Russ Roberts

Sumner on Growth and Economic Policy

EconTalk Episode with Scott Sumner
Hosted by Russ Roberts
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Scott Sumner of Bentley University and the blog, The Money Illusion, talks with EconTalk host Russ Roberts about the last 30 years of economic policy and macroeconomic success and failure. Sumner argues that there was a neoliberalism revolution beginning in the 1980s around the world, an era of deregulation, privatization and falling marginal tax rates. Sumner argues that the states that liberalized the most had the most successful economic results. Roberts argues that it is difficult to assess the independent effect of various policy changes and points to many areas--in the United States at least--where government involvement increased in important parts of the economy, and Sumner responds. Sumner also talks about the importance of culture in economic performance.

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0:36Intro. [Recording date: June 10, 2010.] Growth, broadly defined: Why do some countries do better than others, what role does public policy play in determining, affecting growth? Interested in the relationship between economic policies and outcomes. Clarify some language about how we might describe different policy regimes, different rules of the game; inevitably these are crude definitions. You make a distinction between different kinds of liberalism. Distinguish between classical liberalism--belief in small government, in an economic sense--and modern liberalism--more socialist in orientation--and then neoliberalism--post-modern synthesis of the two, combining relatively free markets with a sizeable government in terms of social welfare spending especially. If you break down government into two broad groups, one would be social welfare spending, which forms a large chunk of government spending, and the other set of government activities is a catch-all--statism--which involves things like price controls, market entry controls, trade barriers, ownership of companies, high marginal tax rates--all sorts of things which might distort the free market but which are not necessarily associated with large levels of government spending. In today's world, let's take a look at some countries--and thinkers. Start with the thinkers. Adam Smith would be a classical liberal. Some debate about this. He did favor some role for the government, but even in the smallest governments in the world today, places like Hong Kong, the government is still substantially involved in the economy. All a question of relative tendencies rather than either/or. The classical liberals weren't anarchists. They believed in a limited state, not a zero state, so they were happy to see government role in the courts, in the enforcement of property rights, police, perhaps fraud, legal system's involvement. A modern liberal would be? Don't put Hayek and Friedman in the classical liberal category. Friedman--and Hayek as well--would occasionally be open to various forms of redistribution through the state. But in the part you call statism the role of altering prices in the nanny state, they weren't particularly eager to see the state involved. They were probably somewhere between classical liberal and neoliberal. Russ: classical liberal camp. Modern liberal--Galbraith, social insurance, large role for the state in actually regulating, perhaps owning enterprises. Associate modern liberalism with a time period, running from late 19th century but really got going during the Great Depression; peaked in the 1970s; and then in the late 1970s the neoliberalism era started, with synthesis of the two. Governments all over the world, regardless of ideology, substantially reduced the amount of statism--actual government ownership, price controls, regulation, trade barriers. Almost all countries, including the Nordic countries, sharply cut their top marginal income tax rates. Movement away from statism, toward this neoliberalism synthesis, where most developed countries kept a fairly large welfare state. The government as a share of GDP hasn't really changed a lot; but what's changed is the amount of statism or interference in the markets. Depends on which country. We deal with crude measures when we try to do this empirically. For example, a lot of people use the size of government as a measure of how involved the government is in the economy. But a lot of what modern countries do is redistribution; though when you talk about health care, kind of hard to think of that as pure redistribution--involves a great deal of intervention.
7:10Challenge a little bit. United States, and then interesting countries like China and India. In the late 1970s, the United States had an economic crisis that called into question the ideas people believed in. Very high rates of inflation coupled with high unemployment--we'd been told that was impossible. Liberalization in the classical sense--reduced government. But it's a pretty complicated, mixed bag. Skeptic. There was certainly deregulation in the areas of transportation--trucking, railroads, air travel had strong changes in the United States. A lot of regulatory structure dismantled in those areas; a lot more freedom to compete, more freedom to set prices. But if you look at other areas in the economy, it's hard to contend we moved to a less regulatory regime. For example, in health care, government increasingly larger in how it steered; in financial sector, government increasingly involved in bailing out financial institutions; in education, government's role got larger; in areas like consumer regulation--cigarette smoking, trans-fats--at both the federal and local level. What's the evidence that this trend is as powerful as you say it is? Two types of regulation. One would be economic regulation; the other would be things like health, safety, environmental--which also are economic in a sense, but motivations somewhat different. If you look at economic regulation--deregulation broader than you might think. Banking was very sharply deregulated in the 1980s, removal of price controls on interest rates, branching regulations. In Chicago, remember when banks were only allowed to have one branch. Health care--New York removed price controls on hospitals in the last few decades. Rent controls in Massachusetts have been abolished, though some cities still have rent control. Communications industry--AT&T was almost a monopoly of the phone system, but no longer. Four primary examples of neoliberalism in the United States: one is the deregulation we've been talking about; second is the sharp cut in marginal tax rates, from about 90%--the peak--to more like 40% or so now; a third, movement toward freer trade--NAFTA, other trade negotiations; fourth, welfare reform--replacing it with things like the earned income tax credit, open-ended opportunities to have welfare. All in the neoliberalism direction; and we're very consistent with what was happening with all other developed economies at the time. The last part, the welfare part: do you think that the social safety net, broadly defined, has gotten more work-oriented in the developed world in the last 25 years? Not an expert, but think the countries that have pursued neoliberalism most aggressively outside the United States--the Nordic countries--have shifted aggressively toward where people are choosing a lot of work. Can't just choose not to work as much as you could have 20-30 years ago in those countries. May be. Those countries also have an enormous amount of neoliberal reforms that we have not done--privatization. Will concede that going back to 1980 there has been a large reduction in marginal tax rates, around the world; and there has been a disenchantment with explicit price controls, though in health care there are still a lot of important price controls. As the price of gasoline has risen in the United States, there has been little demand for price controls as in the 1970s. Milton Friedman said it on his program--people had a bad experience with them. He suggested that when enough time passes and people living in that era die off, they'll become more appealing again. Let's put that to the side.
14:07One more: privatization. One problem with having the vantage point of the United States is it makes us miss how big the change was, because we already started from a point of a market-oriented economy. We privatized ConRail and a few other companies like that; but in other parts of the world there was a lot of government ownership--manufactures, steel companies, auto companies and so on. Even the countries that have a reputation of not having done much neoliberal reform, like France and Germany, have done a substantial amount of privatization. Even Italy. That's definitely a worldwide phenomenon. Obviously, in the formerly Communist countries there has been a lot of privatization as well. In the developing countries, European countries, former Soviet bloc, and elsewhere. Ongoing process, not something that ended with this financial crisis, though you'll read news stories that talk about how the neoliberalism era is ending. Expect over next decade there will continue to be a lot of privatization in the world. The European countries in many respects have gone farther than the United States--airports, air traffic control, highways, some rail lines, passenger trains, post office; in Sweden you have a lot of for-profit schools popping up in K-12; school choice popping up in Sweden, Holland; water systems that are often government-owned in the United States are heavily privatized. A lot of what are thought of as traditional government services in the United States that are increasingly being done by private firms in Europe. One way that can be done is through contract. Big difference between government contracting out for the services versus government opening up to a more competitive world. You can contract in competitive or uncompetitive ways. Part of the challenge of trying to measure any of this--what we are really interested in is how much economic activity is steered from the top down versus from the bottom up. When the government gets out of the education business, that's a big difference from a charter school system, which introduces a little more competition than in the current monopoly public school system, but not quite a free market in schooling. You have to go further than just charter schools. Some of the European reforms like for-profit schools promising. Privatization per se isn't really the issue: if you privatize and maintain a monopoly, might be no better than before. The problem with state ownership isn't so much that the state owns the company, but that they tend to do two other things--the create barriers to entry and they subsidize the company. If you have a government-owned company--e.g., Singapore Air--which is not subsidized and not protected from competition, then it actually runs pretty much as a private company would, competes as a private company. The equivalent of a public school having to charge full price instead of being subsidized to make the price to the consumer zero. One thing driving privatization in Europe is the European Union project. A lot of Americans, especially free-market-leaning Americans, are skeptical of the European Union. But one of the nice things about it is that they've encouraged idea of a level playing field. That has forced companies to cut back on their own subsidization. This has made it somewhat more of a free market economy. Trade issue: America in 1984-1985 was a pretty free-trade country--still had thousands of tariffs and quotas, but relatively low relative to decades before. Had fallen in the post-WWII period. But the rest of the world was much less free-trade, so they have made bigger strides. If you a country in Europe with more open borders even with just the rest of Europe, you are going to see some impact that is going to be fairly dramatic. Also have opened their borders quite a bit with the rest of the world. Northern European countries have reputation of being a little more free trade, even though theoretically they all have the same common tariff wall. The United States is probably not the most free-trade of the developed countries any more.
20:32Misconceptions people have about policy regimes around the world. Start with the Nordic countries. People think of them as sort of socialist models--Sweden, Norway, Finland, Denmark--but that's not quite true. In fact, Denmark might be the most perfect example of neoliberalism. Talk about it quite a bit in paper. It's number one in a lot of interestingly and seemingly unrelated categories. Distinction between statism and social insurance. By some surveys, Denmark has the most equal distribution of income in the world. has a very large government sector, although it reduced its marginal tax rates. Very high overall tax level. In terms of the rest of the economy, it's surprisingly free market. Various rankings of freedom are kind of dubious. If you take, for example, the Heritage Foundation, which has ten categories, two of them involve size of government--taxes and government spending. If you take the other eight categories, that involve a lot of things like free trade, regulation, property rights, etc., Denmark is actually the most free market economy in the world in those other 8 categories. Regulation? List involves things like courts and property rights, trade, price controls. Another measure of how free an economy is would be how easy it is to start a business. We have a vague idea--Hernando de Soto has done a lot of work on the bureaucratic barriers to entrepreneurship around the world. Corruption. If I want to start a business in Denmark, is it hard or easy compared to the United States? Probably fairly easy; the United States scores high in that regard, too. Criticism of the Heritage Foundation's index is that what they call "economic freedom" is to some extent what should be called "good governance." A blogger named "Stats Guy" made this point in a recent post. Good governance involves low levels of corruption, transparency, level playing field, not having to pay a lot of bribes to start a business. It isn't so much that the governments are small but that they function very well. That's what the Nordic countries tend to excel in. Throughout the world, that does seem to be correlated with various surveys of corruption levels. Countries that have low levels of corruption tend to have, first, relatively free markets according to these rankings, but especially in these areas that involve good governance. They also tend to have fairly low trade barriers and other interventions of that sort. Strong cultural aspects. Story: Former Dean of Washington University Business School, Bob Virgil told [Russ] this story. In Egypt, tomb of Anwar Sadat. Memorial, guard, Egyptian soldier. Guard asked if he wanted to have his picture taken. Took picture, then put his hand out--for a handout. Unimaginable in the United States. Cultural norm. These norms about getting a form expedited--in the United States if you want to move a form along, you probably don't slip a guy a $20, but in other parts of the world, you do. As long as you know that, it's just a transfer. Sometimes there is negotiation, slows the process down; exploit it. Good governance: it's just the fact of different numbers of forms to fill out. Sometimes the way people interact with each other, trust, expectations people have; big and unseen impact on how to get stuff done. Civic-mindedness, civic virtue. Surveys all over the world done: Under what circumstances is one justified in accepting government benefits to which one is not entitled? In other words, is it okay to cheat the government? Looked at 32 developed countries. Denmark comes in 2nd in terms of being most honest, or least likely to say it's okay to steal from the government; and they come in number 1 on surveys of corruption done by Transparency International. If you average the two surveys, Denmark by far the most honest. Surveys very different: okay to cheat the government versus outsider's view. In Transparency International, Greece came in last. Greece apparently cooking their books. Neoliberalism: in my survey, Denmark the most neoliberal; Greece the least neoliberal of the 32 countries surveyed. On the statism dimension--the eight categories outside of size of government. Denmark does the least interventions; Greece, the most. People fairly civic minded end up with governments that are more neoliberal. Issues with trust outside the family, government the enemy, end up with more statist regimes.
29:46Not arguing that these cultural differences are innate or immovable. Counterexample: If you look at East Asia, there are big differences in levels of corruption even among countries with fairly similar ethnic backgrounds. Two Chinese-majority countries: Singapore, which ranks 4th in the world on lack of corruption, and Taiwan, way down at 27 out of 32. Both Chinese predominantly, with different levels of corruption. The biggest challenge is what happens down on the ground. Story in Bill Easterly, spending more on education to reduce the results. Spent a lot of money, built all these schools; then it turns out the teachers didn't show up. Could pay them to show up, but if they don't teach when they are there, you have not gotten to the outcome you are hoping for. Better to be in a culture where people feel guilty about taking money from the government, so there is no need to have to incentivize. Cultural factors make a difference. Changing what appear to be the rules of the game may not actually change the rules of the game. The other part of government--the welfare state part--works better in a high-trust society. Two French economists did a study where they looked at this, focused on Denmark, generous social insurance for the unemployed; if people say they will never take a benefit to which they are not entitled, it's easier to make that kind of social insurance system work on a voluntary basis. In countries closest to the Mediterranean where the citizens exhibit less civic-minded attitudes, a lot of social insurance to the unemployed, they tend to have a lot of barriers to firing people--that's the way they protect them. The Danish system, called Flex-security, fairly high social insurance. Would that system work outside of Denmark or would it be abused? How hard it is to hold other things constant. Always should be asking: is there a third factor causing both, so can't just switch this lever to turn off to on. Other factors. Might be hard simply to get the reforms passed through your legislature; and second, if you could get them passed, say by a dictator, they may not work because of different cultural values. Prefer a model somewhere between neoliberalism and classical liberalism. Talk a lot about Singapore. One of the things people debate with me on that: Singapore is a very different country, wouldn't work in the United States. A lot of doubt we could get those reforms enacted here. If we got them enacted, would they work here? Think they would work here. If we could enact the Danish reforms here, not sure they would work because people here might take advantage of the system more than in Denmark. In the 1980s and 1990s, people used to look at Japan's success and say they are who we ought to be emulating. Or the Scandinavian countries--homogenous population, excuse used for their success or it wouldn't work for us.
35:47Marginal tax rates. Can you disentangle, make a distinction, between statism and high marginal tax rates? Obviously the case you can raise any amount of money in all kinds of different ways: high/low marginal tax rates, sales tax, etc. Is it the case that as government gets larger, that the high tax burden--forget the marginal part of it--plays any role in economics? Other than the standard supply side? Think it does. That's why a country like Switzerland is wealthier than Denmark or Sweden: it has a smaller government, lower taxes. The United States, also. Two points with marginal tax rates. One is the overall size of the tax burden. If you have a very large government sector, say 50% of GDP, no matter how well you set up your taxes, you are going to have inefficiencies--distortions created by those taxes, discourage people from working. But in addition, you can also set up your taxes in a very inefficient way just to raise revenue. The countries that raise the most revenue--Northern Europe--tend to have fairly efficient tax systems given the amount of revenue they have to raise. They don't have 90% tax rates on work or heavy taxes on capital; their taxes on capital tend to be lower than the United States in most cases. Lower corporate tax rates; some have no capital gains tax or no inheritance tax. Tend to tax work and consumption heavily but don't have punitive tax rates at the high end, which run into the Laffer curve problem, and don't tend to have heavy taxes on capital which would reduce growth in the long run. Make the best of a bad situation by raising a lot of revenue with as efficient a tax as they can. Strength of the United States: fairly high tax burden, fairly low 30%s for total; the progressivity has been narrowed a bit since the 1980s. We let people get fabulously rich; we let people lose all their money as well. Generally, entrepreneurs who do a good job get really rich; they do send a large check to the government on a quarterly basis. A lot left over, no ceiling. That in turn creates something few other countries have--strong venture capital market. High level of risk, high level of return. What advantage if any does that provide for the United States? How are other countries succeeding without that? Smaller neoliberal countries in Europe do have a lot of that, but because they are small it is not as noticeable. Thinking of Switzerland and the Nordic countries--do for their size have a large number of billionaires, high tech firms, large multinational companies. If you look at Silicon Valley, nothing comparable. Not as successful as the United States. Per capita incomes below ours by 20-25% if you adjust for costs of living. Part of that difference is due to some of these factors. We are more entrepreneurial. But there are other factors than being entrepreneurial--German car companies. Overall level is still around 75-80% of the United States; fall short in entrepreneurial, high tech sectors, and partly because we are less regulated in--companies like Wal-Mart can get going in the United States more easily. Variety of reasons that explain the income differences. We work longer hours here--partly because of the tax and subsidy rates being different. Shouldn't just talk about taxes--it's taxes combined with subsidies. The money that's taxed doesn't disappear. It goes back to people that are not working. Combination of taxes and subsidies that explains why hours worked are typically lower in Europe than in the United States. Ed Prescott's work. Not the only factor. Wal-Mart: In the 1980s, when people were telling us we ought to emulate Japan, the Japanese retail sector very protected, very little competition; special interests. Interesting now that Wal-Mart has become successful, harder for it to open a store. Russ living in Montgomery County, MD; need a special permit to open a store of a certain size--only applies to super-Wegman's and super-Wal-Marts. As a result, we don't have any. Business uncertainty. WalMart successful probably in more conservative parts of the country. Chicago--unions; and snobby, elite areas of the country look down on Wal-Mart. Even fast-food restaurants hard to open near Cambridge, MA, near where I [Sumner] live. Regional differences. In most of the United States, WalMart is welcomed.
45:55Blogosphere, political debates about the role of government: hard to have a rigorous discussion, easy to have discussion conform to your world view. If you believe the world has gotten more free market since 1980, you see the success of the 1980s, 1990s, 2000s as indicating neoliberalism is good for economic growth. But there are people who take the other view. Four quadrants: government's gotten larger, so that's why it's so mediocre. Difficult to have a thoughtful conversation. You wrote, starting around 1980: "Suppose you had gotten a roomful of economists together...." Predictions in 1980: the United States would grow faster than Japan; overtake France. Would have been met with laughter. Yet there was great economic success. Modern liberals--in the sense of leftist-center--tend to forget how much things have changed since the 1970s. Younger ones say, of course we don't want government to run things like auto companies and steel mills; don't believe in across-the-board price controls. But many liberals did believe in those things in the 1970s. We did have across-the-board price controls at various times in the 1970s; textbook predicted Russia would overtake the United States in GDP. Milton Friedman was viewed as a crackpot. A lot of ideas that have gradually been accepted have only become so in the last few decades. Successful transformation in people's ideas in some areas. If you are a pure libertarian, you can still look at the United States today and still be depressed. Like to take the long view--world is much more free market oriented. One list, only four countries that had gotten more statist out of 100-200 countries. One British economist signed a letter in 1979 saying the British economy is going to fail; things have turned around. Articles suggesting neoliberalism is going to be a failure: Paul Krugman quote: "Latin Americans are the most disillusioned. Through much of the 1990s, they bought into...". Really one country in Latin America that stands out, aggressively pursuing neoliberal reforms. If you look at any of these rankings, it ranks much higher. In the Heritage Foundation, Chile is the 10th most free market; only other country in the top 30 is St. Lucia. One country that has done far more in neoliberal reforms and has a level of success not matched elsewhere on the continent. Classed as developed country recently by, think, OECD. Back in 1980, its per capita income was half of Argentina's; now about equal to Argentina. Big economic success. Other countries have tried neoliberal reforms half-heartedly. If you take a close look around the world and compare likes with likes, usually the neoliberal policy regime has better results.
53:10What would the opponents of neoliberalism answer? Examples I think they misinterpret. One example is China, which ranks very low on the Heritage Foundation ranking. Very mixed economy. Obviously growing very rapidly. China is still very poor, poorer than Mexico. Much of the growth is coming from the fact that it's become much more free market than under Mao. Under Mao, it was completely non-free market, almost like what North Korea is today. During the last three decades, it's moved to half and half. Not surprising that they've grown at a low level. Still a fairly poor economy. Second, parts of East Asia that are Chinese and more capitalist, like Singapore and Hong Kong, obviously much richer than mainland China. Within China, more free-market provinces are the richest and the more statist ones like those in the north east tend to be laggards. Just pointing to one country is a gross oversimplification. Have to make comparisons over time and within regions within countries to see the relevant effect of neoliberal reforms. Debate that ensued after you'd written: people pointing out that yes, maybe the United States became more free-market after 1980, but the 1980 and 1990 growth rates were inferior to the 1960s. In the 1960s, whole separate issue of income inequality; but just look at growth rates. In the 1960s, people would say we had the Great Society, very active government, golden years--some people even include the 1950s in the golden years--we did much better than when we were in this free-market era. But you make the point that the whole world just slowed down after the 1970s. Can't just look at America--have to compare it to the rest of the world. Countries that didn't reform very much, like Italy and Greece, their growth rates slowed from 7% to 2% in recent decades. The United States and Great Britain have actually slowed much less than the more statist economies. The growth slowed a little bit in the United States, but not dramatically. Britain a better case, because it was catching up like a lot of Europe. People point to the fact that Europe grew fast after WWII, so it was normal for it to slow down. But Britain had actually fallen behind places like France, Germany, and Italy; and then when it did a much more aggressive reform program it caught up with and surpassed them in per capita GDP. When you make those comparisons, more meaningful. Countries that didn't slow: China. Net effect is that growth slowed less in the countries that reformed more vigorously, on average. Wouldn't say neoliberalism reforms worked in every case: results in New Zealand kind of disappointing. But in the majority of cases, more aggressive reformers have done pretty well.
57:52Informal sector. One of the things that is going to show up in Chinese numbers is that when you have massive migration from a rural area to the cities, your measured economic growth is going to go up a lot just because a lot of what was not being measured is now being measured. In high tax countries in Europe, a lot of barter--Italy, maybe Scandinavian countries as well--there is a lot of barter to avoid those high tax rates. Will show up in economic data in different ways. Italy has started to try to estimate the underground economy. In Europe, they talk about all the extra leisure time; but people are substituting home production for production at work. Because of the high tax wedge you can save a lot of money doing things yourself--painting, etc. What you are actually measuring matters--just because you are in an office versus leisure doesn't mean you are hanging around doing nothing. Inefficiency: instead of getting the advantages of specialization, going back to a do-it-yourself kind of culture, which reduces the efficiency, less specialized on the tasks you are doing.
1:08:20Transition in the 1980s. Slowdown either in rate of growth or even went from positive to negative in the 1970s. What was the cause of that? Some blame high oil prices. But lots of increases in oil prices recently that didn't have much effect at all. Oil overrated as a cause. Demographics. In the 1970s all over the world, a dramatic increase in divorce. Number of households increased. Social challenge: people suddenly in workplace who hadn't been there or planned to be there before--typically women--set of skills they hadn't planned to use. The measured data gets distorted--bottom quintile, people suddenly measured as being in their own households. Enormous around-the-world change. One of the most misleading economic statistics out there: quintiles don't measure what you visualize. When you see the data and you see the bottom quintile, you think those are the poor people; and when you see the top quintile, you think those are the rich people. Not correct. Those measure people in the stages of their life. I lived in the bottom quintile for about 8 years as a young adult, yet I wasn't in any socio-economic sense poor. Yet there are many people in the second quintile who are taking care of a family, urban area--but in a socio-economic sense they are poor. In the top quintile, a Boston cop, who makes $100,000 a year, who aren't what you think of as a wealthy American. Or a nurse who makes $100,000 a year. Class and quintiles are two very different things. And a quintile in 1970s and a quintiles today are very different. Extended adolescence, middle-class type people, well-educated, working at Border's book store for a year, single, versus a roofer supporting a family. Most of the top quintile is what most Americans would regard as middle class. Probably only the top 1-5% would be what would be considered affluent. Life in cities like Boston very distorted. Cost of living for the wealthy has risen faster than for the lower-income groups--Wal-mart--versus living by the ocean. John Nye essays.
1:06:02What do we think we know or have learned that will stand the test of time? Between 1980 and 2005, the countries that reformed the fastest were countries that had the most civic-minded attitudes: attitudes toward corruption. What happened in the middle of the 20th century is that the Great Depression kind of discredited capitalism, and idealistic people all over the world became more socialist. Then, starting in the late 1970s, attitudes switched again, away from the statist part of socialism. The countries that reformed most quickly were those who were most idealistic. In less idealistic countries, powerful interest groups didn't want to let go of their interventions; they reformed more slowly. How idealistic countries are explained rate of change. Narrative you hear in the press is wrong. Have to look beyond ideology; sea change in people's attitudes.

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COMMENTS (23 to date)
Doc Merlin writes:

A large part of it, could be that low levels of regulation lead to lower corruption?

Where officials don't have a lot of power, they have no room to be corrupt.

Doc Merlin writes:

I am not saying that culture isn't important, just that good rules can move a system high trust from low trust.

John Calabro writes:

Scott Sumner say

If you look at East Asia, there are big differences in levels of corruption even among countries with fairly similar ethnic backgrounds. Two Chinese-majority countries: Singapore, which ranks 4th in the world on lack of corruption, and Taiwan, way down at 27 out of 32. Both Chinese predominantly, with different levels of corruption.

Well they may have Similar ethnic backgrounds but vastly different history.
Singapore & Hong Kong were ran by the British, and were educated in both Economics & Government by the English. Taiwan was a part of the corrupted South Chinese government before the Civil war in China. So culturally they are different because of the history of rule they have been under

malavel writes:

Regarding doing things yourself due to high taxes.

We recently got tax reductions in Sweden for cleaning services in your home and sometimes also for 'construction' stuff. Otherwise people usually try to fix things themselves (or asks a friend to do it).

Drew Hage writes:

One underlying factor about why Demark is so honest about not cheating the government is that most of their citizens think they are ENTITLED to a variety of welfare programs. If they have a large welfare program that covers a large percentage of the population you do not have to cheat because you are so call entitled to it. A country with a large welfare system is not free because the government forces the productive citizens to pay for programs for the unproductive citizens. I have not looked at the study the Heritage Foundation preformed on how free countries are, but I would think having the government force its productive citizens to pay for programs for the unproductive citizens would make Denmark a less than ideal free market example.

I really enjoy your podcasts, thank you

Christian writes:

Blech! Macroeconomics is the worst. I mean, it could be anything! There is just absolutely, positively, no way to conduct a double blind placebo test. And, even those are prone to interpretation as is evident from disagreements in the medical community about particular drugs and treatments. Now, if you want to talk about isolating particular events as done in micro, then I'll pay rapt attention.

AHBritton writes:

They are "entitled" to it. Entitlement just means they have been given a legal claim to something, which under their law they have been. They voted on various entitlements and through their system of governance they were enacted into law.

I'm not sure about your measurement of "freedom." It is definitely a very common one among libertarians, and I must say as a former anarchist I am sympathetic to it, but I am curious, how much of a welfare state needs to exist before a country becomes unfree? Basically every country has some forms of regulations, taxations, etc. on the market, and those areas that don't have regulations and taxation do not seem often terribly "free" to me. So how exactly do you judge freedom?

Another question, if you were to ask the people of Denmark and they overwhelmingly reported feeling free in their life activities and choices and happy about it, would you insist that they are still not free? They are just conned into thinking they are free? And doesn't this get more into greater philosophical questions of whether anyone is truly free, etc. if you insist on taking it to this extent.

I don't know of a specific survey asking how free the people of Denmark consider themselves, but I have seen several surveys in which they report feeling generally very happy. So wouldn't it be enough for them to feel free and happy in their day to day lives?

On a related note, there are those who in many ways have much more restriction in movement and choices in their day to day life, yet do not live in a heavily taxed environment with a large government and unwieldy welfare state, and the restrictions may be of little relation to governments at all… are they more free even if they don't think so?

Russ,

I really liked this podcast. I feel it got a lot more into nitty gritty and questioning areas that I feel sometimes get paved over. I would also like to point out that I mentioned this before when you spoke about being "more or less like France" and I think both of you tackled a lot of what I find wrong with this formulation. Too often Americans (heck people who strongly identify with any country) paint these broad pictures of those countries around the world that they don't have necessarily the most in-depth knowledge of. There is a lot to learn from world economics, governments, etc. and I think sometimes talks about economies and governance get too myopic and we can fail to see benefits from other countries, even FRANCE!

Erik writes:

Another good podcast! Thanks, Russ!

How free is the market for personal loans and mortgages in countries that score high on economic efficiency and on those other markers of good governance?

Is financial innovation à la subprime negative-amortization balloon mortgages encouraged in Denmark, say? How much of it is allowed?

Scott Sumner writes:

John, You are probably right about corruption, but that actually fits in with my view (although I didn't express it well.) In the very short run cultural attitudes toward corruption are fixed. But over decades they can be altered by different policy regimes. It seems that occured in HK and Singapore, but not Taiwan. So I am an optimist that culture doesn't condemn countries to be corrupt forever--but it takes time to change.

Doc Merlin is right that over-regulation can contribute to corruption.

Drew, I think the specific issue with Denmark is that the public there is less likely to abuse an unemployment comp. program by staying unemployed longer than they really need to. In some cultures people might abuse the system. A study by Cahuc and Algan showed this.

AHBritton, It's not my index, the Heritage Foundation set it up. They have information that explains how each of the 10 categories are computed. It's available online somewhere. Denmark does rank quite high in terms of economic freedom, so I'm not surprised that they say they are very happy in surveys.

I agree that France does some things (like big infrastructure projects) better than we do.

Erik, I am not an expert, but articles have been written recently praising the Danish mortgage system. Canada is another fairly neoliberal country with very sound banking. I believe that both countries strongly encourage 20% downpayments (or else require mortgage insurance) and this may reduce banking problems. Our problem was guaranteeing deposits and then letting banks take big risks with what are actually taxpayer funds. (If you've read Russ's paper you already know all this about the US.)

I am also pretty sure that Canada lacks institutions like Fannie and Freddie, which have recently required huge bailouts as well.

Mads Lindstrøm writes:

The Danish Rockwool Foundation has just published a study about black market labour. Some highlights. 80% of the Danish population has or is willing to buy labour at the black market. And more than 50% has actually bought labour at the black market within the last year. The Danes bought US $8 billion worth of black market labour in 2009. The level of black market labour has been fairly constant within the last 15 years. So that you may compare, the Danish GDP is US $197 billion.

However, the Rockwool Foundation mentions that the $8 billion of black market labour is far from $8 billion lost taxable income. Mostly because, a large part of the work would not have been done, if it were not possible to buy at black market rates.

Russ, you are right when you suggest that Denmark has a do-it-yourself culture. The funny thing is that people rarely see this as problematic. Whereas, in my experience many see black market labour as a huge problem (and highly immoral). Even though, do-it-yourself is arguably a bigger problem than black market labour. First, do-it-yourself labour lead to inefficiency (not the best man for the job). Second, like for black market labour the tax system loose the tax-revenue from the workman, but also looses tax-revenue from the work you would have done if you had been working at your regular job (instead of working on e.g. your house).

Russ, congratulations with America qualifying for the "round of 16" in the Soccer World Cup. I know you are a great sports fan, even though you may not follow soccer - still, congratulations. You managed to land a first place in your group, even though the referees mistakenly overruled one of your goals in each of your two last matches. An impressive accomplishment by the US soccer team. I watched the end of your latest game at a sport bar, and there was a huge YES from the crowd, when you scored a goal 2 minutes before the match ended. I think people rooted for America, as people felt the referees had treated America unjustly. Now, I just hope that Denmark qualifies for the "round of 16" tomorrow...

Russ Roberts writes:

Mads,

I actually like soccer a lot--I don't think most Americans care much about it which is why I asked Gary Belsky about ESPN's coverage. And the game can drive you crazy between the challenge of goal-scoring even when you outplay a team and the refereeing. But Donovan's goal also elicited a big yes from me even though I had the sound off and was trying to multitask. Good luck with Denmark.

I also appreciate the black market info. Wonder how that was measured and if it's close to accurate. Don't mind the loss of tax revenue, it's the distortion of choice and the loss of the virtues of the division of labor.

Mads Lindstrøm writes:

Russ,

The market info were taken from a newspaper article (the non-tabloid kind), and they only provided the headlines. I will try to dig a bit deeper in the weekend. But I am not sure the survey is available outside university libraries.

Regarding, the lost revenue. If the lost tax revenue means the government spends less, then I would agree that it is not a big problem. But if the government raises the lost money though other taxes (or higher income tax), it could still be a problem, as most (if not all) taxes are distortive.

Worik writes:

Coming from New Zealand where our economy was wrecked first by a statist (Muldoon) then completely ruined by neo liberal reformers I found this fascinating.

But Summers' arguments were weak in places. He talks about comparing like with like then compares China, Taiwan, Honk Kong and Singapore.

Honk Kong and Singapore are port cities, and Taiwan is a client state, and China is, well, China. They are not (apart from the first two) comparable.

He trots out the old chestnut about private enterprise being more innovative than state enterprises. That is nonsense. Innovation is found everywhere, and not found everywhere. Our sate enterprise the DSIR was incredibly innovative and if you eat apples you could well eat varieties they bred. If you eat kiwifruit, the same.

To describe the North European countries as examples of neo-liberals is laughable. They have huge state sectors and high taxation (nearly 50% in most places). And by and large they like it.

I would like to hear Russ interview the authors of The Spirit Level: Why More Equal Societies Almost Always Do Better. http://en.wikipedia.org/wiki/The_Spirit_Level:_Why_More_Equal_Societies_Almost_Always_Do_Better Richard Wilkinson and Kate Pickett

Damn fine over all. As usual I learnt something and I enjoyed it immensely.

peace
W

shawn writes:

worik, are you sure you're not confusing *our* liberals with *your* liberals? when americans say 'liberal', they mean almost exactly the opposite of what the rest of the world does...

just making sure something wasn't "lost in translation" there...

Shawn writes:

As should be obvious, I hadn't listened to the podcast before posting my previous comment. Whoops. So...disregard, and lesson learned on my part.

emerich writes:

Russ, you mentioned in passing that the total tax burden in the U.S. is in the low 30 percents. Are you sure? I think the question of taxes and the tax burden is worthy of a podcast. I heard somewhere recently that our total tax burden, including federal, state, local, sales taxes, etc., is higher than that of most European countries. There's a lot of confusion about taxes and the tax burden for a variety of reasons, but among them is that in the U.S. we are taxed at so many levels. What, in fact, is our total tax burden? Does the particular mix that we have in the U.S. have overlooked incentive effects? Sumner's point that the tax regime in Denmark and other Northern European countries is relatively efficient was a fascinating one. How efficient is ours?

TGGP writes:

Worik, Scott defines neoliberalism to include having a large government sector for redistribution but less of other forms of "statism".

Lane Kenworthy is sympathetic to the preferred policies of the authors of "The Spirit Level" but thinks the book itself makes bad arguments on their behalf:
http://lanekenworthy.net/2010/01/18/inequality-as-a-social-cancer/

Also, the blog commenter is "Stats Guy" not "Staff Guy".

AHBritton writes:

Scott Sumner,

I'm sorry, I could have made my comment clearer. In speaking of freedom I was not referring to your comments in the podcast, but to Drew Hage's comments regarding Denmark. I think you were quite right in much of your evaluation and were someone combating a common these which Drew seems also to be espousing.

Since Denmark has a rather substantial welfare system they cannot be a good example of economic freedom, no matter how free the rest of their market system is. I think this is a dangerous mentality which treats welfare as the ultimate market evil ignoring other factors such as ease of market entry, lack of corruption, tariffs, restrictions on commerce, etc.

Personally I find a substantial welfare program the least detrimental as compared to many of these... I also think their is an American centered bias that portrays all european countries as socialist no matter what the reality is.

Mads Lindstrøm writes:

I promised to dig a little deeper into the Rockwool survey. An abstract of the full survey can be found here http://www.rockwoolfonden.dk/publications/black+activities/publication?id=1498 . The abstract is in English, but the actual survey is mostly in Danish, but the abstract says it contain a "substantial and detailed summary of the results in English".

From the Rockwool foundation newsletter, which is all written in Danish, I could see a few more details about the survey into black market labor. They conducted their survey by interviewing about 2200 people. The survey has been conducted each year, for the last 15 years. Russ, you ask how accurate the survey is and I am unsure about how to judge that. I have not read the report, which obviously would help, but still I am neither an economist nor a social scientist, so I am not the right person to judge the report. However, I can say that the report is well known and respected in Denmark. And the figures they present in their newsletter (summarizing the report) seems reasonable according to my experience.

I wrote earlier that 80 % of the Danish population is willing to buy black market labor. And that is what the survey says. However, the acceptance of black market labor depends upon who and what people are working on and how people are paid. Paying the neighbors daughter to babysit your children, without paying any taxes, is deemed OK by more people than the craftsman working without paying taxes. More people think it is OK to exchange work (I paint your garage, you fix my computer) than when money is involved. The smaller the amounts, the more accepted it is. The 80 % figure means that 80 % of the Danish population accepts at least one type of black market labor.

I cannot get into all the differences according to age, work type, ... But an example will illustrate a bit. 50 % of Danes think that is acceptable that a craftsman earns US $1600 without paying taxes, whereas only 30 % think it is OK that a craftsman earns US $8300.

Padraic writes:

I really enjoyed this podcast and the classification set out by Sumner, thanks for doing a great interview.

I hope to see more discussion of the difference between welfare spending and state control of the economy in future interviews.

engineer27 writes:

I believe you mis-identified "StatsGuy" above. He is not (to my knowledge) the same person as James Kwak. James manages the BaselineScenario blog where StatsGuy is a frequent commenter and occasional guest blogger. James may have posted the article, but the authorship belongs to StatsGuy.

(It is possible that James Kwak has a habit of violently disagreeing with himself by commenting under an alias, but doubtful.)

[I've revised the language above. I did think it was an alias; and at the bottom of the article it does say "written by James Kwak" but it also lists the article in Guest Posts, so that's probably some standardized language. My apologies.--Econlib Ed.]

Richie writes:

I have been looking for a good economics podcast for many months, and finally found this site a few days ago. This may be just what I was looking for!

I have a broad theoretical questions that may relate slightly to this podcast.

Let's assume a land with no government, and nothing but honest people who do not need protecting from themselves, and a land that has no economic exchange or other threats from outside nations.

Would this economy be more efficient if it operated entirely on its own - or if it had some kind of central bank that was able to loan money (and set interest rates)?

Otiose writes:

I liked this one so much I looked for more by Sumner and found the one on monetary policy. Forgive me, but comments are closed there.

His idea of having the Fed auto targeting nominal GDP growth has a flaw he himself mentioned in the talk when he said there are significant factors other than low interest rates that were important in the housing bubble formation. Those same sort of other significant factors also are important in the Fed setting its targets for currency growth. If the Fed targets nominal GDP it ignores the very important political factors. For example, suppose a very leftist president gets elected together with his party's majorities in both houses. And suppose he starts threatening and succeeds in passing legislation that increases taxes and otherwise creates a lot of uncertainty during the biggest downturn since the Great Depression. In such a case Aggregate Demand could be severely curtailed even as the Fed pushes with huge new currency amounts into the system. Auto targeting the nominal GDP rate while ignoring the negative political policies could lead the Fed to levels of new currency that could only end in very high levels of inflation trying to achieve a set level of nominal GDP as new business activity faltered.

[Link added for convenience of readers.--Econlib Ed.]

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