The Free-market Welfare State

Today I’m proud to release my latest paper for the Niskanen Center, “The Free-Market Welfare State: Preserving dynamism in a volatile world.” You can find it here.

The paper proposes a set of principles for a “free-market welfare state” research and reform agenda, based around a simple but provocative thesis: America’s historical combination of free-markets and limited income security is fundamentally unstable. Either we get better at complementing markets with comprehensive income and re-employment supports, or the forces of creative destruction will generate anti-market backlashes with lasting political consequences:

The fallout from China’s entry to the World Trade Organization (WTO) in 2001 is a clear case in point. Cheaper imports benefited millions of Americans through lower consumer prices. At the same time, Chinese import competition destroyed nearly two million jobs in manufacturing and associated services—a classic case of creative destruction. Yet rather than help those workers adjust, our social insurance system left them to languish. In the regions of the United States most exposed to import competition, Social Security Disability Insurance (SSDI) was more than twice as responsive to the economic shock as unemployment insurance and Trade Adjustment Assistance (TAA) combined, even though it is one of the most restrictive disability programs in the developed world. Indeed, while critics of the welfare state often argue the United States spends a trillion dollars a year on social programs, only about a quarter of this comes close to anything resembling cash or quasi-cash income support—about the same annual amount spent subsidizing employer-based health insurance.

Read the rest at NiskanenCenter.org

The Real Source of Teachers’ Struggles

Striking teachers in West Virginia recently made headlines in their efforts to increase their pay and benefits, which are among the lowest in the country. Teachers in Oklahoma, Arizona, and Kentucky have followed suit with similar protests. The dominant narrative, pushed by Democrats and their allies in the labor movement, presents these protests as part of a larger struggle between underpaid educators and miserly state Republicans more concerned with cutting taxes than with investing in children. While politically convenient, this story is largely a red herring distracting us from the real reason teachers in West Virginia and elsewhere are currently underpaid and unlikely to see substantial pay increases any time soon.

The problem is fiscal capacity. This is the ability of governments to raise enough revenues for the provision of basic public goods. Some states have greater total taxable resources (income, wealth, natural resources, etc.) than others. Typically, social scientists discuss fiscal capacity in regard to the inequality that results from the ability of rich suburbs to spend more on education than poor urban areas. While reformers have made great strides in reducing the disparities between urban and suburban school spending, they have paid almost no attention to disparities among states. It is impossible to address the teachers’ grievances without addressing limited fiscal capacity among poor states.

Comparing West Virginia and New Jersey helps us understand the underlying problem. Each state dedicates the same proportion of its resources to spending on education salaries and benefits — about 3.5 percent of its GDP. In other words, they are putting in the same effort. …

Read the rest at NationalReview.com