In recent years the welfare state has come under attack from economists, and in many OECD countries there have been calls for spending on the welfare state to be rolled back. Critics argue that the size of transfer programs is responsible for a decline in economic performance and that cuts in spending are a prerequisite for a return to the golden age of full employment and economic growth. A. B. Atkinson takes such criticisms seriously, placing them under empirical and analytical scrutiny. Atkinson brings a welcome sense of balance to the debate. He warns that many currently fashionable policy proposals to roll back the welfare state could have unintended negative side effects, based as they are on an oversimplified view of the workings of the economy and of how welfare arrangements affect economic incentives. He asks whether there are ways in which the welfare state plays a positive role in the modernization of the economy. He develops new models of the labor market and of the growth of the corporate economy, which provide insight into the role and consequences of unemployment insurance, and the implications of moves to private pension funds. Atkinson does not attempt to determine whether or not spending should be cut. Rather, his aim is to clarify the nature of the charges leveled against the welfare state, so that readers can make up their own minds. Copublished with the Center for Economic Studies and the Ifo Institute