In an important new book (“Growing Public: Social Spending and Economic Growth Since the Eighteenth Century”), Lindert finds the welfare state to be a resilient institution. He acknowledges the conflict. The elderly (those over 65) are expected to reach 20 percent of the population in 2008 for Japan and Italy, in 2015 for Sweden and in 2020 for Germany and Belgium (the United States will then be at about 16 percent). But Lindert thinks governments will dodge crises by a pragmatic mix of benefits cuts and modest tax increases.
Will it be that easy? Last week Federal Reserve chairman Alan Greenspan suggested cuts in Social Security benefits for future retirees–and provoked howls. The reaction to Greenspan’s comments highlights the danger of a vicious circle. Politicians can’t cut popular benefits. Rising taxes or budget deficits then reduce economic growth–making benefits harder to pay. The welfare state ultimately becomes un-affordable and unstable. It promotes economic stagnation and generational and class competition for dwindling benefits.
After an exhaustive analysis, Lindert–who teaches at the University of California, Davis–is less alarmed. His conclusion: so far the welfare state is a “free lunch.” That is, high taxes and benefits (for unemployment, health and retirement) haven’t depressed economic growth. Countries can be caring without crippling themselves. How can this be when economic theory and common sense suggest that heavy taxes and benefits should hurt work and investment?
Lindert offers three answers. First, some public spending (say, on schools) may improve economic growth. Second, generous benefits may reward–and raise–unemployment, but the added jobless are mostly unskilled and unproductive; their loss doesn’t hurt much. And finally, countries with big welfare states have adopted taxes that minimize economic damage. In Europe, taxes approach 50 percent of national income (as opposed to about 30 percent in the United States). But Europe relies heavily on a sales tax–the “value-added tax”–that, in theory, falls on consumption and not investment or work effort.
America’s desire for welfare (called “poor relief” before the 20th century) was always less than Europe’s, Lindert says. The frontier spirit emphasized self-reliance; ethnic diversity discouraged helping dissimilar groups. Even so, welfare in the 1800s was usually below 1 percent of national income in most countries. The poor were stigmatized as failures. The Depression and World War II were transforming, says Lindert. People identified with others’ misfortunes–“that could be me”–and yearned for collective security.
Up to a point, Lindert’s story is a cautionary tale for both liberals and conservatives. For conservatives: there’s no automatic connection between bigger government and lower economic growth; sensible societies can have both. For liberals: it matters how societies pay for welfare programs; “soak the rich” taxes can be self-defeating by discouraging investment and risk-taking. If citizens want more collective benefits (say, health insurance), they need to pay for them collectively. But Lindert’s larger conclusion, that the welfare state has so far only been a free lunch, strains belief.
In 2003 the average income per person in the United States was $34,831, report economists Robert H. McGuckin and Bart van Art of the Conference Board. In Germany the average income was $25,507. Lower productivity (output per hour) doesn’t explain the difference. It was about equal in both countries. The gap has two causes–German workers spend less time working, and proportionately fewer Germans work. Why? One reason may be a greater cultural desire for more vacations and free time. But another is this: higher taxes make work less rewarding; higher welfare makes unemployment more rewarding.
There’s a bigger problem. History doesn’t move in a straight line. It lurches. Problems gather, then abrupt changes occur. Before it happened, hardly anyone predicted the collapse of the Soviet Union. Before it happened, hardly anyone predicted the stagnation (in the 1990s) of Japan’s economy. Europe’s economy has recently sputtered. The accumulating costs of big welfare states may be one cause along with others (say, poor entrepreneurship).
Lindert actually agrees with Greenspan: retirement benefits should be cut, here and elsewhere. Indeed, he expects that to happen. He thinks that democracies instinctively prevent their welfare states from going to destructive extremes. Maybe. But the evidence is skimpy, and that’s the real issue. If we wait until problems become obvious, it will be too late. The welfare state will be resilient only if we make it so.
