Tuesday, 24 April 2012

Dynamic Capitalism vs the Welfare Sate

There's an interesting article in The Fiscal Times, The Choice: Dynamic Capitalism vs. the Welfare State, comparing the economic performance of the US vs Europe during and after the GFC.
There is an implied tradeoff here. In the U.S. system, workers have less protection and hence more insecurity than in countries where protection is more prevalent. In return for giving up security, there are two promised benefits. First, it is argued, economic growth will be higher. With less government interference, lower taxes, and unions all but absent, the economy will be free to reach its growth potential.

Second, the economy will be more stable. If a big shock hits the economy, the U.S. will be able to reestablish full employment in new, productive, high-paying jobs much faster than countries with greater social protections and the flexibility inhibiting institutions that come with them.
If these two benefits are large, then trading security for dynamism, flexibility, and higher growth will be more than worth it. So has the economy lived up to these promises?

The article also notes that most of the growth in income in the USA over the decade preceding the GFC was in at the top.

In terms of economic performance (or at least unemployment) tt seems that the USA was middle of the road - it did better than the southern European countries but worse than the northern European countries.
With such a mixed outcome, it’s difficult to support the claim that the free market approach that began in the 1970s has lived up to the promise of a more dynamic, flexible, faster growing economy. And the case is even harder to make when the fact that the deregulation of the economy that helped to produce the housing bubble is factored in.

Interestingly those European economies with the highest levels of social welfare have had the least problems with sovereign debt whilst those with lower levels of social welfare (think Greece and Italy) have fared the worst.
A larger welfare state did not lead to a sovereign debt crisis, but it did lead to substantial protection during the recession and much better performance than in the U.S.
The author of the article suggests that the USA has room to improve in this area.

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