Welfare states and the new (center) left
By Scott Sumner
In recent years, the reporting at The Economist has moved somewhat to the left. Here’s a recent example:
But the assumption of rational self-interest constrains the welfare state significantly. Generous benefits, and the high taxes needed to fund them, will put rationally minded people off work, undermining economic growth and the government’s capacity to help people in need.
In practice, though, Mr Saez explained, the world works differently. . . .
Employment rates for prime-age men are remarkably similar across rich countries, Mr Saez pointed out, despite big differences in tax and welfare systems. Average tax rates in France are roughly 20 percentage points higher than those in America across the income distribution, yet about 80% of middle-aged men work in each country. (Americans do work more hours, but, as Mr Saez noted, this too reflects social choices, such as the shorter working week specified in French law.) There is strong social pressure for healthy men not to be seen as “freeloaders”, which pushes against the incentives created by higher taxes or bigger welfare cheques. Where social pressures to work are more ambiguous—as for the young or old or, in many places, women—generous benefits tend to have larger effects on employment decisions, Mr Saez noted. But this reinforces rather than undercuts the idea that social factors have important effects on economic decisions.
This isn’t exactly wrong, but it seems a bit misleading. The tone of the article is sort of dismissive of conservative arguments that the welfare state discourages work, but the actual empirical evidence suggests that it discourages work among the young, the old, women, and among men it leads to shorter work hours. This is one reason why per capita GDP (PPP) is far lower in Europe than in America. It’s not true that “the world works differently”; it works exactly the way that classical economic theory predicts. The European welfare state makes Europe a much poorer place. That may be fine (perhaps people prefer the extra leisure time), but it’s foolish to minimize the effect.
And to head off criticism, note that while some European welfare states have incomes well above the European average, so do some American states. Lots of things affect income, not just welfare and taxes.
Over the past quarter century, the center left has shifted a bit left on public policy issues:
1990s-style neoliberalism 2021 post-liberalism
1. Singapore style forced saving Expanded social insurance programs
2. Private infrastructure projects. Public infrastructure projects
3. Progressive consumption taxes Progressive income/wealth taxes
4. Fiscal responsibility Deficits don’t matter
5. Monetary stabilization policy Fiscal stabilization policy
6. Low wage subsidies Higher minimum wages
7. Privatization More aggressive antitrust
In 1996, Clinton ran for re-election on ideas such as “the era of big government is over” and “ending welfare as we know it.” Fiscal stabilization policy was a complete non-starter. We were moving toward budget surpluses, with an eye on the demographic time bomb created by lower birth rates and longer life expectancy.
Why the recent move toward a slightly more socialist approach to policy? (Yes, it’s far from outright socialism, but for the most part the list above is not a move toward the Nordic model, at least the post-1990 Nordic model.)
Some might quote Keynes’s famous remark about how to respond to new information, but I’m not convinced that this can explain the shift. I’m only an expert on one of the 7 areas above (stabilization policy), but in that one area I’ve seen a lots of bad arguments for the move toward fiscal policy, arguments that reflect a misunderstanding of macro theory and an ignorance of macroeconomic history. So I have little confidence that the other 6 examples are any better justified. Especially when I see dubious claims that a less effective policy (minimum wages) can be justified on the basis of being more politically acceptable than a more effective policy (low wage subsidies). We have an EITC program! And we have a new government where the Democrats have an easier time with new spending programs (requiring 50 senators) than regulatory changes (requiring 60 senators).
So what explains the shift? I suspect it’s a mix of various factors. Monetary policy failures like the Great Depression and the Great Recession are almost always misdiagnosed as a failure of capitalism. The move toward an information economy has made income less equal. The zero lower bound makes monetary policy seem less effective than it is.
More speculatively, the center right might feel increasingly comfortable viewing the center left as their “tribe”. The days of P.J. O’Rourke’s “Republican Party Reptile” is long gone. It’s no longer cool to be associated with an ideology that has become increasingly nationalistic and anti-intellectual. Meanwhile, the demise of communism has removed some of the taint from the left. Media outlets such as The Economist and the Financial Times, and think tanks like the Niskanen Center, seem increasingly at home in the center left.
PS. I used the term “post-liberal”, as its relationship to liberalism is analogous to the relationship of post-Keynesian to Keynesianism. Similarly, modernism was followed by postmodernism. In any case, neoliberalism is already taken, and neo-neoliberalism just sounds stupid.