'The Social Insurance State, Economic Problems of the North Atlantic, Redistribution, and the Lesser Depression'

Brad DeLong:

The Social Insurance State, Economic Problems of the North Atlantic, Redistribution, and the Lesser Depression, by Brad DeLong: ... I was told over and over again, the economic problems of the north Atlantic in the 1970s and 1980s–the productivity growth slowdown in the inflation of the 1970s–were the result of an overly-large welfare state produced by an overly-democratic government. Both of these, the argument went, needed to be fixed.

This never seemed to me to make quantitative sense…

The growth of welfare–or rather social-insurance–states in the post-World War II period had not produced an explosion of debt or a “fiscal crisis” of the state in any sense: debt-to-GDP ratios were, rather, at historic lows. The inflation of the 1970s had other causes than a government that didn’t want to pay its bills...

Similarly, the argument that the high taxes needed to finance the social-insurance state were discouraging entrepreneurship and enterprise was nowheresville: those same high marginal tax rates had not discouraged entrepreneurship and enterprise in the 1950s and 1960s, had they?

The argument seemed to be:

1. Inflation is a bad thing.
2. The productivity growth slowdown is a bad thing.
3. The social insurance state is a bad thing.

They must be connected!

Never mind that what short- and medium-run fiscal problems we had were the deliberate creation of a Republican Party faction that thought very large deficits were politically useful. And never mind that what long-run fiscal problems we had were due to that same deliberate creation and to our failure to develop a plan for national health insurance that would keep our projected spending on medical care within our means. Rational argument was powerless against the belief that all bad things must have some common roots and common links.

And now I find the same current of thought is back: the financial crisis of 2007-2009 and our Lesser Depression of 2008-whenever must, the argument goes, be due not to bad deregulation that produced a financial house of cards and made our economy dependent on it and to failures of policymakers to understand what was necessary to restore aggregate demand but, rather, to the fact that our tax and transfer systems are too progressive. ...

Paul Krugman writes:

 ... Overall, the data offer no reason to believe that the economic crisis has something to do with the welfare state…