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How has the Swedish welfare state survived?
...the Scandinavian welfare states have an above average growth record during the period 1970-2000: Sweden has to some extent lagged behind, but Finland and especially Norway have grown steadily.
Andreas Bergh offers two answers: First, if we look at measures of economic freedom, especially those measures which track freedom independent from the size of government expenditures, the Scandinavian countries have become much freer. (Note that the Netherlands, which until very recently was outperforming the other European welfare states, experienced the greatest gains in this category.)
Second, the Scandinavian economies have become much more globalized. The old story was that globalization rendered welfare state expenditures unsupportable; it is more likely that the opposite is true, at least provided trade is open, credibility is high, and business regulation is light.
I wish this paper were 100 rather than 20 pages, but I believe the author is on to something very important.
Addendum: Here are other versions of the link to the Bergh paper, if the given link is still down.
Posted by Tyler Cowen on October 1, 2006 at 08:16 AM in Economics | Permalink
Comments
Wouldn't globalization render welfare state expenditures more supportable if the welfare state expenditures were actually efficient?
I'm thinking of the common "single payer" advocates' claim that the US government should provide free health insurance because companies that are groaning under their health insurance expenses will run to Canada. That argument would work only if either the single-payer system really was more efficient than private health care (or if the Canadians really did manage to find sugar daddy for which the single-payer advocates are constantly searching).
Posted by: Scott Wood at Oct 1, 2006 9:10:39 AM
What I find interesting about this blog is that its purpose seems to be serving the confirmation bias of libertarians.
I've nothing to complain about concerning this paper's analytic content. My only complaint would be its use of the propaganda term "economic freedom", which is why it's promoted in this blog.
Economic freedom (as promoted by right-wing think-tanks in several flavors) is very simply the proposition that property should be dominant over sovereignty. It is simply concerned with the rights of capital: however, capital is not the only component of economics. Thus we see genuinely important economic factors such as "access to sound money" which empowers capitalists, but not other economic factors such as "access to education" which empowers labor.
Overall, I view this article as part of the large literature that illustrates the fraud of the term "economic freedom". That propaganda term should be discontinued and replaced with one whose meaning is more realistic and supportable: consisting of a more sophisticated model which empirical research shows to be predictive. Current indexes of "economic freedom" are not objective and merely model happiness of corporations and entrepreneurs.
However, I'm quite happy with his conclusion: "economic freedom and globalization is highly compatible with high taxes and a big welfare state." This implies that satisfying classes other than just corporations and entrepreneurs is reasonable and can be accomplished without incurring Hayekian doom scenarios.
Posted by: Mike Huben at Oct 1, 2006 10:27:18 AM
^ confirmation bias is hopefully taken into account when AT/TC post content, if not, caveat lector and adjust your reading accordingly. i suspect like libertarians would that AT/TC expect their readers to take responsibility for their own understanding.
also, the link to Andreas Bergh is broken...
Posted by: quitacet at Oct 1, 2006 11:19:35 AM
What about Marxist confirmation bias?
Posted by: Not a Sophist at Oct 1, 2006 11:25:01 AM
Here is a paper looking at the relative economic failure of Latin American countries compared to Europe, the US, and especially Asia. It shows the flip side, that the conditions that Scandinavian welfare states have is what Latin America lacks.
"We find that this failure is primarily due to total factor pro-ductivity (TFP) differences. Latin America’s TFP gap is not plausibly accounted for by hu-man capital differences, but rather reflects inefficient production. We argue that competitive barriers are a promising channel for understanding low Latin TFP. We document that Latin America has many more international and domestic competitive barriers than do Western and successful East Asian countries."
http://www.minneapolisfed.org/research/common/pub_detail.cfm?pb_autonum_id=1065
One of the possible explanations they give for the existence of the barriers to competition is that the extreme concentration of wealth gives the wealthy power over the government. It would be ironic if the policies put into place to increase growth in the United States by increasing incentives had the long term results seen in Latin America.
Posted by: joan at Oct 1, 2006 12:08:09 PM
Yes, especially Norway where there is oil(now in decline--production not price.)
Posted by: lee at Oct 1, 2006 12:52:05 PM
One does have to be careful about making too much
about Norway because it has oil, although it has
avoided the "curse of natural resources" that so
many oil exporting nations have experienced.
I have for some time in many places been trying
to make this point. There is this general knee
jerk reaction out there that Sweden et al are
about to collapse (I have been hearing that they
are "about to collapse" from certain parties for
decades) for their "socialism." But they indeed
have never had comprehensive central planning and
very little state ownership. They have long had
free trade, and they have surprisingly few
business regulations, with the ones they have
carefully targeted. It is easier to establish
property rights in most of those countries
than it is in the US.
Needless to say, their success is really the
success of a model that Hayek was developed
in Germany originally, the social market economy,
a phrase introduced by some allies of Hayek,
the Ordo-Liberals of Frankfurt in particular.
And of course, their success give the lie to
the endless and nearly mindless propaganda
that one hears in the US that one must cut
taxe all the time in every way blah blah blah.
Just plain baloney.
Posted by: Barkley Rosser at Oct 1, 2006 2:25:21 PM
There is actually a fairly extenive literature on a high level of correlation between openness to international trade and levels of government spending. A number of authors believe it to be caused by increasing the concentration of industries, giving labor more political power as unions grow. Some, (e.g. Iversen) see deindustrialization as the better explaining factor, with growing trade being approximately coincident with an increasing service sector and government redistribution policies reacting similarly under deindustrialization as they did in the industrializing period.
For further reading you can check out:
D.R. Cameron. 1978. APSR.
P.J. Katzenstein. 1985. /Small States in World Markets/.
D. Rodrik. 1998. JPE
T. Iversen; T. Cusack. 2000. World Politics.
C. Boix. 2003. /Democracy and Redistribution/.
Posted by: James Sams at Oct 1, 2006 3:13:49 PM
"What I find interesting about this blog is that its purpose seems to be serving the confirmation bias of libertarians."
From the post: "The old story was that globalization rendered welfare state expenditures unsupportable; it is more likely that the opposite is true, at least provided trade is open, credibility is high, and business regulation is light."
The idea that free trade can help support the welfare state isn't very libertarian at all.
Frankly, Mike Huben, it seems more like you don't like any blog that fails to confirm your biases.
In fact, there is simply not another blog out there that challenges its readers underlying biases as much as this one. Not one. Get out of your bubble.
Posted by: Keith at Oct 1, 2006 3:35:18 PM
Keith, what you don't recognize is that Tyler's post is an apologetic for a conspicuous failure of libertarian ideology. I've been watching for this one in particular since Krugman wrote Who knew? The Sweden Model is working.
Apologetics serve to enhance confirmation bias.
And of course you've soft-pedalled Tyler's spin: he's essentially saying that globalization can rescue the welfare state if only they follow the other principles of "economic freedom". Chances are you don't consciously recognize that globalization and "economic freedom" are phatic language in this blog.
"The idea that free trade can help support the welfare state isn't very libertarian at all." A very cute assertion, but wrong. I doubt you could find a libertarian economist who would say free trade cannot help support welfare states: any economic benefits of any sort could be taxed and thus help. Libertarian positions would be more like "should not help support a welfare state."
As for your assertion that this blog challenges the underlying biases of its readers, I'd love to see you back that up in a credible manner. It doesn't even challenge my biases, though it does contradict them occasionally with crude propaganda strategies such as "Markets in everything". (I'm waiting for the celebration of markets in criminality, with praise for the efficiency and satisfaction of customers.)
I will back down on (clarify) one thing though: there is obviously more here than the purpose of serving confirmation bias of libertarians. This is a fine economics blog, doubtless its major intended purpose. I enjoy reading it, though I grit my teeth when I come to something particularly propagandistic.
Posted by: Mike Huben at Oct 1, 2006 4:48:18 PM
"he's essentially saying that globalization can rescue the welfare state if only they follow the other principles of "economic freedom"."
I would say that's more or less a consensus view among most economists, libertarian or not. The evidence points against may interventions in trade and the price system interventions, but a large welfare state doesn't seem to be destructive in certain societies.
"As for your assertion that this blog challenges the underlying biases of its readers, I'd love to see you back that up in a credible manner."
Um, posting about a successful welfare state doesn't challenge libertarian biases?
Look, you're clearly on some sort of moronic crusade. You have some faith-based issue against libertarians. They're some sort of devil to you, and you can't deal with them. That's fine, we all have our hang-ups. Good luck with yours.
Posted by: Keith at Oct 1, 2006 6:06:41 PM
Keith, like David Friedman, appears to have the patience to deal with Mike Huben's marmish sophistry. Patience in such quantities, to me, is astounding.
Posted by: Bob Dobalina at Oct 1, 2006 6:31:01 PM
Maybe the success of Scandinavian welfare states is proof of the Stolper-Samuelson Theorem, that there are enough gains from trade so that the winners can compensate the losers and everyone can be better off.
Posted by: joan at Oct 1, 2006 8:05:12 PM
Nicolai Foss has a related working paper on entrepreneurship and freedom - abstract and blog URL below:
Abstract
While much attention has been devoted to analyzing how the institutional framework and entrepreneurship impact growth, how economic policy and institutional design affect entrepreneurship appears to be much less analyzed. We try to explain cross-country differences in the level of entrepreneurship by differences in economic policy and institutional design. Specifically, we use the measures of economic freedom to ask which elements of economic policy making and the institutional framework that are responsible for the supply of entrepreneurship (our data on entrepreneurship are derived from the Global Entrepreneurship Monitor). The combination of these two datasets is unique in the literature. We find that the size of government is negatively correlated with entrepreneurial activity but that sound money is positively correlated with entrepreneurial activity. Other measures of economic freedom are not significantly correlated with entrepreneurship.
http://organizationsandmarkets.wordpress.com/2006/09/19/paper-on-freedom-and-entrepreneurship/
Posted by: teppo at Oct 1, 2006 11:05:44 PM
The Scandinavian welfare state still works because Scandinavia is full of Scandinavians. The moral hazard of the welfare state has only slowly eroded the Scandinavian work ethic and sense of honesty because they were so deeply rooted to begin with. (Note Tim Harford's article on how Swedish diplomats at the UN don't park illegally even though they can.) In contrast, the welfare state wrecked Britain's economy in just 30 years (1945-1975) and it wrecked American inner cities in about 30 months when it was introduced in the mid-1960s.
Posted by: Steve Sailer at Oct 2, 2006 12:18:45 AM
Some facts and figures to chew on:
http://www.mises.org/story/2259
Posted by: Not a Sophist at Oct 2, 2006 12:46:19 AM
My understanding was that the ethnic homogeneity of Sweden was part of the reason Swedes tolerate such high tax rates. As they bring in more foreigners I'd expect a backlash (perhaps the recent success of the center-right party is part of that.)
I actually have family in Sweden. One relative is a Vietnamese woman who married a Swede. Right now Sweden is paying her way thru Pharmacy school, and giving her husband a year of paternity leave to take care of their kids. She's a wonderful woman, but I imagine situations like hers might well breed a degree of resentment among some parts of Swedish society. Or at least an interest in reducing some aspects of the welfare state.
That said, most Scandinavians I've known have been extremely egalitarian, and although worried about their Muslim immigrants, were still very positive about immigrants like my relative who've worked hard to integrate themselves into Swedish society.
Posted by: mike at Oct 2, 2006 12:52:57 AM
MIke, what do you expect Tyler to do? There is one apparent counter-example (I am not saying there is only one) namely Sweden. Do you expect Tyler to immediately convert to socialism because of thaty? Given how complex societies are that is not a sensible strategy since there will always be apparent counter-examples to any ideology.
The intellectual honest thing is to discuss the apparent counter-examples and determine whether they really falsify your ideology or whether it can in fact be understood with it. Here Tyler concludes that the success of Sweden is not a contradiction with the libertarian ideology since Sweden has relatively free markets.
Now of course a socialist will say that it is not Sweden's free markets but its free healthcare and childcare (actually almost free) that has made Sweden successful. This can not be determined by looking at an individual country but has to be decided by looking at countries that vary in their degree of economic freedom and the provision of healthcare and childcare and estimating the effect of its policies on growth.
Posted by: Johan Richter at Oct 2, 2006 5:45:01 AM
Thanks Tyler for mentioning my paper, and to everyone else for interesting comments!
To Mike (and others), I see your point about "economic freedom" being an ideologically loaded term. But I still think that the index is basically an excellent index of institutional quality
(especially if you exclude the part of the index that is directly related to government size
(and even this component does not include for example total government size, but rather for example top *marginal* tax-rate)
).
As for 'the paper should be 100 rather than 20 pages', I have a book coming out. First in swedish, then in english. 100 pages actually. Working title: "The capitalist welfare state".
Posted by: Andreas Bergh at Oct 2, 2006 8:12:30 AM
Where to start? First, what Barkley said. Second, Sweden is not an ethnic homogenous place. First and second generation immigrants counts for about 15 % of the population (I'm getting really tired of repeating this). Third, Swedes tolerate high taxes beacuse they get value for money. The Swedish welfare state is basically set up for intergenerational redistribution within the middle class, with some extra oomph added to take care of the poor. The set-up is family friendly and geared towards the median citizen. Two kid families with low to relatively high income are winners, and singles and families with more than medium wealth are losers (do the electoral math - even Swedish right wing parties have finally seen the light). The super rich - yes , we have some, the H & M owners are perhaps the best known in the US - are allowed some extra wiggle room to plan their tax expidentures. Most of them stay these days so it seems to work out well for them as well. Fourth, while Swedish social democratic policies disencourages individual wealth accummulation, they very much facilitate corporate wealth accummulation. Swedish social democrats love wealthy and profitable corporations and they know how to transform their love to substantive policy. In Sweden we tax individuals, not enterprise (no, they are not the same thing - to assume that is the real libertarian vice). The recent right wing win at the polls change exactly nothing in this regard.
I have no idea what Tyler means with his assertion that Scandinavian countries have become more globalized. As long as I have lived - I'm forty - Sweden exports have consisted of more than one fourth of GDP - we have recently hit almost 50% of GDP. I guess that means that we have known for a long time that we can't rely on a cozy home market to absorb disruptions in the global market. In that sense we have always known that the welfare sector is part of the solution, not the problem.
Posted by: Dan Karreman at Oct 2, 2006 8:20:06 AM
Oops, turns out that Anders Bergh and I sits within 50 meters from each other, when Anders is not at George Mason. Feels odd to get to know his work through a blog. This may not be pure procrastination, then.
Posted by: Dan Karreman at Oct 2, 2006 8:39:40 AM
Andreas Bergh, of course, not Anders Bergh.
Posted by: Dan Karreman at Oct 2, 2006 8:45:38 AM
I was discussing this very issue with my spouse yesterday. She is a native Finn who has lived in the US for 14 years.
The difference between the countries is that the Scandinavian government is better at stopping graft and corruption. Certainly, there is some. But, it pales to the corruption in the US.
One of problems with America is that there is so much an emphasis equating money with the quality of life. What really matters in Scandinavia is time you have to spend outside of work. Working 14 hours a day is not glorified. In fact, it is scorned.
This does not mean Scandinavians have a low work ethic. One of the things trumpeted by industrialization was that workers would have more leisure time. Certainly, as a culture, spending 1 hour with your child is worth more than spending 1 hour at work. Although the marginal value of spending time with your child goes down, so that 1 hour at work eventually equals out.
And, don't be fooled. Just because one is taxed, say 10% of income to support the health care system in Finland and 1% in the US does not mean that one spends less on health care in the US. To the contrary, we spend more on health care in the US. For, generally, an inferior product.
Yes, it is inferior. On a macro level. On a micro-economic level, our health care system looks good. We have the best doctors, the best hospitals, and the best research. But, they are available to the privileged few. In Finland, health care is excellent, the best in Finland are nearly as good as the best here, but the worst in Finland is about average for the US.
The same goes for other public welfare issues, such as schools. In fact, there is only one area where the US excels. In that area, the US spends as much money as is needed and ignores graft and corruption. That area: defense.
Posted by: Allan at Oct 2, 2006 11:15:47 AM
Try looking here http://www.brusselsjournal.com/node/510 for a little different veiw of the Swedish miracle.
As for their oil: "Only Saudi Arabia and Russia export more oil than Norway." via cia.gov.
Posted by: Anom at Oct 2, 2006 1:48:22 PM
I heard Mancur Olson give a lecture with this argument in the 90s. Don't know if he wrote it up, but it was the same point. Outside of spending and tax levels, Sweden was pretty non-interventionist in markets.
Posted by: Miracle Max at Oct 2, 2006 3:53:57 PM
