The Adverse Consequences of High-Tax Welfare States

From Dan Mitchell.

"Honest leftists (the “Okunites“) generally acknowledge that laissez-faire policies deliver more growth, but they nonetheless favor high taxes and redistribution because they argue that social equality matters a lot.

However, according to this chart, there’s a negative relationship between bigger government and social welfare indicators such as health, education, unemployment, and exclusion.

 

Looking specifically at labor markets, you see a negative relationship between bigger government and good results.

This holds true even for workers with only a basic level of education.

 

The two charts come from a new book (available online for free from the London-based Institute of Economic Affairs) by Nina Sanaddaji and Stefan Stefan Fölster.

Here’s how the authors summarize their findings.

A group of low-tax countries has moved to the top in terms of most measures of welfare quality, surpassing high-tax countries such as the Nordics. is is relevant, not least since for a long time the Nordic high-tax models were considered internationally as the best model for welfare delivery. Yet even the Nordic social and economic success was built during periods of low taxes, and stagnated in relative terms after shifting to high taxes. …At the core of this book is a systematic analysis of the available statistical measures that capture the quality of welfare in higher-income countries. …In the overall ranking, Switzerland, Japan and South Korea occupy the top spots. All of these are low-tax coun tries, with a tax burden between 26 and 32 per cent of GDP. By comparison, a high-tax country like Sweden now ranks 12th in terms of overall welfare, …Low taxes are not sufficient on their own to ensure good welfare outcomes.

Given my interests, I especially liked Chapter 7, which investigated the relationship between economic performance and the size of government.

The authors did something I haven’t seen before, which is to measure that relationship by decade.

For what it’s worth, the strongest link was during the 1980s, which may have been caused by both convergence among Asian nations and the pro-growth policies of Thatcher and Reagan.

 

The relationship was still there, albeit not as strong, in the first decade of this century. 

 

At this point, we’re probably looking at a few examples of anti-convergence.

And we’re definitely looking at more evidence that small government is the best way to deliver more prosperity. And to deliver better results for the less fortunate members of society.

That’s the good news. The bad news is that average growth rates for everyone are lower, which is almost surely due to the fact that public policy has moved in the wrong direction this century."