Why the Welfare State Looks Like a Free Lunch

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Why the Welfare State Looks Like a Free Lunch

• Peter H. Lindert

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Summary

• Lindert believes that there is no clear net GDP
  cost of high tax-based social spending
• Costly forms of transfers dont exist in welfare
  states
• Imagined costs of transfers are projected out of
  sample data
• Tax strategies of hi-budget welfare states are
  pro-growth and less progressive
• Welfare states transfer systems limit work
  disincentives
• There is no measure for positive growth and
  well-being benefits of high social transfers
  (e.g. longer life expectancy, quality of life)

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The familiar cautionary tales miss the mark

• Higher tax rates cut incentives to work, to
  invest and to take risks causing a loss in GDP
  and well being.
• Why Lindert Disagrees?
• Passed findings based on intuition and assumption
• None of the authors found or showed their results
• Crucial ingredient in past findings was a
  theoretical model heavily laden with assumptions
• It is educated, intelligent, plausible fiction

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Micro-Studies of Labor Supply

• Attempts to show how labor supply reacts to a
  change in tax rate and its effect on GDP
• FINDINGS
• Estimated elasticities of labor supply with
  respect to tax wage to be between 0 and 0.5
• Womens labor supply was relatively more elastic
  than men
• LINDERTS ANALYSIS
• Use non policy variation to infer effects of
  policy changes
• If results are valid why doesnt it affect
  welfare state GDP?

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Simulations

• Computer experiments to model deadweight cost
  argument
• FINDINGS
• - The higher the welfare budget, the larger the
  deadweight cost.
• LINDERTS ANALYSIS
• - Findings are imagined
• - Any drop in GDP should be offset by that
  personal saving of time and energy otherwise
  resulting drops in GDP are high
• - virtual reality

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Why Lindert believes welfare states succeed

• Welfare State Style of Taxing
• - Pro-Growth, Not so Progressive tax system
• Recipients Work Incentives
• Poor face lower work disincentives in welfare
  state
• Early Retirement
• Dole
• Other Benefits (not measured by benefits)

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Welfare State Style of Taxing

• Taxation on capital income is lighter than on
  labor earnings and leisure oriented addictive
  goods
• Higher marginal tax rate on middle class
• Consumption tax higher and flatter political
  stalemate.

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Heavy tax on labor-hardest on middle class

• Marginal tax rate flat, steep, flat
• Wealthy avoid
• Poor Receive
• Middle pay

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Consumption Tax

• High Savings-High Growth Rates
• political problems
• Would Lindert be in favor even if didnt
  accompany welfare program?

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Taxes on Addictive Goods

• The welfare states tend to tax addictive and
  leisure goods at higher levels
• The government determines behavior through
  taxation

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Recipients Work Incentives

• Poor face lower work disincentives in welfare
  state
• - poor face high marginal tax rates in US
• - even after reemployment, continue benefits
• Early Retirement
• - good riddance to old lemons
• Dole
• - unemployment compensation higher
  productivity per worker

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Benefits of hi social spending

• Misguided active labor market policies
• - higher returns to pre-natal, infant and
  preschool intervention
• Childcare support and Career investment in
  mothers
• - the greater the support, the more productive
  mothers and the higher the output
• Public Health Care
• - health investment in basic and preventative
  care in welfare states has been pro-growth. (as
  opposed to expenditures on high-budget items to
  extend the lives of the rich)

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• Questions and comments?