In this sequel to the award-winning Growing Public: Social Spending and Economic Growth since the Eighteenth Century (Cambridge University Press 2004), Peter Lindert applies a historical lens to the contemporary welfare state. Although the focus of attention remains on the pillars of social spending—education, poverty reduction, healthcare, and old-age support—the geographic compass is wider than in the previous volume. Lindert seamlessly updates and deepens his previous work. Ever the optimist, Lindert contends that reports of the demise of the welfare state have been exaggerated. Applying a series of stress tests, Lindert identifies areas of concern and offers, in his customary gimlet eyed-prose, clear policy prescriptions to safeguard and expand social spending in the future. The bottom line is that the safety net is best served if states target investments in children.
In the first of four parts of Making Social Spending Work, Lindert defines the components of social spending and gives an overview of the challenges and controversies confronting the delivery of public goods. The growth of social spending was never guaranteed because of enduring seemingly endless conflicts over the distribution of benefits and the incidence of the tax burden. Under what conditions and circumstances have wealthier groups agreed to support their less fortunate neighbors?
The second part of the book provides some answers. To begin, in the rich countries of northwestern Europe, the advent of social spending depended on the fiscal capacity of states. Only then did formal institutions of poor relief emerge, generally in the context of political instability, between the sixteenth and eighteenth centuries. Financed by a mix of local taxes and charity, the Netherlands delivered the greatest share of aggregate income to the poor. But support for the poor was always contentious. The period’s debates on eligibility addressed the incentive and information problems that have resurfaced repeatedly in the conflict over the provision of public goods during the next four hundred years. Social spending remained meager until political voice diffused far down the distribution of income. For many reasons, Old World elites, outside of Prussia, resisted paying taxes for public education. Europe’s overseas offshoots led the development in school funding because of abundant resources, elevated incomes, and a high share of Protestants, although the U.S. investment in years of education before 1914 did not translate in higher quality instruction. In this period of low spending, Lindert passes over other policies favoring redistribution, like reductions in working hours and eliminating child labor, which by reducing labor supply would have indirectly narrowed the wage distribution. In any event, employment standards are also health standards. Since the unit of study is the nation-state, Lindert similarly ignores successful municipal experiments in welfare spending, such as Red Vienna’s social housing program of the 1920s that targeted improving the well-being of children and young mothers. Finally, Lindert discounts the budgetary responses of states during WWI as a force in redistribution.
Lindert devotes considerable attention to the benefits of investments in public education on accumulating skills and making us, in general, smarter. More than other components of the welfare state, it offers a consistently positive rate of return, assuring economic growth and equality. In this instance, free lunches do exist. The growth of public education has far exceeded that of the private sector, but its overall benefits depend on regulating private-school pricing and admissions in order to limit social inequalities associated with school-choice systems like vouchers. Since 1870, years of adult education have converged across and within nations.
For the club of OECD countries, the welfare state reached its maturity sometime around 1970, when states devoted approximately 20 percent of the national income to social spending. By this juncture, spending had shifted from education to pensions and, to a lesser extent, health care. Rich countries generally faced the same demand-side pressures emanating from demographic changes and the legacy of macroeconomic shocks, like the Great Depression. But states differed in the delivery of benefits, the supply side, because of variation in fiscal capacities and in social and political mobilization. In this regard, there was continuity between the “early” and “late” welfare states. Lindert then compares rich and developing countries. The latter spend less than the former, but they have higher tax shares than the leaders had at the same levels of real income. Post-communist countries spend more than Asian ones. Within a generation, Lindert claims, many developing countries will have devoted 20 percent of GDP to social spending, although education will tend to lag as long as political voice remains stunted and privileged groups have access to locked-in pension entitlements. Curiously, international trade and capital mobility as pathways in the spread or retrenchment of the welfare state remain unexplored. Lindert pays no heed to instances of the race to the top or bottom in welfare spending.
Part 3 of the book draws on extensive research to explain the positive effects of social spending on growth and income distribution. These effects tend to be greater if social programs are universal, like health care, because of lower administrative costs and if spending is financed by consumption taxes which are less distorting than direct taxation. Governments demonstrating a strong commitment to family-friendly policies that raise the human capital of parents and children can achieve positive returns. Once in place, these benefits become self-reinforcing. The rise of income inequality since the 1970s has had little to do with cutbacks in social spending since this has not occurred. The analysis in this section relies on comparisons of individual programs, from Québec day care and Chilean education reform to Turkish pension policy. As for identifying causal effects, Lindert is agnostic “[W]hen the experiences of whole nations are being compared, there is no way to meet the highest statistical standards achieved by randomized control trials. History is not an experiment” (p. 160). Bravo!
In the final part of the book, Lindert addresses perceived and actual challenges to the welfare state. Immigration has not weakened social spending. The slight extra GDP generated translates into more government revenues since first-generation immigrants are net taxpayers. Lindert proposes a point-based immigration scheme since it poses little threat to established social programs. Interestingly, he does not pursue the implications of immigration policy on the fiscal capacities of countries of origin. Lindert recommends indexing benefits negatively to life expectancy to maintain a cap on pension benefits. Since 1990, Chile, Latvia, the Netherlands, and New Zealand, have curbed the political voice of the elderly and avoided regressivity, while Brazil, Greece, Italy, Japan, Portugal, and Spain have violated the arithmetic of sustainability. Finally, Lindert recommends reducing reliance on employment-based pensions that have contributed to inequality.
Lindert’s previous work has enriched the profession, and Making Social Spending Work does not break with tradition. The volume makes arguments based on evidence, free of ideology, and unencumbered by theory. Lindert affirms that when it comes to the welfare state, the devil is in the details. Case studies bolster and enhance the quantitative presentation. The reader will find insights from Adam Smith alongside those of Milton Friedman; the experiences of market-based economies of Western Europe and North America are not presumed to be superior to developments in Asia and Latin America. To borrow from America’s pastime, Lindert exemplifies the economic historian’s economic historian, and this book is a testament to his position in the field.
