Working Paper: NBER ID: w9869
Authors: Peter H. Lindert
Abstract: The econometric consensus on the effects of social spending confirms a puzzle we confront in the raw data: 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 paper offers five keys to this free lunch puzzle. First, the costly forms of transfers usually imagined have not been practiced by real-world welfare states. Second, better tests confirm that the usually imagined costs would be felt only if policy had strayed out of sample, away from any actual historical experience. Third, the tax strategies of high-budget welfare states are more pro-growth and less progressive than has been realized. Fourth, the work disincentives of social transfers are so designed as to shield GDP from much reduction if any. Finally, we return to some positive growth and well-being benefits of the high social transfers, and suggest how democratic cost control relates to budget size.
Keywords: No keywords provided
JEL Codes: H0; N4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high tax-based social spending (P35) | GDP growth (O49) |
| tax strategies of high-budget welfare states (H29) | GDP growth (O49) |
| design of welfare programs (I38) | GDP growth (O49) |
| social spending (H59) | GDP growth (O49) |
| government subsidies for early retirement (J26) | GDP (E20) |
| design of social programs in democracies (D72) | GDP growth (O49) |