Welfare Economics

This article got me thinking. The article (spoiler alert) concludes that the Democratic Party will undergo a radical transformation in the not too distant future, just as the Republican Party had due to the Tea Party. It’s a plausible narrative, but what got me thinking was the underlying reason – the relationship between the welfare state and economic growth.

The welfare state is always confronted with “unmet needs” – new frontiers where government spending or re-distribution can correct ever more instances of social injustice. Regardless of whether you think this is a good thing or a bad thing, everyone must agree that it’s an expensive thing. Funding a growing government requires a growing economy. But a growing government, with ever increasing taxes and regulations, impedes economic growth. It’s easy to see that there is some upper limit of spending where attempts to spend more will actually result in spending less! This resembles a classic minimax problem where there is a level of spending which maximizes government services – spend less, get less service or spend more and get less service!

No doubt there are people who would welcome attaining such a condition. But, simple math says that optimum position also requires zero real economic growth. But does it matter?

Yes, it matters a lot. Economic growth allows the option of even greater government spending in the future. Without growth, future options are limited and future citizens pay the price.

There are many debates about what constitutes worthwhile government spending. But even if everyone agreed about what should be done, the issue of when it should be done remains. The more you do now, the less you can do in the future, and vice-versa. That is a far more subtle and difficult issue.

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