Robert Samuelson: Can the U.S. Afford to Run a Welfare State?





Robert J. Samuelson, in Wash Post (March 5, 2004):

One great project of the late 20th century was the construction of vast welfare states in wealthy nations to protect people against the insecurities of the business cycle and the injustices of unfettered capitalism. One great question of the early 21st century is whether these welfare states, facing massive commitments to aging populations, will themselves create new insecurities and injustices. Comes now economic historian Peter Lindert, who has thoroughly probed the welfare state, with a surprising message: Relax.

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 tax increases.

Will it be that easy? Last week Federal Reserve Chairman Alan Greenspan provoked howls by suggesting cuts in Social Security benefits for future retirees. 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 becomes unaffordable. It promotes economic stagnation and generational and class competition for dwindling benefits.

After an exhaustive analysis, Lindert -- who teaches at the University of California at Davis -- is less alarmed. So far, the welfare state is a "free lunch," he concludes. 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; 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 everywhere. 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 deliver both good growth and social justice. 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 only been a free lunch, strains belief.

In 2003 the average U.S. income per person was $34,831, report economists Robert H. McGuckin and Bart van Ark 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 higher taxes also make work less rewarding, while higher welfare makes unemployment more rewarding.


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