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This book presents fifteen papers selected from the papers read at the 53rd Congress of the International Institute of Public Finance held at Kyoto, Japan, in August 1997. Although organized under the general title of Public Finance and Public Investment, the Congress covered a wide range of topics in Public Finance. One of the highlights of the Congress was a historic and brilliant debate between two of the greatest living authorities in the area of public finance, Professors James M. Buchanan and Richard A. Musgrave, on the nature of the welfare state and its future. Part I of this book is concerned with this debate and its empirical counterpart. James M. Buchanan (Chapter 1) warns that the welfare state will be unsustainable unless it preserves generality or at least quasi generality in welfare programs. The introduction of overt discrimination in welfare programs through means testing and targeting can only diminish public support. He argues that a political version of the "tragedy of commons" will emerge if and when identifiable interest groups recognize the prospects of particularized gains as promised by discriminatory tax or transfer payments. Faced with mounting pressure from entitlement-like claims of special interest groups against public revenues on one hand and equally strong pressure against further tax burdens on the other, political leaders are attracted to solutions that single out the most vulnerable targets. Distributional disagreement among classes will then become a major source of political discourse and an impetus for class conflict.
Laying a solid foundation of economic facts and ideas, this book provides a comprehensive look at the critical role of public capital in development.
Corruption, particularly political or “grand” corruption, distorts the entire decision-making process connected with public investment projects. The degree of distortions is higher with weaker auditing institutions. The evidence presented shows that higher corruption is associated with (i) higher public investment; (ii) lower government revenues; (iii) lower expenditures on operations and maintenance; and (iv) lower quality of public infrastructure. The evidence also shows that corruption increases public investment while reducing its productivity. These are five channels through which corruption lowers growth. An implication is that economists should be more restrained in their praise of high public sector investment, especially in countries with high corruption.
This book explores the role of the welfare state in the overall wealth and wellbeing of nations and in particular looks at the American welfare state in comparison with other developed nations in Europe and elsewhere. It is widely believed that the welfare state undermines productivity and economic growth, that the United States has an unusually small welfare state, and that it is, and always has been, a welfare state laggard. This book shows that all rich nations, including the United States, have large welfare states because the socialized programs that comprise the welfare state-public education and health and social insurance—enhance the productivity of capitalism. In public education, the most productive part of the welfare state, for most of the 19th and 20th centuries, the United States was a leader. Though few would argue that public education is not part of the welfare state, most previous cross national analyses of welfare states have omitted education. Including education has profound consequences, undergirding the case for the productivity of welfare state programs and the explanation for why all rich nations have large welfare states, and identifying US welfare state leadership. From 1968 through 2006, the United States swung right politically and lost its lead in education and opportunity, failed to adopt universal health insurance and experienced the most rapid explosion of health care costs and economic inequality in the rich world. The American welfare state faces large challenges. Restoring its historical lead in education is the most important but requires investing large sums in education, beginning with universal pre-school and in complementary programs that aid children's development. The American health insurance system is by far the most costly in the rich world, yet fails to insure one sixth of its population, produces below average results, crowds out useful investments in children, and is the least equitably financed. Achieving universal coverage will increase costs. Only complete government financing is likely to restrain long term costs. In memory of Robert J. Lampman Colleague, Co-author, Friend and Mentor
The traditionally, and wrongly, imagined vulnerabilities of the welfare state are economic. The true threats are demographic and political. The most frequently imagined threat is that the welfare state package reduces the level and growth of GDP. It does not, according to broad historical patterns and non-experimental panel econometrics. Large-budget welfare states achieve a host of social improvements without any clear loss of GDP. This Element elaborates on how this 'free lunch' is gained in practice. Other threats to the welfare state are more real, however. One is the rise of anti-immigrant backlash. If combined with heavy refugee inflows, this could destroy future public support for universalist welfare state programs, even though they seem to remain economically sound. The other is that population aging poses a serious problem for financing old age. Pension deficits threaten to crowd out more productive social spending. Only a few countries have faced this issue well.
Evelyne Huber and John D. Stephens offer the most systematic examination to date of the origins, character, effects, and prospects of generous welfare states in advanced industrial democracies in the post—World War II era. They demonstrate that prolonged government by different parties results in markedly different welfare states, with strong differences in levels of poverty and inequality. Combining quantitative studies with historical qualitative research, the authors look closely at nine countries that achieved high degrees of social protection through different types of welfare regimes: social democratic states, Christian democratic states, and "wage earner" states. In their analysis, the authors emphasize the distribution of influence between political parties and labor movements, and also focus on the underestimated importance of gender as a basis for mobilization. Building on their previous research, Huber and Stephens show how high wages and generous welfare states are still possible in an age of globalization and trade competition.
In the post-war period, spending on social security, health and education has grown continuously in the leading industrialized countries. The considerable size of this spending as a percentage of GDP together with the ageing population raise doubts on the sustainability of welfare spending. These doubts have been accompanied in recent years by an increasing awareness of the allocational inefficiencies and the distributive inequalities caused by the provision of some social services. The welfare state should therefore be reconstructed not only through readjustment of the social security system but also a change in unemployment benefits and the taxation of workers to avoid the perverse spiral that may be produced in the future by cuts in welfare benefits, growing unemployment and the need to further reduce the social security services.
This paper provides new evidence of the macroeconomic effects of public investment in advanced economies. Using public investment forecast errors to identify the causal effect of government investment in a sample of 17 OECD economies since 1985 and model simulations, the paper finds that increased public investment raises output, both in the short term and in the long term, crowds in private investment, and reduces unemployment. Several factors shape the macroeconomic effects of public investment. When there is economic slack and monetary accommodation, demand effects are stronger, and the public-debt-to-GDP ratio may actually decline. Public investment is also more effective in boosting output in countries with higher public investment efficiency and when it is financed by issuing debt.