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Growing Public: Social Spending and Economic Growth Since The This page intentionally left blank Growing Public Social Spending and Economic Growth Since the Eighteenth Century Growing Public explores the links between economic growth and social policies that redistribute income. Taxes and transfers have been debated for centuries, but only now can we get a clear view of the whole evolu- tion of social spending. What kept prospering nations from using taxes for social programs until the end of the nineteenth century? Why did taxes and spending then grow so much, and what are the prospects for social spending in this century? Why did North America become a leader in public education in some ways and not others? Lindert finds answers in the economic history and logic of political voice, popula- tion aging, and income growth. Contrary to traditional beliefs, the net national costs of government social programs are virtually zero. This book not only shows that no Darwinian mechanism has punished the welfare states, but, it uses history to explain why this surprising result makes sense. Contrary to the intuition of many economists and the ide- ology of many politicians, social spending has contributed to, rather than inhibited, economic growth. Peter H. Lindert is Distinguished Professor of Economics at the Uni- versity of California, Davis, and a research associate of the National Bureau of Economic Research. His writings have touched on a wide range of economic and historical topics relating to Europe, the United States, China, Indonesia, and the global economy. His textbooks in in- ternational economics have been translated into eight other languages. Advance praise for Growing Public “Peter Lindert has written a dazzling book. He takes on one of the grand topics of economics – the rise of social spending – and offers us a remarkable combination of new data, historical insight, political analy- sis, and economic assessment. Amazingly, Lindert comes up with fresh, convincing, and important insights on issues that have been debated for decades. Two of Lindert’s major conclusions are that the spread of democracy has historically played a pivotal role in the rise of social expenditures; and that social spending has not gravely weakened eco- nomic incentives and long-term economic growth, despite the drumbeat of criticisms from free-market devotees. Indeed Lindert concludes that ‘the net national costs of social transfers, and of the taxes that finance them, are essentially zero.’ This powerful book will be widely read and debated for many years to come.” – Jeffrey D. Sachs, Director, The Earth Institute at Columbia University “What determines social spending, also known as public education, also known as social security, also known as taking from the rich and giving to the poor? This question is the subject of much theoretical and empir- ical speculation and some moderately detailed previous work. Yet this magnificent summa by Peter Lindert blows away the field. He probes the historical and comparative rise of social spending in today’s OECD countries and derives many new insights into the classic themes of social spending and elite behavior, democracy, inequality, religion, and ethnic divisions. He draws out the implications of his careful analysis for the future of the Third World and First alike. A must-read for anyone inter- ested in big government, political economy, helping the poor, or simply the fate of human societies.” – William Easterly, New York University “Peter Lindert has given us a treatise on the economic and political forces driving social spending and of the effects of the welfare state that sweeps over time, over nations, and over disciplines. It is simulta- neously comparative–political–economic history, demography, applied econometrics, political theory, and political economy. While few will agree with all of the often-surprising answers he gives to the most fun- damental questions regarding the existence and the effects of public social welfare policies, no one will suggest that they are not bold and provocative. Growing Public is a most readable and insightful and, yes, irreverent volume that will be discussed by all concerned with these front-page issues.” – Robert Haveman, John Bascom Emeritus Professor of Economics and Public Affairs, University of Wisconsin-Madison “Growing Public offers economic historians, policy analysts, develop- ment gurus, and the general public – all of whom have reason to be deeply concerned about the growth implications of fiscal policy – the most comprehensive historical and econometric examination of the es- sential value of public expenditures I have seen anywhere. His lens of inquiry encompasses everything from early modern European charita- ble activities to the apex of the late-twentieth-century welfare state, from the ‘Old Poor Law’ to the rise of public schooling, from old-age pensions in the west to social transfers in the developing world. By the conclusion of this tour, the reader is left with a clear view of a world in which public expenditures on human welfare not only do no harm to national growth trajectories, but one in which investment in the infras- tructure of human capital formation is itself growth-enhancing. This core finding of Lindert’s exhaustive research will appear radical, per- haps even heretical, to a generation trained in neo-classical economics, but he arrives at it by employing the best of the theory and methodology of that discipline. As such it will be hard to refute.” – Anne E. C. McCants, Associate Professor of History, Massachusetts Institute of Technology “What determines how much governments spend on health, welfare, education, and social security? What effect does this social spending have on economic growth? Peter Lindert gives new answers to these big questions, in a lucid and engagingly written book that ranges across the globe and from the eighteenth century up to the current day. His surprising finding is that social spending does not slow growth, at least in western democracies, and his gem of a book will be essential reading for historians, economists, political scientists, and modern-day policy makers.” – Philip T. Hoffman, Richard and Barbara Rosenberg Professor of History and Social Science, California Institute of Technology Growing Public Social Spending and Economic Growth Since the Eighteenth Century Volume 1 The Story PETER H. LINDERT University of California, Davis cambridge university press Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo Cambridge University Press The Edinburgh Building, Cambridge cb2 2ru, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521821742 © Peter H. Lindert 2004 This publication is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published in print format 2004 isbn-13 978-0-511-16512-2 eBook (EBL) isbn-10 0-511-16512-9 eBook (EBL) isbn-13 978-0-521-82174-2 hardback isbn-10 0-521-82174-6 hardback isbn-13 978-0-521-52916-7 paperback isbn-10 0-521-52916-6 paperback Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. To Lin, Kathy, Alex, and Nick Contents Preface to Volume 1 page xv partone:overview 1. Patterns and Puzzles 3 Controversy 3 The Road from Here 4 Taxing, Spending, and Giving in the Late Eighteenth Century 7 Poor Relief, Public and Private 7 The Elderly 9 Public Education 9 The Long Rise of Social Spending 11 The Robin Hood Paradox 15 Is the Welfare State a Free Lunch? 16 An Educational Puzzle 19 2. Findings 20 Nine Conclusions 20 How Social Spending Emerged before World War II 22 Lessons from the Postwar Boom 26 Since 1980, Aging Has Brought New Budget Pressures 27 Unlocking the Free-Lunch Puzzle 29 How Welfare States Control the Disincentives 30 Early Retirement: A True, but Limited, Cost 32 The Pro-Growth Side of High Social Spending 32 Reconciling Europe’s Unemployment with Its Satisfactory Growth 33 Two Cost-Cutting Principles in Democratic Welfare States 34 ix x Contents parttwo:theriseofsocialspending 3. Poor Relief before 1880 39 How Much Did Europe Give the Poor before 1880? 40 Private Charity in Early Modern Europe: A Miscellany of Pittances 40 The Amounts of Public Poor Relief to 1880 45 How Europe Gave Relief and for What 48 The Eternal Search for the Worthy and Unworthy Poor 48 The Battle over Putting the Poor to Work 49 Indoor versus Outdoor Relief 51 Administrative Costs 54 What They Gave: Cash versus Aid in Kind 55 Who Received It 56 Town versus Country 56 American Private and Public Relief before the New Deal 58 How Much Public Relief Was Given 59 Private Charity in the United States and the Crowding Out Issue 60 Two Attacks on Outdoor Relief in New York 65 Summary 65 4. Interpreting the Puzzles of Early Poor Relief 67 The Rise and Fall of England’s Old Poor Law, 1780–1834 67 Who Supported England’s Old Poor Law? 67 The Reform Acts, Voice, and the Poor 71 The Rural–Urban Puzzle 73 If England Were Invisible: The Urban Bias in Poor Relief 73 England’s Rural Southeastern Bias and the Boyer Model 75 An Extension to Scandinavia 77 The International Stagnation of Relief, 1820–1880 80 The Predicted Effects of Extending the Franchise
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