Social transfers / Lindert, an economics professor at the University of California, Davis, opens his contribution deftly with rhetorical support from Adam Smith. In Smith’s Lectures on Jurisprudence, Lindert reminds us, the founder of economics refers to the “many expences necessary in a civilized country.” Lindert equates those necessary expenses to government spending on “infrastructure.” In his Wealth of Nations, Smith refers to “publick works which are beneficial to the whole society” that may need to be financed by “the general contribution of the whole society.” Lindert’s take is that Smith “clearly understood that external benefits could justify tax-based social expenditure.” He then moves from economic literature to an empirical investigation of how transfer payments affect macroeconomic performance.

His first piece of evidence is a graph that shows real gross domestic product per capita and “social transfers as a % of [gross domestic product]” for “four of Smith’s civilized countries—the United Kingdom, the United States, Sweden, and Japan.” The graph shows that both real GDP per capita and social transfers as a percentage of GDP have increased over the long run. One interpretation is that standards of living in those four countries have increased despite more government spending on public pensions, health care, unemployment benefits, etc. Another interpretation is that the welfare state is compatible with a high standard of living. Lindert prefers the latter. He recognizes that reverse causality might be at work: “Perhaps the prosperity bred the wasteful social spending.” He responds, “Yet if the social spending is nothing but a rich country’s bad habit, like obesity or recreational drugs, why don’t we see any easy evidence of it dragging down GDP per capita?” Perhaps observing just four high-income countries isn’t enough to respond to that question.

The next piece of evidence is a table that shows correlations between transfer payments and economic performance among a greater number of countries in the Organisation for Economic Co-operation and Development over several decades. Lindert straightforwardly calculates a correlation coefficient between “initial share of social transfers in GDP” with the growth rate of GDP per capita during each decade for all the countries. It is unclear, though, exactly how he did this; did he use average GDP per capita for each decade? Nevertheless, he concludes, “History again shows no significantly negative relationship between the start-of-decade public social spending share and either the growth or the level of GDP per capita.” At this point, he encourages neither advocates of the welfare state nor advocates of limited government. “From all the correlations,” he declares, “we cannot infer a positive causal influence of social spending on economic growth, yet any claim of a negative historical relationship is easy to doubt.” He adds:

I have surveyed the econometric studies available as of a decade ago. None has found a significant negative effect of the whole welfare state package on GDP, at least not any study that has used sound econometric techniques and has made its underlying data available to others. Even the few that announced negative effects but hide their data have failed to show negative effects large enough to imply the major economic damage claimed by some theorists, journalists, and politicians.

And with that, Lindert vigorously advocates for the welfare state. Taxing and transferring income will not, according to him, reduce the standard of living or its rate of growth. He invites us, moreover, to expect these bonuses from the welfare state: less income inequality, reduced poverty, increased longevity, honest government officials, small budget deficits, and even happier people.

He knows that some readers will be skeptical, so he offers justification. Successful welfare states rely on “the broader kinds of taxes that economists consider more efficient.” These include “broad consumption taxes and sin taxes on harmful and addictive products such as tobacco, alcohol, and gasoline.” Bureaucrats that administer successful welfare states spend efficiently too: “Universalist public transfers and services, those to which everybody is entitled, are cheaper to administer because there is less bureaucratic need to investigate who should be excluded from the benefits.”

The efficacy of welfare state spending on health care, “skills accumulation for mothers,” and “social programs for children and those of working age” apparently overcomes any deleterious effect of the welfare state on productive effort. That’s why we don’t observe a negative correlation between welfare spending and GDP. Lindert boldly proclaims, “No welfare state has become poor.” Not even the example of Greece contradicts his findings, according to him, because “Greece has never had a true welfare state and, compared to other rich nations, it does little for the poor.” Yet the author defines a welfare state as “any democratic country for which public social transfers, and the taxes implicitly paying for them, exceed 20 percent of GDP.” The book’s Figure 2.6 shows “public social expenditure as a % of GDP” beyond 20 percent in Greece, which seems to satisfy his definition of a welfare state. The same figure also shows that Greece’s welfare state exhibits “elderly bias,” which may be why Lindert rejects it as “true.” Perhaps we may draw the lesson that the best intentions of a welfare state may be thwarted by special interest groups in the political process.

Size of government / The authors of How Big Should Our Government Be? do not only argue that generous welfare spending is compatible with high standards of living and growth. Bakija, an economist at Williams College, argues at length that government officials can purchase a larger share of all goods and services as well as increase taxes, and there will be no decrease in economic well-being. His first piece of evidence is a graph showing that “across all countries in the world for which data are available, there is a strong positive correlation between taxes as a share of GDP and real GDP per person.” He acknowledges that higher real GDP per person might be causing higher taxes as a share of GDP, but he does not concede that this possibility refutes his finding.

His next piece of evidence is a group of graphs showing the evolution of real GDP per person and the size of government (specifically, government spending as a percentage of GDP) for 12 successful economies over a 100-year period. Each country has a bigger government today than it did about a century ago, and each has a higher standard of living. Bakija emphasizes that “there is no evidence of a slowdown in the long-run economic growth rate in the era of big government.” The case is not closed, however. There is a possibility that bigger government reduces the standard of living without reducing its trend rate of growth. In order to see whether this happens, the author charts the percentage-point change in the ratio of government spending to GDP from 1913 to 2013 versus the average annual percentage change in real GDP per capita over that period for 13 countries. Even if real GDP grew at the same rate almost every year, say 1.75 percent, occasional decreases in real GDP per person because of bigger government will reduce the average annual growth rate over all the years. Bakija’s figure shows that standards of living evidently did not grow at slower rates on average as governments grew larger. But the case is still not closed, as he admits: “A potential confounding factor arises because economic theory suggests that countries starting at lower levels of GDP per person might find it easier to grow quickly.” Even when holding constant this effect of “catch-up growth,” there is “no significant association between increase in size of government and economic growth, despite enormous differences in the magnitude of changes in the size of government.”

Econometric methods might clarify our understanding of the relationship between size of government, economic well-being, and the “many other confounding factors.” Bakija reviews the literature. These number-crunching exercises appear thorough and sophisticated. Although econometric studies don’t resolve the debate over what happens in the economy when the government gets larger, they create what the author calls a “common ground.” Some researchers accept Lindert’s point that efficacious government spending is sufficient to counteract the adverse effects of taxes. Some imply that policies consistent with greater economic freedom—such as free trade, low inflation, and the absence of employment protection laws—offset taxes and government spending. Those economists, according to Bakija, “are essentially arguing that the Nordic countries could have even higher economic growth if they maintained all their market-friendly policies but scaled back on their taxes and social welfare policies.” He admits that this view is possible, even “plausible,” but not “convincingly demonstrated.” He suggests that citizens in a democracy might be more willing to accept the uncertainty that accompanies global capitalism if they get a welfare state along with it.

Which programs and taxes? / Given their evidence that bigger government does not reduce economic growth, Kenworthy and Madrick (the former a sociologist and political scientist at the University of Arizona, the latter a senior fellow at the Century Foundation) call for increasing taxes and government spending by 10 percentage points of GDP. In general, they recommend spending on “infrastructure, economic security, equality of opportunity, and fairly shared prosperity.” In particular, they propose: “universal health care,” “one-year paid parental leave,” “universal early education,” and 13 more programs. The authors do not itch to regulate every aspect of economic life. “Indeed,” Kenworthy and Madrick grant, “the country would be better off if the degree of government intervention in some areas were to shrink.” The areas they have in mind include patents on pharmaceutical drugs, occupational licenses, and land use.

In order to finance bigger government, Kenworthy and Madrick recommend a federal consumption tax, a higher “effective income tax rate for the top 1 percent of households,” “a carbon tax and a small financial transactions tax,” and a higher “earnings threshold for the payroll tax.” In the chapter he contributed, Bakija “dug a little deeper” into the question of whether higher taxes would diminish the incentive to work. The data show that as the highest marginal income tax rate paid by “people in the top 0.1 percent of the distribution of pre-tax income” fell from 70 percent in 1960 to about 40 percent in 2014, their share of the income zoomed over 200 percent. We may not, Bakija cautions, take this to mean that the supply of labor is sensitive to the tax rate on income, and thereby fear that reduced work effort would result from the authors’ plans to increase taxes.

Bakija presents cross-country evidence over the long run that shows no relationship between reductions in marginal income tax rates and growth rates in real GDP per person. He gives reasons why countries do not experience accelerated growth rates in their standards of living along with lower marginal income tax rates. He wants to shed light on what will happen to the standard of living following an increase in marginal tax rates. “The important point for our purposes,” he summarizes, “is that none of the alternative explanations—rent-seeking, technological change and globalization, or shifting of reported income between personal and corporate tax bases—implies that increasing tax rates on high-income people involves large costs in terms of economic efficiency.” Expand government, increase taxes to pay for it, and expect, in the authors’ words, a “free lunch.”

If, a century ago, a progressive proposed increasing taxes and government spending from around 10 percent of U.S. GDP to around 40 percent today, an advocate of limited government would have predicted economic stagnation. Such an expansion of government is now historical fact, and today’s advocate of limited government cannot deny that growth has occurred. He might argue that growth could have been brisker, but he probably boasts of the standard of living we have today.

Yet Bakija, Kenworthy, Lindert, and Madrick face their own paradox. Bigger government is what their intellectual ancestors wanted, and it is what we have today, but the authors still want more government. They thereby admit that today’s size of government is inadequate to maintain infrastructure and solve social problems. How do they know that increasing taxes and spending another 10 percentage points of GDP will upgrade infrastructure and relieve social problems? Would a bigger American welfare state show outcomes similar to Nordic welfare states?

This book will challenge readers wary of big government. Both they and those who embrace big government may look forward to the next round of this debate in the new book by Centre for Policy Studies research fellow Nima Sanandaji, Debunking Utopia: Exposing the Myth of Nordic Socialism (WND Books, 2016).