Comparing median household income in the United States versus the social democracies

Image: Median income and median per capita income of the United States vs. the social democracies (source)


As this graph clearly shows, median household income (blue bars) is pretty similar between the United States and the social democracies. I'm using Gallup World Poll data, and as the authors point out, these data correlate tightly to aggregate wage data. This is a good validation of their results. Per capita household income (orange bars) is simply each household's income divided by the number of people in that household.

Some technical notes:

Just how regressive are the tax systems in the social democracies?

Image: George Stephanopoulos says Bernie Sanders "wants the United States to look more like Scandinavian countries," which may mean that Stephanopoulos believes Sanders has a plan to move the Norwegian fjords to America. (source)



A follow-up post (update: here) will consider how the tax systems of the social democracies differs from the tax system of the United States. Here, I'm going to focus exclusively on the question whether the tax systems of the social democracies are progressive or regressive.

This is a very important question because it's very fashionable among conservatives to argue that because the social democracies tax regressively, progressive taxation is incompatible with social democracy.

But the social democracies do not tax regressively, and it only appears that way because would-be tax policy analysts assume too many similarities between the American and social democratic models for tax and social welfare. Many Americans--experts included--assume that the social democratic model is the same as the American model, just more generous. That is flatly false: the social democratic model for taxation and social welfare is not a more generous American model--it's a different model entirely. Superficial similarities betray experts of the American tax system into making very basic mistakes.

Kyle Pomerleau at the Tax Policy Blog is typical in this regard. I could cite examples all day (here and here, for instance) of professionals making a mess of analyzing the tax systems of the social democracies. I myself have fallen into some these traps before. So don't think that Pomerleau has created some uniquely bad analysis. To the contrary, I'm picking on him because he's assembled a uniquely competent analysis. Most American tax policy wonks who try to characterizing the tax systems of the social democracies make such a mess that it's impossible to criticize what they've written; it's simply all wrong. I can use Pomerleau's post as an example because he manages to get enough things correct that I can fill in missing information. Most other examples are so hopelessly muddled as to be beyond repair. Pomerleau gets the raw numbers right, but fails to understand how the tax systems of the social democracies work.

Here is his very suspect summary statement of the tax systems of the social democracies (emphasis added):

In a recent interview on ABC’s This Week, Presidential hopeful Bernie Sanders reiterated his position that he wants the United States to look more like Scandinavian countries policy-wise:

George Stephanopoulos: “I can hear the Republican attack ad right now: ‘He wants America to look more like Scandinavia.’”

Bernie Sanders: “What’s wrong with that?”

Specifically, Sanders wants the United States to adopt a lot of the spending policies that many of the Scandinavian countries (Denmark, Norway, Sweden) are commonly known to have. Policies such as government sponsored college education, paid parental leave, and universal healthcare.

Many of these new government programs would be expensive and necessitate higher taxes. It is instructive to look at how Scandinavian countries structure their tax systems in order to raise revenue for these programs. Interestingly, some of the ways that Scandinavian countries raise revenue may make Sanders, who is a proponent of highly progressive taxation, uncomfortable.

Just how regressive are taxes in the social democracies?
In the above blockquote, I bolded two misleading statements. The first one is very tangential and Pomerleau shouldn't be faulted because he's a tax guy and not a social policy guy. He wrote, "Many of these new government programs would be expensive and necessitate higher taxes." I've spilled much ink on how the American social welfare system is just as expensive as the social democratic model. Aggregate (private plus public) spending on social welfare is basically the same in the United States as the social democracies. It's not a difference in overall cost; it's a difference in how programs are administered and financed. It's a difference of program efficiency and how well the true cost of each system is concealed with out-of-pocket private spending.

The second statement is more problematic:

Interestingly, some of the ways that Scandinavian countries raise revenue may make Sanders, who is a proponent of highly progressive taxation, uncomfortable.

Pomerleau later calls the tax systems of the social democracies "actually rather flat." That's wrong--but before we can continue, we have to be a little bit more specific of what we mean by tax progressivity.

As I pointed out with inequality measures (specifically the Gini coefficient) and gender discrimination, when studying things that affect all society, there can be no single measure that accounts for everything. In particular, the Gini sometimes gives nonsense conclusions, simply because it quixotically attempts to characterize an entire income distribution. Tax progressivity measures are the same: they also attempt to measure an entire income distribution are thus also create nonsense conclusions.

If the rich pay the highest tax rate but the poor pay a higher rate than the middle class, is this a progressive tax system? Or would it be better to say that some parts of the tax system are progressive and some parts of the tax system are regressive? Clearly--as with inequality--we need to look at multiple measures; a single measure will not suffice. We can never say that one tax system is more progressive than another. We are limited to claiming only that certain aspects of one tax system are more progressive or regressive.

Revisiting aggregate social welfare spending of the United States and the social democracies

Here, I revisit a previous post, or specifically, this graph by the OECD:

This graph shows the total (public + private) social welfare spending of OECD countries as a percentage of GDP. The take-home is clear: the United States does not actually have a less expensive social welfare system than the social democracies. Once we account for private spending on social welfare, it is clear that the American social welfare system costs just as much as the social democratic model.

Two things prompted me to return to this graph. First, the OECD updated the web page the graph was on (my original post linked to the page in 2014), and the graph is no longer at that link. Thus, it is no longer clear where the data from the graph comes from. Second, I didn't initially realize how important this graph is. This graph deserves its own post.

The page where I got the above graph is actually the home of OECD's social expenditure (SOCX) dataset. SOCX compares national expenditures on social welfare and--according to this dataset--the social democracies spend about 30% of GDP on social welfare, the United States about 20%. This only includes spending on government benefits.

However, in 2011, a team of OECD researchers realized that these data were extremely misleading and detailed their findings in a working paper, Is the European Welfare State Really More Expensive? (Adema, Fron & Ladaique). I'll focus on their findings for the United States and the social democracies since this is my primary concern on this blog. There was also a 2014 update, which we'll take a look at after reviewing SOCX methodology and the refinements of Adema, Fron & Ladaique.

First, the SOCX dataset greatly overestimates the the social spending in the social democracies. The biggest issue is cash benefits. In the United States, cash benefits (like Social Security payments) are not subject to income taxes. But that's not so in the social democracies, and the result is that a huge amount of social welfare benefits are actually returned to the welfare system through income taxes. Adema, Fron & Ladaique refer to this as "claw-back." Clearly, it makes no sense to count every dollar in social welfare benefits as a social expenditure, since much of those benefits will be taxed and thus returned to the welfare state. In Denmark, the amount of public social welfare benefits that are returned to the welfare state by direct taxation amounts to a whopping 4% of GDP. Clearly, SOCX is wrong to disregard this.

Comparing new parent social welfare benefits of the United States vs the social democracies

Courtney Jung points out the hypocrisy of American social welfare benefits for new mothers (emphasis added):

In 2010, the Fair Labor Standards Act was amended to require employers to "provide reasonable break time" and space for women to pump breast milk at work. To be clear, those breaks are unpaid, and the Department of Health and Human Services encourages employers to have mothers come in early or stay late to make up the time they spend pumping. Since 2013, the Affordable Care Act has required insurance companies to cover the cost of a breast pump for new mothers.

Such policies have quietly realigned our expectations of what new mothers should do to care for their newborns, making mothers work harder, for less pay, under conditions that risk compromising their dignity and professionalism.

They are also explicitly conceived as business-friendly strategies that enable women to comply with the injunction to breastfeed at no cost to employers. Who needs a lavish European-style maternity leave when we've got breast pumps?

Actually, free markets aren't efficient in theory, either

Image: If we don't get the biggest pie, then what's the point? (source)




The fundamental assumption of free market capitalism is that the free market can provide goods more efficiently than the government, or any other system. If the government interferes in the free market--even with the best of intentions--it will only make things worse. Rent controls cause a housing shortage; price controls cause oversupplies; minimum wage laws increase unemployment. The further we get away from a pure free market, the worse the inefficiencies and unintended consequences. It may be necessary to assist the less fortunate sometimes, but government should interfere as little as possible in order to avoid making things worse. Interference will certainly do harm; it could easily do more harm than good.

A more technical way of expressing this free-market-is-always-best ethos is to say that the free market will naturally reach an efficient equilibrium. An equilibrium of prices will ensure efficient allocation goods to all members of society. It may not be the most socially just distribution, but it will certainly be the most efficient distribution that can possibly be attained. Making the distribution more just--that is, making each person's slice of the pie closer to equal--will result in less pie overall. We can have a full pie with very unequal pieces; we can have a smaller pie with less unequal pieces; but we can't have a full pie with less unequal pieces. In other words, there is a trade-off between equity (or fairness) and efficiency. Increasing equity necessarily results in less efficiency.

Pushed to its limits, this idea is actually a liberating, social justice imperative. With a free market ensuring the most efficient outcome, the pie becomes so big that even with very inequitable slices, the poor are still better off. Even with a very unequally-cut pie, free market capitalism creates such an enormous pie that even the poor have a bigger slice than they could ever hope for in any other pie, no matter how egalitarian the slices are cut. Sure, a market might produce winners and losers, but when the pie is big enough, even the losers are better off.

This idea--that government programs which increase equity are necessary less efficient--underpins bipartisan social policy adventures such as school choice vouchers and privatizing social security. The idea is that--because markets are so efficient--any (real or otherwise) problems with anything can be improved by making them function more like free markets.

Obviously, if the equity-efficiency trade-off exists, we are essentially arguing over values. I may prioritize equity over efficiency while someone else may prioritize efficiency over equity, and there is no right answer, per se. But that the equity-efficiency trade-off exists is utterly fundamental to free market capitalism. Without that trade-off, free market capitalism makes no sense. If free market capitalism doesn't produce the biggest pie, then what's the point? If free market capitalism can't produce the biggest pie, why should we tolerate the incredible inequities it creates?

George Orwell and Karl Marx don't want your iPhone: communism, capital, and private possessions

Image: Street art inspired by George Orwell's Animal Farm (source)



Animal Farm
The novel Animal Farm by George Orwell is remembered as a cautionary tale against the inevitable problems of leftism. In Animal Farm, the farm animals--led by the pigs Snowball and Napoleon--rebel against their drunk and incompetent farmer, eventually prevailing and setting up a farm where all the animals are better off. The animals all learn to read and write, and plans are in the works for all the animals' stalls to have electricity and running water. In order to realize these admirable goals, the animals agree to give up all their possessions so they can be used to benefit the entire farm, and the animals all work hard to contribute to the common good. But Napoleon is able to drive away Snowball, and rather than continuing with the egalitarian projects, Napoleon starts using the community's wealth to improve the condition of the pigs. As a result, the quality of life of the rest of the animals declines until they are far worse off than before the revolution, and--unbeknownst to the animals other than the pigs--some of the animals are even assassinated in order to improve the power and wealth of the pigs. The pigs eventually obtain so many special privileges at the expense of the other animals that they become indistinguishable from the oppressive farmers, and the golden rule of the revolution: "All animals are equal" becomes "All animals are equal, but some animals are more equal than others."

It is impossible to argue that the scenario in Animal Farm isn't more or less what happened in the Soviet Union, Cuba, and Ethiopia. In the name of the common good, a privileged few were able to exploit the rest of society. And this scenario was certainly played out to a horrific level in Cambodia. Yet Orwell could not possibly have intended his work to be a cautionary against leftism generally. Ironically, Orwell considered himself a socialist--and not one of those Scandinavian social democrats who call themselves socialists but actually seek to create a more humane form of capitalism--Orwell was a true socialist who believed that private ownership of capital should be abolished. He traveled to Spain to fight alongside the socialists in the Spanish Civil War, where he was wounded, nearly fatally.

The book's resemblance to the actual history of Soviet-style communism is no coincidence. Orwell wrote Animal Farm as a critique of Soviet-style communism generally and Joseph Stalin in particular. Ironically--given the way the novel is remembered today--Orwell felt compelled to write Animal Farm to counteract the fact that Joseph Stalin was held in very high regard in capitalist Great Britain in the early- to mid-1940's. Orwell believed that Stalinism should be spurned due to its Reign of Terror and dictatorship, even if the Soviet Union was an ally against the Nazis.

Many often assume that communism necessarily demands an Animal Farm-style collectivization of wealth, and the inevitable seizing of society's wealth by the powerful--as if that's even different from our capitalist world where 1% of people own half of all world wealth and half the world lives in abject deprivation, or the United States where the richest 1% controls over a third of all wealth, the richest 10% control over three quarters of all wealth, and the richest 0.1% are about as wealthy as the poorest 90%. Yet Orwell is not alone on the left in his views on collectivization. Karl Marx himself was careful to make the distinction between productive capital and personal possessions, since personal possessions cannot be used to exploit people, but capital can. Your house, mementos from a deceased loved one, family heirlooms, books, pets, smartphone, etc--all of these things are not capital because they cannot be used to exploit people. I'm with Karl and George on this one. If your iPhone makes you happy, keep it, because you can't use it to exploit people.

Comparing the quality of child care services of Finland and the United States

I've spilled much ink on how social democracy is a far more efficient welfare system than one that relies on the private market. Again, when aggregate (private plus public) welfare spending is about the same in the United States as the social democracies, it's clear that social democracy is a far more efficient use of resources.

But this perspective overlooks how much better social democratic welfare services are compared to private market services in the United States. Here, I highlight child care in Finland as an example, but the same analysis could be repeated for nursing homes or other areas of social welfare.

By law, all Finnish children have a right to child care services their family can afford, but even the wealthiest parents are only charged a couple hundred dollars per month. Sara Mead describes the high quality of these services:

Publicly funded kindergartens and preschool in Finland are of quite high-quality, with quality standards roughly on par with those universal pre-k advocates seek for publicly funded pre-k programs in the United States. Kindergartens must have at least one adult for every seven children over age three, for every four children under age three, or for every two one-year-olds (infants under age one are rarely enrolled in kindergartens because Finland offers generous parental leave supports for parents in their child’s first year of life).

To ensure high quality care, there are strict credentialing standards for workers:

One out of every three adults working in kindergartens holds a bachelor’s degree as a certified kindergarten teacher (in effect, the lead teacher in each classroom). The other two adults must hold credentials as “licensed practical nurses,” a vocational degree that is roughly equivalent to a high school diploma with specialized education and training to work with young children.

Finnish child care centers must strictly adhere to a set cirriculum, which also helps to ensure high quality care:

Kindergartens must adhere to the National Curriculum Guidelines for Early Childhood Education and Care in Finland—comprehensive standards for child care environments and activities that address the developmental needs of the whole child—and with more detailed early childhood plans that each municipality must create to implement the national curriculum guidelines. These guidelines are aligned with the National Core Curriculum for Preschool Education in Finland, which is in turn aligned with the National Core Curriculum for Basic Education. These class size, teacher qualifications, and curriculum standards make the programs offered by Finnish kindergartens higher in quality than those offered by many state pre-k programs and Head Start centers in the United States.

Compare this to the American child care system (emphasis added):

In Texas, a person only needs a high school qualification or equivalent to operate a home day care. (That includes online degrees.)...Caregivers are also required to attend a state-sanctioned education session. According to a trainer, Tata had wandered in and out of the classroom, put her head down on the table, and spent much of the time texting. But since the law only requires applicants to show up, Tata had satisfied the requirement.

By national standards, Texas child care regulations are typical—better than average in some respects, worse in others. That is to say, they are painfully minimal. “You know, when we walk into some of these places, they’re meeting the letter of the standards,” Lahmeyer says. “But it’s like a warehouse for children. You know it when, as the inspector, you are the most interesting thing the kids have seen all day. They attach themselves to you and are trying to engage because there’s nothing else going on for them.”

Like most states, Texas inspects child care centers at least once a year, but only has the manpower to visit home day cares every two. Even egregious violations don’t always lead to shutdowns. Sometimes, that’s because parents, lacking alternatives, fight to keep notorious places open. An inspector named Carol McGinnis told me she’d recently visited a center in “total disarray,” with “feces smeared on the walls.” Nevertheless, if the agency closed it, McGinnis expected some parents would resist, because it was one of the few places offering care on weekends.

On other occasions, the process of closing a day care can be torturous. Lahmeyer recalled one place that racked up repeated violations over two years before a judge would shut it down. “I can tell you there’s a fair number [of cases] that we lost because the judge decided, No child’s died yet, so they stay open,” Lahmeyer says...I asked McGinnis how many of the area’s providers she’d trust with her own child. She answered promptly: “Twenty percent.”