Protecting the Welfare State; When Alan Greenspan Suggested Future Cuts in Social Security, Politicians Howled. but the More We Postpone, the Greater the Dangers

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Byline: Robert J. Samuelson

One great project of the late 20th century was the construction of vast welfare states in wealthy nations to protect people against the insecurities of the business cycle and the injustices of unfettered capitalism. One great question of the early 21st century is whether these welfare states, facing massive commitments to aging populations, will themselves create new insecurities and injustices. Comes now economic historian Peter Lindert, who has thoroughly probed the welfare state, with a surprising message: relax.

In an important new book ("Growing Public: Social Spending and Economic Growth Since the Eighteenth Century"), Lindert finds the welfare state to be a resilient institution. He acknowledges the conflict. The elderly (those over 65) are expected to reach 20 percent of the population in 2008 for Japan and Italy, in 2015 for Sweden and in 2020 for Germany and Belgium (the United States will then be at about 16 percent). But Lindert thinks governments will dodge crises by a pragmatic mix of benefits cuts and modest tax increases.

Will it be that easy? Last week Federal Reserve chairman Alan Greenspan suggested cuts in Social Security benefits for future retirees--and provoked howls. The reaction to Greenspan's comments highlights the danger of a vicious circle. Politicians can't cut popular benefits. Rising taxes or budget deficits then reduce economic growth--making benefits harder to pay. The welfare state ultimately becomes un-affordable and unstable. It promotes economic stagnation and generational and class competition for dwindling benefits.

After an exhaustive analysis, Lindert--who teaches at the University of California, Davis--is less alarmed. His conclusion: so far the welfare state is a "free lunch." That is, high taxes and benefits (for unemployment, health and retirement) haven't depressed economic growth. Countries can be caring without crippling themselves. How can this be when economic theory and common sense suggest that heavy taxes and benefits should hurt work and investment?

Lindert offers three answers. First, some public spending (say, on schools) may improve economic growth. Second, generous benefits may reward--and raise--unemployment, but the added jobless are mostly unskilled and unproductive; their loss doesn't hurt much. And finally, countries with big welfare states have adopted taxes that minimize economic damage. In Europe, taxes approach 50 percent of national income (as opposed to about 30 percent in the United States). But Europe relies heavily on a sales tax--the "value-added tax"--that, in theory, falls on consumption and not investment or work effort. …