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.