Voters versus the welfare state

Jun 1, 2011

By

Michael Boskin

CANADA'S Prime Minister Stephen Harper, by winning an outright
majority of seats in Parliament for the first time since assuming office
in 2006, continues a remarkable series of national election victories,
backed by voters demanding at least a pause, and perhaps some reversal,
of the growth of the welfare state.


Mr Harper's victory follows the United States Republican Party's
resounding triumph in last year's mid-term election, a campaign largely
fought on the size and scope of government.


British Prime Minister David Cameron, who leads a centre-right
coalition government, likewise won on a platform to roll back the
excesses of the welfare state.


Next up is French President Nicolas Sarkozy's anticipated re-election
bid. France has higher taxes and social welfare benefits than Britain,
Canada or the US. Mr Sarkozy has thus far produced fewer reforms than Mr
Cameron or Mr Harper, let alone former US president Ronald Reagan or
Britain's prime minister Margaret Thatcher in the 1980s.


Some might argue that economic problems faced by governments are so
severe that simply being in power invites being tossed out of office,
regardless of ideology.


But Mr Harper's re-election suggests otherwise. He lowered Canada's
sales and corporate taxes and, like Mr Cameron, desires more rapid
fiscal consolidation than US President Barack Obama.


The potential significance of these elections must be understood in
the context of the broader sweep of the historical evolution of these
countries' welfare states.


The following trends stand out:

• In all four countries, there has been a sizeable upward trend in government outlays as a share of gross domestic product (GDP);
  
• In
  each country, there has been a sizeable increase in public spending in
  the last few years, particularly in the US and Britain;
  
• France
  has the highest government spending as a share of GDP - well over 50
  per cent - and this has risen continually, decade after decade;
  
• The
  US now has the smallest share of government spending in GDP, although
  it has gained substantially on Canada because of the spending explosion
  since 2000 - former president George W. Bush's military expenditure and
  Mr Obama's social spending;
  
• The increase in Canada's public spending as a share of GDP since 2000 has been the smallest of the four countries;
  
• Canada
  and Britain have had periods of important reductions in the share of
  government spending. In Britain, the share fell four percentage points
  between 1980 and 1990, and fell further until 2000. In the years prior
  to the financial crisis, Canada's share fell from the mid-40s to about
  40 per cent;
  
• Likewise, the Reagan revolution in the US stopped the upward trend in non-defence spending.
  
  

What about economic performance, as measured by real GDP per capita?
The four countries rank exactly in inverse order of their government
spending shares, with the US highest, followed by Canada, Britain and
France.


The voters appear to be on to something important. Of course, there
are myriad other factors that affect economic performance besides the
size, composition and nature of welfare-state spending. Moreover,
governments provide services, from defence and law enforcement to a
humane safety net, that are essential to a successful economy and
society. But the size of the welfare state - and the erosion of
incentives to work, save and invest because of high taxes and bloated
transfer payments - is a major impediment to faster income growth.


This simple analysis should raise a red flag about how we think about
the trade-offs between dynamism and security, or growth and
redistribution. After all, real per capita income in the US is about 40
per cent higher than in France, 22 per cent higher than in Canada and 31
per cent higher than in Britain.


The relative histories have followed a similar trend. For example,
the US advantage over France has expanded from 25 per cent to 40 per
cent since 1980, a period in which the share of government spending in
GDP stabilised in the US (until recently), while it grew substantially
in France.


Likewise, French real per capita GDP exceeded the British level in
1980, but was overtaken in 2000, and by 2007 lagged Britain by about 10
per cent. These differences are the equivalent of an entire generation
of economic progress.


Those who want to control, reform and reduce government spending seem
to have the big picture right. It is a prerequisite for substantial
economic advance.


That is the broad lesson of history - from the Reagan and Thatcher
revolutions in the US and Britain, to Mr Harper's more recent experience
in Canada.


Only time will tell if the recent elections in Britain, the US and
Canada signal a retreat from the growth of the welfare state or just a
temporary respite. The stakes are immense.


The writer, professor of economics at Stanford University and a
senior fellow at the Hoover Institution, was chairman of the Council of
Economic Advisers under President George H. W. Bush.


PROJECT SYNDICATE

[Too neat. A clear case that the welfare state inhibits development. But with just a sample size of 4 countries, it seems a little staged. More evidence and independent corroboration required.]