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Baumol’s cost disease and the sustainability of the welfare state

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  • Andersen, Torben M
  • Kreiner, Claus Thustrup

Abstract

If productivity increases more slowly for services than for manufactured goods, then services suffer from Baumol’s cost disease and tend to become relatively more costly over time. Since the welfare state in all countries is an important supplier of tax financed services, this translates into a financial pressure which seems to leave policymakers with a trilemma; increase taxes (and hence tax distortions), cut spending or redistribute less. Under the assumptions underlying Baumol’s cost disease, we show that these dismal implications are not warranted. The welfare state is sustainable and Baumol growth leaves scope for Pareto improvements.

Suggested Citation

  • Andersen, Torben M & Kreiner, Claus Thustrup, 2013. "Baumol’s cost disease and the sustainability of the welfare state," CEPR Discussion Papers 9772, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9772
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    References listed on IDEAS

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    Cited by:

    1. Bergh, Andreas, 2016. "The Future of Welfare Services: How Worried Should We Be about Wagner, Baumol and Ageing?," Working Paper Series 1109, Research Institute of Industrial Economics.
    2. Torben M. Andersen, 2015. "The Nordic welfare model and welfare services - Can we maintain acceptable standards?," Economics Working Papers 2015-02, Department of Economics and Business Economics, Aarhus University.

    More about this item

    Keywords

    publicly provided goods; redistribution; tax distortions; Welfare state sustainability;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H4 - Public Economics - - Publicly Provided Goods
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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