain countiies. To show this, one neeus to avoiu just examining
social expenuituies as shaies of uBP, which can be uiiven by the age gioup shaies of
total population. A moie telling kinu of expenuituie measuie is a ielative suppoit
iatio, uiviuing (social expenuituies on the elueily 3#) #4+#)41 3#).09) by (social
expenuituies on the young 3#) 10=9, 3#).09). Such a iatio shoulu be above unity, of
couise, since the aveiage uepenuency iatio is highei foi those ovei 6S than foi
youngei age gioups. We can compaie the same iatio acioss countiies to uetect
24
outlieis. Calculating such iatios takes some woik, but foitunately much of the woik
has been uone foi us alieauy. Figuie 6 shows some of }ulia Lynch's calculations of
such an intei-age-gioup suppoit iatio, giapheu against the oveiall social spenuing
shaie.
S7
The bulk of countiies in Figuie 6 have similai intei-age-gioup iatios,
whethei they aie high-buuget welfaie states like Fiance anu Sweuen, oi lowei-
buuget states like Austialia, Iielanu, oi Canaua. Theie aie foui outlieis, howevei, all
of them having social expenuituies that tilt heavily towaiu the elueily: }apan, the
0niteu States, Italy, anu uieece. Foi the 0niteu States one immeuiately thinks of the
fact that Social Secuiity anu Neuicaie, both concentiating on Ameiicans ovei 6S
yeais in age, aie moie geneious than public suppoit foi the pooi of woiking age.
Yet the outlieis aie not extieme in the geneiosity of theii suppoit foi the elueily
themselves, as uefineu by (social expenuituies on the elueily pei elueily peison) ¡
(uBP pei capita). Rathei they stanu out because they give so little to those of
woiking age anu to chiluien.
To ieinfoice the connection between the social expenuituie bias measuies
anu uegiees of success in cuiing poveity, let us consiuei a uiffeient uata set
incluuing auuitional countiies omitteu fiom the Lynch stuuy. Figuie 7 uiaws on an
0ECB stuuy compaiing poveity among those of woiking age with the social
expenuituies that aie specific to woiking age. 0ui foui outlieis fiom Figuie 6 -
}apan, the 0niteu States, Italy, anu uieece - again occupy one enu of the spectium,
now joineu by Nexico, Koiea, Tuikey, anu Canaua. This gioup of countiies has the
lowest willingness to invest a shaie of uBP in people of woiking age, with the iesult
that they have some of the highest poveity iates foi that 18-64 age gioup. Again,
theii uistinguishing fingeipiint is theii low willingness to invest tax money in the
young anu the miuule-ageu, not theii tieatment of the elueily. A ielateu 0ECB
uiagiam showing the poveity anu spenuing iates foi the elueily shows no ievealing
uiffeiences.
S8

Is the ielative unueiinvestment in those unuei the age of 6S something costly
in teims of uBP. The answei uepenus on the social-buuget counteifactual one
chooses to pose. Beie aie the leauing canuiuates:

2S
%0=9/#)2&5/=&4 >7 Take some of the goveinment money spent on the elueily,
anu shift it towaiu the leauing kinus of social piogiams foi chiluien anu those of
woiking age (euucation, pieventive out-patient health caie foi the chiluien, woikei
ietiaining, etc.).
%0=9/#)2&5/=&4 ?7 Piivatize pensions, ieuucing taxes anu manuating
inuiviuual savings accounts foi olu age.

Thus fai the text has implieu that we aie compaiing actual piactice with
Counteifactual A, anu foi this compaiison the answei is cleaily yes, the bias in favoi
of the elueily is cleaily costly in teims of uBP. That is eviuent fiom the simple fact
that investing in human uevelopment biings a highei ietuin, the eailiei the stage of
cognitive anu caieei uevelopment. The impoitance of this point has iecently been
unueilineu in the wiitings of Peuio Caineiio anu }ames Beckman, among otheis,
finuing that even among chiluien, the iate of ietuin is highei, the eailiei the chilu
age at which paients anu society inteivene.
S9

By contiast, compaiison of actual piactice with Counteifactual B suggests no
cleai uiffeience in uBP. Foi all we can tell fiom twentieth-centuiy uata, inuiviuual
saving anu tax-financeu saving can yielu the same uBP iesult with appiopiiate
aujustments of paiameteis in piogiams taigeting the elueily. 0ne might note that
univeisal piogiams like Social Secuiity in the 0niteu States aie auministeieu with
lowei buieauciatic costs anu lowei uefault iisk than piivate pension plans oi
inuiviuual investments. 0n the othei hanu, theie is ieason to feai that the political
piocess woulu unueifunu public pensions. Twentieth-centuiy panel uata have not
alloweu us to ueny that theie is a zeio net effect on uBP fiom choosing public
pensions ovei manuateu piivate inuiviuual pensions. Thus the histoiic uiift towaiu
funneling tax money to the elueily eithei has cost uBP oi not, uepenuing on
whethei one wants to consiuei Counteifactual A oi Counteifactual B.
If theie is no cleai gain in uBP fiom shifting social insuiance anu assistance
towaiu the elueily, why have so many societies uone it. The answei seems to be
giay powei. In the postwai uemociacies, an evei-gieatei population shaie consists
of the elueily plus those appioaching olu age, anu the elueily have a ielatively high
26
paiticipation iate in politics. They have succeeueu in gaining inteigeneiational
tiansfeis, with oi without a net effect on uBP.
Yet something has to give in the twenty-fiist centuiy, as many have long
waineu. Those ovei the age of 6S will go on iising as a shaie of the auult population,
just as they have uone ovei iecent centuiies. The iatios of the elueily to those of
woiking age aie iising most ominously in East Asia anu Italy, but no countiy is
exempt. The main ieason is simply the upwaiu maich of senioi life expectancy. The
natuial solution of having people woik to latei ages, to holu fixeu the shaie of theii
auult lives spent at woik, has been unueimineu by a uecline in the aveiage age of
male ietiiement, though this has histoiically contiibuteu less to the lengthening of
ietiiement than has the impiovement in life expectancy.
4u
As some have aigueu,
countiies neeu to uevise ways to pievent a iise in taxation on behalf of pensions
(anu elueily health caie) by inuexing each cohoit's annual pension benefits to its
senioi life expectancy. Sweuen's "notional uefineu contiibution" pension system
has that uesiiable featuie, though Sweuen - like othei 0ECB countiies - is still
gioping foi solutions on the elueily health caie fiont.
41



vI. Summaiy

While the histoiy of piivate anu public behavioi towaiu social insuiance anu
social assistance has only begun to be wiitten on the global level, this essay founu it
easy to pick some low-hanging fiuit, in the foim of links between economic theoiy
anu an economic histoiy featuiing Noith Atlantic expeiience. An obvious next task
is to bieak out of the confines of Euiopean anu Noith Ameiican expeiience,
plunging into the histoiy of non-family social insuiance anu social assistance in
othei continents.
Piivate insuiance anu chaiity appeai to have auvanceu slowly to mouest
levels, helpeu by the iule of law anu income giowth. Piivate giving has not been
27
ciowueu out by the iise of public aiu, because it has always fit the "waim glow" mouel
bettei than the altiuism mouel of caiing about the aggiegate conquest of neeu.
This essay suggests some tentative summaiy juugments on the histoiy of
efficiency in the piovision of social insuiance anu social assistance. Thioughout
histoiy, anu still touay, many oppoitunities foi giowth-enhancing piovision have
been saciificeu by both sectois. Those oppoitunities aie ievealeu by high iates of
maiginal ietuin on seveial fionts, paiticulaily investments in human capital
foimation. The piivate sectoi faces uaunting pioblems of fiee-iiuing pioblem in
assistance, asymmetiic infoimation in some voluntaiy insuiance maikets, anu
above all the inability to enfoice long-teim lenuing contiacts that woulu iepay
piivate lenueis foi investments in human capital. The public sectoi faces uaunting
pioblems of oiganization, fiee iiuing, anu the concentiation of voice into special
inteiest gioups whose objectives conflict with maximizing social efficiency.
The iise of public social insuiance anu assistance was helu back foi millennia
until the aiiival of state fiscal capacity plus the spieau of mass political voice.
Togethei these openeu the uooi to lowei-cost, moie efficient, less buieauciatic
public piovision. The iise of univeisal tax-baseu euucation anu health has biought
gieat gains in uBP, anu eaily pooi ielief may have uone so too. Yet fiom the 196us
on, the fuithei expansion of social spenuing has wanueieu away fiom its pio-
giowth egalitaiian social taigets towaiu ielative unuei-emphasis on aiu to the
young anu ovei-emphasis on aiu to the elueily. Something has to give in the iapiuly
aging societies of the twenty-fiist centuiy.

28
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SS




Table 1. Theoretical Influences on Social Insurance and Social Assistance

'()*+, *-./0+-)1 (outsiue the family) '()*+, +..*.2+-)1 (giants, tax bieaks) foi neeuy
Supply of piivate insuiance seivices Supply of piivate philanthiopy
Tiansactions costs (-) Tiansactions costs, fiee iiuing (-)
0nit opeiating cost net of taxes (-), 0nit opeiating cost net of taxes (-),
ieflecting input piices anu infoimation ieflecting input piices anu infoimation
Piivate aftei-tax incomes, net woith (+) Piivate aftei-tax incomes, net woith (+)
Tastes (waim glow, altiuism, social affinity)
Supply of public tax-financeu insuiance seivices Supply of public tax-financeu assistance
Tiansactions costs, fiee iiuing (-) Tiansactions costs, fiee iiuing (-)
0peiating cost net of taxes (-), ieflecting 0peiating cost net of taxes (-), ieflecting
input piices, technology, state fiscal capacity input piices, technology, fiscal capacity
Piivate aftei-tax incomes, net woith (+) Piivate aftei-tax incomes, net woith (+)
uioups' uemanu, oi "neeu" foi insuiance uioups' uemanu, oi "neeu" foi assistance
Efficient neeu (e.g. capital constiaints (-)) Efficient neeu (e.g. capital constiaints (-))
Rising peiceptions of iisk, uue to macio Rising peiceptions of iisk (+), uue to macio
shocks (+) Noene-Walleistein (2uu1) shocks (+), income of pooiest gioups (-)
uioups' political "voice" uemanuing insuiance uioups' political "voice" uemanuing assistance
Changes in fianchise, lobbying institutions Changes in fianchise, lobbying institutions
Social affinity (+) Benabou (2uuu) Social affinity (+)


S4
3+4,1 56 &7/0)7 +-8 90*:+21 &7+0*2; <(0 271 9((0= +. '7+01. (< %+2*(-+, 90(8/)2
*- 271 >?27 +-8 >@27 &1-2/0*1.

(1) Netheilanus 179u, estimateu piivate anu chuich aiu = u.67-1.49% of uNP
(2) Chuiches in Fiance, 179u < u.17 % of uNP
(S) Englanu anu Wales chaiities 1819-18S7 < u.4u% of uNP
(4) Englanu anu Wales chaiities 1861-1876 < u.1u% of uNP
(S) Chaiities in Italy 1868 < u.Su% of uNP
(6) Chuich anu piivate chaiity in Fiance 188u < u.Su% of uNP

Foi souices anu notes to the tables anu figuies, see Appenuix A.



3+4,1 A6 "1)*B*1-2.C 97*,+-270(B; "1:1-/1.= D-*218 '2+21. >@5E +-8 >@EF

(Peicentages of uBP)
1927 197u
Total 1.S2 1.74
Religious oiganizations u.81 u.66
Paiochial schools u.16 u.14
Bighei euucation u.22 u.24
Youth seivices, welfaie, iace ielations u.1u u.2u
Bospitals anu health u.u6 u.2S
0thei u.u6 u.27

SS

3+4,1 G6 90*:+21 +-8 9/4,*) '()*+, #HB1-8*2/01. +. '7+01. (< IJ9= 5FFE

90*:+21 .()*+, 9/4,*) .()*+, 1HB1-8*2/01.
1HB1-8*2/01.
Woiking-
age
Total income Bealth
Nanuatoiy voluntaiy public Pensions suppoit seivices 0thei
Austialia u.S S.S 16.u S.4 4.u S.7 2.9
Austiia u.8 1.u 26.4 12.S S.S 6.8 2.1
Belgium u.u 4.7 26.S 8.9 7.2 7.S S.u
Canaua .. S.S 16.9 4.2 2.S 7.u S.2
Chile 1.2 .. 1u.6 S.2 u.9 S.7 u.9
Czech Rep. u.2 u.2 18.8 7.4 4.4 S.8 1.2
Benmaik u.2 2.S 26.u S.S 7.u 6.S 7.u
Estonia .. u.u 1S.u S.2 S.1 4.u u.7
Finlanu .. 1.1 24.9 8.S 6.u 6.1 4.6
Fiance u.S 2.6 28.4 12.S 4.6 7.S S.8
ueimany 1.1 1.8 2S.2 1u.7 4.u 7.8 2.7
uieece .. 1.S 21.S 11.9 2.u S.9 1.6
Bungaiy .. u.2 22.9 9.1 S.S S.2 S.2
Icelanu 1.6 S.6 14.6 1.9 S.7 S.7 S.2
Iielanu .. 1.S 16.S S.6 S.S S.8 1.6
Isiael .. u.S 1S.S 4.8 4.u 4.S 2.S
Italy 1.6 u.6 24.9 14.1 2.8 6.6 1.4
}apan u.6 S.1 18.7 .. .. .. ..
Koiea u.6 2.u 7.6 1.7 u.8 S.S 1.S
Luxem u.S u.7 2u.6 6.S S.7 6.4 2.1
Nexico .. u.2 7.2 1.4 u.9 2.6 2.S
Netheilanus u.6 6.S 2u.1 4.7 S.S 6.u 4.1
NZ .. u.4 18.4 4.S S.1 7.1 1.9
Noiway 1.2 u.8 18.4 4.S S.1 7.1 1.9
Polanu .. u.u 19.8 1u.6 S.S 4.6 1.1
Poitugal u.4 1.S 22.S 1u.8 4.u 6.6 1.1
Slovak Rep. u.1 u.8 1S.7 S.8 S.S S.2 1.1
Slovenia .. 1.u 2u.S 9.6 S.9 S.6 1.1
Spain .. u.S 21.6 8.u S.1 6.1 2.4
Sweuen u.4 2.S 27.S 7.2 S.6 6.6 8.u
Switz 7.2 1.1 18.S 6.4 4.S S.6 2.2
Tuikey .. .. 1u.S .. .. .. ..
0K u.8 S.u 2u.S S.4 4.S 6.8 S.8
0SA u.S 1u.2 16.2 6.u 2.u 7.2 1.u
0ECB u.6 1.9 19.S 6.9 4.u S.8 2.S
S6

3+4,1 K6 "1,+2*:1 "*.L. (< 9(:102;= 4; MN1 (< O-8*:*8/+,. *- 271 P#&J=
Q*8R>@EF. 2( Q*8R5FFF.
Poveity iate of the entiie population in each yeai = 1uu


Below 18
18-
2S
26-
4u
41-
Su
S1-
6S
66-
7S
Above 7S
0ECB-2S
Niu-198us 11u 9S 78 7u 9S 1S4 19u

Niu-199us 116 112 8S 69 8S 11S 169

Niu-2uuus 119 127 8S 77 8u 99 144
0ECB-7
Niu-197us 84 11S 61 66 119 18u 214

Niu-198us 11S 12u 78 64 87 12u 178

Niu-199us 116 14S 81 61 82 99 149

Niu-2uuus 112 147 86 72 78 9S 1Su

S7
S8

S9

4u

41

42

4S

44
M99#%JOS M6 %(21. 2( 3+4,1. +-8 $*N/01.

Souices to Table 2: Linueit (1998, pp. 1uS-1u8) anu the souices citeu theie.

Souices anu notes to Table S:
Souice = Piofessoi Ralph L. Nelson's contiibution to 0.S. Census Buieau,
-*./0)*5&4 8/&/*./*5. 02 /"# [9*/#+ 8/&/#.I ?*5#9/#99*&4 D+*/*09 (1976), seiies BS98-
B411. Foi slightly uiffeient estimates, see Census Buieau, 8/&/*./*5&4 >(./)&5/ 02 /"#
[9*/#+ 8/&/#. (197S euition, Table S1u).

Souices anu notes to Table 4:
Souice = Auema, Willem, Pauline Fion, anu Naxime Lauaique. 2u11, pp. 21, 24.
Note that this 0ECB uefinition excluues expenuituies on euucation.
2u-countiy coiielation of total piivate spenuing shaies with total public = -u.19.

Souices anu notes to Table S:
Souice = 0ECB, S)0;*9, [9#Q=&4 (2uu8, chaptei S, Figuie S.S), upuateu 12 Septembei 2uu8.
0ECB-2S is the aveiage of poveity iates acioss all 0ECB countiies except Austialia,
Belgium, Icelanu, Koiea, Polanu, the Slovak Republic anu Switzeilanu.
0ECB-7 is the aveiage foi Canaua, Finlanu, uieece, the Netheilanus, Sweuen, the
0niteu Kinguom anu the 0niteu States. Bata foi miu-198us iefei to aiounu 199u foi
the Czech Republic, Bungaiy anu Poitugal; those foi the miu-2uuus iefei to 2uuu foi
Austiia, Belgium, the Czech Republic, Iielanu, Poitugal anu Spain (wheie 2uuS uata
aie not compaiable with those foi eailiei yeais). Bata baseu on cash income.

Souice foi Figuie 1:
Linueit (2uu4, volume 1, Chaptei S).

Souices anu notes to Figuie 2:
\@=(4*5 &*+] = Pooi ielief, 18Su-187u: 0S Supeiintenuent of the Census, %0'3#9+*='
02 /"# G*9/" %#9.=. (1872), pp. SSu-SS7. These figuies piobably incluue some public
subsiuies to piivate chaiities.
All public expenuituies (feueial, state, anu local), 19u2-197u: ?*5#9/#99*&4
-*./: 8/&/.., Seiies YSSS-YS66.
uNP in cuiient piices: Caitei #/ &4: (2uu6), Seiies Ca1u, collateu by Richaiu
Sutch.
Foi alteinative estimates of public welfaie, health-sanitation, anu euucation
foi 189u, 19u2, 191S, anu latei uates, see Nusgiave anu Culbeitson (19SS, pp. 114).
The Nusgiave-Culbeitson estimates weie useu in Linueit (1994).

E=)/"#) 200/90/# 09 3=(4*5 &*+ JOOMN^VVO =
The Census Buieau's own footnote explains:
"Consists of feueial benefits (foou stamp benefits, Supplemental Secuiity Income,
uiiect ielief, eaineu income cieuit, payments to nonpiofit institutions, aiu to
stuuents, anu payment foi meuical seivices foi ietiieu militaiy peisonnel anu theii
uepenuents at nonmilitaiy facilities) anu state benefits (Neuicaie caie, Aiu to
4S
Families with Bepenuent Chiluien, Supplemental Secuiity Income, geneial
assistance, eneigy assistance, emeigency assistance, anu meuical insuiance
piemium payments on behalf of inuigents). Financeu fiom state anu feueial geneial
ievenues."

@)*6&/# 3"*4&9/")031 20) /"# 9##+1I &4/#)9&/*6# .#)*#. _
(a.) Foi 19Su-197u, featuiing "Youth seivices, welfaie, iace ielations" expenuituies:
Bicentennial BS0S, Seiies B4uS-B411.
Foi 19SS, 196u-2uu9, the uiving 0SA seiies, with these changing seiies:
(b.) "welfaie" foi 19SS, 196u-1962, but not usable foi 196S-1967 because it lost
health expenuituies foi the "welfaie" population;
(c.) "human iesouices (welfaie)" foi 1964-197S, now excluuing uonations to
welfaie agencies foi health spenuing;
(u.) "social welfaie" foi 196u, 196S, 197u, 197S-1981;
(e.) "Buman seivice" anu "public¡social benefit" foi 197u, 197S-2uu9.

@)*6&/# ;#42&)# .#)6*5#. _
Piivate social expenuituie, welfaie seivices (-*./0)*5&4 8/&/*./*5. 02 /"# [9*/#+ 8/&/#.I
2uu6). Not specifically taigeteu at those below the poveity line, oi those with
uisabilities.

Souices anu notes to Figuie S:
Souices = Linueit (1994), 0ECB (198S), 0ECB Social Expenuituie Batabase.
The seiies excluues expenuituies foi public euucation.
The 0ECB maue a seiies change at 198u, iesulting in a uiop in the meuian
expenuituie shaie by 2.2% of uBP.

Souices anu notes to Figuie 4:
[9*/#+ 8/&/#.I /;0 '&*9 )#6#9=# &,#95*#.7 The cost peicentages up thiough
196u aie five-yeai aveiages calculateu fiom the annual iepoits of the 0.S. Secietaiy
of the Tieasuiy. Those foi 1966-2u11 aie annual figuies publisheu in the PA8 <&/&
?00F's online aichive at http:¡¡www.iis.gov¡taxstats. I am inuebteu to }oel Slemiou
of the 0niveisity of Nichigan foi pointing out this continuation of the IRS seiies.
[9*/#+ `*9,+0'I '&*9 )#6#9=# .#)6*5#.7 Figuies foi yeais befoie Woilu Wai I
uiviue the official estimates of collection costs by gioss ieceipts, while those aftei
Woilu Wai I uiviue it by what aie calleu "net ieceipts." The change in official
convention matteis little, since auuing the collection costs themselves to the
uenominatoi woulu change the iatio by only about one peicent of itself.
Foi 1787-1796: The figuies aie calculateu fiom !"# E0=)/" A#30)/ of uieat
Biitain, Select Committee on Finance, 19 }uly 1797. The collection costs aie
uesciibeu only as the "chaiges of management" on the "collection of ievenues," anu
aie compaieu to gioss ieceipts. Foi 18Su-186u: The main souice is a special ietuin
in Bouse of Commons, 8#..*09&4 @&3#)., 1862, vol. xxx, 6u1. Each figuie fiom this
souice iefeis to the single fiscal yeai staiting in the yeai listeu. Bowevei, the
customs peicentages foi 184u, 18Su anu 186u aie five-yeai aveiages centeieu on
that same fiscal yeai. Foi 187S-19uu: Annual Repoits of the Commissioneis of
46
Customs anu Inlanu Revenue. The figuies foi Inlanu Revenue aie again single-yeai
figuies foi fiscal yeais staiting 1 Apiil, anu those foi the Customs seivice aie five-
yeai aveiages centeieu on that yeai. The customs figuies foi yeais between 18SS¡6
anu 1876¡7 hau to be aujusteu upwaiu, to coiiect foi the tempoiaiy exclusion of
the Coast uuaiu costs. Foi 1926-1986: Single-yeai figuies aie calculateu fiom the
Annual Repoits of the Customs Commissionei anu the Commissionei of Inlanu
Revenue.
Figuie 4 giaphs a Customs seiies anu an Inlanu Revenue seiies foi the 0niteu
Kinguom as if they weie consistently uefineu thioughout. That is, the figuie ignoies
the fact that excises weie shifteu fiom the Inlanu Revenue seiies to the Customs
(anu Excise) seiies between the 19uu uata point anu the 1926 uata point.

Souice foi Figuie S = http:¡¡www.census.gov¡hhes¡www¡poveity¡uata¡
histoiical¡people.html, accesseu S1 Becembei 2u11.

Souice foi Figuie 6 = Lynch (2uu6). Foi similai figuies coveiing 198u, 198S, anu
199S, see Lynch (2uu1).

Souices anu notes to Figuie 7:
Souice: 0ECB, S)0;*9, [9#Q=&4 (2uu8, p. 14S), using computations fiom 0ECB
income uistiibution questionnaiie anu 0ECB Social Expenuituie uatabase (S0CX).
Note: Poveity iates baseu on a thiesholu set at half of meuian householu uisposable
income. Social spenuing incluues both public anu manuatoiy piivate spenuing in
cash (i.e. excluuing in-kinu seivices). Social spenuing foi people of woiking age is
uefineu as the sum of outlays foi incapacity, family, unemployment, housing anu
othei (i.e. social assistance) piogiams; social spenuing foi people of ietiiement age
is the sum of outlays foi olu-age anu suivivois benefits. Social spenuing is expiesseu
in peicentage of uBP at factoi costs. Bata on poveity iates iefei to the miu-2uuus
foi all countiies; uata foi social spenuing iefei to 2uuS foi all countiies except
Tuikey (1999).
Fiom its age-gioup analysis, the 0ECB iepoit infeis (2uu8, p. 14S-144) that
"While this pattein ieflects the eainings-ielateu natuie of olu-age pensions in most
0ECB countiies, it also suggests that laigei inioaus into ieuucing poveity coulu be
achieveu by ieuiiecting spenuing fiom pension piogiammes towaius piogiammes
taigeteu to people of woiking age anu theii chiluien at the bottom of the income
scale."

47
#%J%P3#'

1
Among the many ways that economists mouify uBP to make it a bettei measuie of
wellbeing, one in paiticulai must be boine in minu thioughout this essay. Piivate
inuiviuual giving, as uistinct fiom employei-baseu of tax-baseu tiansfeis anu
insuiance, is a foim of consumption that ueliveis utility uiiectly to the inuiviuual
givei. Its monetaiy component coulu be counteu as pait of consumption, though
national income accounting consiueis it a tiansfei payment iathei than a payment
foi piouuctive seivices. Bonations of volunteei time coulu also be valueu as
consumption on the pait of the volunteei, though this too is omitteu in conventional
accounting.
2
The official 0ECB uefinition of social expenuituies is as follows: "The piovision by
public anu piivate institutions of benefits to, anu financial contiibutions taigeteu at,
householus anu inuiviuuals in oiuei to pioviue suppoit uuiing ciicumstances which
auveisely affect theii welfaie, pioviueu that the piovision of the benefits anu
financial contiibutions constitutes neithei a uiiect payment foi a paiticulai goou oi
seivice noi an inuiviuual contiact oi tiansfei." Auema, Fion, anu Lauaïque (2u11, p.
9u).
S
See the bioau inclusive measuies offeieu by Auema (1997); Fishback (2u1u);
uaifinkel, Rainwatei, anu Smeeuing (2u1u); anu Auema, Fion, anu Lauaique (2u11).
4
Again, as with the bioauei social spenuing concept, the naiiowei anu moie
taigeteu concept will eithei incluue oi excluue expenuituies on euucation,
uepenuing on the context.
S
In this essay we focus on expenuituies of money anu commouities, anu not the
uonoi's time spent. This again allows us to focus on those iesouice tiansfeis that
aie moie contioveisial. Foi global uata on the less contioveisial giving of
volunteeis' time, see Chaiity Aiu Founuation (2u1u) anu uiving 0SA (2u1u).
6
Piauos, "Capitalism anu Buman Welfaie", chaptei 17 in this volume (Figuies 8-9)
notes the stiong, though ueclining, inteinational coiielation between his bioau
welfaie measuie anu the shaie of social tiansfeis in uBP. The histoiical paiallels
between social spenuing anu conventional measuies of wellbeing aie uevelopeu
moie fully in his backgiounu papei (Piauos 2u1S).
7
0n tiansactions costs anu institutional baiiieis to setting up piivate businesses
anu goveinment institutions moie bioauly, see Noith (1981, 199u). 0n the fiee
iiuei pioblem anu its possible solutions, see 0lson (196S), anu the textbook
summaiies in Nusgiave anu Nusgiave (1989), Stiglitz (2uuu), anu especially uiubei
(2uuS, Pait II).
8
Kailan anu List (2uu7, 2u12) offei expeiimental eviuence of the powei of matching
giant offeis by laige uonois. They theoiize that pait of the powei might come fiom
small uonois' feeling assuieu that laige uonois can monitoi the chaiity's behavioi
moie effectively.
9
See Biiu (1971). The oiiginal iefeience is Auolph Wagnei's S)=9+4#,=9, +#)
@04*/*.5"#9 aF090'*# (186S).
1u
See Anuieoni (1988, 199u, 2uu6) anu Anuieoni anu Payne (2u11).
11
Rotembeig (2u11), Anuieoni #/ &4: (2u11). 0f couise, the effect of income
inequality on piivate giving can be sensitive to the tax stiuctuie. If tax ueuuction
48

iates foi chaiitable contiibutions iise steeply enough with income, then gieatei
inequality of pie-tax income coulu iaise chaiitable giving.
12
Foi a theoiy of political piessuies emphasizing social affinity as the basis foi
ieuistiibution, see Kiistov #/ &4: (1992). Foi empiiical veiification of the negative
effects of ethnic fiactionalization on public social anu infiastiuctuie spenuing, see
Easteily anu Levine (1997), Alesina #/ &4: (1999), Alesina anu ulaesei (2uu4),
Bahlbeig #/ &4: (2u12).
1S
van Leeuwen (2uuu, 2u12). The laigei guilus also combateu the potential
pioblems of auveise selection by compelling membeis to pay fees that helpeu
finance the insuiance pool.
14
Linueit (2uu4, volume 1, pages 4u-4S). 0f couise, the amounts given woulu be
highei shaies of uonoi incomes than of national incomes. The national income
uenominatoi is useu heie because it is moie available, anu because shaies of
national income suggest the limiteu extent of oveiall ieuistiibution anu of poveity
ieuuction.
1S
Claik #/ &4: (2uuS Chapteis 2-S).
16
See Linueit (1998 anu 2uu4, volume 1, chapteis 1, S, anu S).
17
See Caitei #/ &4:I (2uu6, Seiies Cu44, Cu48, Cu2u6, anu Cu214).
18
Williamson anu 0'Rouike, Chaptei 1 of this volume.
19
Reynolus anu Smolensky (1977), Baluwin (199u).
2u
The one possible exception is the Soviet 0nion up to 19Su, on which we lack
sufficient uata on social expenuituies.
21
The text says "non-Euiopean anu non-Communist" to allow foi the exceptional
case of Cuba.
22
This aigument must iemain iough anu tentative, of couise. The income anu piice
elasticities of piivate chaiitable giving aie exceeuingly haiu to iuentify statistically.
Even foi the 0niteu States touay, wheie we have a iich uatabase, it is haiu to extiact
exogenous measuies of income oi aftei-tax piice, in pait because the income tax
ueuuction foi chaiitable giving is a piice effect uiiectly tieu to income itself. Foi a
thoiough uiscussion of the uifficulty of measuiing income anu piice elasticities of
giving see Anuieoni (2uu6, pp. 12SS-12S8).
2S
This section's tieatment of the histoiy of public piimaiy euucation uiaws on uo
anu Linueit (2u1u) anu Linueit (2u1u).
24
Bincecco (2u11), Bincecco anu Katz (foithcoming).
2S
Foi the eviuence linking nutiition with health anu laboi supply foi the pooi of
Englanu anu Fiance, see Flouu #/ &4: (2u11, pp. 12S-22S). We shoulu auu a fuithei
paii of links, fiom pooi ielief to feitility, anu fiom feitility to laboi supply. Boyei
(1989) has shown statistically that Englanu's pooi ielief facilitateu feitility, thus
fuithei incieasing the laboi supply in the long iun.
26
Williamson (199u, pp. 276-298).
27
The uevelopments sketcheu heie paiallel those uesciibeu as the aiiival of "new
alteinatives to libeial capitalism" in the chaptei in this volume by }effiy Fiieuen anu
Ronalu Rogowski.
That elites with entiencheu powei, fiee fiom political competition, will block
innovations anu investments enhancing economic giowth has long been suspecteu.
49

Foi a cuiient theoietical mouel foimalizing this point see Acemoglu anu Robinson
(2uu6).
28
Foi the chionology of the spieau of voting iights anu votei tuinout, see Floia #/ &4:
(198S) anu Nackie anu Rose (1991, 1997). Foi the issues of public social spenuing
anu the taxes to pay foi it, the extent of the fianchise seems a moie useful measuie
than the oft-useu Polity inuices of constiaints on the executive anu inteipaity
competition.
0n the iole of electoial voice in schooling, pooi ielief, anu public health
befoie 19Su, see Linueit (2uu4, Chapteis 4, 7, 1S, anu 16), uo anu Linueit (2u1u),
anu Williamson (199u, pp. 294-298). The same influence of voting powei is
uocumenteu globally foi euucation spenuing in the postwai eia by Ansell (2u1u).
29
Linueit (2uu4, volume 1, Figuie 12.1 anu the accompanying text), anu again
Bincecco (2u11).
Su
The auministiative costs foi the 0S Social Secuiity Auministiation weie 1.6
peicent of benefit payments in fiscal yeai 2u12, anu aie piojecteu as 1.4 peicent foi
fiscal 2u1S. See www.ssa.gov¡buuget¡2u12KeyTables.puf, anu similai foi 2u1S. Foi
the late twentieth centuiy, see Estiin (1988). Foi the slightly highei cost shaies of
less univeisal assistance piogiams in the eaily twentieth centuiy, see uoiuon
(194u).
Foi the highei auministiative cost iatios in ueveloping countiies of Latin
Ameiica, see K. Linueit #/ &4: (2uu6, pp. 76-78).
S1
Woolhanulei (2uuS, especially p. 771), Reinhaiut (2uuu).
S2
Foi the Ameiican Reu Cioss expenses in 2u1u, see http:¡¡www.ieucioss.oig¡flash
¡AnnualRepoit¡2u1u¡AnnualRepoit.html. Foi the Bill anu Nelinua uates
Founuation, see http:¡¡www.gatesfounuation.oig¡annualiepoit
¡2u1u¡Pages¡oveiview.aspx; anu foi 0niteu Way, see http:¡¡www.uniteuway.oig¡
pages¡2u1u-annual-iepoit; all last accesseu 27 Apiil 2u12.
SS
Linueit (2uu4, chapteis 7, 16, anu 17). In Spain, howevei, this tiansition began
only in the 196us, in the seconu phase of the Fianco uictatoiship. 0p to that time
the Chuich was still Fianco's ally against laige social piogiams, with a similai
alliance to Salazai in Poitugal. Still, in countiies thieatening to vote foi
Communists, as in Italy anu Fiance, the Chuich showeu moie suppoit foi social
safety nets.
S4
Again see Easteily anu Levine (1997), Alesina #/ &4: (1999), anu Alesina anu
ulaesei (2uu4).
SS
Foi an explanation of how Belgium foigeu a social compact in the eaily twentieth
centuiy, pioviuing foi social aiu uespite its uivisions, See Bubeiman (2uu8, 2u12,
anu this volume).
S6
Again see Balhbeig #/ &4: (2u12), showing that the paits of Sweuen moie exposeu
to immigiants now expiess moie uoubts about the welfaie state.
S7
See Lynch (2uu1, 2uu6).
S8
0ECB, S)0;*9, [9#Q=&4 (2uu8).
S9
Caineiio anu Beckman (2uu6), anu the souices citeu theie.
Su

4u
Foi histoiical ietiiement tienus fiom the 0niteu States see, foi example, Costa
(1998) anu Lee (1998, 2uu1). 0ne shoulu also note that the tienu towaiu eailiei
male ietiiement has ieveiseu itself in many 0ECB countiies since 2uuu.
41
0n the neeu foi a tax-iate-capping foimula linking pension benefits to suivival
anu elueily laboi foice paiticipation, anu on the Sweuish 1998 iefoim, see Linueit
(2uu4, volume 1, Chapteis 9 anu 11).

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