The New Economy: End of the Welfare State?

The New Economy transforms the business of and relationships between consumers and firms by changing the boundaries of products and marketplaces, by innovating new ways to transact in goods and services, and by enabling whole new activities that depend on the network of information and communications technologies that bind the world ever closer together. Together these changes highlight the economics of networks and of information, both of which create tensions between the global commercial reach of firms and customers and the local jurisdiction and authority of law and policymakers. Just as the New Economy is changing the commercial landscape, so too is it affecting the 'business' and 'relationships' of governments and policymakers. This essay will trace through the forces of the New Economy on two areas—fiscal systems and information privacy. These are two of the most challenging policy arenas and the ones where the archetypal Welfare State is most applicable. That is, in the archetypal Welfare State, high tax revenues fund generous public services and policymakers take a very activist role in governing the lives and environment of their citizens, including with regard to personal data. For fiscal systems, I conclude that transaction-based tax regimes will be stressed by the forces of the New Economy and will need to evolve in response to the more complex and global nature of production. But the notion of " the death of taxes " is false and the government can still play a significant role in providing for ample public services. In the area of personal information, I conclude that there are several possible sources of market imperfections, which allow for welfare-enhancing policymaker intervention. To ensure the best outcome, such intervention must preserve the private sector's incentive to innovate, even as government should be an advocate for citizens ignored by the market. Therefore, the New Economy does not portend the end of the ability of the State to play a significant role in enhancing the well-being of its citizens. But, it does mean that the Welfare State must change the way it operates, the way government sets policies on behalf of its citizens, and the way that citizens respond to the marketplace. The New Welfare State for the dynamic environment of the New Economy will be characterized more by incentives and responsibilities than by rules and outcomes. In this Welfare State, policies should focus on enabling transformation to achieve superior productivity and growth, …