November 27, 2006

Jeffrey Sachs, beyond ideology

Jeffrey Sachs says in Scientific American (The social welfare state, beyond ideology) that a combination of markets and high taxes is the best way to reconcile "society's desires for economic prosperity and social security," that those who disagree with him are driven "by vested interests and by ideology" and that "there is by now a rich empirical record to judge these issues scientifically." Despite the record being so "rich" he chooses to support his position on a useless statistical construct that fails on its own terms.
The evidence may be found by comparing a group of relatively free-market economies that have low to moderate rates of taxation and social outlays with a group of social-welfare states that have high rates of taxation and social outlays.

Not coincidentally, the low-tax, high-income countries are mostly English-speaking ones that share a direct historical lineage with 19th-century Britain and its theories of economic laissez-faire. These countries include Australia, Canada, Ireland, New Zealand, the U.K. and the U.S. The high-tax, high-income states are the Nordic social democracies, notably Denmark, Finland, Norway and Sweden, which have been governed by left-of-center social democratic parties for much or all of the post–World War II era. They combine a healthy respect for market forces with a strong commitment to antipoverty programs. Budgetary outlays for social purposes average around 27 percent of gross domestic product (GDP) in the Nordic countries and just 17 percent of GDP in the English-speaking countries. [Emphasis is mine, to show how "scientific" and untainted by ideology Sachs's language is. He later speaks of "the mean-spirited neglect that now passes for American social policy."]
Sachs finds that income per working age population, corrected by purchasing power, is $48500 in the Anglo countries and $50700 in the Nordic countries. Let me say from the start that this comparison is useless. You cannot just pick only four "social democratic" neighboring countries, one of them the third largest oil exporter in the world, and compare them to only six "19th century" countries that, although they are not neighbors, also share a common culture, as admitted by Sachs. Both the low number and the non-independence of the data render the analysis completely useless.

But not only the selection of data is suspect. Sachs arrives at the $48500 and $50700 figures by averaging the data across countries, instead of averaging the data across people. I have done the latter. I have taken the PPP-GDP figures from an OECD database, summed them for each set of countries, and divided the sum by the total working-age population of each set of countries. This gives more weight to the US, with 197 million people aged 15-64 and the highest income of all ten countries in 2004, than to New Zealand, with 3 million people and the lowest income. It also reduces the relative weight of petro-Norway, which has the highest income and the smallest population of the Nordic countries. The result is that the average is $55300 for the "19th century" countries and $48600 for the "social democratic" countries. I do not argue that this is "scientific" proof of the superiority of the "19th century" theories. I only argue that Sachs has messed up the statistics.

Johan Norberg discusses why Sweden's policies are not as successful as Sachs and others suppose them to be. One of Norberg's key points is that Sweden's welfare system did not appear overnight when the social democrats first gained power. It was a gradual evolution from a laissez-faire system with low taxes. This evolution in the end resulted in a declining economic performance.

1 comment:

  1. Your argumentation is most curious.

    It would be robust if you could point out what low-tax, high-income countries he left off to skew his piece, and at the same time, what high-tax, high-income states he should have included to obviate the skewness you eschew? Otherwise, you are just saying stuff without justification.

    In addition, your per capita point is fine I guess, but the topic is addressed at societal responses to challenges. The column headings are indicative of this (which you ignore, BTW).

    Societal responses. How does a capita feel about the poverty rate? Depends upon the capita, I guess.

    Thank you in advance for the list of additional countries to make you feel better,