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From New York Times, April 15

Does Big Government Hurt Economic Growth?

April 15, 2004
 By JEFF MADRICK

IN widely reported comments before a Congressional
committee in February, Alan Greenspan, the Federal Reserve
chairman, suggested that President Bush's tax cuts should
not be even partly rescinded. Rather, Mr. Greenspan said,
the nation should cut future domestic spending, including
Social Security benefits, to balance the budget. Higher
spending or higher taxes would deter economic growth, he
warned.

The committee should have asked the statistically oriented
chairman for the evidence. A comprehensive analysis by the
economic historian Peter H. Lindert, published in a new
book, "Growing Public" (Cambridge University Press),
contends that there simply is none. His analysis is partly
a broad extension of other studies by economists like Joel
B. Slemrod of the University of Michigan, but he adds
considerably to the argument.

Mr. Lindert is a professor at the University of California,
Davis; former president of the Economic History
Association; and an associate of the National Bureau of
Economic Research. He has examined levels of taxes, public
investment in education, transportation and health care,
and social transfers like Social Security, and finds a
stark contradiction between conventional wisdom and the
evidence. "It is well known that higher taxes and transfers
reduce productivity," he writes. "Well known - but
unsupported by statistics and history."

He compares the level of social spending over nine decades
up to 2000 in 19 developed nations, including most of
Western Europe, Japan, Australia, the United States and
Canada. His analysis differs from many studies in part
because he focuses on social programs, not overall
government spending.

He finds that high spending on such programs creates no
statistically measurable deterrent to the growth of
productivity or per capita gross domestic product. As many
nations in Europe built welfare states after World War II,
they continued to grow faster than the United States, a
nation with low social spending.

For many people, this defies common sense. Higher taxes to
support social programs surely deter investment or the
willingness to work to some degree. As Mr. Lindert points
out, estimates by some economists, like Martin Feldstein, a
Harvard professor and president of the National Bureau of
Economic Research, find that extra government spending
leads to a large reduction in gross domestic product.

In fact, taken literally, these studies suggest that the
gross domestic product of Sweden, to take an example of a
nation with heavy social spending, should have been reduced
by up to 50 percent. But nothing remotely like that has
happened.

The principal problem with such studies, Mr. Lindert
writes, is that they are simulations of a highly simplified
world. The economists recreate an economy where almost all
incentives lead to slower growth, Mr. Lindert said, but
that world does not exist.

Why, then, have high levels of social spending proved no
deterrent to growth in the real world? Mr. Lindert has
several explanations, some of them surprising.

First, he says, the tax systems of countries with high
social spending are less antigrowth than is realized
because nations in Scandinavia and Continental Europe
typically derive so much tax revenue from regressive
consumption taxes. In fact, these nations do not penalize
profits and capital investment any more than the United
States or Japan does, and possibly even less.

Mr. Lindert cannot be pigeonholed as a conservative or a
liberal. He says he believes that less tax on capital will
promote growth. But nations with high social spending
typically tax alcohol, tobacco and gasoline highly, he
notes, which contributes to better health and environmental
quality. Healthier workers are more productive, and cleaner
air requires fewer expensive environmental regulations.

Second, he finds that social programs in nations with high
welfare levels usually include everyone. Because benefits
are generally not cut off as incomes grow, the disincentive
to get jobs or invest is reduced.

But third, he finds, much of the public spending in these
nations is also conducive to economic growth. Among such
spending is that for education and health. Mr. Lindert
argues firmly that under comprehensive public health
programs, people are healthier and live longer, which also
makes them more productive. He cites a study by the
economist Zeynep Or for the Organization for Economic
Cooperation and Development that finds that in nations
where a higher proportion of all health outlays are public,
life spans are significantly increased.

Mr. Lindert also contends that higher levels of government
support for child care and requirements to re-employ women
after maternity leave at the same job can enhance economic
growth. Business considers such workers long-term employees
and is likely to invest more in their training and place
them on a faster track. Workers probably expend more time
and effort on their long-term careers.

The statistical probability that some women will leave work
creates a bias against all women. Ample government support
apparently reduces this bias. The difference between pay
for men and women is higher in the United States than in
most of Europe, and is especially narrow in Sweden, which
provides generous child support.

This summary does not do justice to Mr. Lindert's book. He
also, for example, provides a valuable history of social
spending and proposes a theory about why some nations spend
more than others that is closely related to how well
democracy works. This is a piece of research that is rich
in insight and grounded in empirical evidence. There will
be challenges. But the upshot is unmistakable. Government
spending, if administered wisely, can have great value for
everyone, including but not limited to the especially
disadvantaged.

Jeff Madrick is the editor of Challenge Magazine, and he
teaches at Cooper Union and New School University.E-mail:
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