Wednesday, September 13, 2006

Sweden - 3: The 'free-lunch' puzzle

In a 2001 paper titled Why the welfare state looks like a free lunch, Peter Lindert (UC-Davis) offers a few possible explanations for the following puzzle:

The econometric consensus on the effects of social spending confirms a puzzle we confront in the raw data: There is no clear net GDP cost of high tax-based social spending on GDP, despite a tradition of assuming that such costs are large. [Bold emphasis added]

He went on to write Growing Public: Social Spending and Economic Growth Since the Eighteenth Century, a two-volume book that I haven't read. I mention the book here because it -- and, in particular, its use of Sweden as an exemplar of the 'free-lunch puzzle' -- has been the focus of an interesting debate in the online (and free!) journal Economic Journal Watch. The debate has been between Andreas Bergh (The Ratio Institute, Stockholm) and Peter Lindert. Here are the links to Bergh's first salvo, Lindert's response, Bergh's second piece and Lindert's second response.

It's worth reproducing the concluding paragraph from Lindert's second reply:

The welfare state remains a “free lunch” in the same sense that I used this phrase in my 2003 NBER paper, my 2004 book, and my first reply to Bergh earlier this year: The higher social transfers of the welfare state have brought less poverty, less inequality, and longer life expectancy with no statistically significant cost in terms of GDP. [Bold emphasis added]