Generous welfare states are fine for growth

The main finding of Peter Lindert’s intriguing 2003 paper, “Why the welfare state looks like a free lunch” (a warm-up for his 2004 book Growing Public: Social Spending and Economic Growth since the Eighteenth Century is that generous social democratic welfare states, with a variety of universalist and means-tested safety net and family support programs, grow just as robustly as stingy laissez-faire states. Here’s the key summary from the abstract:

There is no clear net GDP cost of high tax-based social spending on GDP, despite a tradition of assuming that such costs are large.

The finding should obviously be plastered on bumper stickers, refrigerator magnets, and dorm-room walls and played continuously on a loudspeaker outside the Chamber of Commerce, Club for Growth, Council on Competitiveness, etc. The welfare state doesn’t just look like a free lunch, it is a free lunch, at least from the standpoint of national aggregates.

Class conflict may mean that it’s hard for us to order that free lunch in the U.S. anytime soon, but the barrier between us and the free lunch doesn’t come in the obvious way.

The social democratic welfare states deliver benefits in smart ways that support working families, encourage women’s equality in the labor market (and even the home?), care for disabled people, and improve health, all without growth-inhibiting effects on incentives. In fact, many of the benefits support economic growth.

But the curious observation in the paper is that the social democratic welfare states tax themselves much more like “pro-growth” right-wingers think Americans should be taxed. Because the social democratic welfare states rely on VAT and consumption taxes, labor is taxed more heavily and capital at least as lightly as in the stingy zone. Tax structures are generally less progressive (although that proves very hard to measure concretely) than in the stingy zone.

Lindert credits the neo-liberal tax system in the social democracies with supporting growth. Suppose for argument’s sake that Lindert is right. Then a problem in the U.S. of moving from the current mix of inefficient taxes and crummy benefits to efficient taxes and great benefits is that the ruling class can’t be trusted to keep the deal. Sure they’ll be delighted to shift taxes from capital and very rich people to labor and middle-income people, but who believes that they’d follow through on improving the benefits? Class conflict ruins the opportunity for a free lunch.