welfare-state programs aren't devil's spawn
Source Jim Devine
Date 04/04/15/14:34

April 15, 2004
Economic Scene

IN widely reported comments before a Congressional committee in
February, Alan Greenspan, the Federal Reserve chairman, suggested that
President Bush's tax cuts should not be even partly rescinded. Rather,
Mr. Greenspan said, the nation should cut future domestic spending,
including Social Security benefits, to balance the budget. Higher
spending or higher taxes would deter economic growth, he warned.

The committee should have asked the statistically oriented chairman for
the evidence. A comprehensive analysis by the economic historian Peter
H. Lindert, published in a new book, "Growing Public" (Cambridge
University Press), contends that there simply is none. His analysis is
partly a broad extension of other studies by economists like Joel B.
Slemrod of the University of Michigan, but he adds considerably to the

Mr. Lindert is a professor at the University of California, Davis;
former president of the Economic History Association; and an associate
of the National Bureau of Economic Research. He has examined levels of
taxes, public investment in education, transportation and health care,
and social transfers like Social Security, and finds a stark
contradiction between conventional wisdom and the evidence. "It is well
known that higher taxes and transfers reduce productivity," he writes.
"Well known - but unsupported by statistics and history."

He compares the level of social spending over nine decades up to 2000 in
19 developed nations, including most of Western Europe, Japan,
Australia, the United States and Canada. His analysis differs from many
studies in part because he focuses on social programs, not overall
government spending.

He finds that high spending on such programs creates no statistically
measurable deterrent to the growth of productivity or per capita gross
domestic product. As many nations in Europe built welfare states after
World War II, they continued to grow faster than the United States, a
nation with low social spending.

For many people, this defies common sense. Higher taxes to support
social programs surely deter investment or the willingness to work to
some degree. As Mr. Lindert points out, estimates by some economists,
like Martin Feldstein, a Harvard professor and president of the National
Bureau of Economic Research, find that extra government spending leads
to a large reduction in gross domestic product.

In fact, taken literally, these studies suggest that the gross domestic
product of Sweden, to take an example of a nation with heavy social
spending, should have been reduced by up to 50 percent. But nothing
remotely like that has happened.

The principal problem with such studies, Mr. Lindert writes, is that
they are simulations of a highly simplified world. The economists
recreate an economy where almost all incentives lead to slower growth,
Mr. Lindert said, but that world does not exist.

Why, then, have high levels of social spending proved no deterrent to
growth in the real world? Mr. Lindert has several explanations, some of
them surprising.

First, he says, the tax systems of countries with high social spending
are less antigrowth than is realized because nations in Scandinavia and
Continental Europe typically derive so much tax revenue from regressive
consumption taxes. In fact, these nations do not penalize profits and
capital investment any more than the United States or Japan does, and
possibly even less.

Mr. Lindert cannot be pigeonholed as a conservative or a liberal. He
says he believes that less tax on capital will promote growth. But
nations with high social spending typically tax alcohol, tobacco and
gasoline highly, he notes, which contributes to better health and
environmental quality. Healthier workers are more productive, and
cleaner air requires fewer expensive environmental regulations.

Second, he finds that social programs in nations with high welfare
levels usually include everyone. Because benefits are generally not cut
off as incomes grow, the disincentive to get jobs or invest is reduced.

But third, he finds, much of the public spending in these nations is
also conducive to economic growth. Among such spending is that for
education and health. Mr. Lindert argues firmly that under comprehensive
public health programs, people are healthier and live longer, which also
makes them more productive. He cites a study by the economist Zeynep Or
for the Organization for Economic Cooperation and Development that finds
that in nations where a higher proportion of all health outlays are
public, life spans are significantly increased.

Mr. Lindert also contends that higher levels of government support for
child care and requirements to re-employ women after maternity leave at
the same job can enhance economic growth. Business considers such
workers long-term employees and is likely to invest more in their
training and place them on a faster track. Workers probably expend more
time and effort on their long-term careers.

The statistical probability that some women will leave work creates a
bias against all women. Ample government support apparently reduces this
bias. The difference between pay for men and women is higher in the
United States than in most of Europe, and is especially narrow in
Sweden, which provides generous child support.

This summary does not do justice to Mr. Lindert's book. He also, for
example, provides a valuable history of social spending and proposes a
theory about why some nations spend more than others that is closely
related to how well democracy works. This is a piece of research that is
rich in insight and grounded in empirical evidence. There will be
challenges. But the upshot is unmistakable. Government spending, if
administered wisely, can have great value for everyone, including but
not limited to the especially disadvantaged.

Jeff Madrick is the editor of Challenge Magazine, and he teaches at
Cooper Union and New School University.E-mail:

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