The quality of welfare spending, not just the quantity, influences household debt levels between countries. Welfare systems that focus spending on the elderly (high elderly-biased social spending index/EBiSS) correspond to lower borrowing among young people. Younger individuals in countries with more balanced welfare spending have more stable financial expectations, making them less risk-averse and more willing to take on long-term debt like mortgages. The author proposes studying the relationship between different types of welfare regimes and levels of household debt, including consumer credit.

1. Private Debt,
Public Virtues
On the relationship between welfare and household debt.
Martino Comelli
martcomelli@mrtno.com

2. Why does the quantity of household debt varies
so much between countries?
If welfare is primary focused on the elderly
(mainly pensions), young people are less willing
to borrow money.
I argue that the quantity of household debt is
influenced by the quality of welfare spending.

3. Structure
• What the current literature is saying, and what is missing:
• Substitutive relationship
• Complementary relationship
• An alternative explanation:
• How is household debt is distributed in Europe between citizens?
• How is household debt is distributed in Europe between countries?
• How does welfare programs influence that distribution?
• Patterns of Welfare and Debt.
But first…

4. Why should we care?
• Private debt matters for understanding economic
instability. (Mian & Sufi, King, Minsky, Fisher)
• “Financial stability risks have been increasingly
linked to […] lending booms which are typically
followed by deeper recessions and slower
recoveries.” (Moritz Schularick, Òscar Jordà and
Alan Taylor)

5. Macro: Trade-off between welfare and debt.
(Prasad, Trumbull, Rajan, Kus, etc…)
Household debt:
Hypotheses in the literature?
Micro: “Keeping up with the Joneses” (Veblen
consumption, ex: Rancière & Kumhof)
Macro: Financial innovation (Fligstein & Goldstein,
Fourcade & Healy, Poon, MacKenzie)

6. http://www2.asanet.org/sectionchs/secure/prasad.pdf
1# Trade-off hypotheses (Prasad, Trumbull)
Substitutive Relationship

7. Yes, but…
https://fullfact.org/factchecks/is_uk_household_debt_to_income_ratio_highest_in_the_world-2986

9. #2“Lifetime consumption
smoothing” (Modigliani, Friedman)
Complementary relationship
http://www.bogleheads.org/w/images/c/cf/Consumption_Smoothing.png

10. 10
TABLE 4: Probability of Household Debt
(Probit estimations)
Age
35-44
45-54
55-64
>65
Education
Secondary
>= Tertiary
Income Quintiles
2
3
4
5
Relative Poverty
Poor
Household Size
Two
Three
Four
5 or more.
Household type
Single Parent
Couple, No Children
Couple, With Children
5 or more.
Immigration
Immigrant
Health
Disabled
Working Status
Employed
Mainly employed
Unemployed
Constant
No. Of Observations
Pseudo R^2
Source: LIS dataset 2004.
Country dummies are included. (***) coefficient is significantly different
from zero at the 1% (**) 5% (*) 10%.
Model 1
0.171
0.048
-0.42
-1.03
0.225
0.324
-0.791
183101
0.197
(***)
(**)
(***)
(***)
(***)
(***)
(***)
Model 2
0.177
-0.007
-0.472
-1.029
0.102
0.091
0.311
0.57
0.673
0.869
-0.311
-1.13
182479
0.224
(***)
(***)
(***)
(***)
(***)
(***)
(***)
(***)
(***)
(***)
(***)
Model 3
0.168
0.013
-0.362
-0.823
0.13
0.151
0.307
0.556
0.656
0.845
-0.269
0.034
0.093
0.303
0.293
-0.013
0.315
0.407
(omitted)
-1.581
182479
0.244
(***)
(***)
(***)
(***)
(***)
(***)
(***)
(***)
(***)
(***)
(**)
(***)
(***)
(***)
(***)
(***)
Model 4
0.06
-0.121
-0.421
-0.892
0.023
0.117
0.153
0.334
0.477
0.691
-0.368
0.2
0.182
0.398
0.382
-0.023
0.117
0.252
(omitted)
-0.162
-0.038
-1.217
88103
0.22
(***)
(***)
(***)
(**)
(***)
(***)
(***)
(***)
(***)
(*)
(**)
(***)
(***)
(***)
(**)
(***)
Model 5
0.061
-0.122
-0.404
-0.789
0.044
0.128
0.132
0.311
0.451
0.568
-0.306
0.18
0.161
0.395
0.387
-0.028
0.121
0.236
(omitted)
-0.16
-0.05
0.027
0.016
-0.18
-1.229
61554
0.119
(**)
(***)
(***)
(**)
(**)
(***)
(***)
(***)
(***)
(*)
(*)
(***)
(***)
(***)
(**)
(**)
(***)
Luxembourg Income
Studies (2004)

11. 11
Young, rich, educated.
(demographic, economic, social reasons…)

12. Yes, but still…
With a micro explanation we fail to explain macro
differences…
https://fullfact.org/factchecks/is_uk_household_debt_to_income_ratio_highest_in_the_world-2986

13. 13
We need a
sociological
explanation!

14. 14
It’s not the quantity of
welfare spending that
influences the quantity of
household debt.

15. 15
…but the quality of welfare
spending that influences
the quantity of household
debt.

16. • Macro data:
• Comparative Welfare Entitlements Dataset
(2014) - compiled by Lyle Scruggs, Kati Kuitto,
Detlef Jahn. (Decommodification)
• Comparative Welfare States Data Set (2014) -
compiled by David Brady, Evelyne Huber, and
John D. Stephens. (Spending)
• OECD (National Accounts at a Glance)

17. 17
It’s not the quantity of welfare spending that
influences the quantity of household debt.

18. 18
…it is the quality of welfare spending that
influences the quantity of household debt. (1/2)

19. 19
Years: 1995-2012.
Period dummies are included in the regression.

20. Elderly-oriented spending (numerator) / Non-elderly oriented spending (denominator)
Pieter Vanhuysse, Intergenerational Justice in Aging Societies, http://www.bertelsmann-stiftung.de/fileadmin/system/flexpaper/
rsmbstpublications/download_file/3359/3359_26.pdf

22. 22
It is the quality of welfare spending that
influences the quantity of household debt…
…and by quality I mean who gets welfare
money and services.

24. 24
Ok, but do you have a theory?
• The expectation that personal finances will be stable makes
people less risk averse.
• That’s why the rich borrow more in general.
• Northern welfare states facilitate the expectation that personal /
household finances will be stable, especially for youth.
• That’s why Scandinavians borrow more in general.
• Continental welfare states fail to guarantee stable financial
expectations, especially for youth.
• That’s why continentals borrow less.

25. 25
Do you have a (research) agenda?
• Stable financial perspectives make people less risk
averse.
• That’s why Scandinavians have an higher fertility rate.
• …and that’s why continental Europe (with the
exception of France) has a very low fertility rate.
• Babies and families are like debt: a long term risk.
• Debt, children, startups, etc…

26. 26
…How does the quality of welfare spending
influences the quality of household debt?
(Mary Caplan & Me)
But what about short term risks?
And in particular short term debt?
Consumer credit

27. 27
Consumer credit

28. 28
The Three Worlds of
Debtfare Capitalism
Welfare /
Debt
Continental Universal Liberal
Short term
(Consumer
credit)
Low Low High
Long Term
(Mortgages)
Low High Medium

29. 29
…to take away.
Unexplored relationship between welfare
and financialization of households.
(household debt)
Welfare for the young encourages risk-
taking behaviours.
Debtfare regimes.

30. I’m done!

31. 31
“EBiSS is calculated as follows. On the elderly-oriented spending side (the
numerator), the following public spending programs were included: (1) old-age-
related benefits in cash (pensions, early-retirement pensions, other cash benefits)
and in kind (residential care/home-help services, other benefits in kind); (2)
survivor’s benefits in cash and in kind (funeral expenses, other in-kind benefits),
(3) disability pensions, (4) occupational injury and disease- related pensions, and
(5) early retirement for labor market reasons.
On the nonelderly-oriented side of the EBiSS (the denominator), the following
public spending programs were included: (1) family benefits in cash (family
allowances, maternity and parental leave, other cash benefits) and in kind (day
care/home-help services, other in-kind benefits), (2) active labor market
programs (employment services and administration, labor market training, youth
measures, subsidized employment, employment measures for the disabled), (3)
income maintenance cash benefits, (4) unemployment compensation and
severance pay cash benefits, and (5) education spending for all levels of
education from early childhood to university.29
To adjust for demographic structure
(spending need), the resulting elderly/nonelderly social spending ratio in each
country has been multiplied by the country’s old-age support ratio, that is, the
number of persons aged 20 – 64 over the number of persons aged 65 or more.”
Pieter Vanhuysse, Intergenerational Justice in Aging Societies, http://www.bertelsmann-stiftung.de/fileadmin/system/flexpaper/
rsmbstpublications/download_file/3359/3359_26.pdf