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2005-05-23

Tyler Cowen and Alfred Gusenbauer on welfare 

I enjoyed reading Tyler Cowen's paper from 2000 over the weekend, "Does the welfare state help the poor?". I would guess that what it presents in concise and understandable form is a reasonable summary of the economically liberal case against the welfare state as we know it and its ambition to help the poor by means of redistribution. For contrast, on Sunday I had the pleasure of watching Alfred Gusenbauer, the leader of the Austrian socialdemocrats (SPÖ), in the one-hour TV-interview format "Pressestunde" [DE] of national broadcaster ORF.

Cowen makes three arguments in his paper:
  1. Welfare payments do help the persons who receive them, contrary to what is sometimes argued by liberal radicals. More capital always means more choice for the owner. In a side-argument, Cowen shows that only a very small proportion of national wealth is actually redistributed, and that a lot of state spending favours the well-off.
  2. Since increases of state spending empirically reduce long-term growth as they tend to be spent inefficiently, state welfare hugely decreases the wealth of future generations of poor due to the effects of compounding.
    If the annual growth rate of American gross domestic product had been one percentage point lower, between 1870 and 1990, America today would be no richer than Mexico. Similarly, if a country can grow at a rate of five percent per annum, it takes just over eighty years for it to go from a per capita income of $500 to a per capita income of $25,000. At a growth rate of one percent, that same improvement takes 393 years.
  3. Finally, state welfare hurts the poor in other, poorer countries.
    Most directly, the higher the level of welfare payments, the more difficult it is for a country to absorb large numbers of immigrants. ... If our only goal is to make people less poor, the most effective anti-poverty program might be to abolish or shrink the welfare state and allow in more immigrants.
    Cowen discusses differential treatment of immigrants as a possible counter-measure, mentioning the German [and Austrian] Gastarbeiter-system, but rightly remarks that differential treatment becomes infeasible when the share of the discriminated population exceeds certain thresholds. Therefore even countries with differential treatment must impose severe limits on immigration.

Alfred Gusenbauer, in turn, criticised 'tax-dumping', by which he means lower levels of corporate taxation in neighbouring EU-countries that receive regional cohesion subsidies from the EU. Gusenbauer also wants to re-increase the share of tax revenues from large corporations. He wants to tackle unemployment by increasing the number of case-workers in the labour agencies, and generally by increasing state spending on matters that will increase long-term growth, such as R&D and infrastructure. Gusenbauer emphasised that there is an alternative to ever-lower levels of taxation, namely a high-tax regime as it is successfully employed in the Scandinavian countries. Austria, he said explicitly, should follow the model of these Scandinavian countries.

Part of the trouble I have with the SPÖ is that it acts as if the poverty of non-Austrians should be of no concern to Austrian voters. For example, the SPÖ is strictly anti-immigration, but in addition, it also wants European corporate tax harmonisation to force fast-growing Eastern European countries to adopt the SPÖ's allegedly preferred economic model, the high-taxing Scandinavian one.

To start with, there is an empirical error in this, since to my knowledge corporate taxation has traditionally been low in Scandinavia, whereas labour taxation is much higher than in Austria (the SPÖ hints that it would even lower labour taxation, a vote-winner). The Swedes for example know better than to harm their multinationals - they groom them so that they can act as large employers.

Even more importantly, if an immature post-revolutionary state with significant levels of corruption were to adopt a Scandinavian-type state-heavy political model, the results could only be disastrous. The Eastern Europeans do well to stay clear of such ideas, at least for now. At which point we come to Austria, and need to make a painful assessment of its level of development in comparison to that of the Scandinavian nations. No, the maturity, openness, and efficiency of the Austrian state is not at the same level as the Swedish one. No, the education level of the population and social equality are not on par.

We still haven't said anything about the contradiction between Cowen's claim that state spending reduces growth and Gusenbauer's claim that it does the opposite. What to make of this? State spending in Scandinavia doesn't seem to wreck these economies, although this doesn't tell us whether it helps them forward or keeps them back. But what we probably can say with some confidence is that relatively efficient state spending in a well-functioning state will help the beneficiaries of redistribution (as Cowen concedes) and will still allow for above-average growth rates. This, I believe, is what we should strive for.

The SPÖ believes that an SPÖ-governed Austria can work like Sweden. The ÖVP believes that Austria should stick to the modest government appropriate for a second-tier state. As you would have guessed, I believe that both are wrong: an Austrian government should be honest about its limitations, should try hard to improve the openness, transparency, and efficiency of the state, and only as it starts to succeed it should gradually become more redistributive, in baby-steps: baby-steps get on the elevator, get out of town, out of the country, out of the continent.


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