Under one argument, economic progress will make welfare states harder to maintain. Resource mobility (one result of greater productivity) will force states to lower tax rates to avoid the loss of capital and labor.
I no longer hold this view. Instead I expect rising wealth to lead — for better or worse — to a massive expansion in welfare benefits. In other words, income effects could outweigh substitution effects.
Matt Yglesias notes that Iceland has high levels of government spending yet is prosperous. Note that the country has less than 300,000 people and 70 percent of their export earnings comes from fishing. This is sustainable as long as the cod stick around. Norway relies on the North Sea for oil and gas. Botswana, the African success story, uses diamond wealth to maintain extensive public spending.
Some of the smaller Gulf economies have extraordinarily high productivity for their modest labor inputs, because of accessible oil or gas. Qatar and Dubai have erected elaborate welfare states; most citizens don’t work at all, unless you count extended trips to the shopping mall. Guestworkers handle most of the menial labor or even the white-collar jobs. The point is not that every welfare state has external largesse, but rather that free lunches tend to produce welfare states.
Imagine that nanotechnology, or some other version of The Next Big Thing, came to pass. The bounty of nature would be replaced by the bounty of science. Might our economy look a bit more like the welfare policies of the Gulf states, albeit with greater diversification? Won’t we massively expand our welfare state? Since the whole point is not to work, no one will complain much about the high (implicit or explicit) marginal tax rates. The rush will be to get in, not to leave town.
For a cyberpunk look at this topic, check out “The Diamond Age” by Neal Stephenson. In it, he posits Nanotech leading to ‘the Feed’, a manufacturing process that is so cheap that nearly all basic necessities are provided free of charge to every home (the most basic of which, of course, is also provided free of charge).
It is indeed possible that the absolute amount of goods and services provided free of charge will increase but I doubt that this will represent an “expansion” of the welfare state – such largesse will hopefully stay constant as a percentage of GNP, and may even decrease. Given enough wealth, I would expect that the total tax burden on the productive members of the society imposed to support the rest could be reduced without triggering a violent backlash, and indeed a reduction of such burden may be crucial to the continued existence of the welfare state (as exemplified by the changes in Sweden in the late 90′s)
I was saying very nearly the same thing to my wife last week. I’m rather
aggressively libertarian, but am rather convinced that productivity
improvement into the double-digit annual rates will trigger a rather
expansive welfare system. Banks’ Culture novels, Stross’s Accelerando,
Stephenson’s Diamond Age all provide the same picture along with your
observations about Dubai, etc.
If it’s relatively easy to be generous, people want to be generous.
And government, with all it’s warts, is the vehicle normally chosen to
do that. So I concur with you strongly. Future will see big welfare
states…but since it won’t notably drain the economy, no worries.
Here’s where I think the rub is:
They’ll complain. It makes no difference. For most people wealth isn’t an absolute, it’s how far ahead you are of the other guy.
As a follow-up question, why aren’t we already at the point you suggest?
This is one of the more interesting posts I’ve read on a blog in a long time.
I think that Dave more or less nailed it. The ‘haves’, so to speak, don’t have some notion of a nominal amount of wealth beyond which point they’re willing to pay for services that they don’t directly benefit from. I don’t think that any love of country, patriotism, care for your fellow man, etc, outweighs personal monetary gain in the short term. Not for the vast majority of folks, anyhow. This isn’t a moral judgement per se, just my opinion on how things are. To most people, buying that 16th SUV is more important than a gov’t handout program to feed children of single mothers. Why would the rich allow the government to pay for anything that’s not necessary? Yes, there was a big buildup of a welfare state during the Great Society, etc, but things are moving in the opposite direction now. Ironic, since productivity growth has been very good as of late.
I can think back on texts that are 50 yrs old, talking about how all the labor saving devices that were going to be made would lead to a lifestyle of leisure for all. It certainly hasn’t happened here in the U.S. We do have $30 DVD players today and that’s very nice. I’m materially better off being able to buy a $30 DVD player than my father was paying $500 for a mediocre VCR 15 or 20 yrs ago. However, it would be interesting to compare the median wage of, say, 1970 vs today in terms of the hrs of work it required to buy housing, transportation, food, health care, and education. (Food is cheaper but I bet everything else has gone up in price)
The last few years-despite great productivity gains-wages have not kept up with inflation(has Greenspan referred to this as a conundrum?), and I don’t think that the government is providing any greater quantity or quality of services, either. Basically, I think things are moving in the opposite direction of what Dr. Cowen is talking about.
There are agricultural societies in different parts of the world(wish I had some references handd) where the people live as they did in ancient times with no contact with the outside world. The people have to work no more than 15-20 hrs per week to survive. You couldn’t pay me enough to live in such a society, but I bet that people who are born into such a civilization live lives that are as happy and fulfilling as we enjoy now.
Increased productivity may make more generous welfare states *possible*. But I don’t think that, in and of itself, it will ever be a cause. The Industrial Revolution produced huge gains in productivity, but those in power didn’t wake up one day and say “hey, we can make all this extra stuff, let’s give folks a 40 hr work week”. It took strikes, violence, and killing.
To anyone who agrees with Dr. Cowen, what % increase in productivity do we need to see before we get universal health care? Free university education? Hell, how much productivity gains need be realized before we get a working transportation infrastructure here in the nations capital?
The question will be what items will be scarce in a world of nanotech or other super-productive technology? If anyone can easily access food, clothing, shelter, medicine, and entertainment, presumably much better than what we have now, without subsidy, will there still be a) sympathy for these folks for not possessing scarce positional goods or b) fear of falling into destitution? My guess is that the answer to both of these questions is “no,” and so there will not be an expansion of transfers under conditions of super-productivity.
The ‘haves’, so to speak, don’t have some notion of a nominal amount of wealth beyond which point they’re willing to pay for services that they don’t directly benefit from.
They don’t have to have a notion or a threshold, just the money becomes less valuable as they have more of it. When my net worth was $5000, I gave $0; when it was $50000, I gave $8000.
Housing has also come down since 1970, per square foot. I betcha.
I believe that increased productivity will lead to some modest expansion of the welfare state, but not necessarily for the reasons mentioned above. As producers add more and more capital equipment, the labor required to keep production going will require more and more skills – better education, and smarter workers. There already are now, and will be more as this trend increases, people who are insufficiently intelligent or educated to earn what society considers a minimally bearable living. Rather than see those people starve, society will, generally through government, provide some supplement so that people who can’t earn a decent living will be provided one, anyway.
The generosity of the welfare state will vary, and will remain a political issue; ways of preventing people who are capable of working for a decent living from collecting welfare will keep changing, as will the numbers of people who could work but don’t.
I suspect there’s some natural limit to the process – supporting a welfare state for too much of the population will inhibit the ability of producers to increase their stock of capital, which will limit the rate of increase in intelligence/education required to do better by working than on welfare.
When I first read Tyler’s comment I thought I would like to have some of that good Sh*t he was smoking. Then I thought of that Billionairs son who thought he would rather do something else with his money than making daly shopping trips to the mall. He got together with a bunch of like minded folks who thought that driving airplanes into tall buildings would be a fun idea.
MMMM? Wonder what that society where the basics were free would look like?
Regulation is worse than taxation — so I support more gas taxes rather than Kyoto regulation (and Bush could offer some 10% of Fed. Budget Revenue as a goal for gas taxes to all countries, including China & Iraq).
Welfare grants should be replaced by gov’t “loans” — either as real loans or in some tax-subsidized (Tax loans) way. Those who “need help” should get gov’t help, but be expected to pay it back (with interest?).
The entitlement trap has become a rush to get free money.
Even if there is plenty of material wealth, there will always be a zero-sum competition in Status. Who gets fame/ influence (based on eyeball counting). Oh yeah, and BABES.
Bloggers should be well aware of this metric. As I’m reading here, I’m not writing on my blog, nor reading others. (Not to mention not doing my work…)
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