The ‘free-lunch puzzle’: hard times for critics of social spending

From the US to Britain and across the European Union, governments have been ramping up public spending to deal with the consequences of the COVID-19 pandemic. For a long time, common wisdom dictated that social spending drags down the growth and level of GDP. Peter H. Lindert says that history shows otherwise. He writes that over the past 140 years larger social-spending budgets have not accompanied any net loss of GDP, skills, or work. 

 
The opponents of social spending have been routed from the political battlefield by the coronavirus crisis of 2020-2021. The United States hurriedly doled out more than 10 per cent of a peak year’s GDP in the Cares Act of March 2020 and added almost as much under the American Rescue Plan of March 2021, in the form of unemployment compensation and other direct transfers to workers and the poor. Britain’s Conservative government ramped up public spending on health care and other social services. The conservative Christian Democratic coalition of Germany and other European Union governments did likewise. They and the European Central Bank even exempted Greece, Italy, and other heavy EU debtors from the usual belt-tightening strictures. Financial markets smiled through it all, and the losses of jobs and output have been reversed.

In fact, even before the COVID crisis, the world’s historical experience had already delivered a verdict against the common claim that social spending drags down the growth and level of GDP. My new book re-affirms a “free-lunch puzzle”: larger social-spending budgets have not accompanied any net loss of GDP, or in skills, or in work. So say the experiences of over 20 countries over the last 14 decades. Testing the effects of the size of total social budgets means comparing whole national bundles of social policies to see how they correlate with economic outcomes. There is always wisdom in looking first at the whole forest, before approaching any trees. Even if one tries to control for other factors, one still finds no clear negative effects. Without any such costs, Europe’s welfare states have quietly produced greater equality, cleaner government, and even longer life.

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Πηγή: blogs.lse.ac.uk