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Thursday, February 19, 2004

Take Sweden - Please!!!

Jim writes:
Take Sweden, for example. Very high tax rates -- among the highest. Pretty decent economic growth. Good healthcare. Viewed favorably as a country in nearly any dimension you want to survey. Care to explain why?
Sure. Sweden has long been put forth as the shining jewel of socialism, with the implication that if only we adopted their approach, we too could have a wonderfully utopian society. There are a few impediments, however.

First, Sweden is Sweden because, well, the Swedish live there. This obvious and snarky truism has three important aspects: culture, homogeneity, and population. As far as culture goes, the stereotypical Swede has been and is thought of as skilled and industrious and I think that the stereotype is well earned in this case (don't tell Johann I wrote this, I'll never hear the end of it). What this means is that even if the Swedes were subjected to a marginal government, they would still do relatively well. Therefore, I think it's difficult to conclude that Sweden is prosperous because of the socialistic government. It may well be that they're prosperous in spite of the government.

If a welfare state is going to be relatively successful, it turns out that homogeneity is critically important. Consider the following excerpts from a typical study of success and socialism:
But multiculturalism may bring an even broader transformation of political life and policy regimes. In particular, it may call the welfare state in question. New forms of social diversity spark debates about traditional conceptions of identity and community, and the rights and mutual obligations embedded in citizenship. [...]

For example, analysts have pointed to different levels of social diversity in explaining differences between US and European social welfare programmes (eg, Gould and Palmer 1988; Alesina, Glaeser and Sacerdote 2001). Studies comparing social expenditures across US cities and states find that ethnically heterogeneous states tend to spend less on redistributive programmes (Alesina, Baqir and Easterly 1997; Hero and Talbert 1996; Plotnick and Winters 1985). And development economists have found similar patterns across a wide range of countries, including the richest and poorest nations in the world: spending on private education tends to be higher in countries with considerable religious and ethnic diversity, and income transfer paymentstend to be lower in such countries (James 1987, 1993; Easterly and Levine 1997). It is difficult, these studies suggest, to sustain strong social welfare programmes in the face of comparatively high ethnic diversity.
While not everybody agrees with the above excerpts, I do find it striking that the world's most successful socialist country is also one of the world's most homogeneous countries.

The importance of the population is partially illustrated by the following table:
CountryGDP Per Capita (PPP) US$Population (millions)
1. Luxembourg44,0000.45
2. United States37,600290
3. Bermuda35,2000.06
4. Cayman Islands35,0000.04
5. San Marino34,6000.03
6. Norway31,8004.6
7. Switzerland31,7007.3
8. Ireland30,5003.9
9. Canada29,40032
10. Belgium29,00010
22. Sweden25,4008.9

In the top ten countries ranked by US$ GDP per capita (using Purchasing Power Parity to normalize the numbers), four of the countries have a population less than one-million and all but two of the countries have a population of approximately 10 million people or less.

I think there are several reasons that small countries tend to be at the top of their class. They are more likely to be homogeneous which has the benefit discussed above. They have more of a feel of being a community than an artificial state, which I think is both motivational and less likely to foster endemic corruption. It's also simply easier to govern a smaller state. Lastly, sheer luck means that out of lots of small countries, some will do better than others, and it could be that things just happened to work out well for Sweden, and it might not mean that the Swedish experiment can be duplicated (even in Sweden).

Unfortunately, the above factors also means that we can't be Sweden because we're not Swedish. We are the most diverse nation on earth, and in my opinion we're way, way too big to consider many of the policies that work for Sweden, at least at the national level.

Also, there is some question as to how well Sweden is really doing. For example, consider this excerpt from Front Page Magazine:
Sweden, for example, was with its socialist welfare state supposed to inspire a "Third Way" for the world midway between capitalism and communism. But last month a new study by the Swedish Research Institute of Trade (HUI) revealed that the typical middle-class Swede, even before paying his nation's highest-in-the-world taxes, earns less money and enjoys fewer material goods than the average African-American in the United States.

The median income of African-American households is about 70 percent that of overall U.S. median income. This means, wrote HUI study authors Fredrik Bergstrom and economist Robert Gidehag, that Swedes are "below groups which in the Swedish debate are usually regarded as poor and losers in the American economy."

If present Swedish trends continue, they wrote, then "things that are commonplace in the United States will be regarded as the utmost luxury in Sweden."

"If Sweden were a U.S. state, it would be the poorest measured by household gross income before taxes," the HUI study reported. Sweden is poorer than Arkansas, Alabama, or Mississippi.

Prior to its plunge into welfare statism during the 1960s and 1970s, Sweden had one of the world's fastest-growing, most prosperous economies, writes Swedish historian Johan Norberg. Socialism dragged it down from being the 4th richest among OECD nations to the 17th. Confiscatory taxes that could reach 104 percent of income destroyed the incentive to work, become educated, or invest.
Comparing Sweden with Mississippi or Swedes with African-Americans is like comparing apples to oranges since Sweden is a socialist state and we're not. However, it still makes it difficult for me to consider the Swedish experiment an unqualified success, especially given that our GDP per capita is half again as large as theirs, and they did much better on the growth front prior to their "plunge into welfare statism." In addition, according to this article based on the same study:
Poor Swedes also experienced less income growth than African-Americans. Between 1980 and 1999, the gross income of Sweden's poorest households increased by only 6 percent while the poorest households in the U.S. enjoyed an increase in income that was three times higher.
In summary, I don't think that the Swedish approach would work nearly as well here, at least at the national level, and I'm not completely convinced that the Swedish approach works optimally for Swedes either.

Update: Lory, who lived in Sweden for a year as an exchange student, and who has a career in health care administration, questions the "Good healthcare" in Sweden assumption. She says its good for a country with socialized medicine, but not necessarily good. For example, it has severe queueing problems. She also says that the Swedes are very health conscious and take very good care of themselves, which enables their healthcare system to survive. She also strongly agrees with the homogeneity points above.

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