Reducing poverty
Does the modern social state work? Historically, mass education has always been state-driven and was actually the first pillar of the social state to develop, as early as the 19th century in Prussia and the United States. And virtually everybody agrees that an educated workforce is a requisite for long-term economic development. Mass education is achieved through a combination of compulsory schooling and government funding. Government funding is needed because low- and moderate-income families are unable to afford the high cost of a quality education. This in turn provides opportunities for economic success to children from disadvantaged backgrounds. The experience of unbearable student loans and predatory for-profit schools in the United States shows that markets and the profit motive work much worse.
Modern health care is even more expensive than education in advanced economies. Absent government funding, only the well-off would be able to afford health care. This is why universal health insurance largely funded by government has so far been the only successful way to provide quality care to all, a goal that is enormously popular and has contributed to continuously rising longevity in richer countries.
A large body of work shows that individuals are not good at saving on their own for retirement or even at accumulating a modest nest egg to weather a temporary loss of income. The social state organizes such saving through taxes and corresponding retirement or unemployment benefits. This social solution undoubtedly reduces enormously poverty in old age or during unemployment, and it also receives broad popular support.
Backward logic
What does this mean for economic policy advice? Economics assumes that humans are good at solving the problems of education, retirement, and health insurance as individuals, but the evidence shows that success requires a social solution through the social state. Standard economics gets its logic backward: it worries about the growth effects of large social states, whereas their rise in the middle of the 20th century came with extraordinary and equitable growth in Western countries (Piketty 2020). It worries about the social state reducing individual incentives to work, whereas societies voluntarily decided to reduce work for the young and the old through mass education and retirement benefits and for the overworked through labor regulations.
Fast-developing economies today, such as China and India, have also experienced growth in the size of their governments relative to GDP, but it has not been nearly as large as in advanced economies (Chancel and others 2022). If the points made here are correct, this implies that large segments of the populations in these countries will remain excluded from high-quality education, health care, and old-age support, hampering broad-based economic growth and widely shared economic well-being.
