TRUST AND THE SIZE OF THE WELFARE STATE: A relationship with twin peaks among OECD countries
06 Jun 2016
Large, corrupt and ineffective welfare states can survive in OECD countries, thanks to the support of a majority of people who are not civic-minded. But the creation of large, transparent and effective welfare states needs a large majority of trustworthy citizens.
These are among the findings of research by Yann Algan, Pierre Cahuc and Marc Sangnier, which detects two distinct types of welfare states: the Scandinavian-type inhabited mainly by trustworthy people; and the Mediterranean-type, inhabited by a large share of people lacking civic attitudes.
The results of their study, which is published in the June 2016 Economic Journal, help to explain why it is so difficult to reform the large welfare states of several continental European countries despite the widespread consensus that they are less effective and transparent than the welfare states of Scandinavian countries.
The researchers begin by noting the common argument that the persistence of large welfare states in Scandinavian countries is explained by the trustworthiness of their citizens. Those large welfare states presumably rely on conditional cooperation. Trustworthy or ''civic'' individuals consent to pay high taxes only because they are convinced that their compatriots are paying their taxes too and not misusing social benefits (Rothstein and Uslaner, 2005).
In fact, a glance at the data shows that this explanation can only be one part of a much broader story for the OECD countries. As Figure 1 shows, the observed cross-country relationship between trust and the size of welfare states, measured by the share of social expenditure in GDP, is not monotonic, contrary to the traditional claim, but ''twin-peaked''. Although Austria, Belgium, France, Germany and Italy display limited trust, their welfare states are as large as those of Scandinavian countries.
This study shows that the interplay between two opposing forces leads to two types of welfare states: the Scandinavian-type inhabited by trustworthy people, and the Mediterranean-type, inhabited by a large share of people who are not civic-minded.
Indeed, the researchers show that large welfare states can exist in societies populated by a majority of untrustworthy individuals who cheat on social benefits and taxes, and where the share of civic citizens is nonetheless large enough to raise a significant amount of taxes. If the civic spirit of public officials mirrors that of the population, these large welfare states will also be corrupt.
Conversely, welfare states can be both large and transparent, but only if the share of trustworthy individuals is very large.
The researchers explore the empirical relevance of this explanation by using international social surveys:
• From the European Social Survey, they find that individuals exhibit stronger support for the welfare state when they are surrounded with more people they trust.
• From the World Values Survey, they find that untrustworthy individuals support the welfare state more strongly than civic ones. In particular, individuals who declare that it may be excusable for people to claim government benefits to which they are not entitled or to avoid a fare on public transport are found to support more generous social programmes than trustworthy individuals who declare that there is no justification for cheating.
These findings might explain why it is so difficult to reform the large welfare states of several continental European countries despite the widespread consensus that they are less effective and transparent than welfare states of Scandinavian countries. Their large size might be sustained by an equilibrium in which the majority of the population is made up of untrustworthy individuals who exploit the advantages provided by the welfare state at the expense of a minority of trustworthy individuals.
But the long-run sustainability of this equilibrium is an open question. The fact that all individuals, either trustworthy or untrustworthy, are better off when they are surrounded by trustworthy individuals suggests that all individuals could coordinate to invest in education in order to improve the civic spirit of their offspring, to the extent that education can improve civic spirit (see Glaeser et al, 2007; and Algan et al, 2013).
This should improve the effectiveness and the transparency of the welfare state. But there are also opposing forces at play. Generous welfare states provide numerous individuals with incentives to abuse social benefits and evade taxation, which can undermine civic attitudes (Ljunge, 2012).
''Trust and the Welfare State: the Twin Peaks Curve'' by Yann Algan, Pierre Cahuc and Marc Sangnier is published in the June 2016 issue of the Economic Journal. Yann Algan is at Sciences Po. Pierre Cahuc is at CREST-ENSAE. Marc Sangnier is at the Aix-Marseilles School of Economics.
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Algan, Yann, Pierre Cahuc, and Andrei Shleifer (2013) ''Teaching Practices and Social Capital'', American Economic Journal: Applied Economics 5 (3): 189-210.
Glaeser, Edward, Giacomo Ponzetto, and Andrei Shleifer (2007) ''Why does Democracy need Education?'', Journal of Economic Growth 12(2): 77-99.
Ljunge, Martin (2012) ''The Spirit of the Welfare State? Adaptation in the Demand for Social Insurance'', Journal of Human Capital 6(3): 187-223.
Rothstein, Bo, and Eric M. Uslaner (2005) ''All for All: Equality, Corruption, and Social Trust'', World Politics 58(1): 41-72.
The twin peaks relationship between the generosity of the welfare state and trust