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Why the Welfare State Looks Like a Free Lunch

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Author Info
Peter H. Lindert

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9869.

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Date of creation: Jul 2003
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Handle: RePEc:nbr:nberwo:9869

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H0 - Public Economics - - General
N4 - Economic History - - Government, War, Law, and Regulation

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  1. Heinz Handler & Andreas Knabe & Bertrand Koebel & Margit Schratzenstaller & Sven Wehke, 2005. "The Impact of Public Budgets on Overall Productivity Growth," WIFO Working Papers 255, WIFO. [Downloadable!]
  2. Joshua Hall & Robert Lawson, 2008. "Theory and evidence on economic freedom and economic growth: A comment," Economics Bulletin, Economics Bulletin, vol. 15(18), pages 1-6. [Downloadable!]
  3. Davis, Steven J. & Henrekson, Magnus, 2004. "Tax Effects on Work Activity, Industry Mix and Shadow Economy Size: Evidence from Rich-Country Comparisons," Working Paper Series in Economics and Finance 560, Stockholm School of Economics. [Downloadable!]
    Other versions:
  4. Andreas Bergh, 2006. "Is the Swedish Welfare State A Free Lunch?," Econ Journal Watch, Atlas Economic Research Foundation, vol. 3(2), pages 210-235, May. [Downloadable!]
  5. Richard M. Bird & Jorge Martinez-Vazquez & Benno Torgler, 2004. "Societal Institutions and Tax Effort in Developing Countries," International Studies Program Working Paper Series, at AYSPS, GSU paper0406, International Studies Program, Andrew Young School of Policy Studies, Georgia State University. [Downloadable!]
    Other versions:
  6. Bird, Richard M. & Martinez-Vazquez, Jorge & Torgler, Benno, 2008. "Tax Effort in Developing Countries and High Income Countries: The Impact of Corruption, Voice and Accountability," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 38(1), pages 55-71, March. [Downloadable!]
  7. Frederic L. Pryor, 2004. "Economic Systems of OECD Nations: Impact and Evolution," Papers on Economics and Evolution 2004-14, Max Planck Institute of Economics, Evolutionary Economics Group. [Downloadable!]
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