Welfare State Free Lunch?
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?