Thursday, February 08, 2007

CASE STUDY: ECONOMIC ILLITERACY

"Though it is not as true now as it used to be with the influx of immigration, the Scandinavian countries have a very small, homogeneous population. That enables them to get away with a good deal they couldn’t otherwise get away with. What works for Sweden wouldn’t work for France or Germany or Italy. In a small state, you can reach outside for many of your activities. In a homogeneous culture, they are willing to pay higher taxes in order to achieve commonly held goals. But “common goals” are much harder to come by in larger, more heterogeneous populations. The great virtue of a free market is that it enables people who hate each other, or who are from vastly different religious or ethnic backgrounds, to cooperate economically. Government intervention can’t do that. Politics exacerbates and magnifies differences."

Milton Friedman

In an ultraleftist pamphlet, Mr. Dusan Keber, former Minister of Health of Slovenia, repeatedly tries to confirm the rightness of theories concerning welfare economics as Mr. Jeffery Sachs tries as well.


In the article, there is no empirical evidence on the truth about Sachs's arguments of the welfare state. Beyond the edge, the propaganda concerning the influence of Keynesian welfare economics is boosted by the manners of the ideology rather than empirical investigation. Mr. Keber has defined himself as a leftist when he pinned the ultraleftist, anti-growth, pro-poverty and anti-progress political program entitled "People over profit" (Za ljudi pred profitom) which would ruthlessly lead Slovenia to further loss of global competitiveness and domestic stability. The program says nothing about the enormous size of public consumption which would presumably increase if the program were put into effect. Further, the program rampantly calls for raising tax rates on individual and corporate income. It aims to protect trade unions against market competition as well as it denies any possibility of radical labor market reform which still remains one of the foremost obstacles to the competitiveness of the Slovenian economy in a global sphere.



In the article, Mr. Keber says:

"In the late 40s of the 20th century, Friedrich August von Hayek wrote that high taxes are the road to serfdom and a huge threat to the freedom itself. Jeffery Sachs says that this statement is boosted by the interests of the capital and ideology and that there is enough evidence that goes in the opposite direction."



It simply cannot be justified that higher taxes lead to more prosperity. Recent and historical evidence shows quite the opposite examples of what Jeffery Sachs says. Higher taxes are usually the magnitute of progressive tax rates which do not stimulate "cross-section" economic activity. Numerous empirical studies have verified the negative impact of high taxes. Saying that tax system is designed in a static behavior, is actually a sign of deep misunderstanding of how economic processes work in the equilibria behavior. Hence, saying that the fact that high taxes mean lower prosperity, is boosted by the interests of the capital and ideology, is pretty much a sign of weakness in giving arguments. Economic growth is created through the productive behavior, generated by human capital. And there is an empirical evidence that the reason for lower tax rates is not "making the rich richer and making the poor poorer". The real reason for lower tax rates is the to increase the level of welfare and prosperity for all. The way to achieve this, is not to increase tax rates and boost consumption and spending; the real way to move further towards prosperity is to cut both; taxes and spending.



Mr. Keber, further, claims:

"Jeffery Sachs compares two groups of countries; one with low taxes and comparably small social expenditures and another one, mostly welfare countries with high taxes and large welfare expenditures. The first groups consists of Anglo-Saxon countries with historical grounds of laissez-faire economic policy of the 19th century, while the other group presents Nordic countries - Denmark, Norway, Finland and Sweden. In the first groups, there are comparably small welfare expenditures, averaging 17 percent of the GDP while there is increasingly larger social welfare expenditure rate at the average of 27 percent of the GDP. Nordic countries outperform the Anglo-Saxon countries on the majority of economic indicators. There is less poverty, income per capita is bigger, unemployment is similar, budgets are more stable. Nordic countries contribute budget outlays to education, science, research and development. They used the ICT (information communication technology) revolution faster than any other country in the world in order to raise the level of global competitiveness. According to World Economic Forum's Global Competitiveness Index three Nordic countries outperformed the United States."



Jeffery Sachs neglects one of the basic scientific facts - keeping other factors relevantly constant when working on periodic and time-adjusted observations. Welfare expenditure rate cannot explain the level of prosperity. Prosperity is measured through the economic growth and the increase of income and wealth per capita. Prosperity itself, does not emerge from government spending. It emerges from the ability of entrepreneurial sector to achieve high rates of market growth. Prosperity includes the free trade as well. Many unsophisticated "self proclaimed" experts still believe that the reduction in tax rates will result in lower tax revenue. Laffer Curve offers pretty much different results than static predictions. Lower tax rates on personal and corporate income channge the behavior of the dynamics of the productive behavior. Decreased tax burden means that increased incentives to work, save and invest accelerates the desirability of enterprises and households to increase wealth and their income level. Huge government spending leads to small economic growth. Hence, high public consumption rates (Sweden, Denmark) coupled with massive welfare expenditures mean that there is something seriously wrong with government policy. On one side, high government spending is exercised through high tax rates on individual and corporate income. This implies that the productive behavior avoids higher levels of productivity by tax sheltering and tax deductions. Progressive tax code rapidly increases compliance costs while flat tax codes make tax avoidance less probable and very costly. In effect, lower tax rates accelerate the economic growth and they also mean higher wage rates.



Ad.1: Economic indicators of the Anglo-Saxon countries outperform the economic performance of Nordic countries

In Sweden, not a single job in the private sector has been created since 1950. Unemployment rates remains high despite being shown as relatively small averaging 5,5 percent. The real Swedish jobless rate is 15 percent. The country has had a long tradition of labor training and unemployment support programs. Those individuals are, according to methodological details, not statistically included in the group of the unemployed. After years of exploding welfare statism, Denmark dropped from the 3rd to 7th place on the scale of world GDP per capita. Finland, faces a severe economic slumps in the beginning of the 90s after being pushed by the reduction of export propensity when the Soviet Union collapsed. On the way ahead, Finnish policymakers relied on privatization, liberalization and the deregulation. Iceland, once the sickest Nordic economic patient, achieved high rates of economic growth through laissez-faire economic policy under the leadership of David Oddsson who was inspired by Milton Friedman, Friderich August von Hayek and James Buchanan. Economic growth rates in Anglo-Saxon countries are exceeding the compound average growth rates of Nordic countries. Swedish 5-year compounded annual economic growth rate is 2,6 percent. In Denmark, the average 5-year economic growth is 1,4 percent, in Finland 2,8 percent, in Norway 2,2 percent and on 3,6 percent on Iceland. The average compounded rate of economic growth in Ireland is 6,4 percent, strongly outperforming the average rate of Nordic countries. In Australia, the average growth rate in recent 5 years equals 3,3 percent. In the United States and United Kingdom, job creation rates in private sector have skyrocketed since Ronald Reagan and Margaret Thatcher implemented free-market economic and structural reforms in order to boost competitiveness and achieve higher level of the GDP per capita. Contrary to what Mr. Sachs says, Sweden dropped from5th place in its welfare ranking to 112th in 2004. In previous periods, productivity has grown very slowly while the performance of the public sector has been awful. It has also been shown that employment statistics in Sweden and Finland has been modified by tricky methodolgical details when public sector employment and total unemployment rates have been slightly hidden and have, thus, covered the real unemployment and public sector employment rates. According to the stated indicators, it seems that Mr. Jeffery Sachs does not know what he's actually speaking, neglecting the whole panel of data and parameters required for a coherent economic analysis. What appears to be suitable for socialist policymakers, in reality reflects the story of Swedish myth. It cannot be understand why people like Jeffery Sachs interpret Swedish economic policy on the basis of high taxes while they avoid to tell that during the period between 1870 - 1950, the policy of positive free market non-intervention, the country created much of today's wealth.



Ad.2: Competitiveness is measured according to business models and private sector entrepreneurial strategies.

The resource of Information-Communication Technologies that, potentially, boosted the competitiveness levels of Nordic countries have been misunderstood. It has not been the government that created Nokia. Only one out of ten big size enterprises has been establish since 1970 in Sweden. Ericsson and Nokia have reached success because their business models suited the missing gaps in a global competition that enabled rapid stategic expansion as well as a boost in global sales which coexisted together the emergence of the new economy. The majority of successfully managed Swedish enterprises has been created in the years of Swedish road from rags to riches (1870-1950), on the path to free economy.




Ad.3: Expansionairy fiscal policy, increased government spending and high public consumption rate lead to economic stagnation and the loss of competitive position in the global economy

In his article, Mr. Keber continues followingly:

"Nordic countries can adjust social differences with open market economy. The outcome at the bottom of the social scale is sufficient, especially when we compare it with the U.S. case where the poverty flourishes and prisons are becoming overdrawn... American health-care sector is burdened and severe because it's private. Sachs says that Hayek was wrong. In strong and vibrant democracies, expansionairy welfare state does not lead to serfdom but into a just society, economic equality and international competitiveness."

The business environment in Nordic countries is singnificantly freer than in the rest of the world. In Denmark, for example, it takes 5 days in average to start a business, obtaining a business license is easy and closing down a business presents no major difficulties at all. Reliable business freedom coexists with sufficient investment and financial freedoms. It is empirically proven that generous welfare state, on the other hand, leads to smaller growth rates as shown by Armey Curve and Rahn Curve. Professor Robert J. Barro has demonstrated that the reduction in public sector size by 10 percent reflects higher economic growth rate by 1,8-2,8 percent. The health-care sector in the U.S. is burden very much by Medicare which is boosted throug government intervention and high public spending rates. It is an empirical evidence that private sector allocates resources much more efficiently than public sector can. Is health-care sector an exemption? The answer is no. Government health-care programs produce cost-inefficiency at the expense of taxpayers while greater supply of service leads to price reduction and greater quality.

The relative success story of the Nordic countries is very much the result of laissez-faire economic policy back at the beginning of the 90s when Nordic countries faced a severe economic stagnation. In Sweden, private health-care saving schemes were allowed, vouchers boosted the performance of the education system, telecommunication sector was liberalized and the deregulation vastly helped to stimulate the entrepreneurial performance. Free-market institutions obtained a greater role in economic progress while the size of the government started to diminish. It has also been empirically shown that regulation strongly influences economic performance. The proponents of the Swedish model have claimed that the model itself is a reason for evenly greater Swedish economic performance. The truth is very far from this statement. Swedish companies have been breaking export rates and the quarterly economic growth rate have sparked due to deregulation programs that stressed the potentials of the Swedish economy and helped to stimulate the performance of the private sector at a low inflation rate controlled by Riksbank.

If Nordic countries continued to follow the economic doctrine of Keynesianism, its performance would end-up in a severe economic depression when it would take a long time to recover from the policy of "generous welfare state" based on expansionairy spending and high public consumption rate. In Sweden, despite the welfare state, Foreign Direct Investment (FDI) fell to zero. Facts, figure and data on international competitivness show that parameters of low spending, the economic policy of liberalization and deregulation, the rule of law, free trade and competition lead to higher economic growth rates, more economic freedom, and higher levels of prosperity and wealth creation.

Literature and further Reading:

Christopher S. Allen: Forming Left Wing Coalition Governments? Sweden and Germany in the early 21st Century, Annual Meeting of American Political Science Association, Philadelphia, 2006 http://csallen.myweb.uga.edu/CSAllen-APSA-2006.pdf

Kathleen Bawn, Frances Rosenbluth: Short versus Long Coalitions: Electoral Accountability and the Size of the Public Sector http://sitemaker.umich.edu/epss/files/paper-kathleen_bawn.doc

Die nordeuropäischen Wohlfahrtsstaaten, Zusammengestellt von Norbert Götz, Lehrstuhl für Nordische Geschichte an der Universität Greifswald, Stand: Dezember 2000 http://www.uni-greifswald.de/~skanhist/Publikationen/welfare.htm

Index of Economic Freedom 2007, Heritage Foundation http://www.heritage.org/research/features/index

Per Bylund: How Welfare State Corrupted Sweden, Mises, 5/31/2006 http://www.mises.org/story/2190

Daniel Drezner: Would the Scandinavian Model for the United States? http://www.danieldrezner.com/archives/002565.html

Free Markets and the End of History, Interview with Milton Friedman, New Perspectives Quarterly, Vol. 23, Winter 2006 http://www.digitalnpq.org/archive/2006_winter/friedman.html

David Ibison: Real Swedish jobless rate is 15 percent, Financial Times, June 15, 2006 http://www.ft.com/cms/s/c18430e6-fc0b-11da-b1a1-0000779e2340.html

Stefan Karlsson: Swedish FDI falls to zero "despite" the welfare state, Mises, August 26, 2005 http://blog.mises.org/archives/004000.asp

Stefan Karlsson: The Sweden Myth, Mises, 8/7/2006 http://www.mises.org/story/2259

Mikko Matilla: Economic Changes and Government Popularity in Scandinavian Countries, British Journal of Political Science, Vol. 26, No. 4 (Oct., 1996), pp. 583-595 http://links.jstor.org/sici?sici=0007-1234(199610)26%3A4%3C583%3AECAGPI%3E2.0.CO%3B2-W

Johnny Munkhammar: Swedish Failure and Slovakian Success, Reply to Vladimir Manka http://www.munkhammar.org/pdf/ReplyManka.doc

Johnny Munkhammar: A Coup d'Etat in Sweden, Wall Street Journal, September 13, 2006 http://www.munkhammar.org/pdf/WSJE.doc

Johnny Munkhammar: Beyond the European Social Model, Open Europe, 2006 http://www.openeurope.org.uk/research/fullbook.pdf

Bertil Ohlin: Tendencies in Swedish Economics, The Journal of Political Economy, Vol. 35, No. 3 (Jun., 1927), pp. 343-363 http://links.jstor.org/sici?sici=0022-3808(192706)35%3A3%3C343%3ATISE%3E2.0.CO%3B2-Z

Terence Roth: Sweden's Hidden Jobless, Wall Street Journal, June 1, 2005 http://online.wsj.com/article/0,,SB111714741454244517,00.html

Nima Sanandaji, Tino Sanandaji: How do you say "Economics" in Swedish? Unemployment, entrepreneurship and working ethics in the Swedish welfare state, The New Libertarian, 2006 http://www.neolibertarian.net/articles/sanandaji_20060414.aspx

Rok Spruk: Sweden, Success and Failure, Capitalism & Freedom, January 17, 2007 http://rspruk.blogspot.com/2007/01/sweden-success-and-failure.html

5 comments:

keber said...

"The real Swedish jobless rate is 15 percent. The country has had a long tradition of labor training and unemployment support programs. Those individuals are, according to methodological details, not statistically included in the group of the unemployed."

Well, if the real jobless rate is a base for comparison, I would expect you to provide us with real jobless rates of other countries. Just to let us know, where they stand. Or do you simply assume that other countries report their real jobless rates? How much work on statistical methodology have done to make such assumptions?

Rocks said...

Methodologically, unemployment analysis reported by Swedish institutions has left out the population of those who have remained kept on labor training programs despite not doing anykind of work. This has been firmly prooved by McKinsey as well as OECD has warned Sweden to change the methodology of unemployment in order to show real the rate oj joblessness.

You can conduct a methodology of measuring unemployment by eliminating certain groups and report that to international institutions. This way of measuring unemployment was developed during Palme administration when the real unemployment rate was much higher than displayed by public officials. WSJ has recently wrote a great article on how welfare-cheating in Sweden was transformed into hiding the real unemployment data. Regard the methodology, Eurostat and OECD perform a lot of sophisticated methods of measuring unemployment. Sweden was alerted several times.

Sweden's major trade union fired their economic head because he wanted to depict the real unemployment situation when the latter was topping 20 percent.
See: Johnny Munkhammar's "Coup d'Etat in Sweden", WSJ

Taking a closer look, Irish don't cheat OECD in telling the real rate of unemployment. Supposedly, the consequence of Swedish "trick" was the promotion of the Swedish model in the international community by largely mistaken beliefs.

Somehow ironically, it is a little bit irresponsible to promote the Swedish model without knowing the insights of it. I recommend the reading of "Blood on the Snow: The Killing of Olof Palme" where the economic and structural policy under his leadership is unmasked.

Regards,
Rocks

keber said...

here's your insight, buddy:

http://www.weforum.org/pdf/Global_Competitiveness_Reports/Reports/gcr_2006/sweden.pdf

keber said...

your recommended reading list is quite long, but doesn't it strike you as a case of intelectual mimicry - practically all cited sources come from hard-core libertarian think-thanks. do adopt a strategy of diversifying your sources - you could be mistaken for just another free-market zealot.

Rocks said...

http://www.weforum.org/pdf/Global_Competitiveness_Reports/Reports/gcr_2006/sweden.pdf

Sir, we're talking about unemployment, we're not talking about business competitiveness. Overall, international competitivness is a microeconomic phenomena as contemporary studies and literature have confirmed. Unemployment is actually only one particular sign of competitiveness showing how working environment sitmulates or encourages productive behavior such as work, saving and investment. Unemployment is a natural consequence of rigid labor legislation with restrictive hiring/firing practices. Nevertheless, rigid labor code is a particular weakness undermining Sweden's competitiveness. If we study economics, we see that structural unemployment is a price that society must pay for the protection of labor market exercised by trade unions. The insights are quite simple: trade unions obtain a control over labor demand through which they want to cut the supply of labor as much as possible to deliver themselves benefits at the expense of job-seekers in the future.

Hard-core libertarian think-thanks?

Let's take a closer look. Per Bylund is a business advisor and an expert on information technology, David Ibison is an economic analyst at Financial Times, Johnny Munkhammar is an internationally highly respected economic and political analyst. He wrote a thorough analysis of labor market for the annual index of economic freedom (published alongside the analysis conducted by Xavier Sala-i-Martin) which has several million readers and visitors a year. Further, Nima Sanandaji is a student at one of Swedish universities, and Milton Friedman is a Nobel winning economist and the most influential economist of the 20th century. You check his treasury of awards and winning titles:
http://en.wikipedia.org/wiki/Milton_Friedman

Looking forward to further discussion.

Regards,
Rocks