The Social Welfare State, beyond Ideology [Jeffrey Sachs at SciAm]

[Erik Mesoy]

Are higher taxes and strong social "safety nets" antagonistic to a prosperous market economy? The evidence is now in
By Jeffrey D. Sachs

One of the great challenges of sustainable development is to combine society's desires for economic prosperity and social security. For decades economists and politicians have debated how to reconcile the undoubted power of markets with the reassuring protections of social insurance. America's supply-siders claim that the best way to achieve well-being for America's poor is by spurring rapid economic growth and that the higher taxes needed to fund high levels of social insurance would cripple prosperity. Austrian-born free-market economist Friedrich August von Hayek suggested that high taxation would be a "road to serfdom," a threat to freedom itself.*

Most of the debate in the U.S. is clouded by vested interests and by ideology. Yet there is by now a rich empirical rec-ord to judge these issues scientifically. The evidence may be found by comparing a group of relatively free-market economies that have low to moderate rates of taxation and social outlays with a group of social-welfare states that have high rates of taxation and social outlays.

Not coincidentally, the low-tax, high-income countries are mostly English-speaking ones that share a direct historical lineage with 19th-century Britain and its theories of economic laissez-faire. These countries include Australia, Canada, Ireland, New Zealand, the U.K. and the U.S. The high-tax, high-income states are the Nordic social democracies, notably Denmark, Finland, Norway and Sweden, which have been governed by left-of-center social democratic parties for much or all of the post–World War II era. They combine a healthy respect for market forces with a strong commitment to antipoverty programs. Budgetary outlays for social purposes average around 27 percent of gross domestic product (GDP) in the Nordic countries and just 17 percent of GDP in the English-speaking countries.

Friedrich Von Hayek was wrong.

Article continues...

The U.S. spends less than almost all rich countries on social services for the poor and disabled, and it gets what it pays for: the highest poverty rate among the rich countries and an exploding prison population. Actually, by shunning public spending on health, the U.S. gets much less than it pays for, because its dependence on private health care has led to a ramshackle system that yields mediocre results at very high costs.

Von Hayek was wrong. In strong and vibrant democracies, a generous social-welfare state is not a road to serfdom but rather to fairness, economic equality and international competitiveness.

Thoughts?

Interesting to see this. Studies of this sort are why I wobble between libertarianism and socialism. Still in favor of letting people keep their guns, but let's invest in the poor, it'll be useful.

PS: Anyone who says anything to the effect of "but socialism is communist" in place of an argument will be reported. This shouldn't be necessary to say.
PPS: "Thoughts?" means thoughts and opinions on the article and the argument in general, not "I'm sure somebody disagrees", which adds little to the discussion.

 

[Atropos]

Hayek's argument was about individual liberties, not economics, so the article is not really addressing the question.

Moreover, all four of the nordic countries in question have repeatedly cut down their social expenditure in recent years. Or are you not aware of the mess Sweden's economy was in prior to the drastic trimming of the welfare state in the early 1990s?

The article is far too short and offers no detailed analysis of the specific "welfare" vs. "free market" initiatives it purports to be describing. If it had, it would have discovered that the Nordic economies are quite "free market" in terms of the recent (last 10 years) directions that their economies have been heading.

France and Germany would be better counterexamples to the US.

EDIT: Oh, and since when has Scientific American been an authority on economics?

 

[Erik Mesoy]

Moreover, all four of the nordic countries in question have repeatedly cut down their social expenditure in recent years. Or are you not aware of the mess Sweden's economy was in prior to the drastic trimming of the welfare state in the early 1990s?

You should be asking if SciAm is aware of it. And as this is from the November 06 issue, they probably are.

EDIT: Oh, and since when has Scientific American been an authority on economics?

Since economics was a science, perhaps, and since Jeffrey Sachs was an economist?

Jeffrey David Sachs (born November 5, 1954 in Detroit, Michigan) is an American economist known for his work as an economic advisor to governments in Latin America, Eastern Europe, the former Yugoslavia, the former Soviet Union, Asia, and Africa.

France and Germany would be better counterexamples to the US.

Since when were you an authority on this?

Hayek's argument was about individual liberties, not economics, so the article is not really addressing the question.

Really.

Friedrich August von Hayek, CH (May 8, 1899 in Vienna – March 23, 1992 in Freiburg) was an Austrian-born British economist and political philosopher noted for his defense of liberal democracy and free-market capitalism against socialist and collectivist thought in the mid-20th century.

"A claim for equality of material position can be met only by a government with totalitarian powers."

The article is far too short and...

Your post is far too short, too. You basically assume that you know more than Jeffrey Sachs.

 

[luiz]

This was an opinion article published on SciAm, I'm sure there are others with the exact opposite opinion.

Edit: BTW, considering the governments that this guy advised and how they turned out, I don't see why I should listen to him

And I assure you that I can "manipulate" statistics to make the "english-speaking model" look better. For exemple, I could mention that the US has a higher per capita income than all nordic countries but Norway, which is a major oil exporter. I could also mention that the US, Ireland, Canada and Australia all have a higher HDI than Denmark, which is perhaps the Mecca of the "social market". It's all about how you phrase the numbers. This guy has an agenda and phrased them in a way that suits it. And that's fine. I just don't forgive his pretentiousness to bluntly state that Hayek was wrong.

 

[Hayek]

Donald J. Boudreaux of Mason university already replied to the bit in Sachs's article that concerned Hayek in a letter to the Editor of Scientific American. I might as well quote part of his letter (which I first saw on the Becker-Posner blog www.becker-posner-blog.com) to save me from typing:

But as for limited security, Hayek wrote that "There is no reason why in a society which has reached the general level of wealth which ours has attained the first kind of security [that is, limited security] should not be guaranteed to all without endangering general freedom…. Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision" [pages 133-134].

As for poverty in the U.S.A., the official rate is somewhere between twelve and fourteen per cent of the population, but according to the Economist magazine, only two per cent remain poor for all the twelve months of the year. I shall not pretend to be an expert on why so many people are in prison, but it may well be due to the "War on drugs", which I cannot see how is related to welfare the way Sachs talked about it.

 

[Atropos]

You should be asking if SciAm is aware of it. And as this is from the November 06 issue, they probably are.

If they are aware of it then why don't they mention that it completely disproves their thesis?

Since economics was a science, perhaps, and since Jeffrey Sachs was an economist?

Economics has its own journals. Scientific America is not among them.

Since when were you an authority on this?

I'm not. No one in this thread has cited me as an authority, though, so that's not relevant.

If you like authorities, however, perhaps you'd like to ask JerichoHill, who is one?

Your post is far too short, too. You basically assume that you know more than Jeffrey Sachs.

So far as I'm aware, the average length of forum posts tends to be significantly shorter than that of articles in learned journals. Sachs professes to offer, in two pages and a graph, the definitive answer to a subject on which thousands of academics have written thousands of books.

And I didn't assume anything. I showed that Sachs has made the most basic mistake in the whole of economics - assuming that correlation implies causation. He states:
1. The Nordic countries have better socioeconomics statistics (in a few highly selective areas) than the US and a few other countries. (They have worse statistics in others, but that's the least of the problems with the article).
2. The Nordic countries have broader welfare nets than the US and the aforementioned few countries.
3. Therefore, if the US and aforementioned other countries imitated the Nordics in this regard, they would improve in the socioeconomic measures Sachs looked at.

Shall I demonstrate that red hair causes abortions?

1. Fiona has red hair and had an abortion.
2. Flora had black hair and had no abortion.
3. If Flora had had red hair, she would have had an abortion.

It's the same argument.

Sachs' argument is wrong because he takes it for granted that the Nordic countries' relative success is the consequence of their broader social nets. In reality, if he had bothered to contrast statistics from the early 1990s, (when, prior to the scaling back of the welfare state, the Swedish economy was in meltdown), the picture would be far bleaker. There's a reason why Sweden has gone from being the fourth richest country in the world in 1970 to the fourteenth richest today.

Sachs assumes, based on no evidence whatsoever, that the Nordics are wealthy from welfare. If that's the case, why didn't their relative performance deteriorate instead of improving after the 1990s free market reforms?

 

[C~G]

ISachs assumes, based on no evidence whatsoever, that the Nordics are wealthy from welfare. If that's the case, why didn't their relative performance deteriorate instead of improving after the 1990s free market reforms?

Maybe Sach's point is that welfare state works better with capitalism and vice versa than without it.

 

[Atropos]

Maybe Sach's point is that welfare state works better with capitalism and vice versa than without it.

Well, if that was his point it certainly wasn't what he said.

 

[Evie]

And I assure you that I can "manipulate" statistics to make the "english-speaking model" look better. For exemple, I could mention that the US has a higher per capita income than all nordic countries but Norway, which is a major oil exporter.

Of course per-capita income is a troublesome measure of overall development anyway, given the fact that it does not take too many very rich individuals or corporations to grossly inflate the PCI beyond what the average citizen can actually expect to see in a year.

It certainly measure "world economic performance" well, but there is more to the world than that.

 

[luiz]

Of course per-capita income is a troublesome measure of overall development anyway, given the fact that it does not take too many very rich individuals or corporations to grossly inflate the PCI beyond what the average citizen can actually expect to see in a year.

It certainly measure "world economic performance" well, but there is more to the world than that.

I don't deny that.

My point is that the guy has not proven the superiority of the nordic model anymore than I pro ved the superiority of the "english-speaking" model.

 

[The Last Conformist]

Moreover, all four of the nordic countries in question have repeatedly cut down their social expenditure in recent years.

Since the centre-right came to power in Sweden earlier this year, there's been some cuts, but in the years preceeding that social expenditure was increasing.

Or are you not aware of the mess Sweden's economy was in prior to the drastic trimming of the welfare state in the early 1990s?

I'd not quite call it drastic, but more importantly, the Swedish economy has done pretty well during the past decade, and that with a welfare state much closer in size to what we had in 1990 than to America's at point. This hardly makes for a case that a large welfare state is inimical to economic growth.

 

[WillJ]

I think we can agree that there's nothing wrong with Sachs's analysis, and I personally am in agreement with his conclusion, but the issues at hand are so complicated that I can hardly imagine how this little mini-study is broad or deep enough to warrant such a strong conclusion. Of course, Hayek's work never warranted strong conclusions either.

Edit: And I didn't realize Sachs writes for SciAm. Thank you for making me realize this.

 

[Atropos]

Since the centre-right came to power in Sweden earlier this year, there's been some cuts, but in the years preceeding that social expenditure was increasing.

I was referring to the Carl Bildt reforms. If I remember correctly, he slashed social spending by 6% of GDP.

I'd not quite call it drastic, but more importantly, the Swedish economy has done pretty well during the past decade, and that with a welfare state much closer in size to what we had in 1990 than to America's at point. This hardly makes for a case that a large welfare state is inimical to economic growth.

True. Sweden and the other Nordic countries have done quite well without abandoning their old social model completely (although they've come a long way in that regard since the glory days of the 1970s). That's why Sachs selected them - they're very special cases of pragmatic leftism where welfare measures have been carefully redesigned to impinge on the working of the economy as little as possible. For example, take the Swedish wealth tax - it's a model of redistributive economics, but in practice, Sweden's wealthiest individuals have been given exemptions.

I reiterate that using the Nordics to evaluate welfare state performance in general is like using Hong Kong alone to evaluate capitalism. France and Germany, where reforms have been less thoroughgoing and politicians less pragmatic, are better examples of how welfare impacts the economy. At the very least, Sachs should have looked at them as well.

 

[Atropos]

I think we can agree that there's nothing wrong with Sachs's analysis

Speak for yourself.

and I personally am in agreement with his conclusion, but the issues at hand are so complicated that I can hardly imagine how this little mini-study is broad or deep enough to warrant such a strong conclusion. Of course, Hayek's work never warranted strong conclusions either.

Edit: And I didn't realize Sachs writes for SciAm. Thank you for making me realize this.

Hayek at least drew his conclusions from a book, not a two-page article.

Yes, it's Sachs' insistence that in two pages and one graph he can disprove 20 years of research on this issue that gets my goat.

 

[WillJ]

Speak for yourself.

What I meant was that there was nothing factually wrong with what he said (as far as I know), and his comparisons are relevant (they just might not tell the whole story). You agree with me there, right? Of course, that hardly means his general points are valid, which is what I got into in the rest of my post, and which you seem to agree with me on.