Sunday, November 23, 2014

Links worth reading

What have I been reading over the last month?

Friday, November 21, 2014

Social democracy / social security is the fiscally responsible choice

Image: The fiscally responsible save for a rainy day. (source)

UPDATED--see below [in brackets]

It should go without saying that budget deficits aren't a result of government spending, but rather the balance of government spending and government income. This becomes obvious when we look at budget deficits of the social democracies, which have far greater government spending per capita than the United States. The United States' budget deficits were 7% of GDP in 2012 (and 10.1% in 2009 at the height of the Great Recession), while Denmark's were 4%, Austria's were 3.1%; Finland's were 2.1%; Iceland, 1.9%; Sweden, 0.3%; and Norway actually ran a surplus of 13.8%. Social democracies are generally very responsible fiscally, historically running fewer budget deficits (chart 4.1) than most other OECD countries, including the United States (Austria being the exception) (click for unobscured graph):

It's important to remember that this 35 year period includes is an incredibly severe recession that affected only Scandinavia in the 1990's; for Finland, this recession was arguably worse than their experiences during the Great Depression. Despite having an extra recession, the social democracies managed to be more fiscally responsible as a whole than the rest of the developed world.

[Update, 02/19/2016: Simply tallying the number of years of budget deficits can be misleading, since a single year may have a greater deficit than the cumulative effect of many years of very small deficits. So, here's a graph of government financial net worth (government assets minus liabilities) with datapoints for 2007, 2009, 2013, and 2014--so before, during, and after the Great Recession. I've marked the social democracies in red and the United States in blue:

Clearly, the social democracies are very fiscally responsible by this measure as well.]

Not only have the Scandinavian social democracies had fewer years of budget deficits, but their rock bottom borrowing costs indicate that investors have utmost confidence in the finances of the social democracies. Markets do err, but the market for the debt of social democratic countries proves that no one seriously thinks that large social democratic welfare states pose a threat to a country's fiscal footing--simply because nobody is willing to bet their money against it.

This adds up to a compelling case that social democracy is fiscally responsible.

Scandinavians don't mind paying taxes, and neither do Tea Partiers

Image: Social democratic activists (source)

The Swedish really love paying taxes:
[A 2012] survey shows that 80 percent of the population thinks the municipal and regional governments should increase the quality of childcare, while only 15 percent think that taxes should be lowered instead. Furthermore, 93 percent believe that the local governments should increase care for the elderly, while only 5 percent favor lowering taxes. Similarly, 91 percent prefer increasing the quality of healthcare rather than lowering taxes.
Since I don't speak a Scandinavian language, more data like these have proven difficult for me to locate. But it's clear that Scandinavians really like paying taxes, and the Swedish even think very highly of their tax collection agency:
Skatteverket, the Swedish Tax Agency, is popular. In fact, it is really popular, with poll after poll showing that it is trusted and respected. A 2013 survey concluded that the Tax Agency has the second-best reputation – beaten only by the Swedish Consumer Agency – of 26 major Swedish public bodies, scoring highly for its customer service and for ‘contributing positively to society’.
‘You don’t have to like taxes, but most people seem confident that things are done fairly’, says Toivo Sjörén of market research institute TNS Sifo, which conducted the poll (link in Swedish).
By contrast its American equivalent, the Internal Revenue Service, is one of the least popular federal agencies in the United States, according to a 2013 poll.
So how has the Swedish Tax Agency managed to pull off what seems like the ultimate confidence trick – taking people’s money but leaving most of them grateful and smiling?
This feat is pulled off very simply. The Guardian wrote a neat story that interviewed the typical Sven on the street about taxes and the welfare system. See if you notice the pattern:

Sunday, November 16, 2014

Why social democracy can work in a city, county, state, or country of any size

A common argument holds that social democracy cannot succeed in the United States because it is thirty times more populous than Sweden--population 10 million--the largest social democratic country (though Kerala is a social democratic state in India with 20 million residents). The reason why size is so important is never articulated--but it is nevertheless taken as obvious that social democracy is practical in a nation of 10 million, but impossible in a nation of 316 million.

There are several problems with this argument, however. From the outset, the United States has two extremely successful social democratic programs--Social Security and Medicare--so the burden of proof for this argument is enormous.

Indeed, this assumption contradicts the basic statistics behind social policy design. As I wrote previously, the major strength of social democracy is that the cost of providing services to each participant falls as the number of participants increases. Though there are diminishing returns, for social democratic-style social welfare programs, bigger is always better. The more people participating in a social democratic system, the more secure, efficient, and cost-effective that system will be. In theory, then, social democracy should function better in larger countries like the United States than in smaller ones like Denmark or Sweden.

Of course, statistics and actuarial tables occur in paper, ink, and computer models, not in the real world. Perhaps there are practical, more down-to-earth logistical or management difficulties that are incurred in administering social welfare programs when there are hundreds of millions of participants, rather than millions.

Indeed, intuition argues that large systems cannot be efficient. When a system gets larger and larger, more and more layers of bureaucracy and management are needed to successfully run that system. For an example, let's assume that every ten people need to be managed by a supervisor. For a program with ten employees, one supervisor is needed--that's one layer of management. But if there are 100 employees, then ten supervisors are needed--meaning those ten supervisors need a supervisor--and suddenly we have two layers of management. As more and more employees are needed to administer a program, more and more layers of management are needed, stifling efficiency with oppressive bureaucracy. At some point, the increasing efficiency of more enrollees is certainly overcome by the decreasing efficiency of needing to layer more and more levels of management.

But the intuition is wrong. The administrative costs of Social Security are less than 1% and those of Medicare are around 3%. Neither Social Security nor Medicare have layers upon layers of management. Medicare, for example, is administered by the Centers for Medicare and Medicaid Services (CMS). CMS is responsible for Medicare, Medicaid, HIPAA, parts of Obamacare, clinical laboratory standards, long term care facility standards, and the Children's Health Insurance Program (CHIP). All told, 100 million Americans are covered by a CMS health insurance program: Medicare, Medicaid, or CHIP. Despite enrolling 100 million people--nearly a third of the entire country, or ten times the entire population of Sweden--as well as having numerous other responsibilities, CMS only employs around 4000 people (far fewer than private sector insurance companies).