Public Choice and the Modern Welfare State

In the 25- year period between 1960 and 1985, social insurance and transfer programs expanded greatly in all Western countries. The fraction of GDP accounted for by government expenditures approximately doubled in much of Europe and grew by 40 percent to 50 percent in most other Organisation for Economic Co- operation and Development (OECD) nations. After 1985, there has been relatively little growth in the scope of the welfare state relative to other parts of the economy. This chapter summarizes public choice and related research on the political economy of the welfare state. There are essentially two strands of the literature. One stresses the extent to which institutions, voter interests, and ideological shifts account for the period of rapid growth. The other emphasizes the importance of interest groups, who lobby for extensions of the welfare state in order to profit from larger budgets, more generous transfers, or new spending by those receiving the transfers. This chapter suggests that ideas as well as conventional economic interests also played a role in the twentieth century expansion of the welfare state.