Social democracy and growth

Paul Krugman has a piece today that is aimed squarely at Americans and their prejudices regarding Europe. But his point that social democracy and good economic performance are not mutually incompatible could be backed up with more evidence than his simple US-EU15 comparison. Within the EU15, the Scandinavians and Germans are fairly obviously doing better than average. And when comparing EU-15 growth rates over time, the fact that jumps out is how rapid were the growth rates experienced during the 1950s and 1960s, when the welfare state was being constructed and consolidated.

There is also a vast literature demonstrating that social democracy, far from undermining the market, increases political support for it; and that income inequality makes ordinary people hostile to trade, immigration, and markets generally.

Fairness matters.

35 replies on “Social democracy and growth”

JK Galbraith said that a more even distribution of wealth in an economy leads to more stability and a healthier economy. I would be interested to know how wealth is distributed in the USA, Europe and China and how this has affected economic growth and resilience in each country. I would also be interested to know how labour costs, management/flexibility of labour costs and taxation of worker income has affected economic health and wealth in these countries.

Private wealth and savings seem to be critical to the economic health of nations. It is difficult to know how one should calculate private wealth in high tax, high welfare social democracies vis-a-vis private wealth in low tax low welfare states.

If fairness matters, we need an economy first to pay and redistribute. So we must be more competitive than Germany as long as we remain in the euro which we know can’t and won’t happen.

The elephant in the room is the euro, David McWilliams in yesterday’s Business Post,

“So the question I have for those who rightly suggest that we need to get our wages and prices down by 30 per cent to claw back the competitive losses we suffered since joining the euro is: how are we going to do it? In particular, how are we going to do this without leaving the euro?

What is the alternative to leaving the euro? How high does unemployment have to go for us to be competitive again?

If there is an alternative way to get costs down which doesn’t involve changing the currency, and that doesn’t involve massive unemployment and job losses in the trading part of our economy, I would love to hear it. Irish wages are not that flexible, despite the spin being put out.”

It would be refreshing to hear some expert contributors set out how Ireland might affect an orderly withdrawal from the euro.

These questions are not being answered. We have come into a new mode of consensus similar to that of the bubble. The price will surely be mass unemployment and the gradual collapse of the economy.

Kevin, it is interesting to note that non-economists appear to be more sensitive to absolute differences of income between people and hence absolute measures of inequality, rather than the purely relative measures (like the Gini coefficient for example) which econmists tend to quote (Martin Ravallion of the World Bank has written some good stuff on this).

Re the links between equality and growth, my reading of the literature is that there is so much simultaneously happening regarding the two that it is extremely difficult to determine directions of causation. Though perhaps there is some recent work out there using clever natural experiments or whatever which disentangles the simultaneity.

@Kevin O’Rourke

“Within the EU15, the Scandinavians and Germans are fairly obviously doing better than average.”

How exactly is it ‘fairly obvious’?

If it is ‘fairly obvious’, perhaps you might back your claim up with some figures that illustrate just how ‘fairly obvious’ it is?

In making this claim, are you comparing the Scandanavians and Germans simply with the EU15 average, which includes poorer Mediterraenean countries and long-term low-growth countries like Italy and France? Or are you comparing them with the United States, which was the point of the original article by Krugman? If the latter, it is far from ‘fairly obvious that the Scandinavians and Germans are doing better’. In the first three quarters of 2009, the y-o-y falls in GDP were:

U. States -3.3%
Denmark -5.5%
Germany -5.8%
Sweden -5.8%
Finland -8.5%

@ JtheO

How an economy has fared in the past year is not the be all and end all of economic history. Kevin’s use of the phrase “within the EU15” makes it clear what his comparison is – i.e. not the US (which comparison was already made by Krugman).

The fact that Scandanavia and Germany are doing better than average within the EU15 is shown by their GDP per capita among other measures.

As Ciaran points out, Scandanavia (no euro) and Germany (de facto Mark). Very basic economics. Paul K. and Kevin O’R. I believe you are in the wrong classroom. Political science is further down the corridor on the left.

In terms of the specific policy implications of “social democracy” and how this might fit into the Irish debate about the reforming our tax and spending systems I think it’s important to point out that the Nordic social democracies do not achieve their mix of equality and economic success through highly redistributive tax systems.

In fact their tax systems tend to use a lot of indirect taxes, and within the direct tax area the focus tends to be more on labour than capital.

Nor are their spending programmes especially focused on the poor – rather they tend to have universal welfare programmes and services.

This is what is sometimes called “the paradox of redistribution” – the countries that achieve the greatest redistribution tax and spend in seeminly non-redistributive ways. The redistribution happens because it is the amount of social spending, not how it is funded or how it is distributed, that makes the difference. A cash transfer given on an equal per capita basis may leave everyone better off by the same amount, but this is a dramatically more egalitarian outcome than if the same cash were distributed by the market.

Some relevant literature backing these points:

Peter Lindert’s article on the welfare state as a free lunch:

http://www.econ.ucdavis.edu/faculty/fzlinder/Freelunch/HarvardFreelunch1.pdf

A blog post by Lane Kenworthy showing that it’s the size of the tax revenues rather than how they’re funded or spent that make the redistributive difference:

http://lanekenworthy.net/2009/04/17/reducing-inequality-how-to-pay-for-it/

Some loaf, some work, others manage.
Owners create oligopolies.
Owners use those who manage, to do so.

The inefficiency introduced is minor at first but multiplies as those who manage adopt what methods and assets they can of those who own. The thing then tends to snowball. Galnbraith jr has drawn a comparison of wealth inequality by comparing income inequality over the years since the last depression. Starting of low, the inequality picked up pace and by RRs time was increasing.
GWB quipped that he was talking to “HIS base”, when addressing those who owned America, a reference to the created and controlled terror group Al Qaeda, meaning the base or foundation. He was happy to cut taxes on the rich. Inequality increased considerably. A Kleptocracy is born!

Economy is tied to politics when an economy has been socialized and when it is dominated by government, in all its forms, county, state and Federal.

Management has learned to be indispensable to the owners! Government is official management. They also loaf.

Paul K continues not to impress me. He cites statistics.
http://globaleconomicanalysis.blogspot.com/2010/01/reflections-on-boomer-demographics.html

Employment rates etc are not that different, but Europe does not lie so consistently as the USA. Who prepares these stats? Managers. Clearly all this “management” interferes with markets. Most of Europe is more honest and fair than the USA or Ireland. Boston or Berlin?

It is not so complicated, unless you are acting as a manager and obscuring the battlefield for some purpose of your own. Trends matter. And then they do not and “this time it is different” becomes an obvious fallacy. All change, utterly.

The trend now is for wealth extraction from the economy, disinvestment. Theft, put crudely, when laws and procedures of governance obstruct the rights of those who do not make the rules. Buy gold, metals anything but not anything actually producing!

Oligopolies are the rule in South America and PIGS. Families control the ownership of capital. Ireland had pretensions to create wealth by increasing capital by banking. How is that going now? The bankers will soon have their capital back courtesy of the taxpayer. The worker. And soon there will be no management jobs! People will then clamour for “equality”.

Please relate the matters discussed on this forum to matters historical for the truth to be obvious. All else is mere spin.

Social democracy or whatever, depends upon a well informed populace who can make up their minds. Spin robs them of this and the media are often complicit. Propaganda was supposedly perfected in WWII. It has been perfected in colour revolutions exported by the USA with a view to asset stripping in new countries. The Han refused to play in Kobenhaven. The Hindu are far older than the US. Their lies impress only their captive audience. Orwell used the name Oceania for his hero’s native land. The enemy were Eurasia. Except there might not have been any real conflict at all, just a means of enslaving the population of Oceania. Millions of casualties were merely millions of lies. Watching the birth of NAMA and the return of blasphemy seems to be fitting. Slavery can be imposed by getting people to want to be wealthy. And then giving them debt!

@Pat Donnelly – “And, war is so good for certain parts of the economy!”.

Even more so when the unemployed are sent out to fight it.

It’s just turning into one big resources grab but they will find when they get to Africa that our Chinese friends got there first and then there will be fireworks.

@James Conran

“JtheO. How an economy has fared in the past year is not the be all and end all of economic history.”

Very well. Let’s look at it over a longer time span.

change in GDP between 1995 and 2009:

—-U. States +42.7% – Germany: +15.7%

change in GDP between 2000 and 2009:

—-U. States +15.6% – Germany: +4.7%

So, why do you claim that Germany is doing better than the U. States?

“why do you claim that Germany is doing better than the U. States?”

I didn’t. I don’t think anyone in this thread has made such a comparison apart from yourself! The whole point of Kevin’s post, as I said already, is that while Krugman confines the comparison to Western Europe vs USA, the same point applies withing the EU15.

And economic history (more pertinently the economic history of social democracy) didn’t start in 1995 either. Kevin points out that the 1945-70 period was marked by both the birth and expansion of the welfare state and unparalleled (before or since) economic growth.

As it happens I certainly don’t think Germany has had a good 20 years economically, certainly in terms of labour market indicators. Three caveats though – 1) contra Kevin, I don’t thnk Germany would normally be seen as one of the most social democratic economies in the EU15, 2) an important part of Krugman’s article is that comparing GDP growth neglects the fact that population growth has been so much higher in the US and 3) The US might not have performed as well if it had had to integrate Mexico into its economy and polity. East Germany was obviously a big problem for German economic performance.

Joseph

Yes the Han are organized and appear to take a long term view. A wise ruler is a theme in their lexicon as a result of Confucius, Lao Tse?

They have yet to drop “devices” and are strangely aware of the ability of the USA to cause tsunamis……! Russia was thoroughly penetrated, but seems to have been cleaning house for some time. They seem to have retreated from their colonial ventures?

Although China is inscrutable economically, they do seem to measure twice….. I expect economic problems given the propensity to gamble. Just like the Japanese, they are vulnerable to an oil shut down. We know how that ended. Singapore is crucial. And Australia backs up Singers. China is more aware of that than the USA! I suppose that Japan also engaged in stockpiling crucial war materiel in the 1930s? Any one know?

Some further evidence. Labour productivity (i.e. GDP per hour worked) as a percentage of the US, for the original 6 EEC members:

Luxembourg 131.2% (I don’t take that seriously)
Netherlands 100.9%
Belgium 98.8%
France 95.3%
Germany 91.8%
Italy 88.3%

The next batch of entrants do less well:

UK 89.4%
IRL: 87.9%
DK: 80.3%

and the next batch do less well again, but we are now getting into peripheral territory:

Austria 96.4%
Sweden 84%
Finland 79.6%
Spain 73.9%
Greece 69.6%
Portugal 44.7%

Source: http://www.conference-board.org/economics/downloads/SummaryStatistics_09I.xls

It is notable how the EEC6 do so much better than the EEC9, or EU15. Or, putting it differently, it is notable how much better the French do than the British.

The point is not that European style welfare systems makes countries richer, but that the welfare state is a ‘free lunch’ of sorts, as Peter Lindert puts it:

http://www.econ.ucdavis.edu/faculty/fzlinder/

If societies want it, they can have it (so long as they pay for it of course) without fears that they will be impoverished in the process.

The figures given by Kevin O’Rourke are rather selective. They give GDP per hour worked. But, the real measure of how wealthy countries are is given by GDP per capita. So, from the same source, indeed from the very same table that Kevin has selected from, here are the figures for GDP per capita (expressed as %age of USA):

Netherlands 87.0%
Belgium 80.0%
France 73.0%
Germany 75.0%
Italy 67.0%
UK 79.0%
IRL: 97.0%
DK: 80.0%

note: if GNP was used for Ireland, it would be around 84.0%

So, clearly all the European countries are poorer than the US. On the GDP measure, only Ireland comes close to the US. Germany is 25% poorer than the US, France 27% poorer, and Italy 33% poorer. These figures are for 2008. If the 2009 figures were available, the gap between the US and Germany, France and Italy would be larger because GDP fell by less in 2009 in the US than in Germany and Italy.

So, how do we reconcile these figures with the figures Kevin gave, which show GDP per hour worked?

The answer is that, in many of the countries of continental Europe they work far fewer hours. Or, to put it another way, they are bone idle. Their work ethic has been destroyed by high taxation and general mollycoddling by the state. This derives from two separate causes: (a) those employed work much fewer hours per week than in the US (think of the 35-hour week limit in France) and (b) a much smaller proportion of the able-bodied population are in employment. The latter cause is the result of ridiculously low retirement ages in many continental countries (in France employees retire 6 years earlier on average than in Ireland), and their willingness to put people on invalidity benefit for relatively minor ailments.

The same table that Kevin used gives separate figures for the effect on the number of hours worked for both these causes. For simplicity, I have combined them below:

Netherlands -15.6%
Belgium -17.6%
France -20.9%
Germany -16.5%
Italy -15.5%

UK -10.6%
Ireland +9.4%
Denmark -1.2%

To explain these figures briefly. Compared with the US, the population of the Netherlands works 15.6% fewer hours annually, the population of France works 20.9% fewer hours, and so on. Only the population of Ireland works more hours annually than the US. To repeat, these figures take account, not just of the hours worked by those in employment, but of the proportion of the population in employment.

It is hardly earth-shattering news that people who work fewer hours may have slightly higher productivity per hour worked. If I decide to lie in bed until midday every day, and condescend to work 20 hours a week instead of 40 hours a week, it is quite likely that my productivity per hour will increase. I may put this suggestion to my boss today, but I doubt he’ll go for it.

So, in short, the situation, regarding the Boston v Berlin debate in Ireland, would appear to be as follows:

to be a wealthy country, continue with the Boston (low-tax) model

to be a nation of dossers, adopt the Berlin/Paris (high-tax) model

@John: I may be intellectually handicapped by my training, but economic theory assumes that leisure is a good thing, or in our parlance a “good”. If people want to spend time with their kids instead of buying that extra flat screen TV, who is to say that they are wrong? De gustibus non est disputandum and all that.

So: GDP per hour is the right measure of productivity. And the right measure of economic welfare would include the utility people derive from leisure (and, perhaps even, the utility they derive from the insurances of various kinds provided for them by the state).

@Ciaran Daly
“So the question I have for those who rightly suggest that we need to get our wages and prices down by 30 per cent to claw back the competitive losses we suffered since joining the euro is: how are we going to do it? In particular, how are we going to do this without leaving the euro?

What is the alternative to leaving the euro? How high does unemployment have to go for us to be competitive again?”

McWilliams is surely right. The general public are being told the worst is over. The phrase the worst is over, while I am sure well meant, does come with a massive amount of in built mental reservation. It would be almost as accurate to say that the worst is yet to come.

“It would be refreshing to hear some expert contributors set out how Ireland might affect an orderly withdrawal from the euro.”
I don’t agree with leaving the Euro. For one thing, five years after we leave, the establishment will be trying to get us back in.

“These questions are not being answered. We have come into a new mode of consensus similar to that of the bubble. The price will surely be mass unemployment and the gradual collapse of the economy.”

The solution to high wages and professional fees will have to be a national agreement cutting everyone significantly across the board.
http://www.irisheconomy.ie/index.php/2009/01/23/deflationary-spirals/
http://www.irisheconomy.ie/index.php/2009/03/16/honour-for-blog-contributor-kevin-orourke/
This, together with the measures to boost internal competitiveness advocated by Philip Lane, will get the ship of the reefs. If there is a once off significant cut in wages and rents are allowed to fall – not deliberately propped up – the standard of living will not be significantly affected i.e., wages will be lower but the cost of buying in Lidl or Aldi Dublin will now be the same as the much lower cost in Berlin. Cross border shopping will become people from Newry travelling to Dublin.

@Ciaran Daly
We are also adopting completely the wrong policy on the house and hotel mountains. Minister Gormley’s plan is, I believe, to buy them all up and knock them all down, selling the remainder on to the market when it is clear, not that prices have improved, but that they have dropped permanently. What he should do instead is cheer everyone in negative equity up by giving them to them. People in negative equity (and property investors) have been funding the country for years through the huge stamp duty they paid. They would now have as much property as the giant mortgages they paid deserved. They could then holiday in them or rent them out to tourists. Their standard of living would actually take a huge leap through having another property. {I do not have a giant mortgage}

Let Michael O’Leary build multiple Beauvais style airports around the country. Let him bring in huge numbers of tourists. Don’t knock down the hotels, as Peter Bacon suggests. Instead fill them up with spending guests. Don’t knock down all the houses in Longford, as Gormley will do. No one in their right mind will commute from there to Dublin in the next 20 years, anyway, if they do not already live there and will be commuting anyway. Give them to those who paid huge stamp duty and then they will holiday at home or rent them out to tourists.

The property mist is now lifting. But this allows not only to see that prices will not recover but also that there are huge opportunities – not threats – from having lots of houses and hotel rooms.

We need a blog on the hotel mountain and house mountain before bad decisions are taken without any pubilc debate, by people suffering from property fever and green fever.

http://www.msnbc.msn.com/id/34769831/ns/business-careers

Social democracy is being challenged by the technology. Robots can perform mech tasks but are not as productive, oer $, as cheap Chinese labour.

Working is a psychological need. It should also be productive, but Japan has built bridges to nowhere.

Leisure was in short supply when the malinvestments were being made. Now many will be cash poor time rich. A challenge for the managers to manage this? The EU solution is viable now, with an eye to keeping the max number of persons employed, at a lower per capit?

John The Optimalist
Figures are a slave to collection. Perhaps we should engage in their practices, war, shipping jobs abroad, etc? The picture in the USA is about to change. Bone idle? Hyperbole! Let us not forget where the credit expansion trap originated!

Aim for where the ball will be not where it was?

K’OR:

I may be intellectually handicapped by my training, but economic theory assumes that leisure is a good thing, or in our parlance a “good”. If people want to spend time with their kids instead of buying that extra flat screen TV, who is to say that they are wrong?

Don’t be silly, Europeans don’t have kids.

But more seriously, while choosing leisure over work may be a good for some, it by no means follows that the State should tax everyone into doing it.

Secondly, what are your thoughts on the long Jim Manzi piece on this topic?

http://nationalaffairs.com/publications/detail/keeping-americas-edge

@ Matt,

Actually if you follow the links back (the Krugman piece linked to in Kevin’s post plus various recent posts on Krugman’s blog) you’ll find that the Jim Manzi piece is what ultimately sparked this whole debate.

@Kevin O’Rourke

“I may be intellectually handicapped by my training, but economic theory assumes that leisure is a good thing, or in our parlance a “good”. If people want to spend time with their kids instead of buying that extra flat screen TV, who is to say that they are wrong? De gustibus non est disputandum and all that.”

I certainly wouldn’t say that they are wrong. Its their choice. As long as people are properly informed about the likely outcomes of the different types of economic model on offer, they can choose whichever one they prefer. As I see it, the options are:

(a) The low-tax USA/Ireland model will result over the long-term in higher economic growth rates and people being much better off – that is, ‘much better off’ in the sense of having lots more dosh at their disposal, which they can then use, as they see fit, on larger houses, bigger cars, fine wines, dining-out, 48″ hi-definition tvs, holidays in Florida, the best steaks, skiing trips, following Ireland’s rugby team around Europe and so on

(b) The high tax continental/social democratic model will result over the long-term in relatively slow economic growth and people having lower incomes – but, with the compensation that they will work considerably fewer hours and, therefore, have more time to watch Richard and Judy on daytime television.

Its a tough choice.

@Kevin O’Rourke

Thanks for that link. Unfortunately, I’d sent my post in just before seeing your link. So, I will read it this afternoon and see if I need to revise the opinions I expressed in m post.

@ Kevin,

I’m interested by this claim in your linked-to piece:

“The Government’s aim seems to be to get women into the formal work-force and to have children cared for in creches. That policy may succeed in raising GDP but it is likely to reduce welfare.”

I get your point that simply transferring activity from the home to the market adds to GDP but not to welfare. (The point applies to cooking, cleaning etc. as well as childcare). But surely there is a genuine gain to the labour supply (hence a meaningful addition to GDP) when children are cared for in creches rather than in the home since the carer-to-kids ratio decreases? (Obviously there are controversies over the relative quality of care in creches/homes and the effects on society.)

@John,

It’s well known that overworked Anglo-Saxons are so zonked out when they get home from the office that their scarce free time is spent watching Richard and Judy/Jerry Springer, whereas sophisticated Europeans have learnt to enjoy the fruits of civilisation by luxuriating in vast quantities of Chateauneuf du Pape while listening to JS Bach and watching arthouse films.

@James: yes, it will raise measured GDP, and the government then was fixated by this. I care about welfare.

You can dispute the logic, but here goes. Parents will make the best decisions for themselves and their children. If the government then tilts the fiscal playing field so as to incentivise them to make one decision (work + creche) rather than another (stay at home), this is a distortion that will lower welfare. (Unless you can think of some externality that this policy is offsetting.)

“…whereas sophisticated Europeans have learnt to enjoy the fruits of civilisation by luxuriating in vast quantities of Chateauneuf du Pape while listening to JS Bach and watching arthouse films.”

…and, in the case of French women, perfecting ways of being incredibly sexy.

@Kevin

I suppose the question is whether fiscal policy is in fact neutral if someone with a non-employed spouse gets more tax credits than someone with an employed spouse.

Hmm, I tend towards that view as well really – though only really so as I can sneak in my pet “universal basic income” policy under the cloak of “refundable tax credits”.

I’m all for the state being neutral as between life choices and values (with all the usual liberal caveats – “but don’t go eating your neighbours” etc). Of course really expanding the choices available to families requires, e.g., public support for childcare, so maybe stay-at-home tax credits are an appropriate counterbalance to that.

I have to admit though that my liberal views are probably somewhat contaminated by my belief that a generous welfare state is best supported by high employment/population ratio (i.e. high participation rates for women), plus a sympathy for the feminist demand that both domestic and paid labour be more even distributed between the sexes.

@Kevin O’Rourke

“You can dispute the logic, but here goes. Parents will make the best decisions for themselves and their children. If the government then tilts the fiscal playing field so as to incentivise them to make one decision (work + creche) rather than another (stay at home), this is a distortion that will lower welfare. (Unless you can think of some externality that this policy is offsetting.)”

As a social conservative myself, I’m genuinely impressed by Kevin’s
comment. I too think it is preferable that children be raised at an early age by their parents, rather than in child-processing factories.

But, I just don’t see that this is what social democracy about. The high-tax social democratic countries of northern Europe have far higher proportions of children raised in state-run creches than in Ireland. Surely, one of the major complaints of Irish Times columnists and Labour party politicians in Ireland in recent years is precisely that the Government here doesn’t provide the same scale of childcare facilities as in continental Europe, which, of course, to achieve would require a large increase in taxation.

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