Arnold Kling  

Welfare State Free Lunch?

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In his New York Times column last week, Jeffrey Madrick referred to the work of Peter Lindert on the ability of countries to grow in spite of welfare state distortions. Lindert's argument can be found in Why the Welfare State Looks Like a Free Lunch


The overriding fact about the cases of costly welfare states, though, is that they
never happened. That’s what their being extrapolations out of the sample range really means. Once we draw back from such imaginary extrapolations to the historical range of policies actually tried, no expansion of taxes and transfers significantly lowers (or raises) GDP.

Lindert's main sample is 1978-1995. It strikes me that now that we have gone "out of sample," Europe has underperformed the United States. Some people think that this illustrates the cost of the welfare state.

Most of Lindert's paper is focused on possible explanations for the affordability of the welfare state (taking this as a demonstrated fact). He suggests that European taxes and benefits are relatively nondistortionary.

For Discussion. Lindert argues that providing incentives for early retirement does not hurt per capita GDP, because older workers may be less productive, or even completely unproductive. Is this at all plausible? If so, what policy implications does it have?



COMMENTS (9 to date)
Eric Krieg writes:

I think that, as the baby boomers near retirement, we may see a rethinking of the anti-aged predjudice displayed by Lindert.

The boomers have a lot of skills and knowledge, especially compared to those of us coming behind them. Also, I don't think that our work ethic is quite as strong as the boomers.

So, even if the productivity of the near-retired was poor in the past, that is not the case now.

Boonton writes:

There's a lot of good ideas in the paper, especially intersting (I'm only on page 18) was that while welfare states offer incentives for early retirement, they are especially strong for those with low productivity. Also intersting was tha their welfare systems are set up in such a way as to minimize the disincentives to work for those collecting benefits.

In the US, I think the Earned Income Tax Credit is one of the most powerful anti-poverty programs around. It provides low income workers with an income subsidy...the result is that it makes sense to work even if the job pays poorly.

In contrast, I went with my girlfriend to the unemployment office last week (she was laid off in December). She told me that if you work they deduct your earnings from your benefit. So if you're supposed to get $450 a week but work one day and earn $50 you'll get $400 that week (but your benefits will last longer since you're burning them less quickly). This just doesn't seem right, if you earn a $1 you should have $451 at the end of the week...or at least a little bit more than if you didn't do anything!

Randal Verbrugge writes:

I haven't read the Lindert article; this is a comment on the European welfare states. At least in France, Timmerman seems to think that lucrative/shady/dirty deals with dictators allows the state to have a more generous welfare policy than it could otherwise afford. I haven't crunched Timmerman's numbers (haven't gotten the book yet) and don't know how reliable they are.

Trent McBride writes:

If people have historically given X percentage of income as charity, then welfare will not affect GDP growth up until welfare approaches X. It will just elbow charity out of the way. (I would agrue that this form of charity is less efficient and decreases overall welfare.) Right?

Boonton writes:

The implication of the paper seems to be that the European economies are roughly equal to the US economy in terms of the drag of their social programs. The reason for this is that the Europeans are smarter about funding their social programs than Americans are, hence they can afford a more generous welfare state.

This would mean that the US could keep the same level of 'welfare stateness' but at a much lower cost than it is currently spending. Or it means the US could expand its welfare state without hurting the economy, provided it did so in a smart way. Would Bush's expansion of Medicare's Drug benefits, apparantly financed by nothing but borrowing qualify???? Hmmmmm

Lindert's main sample is 1978-1995. It strikes me that now that we have gone "out of sample," Europe has underperformed the United States. Some people think that this illustrates the cost of the welfare state.

True but does this illustrate much? The US was enjoying the dot com bubble from 1995-2000 so was Europe really underperforming or was the US overperforming? Doug Henwood has observed that the 'Europe underperforming due to their welfare state' doesn't always pan out under scrutiny. Often states with smaller welfare budgets like Spain seem to suffer worse unemployment & economic anemia than welfare heavyweights like Germany or Sweden.

Eric Krieg writes:

Does he get into the tax laws? Europeans seem to tax consumption and income, not capital. This partially explains their high productivity and high unemployment.

How would the US perform with our current welfare system, but an elimination of the corporate income tax?

There are so many possible variables that cross country comparisons are difficult at best.

Tom writes:

"[P]roviding incentives for early retirement does not hurt per capita GDP, because older workers may be less productive, or even completely unproductive." Well, if that were true, it seems to me that European governments -- given their vaunted rationality is such matters -- would put all below-average workers on the dole or give them early retirement and let the other half of the work force support them. Is that the case?

Posit a simple two-person economy (where labor is the only factor of production) consisting of a 35 year old person who earns $100,000 a year, and a 60 year old person who earns $30,000 a year. Per-capita GDP is $65,000. Suppose that the 35 year old can earn $140,000 a year with the 60 year old "out of the way." Now per capita GDP is $70,000. First, it's incredible to me (based on 40 years' of working in the U.S. economy) that such would be the case. Second, in a real (complex) economy) it's incredible that the state (that is, a bunch of bureaucrats) could actually know that per capita GDP would be higher with older workers out of the way. Third, how likely is it that the state will calculate just the pension that will make the older workers better off (even assuming they will accept a lower income in return for more leisure) without making younger workers worse off? There's something incredibly fishy about Lindert's results.

Mats writes:

"older workers may be less productive, or even completely unproductive." At higher levels they probably are. They stand against productivity increasing new methods and technologies that would devalue their standing in the companies and the value of their knowledge about previous methods. Early retirement could indeed be veiwed as Schumpeterian. You can find these ideas as early as from Gunnar Myrdal, in his work on the Swedish population crisis in the 30's.

Boonton writes:

Actually it's not that the older workers have lower productivity...it's that their marginal productivity is actually negative! This may sound impossible but remember most people are not working by themselves in a basement workshop. They work with teams of people & sometimes an older person may end up becoming a drag on productivity because their abilities are failing but no one has the power to do anything about it because they have seniority & the power that comes with that.

The paper, interestingly, observes that Universities are especially suspectible to this 'tyranny of the grandpas' :) This is not to say that all older workers are a drag on productivity or even most of them are.

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