The Public Economy and Economic Growth in Western Market Economies

Abstract

This essay analyzes the impact of two welfare states-one for households and the other forfirms-on economic growth in twelve advanced market economies between 1962 and 1983. We find that both welfare states contain stimulative and depressing forms of spending. Transfers in support of household income stimulate growth, while public production of goods and services largely consumed by households depresses growth. Transfers to firms may have a predominantly negative impact on growth, while military spending has a stimulative impact on the economy. We also find that increasing household tax burdens, a correlate of postwar welfare-state expansion, slows economic growth. National debates about economic growth have increasingly been structured as zero-sum choices between the welfare state for households and economic growth. This reasoning neglects the potentially stimulative components of the welfare state for households, and ignores the potentially negative impact of the welfare state forfirms.