Government Social Spending Does Not Stunt Growth

[catbirdseat]

Now that Fairweather is lurking again, I felt the need to come up with a tweak for the conservatives. This comes in the form of an article I saw in the April 15 New York Times. It was a book review by Jeff Madrick about a new book by Peter H. Lindert called " Growing Public " (Cambridge Univ. Press).

 

The book contents that there is no evidence that cutting domestic spending will spur economic growth or that conversely, increasing it will deter growth. He used 19 developed nations as examples in which he focused on social spending rather than total spending as previous studies have done. Here are the findings:

 

(1) Tax systems of countries with high social spending are less antigrowth than is realized because nations in Scandinavia and Continental Europe typically derive so much tax revenue from regressive consumption taxes.

 

(2) Social programs in nations with high welfare levels usually include everyone. Because benefits are generally not cut off as incomes grow, the disincentive to get jobs or invest is reduced.

 

(3) Much of the publich spending in these nations is also conducive to economic gowth. Public health programs produce a healthier work force that is more productive. Education programs also result in more productive workers.

 

Here is the article in it's entirety, if you care to read it:

 

Does Big Government Hurt Economic Growth?

By JEFF MADRICK The New York Times

 

Published: April 15, 2004

 

 

N widely reported comments before a Congressional committee in February, Alan Greenspan, the Federal Reserve chairman, suggested that President Bush's tax cuts should not be even partly rescinded. Rather, Mr. Greenspan said, the nation should cut future domestic spending, including Social Security benefits, to balance the budget. Higher spending or higher taxes would deter economic growth, he warned.

 

The committee should have asked the statistically oriented chairman for the evidence. A comprehensive analysis by the economic historian Peter H. Lindert, published in a new book, "Growing Public" (Cambridge University Press), contends that there simply is none. His analysis is partly a broad extension of other studies by economists like Joel B. Slemrod of the University of Michigan, but he adds considerably to the argument.

 

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Mr. Lindert is a professor at the University of California, Davis; former president of the Economic History Association; and an associate of the National Bureau of Economic Research. He has examined levels of taxes, public investment in education, transportation and health care, and social transfers like Social Security, and finds a stark contradiction between conventional wisdom and the evidence. "It is well known that higher taxes and transfers reduce productivity," he writes. "Well known - but unsupported by statistics and history."

 

He compares the level of social spending over nine decades up to 2000 in 19 developed nations, including most of Western Europe, Japan, Australia, the United States and Canada. His analysis differs from many studies in part because he focuses on social programs, not overall government spending.

 

He finds that high spending on such programs creates no statistically measurable deterrent to the growth of productivity or per capita gross domestic product. As many nations in Europe built welfare states after World War II, they continued to grow faster than the United States, a nation with low social spending.

 

For many people, this defies common sense. Higher taxes to support social programs surely deter investment or the willingness to work to some degree. As Mr. Lindert points out, estimates by some economists, like Martin Feldstein, a Harvard professor and president of the National Bureau of Economic Research, find that extra government spending leads to a large reduction in gross domestic product.

 

In fact, taken literally, these studies suggest that the gross domestic product of Sweden, to take an example of a nation with heavy social spending, should have been reduced by up to 50 percent. But nothing remotely like that has happened.

 

The principal problem with such studies, Mr. Lindert writes, is that they are simulations of a highly simplified world. The economists recreate an economy where almost all incentives lead to slower growth, Mr. Lindert said, but that world does not exist.

 

Why, then, have high levels of social spending proved no deterrent to growth in the real world? Mr. Lindert has several explanations, some of them surprising.

 

First, he says, the tax systems of countries with high social spending are less antigrowth than is realized because nations in Scandinavia and Continental Europe typically derive so much tax revenue from regressive consumption taxes. In fact, these nations do not penalize profits and capital investment any more than the United States or Japan does, and possibly even less.

 

Mr. Lindert cannot be pigeonholed as a conservative or a liberal. He says he believes that less tax on capital will promote growth. But nations with high social spending typically tax alcohol, tobacco and gasoline highly, he notes, which contributes to better health and environmental quality. Healthier workers are more productive, and cleaner air requires fewer expensive environmental regulations.

 

Second, he finds that social programs in nations with high welfare levels usually include everyone. Because benefits are generally not cut off as incomes grow, the disincentive to get jobs or invest is reduced.

 

But third, he finds, much of the public spending in these nations is also conducive to economic growth. Among such spending is that for education and health. Mr. Lindert argues firmly that under comprehensive public health programs, people are healthier and live longer, which also makes them more productive. He cites a study by the economist Zeynep Or for the Organization for Economic Cooperation and Development that finds that in nations where a higher proportion of all health outlays are public, life spans are significantly increased.

 

Mr. Lindert also contends that higher levels of government support for child care and requirements to re-employ women after maternity leave at the same job can enhance economic growth. Business considers such workers long-term employees and is likely to invest more in their training and place them on a faster track. Workers probably expend more time and effort on their long-term careers.

 

The statistical probability that some women will leave work creates a bias against all women. Ample government support apparently reduces this bias. The difference between pay for men and women is higher in the United States than in most of Europe, and is especially narrow in Sweden, which provides generous child support.

 

This summary does not do justice to Mr. Lindert's book. He also, for example, provides a valuable history of social spending and proposes a theory about why some nations spend more than others that is closely related to how well democracy works. This is a piece of research that is rich in insight and grounded in empirical evidence. There will be challenges. But the upshot is unmistakable. Government spending, if administered wisely, can have great value for everyone, including but not limited to the especially disadvantaged.

 

 

Jeff Madrick is the editor of Challenge Magazine, and he teaches at Cooper Union and New School University.E-mail: challenge@mesharpe.com.

[j_b]

Mr. Lindert is a professor at the University of California, Davis; former president of the Economic History Association; and an associate of the National Bureau of Economic Research. He has examined levels of taxes, public investment in education, transportation and health care, and social transfers like Social Security, and finds a stark contradiction between conventional wisdom and the evidence. "It is well known that higher taxes and transfers reduce productivity," he writes. "Well known - but unsupported by statistics and history."

 

it is only "conventional wisdom" because conservatives have been able to frame the issue in these terms without being called on the glaring contradictions. common sense tells us that an educated healthy worker is more productive over his lifespan than if he is unhealthy and poorly educated. this is just one in a whole list of issues that have been framed in such unrealistic terms that it prevents any meaningful debate. my favorites on the "conventional wisdom" list are the "tax relief" and "free market" bits. none of which are supported by real data of course.

[catbirdseat]

I think it all comes down to whether you take the long term view or the short term one. Investing in education and health care is more expensive short term. You more than get your investment back long term. I think conservatives tend to take the short term view because they are more opportunistic, meaning gamblers. By reserving capital short term, it is available for possible investments that are unforseen. Liberals are planners and are willing to wait for their investments to mature. For example, the wisdom of the latter philosophy is bearing fruit for Airbus big time these days. Airbus is kicking Boeing's butt big time and will probably push it out of the commercial airliner business if it doesn't start thinking long term again.

[Fairweather]

I think it all comes down to whether you take the long term view or the short term one. Investing in education and health care is more expensive short term.

I don't consider nationalized health care an 'investment'. I continue to scratch my head when I hear liberals, and even some libertarians scream about their eroding freedoms in one breath - and then tout the virtue of turning over the fate of their very bodies to some new government behemoth in the next.

 

Will our national investment in education be for naught if our industries continue the current trend of using well educated foreigners who are willing to work for one-third the price of their American counterparts?

Liberals are planners and are willing to wait for their investments to mature. For example, the wisdom of the latter philosophy is bearing fruit for Airbus big time these days. Airbus is kicking Boeing's butt big time and will probably push it out of the commercial airliner business if it doesn't start thinking long term again.

Not to defend the idiots that manage Boeing, but are you saying that Airbus is somehow liberal? I suspect that the execs at Airbus would love to conduct their business under American tax and labor regulations versus those under which they now reside. (The illegal EU susidies they receive notwithstanding) Edited April 20, 2004 by Fairweather

[Peter_Puget]

Check this out: Lindert!

 

Lindert's main sample is 1978-1995. Europe has underperformed the United States out of that sample range. Lindert's paper is focused on possible explanations for the affordability of the welfare state taking this as a demonstrated fact.

[catbirdseat]

I believe that 1995 is when Europe incurred large costs related to formation of the European Union. Also, they have been cutting back on social spending, just as we have.