Racism Is the Biggest Reason the U.S. Safety Net Is So Weak
Harvard economist Alberto Alesina, who died last week, found that ethnic divisions made the country less effective at providing public goods.
Last week, the economics profession lost one of its leading lights -- Harvard professor Alberto Alesina. The Italian economist, who died of a heart attack at age 63, helped revolutionize the field of political economy.
Economists are often criticized for ignoring the political aspects of their theories. At least since the end of World War II, economists have generally seen their role as offering expert advice to wise technocratic leaders -- “whispering in the ears of princes.” But in the real world, leaders with both the wisdom to listen to academic experts and the power to implement any much less all of their recommendations are quite rare; more often, the political world is a tangle of interest groups, culture wars, partisan bickering and electoral expediency.
Some economists throw up their hands at this mess and conclude that if leaders aren’t going to listen to reason, so be it. Not Alesina. He waded directly into the tangled mess, using theory and data to try to tease out the complicated interplay between politics and economics.
One of the big questions Alesina tackled was why the U.S. doesn’t have the generous welfare benefits of advanced countries in Europe. His answer, along with co-authors Edward Glaeser and Bruce Sacerdote, was twofold. First, U.S. institutions -- the Senate, the electoral system, the legal system -- were designed much earlier than their modern European equivalents, and are thus more oriented toward protecting private property above all else. But in addition, the economists found evidence that racial animosity was a source of American exceptionalism:
Opponents of redistribution in the United States have regularly used race-based rhetoric to resist left-wing policies…Within the United States, race is the single most important predictor of support for welfare. America’s troubled race relations are clearly a major reason for the absence of an American welfare state.
Listening to conservative talk-show hosts such as Rush Limbaugh, who derided Obamacare and other Obama administration social programs as “reparations,” it’s hard to argue with Alesina’s conclusion.
Alesina also believed that racial and ethnic divisions could inhibit a country’s economic growth. With co-authors Reza Baqir and William Easterly, he found that U.S. cities with more ethnic fragmentation were less effective at building roads, picking up trash and spending money on education -- all things that contribute to economic growth. And with Easterly and Janina Matuszeski, he found that post-colonial states with boundaries that cut across ethnic groups tended to do worse economically than those with more natural borders like rivers and mountains.
To some, this might seem like a confirmation of right-wing ideas that diversity is bad for a country. But although it might help explain the success of homogenous countries such as Sweden and South Korea, Alesina’s theory is much more subtle than it might appear. As he explained in a 2003 paper, the key isn't how similar the inhabitants of a country might appear on paper, but how much they see themselves as one people; fractionalization is in the mind, rather than in the genes. That implies that the way forward for the U.S. and other diverse countries, to become more equal and prosperous, is to de-emphasize racial and ethnic divisions and promote a shared identity.
Alesina’s research, of course, covered much more than the question of ethnic tensions. He also researched the link between inequality and growth. Some economists believe that the key to growth is to cut taxes and deregulate the financial system; the increased inequality that results from these policies, they argue, is simply the price of greater efficiency. But Alesina had the opposite theory -- inequality, he reasoned, leads to social discontent, which foments political instability, reducing economic growth. Looking across recent history, he and co-author Roberto Perotti found that more unequal countries are more likely to fall into political chaos and suffer economic decline. So time and again, Alesina shows that politics can turn intuition about markets on its head.
It’s worth noting that there was one case when his emphasis on politics may have led Alesina astray. After the 2008 financial crisis, Alesina and his co-authors argued that it was possible for spending cuts to be expansionary in a recession. A key idea was that spending cuts convince the public that a government will be fiscally responsible in the future, and makes consumers more confident to spend in the present. But later research by various economists at the International Monetary Fund found that the conventional wisdom is right -- austerity in a recession hurts growth. In the case of stimulus, brute economic forces tend to be more powerful than political ones.
But even though politics doesn’t always dominate market forces, it does so often enough that the economics world can ill afford to ignore the insights that Alesina uncovered. The world is not ruled by wise, selfless technocrats, but by the chaotic sentiments of the masses. Good advice is never enough; there must be some way of making economics work in the eyes of the people it’s designed to benefit.
The European Union has a habit of disappointing when trying to design a joint response to an economic crisis. However, Ursula von der Leyen’s speech at the European Parliament on Wednesday about a pandemic recovery fund could well be one for the history books.
The Commission president outlined a 750 billion-euro ($825 billion) rescue program to help the bloc cope with the fallout from Covid-19. EU governments still have to agree to the plan, and some northern member states — especially the Netherlands and Austria — are likely opponents. But if the final deal looks even close to Von der Leyen’s proposal, it will mark a radical transformation of Europe.
The Commission plans to borrow the hefty sum on the financial markets and then distribute it to member states between 2021 and 2024, with those who’ve suffered the most economically getting the bigger share. The fund is the sum of many parts. Some 560 billion euros will pay for a “Recovery and Resilience Facility” that will go directly to governments. There will also be a 31 billion-euro scheme to support solvent companies that need temporary state aid, and 9.4 billion euros to prepare for future health crises.
Italy and Spain will be the biggest beneficiaries, while Germany will receive relatively little. The EU will pay back investors via its own budget over a long period — as much as four decades.
The fund breaks a number of EU taboos. First, it raises significantly the amount the Commission can borrow on the financial markets. These are not “euro bonds” in the classic sense of the word, since individual member states will still have to pay their individual contributions to the EU budget, to be calculated by the relative size of their gross domestic product. The vehicle is also expected to be a “one-off” for the pandemic. However, it will be a very useful blueprint if the euro zone ever chooses to move closer to a much-needed fiscal union.
The second big change is that two-thirds of the money would given away as grants. This is the most controversial part of the plan, and it risks being watered down in the forthcoming negotiations between member states. There will be strings attached too, since governments will have to present reform programs to receive support. The extra spending will need to comply with EU-wide priorities such as technology investments and tackling climate change. But the generous provision of grants is a step change from the European Stability Mechanism, the euro area’s rescue fund, which only offers loans.
The final taboo to be possibly broken is on EU-wide taxation. The Commission has an eye on setting up new revenue streams, which could help to pay back investors, including environmental taxes and levies on multinational companies. This is the vaguest part of the plan, but potentially one of the most profound. It would create the seed of an EU Treasury, which could disburse its money where it sees fit.
Von der Leyen will have a tough time selling all of this to the so-called “frugal four,” which includes Sweden and Denmark as well as Austria and the Netherlands. They prefer loans because they fear some of this money will be misspent.
Countries in Eastern Europe have traditionally benefited from the bulk of the EU’s cohesion fund, but they’ve have had a relatively good pandemic so won’t receive much of this new support. It will be interesting to see which way they lean. The proposal needs unanimous support, which will be hard to secure.
At least the Commission president can rely on France and Germany, the EU’s biggest beasts, who struck the breakthrough deal that paved the way for Von der Leyen’s proposal. Spain, Italy and other southern countries are obviously in favor since they’d get most of the money. For once, the political stars may be aligned. If so, 2020 might be remembered in Europe as more than just the year of the pandemic.
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