Bad lessons from the North

This article by Jeffrey D Sachs really annoyed me: Lessons from the North via Burden of Proof.

Jeff really got so many facts wrong lets look at them one by one:

But the debate can be moved forward by examining the successful economies of Denmark, Finland, Iceland, the Netherlands, Norway, and Sweden. While no regional experience is directly transferable, the Nordic countries have successfully combined social welfare with high income levels, solid economic growth, and macroeconomic stability. They have also achieved high standards of governance.

Says who? While not as inefficient as others (France) we have severe short and long term economic problems that are almost impossible to solve because of myths like the above. I will cover this in the paragraph about democracy below.

High taxation supports comprehensive national health care, education, pensions, and other social services, resulting in low levels of poverty and a relatively narrow income gap between the richest and poorest households. In the US, the poorest 20% of households receive just 5% of total income, putting their income at around one-fourth of the national average. In the Nordic countries, by contrast, the poorest 20% of households receive nearly 10% of total income, putting them at roughly one-half of the national average.

However you put these stats about relative poverty, they are absolutely irrelevant. What matters is what people can do with what they have. See chapter 3.4 in Timbro’s excellent study EU vs USA, which looks at this in detail. Did you know that 40% of Swedish households would classify as poor under US federal poverty guidelines? Actual US govt figures are that 12% of the US population is poor. These figures are also improving rapidly every year.

American conservatives argue that a large public sector is subject to inefficiency and mismanagement, corruption, and bureaucratic abuse, while the taxation needed to support it blunts economic efficiency. But each of these propositions is refuted by the Nordic experience.

I do not understand how these propositions are refuted. I can’t speak for the other Scandinavian countries, but Denmark has a huge inefficient public sector with lots of blatant mismanagement and bureaucratic abuse. Corruption is really how you define it. It does exist on all levels of government, but granted not as much as you see say in France or Africa.

Consider the claims of inefficiency and waste. As a result of government-funded national health insurance, the Nordic countries have a higher life expectancy and a lower infant mortality rate than the US. Life expectancy is close to 80 years in the Nordic countries, compared to 78 years in the US, where the government does not guarantee national health insurance and millions of families are too poor to pay for it on their own. Ironically, the heavy reliance on the private sector in the US system is so inefficient that Americans pay a larger share of GNP for health (14%) than do the Nordic countries (11%), but get less.

Besides are these statistics that good to go after? Look at the CIA World Factbooks ranking of nations on Life Expectancy. The 2006 numbers put Denmark behind the US. Just slightly, but still. Denmark is even below the European Union average. But then again who cares if there is 14 days difference in average life expectancy. These are just numbers anyway.

The Danish health care system is bad. On some levels it does work, but on others it is horrible. That Denmark has worse breast cancer survival rates than the US is one thing, but objectively speaking it is inefficient and impersonal. My wife and I have never been treated as rudely in our lives as we have by many of the bureaucrats hiding behind Doctors diplomas in the Danish health care system.

Many countries in the world have socialized health care (this includes much of Latin America) and very few places does it actually work as well as the US.

Similarly, although social welfare spending is lower in the US than in the Nordic countries, its budget deficit as a share of national income is much larger. The US spends less in the public sector, but it taxes even less than it spends.

This sounds a bit like the Chewbacca defense, but maybe I just don’t understand it, someone please explain.

Nor has high taxation in the Nordic countries impeded economic performance. Rather than relying mainly on income taxation, as in the US, the Nordic countries rely on value-added taxation, which provides a relatively high amount of revenue with relatively low rates of evasion and few distortions to the economy.

Jeeze. It is true Denmark does not just rely on income tax and fleece their citizens with a 25% Value Added Tax. You can’t just ignore the minimum 43% tax rate. The marginal tax is at 65% and very few people manage to avoid it. This leads to a massive tax wedge which kills productivity in Denmark.

The Nordic experience also belies conservatives’ claim that a large social welfare state weakens incentives to work and save. National saving in the Nordic countries averages more than 20% of national income, compared to around 10% in the US.

Where does he have this from? The Danes are about the worst savers in the world, they have sky high credit and only save for pension when their employer or law forces them to do so. I assume National Saving rate is some invented macro economic figure. Look at these numbers randomly googled: Denmark 16%, US 9% and Panama 18%. Maybe Gabriel can explain to me (an economics amateur) what that means.

Moreover, economic growth in the Nordic countries has been similar to that in the US in recent years. Income levels are higher on average in the US, but mainly because the Nordic countries work fewer hours per week. In any case, all of the Nordic countries have very high incomes, and Norway’s per capita income actually exceeds the US.

If it wasn’t for the high tax wedge Scandinavians would work harder. Right now if you include all the hours we spend here on crap we don’t really want to do because it’s to expensive to pay someone to do it we probably work even fewer hours. Denmark is the country where highly skilled workers (eg. Doctors, Lawyers, me…) take billable time off from work to do just about everything we wouldn’t do in a place with a low tax wedge. See chapter 4.2 in Timbro’s EU vs USA and this NYT Article We’re Rich, you’re not. End of story.

About Norway’s GDP. There is one simple explanation the price of oil. These are also helping Denmark and the UK give a few extra years of undeserved life to their welfare system.

Several factors appear to explain the Nordic countries’ economic success. Taxation is broad-based and relatively non-distorting, while open international trade, market forces, and private ownership of industry are relied on to maintain incentives. The Nordic countries are not “socialist” economies, based on state ownership and planning, but “social welfare” economies, based on private ownership and markets, with public provision of social protection. Importantly, they invest heavily in higher education and in science and technology, so they remain at the cutting edge of high-technology industries.

The Danish government invests heavily in higher education, unfortunately no one wants to be in science and technology. It has become somewhat of an uphill battle persuading the generations grown up in the welfare society that they need to learn anything useful. There is also very little incentive to get an university degree amongst the so called working classes. A skilled worker can often make more money (and has better opportunities for moonlighting) than a university educated worker.

Half a century ago, the free-market economist Friedrich von Hayek argued that a large public sector would threaten democracy itself, putting European countries on a “road to serfdom.” Yet the Nordic states have thrived, not suffered, from a large social welfare state, with much less public-sector corruption and far higher levels of voter participation than in the US. According to Transparency International, the Nordic countries have the world’s least corrupt political systems (with Iceland and Finland ranking as the least corrupt), while the US, with its big money politics, is fairly far down on the list.

The problem with this is a that corruption in Denmark is on such a large scale, that it can be hard to see. More than 50% of the voters either have government jobs or receive their main income from the large variety of government benefits. Each election is about who can get more people on the pay.

In reality in Denmark, it is not necessarily individual government functionaries that are the problem, it is the 55% of the voters who are paid to vote for their income. This also means that is highly unrealistic that anything will ever change.

There are countless debates, but no one wants to talk about the real problems as they are scared to get punished in the next election.

Maybe we need a new word for this. Macro Corruption maybe?

But how replicable are the Nordic successes? These countries have small populations, easy access to international trade, natural resources, and peaceful neighbors. Most notably, they are ethnically homogeneous, so that social divisions are more amenable to compromise. However, this means that the challenge of maintaining a strong social welfare state in ethnically and racially diverse societies such as the US is not economic, but one of promoting respect and inclusiveness.

Firstly as pointed out. These are not successes. Secondly people have attempted to replicate this many times. Thirdly, most of Western Europe follows a similar welfare state model. As does Canada, Panama, Costa Rica, Australia, Massachussetts and many other places. The whole concept of this being an exclusively Nordic phenomena is a long con. All of these places have the exact same problems as we do here.

The economy may be booming in several Nordic countries, but this has nothing to do with the welfare system. Arguably it is despite the welfare system. The one thing saving the Scandinavian countries now (besides the price of oil) is that they actively globalized in the 70s and 80s with a successful transition to the knowledge economy. Most of the large old fashioned factories were closed down in this period. Their real problem is that they can not compete well enough in the future with lower cost knowledge workers else where. The US is being successful competing on innovation and flexibility and these are exactly the things the Nordic welfare systems do not like.