Apago PDF Enhancer .. State University, has taught both under- graduate and graduate courses in public finance there since Professor The new edition of this book documents the accelerated growth of the gov- ernment sector of the. book is 'the best treatise on the theory of public finance ever written,' one PDFs/ and from Robert A. Sirico, “Charity Bill Would Expand. aim, while preserving the general character of the book, to give due place to the . this need by going over the whole field of Public Finance and presenting the.

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“This book shows luminously how public finance is responding to the challenges []. ———. Before we begin with the public finance, we would like to point out the major public finance is to help in the achievement of certain social and economic. By drawing on insights from normative public finance, public choice, and new The book will not only be of value to undergraduate teaching in.

Its the field of economics concerned with how the government raises money, how that money is spent, and the effects of these activities on the economy and on the society. Public finance studies how the governments at all levels- national, state and local provide the public with desired services and how they secure the financial resources to pay for these services.

The importance of public finance could be view from the following angle. Taxation: The consumption of cigarette, alcohol and other commodities that fall within that general category need to be discouraged.

The governments often levy taxes to discourage the consumption of these harmful commodities. Protection of Infant Industries: If the infant and newly started firm or industries in developing nations are allowed to struggle with foreign firms especially from those technologically advanced countries, they may not survive due to many reason and factors.

These industries need protection and government often levies duties in order to protect them. Provision Public Goods: Governments provide public good, the government- financed items and services such as roads, military forces, lighthouses, and streetlights. Private Citizens even the wealthy ones would not voluntarily pay for these services, and therefore businesses have no incentive to produce them. Side Effects of a Market Economy: Public finance also enables governments to correct or offset undesirable side effects of a market economy.

These side effects are called spillovers or externalities. Example: households and industries may generate pollution and release it into the environment without considering the adverse effect pollution has on others. Pollution is a spillover because it affects people who are not responsible for it. To correct a spillover, governments can encourage or restrict certain activities.

For example, governments can sponsor recycling programs to encourage less pollution, pass laws that restrict pollution, or impose charges or taxes on activities that cause pollution.

David Bradford chapter 3 examines the ambiguity of budgetary language. Henry Aaron.

Nature of public finance

All in all. Burda thinks that Slemrod shares some of this ambivalence. Michael Burda wonders whether trust is the appropriate framework for thinking about citizen-government interactions. Harvey Rosen points out that once one opens the door to differential tax rates. Alan Auerbach and Jim Hines chapter 4 analyze features of perfect taxation—also known as optimal taxation—when one or more private markets are imperfectly competitive.

When governments have uncertain knowledge of the degree of competition in product markets. Green or Pigouvian taxes have the potential to. Among its new contributions are a demonstration of the close relationship between the policy rules for correcting externalities and competitive imperfections.

If this argument were right. This appears to imply that the marginal cost of public funds MCF —usually greater than one in the presence of distortionary taxes—could be less than one.

He proposes an explanation for these observations. Some recent work has argued that if the tax rate is high enough. Sandmo shows. To begin with. In the event.

Taken as a whole. He compares his property tax with two other taxes: In the next essay. Jay Wilson chapter 7 develops a hybrid model of the property tax that combines features of two competing views on the incidence of the property tax: In his view. Cnossen and Bovenberg contrast this wealth tax with a conventional realization-based capital gains tax.

He contrasts this recommendation with the proposal that the German government made in Sinn recommends obligatory private saving at a variable rate where the time path of the saving rate is chosen so as to stabilize the sum of this rate and the PAYGO contribution rate.

Alfons Weichenrieder points out that if. Georges de Menil believes that in addition to introducing individual accounts. Using a simple.

Introduction and Summary xvii products and b a capital gains tax with interest to tax the returns on hard-to-value real estate and small businesses. Hans-Werner Sinn chapter 9 points out that the population of Germany is aging faster than those of most other countries. He notes that in the modern European Welfare State.

He believes that the assumption of a linear income tax unnecessarily restricts the analysis. Dominique Demougin observes that the contribution by Boadway. Manuel Leite-Monteiro. They show that government intervention in health insurance markets is welfare improving and that social insurance is generally desirable particularly when there is a negative correlation between labor productivity and loss probability.

Craig Perry and Harvey Rosen chapter 12 suggest that the link between insurance and utilization of healthcare services is not as strong as assumed in the policy debate.

Private insurance is available and individuals differ in labor productivity and loss probability. Boadway and his colleagues draw this conclusion in a study of linear income taxation and redistributive social insurance when the former has the traditional labor distortion and the latter generates both ex ante and ex post moral hazard.

This is causing substantial public policy concern. Using data from the Medical Expenditure Panel Survey conducted in For a number of medical care services. Maurice Marchand. Health insurance coverage is low among the self-employed in the United States. Introduction and Summary xix to consume other goods and services.

In particular. Bird and Mintz offer some thoughts on how the ongoing process of developing a new international tax system for the new world economy might best proceed. A more structural approach combined with the use of panel data would probably deliver more insights. Kai Konrad and Helmut Seitz chapter 15 revisit the fundamental trade-off between risk sharing and incentives for local governments under a system of unconditional transfers between states in the German federation.

In the context of the original formal apparatus. Fuest notes that Musgrave is often associated with the issue of externalities. Moving from the international to the federal scene. Following suggestions from the literature. Under linear mutual insurance schemes. With revenue sharing. Clemens Fuest examines the arguments in favor of decentralized policymaking that are found in the literature: If two states differ in size.

Delayed Integration. No doubt. Precisely the opposite can be said about the Home Country Principle. Richter argues that Delayed Integration may be a principle that policymakers should seriously consider as an option for coordinating the policies of autonomous jurisdictions committed to the free movement of all their citizens.

For the principle of Delayed Integration to work. He considers that it would be useful to extend the analysis by introducing some explicit modeling of the political economy. Jon Skinner. Richard Musgrave. Robin Boadway. Clemens Fuest. Michael Burda. Deborah Schenk. David Bradford. In the course of editing the volume. Len Burman. Richard Doernberg. Panu Poutvaara. Reuven Avi-Yonah. Assar Razin. Gareth Myles. Ray Rees. Assar Lindbeck. Sam Bucovetsky. Pierre Pestieau.

Paul Samuelson. Agnar Sandmo. Robert Inman. Peggy Musgrave. Georges de Menil. Lars Feld. Manfred Rose. Bernd Huber. Theo van de Klundert. A booklet with all the speeches and tributes by Henry Aaron. Hans-Werner Sinn. Alex Boersch-Supan. Massimo Bordignon. Tim Besley. Donald Brean. Ruud de Mooij. Jeremy Edwards.

The booklet and videos of the festivities are also available on the CESifo homepage: Bev Dahlby. Ulrich Hange. As this long list indicates. We also wish to thank Martina Grass. Michael Orszag. We gratefully acknowledge the cooperation of all authors and commentators. Harry Huizinga. Vito Tanzi. Ken Messere. Andreas Heldrich. Thanks are due to Judith Payne. Don Fullerton. Peter Mieszkowski. Peter Heller. Paul Besseling.

Richard Musgrave was my teacher through his writings. The intellectual constructs that he pioneered are now so much a part of our thinking that it is hard now to recover our pre-Musgrave mindsets. We are all honored by the privilege of celebrating his life with him. The contributions are numerous.

This invitation caused me. We have all been touched personally. Let me amend that—we are all honored by being privileged to celebrate the lives of Richard and Peggy with them. Although I never took a course from him. Doing so is not easy for two reasons. We all recognize in Richard Musgrave a combination of quite extraordinary personal and intellectual integrity and creativity.

He is one of those rare people who elicit both respect and affection and who display both dignity and warmth. I think. Doing so underscored the fact that. There is only one problem with this convention. Tax and expenditure policy are now regarded as relatively unimportant or clumsy short-run stabilization tools. Most incidence analysis—and debates—dwell on the implicit or explicit evaluation of the distributional impact of taxes the revenue from which is returned to taxpayers through lump-sum transfers distributed in a distributionally and allocatively neutral manner.

Distributionally and allocatively neutral ways of distributing tax revenue in practice are never used. But it would be far more constructive. With the passage of time. The most celebrated is the division of the operations of the public sector into three branches responsible for allocation.

Of perhaps even greater analytic use was the distinction among three kinds of incidence—balanced budget. Richard Musgrave was the midwife of modern public economics. Various sections of that book provoked different thoughts. Aaron inserted sheets of note paper with derivations. At least. As a second example. Under standard tax analysis. I believe.

But the relatively regressive European taxes are also very large. The difference between the U. They pay for generous social services that are distributed in a highly progressive fashion. This approach to incidence analysis forces the analyst to interpret political events and intentions as well as to do standard economic analysis. That tradition. Two examples illustrate the point. No person who has left his homeland in protest against Naziism could harbor any illusion regarding the capacity of governments to run amok.

So it is not naivete that Musgrave expresses in this approach to the role of government. It is, I believe, a deep moral commitment that governments must be shown how they should behave, how they must behave, and how in a democracy, if shown, they will behave. Of course, they do not always behave as they should. Take merit goods, for example. Wrestle is the right metaphor. In The Theory of Public Finance, Musgrave explicitly disavowed so-called organic national preferences. Having lived through the results of philosophies that incorporated organic theories of the state, he opted instead for models based on individual preferences.

Atkinson and Stiglitz mention merit wants in one short paragraph in the introduction and then say no more. There is simply no place for merit wants within the individualistic framework they explore with relentless consistency. There is no place, that is, unless one declares as legitimate individual preferences regarding. But that assumption would hopelessly complicate much of microeconomics.

Richard Musgrave represents a generation of scholars for whom responsible scholarship was coterminous with confronting large, if messy, problems, rather than limiting oneself to questions drained of their historical and philosophical meaning. They could do no less because, as they saw it, the preservation of culture and civilization depended on it.

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Liberals such as Musgrave or conservatives such as Friedrich von Hayek or James Buchanan were engaged in a similar enterprise. However much they may have disagreed about policy, they saw—and see—problems in historical and philosophical context. They began to apply the language of mathematics to these problems. But they and their students discovered that, while mathematics was liberating, it was also constraining—liberating because it provided harder conclusions than verbal reasoning permitted, but constraining because restrictive assumptions were necessary to realize that potential.

Willy-nilly, the restrictive assumptions accumulated. The energy and time necessary to master the new skills mounted. The nuanced ambiguities of the political and historical context of economic problems that suffuses the work of Musgrave and his contemporaries faded away until, as David Colander and Arjo Klamer reported in the late s, more than two-thirds of U. If mid-twentieth-century scholars could be faulted for tackling problems so large and important they were insoluble, some of their successors can be faulted for being willing to apply technically virtuosic methods to problems so stripped of institutional context or relevance that no serious person could care about the answers.

Countertrends are evident, however. A small group of economists persist in paying careful attention to philosophical questions. Amartya Sen is only the best known. Later, CES expanded into a true university research institute with several full-time research positions. Out of the growing number of visitors, an informal research network emerged.

CES has gradually evolved over its ten-year existence. Then, HansWerner Sinn managed alone. Now, it has four directors for the visiting program: The genius of CES is its combination of a sense of community and a subtle force that I call leverage. Rather more special, a visitor is normally invited to give a series of lectures, usually one a week for three weeks, covering an area of his or her expertise. For the doctoral students, especially, the result is an exposure to the current work of leading thinkers, with plenty of chances to interact very directly, that is unique in Germany and, really, in the world.

In March , James Buchanan and Richard Musgrave were invited to CES for a week-long debate on the role of the state in the modern economy, which was attended by a large number of economists from Asia, Europe, and the United States. This was an important event in the history of economic thought, clarifying the roots of our thinking.

The papers and comments presented at the symposium have been published as Public Finance and Public Choice: CES and its creators should take enormous pride in what has been accomplished. Much has been ventured and much has been gained. All who have an interest in the welfare of economics in Munich, in Germany, in Europe, and in the world should be grateful for what is happening at CES.

The Welfare State is an inheritance from political responses to changes in socioeconomic conditions and values in the past. But the situation today is very different from that which prevailed when the Welfare State was constructed.

But as we shall see, new socioeconomic developments and changes in values help explain why proposals for Welfare State reform abound and why some such reforms have already been initiated in a number of countries. These are the issues focused on in this chapter. The socioeconomic background of the Welfare State is well known. Industrialization meant that periods of work and nonwork became more discrete and more random events than before Piore ; Atkinson It is also well known that.

Nor could the family alone satisfy the increased need for education and healthcare in industrial and urban societies. Moreover, we may speculate that destitution among minorities became less socially acceptable during the course of the twentieth century. In this sense, social political preferences gradually changed, perhaps to some extent as a result of higher income and more widespread education.

These features include a rather homogeneous labor force, full employment mainly for men , quite stable families, and favorable demography a large fraction of the population of working age. General franchise provided political channels through which the new needs could gradually be translated into concrete action, even though embryos of Welfare State arrangements already existed. These changes have also generated new service needs that are not well met by traditional Welfare State arrangements.

As in the case of industrialization and urbanization a century ago, the most important changes have taken place in the labor market and the family. Several driving forces behind these developments may be regarded as exogenous from the point of view of the Welfare State.

Obvious examples are new technologies, advances in medicine, and increased international economic integration. As argued by many observers e.

Public Finance

The recursive and incremental nature of the political decision-making process may accentuate this tendency, since different spending programs are seldom weighted against each other simultaneously Lindbeck , Additions to Welfare State arrangements also create new interest groups for Welfare State spending.

Indeed, in societies where a large part of the electorate get the bulk of their income from the government—via. In particular, norms inherited from the past may constrain the dis incentive effects in the short run. In a long-term perspective, however, these norms themselves may adjust in response to changes in economic incentives Lindbeck I begin by discussing changes in the labor market section 1.

Next, I deal with changes in the structure and stability of the family section 1. I then turn to contemporary changes in the macroeconomy with important consequences for the functioning of the Welfare State section 1. Here, I deal with three macroeconomic features—shortterm macroeconomic instability, economic growth, and the internationalization of national economies.

Some concluding remarks are offered in section 1. With respect to labor supply, it is a commonplace that the aging of the population—a combined result of the baby boom in the s, low birth rates since the s, and increasing longevity after. Instead of 45—50 years of work and 5—10 years of retirement half a century ago.

Although such immigration certainly makes sense from an economic point of view. Some Welfare State arrangements have also contributed to the fall in birth rates. The average birth rate in Western Europe the number of children born divided by the average number of women in fertile cohorts was only 1.

A likely future strategy of governments to deal with this issue would be to favor the immigration of skilled rather than unskilled workers. Bureau of the Census PAYGO pension systems. This is particularly likely to occur if immigration is thought to result in downward pressure on the wages of low-skilled workers or upward pressure on social assistance spending. Since the demographic problems are about the same in most countries in Western Europe.

This has reduced the number of taxpayers. Such developments would also complicate the ambitions of Welfare States to mitigate segregation and promote social accord. Government subsidies to education have also delayed the entry of individuals into the labor force.

Considering the wide variability in the capacity and willingness to work among the elderly. For instance. A common argument is that this reduces aggregate unemployment. Since better health among elderly citizens usually enhances their ability to work. As an illustration of the potential importance of such reforms. Females are also employed proportionally more than males in the production of government-subsidized services.

Changing Tides for the Welfare State 9 Elderly workers in poor health could then be referred to the sick or disability insurance system rather than to the pension system. The background is well known: Besides these demographic developments.

I return to this issue in section 1. The EU average of labor-force participation among adult females aged 15—64 has increased from 42 percent in to 58 percent today.

Eurostat a. We know that many countries also contemplate more far-reaching reforms of their pension systems. There is strong empirical evidence that working women tend to vote for parties that favor high government spending in the social sphere.

But it also increases the political pressure for Welfare State spending aimed at helping individuals. So far. The Nordic countries are an exception. The rise in female labor-force participation is. Economists typically react to this question by suggesting policies that encourage lower relative wage rates or reduced payroll taxes for this group of workers.

But insiders may be able to resist this as well. OECD As an alternative. In the United States. Although some observers have referred to increased international competition for labor-intensive products.

Lower payroll taxes for elderly workers are perhaps a more realistic alternative than lower relative wages as a way of boosting labor demand for this group. In the Nordic countries.

In a similar vein. This may be achieved by threatening to harass potential underbidders or by refusing to cooperate with them in the production process Lindbeck and Snower Lindbeck and Snower emphasize a third explanation—namely. But insiders might use their political powers to resist such policies as well. On this count. Atkinson b. Recent changes in types of labor-market contracts have also contributed to more heterogeneity in the labor market.

There is no doubt that these developments in the labor market complicate the egalitarian ambitions of the Welfare State. Since centralized wage bargaining often results in a squeeze of wage differentials. The standard policy prescription to counteract tendencies toward a wider dispersion of wages has been to stimulate education and training. Rodriguez More. It is not obvious. The long-term effect of selective education subsidies on social mobility is a more complex matter. Western Europe has been less successful in promoting full employment than in mitigating tendencies toward a wider dispersion of disposable income—presumably in part because of its highly institutionalized.

Such subsidies would also stimulate social mobility. While mobility is stimulated by greater economic resources for investment in education among families with low factor income. Changing Tides for the Welfare State 13 than among other groups.

The notion that better education also makes workers more versatile would further mitigate tendencies toward a wider dispersion of wages as a result of the reorganization of work. By contrast. Selective education subsidies to low-skilled workers. Spain and Italy are extreme cases in the opposite direction. During the last two decades of the twentieth century.

But this is not the end of the story. Exceptions are countries with well-developed apprentice systems. The consequences of job-security legislation are an even more complex issue. Since the market power of insiders in the labor market is.

Obvious examples are high subsidies of nonwork. What is controversial is the quantitative importance of these employment effects. It is unavoidable that both equilibrium unemployment the natural rate or NAIRU and unemployment persistence prolonged deviations from the equilibrium rate may be accentuated by certain types of Welfare State arrangements.

These general comments are not very controversial. The reverse causation. As mentioned earlier. I have argued elsewhere that the prolonged period of high unemployment in Western Europe during the s and s had more to do with high unemployment persistence than with an asserted increase in the equilibrium unemployment rate Lindbeck Such unemployment persistence may be the result of behavioral adjustments of either insiders or outsiders or both. I then assume that unions are more concerned about the welfare of insiders than of outsiders.

Changing Tides for the Welfare State 15 augmented by such legislation. The welfare implications are grimmer if unemployment is high initially—for instance. One example is that after a recession. It is often hypothesized that low investment in real capital during prolonged periods of.

In this case. Other types of legislation that enhance the bargaining power of unions will accentuate these effects—for instance. If the economy is initially close to full employment. But since such subsidies are reduced when an individual acquires more skill.

Unemployment persistence may be further accentuated by endogenous changes in the work ethic and social norms in conjunction with long periods of mass unemployment.

Reduced payroll taxes for low-skilled workers. In this sense. But this inertia is likely to recede if a large fraction of the population are unemployed for long periods of time. The most obvious example is the school system. In a short. There is always a general tendency toward segregation. By simply putting a book in the hands of all unemployed workers and calling them students or trainees. While these rates were about the same approximately 65 percent in most OECD countries in the early s.

Since outsiders have smaller economic resources than insiders. Changing Tides for the Welfare State 17 unemployment rate and unemployment persistence. On the other hand. The division of workers into insiders.

In the United States and the Nordic countries. A large number of studies. Growing numbers of two-earner and single-parent households have heightened the political pressure for subsidized childcare outside the household.

Recent changes in household structure. Up to a point. There will be a division between housing-market insiders. Single-parent households now average 14 percent of households in EU countries. The punchline of this discussion is that the Welfare State has a long way to go in order to adjust to changing tides in the structure of the labor market. Low-income groups. A positive correlation would also be expected between being an outsider in the labor market and being an outsider in the housing market.

In this situation. Two-earner households constitute on average about 40 percent of households in the Nordic countries and about 25 percent in Southern Europe Italy and Spain. In the case of small families. The issue becomes more complex. Sweden—childcare subsidies outside the family are now higher than required to compensate for the tax distortion.

There may also be an externality argument for subsidies to childcare outside the family in such cases. Another reason is that returns to scale in household service production cannot be exploited in such households. Changing Tides for the Welfare State 19 work. Heckman Although explanations of the rise in single parenthood are manifold. There is a strong ethical case for government support to single parents. Whereas two-earner households rarely exhibit poverty. For families with little education or severe problems including criminality and alcohol or drug abuse.

A basic reason is that labor-force participation among single adults with children is low in most countries. In the United Kingdom. The policy trend. But it is also likely that preferences and attitudes are gradually undergoing change in the sense that individuals with given income want to realize idiosyncratic life projects.

The latter. The question of how problems related to single motherhood should be dealt with politically is a complex and controversial issue.

There is probably mutual causation in this case: While weaker norms against being a single mother result in more of them. The situation in the United States is not much different—about 45 percent Gornick It is clear that traditional Welfare State arrangements.

The generosity of Welfare State support to single motherhood differs considerably among countries. It is also likely that social norms against being a single mother have diminished in recent decades. In some cases. Recent socioeconomic changes also have important implications for housing policy.

But since females increasingly have their own income from work. From this point of view. In Sweden. Changing Tides for the Welfare State 21 Moreover. Increased family instability in many countries after World War II has also created intrafamily distributional problems for social insurance entitlements.

The traditional system was largely designed to protect widows and their children. An obvious solution in the event of separation is to split pension claims between spouses—and perhaps also between other types of long-term cohabitants. In addition to problems for widows and their children. One important example. Greater instability of family structure—due to divorce. Labour party. This tendency may be seen as a reaction against the paternalistic notion that the government.

Some leaders of the Democratic party in the United States. The emergence of broad and highly liquid international capital markets. More generally. There is a tendency either to take a neutral stance regarding the choice between work and nonwork or. Even leaders of traditional left-wing parties.

Kotlikoff This rationale. Subsequent generations will enjoy a return on their mandatory saving equal to the market interest rate. The case is stronger for a partial rather than a total shift to a fully funded pension system. It is also unavoidable that shifts to fully funded systems. This merely illustrates the general principle that greater individual freedom of choice tends to create increased differences in outcome. It is not necessarily helpful to instill a regulation according to which mandatory pension funds should invest in mutual funds or foreign stocks.

Future politicians with ambitions of power can always change such regulations. The most promising way of minimizing the risk of politicization is probably to let each citizen choose among a number of competing private funds from the very beginning.

This is likely to impede future politicization since outright nationalization of private pension funds would then be necessary.

Of course, the administrative costs for competing pension funds are likely to be higher than for a unitary government-operated fund, at least in countries with a reasonably well-functioning government administration.

Public Finance Ed. 5th

But adherents of a pluralistic society may be willing to pay a price, not only in terms of greater dispersion of the distribution of pensions but also in the form of higher administrative costs, in order to enhance the survival of a pluralistic society.

Administrative arrangements could also be implemented to curtail these costs—for instance, by lids on the fees in mandatory pension funds, which would prompt many fund managers to choose indextype funds. What remains in the account at the time of retirement would determine the size of his pension. Thus, an individual would have greater freedom than today to reallocate Welfare State entitlements over his life cycle according to idiosyncratic preferences.

For the time being, the most obvious real-world example of such a system is the central provident fund in Singapore. While contemporary changes in family structure increase the demand for childcare and old-age care, higher real income and. In all of these cases, Welfare State policies, of course, boost these demands via subsidies or mandatory insurance.

These developments accentuate the problem of deciding who should provide and produce the services. In several countries in Western Europe, again notably the Nordic nations, the public sector is in charge of both the provision and the production of these services. In fact, personal human services—education, healthcare, childcare, and oldage care—have largely been socialized in these countries.

While the public service sector accounts for about 25 percent of total employment in the Nordic countries, the average for Western Europe is about 18 percent OECD In the United States, where taxes are relatively low and the dispersion of wages relatively wide, market downloads of such services including arrangements provided by employers are instead relatively large. The reason is that the tax system favors home production of services in general—including repairs, cleaning, and gardening.

I suppose Karl Marx would have been surprised by this combination of socialized household production of personal services and a shift of various material services from the market to the household— while manufacturing production has remained in the private sector. It is not obvious why governments in some countries have thus created near—public sector monopolies for both provision and production of important personal services.

One conceivable explanation is that such policies tend to change the distribution of income to the.

Another explanation may be that public sector service monopolies make it easier for politicians and public sector administrators to control the type, quality, and distribution of such services. But why would a majority of voters support such arrangements, which largely do away with individual freedom of choice in these areas? Today, it may well be that only a small minority of voters are concerned about freedom of choice for services such as childcare and old-age care, in particular if most families are basically content with the quality of governmentproduced services.

The absence of freedom of choice may be a serious concern only for those who adhere strongly to the principle that individuals should be free to choose. Again, this would be a parallel to the observed high income elasticity of demand for product variability in the case of private goods and services.

As a result, Welfare States that favor public sector service monopolies are likely to be less and less in touch with the values of a large number of their citizens. One increasingly popular way of creating competition in the production of such services is different forms of outsourcing, sometimes after competitive bidding among private service producers.

It is not obvious why the case for freedom of choice, competition, and innovation experimentation should be weaker in these areas than for ordinary consumer goods.

The most common argument against vouchers seems to be that they might increase institutional segregation along the lines of in-. But this argument is far from obvious. Vouchers may then, in fact, contribute to institutional desegregation of childcare, education, and old-age care services. The empirical studies carried out so far do not lend support to the negative hypothesis; there is, rather, some support for the positive one.

Individuals subscribing to the view that certain types of personal services should be more equally distributed than downloading power in general are likely to argue in favor of restrictions on allowing parents to add private cash to vouchers.

Contemporary changes in information and communication technology ICT are likely to have important consequences for public service production. ICT also makes it cheaper to administrate individually adjusted, and hence more differentiated, social insurance systems, including both pension systems with individual accounts and compulsory saving with individual drawing rights.

Moreover, as new forums gradually emerge on the Internet, individual citizens can express their opinions not only about goods in the private sector but also. An individual will then be able to air his views not only on the Web site of politicians and public sector institutions but also on nongovernment sites: Correspondingly, exit options are more valuable if the individual is well informed—for instance, via the Web.

Thus, voice options by way of the Web and exit opportunities by way of voucher systems are highly complementary mechanisms. The developments discussed above—concerning family structure, life cycle, and values—challenge both the family-oriented, transferheavy Welfare States on the European continent and the more individually oriented, public-service-heavy Welfare States in the Nordic countries.

The former type of Welfare State emphasizes family stability and family-provided services to family members, while female labor-market participation is discouraged. In practice, these countries also exhibit strong gender segregation in the labor market—a concentration of women in the public sector and men in the private sector.

For instance, in Sweden, 51 percent of the female labor force work in the public sector, and 73 percent of the employees in this sector are females Statistics Sweden Married females have adjusted to this dilemma not only by working part time but also by cutting the number of hours of work in the home as compared with housewives Esping-Andersen , The answer to the question of what would be an appropriate strategy for Welfare State reforms from a normative point of view depends, of course, on what type of society we strive to realize.

One way is through a U. Another way is the Nordic strategy of generous subsidies to childcare and old-age care outside the household. Instability, Growth, and Internationalization 1.

But, as we know, this view has recently been challenged. Nor do I refer to views developed by a number of German economists in the s to the effect that higher government spending may create expectations about permanently higher taxes in the future, which are assumed to reduce private spending and hence have negative macroeconomic effects see the discussion in Giavazzi and Pagano There are at least two reasons for such a destabilizing effect due to increased uncertainty about government behavior.

They then require higher—possibly much higher—interest rates, with restrictive macroeconomic effects as a result. This also tends to deepen a recession. In particular, this may happen in countries where the budget balance is very sensitive to changes in macroeconomic activity, which is the case in countries with highly ambitious Welfare State arrangements.

At the same time as the tax base became more sluggish, various Welfare State entitlements, often based on earlier macroeconomic developments, continued to expand.

But what about the possibility of reverse causation—from the Welfare State to long-term economic growth? The most obvious example of positive growth effects, at least during a period of transition, is probably government subsidies to investment in human capital—education, training programs, and, to some extent, also healthcare though perhaps not in the case of retired individuals.

Indeed, there is some empirical support for this hypothesis Alesina et al. Moreover, as pointed out, in particular by Feldstein , existing capital income taxes are likely to have depressed physical capital formation over a number of years. Similarly, progressive taxes on earnings are likely to have reduced the incentives to invest in human capital, hence counteracting the positive effects of various educational subsidies on such investment. I would hypothesize that the negative growth effects will be particularly pronounced if Welfare State egalitarianism spreads to the business sector.

This way of looking at the issue is evidently based on the observation that the marginal disincentive effects of explicit and implicit taxes increase with the rates, and the assumption that governments, to begin with, choose growth-enhancing rather than growthretarding programs.

This is the background for the usual hypothesis of a nonlinear concave relation between Welfare State spending and economic growth, with an internal maximum point for the growth rate.


Indeed, there is not even. Government revenues from capital taxes, however, usually comprise only a few percent of total government tax revenues. A long time ago, Myrdal pointed out that countries with generous Welfare State arrangements and strongly egalitarian ambitions will undergo strong pressure for immigration of low-skilled workers.

He predicted that this will induce such countries to pursue quite restrictive immigration policies for low-skilled workers. So much for capital and low-skilled labor. Several factors have certainly increased the mobility of human capital: Thus, the risk that countries with high and strongly progressive taxes will face a brain drain has certainly increased, though from quite low levels. While countries have some control of immigration of low-skilled workers through quantitative regulations, attempts to counteract emigration of high-skilled individuals have to rely on other methods, including economic incentives.

It is mainly this relation governments should consider when worrying about brain drain in connection with Welfare State policies. So far, however, the quantitative importance of this type of brain-drain problem has not been overwhelming for rich countries, except possibly for some Englishspeaking countries. The situation may well change in the future. But it is still too early to say whether much coordination and centralization of Welfare State and tax arrangements will be necessary later on in order to limit brain drain and downward tax competition in the case of human capital.

There is, no doubt, a case for making social insurance entitlements internationally transferable—a parallel to attempts to make occupational pensions transferable among production sectors in the domestic economy. The exit option is strengthened. The most far-reaching change has taken place in the Nordic countries.

Rather than looking at this as a problem for governments. Adjustment to changes in family structure has also been quite modest in most OECD countries. This is an important explanation as to why labor-force participation in these countries is as high as it is in the United States.

In most countries. Although attempts have been made in several countries to raise the average pension age. In one important respect. There is. There are only modest tendencies to encourage greater freedom of choice concerning types of personal services—for instance.

In only a very few countries. The insider-outsider divide in the labor market and society at large also prevails. Reforms of the labor market in response to shifts in supply and demand for labor have also been modest.

In line with Khaneman-Tversky-type theories. Myrdal and Myrdal argued that a broadening of educational opportunities would ultimately result in genetic sorting on income classes and that this would subsequently harm the genetic pool among low-income classes and.

Even with that terminology. I am also grateful for comments from two anonymous referees. This explanation then emphasizes the role of versatility rather than just technical skills.

It is true that unemployment has tapered off cyclically during boom periods in Western Europe in the mids and early s. It is true that some factors have operated in the opposite direction. The outcome is either that new arrangements will not develop in response to new demands the situation in the United Kingdom and in most countries in continental Europe or that new arrangements are piled on top of the old ones.

According to projections by the EU Secretariat. Notes I am grateful to Jon Dutrieux Anderson. Long ago. Women account for 84 percent of single parents in Western Europe Eurostat b. The big risk for entrepreneurs involves losing their equity capital. This cannot possibly be a decisive point. These studies have looked mainly at the possibility that lower government spending has expansionary macroeconomic effects. It has also been argued by Sinn that increased income security provided by various Welfare State arrangements promotes economic growth.

For a survey of the literature. In the early s. Childcare by grandparents and other relatives is important in all countries. I include in this concept childcare. Esping-Andersen As a rule. While some authors. The effects depend partly on the elasticity of labor demand with respect to real wage costs. It could be that these studies underestimate the long-term positive employment effects of such policies.

If so. Competition Founds a School: Konkurrens Bildar Skola: University of Oslo. A celebrated explanation as to why these countries have built up quite ambitious programs of income protection is that highly open economies are particularly exposed to the risk of income disturbances emanating from worldwide developments..

Edward Elgar. References Alesina. A Critique of the Transatlantic Consensus. ESO Report. How Bad Is Eurosclerosis? Even if this result makes sense to many observers. Harvard University Press. Changing Tides for the Welfare State 39 ness sector was an important explanation for the slow growth in Sweden relative to other countries during the last quarter of the twentieth century Lindbeck b..

An Incomplete Debate.

This policy was gradually abandoned in the late s and early s. A Survey and Interpretation. Seeking to Explain Recent Developments.The state can direct the flow of production, consumption and distribution in the economy by framing a suitable budget policy.

Trust in Public Finance 85 See Klepper and Nagin February 1. Summary statistics are presented in appendix 2B. Trust must be distinguished from credibility. The proper utilization of natural resources is imperative not only for the present generation, but also for the unborn generations.

SABINA from Arvada
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