Published by EH.NET (April 2004)
Peter H. Lindert, Growing Public: Social Spending and Economic Growth Since the Eighteenth Century, Volume I: The Story. New York: Cambridge University Press 2004. ix + 377 pp. $65 (hardcover), ISBN: 0-521-82174-6; $24 (paperback), ISBN: 0-521-52916-6.
Reviewed for EH.NET by Robert A. Margo, Department of Economics, Vanderbilt University.
Peter Lindert is one of the most prolific economic historians on the planet. In early 2003, I walked into the MIT Press bookstore and purchased a copy of what was, at the time, his latest book — on soil erosion — very recently published. It’s not his latest, however — that would be Growing Public: Social Spending and Economic Growth since the Eighteenth Century, the subject of this review. Lindert is Distinguished Professor of Economics at the University of California, Davis, and a Research Associate of the National Bureau of Economic Research.
Lindert has always followed the McCloskey fifty-year rule — that is, he only works on topics that are really important. Growing Public is about a central topic. Why do governments spend so much more on “social spending” today than they did, say, two hundred, or even one hundred, or even fifty years ago?
Like Time on the Cross, another work satisfying the fifty-year rule, Growing Public is in two volumes. Volume 1 — subtitled “The Story” — is “written for human beings,” while Volume 2 is written for “social scientists.” Operationally, this means that simple tables and figures abound in Volume 1 but no math (save a bit of algebra here and there) and no regression equations. The “story” is explicitly comparative and makes use of a wide range of data and secondary sources. This is a review of Volume 1; at the time of writing, Volume 2 was not yet available. A separate review of Volume 2 will follow.
Volume 1 is divided into four parts, with twelve chapters in total. Human beings with short attention spans can get the fundamentals of the book by reading the first two chapters. These set forth two puzzles and summarize the key findings, nine in all. The two puzzles are the “Robin Hood” paradox and the “free lunch” paradox. The Robin Hood paradox is really the stylized fact that motivates the book: social spending is negatively correlated with poverty and with inequality. The paradox, according to Lindert, is that social spending “ought” to be higher where people “need it” — poverty is high — and when there are relatively few rich compared with the poor, so the rich can be soaked — inequality is high. But history is not so kind: social spending is higher in rich countries that have a relatively equal distribution of income and wealth.
The second puzzle is the free lunch puzzle. According to the textbook models of supply and demand, taxes and transfers are supposed to produce deadweight losses. Deadweight losses are not supposed to promote economic growth. Yet, according to Lindert, the data provide very little evidence that social spending is negatively associated with growth; social spending seems to be a free lunch.
The nine principal findings appear conveniently on pages 20 and 21 of Volume 1. Rather than repeat them here, I summarize the key motifs. Motif #1 is that political voice matters. Social spending rises when political voice is relatively equalized; that is, when the franchise is extended. This is the resolution of the Robin Hood paradox. Motif #2 is that Rawls matters: when the middle ranks of society really know what it is like to be poor — either through personal experience, or because the poor “look like them” (ethnic homogeneity) — social spending rises. Motif #3 is that social spending doesn’t harm growth because governments aren’t stupid. When social spending is a large fraction of GNP, taxes and transfers are designed to reduce (“minimize” is probably too strong a word) deadweight loss. This is the resolution of the free lunch paradox. Moreover, even when the interventions do look stupid on paper — a minimum wage, say, close to the median wage, or draconian laws governing the firing of workers — they aren’t really as costly as they look, because the people who aren’t employed aren’t very productive anyway, and the “leisure” they enjoy has economic value.
Part Two of the book, composed of chapters 3 through 7, focuses on the rise of social spending. Chapters 3 and 4 are about poor relief. Chapter 3 presents an overview of the early (pre-twentieth century) history of poor relief. In a phrase, life for the poor was nasty, brutish, and short. Measured as a fraction of per capita income, most governments spent very little on poor relief, with very little trend in generosity. There was, as Lindert notes, one interesting, albeit partial exception to this general pattern — England, which experienced a sharp rise in poor relief spending after 1750 and an equally abrupt decline after 1820. Lindert also claims that very little “crowding out” took place because private relief was almost as non-existent as public relief. Chapter 4 explains the major empirical patterns in early poor relief, emphasizing politics and decentralization. Borrowing heavily from George Boyer’s well-known work on the subject, Lindert argues that England was an early leader in poor relief because large landowners wanted to keep their rural labor supply around in the winter. The locus of control mattered because, in the early history of poor relief, more support for helping the poor could be generated at the local level rather than as the national level.
Chapter 5 focuses on the expansion of public schooling before World War I. Among other findings, Lindert points out that, once its statistics are properly interpreted, France was actually an early leader in education. As in the case of poor relief, the self-interest of elites, voting rights, and centralization play important roles. The non-Southern U.S. was also an early leader, because school finance was largely a local issue and because voting rights were (relatively-speaking) widespread. Communities that wanted to tax themselves for the support of public schools could, in other words, without interference from a central authority.
Chapter 6 is titled “Public Schooling in the Twentieth Century” but the title is somewhat misleading, being that the chapter is really about America’s position relative to other countries in the late twentieth century. As is well known, American students lag behind other countries in scores on internationally comparable tests of school achievement. Lindert considers, and ultimately rejects, several well-known explanations for the test score gap, but does acknowledge that the gap might reflect poor incentives to take such tests seriously, and declines in competition among schools, brought on by school consolidation and the rise of teacher unions. Chapter 7, “Explaining the Rise of Social Transfers since 1880,” closes Part II. Enfranchisement, aging populations, “globalization”, rising per capita income, and whether or not the middle class can relate to the impoverished (important, Lindert thinks, because of the Great Depression and World War II) are offered as explanations.
Part Three, made up of Chapters 8 and 9, focuses on prediction. Chapter 8 examines public pensions in the distant and not-so-distant future. It reaches two conclusions: aging populations will have to give something back (as the proportion B of the population is retired, the willingness of 1 – B to support them goes down) and that pay-as-you go is here to stay. Chapter 9 asks whether the history of social spending in rich countries applies to the developing world as it develops. For the most part, Lindert says “yes,” but notes that pension crises in such countries may have more to do (in the short run) with government mismanagement than aging populations per se.
Chapter 10 elaborates on the “free lunch” puzzle. Standard blackboard economics “demonstrates” that, most of the time, taxes have a deadweight loss. More elaborate blackboard economics, a.k.a. simulation models, add numerical magnitudes to the chalk talk. Both, according to Lindert, are “educated fiction.” When we turn to the “facts” as elucidated by panel regressions, it is difficult to find any negative effect of the welfare state on growth. This, Lindert claims, is no accident. West European countries that have embraced high levels of social spending choose taxes that have relatively small deadweight losses and pay attention to disincentive effects. Labor force participation has fallen in these countries but labor productivity of those working has gone up, partly due to a composition effect and partly because some of what government spends money on — schools, public health, and so on — is growth enhancing. Chapter 11 is a case study of the free-lunch puzzle, focusing on Sweden. Lindert argues that relatively slow growth in Sweden in recent decades can be blamed on bad macroeconomic policies, not the welfare state. Chapter 12, very brief, offers further reflections on the free lunch puzzle, emphasizing two points, the “budget stakes principle” and “universalism.” The budget stakes principle says that if a country spends more on welfare policies, it takes greater care in designing efficient taxes and transfers. Universalism says that the costs of administering the welfare state are lower if taxes and entitlements are broad based. There is no concluding chapter as such.
Volume 1 of Growing Public is a mixed bag. There is no question that the subject matter is first order important and no question that Lindert has an incredible command of a vast array of historical and contemporary evidence. If my casual empiricism is any guide, there are many among us (not me) who embrace comparative economic history as a superior methodology and will, therefore, find the approach (if not all the details) compelling.
However, the book is not as well-written as it could or should be. Some portions read like rough drafts of working papers as opposed to polished, finished products. Chapter 6, as noted, is mis-titled; there should be a Chapter 5.5 that is much broader in score. I cannot pretend to the same scope of knowledge as Lindert, but as to the stuff I do know, I find myself with raised eyebrows at certain passages. Chapter 3 fails to cite, for example, anything in the Summer 1997 special issue of the Quarterly Review of Economics and Finance, which is all about nineteenth century U.S. poor relief. Pages 124-126 of Growing Public discuss public schools in the South in the early twentieth century. Lindert writes (bottom of page 125, top of page 126): “One could rightly ask whether Southern employers would not have felt an incentive to pay taxes for schools that would keep … laborers from leaving [the South]. Why didn’t they use schools as a magnet against emigration, just as in the Northeast?” At this juncture Lindert cites (vaguely) my work (Margo, Race and Schooling in the South, 1880-1950: An Economic History, chapters 2-5). But, as pointed out in my book [pp. 48-49] and in a paper in the Quarterly Journal of Economics (1991, not cited by Lindert) Southern local governments did consider the threat of exit in deciding how much discrimination against black schools they could get away with. Chapter 10 discourses about the static deadweight losses of taxes and transfers, but moves on to measuring dynamic effects on growth without doing much to help the reader link the former to the latter.
This is a review of Volume 1, not Volume 2, where the panel regressions reside and which I haven’t seen yet. Still, I am struck as I read Volume 1 at how certain issues don’t seem to show up in the text as much as I thought they would (or should). Causality is a case (actually, the case) in point. A dominant issue these days in contemporary econometrics is exogeneity — is an estimated “treatment effect” truly causal, or just a correlation? Lindert is telling us that voting matters. On a priori grounds, it does not seem plausible that variations in voting rights, across countries or within countries over time, are random, dropped (by governments) from proverbial helicopters. Maybe some of this variation, however, is credibly exogenous, the outcome of forces that are uncorrelated with social spending. What, exactly, are these forces? Perhaps I missed something — and perhaps I will read more about it in Volume 2 — but Lindert doesn’t really tell us much about identification in Volume 1.
Criticisms aside, Volume 1 of Growing Public is an important book that will be widely read and debated. I look forward to Volume 2.
Robert A. Margo is Professor of Economics and History at Vanderbilt University, Nashville, TN, and a Research Associate of the National Bureau of Economic Research. He is the Editor of Explorations in Economic History.