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« Salingaros on Tschumi 7 | Main | What's Appropriate? »

April 28, 2004

I thought so

Michael:

Surfing Marginal Revolution the other day, I came across a posting by Tyler Cowen, Is the welfare state good for growth? (You can check out Tyler’s posting here.) It’s a short discussion of a paper by Peter H. Lindert, a professor at UCSD, “Why the Welfare State Looks Like a Free Lunch.” You can read Mr. Lindert’s full paper here.

Econ #101, of course, would predict that income redistribution wouldn’t be good for economic growth, and hence would not be a 'free lunch.' After all, redistribution would appear to create a negative incentive to work for both ends of the transaction—that is, for the person coughing up the dough and for the person receiving it. Mr. Lindert calls the effects of such negative incentives ‘deadweight’ and notes that there have been many recent and sophisticated attempts to estimate the size of such a deadweight burden. However, Mr. Lindert claims—and here I’m in no position to dispute or support him, being in zero possession of the relevant facts—that even very sophisticated analyses have never actually detected the presence of this theoretical ‘deadweight.’ Hence, it appears that for society as a whole, if not its wealthier members, the welfare state is a free lunch—at least in the sense that it isn’t paid for with less economic efficiency or with slower growth.

Mr. Lindert admits that such studies have shown that redistribution could be fraught with potential growth-sabotaging landmines. For example, if strident class-warriors got their way and funded Swedish-style social welfare spending out of very high taxes on property or capital generally, the effect on growth would be grim. Likewise, having government bureaucracies provide services that the private sector can supply appears to lower economic efficiency and usually involves nasty corruption, as countless Third-World kleptocracies demonstrate every day.

However, he claims that in the developed world (read Europe), social-welfare states have avoided—most of the time, anyway—steering their ships onto the reefs of really stupid tax and/or benefit policies. In other words, the welfare states of the world have not merely taxed harder, they’ve also taxed smarter than their lower-tax counterparts in North America, Japan and elsewhere.

Mr. Lindert is quite frank about what this has meant:

Postwar history has brought the evolution of a different style of taxation in the countries where social transfers take a large share of GDP. Contrary to what many have assumed about redistributive welfare states, that style tends to raise GDP and inequality, relative to the tax mixtures in the lower-spending countries. In the high-tax high-budget social democracies, the taxation of capital accumulation is actually lighter than the taxation of labor earnings and of leisure-oriented addictive goods.

According to Mr. Lindert’s analysis, the Euro-style of taxation is as follows:

#1. Social welfare state countries don’t tax capital any more harshly, and in many respects, somewhat less harshly, than do lower-taxing countries like the U.S., Canada, Japan, Switzerland, etc., which tend to go in for idiotic policies like double taxation of dividends. In fact, social welfare state countries end up taxing labor far more vigorously than capital—both absolutely and relatively to low tax countries.

#2. Social welfare states also tax all forms of consumption more heavily than lower-taxing countries, using essentially flat rates—the same for the millionaire as for the factory worker.

#3. Social welfare states have much higher ‘sin’ taxes (i.e., on liquor, cigarettes, etc.) than lower-taxing countries, including on such environmentally-harmful commodities as gasoline. And, of course, as we know, poorer people tend to consume by choice or necessity their fair share (or more) of these sinful commodities.

Notice something about this taxing philosophy? It’s all quite regressive. These countries may talk the class-warfare talk but they don’t really walk the class-warfare walk, so to speak. That explains, of course, a question that puzzled me a few months ago when I looked at GINI coefficients for European countries and was surprised to see that despite their massive social welfare programs, income inequality is not merely alive but quite healthy in that part of the world.

But surely their generous social policies—i.e., handouts—reduce the incentive of the recipients to work, and thus raise unemployment, encourage early requirement, etc., etc. Those policies must have negative consequences for growth, right?

Well, according to Mr. Lindert, not necessarily. To keep this post to a manageable length, I won’t go into the details of his argument, but it pretty much boils down to the fact that it tends to be the least educated and productive citizens of social welfare states that end up on the dole and take early retirement, thus raising the productivity of the remaining workforce. He also argues that other social policy decisions in these countries are also growth-enhancing, such as greater state provision for child-care (to permit highly productive women to remain in the workforce) and public health care (which funnels more spending toward the young and the poor, thus getting a greater productivity bang for the buck than American-style health provisions, which tend to focus more on the unproductive elderly.)

Anyway, assuming Mr. Lindert knows whereof he speaks, a subject I am resolutely not qualified to opine on, it would appear that the social welfare states of Europe could largely have been designed by a bunch of American conservatives with a strong dose of realpolitik. In other words: "One, don’t unduly burden entrepreneurial profits with heavy capital taxation, as they are the motor of growth for the whole society. Two, keep the employees happy with generous social safety-net programs, but also tax the bejesus out of them to pay for it. They want it, they can pay for it. And even if they don't want it, what are they going to do--stop working? Three, structure any payouts to encourage the least productive to sit on the sidelines, where they won't obstruct progress." It doesn't exactly sound like a vision that would light up the eyes of American liberals, does it?

Mr. Lindert also slyly suggests that politicians in low-tax countries such as the U.S. can get away with stupid, moralistic, growth-reducing tax and benefit policies because, in a lower-tax environment, the public tends to be much less attentive to the merits or demerits of such policies.

Maybe it’s time we started paying closer attention.

Cheers,

Friedrich

posted by Friedrich at April 28, 2004




Comments

Have you seen David Goodheart's article "Too Diverse" in Prospect Magazine? It can be found at

www.prospect-magazine.co.uk/start.asp?P_Article=12394

Steve Sailer has written about it too, at VDare.

Basically: it argues that there's a trade-off between egalitarian policies and a commitment to diversity. And that a mono-cultural Europe was able to afford higher levels of welfare-statism since, in essence, all were agreeing to play a game by the same set of rules. And that when the rules of the game are more uncertain, as would be expected to prevail under a particular strain of multiculturalism, the system can break down.

Not directly germane to your post, which dealt with the matter in neutral economist's terms, but culture is always a part of it.

Posted by: fenster moop on April 28, 2004 11:05 AM



I know what you mean, but the "greater safety net" part seems like it might appeal to liberals. I suppose taxing everyone for them wouldn't, but the whole thing seems kind of appealing to me.

Posted by: annette on April 28, 2004 11:40 AM



I've always thought (veering enthusiastically offtopic here) that, where policy diffs between European countries and the States go, not enough is made of the differences between the two places. People sometimes seem to think that what works here ought to work there. Or that what works there ought to work here. And while I'm happy to agree that everyone ought to do their best to learn from each other, I also think that diffs have to be acknowledged and taken into account.

Where the social-welfare state is concerned, for instance, leftie Americans often seem to think, "Well, if Sweden can do it, why shouldn't we too?" I don't often hear them talking about how relatively small Sweden's population is, how relatively small and centralized a country it is, how relatively homoegeneous it is as a population, etc etc. Perhaps one of the reasons a country like Sweden can do the welfare-state thing as effectively as they do is that they're the country they are. The States, on the other hand, is big, sprawling, full of regions, not very centralized, roiling with many different population groups, and immensely generous where immigration's concerned. We're a very loosely-roped-together bundle of contradictory parts. Perhaps any attempt to impose a highly-centralized welfare state on such an organism is bound to turn into a mess.

Same with the arts. In chats (and disagreements) with fellow arts buffs, I'll often hear them talk about how France does this, and Britain does that, and why can't we ... And I'll stare at them in disbelief. France has one single culture (gross overgeneralization, of course, but relatively speaking) that the entire country is in broad agreement about supporting. It's also highly centralized. Having an aggressive, governmentalized national cultural policy makes sense for such a country. I'm against the NEA in America not because I'm somehow and on principle against all national/governmental arts entities but because I think it's been a disaster (and will probably always be a disaster) in this country. We have lots of different cultures -- how are you going to pick which one to support without pissing off the others?

Anyway, maybe policies that make sense in one culture make none at all in another. But maybe there are elements that can be learned from and even imitated or ripped off. Hard to know how to judge, though, isn't it?

Posted by: Michael Blowhard on April 28, 2004 12:25 PM



Mr. Moop and Michael Blowhard:

I completely agree that there are many cultural issues that prevent the widespread adoption of one culture's 'solutions' in another culture. The situation is very much as in medicine, where the same drug may cure one person's disease entirely and have no impact on another's--that is, the underlying mechanisms differ more from one 'body' to another than one might think. (Another item rarely mentioned in discussing Sweden is that the country is financially dependent on its export industry, which is not a situation that can be universalized.) That doesn't mean we shouldn't look around for good ideas though, just be appropriately agnostic about whether they'll work here or not.

Annette:

What you say raises an interesting point. I suspect a lot of people are more interested in security than low taxes; why can't we have a multi-tracked welfare state? If you want to live in a Swedish-style welfare state, you have to pay Swedish-style taxes (i.e., roughly 50-70% of your income.) If you want to live in laissez-faire Hong Kong, you can do that too, and pay roughly 15% of your income in taxes.

I could see only two obstacles. The biggest one is the Democratic Party, which has been committed for over 100 years to the notion that the bottom two thirds of the income distribution should get their security net mainly or even solely paid for by the top third of the income distribution. I suspect this class-warfare vibe has worked to the detriment of actually achieving a 'richer' welfare state in the U.S. Second, one suspects that even in Europe a number of these benefits are paid for disproportionately by the tax 'contributions' of the wealthy. It would be interesting to see exactly how that would all work out.

Posted by: Friedrich von Blowhard on April 28, 2004 1:39 PM



I don't have a lot of pithy commentary to add (I'm supposed to be studying) but just wanted to chime in with a couple of things:

i) I nearly sprayed green tea out of my nose when I read that Canada is a "low-tax country". Reading this, I was probably shocked as much as Annette was upon learning that Felix Salmon ranks "Hit Me Baby One More Time" as one of the greatest pop songs ever. I love this site, but it's getting loopier every time I visit...

ii) Friedrich's point that "it would appear that the social welfare states of Europe could largely have been designed by a bunch of American conservatives with a strong dose of realpolitik"
immediately made me think of two (very different) German conservatives, Bismarck and Adenauer.

Posted by: Haystack on April 28, 2004 4:40 PM



Mr. Haystack:

I thought you did pretty good on the pithy commentary front. I grant you I wouldn't consider Canada a low-tax country, unless you compare it to Sweden or France. And it did occur to me reading the post over that conservatives may well have had a good deal to do with the design of the European welfare state.

Drop by anytime.

Posted by: Friedrich von Blowhard on April 28, 2004 6:08 PM



"it would appear that the social welfare states of Europe could largely have been designed by a bunch of American conservatives with a strong dose of realpolitik"

Curse you, Haystack, for beating me to Bismarck!

Friedrich, if you have a chance, browse the chapter on Stockholm in Sir Peter Hall's "Cities in Civilization." According to Hall, Sweden's welfare state originated when a handful of giant corporations struck a deal with a handful of giant labor unions. The corporations clearly benefited (no tax on capital gains if reinvested), and their owners and managers probably did too (I'm guessing Swedish corporations can provide fringe benefits (cars, houses, etc.) to make up for the high marginal tax rates on owners and managers' nominal income). The benefit to the labor unions would seem to be a locking-in of the status quo--laborers would be satisfied with the welfare state and thus support the unions for the indefinite future. Well, that's a benefit to the union leadership, at least.

One thing that often amazes me is when left-of-center Americans think corporations wield much more power in the US than in Europe. Is it because our corporate leaders spend more time in the mass media eye? Do left-of-center Americans accepts as an axiom "corporations hate the welfare state?" Or something else?

Posted by: Raymund on April 29, 2004 10:20 AM



FWIW, I was in France during the Nixon years. And the French understood and liked Nixon quite a lot -- they seemed to see him as a real politician in the European sense (Machiavellian, cynical, ruthless, self-interested, shrewd), rather than one of those clueless/earnest/do-gooding types they have such scorn for.

Posted by: Michael Blowhard on April 29, 2004 10:46 AM



Great post! It fits with what I've noticed - that in many ways, those Social Democratic countries are paradise for wealthy people. Take their most celebrated specimen, Denmark. Taxes on gasoline are very high, $4.10 / gallon in 2000, and higher now I suppose. This means that you have to value your time pretty highly to choose to drive anywhere, which keeps the hoi polloi off the freeway, which keeps the traffic fast and light.
I've heard - OK, I've seen surfing the web - that with the current spike is gas prices, the traffic-cursed parts of the U.S. have been noticeably less cursed lately. Have you all been seeing that?

Posted by: Ethan Herdrick on April 29, 2004 1:47 PM






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