Why public provision makes economic sense

The blog has made several references to the Nordic social model. At a time when neo-liberal attacks on the "welfare state" are as strong as they have ever been, it is important that a properly strong response is given to these attacks. The argument is that public goods make strong economic sense. And this is well stated in a recent Social Europe article 

there are many misunderstandings of the Nordic states, even by sympathetic commentators. The most common one is that the state is portrayed as a very costly undertaking that by its high level of taxation becomes a hindrance to economic growth. This reveals a misconception regarding what the welfare state is about. The largest part of this type of welfare state is not benefits to poor people but universal social insurances and social services (like health care, pensions, support to families with children and public education) that benefit the whole, or very large, segments of the population. These goods are in high demand by almost all citizens and research shows that having these demands covered by universal systems in many cases becomes more cost effective.

The economic theory about problems of asymmetric information in markets is well suited for understanding this. Although this theory is quite technical, the logic is very simple. For example, in private health insurance systems, the costs that such information problems lead to (overtreatment, overbilling, the administrative costs for insurance companies screening out bad risks, the costs for handling legal problems about coverage) can become astronomical as seems to be the case in the United States[2]. Universal systems are much more cost effective in handling these problems since risks are spread over the whole population and the incentives for providers to overbill or use costly but unnecessary treatments are minimal.

The second misunderstanding is that such welfare states by necessity come with heavy handed bureaucratic intrusion and paternalism (“the nanny state”) and that it cannot be combined with freedom of choice for various services. This is for the most part wrong. An example is the publicly financed school system in Denmark and Sweden that are full-fledged charter systems. Public schools compete with private charter schools that are run on public money and have to accept to work under the same national regulations and education plans. For example, they have to accept students without any discrimination concerning their learning abilities. This can be compared with the intrusive inquiries and testing used by many private schools in the US in their admission processes. The same choice systems have been developed when it comes to health care, elderly care and pre-schools in the Nordic countries. Simply put, public funding of social services can very well be combined with consumer choice and respect for personal integrity.

A third common misunderstanding about the universal welfare state system is the neo-liberal argument that high public expenditures is detrimental to market-based economic growth. As shown by the economic historian Peter Lindert, this is simply not the case. In a global perspective, rich states have a level of taxation that is almost twice as high compared to poor states. And when the rich western states are compared over time, the evidence that high public spending is negative for economic growth is simply not there. This is also shown when the leading international business organization, the World Economic Forum, ranks countries’ economic competitiveness. The Nordic countries come out at the very top, far ahead of most low tax/low spending countries. In addition these states have their public finances in good order, simply because people are willing to pay taxes for the services that are proven. And lastly, when it comes to measures of human well-being, the Nordic countries outperform all other known social models. Thus, the future of the state looks bright, provided it is modelled on the Nordic model.