[Dialogue] Welfare States, beyond Ideology

[Harry Wainwright]

 <http://www.sciam.com/> ScientificAmerican.com      



October 16, 2006

 

Welfare States, beyond Ideology



Are higher taxes and strong social "safety nets" antagonistic to a
prosperous market economy? The evidence is now in



By Jeffrey D. Sachs 



One of the great challenges of sustainable development is to combine
society's desires for economic prosperity and social security. For decades
economists and politicians have debated how to reconcile the undoubted power
of markets with the reassuring protections of social insurance. America's
supply-siders claim that the best way to achieve well-being for America's
poor is by spurring rapid economic growth and that the higher taxes needed
to fund high levels of social insurance would cripple prosperity.
Austrian-born free-market economist Friedrich August von Hayek suggested in
the 1940s that high taxation would be a "road to serfdom," a threat to
freedom itself. 

Most of the debate in the U.S. is clouded by vested interests and by
ideology. Yet there is by now a rich empirical record to judge these issues
scientifically. The evidence may be found by comparing a group of relatively
free-market economies that have low to moderate rates of taxation and social
outlays with a group of social-welfare states that have high rates of
taxation and social outlays. 

Not coincidentally, the low-tax, high-income countries are mostly
English-speaking ones that share a direct historical lineage with
19th-century Britain and its theories of economic laissez-faire. These
countries include Australia, Canada, Ireland, New Zealand, the U.K. and the
U.S. The high-tax, high-income states are the Nordic social democracies,
notably Denmark, Finland, Norway and Sweden, which have been governed by
left-of-center social democratic parties for much or all of the post-World
War II era. They combine a healthy respect for market forces with a strong
commitment to antipoverty programs. Budgetary outlays for social purposes
average around 27 percent of gross domestic product (GDP) in the Nordic
countries and just 17 percent of GDP in the English-speaking countries. 

  _____  

Friedrich Von Hayek was wrong

  _____  

On average, the Nordic countries outperform the Anglo-Saxon ones on most
measures of economic performance. Poverty rates are much lower there, and
national income per working-age population is on average higher.
Unemployment rates are roughly the same in both groups, just slightly higher
in the Nordic countries. The budget situation is stronger in the Nordic
group, with larger surpluses as a share of GDP. 

The Nordic countries maintain their dynamism despite high taxation in
several ways. Most important, they spend lavishly on research and
development and higher education. All of them, but especially Sweden and
Finland, have taken to the sweeping revolution in information and
communications technology and leveraged it to gain global competitiveness.
Sweden now spends nearly 4 percent of GDP on R&D, the highest ratio in the
world today. On average, the Nordic nations spend 3 percent of GDP on R&D,
compared with around 2 percent in the English-speaking nations. 

The Nordic states have also worked to keep social expenditures compatible
with an open, competitive, market-based economic system. Tax rates on
capital are relatively low. Labor market policies pay low-skilled and
otherwise difficult-to-employ individuals to work in the service sector, in
key quality-of-life areas such as child care, health, and support for the
elderly and disabled. 

The results for the households at the bottom of the income distribution are
astoundingly good, especially in contrast to the mean-spirited neglect that
now passes for American social policy. The U.S. spends less than almost all
rich countries on social services for the poor and disabled, and it gets
what it pays for: the highest poverty rate among the rich countries and an
exploding prison population. Actually, by shunning public spending on
health, the U.S. gets much less than it pays for, because its dependence on
private health care has led to a ramshackle system that yields mediocre
results at very high costs. 

Von Hayek was wrong. In strong and vibrant democracies, a generous
social-welfare state is not a road to serfdom but rather to fairness,
economic equality and international competitiveness. 

C 1996-2006 Scientific American, Inc. All rights reserved.
Reproduction in whole or in part without permission is prohibited.

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