TAX, WELFARE AND WILLINGNESS TO WORK

There is a useful review by Jeff Madrick in the New York Review of Books of the broadly conservative book Transformation of the Welfare State: The Silent Surrender of Public Responsibility by Neil Gilbert. A bias alert is needed however. Despite the apparently reasoned tone of the article, you can see where Madrick is coming from when you note that he blames America’s “low” level of welfare expenditure for the fact that “a huge proportion of African-American men are now in prison”! I wonder what proof he has for THAT connection! It would be great if it were that simple. Even I would favour Danegeld if it would end black crime. The orientation of the article might also be suggested by the fact that it is accompanied by a graphic which appears to show GWB with a large Pinocchio nose! Madrick also finds “refreshing” the suggestion that because people sometimes invest their retirement savings unwisely the government should take over the savings concerned and use them to build roads etc! Socialism lives among U.S. intellectuals!

The article really requires a response from an academic economist and economics is not my specialty but one of his central points did nonetheless seem pretty silly to me from a psychological point of view. He notes some evidence that economic growth does not always closely track tax levels and argues that tax levels therefore have no effect on economic growth. There are of course many things that affect economic growth but a key one would have to be the work-motivation of the population. And expecting work-motivation to track tax policy closely shows no understanding of human nature -- to be expected from a Leftist, of course. People do not change their values and habits overnight (though no doubt Leftists wish they would) and ALL economic changes take a while to show their effects. In the case of willingness to work, we may even be looking at a generational phenomenon: willingness to work may for many older workers reflect values acquired in their youth rather being immediately responsive to the current situation. In that case, a more informative approach would be to plot levels of growth against level of tax over a period more like a century than anything shorter.

That it takes a long time for work habits to change is in fact shown by the Scandinavian experience. When high taxes to fund very generous welfare programs were introduced after World War II, most Scandinavians continued to work as before -- even though they would generally have been roughly as well-off to stop working and go on welfare. But a generation or more later, that has now changed so much that all the Scandinavian countries are now trying to change their welfare systems in a way that will re-create an incentive to work.

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