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In this week’s Grumpy Economist Weekly Rant, John Cochrane questions whether the modern welfare state is economically sustainable. With government spending reaching 57 % of GDP in France and approximately 45 % in the United States, he argues that high taxes, extensive regulation, and social benefits that discourage work contribute to economic stagnation.
Beyond rising debt and slow growth, Cochrane examines how declining birth rates threaten welfare systems that depend on future generations to finance today’s benefits. Rather than expanding government programs, he makes the case for reforming the welfare state to focus assistance on those most in need while restoring incentives to work, save, invest, and raise families.
Transcript
Hi, I’m John Cochrane, senior fellow here at the Hoover Institution, and welcome to my Grumpy Economist Weekly Rant.
Today, I’m gonna rant about the welfare state.
I was invited to the Festival Internazionale dell'Economia in Turin to speak about inflation and debt. But the grand topic of the conference was how to save the welfare state. I went off script with these comments.
How to save the welfare state is the wrong question. The question is how to save our countries from the welfare state.
France’s debt is in the news. France’s government spends 57% of GDP. 57%! That means that the average tax rate in France is 57%. And for anyone who pays less, someone else must pay more, either now or later. For much of Europe, the number’s only slightly less, about half. And the US isn’t far behind, about 45%, and more when you count our healthcare mandates and cross-subsidies that are the same as taxes and spending, really.
Europe’s crying economic problem is economic stagnation. And marginal tax rates well above a half are deep in the range of undeniable disincentives to work, save, innovate, start and grow businesses, invest in education, and so on.
You add extreme business protections and over-regulation, pay people not to work, and you get the ingredients of stagnation. What to do? Tax even more? Cut benefits to needy people?
Economics offers a way out. Focus on the incentives.
In the United States, people lose about a dollar of benefits for each dollar they earn from zero to about $60,000, with a lot of cliffs along the way. Many retirement and disability schemes make work essentially impossible.
You don’t have to force people to work. You just have to let them work, let them keep some of the money, and let the economy grow, which mostly needs a big dose of get out of the way.
Beyond debt and growth, our societies are failing the most basic biological commandment: to reproduce.
When the average woman has one child, the population falls by half every 30 years. A pay-as-you-go welfare state can’t survive that. And it’s doubtful that our highly specialized economies can survive population decimation either.
In the old days, people had children in part to support them when they got old, sick, or unlucky. In a welfare state, other people’s children take care of you when you get old or sick or unlucky.
Margaret Thatcher once said, “Socialism ends when you run out of other people’s money.”
Here we are. The welfare state ends when you run out of other people’s children. Here we are.
For better or worse, the regulated welfare state substitutes a personal individual relationship with the central government for the support once provided by family, markets, savings, community, church, charity, and local government.
But incentives matter.
Children are now just an expensive luxury consumption good. The welfare state is at least part of the plummeting fertility that undermines the welfare state.
Don’t save the welfare state. The welfare state is killing our prosperity and/or at least deeply reform the welfare state.
Focus government efforts on the truly needy and the unfortunate. Leave the average person and their childcare, education, healthcare, insurance, retirement, employment, transportation, housing—leave that to the glorious incentives, rewards, and protections of the innovative, competitive free market.
Thanks for listening. And if you liked my Weekly Rant, don’t forget to click to subscribe.
John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow of the Hoover Institution at Stanford University. An economist specializing in financial economics and macroeconomics, he is the author of The Fiscal Theory of the Price Level. He also authors a popular Substack called The Grumpy Economist.