Trade-Offs in Public Finance: Comparing the Well-Being of Big Spenders and Lean Spenders

Abstract

Drawing on research analyzing similarities and differences among 19 rich democracies, this article compares the economic performance of big spenders and lean spenders at a similar economic level from 1950 to the late 1990s. Going beyond aggregate public spending, it shows the contrasting effects of particular types of spending and taxing and particular social policies. I highlight the extraordinary continuity of the contrasting institutions and policy directions of these countries. I find that there is not one road to good economic performance, but several. I specify five types of political economy, each with its own costs and gains in people’s well-being, both economic and noneconomic. A final summary compares extremes: the confrontational “low road” pursued by the USA and the “high road” pursued by the strongest consensual democracies of Continental Europe, where social partners have negotiated real reforms in expensive social policies while preserving social cohesion.