SUMMARY

1. The welfare state absorbs a large share of government spending in all wealthy countries. Government transfers are the payments made by the government to individuals and families. Poverty programs alleviate income inequality by helping the poor; social insurance programs alleviate economic insecurity. Welfare state programs also deliver external benefits to society through poverty reduction and improved access to health care, particularly for children.

2. Despite the fact that the poverty threshold is adjusted according to the cost of living but not according to the standard of living, and that the average American income has risen substantially over the last 30 years, the poverty rate, the percentage of the population with an income below the poverty threshold, is no lower than it was 30 years ago. There are various causes of poverty: lack of education, the legacy of discrimination, and bad luck. The consequences of poverty are particularly harmful for children, resulting in more chronic disease, lower lifetime earnings, and higher rates of criminality.

3. Median household income, the income of a family at the center of the income distribution, is a better indicator of the income of the typical household than mean household income because it is not distorted by the inclusion of a small number of very wealthy households. The Gini coefficient, a number that summarizes a country’s level of income inequality based on how unequally income is distributed across quintiles, is used to compare income inequality across countries.

4. Both means-tested and non-means-tested programs reduce poverty. The major in-kind benefits programs are Medicare and Medicaid, which pay for medical care. Due to concerns about the effects on incentives to work and on family cohesion, aid to poor families has become significantly less generous even as the negative income tax has become more generous. Social Security, the largest U.S. welfare state program, has significantly reduced poverty among the elderly. Unemployment insurance is also a key social insurance program.

5. Health insurance satisfies an important need because most families cannot afford expensive medical treatment. Private health insurance, unless it is employment-based or carefully screens applicants, has the potential to fall into an adverse selection death spiral. Most Americans are covered by employment-based private health insurance; the majority of the remaining are covered by Medicare (a single-payer system for those 65 and over in which the government pays for most medical bills from tax revenue) or Medicaid (for those with low incomes).

6. Compared to other countries, the United States relies more heavily on private health insurance and has substantially higher health care costs per person without clearly providing better care. Health care costs are rising, largely due to advances in technology. The rising number of uninsured and the financial distress caused by lack of insurance prompted the passage in 2010 of the Affordable Care Act, or ACA. Its objective is to reduce the number of uninsured and reduce the rate of growth of health care costs.

7. Debates over the size of the welfare state are based on philosophical and equity-versus-efficiency considerations. Although high marginal tax rates to finance an extensive welfare state can reduce the incentive to work, means-testing of programs in order to reduce the cost of the welfare state can also reduce the incentive to work unless carefully designed to avoid notches.

8. Politicians on the left tend to favor a bigger welfare state and those on the right to oppose it. This left-right distinction is central to today’s politics. America’s two major political parties have become more polarized in recent decades, with a much clearer distinction than in the past about where their members stand on the left-right spectrum.