Sunday, July 21, 2013

Large, universal Scandinavian-style government welfare programs do not hurt the economy or unemployment

Image: Don't worry kids.  It turns out that alarm over your ability to strangle the American economic system was just hype. (source)

Note: This post is about social democracy.  If you don't know what social democracy is, first read this page on basic social policy.

Several arguments are typically leveled against social democracies.  The most common objection is that universal social welfare programs are simply too large, and thus are a drag on the economy.  Having large programs like universal health care, universal child care, and universal old age and disability insurance thus result in slow economic growth, and thus high unemployment.  So, while these programs may be nice to have, the resulting slow economic growth and high unemployment make them more trouble than they're worth.  The second most common argument is that social democracies really aren't that much better at promoting social welfare.  Are the sacrifices to the economy really worth it for a populace that's only marginally better off?

Navarro and Shi (2001) looked directly at these two (related) criticisms by comparing health and economic indicators of all advanced countries with the four basic types of welfare systems (liberal, Christian democrat, social democrat, and fascist), over four decades (1950's through 1990's).

Taking the second criticism first (that liberal or Christian democratic welfare states can be as good as social democratic ones), here is what Navarro and Shi found about infant mortality:

Social democracies as a whole perform better in infant mortality.  Sweden, Norway, and Finland were tied for the lowest infant mortality rates (4.0) in the most recent year for which Navarro and Shi had data (1996).  The next lowest infant mortality rate was in Switzerland (4.7) and France (4.9); every other country was 5.0 or higher.  The three top performers--by a wide margin--are all social democracies.  This is all the more impressive since (as we shall see below), Sweden and Finland were recovering from brutal economic recessions in 1996--yet still maintained phenomenally low infant mortality rates.

Similarly, social democracies are also much better at limiting poverty and inequality:

In particular, Christian democracies achieved comparable overall poverty rates as the social democratic countries, but were nowhere near social democratic countries' ability to mitigate child poverty or inequality.  The liberal countries' poverty rates are enormously high; witness the United States' poverty and child poverty rates of 19% and 25%, at a time when the United States economy was much stronger than it is today.  Interestingly, the poverty and child poverty rates are now 15% and 22%, respectively.   Inequality is also much higher in liberal countries.

It's worth pausing to consider that these data, presented in this way, may be misleading; there may indeed be a trade-off between income and poverty rate.  Poverty rates are measured differently in different countries, so it is difficult to understand what this means.

Matthew Yglesias examined this issue in 2010 with these OECD graphs:

The top graph shows that median income in the United States really is not so much greater than other developed countries, including social democracies.  This is very misleading, however, for two reasons.  First, these data do not include the fact that citizens of social democracies get free child care, health care, more robust public pension systems, etc.  This is not an apples-to-apples comparison, since a Norwegian bowl of apples would come with a side of free health care, child care, paid parental leave, guaranteed paid vacation, and an excellent public pension plan.  The American bowl of apples might include some of that.  Second, as Yglesias points out, Americans work longer hours, and these data do not account for the fact that Americans must work much longer to get their incomes.

The overall message, however, is contained in the second graph.  If American median income is higher than that of social democracies, it is only because the burden of that financial success is placed on the shoulders of the poor.  American median income may indeed be slightly higher than social democracies (but without free health insurance, child care, etc, is that little bit of extra income really worth it?), but only because of greater inequality.

Conclusion: poverty, inequality, and health indicators really are better in social democracies.

Navarro and Shi also looked at the other criticism of social democracies--that government spending in social democracies is so great that it is a drag on the private sector, and badly hurts economic growth.  According to this hypothesis, social democracies must sacrifice economic growth and low unemployment rates in order to have such generous welfare programs.  This hypothesis seems dubious on its face; if your country ensures that all parents can work because their children have child care; that all workers, covered by world class health care, are healthy; children, tomorrow's workforce, are all given access to world class education; and anyone with ambition can go to college for free--why would any of this be a drag on the private sector?  Indeed, the data do not support this:

Contrary to popular belief, in most cases, in most decades, economic growth has been greater in social democratic countries than it has in liberal or Christian democratic ones.  And, also contrary to popular belief, social democracies clearly performed better overall in unemployment rate.

Is this reversing causality?
I'm not trying to make the case that a country's type of welfare state determines their economic performance or unemployment rate.  To bring this point home, it's worth noting that unemployment rates were unprecedentedly high in the early 1990's for Norway, Sweden, and Finland.  This is because all three countries experienced a banking crisis more or less identical to the one experienced by the United States in 2007-2008 that led to the Great Recession. 

Essentially, Norway, Sweden, and Finland (the United States) experienced strong economic growth in the 1980's (1990's) and deregulated their banking sector (repealed Glass-Steagall and stopped regulating derivatives).  Once deregulated, banks (Wall Street) started extending extremely risky loans they knew could not be repaid, fueling a housing bubble.  When home prices collapsed in the early 1990's (2007-2008), the economies of Norway, Sweden, and Finland entered a severe recession (the United States economy entered the Great Recession) and the government was forced to intervene in the banking sector (the government bailed out Wall Street).  In the case of Finland, the collapse of the Soviet Union greatly exacerbated its crisis.  At that time, 15% of Finland's economy was based on trade with the Soviet Union; when the Soviet Union collapsed, 15% of Finland's economy thus disappeared, essentially overnight, simultaneous to the banking crisis.  Obviously, banking policy (and collapse of trading partners) has nothing to do with welfare systems in Scandinavia or the United States; none of these welfare systems should be held accountable for the results of irresponsible banking policies.  For more technical information on Norway, Finland, and Sweden's banking crises, see part 2 here (starting on page 79).  To see comparisons of the United States' and Sweden's banking crisis, follow this link.

Spain is currently in the throes of a severe recession following a housing bubble bursting, as a result of banking deregulation--in other words, exactly what happened to the United States, Norway, Sweden, and Finland.  In all these countries, banking policy torpedoed economic growth, and a country's welfare state should not be held accountable for the mistakes in banking policy.  More on this in the conclusion.

Future directions
Navarro and Shi wrote an excellent paper that makes the strongest argument I have ever seen in favor of social democracy.  This is the best place to start.  Unfortunately, the 2001 publication date is fairly old.  Many things have changed since then, and I will write about this in the future.  All posts about this topic will be tagged with the label History of Social Democracy.  A preview:

Changes in social policies:  The categories in Navarro and Shi (2001) may need revision. For example, over the past decade, Sweden has greatly reduced the size of its welfare state.  

Eurozone:  As Europe lunged from crisis to crisis in 2011-2012, it became obvious that joining under one currency was a serious mistake.  Just as it is clear that Greece, Spain, and Portugal owe the depths of their recessions to their adoption of the Eurodollar, it is unequivocal that the strong economic performance of Germany, Finland, and other interior countries would not have been possible without adopting the Eurodollar.  In other words, the economic performance of Eurozone countries has so much to do with the Eurodollar that comparisons of the economies of Eurozone countries no longer make sense--they can't be compared to each other, and they can't be compared to non-Eurozone countries.  It's hard to overstate the importance of this effect:
Imagine that you’re a country that, like Spain today, recently saw wages and prices driven up by a housing boom, which then went bust. Now you need to get those costs back down. But getting wages and prices to fall is tough: nobody wants to be the first to take a pay cut, especially without some assurance that prices will come down, too. Two years of intense suffering have brought Irish wages down to some extent, although Spain and Greece have barely begun the process. It’s a nasty affair, and as we’ll see later, cutting wages when you’re awash in debt creates new problems.
If you still have your own currency, however, you wouldn’t have to go through the protracted pain of cutting wages: you could just devalue your currency — reduce its value in terms of other currencies — and you would effect a de facto wage cut.
This "de fact wage cut" would result in Spanish goods being less expensive in other countries, leading to an economic recovery led by booming exports.  But, with the Eurodollar, none of this is possible.

Conversely, Germany has experienced enormous economic success based on booming exports.  However, these exports are only because they are on the opposite side of the coin as Spain and Greece; the value of the Eurodollar is a function of the strength of the economies all participating countries.  For Germany, instead of having an artificially strong currency (like Spain and Greece), they have an artificially weak currency.  This artificially weak currency makes their exports cheaper for the rest of the world to buy, creating an economic boom.  But this weak currency is only possible because of the pain in countries like Spain and Greece; perversely, the Eurodollar is thus responsible for making prosperous countries more prosperous directly at the expense of the poor countries, whose recessions are becoming worse and worse--all because of participation in the Eurodollar.

In short, the Eurodollar is such an enormous confounding variable that it is unlikely that Navarro and Shi's analysis can be meaningfully repeated.

Obviously, choosing a welfare strategy is not destiny; for example, poor banking policies can destroy entire countries, be they social democratic or liberal.  Indeed, this demonstrates the limits of examining correlations between economic indicators and social welfare policies.  There are so many things that affect a country's economy; it really makes no sense to look at this single factor in isolation.  Nevertheless, it should be abundantly clear that there is no inherent trade-off between social democratic social welfare programs and economic growth or unemployment.  The decades of data reviewed above prove that it is possible to have large, universal programs alongside a strong economy--we do not have to choose between the health of the economy and the health of the people in it.  If anything, economic growth is higher and unemployment lower for social democracies than for liberal and Christian democratic countries.  It is difficult to argue with decades of data.

Put another way, if our goal is to maximize the well being of all Americans and maximize economic growth and minimize unemployment, the data argue that we should institute social democratic policies as part of a larger plan to achieve all of these ends.

But the reason I started writing this blog is because I came to realize that the goal of our political system is not to do any of these things.  The goal of our political system is to maximize inequality--to further the goals of the ruling class at the expense of everyone else: at the expense of favorable economic growth, unemployment, poverty, and infant mortality rates; at the expense of life expectancy; at the expense of the health care and pensions of most Americans.  For achieving these goals, our liberal system is doing just fine.  If our political system really was interested maximizing general welfare and economic growth, it would have adopted social democratic policies long ago, based on decades of evidence.  Instead, we have one party forwarding liberal policies, the other party forwarding Christian democratic programs (though that's being generous), and both parties arguing over how to best cut our social democratic programs.

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