## THE SOCIAL STATE — RETHINKING FISCAL

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**Canonical URL:** [THE SOCIAL STATE — RETHINKING FISCAL](https://www.imf.org/-/media/files/publications/fandd/article/2022/march/saez.pdf)

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### Evolution and scale of government
- Tax revenue to national income increased from less than 10 percent at the beginning of the 20th century to levels between 30 percent and 50 percent by 1980.
- In France, Sweden, the United Kingdom, and the United States:
  - The tax ratio was below 10 percent until World War I, increased until about the late 1970s, and remained largely stable thereafter.
  - France and Sweden stabilized around 50 percent.
  - The United States stabilized around 30 percent.
  - The United Kingdom stabilized around 40 percent.
- The ratio of tax revenue to GDP rose steadily from the end of World War I until the late 1970s before leveling off (the last point is updated to 2018).

### Composition shift: from regalian public goods to the social state
- Until the early 20th century, most government spending in Europe focused on regalian public goods: law and order, national defense, administration, and basic infrastructure.
- The 20th-century growth of government in advanced economies was almost entirely due to growth in the social state, which expanded spending on:
  - Education and childcare support for the young.
  - Health care for the sick.
  - Retirement benefits for the old.
  - Income support programs for the disabled, the unemployed, and the poor.
- The social state effectively extended to the full population quality education, health, and retirement support that previously only the elite could afford.

### Human nature, evolution, and the rationale for socialization
- Humans evolved as a social species with deep sensitivity to group cooperation and distribution of joint work.
- Early hunter-gatherer societies took care of the young, sick, and elderly through community support; modern social states reflect an extension of that social logic at national scale.
- The standard economic model, premised on rational, self-interested individuals solving education, health, and retirement problems privately through markets and credit, does not align with historical and empirical realities for the broad population.

### Evidence on outcomes and mechanisms
- Mass education:
  - Historically state-driven and the first pillar of the social state to develop, as early as the 19th century in Prussia and the United States.
  - Achieved through compulsory schooling and government funding because low- and moderate-income families cannot afford high-quality education.
  - Provides opportunities for children from disadvantaged backgrounds and is a requisite for long-term economic development.
  - Market solutions (e.g., predatory for-profit schools, unbearable student loans) have underperformed for broad access.
- Health care:
  - Even more expensive than education in advanced economies.
  - Universal health insurance largely funded by government has been the only successful way to provide quality care to all and has contributed to continuously rising longevity in richer countries.
- Retirement and income support:
  - Individuals struggle to save adequately for retirement or temporary income shocks.
  - The social state organizes saving through taxes and corresponding retirement or unemployment benefits, reducing poverty in old age or during unemployment and receiving broad popular support.

### Policy implications and critique of standard economics
- Standard economics focuses on potential negative growth effects of large social states and on reduced individual work incentives.
- Historical evidence shows the rise of the social state in the mid-20th century coincided with extraordinary and equitable growth in Western countries.
- Societies voluntarily chose to reduce work burdens for the young and old through mass education and retirement benefits and to regulate labor for the overworked.
- Fast-developing economies such as China and India have experienced growth in the size of their governments relative to GDP, but not nearly as large as in advanced economies; this implies that large segments of their populations may remain excluded from high-quality education, health care, and old-age support, hampering broad-based economic growth and widely shared economic well-being.

### Key statements and synthesis
- The modern social state provides social solutions (education, health care, retirement support) that markets and individual action alone have not delivered for the majority.
- Success in these domains requires a social solution through government action rather than solely market mechanisms.

*Emmanuel Saez, Finance & Development, March 2022*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2022/march/saez.pdf_