Rethinking the Welfare State

By Nezih Guner, Remzi Kaygusuz and Gustavo Ventura

The U.S. spends non trivially on non-medical transfers for its working-age population in a wide range of programs that support low and middle-income households. How valuable are these programs for U.S. households? Are there simpler, welfare-improving ways to transfer resources that are supported by a majority? What are the macroeconomic effects of such alternatives? We answer these questions in an equilibrium, life-cycle model with single and married households who face idiosyncratic productivity risk, in the presence of costly children and potential skill losses of females associated with non-participation. Our findings show that a potential revenue-neutral elimination of the welfare state generates large welfare losses in the aggregate. Yet, most households support eliminating current transfers since losses are concentrated among a small group. We find that a Universal Basic Income program does not improve upon the current system. If instead per-person transfers are implemented alongside a proportional tax, a Negative Income Tax experiment, there are transfer levels and associated tax rates that improve upon the current system. Providing per-person transfers to all households is quite costly, and reducing tax distortions helps to provide for additional resources to expand redistribution.

It is no surprise that it is a bad idea to remove insurance that targets support to those who need it. What I find more interesting is that there is no political support for welfare programs. My experience comparing UBI with unemployment unsirance is that the latter has wide support because it is a risk that everyone faces, though with different probabilities. It should be no different with health. I suppose the difference is that the richness of this model takes into account how people may lock themselves into particular states (getting married, having children) and differ by gender and age, and may thus not care about the other states that they will never reach (again).

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