It's not entirely clear what Sumner's point is on a recent piece about the level of government spending vs. wealth in various countries. He seems to be trying to suggest there's some sort of meaningful causality between somewhat lower government spending and more wealthy countries. of course, since then then he's been arguing that this is not what he was actually driving at.
First of all he admits the fact that in comparisons between richer and poorer countries, richer ones have governments that spend considerably more.
It’s widely known that governments in rich countries spend much more than governments in poor countries, even as a share of GDP. There are a number of possible explanations of this pattern. Perhaps rich countries choose to consume more government services, such as education, health care and pensions. Or maybe it’s hard to extract a lot of tax revenue in poor countries where corruption in endemic and many people are peasant farmers or unregistered small businesses. (The fact that the least corrupt rich countries (the Nordics) are especially adept at collecting tax revenue is suggestive.)
http://www.themoneyillusion.com/?p=18942
However, he thinks the more interesting question is the level of spending differentials between different rich countries.
He puts up a couple of lists, one ranking countries by wealth per capita and one by government spending as a percentage of GDP. From this he draws these observations:
"1. Germany is a fairly typical rich European Country. Of the 15 countries richer than Germany, only three have larger governments (Austria, Netherlands, Sweden). Of the 8 countries poorer than Germany, only two have smaller governments (Taiwan, Japan.)"
"2. It appears that among the very rich countries of the world, the correlation between per capita GDP and size of government reverses. I can’t be certain, but I think this is even true if you exclude the 4 petro-states (Norway, UAE, Qatar, Kuwait.)"
"3. Part of this reversal may be due to wealth causing less government spending. Once the basic services are provided, a gusher of oil wealth leads to more non-government consumption."
"4. Part of this reversal may be due to high taxes reducing work effort. Many of the richest countries (excluding petro-states?) have both lower taxes and longer working hours."
"5. What are we to make of the exceptions?
a. Some rich countries have policies that encourage female employment, despite high taxes. Sweden doesn’t have a marriage penalty discouraging wives from working, for instance, and provides lots of childcare. Others have quite market-friendly policies, despite the big government. This is especially true of the Nordics. Thgis might explain their relatively high productivity, despite high taxes.
b. One country on the list is arguably still developing. Taiwan will likely move into the richer group over time. Its relatively low level of income does not reflect a lack of work effort, but rather low productivity.
c. Japan is the real puzzle here. Like Taiwan, hours worked are pretty long, much higher than Western Europe. This suggests the Japanese workers are extraordinarily unproductive. Some might point to low female labor force participation. But that just means that Japanese females are very unproductive. You could argue that they are at home taking care of the chilren, except that they aren’t having any children.
"6. This reversal of correlation at the top end often shows up in comparisons of similar neighbors. The US is richer than Canada, and has a slightly smaller government. Australia is richer than New Zealand, and has a significantly smaller government. Switzerland is richer than Austria, and has a smaller government. Norway is the richest of the Nordics, and has the smallest government. Belgium is ethnically part French and part Dutch, and both its size of government and its wealth is midway between the two. Spain is richer than Portugal and has a smaller government."
"7. The East Asian rich tend to have small governments. South Korea was a bit too poor to make the list, but its government spends only 30% of GDP. It will be on the list quite soon. This pattern has huge implications for where the world’s biggest economy (no, not the US anymore) will end up on the list."
"8. I predict that within a few decades the US will no longer be regarded as an outlier. It will no longer be regarded as a very rich country with a surprisingly small government."
"9. Clinton said the era of big government is over. Obama seems determined to prove Clinton wrong. (Don’t ya just love it when progressives insist Obama is a centrist. Yes, he’s right in the center of progressivism.) This data has support for both sides. It shows that a country can be fairly rich, and still have a very large government. But it also suggests that if Obama pushes the size of government substantially higher, there may be a price to pay. We’ll still be rich, but not as rich. More like France than Switzerland or Norway. I’m not sure how voters would react to that outcome."
"10. Sweden’s government is vastly larger than the Swiss government, and yet from an American perspective the two countries seem quite similar. Do both liberals and conservatives overrate the importance of big government? I.e. are conservatives wrong that it would wreck the economy, and are liberals wrong that lots more government spending would greatly improve quality of life? If so, why isn’t Switzerland a hellhole, and why isn’t Sweden poor?"
http://www.themoneyillusion.com/?p=18942
I think the commentator, Alekseyev , gets it right when he says:
"Given that some of the countries here are city-states and some are avowedly non-militaristic, I really wonder how good of a list this is. For example, nice for Hong Kong to have 18% GDP spending, but how does that figure change if you were to adjust it for the security services provided by the mainland Chinese?"
"And military aside, this is a very dubious data set over which to build policy implication theses. It’s hard to understand what lessons can a country like United States, Germany or France learn from Singapore or Hong Kong. It’s equally hard to understand what an energy-resource barren Japan can learn from UAE or Norway."
"There is just so much more to GDP/capita equation than the level of taxation and government spending. But maybe that’s what the hodge podge result and very weak correlation actually shows."
Sumner ended up spending a lot of time in the comments section explaining what he didn't mean-not what many people took him to mean:
" Everyone, I do know that government spending is not a good metric for total government involvement in the economy, as I indicated in the post. Many readers seemed to assume I was trying to make some sort of argument that I never made."
"Alekseyev. You said;
“For example, nice for Hong Kong to have 18% GDP spending, but how does that figure change if you were to adjust it for the security services provided by the mainland Chinese?”
"Much less than you’d think."
"I agree that it’s tough to make comparisons between widely dissimilar countries. Still I found it interesting that the positive correlation between size of government and wealth seems to reverse slightly at the very top. Maybe others don’t find that interesting. Years ago when I predicted Singapore and Hong Kong would become very rich, almost no one believed me. Now that they have, the same people tell me that it’s meaningless. But is it?"
In a piece he wrote afterwards he's still trying to convince us that he wasn't saying anything you might think he was saying:
"I added some graphs to the previous post on income and government spending. Many readers assumed I was trying to explain why some countries are richer than others. Not so. I did that elsewhere"
http://www.themoneyillusion.com/?p=19010
Linking to that previous post where he did make the argument we only thought he was making here but did make then, it's an apology for Reaganism, with the very ambitious title:
America's Amazing Success Since 1980: Why Krugman is Wrong.
http://www.themoneyillusion.com/?p=5164
Right away, he lowers the bar for what he needs to achieve by offering a comparison. He doesn't so much tell us how great the last 30 years have been as argue they're better than Europe:
"Suppose you had gotten a room full of economists together in 1980, and made the following predictions:
"1. Over the next 28 years the US would grow as fast as Japan, and faster than Europe (in GDP per capita, PPP.)"
" 2. Over the next 28 years Britain would overtake Germany and France in GDP per capita.
And you said you were making these predictions because you thought Thatcher and Reagan’s policies would be a success. Your predictions (and the rationale) would have been met with laughter. Indeed around that time most of the top British economists signed a petition asserting that Thatcher’s policies would fail. For those of you not old enough to remember 1980, let me explain why. Labour rule of Britain had reduced their economy to a shambles. The government ran the big manufacturing corporations and labor unions were running wild. They had 83% MTRs, 98% on capital. There was garbage piling up in the streets of London. Britain had been the sick man of Europe for decades, growing far more slowly than Germany, France and Italy. The US wasn’t doing as badly, but certainly wasn’t doing that well either. We had also been growing much more slowly than Europe and Japan. Unlike Britain, we were still richer than most other developed countries, so this convergence was viewed as partly inevitable (the catch-up from WWII), and partly reflecting the superior economic model of the Germans and Japanese."
Actually it depends what metrics you prefer. What Britain did have prior to 1980 was a very low rate of unemployment. Whatever the benefits you might claim that Thatcherism brought, it came at a high price. How much was the story less about an improvment in Britain and the U.S. and more about a deterioration of say France?
Indeed, Sumner ultimately again lowers the bar considerably:
"Several commenters mentioned median income rather than GDP/person. The median income data does show slower growth than GDP/capita, partly because of increasing inequality, but partly because of statistical problems with the data (health benefits are excluded, etc.) I believe consumption data is far superior to median real income, and that shows Americans doing much better. Will Wilkinson has posted on this. The consumption data also show a much smaller increase in inequality. But I was primarily interested in international comparisons, for which all I had was GDP data in PPP terms. The point was that countries that did more reforms did better than those that did fewer reforms. I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy."
It certainly is not easy to say the U.S. has had "amazing success" since 1980. The picture changes a lot starting in the Great Recession that begun in 2007.
P.S. Interestingly, now, you perhaps can talk about our "amazing success"-though again, largely comparatively, how have we fared so much better than both Britain and the EU? What correlations would Sumner point to there? One I will point to is our relative lack of austerity.
http://diaryofarepublicanhater.blogspot.com/2013/01/the-s-says-were-better-now-than-4-years.html
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