Clinton Brings Europe's Welfare State to America

by Wyoming Liberty Staff

In her big speech on economic policy on July 13, Democrat presidential candidate Hillary Clinton outline a vision for expanding the American welfare state. At 17:45 into the video, Mrs. Clinton summarizes her entitlement agenda:

Fair pay and fair scheduling, paid family leave and earned sick days, child care are essential to our competitiveness and our growth.

This entitlement agenda is nothing new. All its components are items on a long-standing statist policy agenda. In my book Remaking America: Welcome to the Dark Side of the Welfare State I presented a short list of items that distinguish the American welfare state from its standard European counterpart. Those items were: single-payer health care, general income insurance and universal, tax-paid child care. With the Affordable Care Act the Democrats in Congress worked hard with President Obama to cross off the single-payer item off this list. They did not quite succeed, but the platform has been laid for a "completion" of the reform into a single-payer system.

Of the items of Mrs. Clinton's entitlement agenda, the most radical one - and easily the most costly - is the "family leave" program. It would become the first general income insurance program for working-age Americans. A staple of Scandinavian welfare states it works, generally, as follows:

• Government – in this case presumably the federal government – defines a list of circumstances that make a person eligible for "family leave" from work;
• The person will have the right to income during the leave, either in the form of a check from the employer or as income replacement pay from a government agency;
• A person's income during "family leave" would be a percentage of her income, which based on the Scandinavian model is in the 60-80 percent range.

Assuming that this is constructed based on the Scandinavian model, the reform would create a government agency for "general income security" or something similar. A person who believes she meets the criteria for "family leave" then applies to the agency and, when the application is approved, receives regular checks from the agency. The money paid out, as well as the operations of the agency, would be funded by a new payroll tax.

Again, it is not to be taken for granted that this is the actual model that Mrs. Clinton has in mind. However, the exact construction matters less; the big problem with this reform is that it creates a new incentive for people to be away from work, and it creates the need for massive new taxation. The cost, again, depends on the exact design, but a rough estimate would look as follows:

• As of June 2015 there are 121 million employees in the private sector; adding government brings the total number of employed Americans up to 142.8 million;
• The average earning (wage or salary) in the private sector is $53,325 and in government $56,716;
• Suppose Mrs. Clinton's reform mandated paid "family leave" at 80 percent of one's annual earning, and that each employee has the right to a total of ten "family leave" days, or two regular work weeks, per year;
• If every private-sector employee used this entitlement in full, it would cost private employers a total of $198 billion per year in new taxes; for government employees the extra cost would be $38 billion.

In other words, as sketched here the paid "family leave" reform could cost American taxpayers an additional $236 billion per year.

For comparison, in 2015 America's businesses are expected to pay $449 billion in federal corporate income taxes. Since all taxes are ultimately paid by the private sector, a "family leave" reform as sketched here would increase the income tax burden on our businesses by 53 percent.

If the Clinton campaign disagrees with this cost calculation, they are more than welcome to present their numbers. Let us just bear one thing in mind: in order to reduce the costs of the program compared to what I have sketched here, the Clinton campaign would have to add either of three things: a restriction on who is eligible (such as only parents with children under a certain age); a lower cap on income compensation; or a shorter period of time granted for leave, such as a "lifetime" cap per child.

Regardless of how the program is designed, it would produce one of the largest tax increases ever on the American economy. It would also open a Pandora's Box of related income-security entitlements, just as happened in Scandinavia. In Sweden, a person who utilizes the full roster of income-security programs during one year can easily be away from work up to seven months per year. Add to that five weeks of paid vacation, and a person could reduce his full-time contribution to the work force to one third of the year.

Mrs. Clinton motivates her list of entitlement reforms with alleged positive effects on GDP growth. It is difficult to see how higher taxes will contribute to this.

More importantly, the economy of the European Union, which consists of 28 welfare states, almost all with higher entitlement ambitions than their American counterpart, has a very disappointing growth record. Over the past three years the U.S. economy has been growing at 2-2.5 percent per year while the European economy has barely reached one percent. Therefore, it is reasonable to draw the conclusion that an expansion of the American welfare state to European proportions would be negative, not positive, for the economy.