There’s “big government” and then there’s big government

Bryan Caplan took me to task for trying to separate size of government from other interventionist policies:

The truth is that size of government and economic freedom are inextricably connected.  Any definition of “economic freedom” that doesn’t directlyincorporate the size of government is a crummy definition.

To illustrate, consider the following hypothetical.  The government of Ruritania allows consenting adults to sell one another anything on any mutually agreeable terms.  Ruritania has no minimum wage restrictions, no hiring or firing restrictions, no licensing, no zoning, and no paternalism.  It even – wonder of wonders – has totally open borders.  Anyone can hire anyone regardless of their national origin.

Before you packs your bags, I should point out that the government of Ruritania does have one little function.  Namely: It imposes a 100% tax rate on all income, and redistributes that income equally to all.  To enforce this tax rate, Ruritania has an all-pervasive system of surveillance – and punishes tax evasion with torturous death.  Leaving the country counts as tax evasion.

By Scott’s standards, Ruritania is a free-market utopia.  But almost no one else – economists, non-economists, or its own citizens – would see it that way.  Ruritania is functionally equivalent to North Korea.

OK, let’s do another example.  Start with a country like Australia, where government is 36% of GDP.  Then pass a law stating that henceforth each person must pay, in addition to their regular taxes, another lump sum tax equal to 64% of gross income.  However each person is also entitled to a welfare benefit equal to 64% of gross income.  Voila, you’ve just raised taxes and spending to 100% of GDP.  And yet of course absolutely nothing has changed.  Now of course no country with an economic model worth considering is anything like my example, or like Bryan’s example.

But what this thought experiment does show is that spending/taxes as a share of GDP may be a highly misleading indicator of the degree of government intrusiveness.  So what separates Bryan’s example from mine?  It turns out that we actually care about other factors, which are very imperfectly proxied by spending ratios.  For example:

1.  High MTRs on consumption/labor discourage work.

2.  Taxes on saving discourage investment and are biased against future consumption.

3.  Taxes on estates discourage saving and investment.

4.  Tax codes filled with loopholes encourage wasteful tax avoidance, and lead to wasteful expenditures of time and money on tax preparation.

Now let’s compare a country like Sweden to the US.  Their total tax bill is much higher, but that tells us very little about how much we are interfering in the free market.  Sweden has much higher taxes on labor/consumption (bad) but no marriage penalty (good).  They have no inheritance tax (good) and similar MTRs (I think) on capital income. And they have a very simple income tax system (no forms to fill out), they just send you the bill (very good.)  How does all this net out?  I’m not sure.  But what I do know is that we should pay much less attention to the fact that spending is 52.5% of GDP in Sweden and 38.9% of GDP here, and much more to how taxes affect one’s life.

I’m certainly not claiming Sweden’s system is “better” in any overall sense.  Rather that the traditional “capitalist” and “socialist” labels don’t really capture the actual differences between the two economies.  I will continue to consider it useful to differentiate between statist polices and egalitarian policies, even though I accept Bryan’s claim that virtually all real world egalitarian policies are at least slightly statist.

However I can’t accept this argument:

The essence of a free market isn’t merely that people can buy and sell whatever they want on whatever terms they find mutually agreeable.  Without the right to keep what you earn, freedom of contract is utterly hollow.  A society that redistributes most of what you earn is economically unfree.

.  .  .

Swedish school vouchers sound great.  Nevertheless, Sweden’s tax/GDP ratio in 2011 was almost double that of the U.S – 47.9% versus 26.9%.  The comparison for spending/GDP isn’t quite as lop-sided, but it’s still pronounced: 52.5% versus 38.9%.  If you don’t think that weighs heavily against Sweden’s free market credentials, you’re making a big mistake – and abusing language along the way.

I reject the term ‘heavily.’  As I tried to show above, government spending and taxes as a share of GDP can be highly misleading.  It doesn’t tell us how much “redistribution” is occurring, for instance.  To a large extent the Nordic social welfare programs take money from the middle class and then return the money to the middle class.  In contrast, Singapore forces people to take care of their own medical/retirement, etc.  So the “official” level of government spending in Singapore is very low.  And I do prefer the Singapore approach, which involves less redistribution and lower MTRs.  But the G/GDP ratios vastly overstate the difference between the Nordic and Singaporean models. That’s why I focus on variables like MTRs and tax complexity, which do a far better job of picking up the extent of market distortion.

BTW, I was pleased to see Garett Jones raving about Prescott’s insights into tax theory, particularly the fact one should generally ignore the income effect when considering the effect of taxes on labor supply, and that a consumption tax is identical to a payroll tax.  We learned all that at Chicago in the 1970s—glad to hear the rest of the world is now catching up.


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69 Responses to “There’s “big government” and then there’s big government”

  1. Gravatar of Shane Shane
    16. October 2012 at 19:36

    “Ruritania has an all-pervasive system of surveillance – and punishes tax evasion with torturous death.”

    That actually sounds much more like Singapore than Sweden. And yet I bet Caplan wouldn’t challenge the idea that Singapore–an authoritarian, Sparta-esque city state–is a free market paradise.

    But then, hey, Hayek and Thatcher and Friedman were both huge fans of Pinochet. Torture not a big problem for “free market” types as long as the rich pay very low taxes.

  2. Gravatar of Prakash Prakash
    16. October 2012 at 22:17

    Scott, if you were in a nation where government’s competence cannot be taken for granted, like India, you would be justified in being extremely worried that your tax return check would not come. A 100% tax in that case would be an unmitigated disaster for the formal sector.

  3. Gravatar of Benjamin Cole Benjamin Cole
    16. October 2012 at 23:49

    Even if it is true, I won’t believe a payroll tax is equal to a consumption tax, at least not as applied in the USA.

    It seems to me a payroll tax is unavoidable for everyone who needs to work for a living or employ someone, and in the USA is applied only to wage income, the first $100k or so.

    A national consumption tax would fall on all final sales.

    As Sumner has pointed out many times, a consumption tax is very fair, in that only people who consume a lot would pay a lot in taxes, and that makes sense, as if you consume a lot, you are using the nation’s infrastructure a lot, and other government services more than someone who lives in a desert trailer.

    We all want a smaller government, but simple size does not tell you much. You want to do business in Egypt, where everything is graft graft, graft, and you cannot get a permit to do anything? Venezuela’s government takes a 15 percent share of GDP, btw. Amazing.

  4. Gravatar of Vivian Darkbloom Vivian Darkbloom
    17. October 2012 at 00:21

    “Even if it is true, I won’t believe a payroll tax is equal to a consumption tax, at least not as applied in the USA.”

    How can you argue with someone who refuses to believe something that is “true”?

  5. Gravatar of Justin Irving Justin Irving
    17. October 2012 at 02:17

    Sweden’s capital tax rate is 30%…according to wikipedia http://sv.wikipedia.org/wiki/Kapitalinkomst (just paste this link into translate.google.se)

  6. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    17. October 2012 at 02:42

    If one country charges higher taxes and then subsidizes activity A, while another charges high taxes to everyone except people pursuing activity A; then it would seem that the first one has a larger state than the second one. However, I hope readers here will realise that the differences are mostly cosmetic.

    Of course, I am talking about tax expenditures which are huge in the US, allowing (especially GOP) pols to spend money while lowering the size of government. Size of government is a statistic that is actively being manipulated by pols.

    Of course, they are more or less equivalent to spending (sometimes, tax credits can even be sold to other companies or transferred when a company is acquired).

    What really matters is how much of the economy comes from the voluntary interaction and how much comes from state mandates. In this case, Caplan is absolutely right. The officially measured size of government only approximates this. For example, I would add all the tax accountants & compliance officers in private companies to the state side of the ledger.

  7. Gravatar of Saturos Saturos
    17. October 2012 at 03:28

    Thanks, I was wondering whether I should bring this to your attention, good reply.

    On the subject –

    Scott, you must comment on this (read all the replies): https://twitter.com/Noahpinion/status/258426502742429697

  8. Gravatar of ssumner ssumner
    17. October 2012 at 04:30

    Shane, You really are ignorant. Friedman opposed Pinochet. Have you been reading Naomi Klein? Where did you get this misinformation?

    Prakash, Yup.

    Justin, Ours will be 30% next year in states like California and New York, and our corporate tax rate is much higher than Sweden’s. So I stand by my claim.

    Luis. Good point, which is why MTRs are important.

    Saturos, I agree with Noah, Ironically Matt’s point about business taxes and employment is wrong if the Keynesian model is right. More investment would trigger higher AD, and indirectly boost employment.

  9. Gravatar of Saturos Saturos
    17. October 2012 at 04:42

    You agree that “the effect of income taxes on employment is probably miniscule”? Including payroll taxes? I thought you were in favor of employer side tax-credits? And do you agree that both pre and post- tax wages are sticky?

  10. Gravatar of Saturos Saturos
    17. October 2012 at 04:43

    Am I wrong that lowering taxes on business income will boost hiring?

  11. Gravatar of Saturos Saturos
    17. October 2012 at 04:45

    Ben, good point.

    Vivian, let’s not start that one again…

  12. Gravatar of J.V. Dubois J.V. Dubois
    17. October 2012 at 04:58

    Yes, this is a great article and I am glad that you made your opinion known. This whole government expenditures as % of GDP reminds me the arguments about tax cuts being government subsidies or not.

    Anyways, I think that the whole work disincentive arguments of taxation are overblown – at least in the level of taxation currently prevalent in western countries. There are several reasons:

    1. Historically it is impossible for people to work more than historical height of 3600 hours a year. These numbers were achieved during the second half of 19th century, thanks to invention of cheap artificial light and with industrialization. Workers worked 12 hour shifts 6 days a week with no vacations etc. This can be considered as upper boundary, no matter how “favorable” taxes are, or how unfavorable workers arguing power is, 3600 hours a year is probably the upper limit on how hard working one can be (in market economy).

    Currently the average hours worked in western countries range from about 1500 in Norway or Germany to 1800 in Italy, USA or Japan. This may seem as large difference, but it truly is not as dramatic as fall from 3600 to 1500-1800 range. There seems to be almost an order of magnitude difference between impact of taxes and an impact of some unknown force upon hours worked in an economy.

    2. Singapore and Korea: these are the true outliers – with over 2400 hours worked, and with favorable taxation it almost begs for connecting correlation to causality. I am much more skeptical about this, because:

    - These numbers may not reflect actual productivity. If you sort countries by GDP per hour worked, you get almost perfect inversion – leaders in hours worked become losers in labor productivity. And then there are stories of Korean employees staring into blank monitors because they cannot leave workplace sooner than their boss – or risk losing chance for promotion – corroborating this productivity argument.

    So my theory is very simple: as for the labor supply of any individual, there seems to be a steep change somewhere in the area of 1500 – 2000 hours worked per year. If you try to incentivize people to work more than that, it gets very costly. It is not just about people dividing time between labor and leisure. People need to have some leisure time to get something to eat, to sleep and to refresh themselves mentally.

    Another point is, that there seems to be no dynamism in labor supply. If in country A people work 1500 hours a year and in country B they work 1600 hours a year, country B will have approximately 6% larger GDP per capita then country A. But there is no reason for this gap to grow larger in time. If everything else remains equal, then this relative ratio will remain the same in the future.

    On the other hand, there are more important things to consider you want to concentrate on how to make one country richer even in relative terms. These are things like consumption/investment ratio etc.

  13. Gravatar of Saturos Saturos
    17. October 2012 at 05:14

    J.V. Dubois, there are other margins, such as human capital, quantity of effort, quality of effort, etc.

  14. Gravatar of Saturos Saturos
    17. October 2012 at 05:29

    And don’t forget tax evasion.

  15. Gravatar of dBonar dBonar
    17. October 2012 at 06:07

    Maybe it is a nit-pick, but your thought experiment doesn’t sound like a reasonable proxy for “big government”. You assume it takes no overhead costs to do the collection and re-distribution. You also assume there will be no pressure over time to change how the money is redistributed.

    I agree with your point that a simple ratio of government spending to GDP doesn’t tell the whole story. At the same time, you have assumed away some of the potential problems people fear in ‘big government’. Perhaps many of the people using spend/GDP as a rough indicator of the size of the government as assuming that its quality — good or bad — remains the same as the size (so measured) changes. In that case, your example sidestepping their issue.

  16. Gravatar of J.V. Dubois J.V. Dubois
    17. October 2012 at 06:36

    Funilly enough, I just read an article on WCI where a commenter “sandwitchman” posted a very interesting link on his paper about too long working hours being inefficient and why markets are not able to deal with it. There is a long list of literature and research by economists who studied impacts of shortening working hours at the beginning of 20th century. Go read: http://www.dse.unifi.it/upload/sub/walker2011.pdf

  17. Gravatar of Doug M Doug M
    17. October 2012 at 07:46

    Benjamin Cole,

    “You want to do business in Egypt, where everything is graft graft, graft, and you cannot get a permit to do anything?”

    I know some people who will say that it is easier to bribe one guy who will take care of all of your permitting that to deal with multiple layers of local, state and federal buraucracy to get licensed. Of course this assumes that your one bribe greases all the palms necessary, and that your agent stays bribed.

  18. Gravatar of Lawrence D’Anna Lawrence D'Anna
    17. October 2012 at 08:35

    A consumption tax is not equivalent to a payroll tax when it comes to savings. With a payroll tax, the income is taxed before it can be saved, so less interest is earned by savers than under a consumption tax.

  19. Gravatar of mpowell mpowell
    17. October 2012 at 08:52

    There is a really important point that makes Caplan’s ‘heavily’ modifier really out of place. If the government implements a single payer based health care system funded through a minimally progressive tax, that represents very little government intervention in the free market compared to a US type system. There is already a huge amount of government distortion in the US health care system and anyways any health care system has very few of the desirable properties of a properly functioning market. But if you implement single payer, your government spending is going to bump up by around 10% of GDP.

    Opposition to single payer from libertarians comes almost entirely due to their ideological, knee-jerk resistance to the reality that certain markets are so poorly functioning they are better operated by the government. And healthcare is pretty clearly one of these.

  20. Gravatar of Doug M Doug M
    17. October 2012 at 09:41

    Lawrence,

    the theory is that it doesn’t matter what you tax, income consumption, property, VAT, payrolls… either you have less money in your pocket or you pay a higher (final) price for goods, your real disposable income is about the same.

  21. Gravatar of Shane Shane
    17. October 2012 at 10:50

    One need not read Klein, just the letters she published that Friedman wrote to Pinochet, in which he claimed that Chile’s problem “arises from trends toward socialism that started forty years ago, and reached their logical–and terrible–climax in the Allende regime. You have been extremely wise in adopting the many measures you have already taken to reverse this trend.” He’s maybe not a supporter, but he certainly was not a critic. It’s not a stretch to say that he at least flattered Pinochet, if not outright rationalized the means he used to deal with the “terrible” climax of the Allende regime. If I just killed Allende, and was being widely denounced for such a move, a letter from a prominent American academic saying that such measures were wise in their effects might make me feel a bit better.

    But my point is not that Friedman is evil, just that low MTR are often enough to take the liberal out of the most liberal of liberaltarians. Dr. Sumner, you will often say things like “I’d prefer the low tax model of Singapore to the high tax Scandinavian” model.” But this fails to take into account that Singapore may not even be a comparable liberal country, at least in the sense that you borrowed from Haidt and used in your “Great Danes” paper: the low marginal tax rates might be less about liberal values like fairness and efficiency and much more about authoritarian and hierarchical values. One can be for free markets because one is a liberal utilitarian, or because one is a believer that this delivers just deserts to the undeserving masses and rewards our social betters. The two may bear a superficial resemblance, but have little to do with one another, and I think the liberal cause would be better served with less apologizing for the authoritarian imitation of liberalism.

  22. Gravatar of Justin Irving Justin Irving
    17. October 2012 at 12:55

    Yeah, that is a good point Scott. Swedish gov announced a cut to the corporate rate in 2013 too…from 26.3% to 22%, wikipedia is wrong!

  23. Gravatar of Major_Freedom Major_Freedom
    17. October 2012 at 20:37

    ssumner:

    OK, let’s do another example. Start with a country like Australia, where government is 36% of GDP. Then pass a law stating that henceforth each person must pay, in addition to their regular taxes, another lump sum tax equal to 64% of gross income. However each person is also entitled to a welfare benefit equal to 64% of gross income. Voila, you’ve just raised taxes and spending to 100% of GDP. And yet of course absolutely nothing has changed.

    That bolded part is false. I guess monetarists focused on nominal statistics would overlook something like this, but should the state tax and then send checks for 64% of gross income, this will indeed have real effects. It will incur real costs. Even if we assume unchanged 36% G to GDP spending, the state will need more tax collectors and more welfare distributors. This will consume real resources and reduce overall productivity.

    More state action means less room for market action.

    All actions have costs.

    It’s still important to include size of government in all measurements of economic freedom.

    My guess as to why Sumner rejects the “size of government should be included in measures of market freedom” argument, is not because G/GDP “can be highly misleading”. It is because NGDP targeting theory does not specifically preclude government taking up 100% of it, and yet, as a so-called pro market economist, he has to defend NGDP targeting against anti big government economists.

    There is no inherent “free marketness” to NGDP targeting theory. If there is one economy with a constant 5% NGDP growth but 100% government taxation and spending, and another economy has erratic NGDP growth but small government taxation and spending, then NGDP targeting advocates would be compelled to make a tough choice: advocate for the communist system or abandon NGDP targeting.

  24. Gravatar of Major_Freedom Major_Freedom
    17. October 2012 at 20:41

    Sweden’s redistribution system heavily (there’s that word again) favors low-income families.

    It is inaccurate to paint Sweden as a “middle class is taxed, middle class gets welfare” society.

  25. Gravatar of Saturos Saturos
    17. October 2012 at 21:15

    Shane, so it’s wrong to praise Pinochet for making people better off economically? Friedman was also widely known to hold the view that economic freedom must eventually lead to political freedom.

  26. Gravatar of Saturos Saturos
    17. October 2012 at 21:19

    J.V. Dubois, demanding more labor in the labor market does not impose an externality on those workers. I suspect Chapman is wrong too, seems to contradict the First Welfare Theorem.

  27. Gravatar of J.V. Dubois J.V. Dubois
    18. October 2012 at 00:45

    Saturos: I do not want to weight into the externality debate. It is this passage that got my attention:

    “In his analysis, Chapman had referred to a mass of evidence from the 19 th century indicating that reductions in the hours of work had not led to proportionate declines in output and, instead, had often led to increases. The reduction of hours allowed better rested workers to produce as much or
    more in shorter hours.”

    If working 3600 hours a year is not efficient for average 19th century worker and if reducing hours worked often led to increases in output per worker/year in absolute terms, I wonder how this applies to contemporary workplace where many people engage in creative tasks that cannot be simply rushed just by sitting at the desk for 16 hours a day all around the year.

    This makes me very suspicious if the taxes are that all important for incentives to work as some economists seem to think. In my opinion, cultural or peer pressure is more important for incentives than the financial one. Cultural or country specific influences are things like state holidays, number vacation days, existance and/or tolerance of things like sick days, existance/tolerance of overtime work or work at home during the worker free time etc.

    Or to make another argument, there seems to be much more going on with working than just getting slightly larger paycheck. For instance in some countries and companies working overtimes or working at home is mostly about employee signalizing some qualities that may make him a good candidate for promotion. So it is that much about working 20% more hours to get 20% higher salary, as it is about working more hours than your competitors so that at some distant time you will not only get salary bump, but also better office, higher status and all those perks of promotion.

    In the end this can lead to some king of an arms race where everyone will lose.

  28. Gravatar of ssumner ssumner
    18. October 2012 at 05:27

    Saturos, Maybe I read it too fast–no I don’t agree with those comments. I thought he was claiming there are supply side effects.

    mpowell, Or we could remove all that government “distortion.” But I do agree with your claim that single payer wouldn’t do much to increase government involvement–we are almost there already.

    Shane, Friedman also gave lots of advice to the Chinese Communist government during the 1980s. If a letter was found where Friedman made polite comments about Deng, I suppose you would call Friedman a communist. Is that right? And did Klein mention the comments where Friedman harshly condemned the human rights abuses in Chile?

    Your comments about my supposed support for Singaporean authoritarianism are so ridiculous I hardly see a need to respond.

  29. Gravatar of Shane Shane
    18. October 2012 at 17:36

    Dr. Sumner,

    I love your blog, and I find you to be among the most fair-minded of people on the internet who comes from a different political persuasion. So I’m a bit disappointed that we can’t have a reasonable discussion on this point. I don’t think I’m being unfair. I am certainly not trying to troll you, although your responses suggest you feel that I am. I am sorry that I came across that way.

    Let me just say so more nice things about you to convince you that I’m not a troll:

    -Your blog has changed my view of monetary policy.

    -I consider your blog to be the absolute “must read” source on the aftermath of 2008.

    -You’ve wholly convinced me of your view that monetary policy, not housing or Wall Street malfeasance, caused the collapse.

    -You have single-handedly taught me to read Krugman much more critically and skeptically.

    So again, I’m disappointed that we can’t have a reasonable conversation about this. I am a scholar of liberalism, which is what first drew me to your blog, and I was making a very modest point about a libertarian tendency to soft-pedal the illiberal elements of rightwing free market states.

    I am not saying you support authoritarianism.

    I am not saying Friedman supported authoritarianism.

    I never called Friedman an authoritarian.

    But he did not write a letter about Pinochet–he wrote one *to* him. And he chose not to say one critical thing. Instead, he praised his wisdom in “reversing” the policies of Allende, a man he had killed.

    The equivalent is not Friedman giving advice to Deng–it is Friedman praising policy choices that were a direct result of anti-democratic oppression. If Krugman wrote a letter to Deng, praising reforms that were part and parcel of his Tiananmen policies, because they represented standing firm against those who were critical of reform, many would rightly jump on him.

    I am simply pointing out that the differences between Scandinavia and Singapore (or Pinochet’s chile) have a lot more to do with low v. high MTR, and that you gloss over a great deal when treating places like Singapore as just another strain of the liberal tradition.

    Singapore is at best a highly problematic representative of any strain of liberalism.

  30. Gravatar of Philemon Philemon
    18. October 2012 at 18:46

    @Shane

    I’m puzzled. Has Scott ever praise Singapore as a representative of any strain of *liberalism*?

    Maybe he might agree with the widespread notion that Singapore is an example of a neo-liberal *economic* arrangement. But I don’t ever recall him saying that Singapore has a liberal social or political arrangement. Relatedly, wasn’t the point between him and Bryan over measures of *economic* freedom–specifically, whether government and taxes as a % of GDP is a good or misleading indication of economic freedom. Civil/political freedom is not the issue here.

    So I’m not sold on the idea that Scott “soft-pedalled” the illiberal elements of, say, Singapore. (There is nothing particularly “rightwing” about Singapore.)

    On Friedman. Yes, he praise Pinochet for reversing the policies of someone he had killed. But presumably he did so not under that description, but as bad economic policies–which were pursued by Allende. He even took some trouble to explain in the letter–especially in the case of inflation caused by large government spending with significant part not funded by explicit taxation–why they were bad and what can be done about it.

    On the hypothetical Friedman and Deng–wouldn’t it depend on what the specifics of what the Tiananmen demonstrators were protesting vs. what Deng wanted to implement. After all, it is not impossible that Deng’s economic policies would have been the right ones, and the protesters policies, if implemented would have caused economic problems–while granting that putting down the protesters with soldiers and tanks is reprehensible? In other words, your scenario is at least a bit underdescribed.

  31. Gravatar of Saturos Saturos
    18. October 2012 at 19:55

    Shane – Given that power has been seized (and maintained) anti-democratically, is it wrong to praise the dictator for using it wisely? From a consequentialist point of view this seems unobjectionable, to say the least. Governments always live off force, in this case the propagation mechanism is deplorable, but that doesn’t mean we don’t seek marginal improvements, yes?

  32. Gravatar of Saturos Saturos
    18. October 2012 at 19:57

    This seperate from your Tiananmen example of commending policies that are part and parcel of the repression – Friedman’s recommendations were regime-independent.

  33. Gravatar of Saturos Saturos
    18. October 2012 at 20:11

    Actually, Scott, I’ve changed my mind about this post. Taking thousands of dollars from every citizen in order to pay them back thousands of dollars of in-kind benefits is obviously welfare-reducing, to the extent that no redistribution actually occurs. This is in fact the most obvious reason to oppose big government. (I’m sure no-one is arguing that the government is a more efficient producer, either…)

  34. Gravatar of Shane Shane
    18. October 2012 at 20:20

    @ Philemon:

    See the following post:

    http://www.themoneyillusion.com/?p=6971

    There he discusses Singapore as a version of neoliberalism–which I presume we can all agree is itself a type of liberalism–on par with Switzerland and Denmark.

    In the article Dr. Sumner says: “Because I am a right-wing liberal who thinks incentives matter more than progressives believe they do, I’d vote for the Singapore/HK low tax model, not the Danish/Swedish high tax model. ”

    That post builds on the framework from the “Great Danes” paper, where he talks about the three strands of liberalism. He definitely *does* criticize the authoritarian tendencies of Singapore in that paper, but thinks that their economic policies are a brand of liberalism largely separable from other types of liberalism.

    I don’t think this is the right way of looking at things, as I indicated. That free market policies were introduced by dictatorships in Latin America has been a major reason for the backlash against liberalism in recent years. This blog has helped me appreciate the positive aspects of Milton Friedman, but for my Chilean friends, he is little more than an opportunist who used his pull with a dictator to engage in social engineering. I certainly *disagree* with that assessment, but I can hardly blame them.

    The cause of free markets would have been much better served if Friedman had used his audience with Pinochet to denounce his violence–full stop. He could easily have written a letter that was partly critical of Pinochet’s abuses. He chose not to, and only criticized him when he was called out for the contradiction. That he failed to do so has, unfortunately, turned a generation of Latin Americans against free markets, and rendered Friedman a near synonym for tyranny to many in the region (he is a name associated much more with the extreme right among my Chilean friends).

    Who is to say that Singapore and China won’t experience as similar fate? This is why I think it is best to treat liberalism as a total package, and not talk about some abstraction called “economic freedom” that can be introduced by an authoritarian state as much as by a democracy. Dr. Sumner’s refutation of Caplan makes a cogent argument for removing size of government from the “economic freedom” equation. I agree with that, but would argue that mode of government very much needs to be back in the equation.

  35. Gravatar of Shane Shane
    18. October 2012 at 20:38

    @Saturos,

    The engagement with dictators was bad also from a consequentialist point of view, because it turned the continent against sensible policies. Friedman easily could have told Pinochet the simple truth: economic reform is no excuse for political oppression. Instead, he rationalized the behavior as “economic reform will lead to personal freedom.” What it actually did was render “economic reform” a rationalization for bad policies in the minds of millions–which essentially it became in Friedman’s take on the situation.

  36. Gravatar of Saturos Saturos
    18. October 2012 at 20:51

    “economic reform will lead to personal freedom.”

    Well, didn’t it?

    The policies were good, it was the regime (by which I mean more than a particular administration) that was bad.

    “Friedman easily could have told Pinochet the simple truth: economic reform is no excuse for political oppression.”

    Right, and what response would that have gotten? I don’t think Friedman’s role was a big factor in determining, eg. support for people like Chavez.

  37. Gravatar of Saturos Saturos
    18. October 2012 at 20:55

    Btw Shane, just looking at your profile, I totally agree with you about Shostakovich. But I think your “endorsement” of the Communist Manifesto is too clever by half… no fiction on your favourite books list? (Unless it was the Manifesto.)

  38. Gravatar of Shane Shane
    18. October 2012 at 20:58

    @ Saturos,

    Like I said, I don’t think we can or should neatly compartmentalize policies from the government implementing them. Friedman certainly didn’t, describing Allende as “terrible” and part of a “regime.”

    The “states are always using force” argument seems like just another rationalization. I’m someone who is sympathetic to Friedman’s arguments, but most people on the left aren’t, because they associate the terms “neoliberal” and “free market” with the contexts in which they were often deployed in Latin America in the 70s and 80s: as excuses to distribute income upward (hierarchy and authoritarianism by other means) and as rationalizations for political oppression (“just be patient, freedom will eventually come.”)

    From a consequentialist viewpoint, the mere appearance that Friedman was rationalizing authoritarianism with the “personal freedom will come” argument was extremely damaging. So the context, or the state that is implementing policy, is never a separate question. Free markets don’t exist in the abstract. The reason why they are often so hard to introduce is that in practice they do radically change power and wealth–people like Smith like them in part because they were a means to challenge entrenched privilege. But they can also be used in a way that simply reinforces existing forms of hierarchy.

  39. Gravatar of Shane Shane
    18. October 2012 at 21:09

    Saturos, you said “Right, and what response would that have gotten?”

    Who knows? Maybe if all the Chicago Boys insisted on the link between personal and economic freedom, things would have changed. “He wouldn’t have listened” is an excuse more than a reason.

    “I don’t think Friedman’s role was a big factor in determining, eg. support for people like Chavez.”

    It’s not just Venezuela. Argentina, Ecuador, and Uruguay have swung sharply to the left. Chile is highly polarized, although currently under a rightwing government. Part of the reason for the polarization is no doubt due to the way in which previous policies created the sense of a separation, even a conflict, between economic and personal freedom.

    “No fiction.” This is the class blog for an Adam Smith/Karl Marx themed writing class. So it’s not really representative of the real me…not that I’m that interesting. :)

  40. Gravatar of Shane Shane
    18. October 2012 at 21:15

    BTW, I think I know how Friedman must have felt. I do believe that he really did not think he was offering any kind of aid to Pinochet. Just like I really intended not to go a-trolling when I first commented on this post. :)

  41. Gravatar of Saturos Saturos
    18. October 2012 at 21:23

    I think if you had a chance to make some marginal improvement to Stalin’s policies, saving a few thousand people here or there, you wouldn’t start nagging him about being a dictator (for several reasons.)

    The Chicago School was a bunch of economists, not all with the exact same ideology but rather a common approach to adressing economic questions (Hard-headed, skeptical, data-minded). Friedman was one of the people who did more than anyone else last century to advocate all forms of freedom, in the sense of protection against force by others. He defended freedom in very general terms, see his clips on YouTube for a start. None of us could hold a candle to the humane impact he has had on the lives of millions. (I’m counting many in Russia and China as well as Eastern Europe, not to mention heading off sclerosis for the West.) He was against all forms of excessive power and authority of one man over another. Quite well known for that, actually, to anyone who’s watched him speak without the filter of a Naomi Klein presentation.

    Part of the reason for the polarization is no doubt due to the way in which previous policies created the sense of a separation, even a conflict, between economic and personal freedom.

    Right, so statist policies conducted by autocrats without the benefit of Friedman’s advice must have discredited statism, then? No such thing as regions full of statist regimes side-by-side?

    “This is the class blog for an Adam Smith/Karl Marx themed writing class.”

    And I guess Dean Baker is supposed to be the brilliant modern-day compromise. *facepalms again*

  42. Gravatar of Saturos Saturos
    18. October 2012 at 21:28

    I’m someone who is sympathetic to Friedman’s arguments, but most people on the left aren’t, because they associate the terms “neoliberal” and “free market” with the contexts in which they were often deployed in Latin America in the 70s and 80s: as excuses to distribute income upward (hierarchy and authoritarianism by other means) and as rationalizations for political oppression (“just be patient, freedom will eventually come.”)

    I agree with all that.

    Friedman certainly didn’t, describing Allende as “terrible” and part of a “regime.”

    As Scott said, Friedman vocally opposed all abuses conducted by Chilean authorities. He just wouldn’t have done that whilst he was trying to make marginal improvements to the living standards of the Chilean people, by getting the ear of Pinochet, who despite his flaws was a man who could be worked with.

    Btw his role in all this is often greatly overstated. (By the propagandists originally, of course.)

    But they can also be used in a way that simply reinforces existing forms of hierarchy.

    Hmmm, I wonder what exactly you mean by that? (Time to get MF over here…)

  43. Gravatar of Saturos Saturos
    18. October 2012 at 21:42

    “…but thinks that their economic policies are a brand of liberalism largely separable from other types of liberalism.

    I don’t think this is the right way of looking at things, as I indicated. That free market policies were introduced by dictatorships in Latin America has been a major reason for the backlash against liberalism in recent years.”

    Clearly according to this it would have been better if they had not introduced free-market policies, is that right? Or do you admit that they are seperable?

    The “states are always using force” argument seems like just another rationalization.

    No, the argument is that force will always exist, because of human incentives, so we should push (intelligently) for arrangements in which force will be minimized, to maximize “aggregate” welfare (also to satisfy the ethical proclivities of people like me for whom abhorring harm is a first-order concern – which might be called “libertarianism”, although I increasingly don’t like the label).

    Boy are you lucky that Major_Freedom was not around to answer that one.

  44. Gravatar of Saturos Saturos
    18. October 2012 at 21:42

    Separable. Dammit, I always get that one wrong.

  45. Gravatar of Major_Freedom Major_Freedom
    18. October 2012 at 22:07

    Saturos:

    The Chicago School was a bunch of economists, not all with the exact same ideology but rather a common approach to adressing economic questions (Hard-headed, skeptical, data-minded).

    You forgot partial to communistic central planning in the field of money production.

    The Chicago School’s roots are leftist. Henry C. Simons, a founder and mentor of the school, wrote “A Positive Program for Laissez Faire”, and this book consisted of three core principles:

    1. A radical policy of trust busting of all firms and unions down to shopkeeper size and status;

    2. Equalization of incomes through compulsory egalitarianism in the tax structure;

    3. Price stabilization through monetary and fiscal management.

    Funny how these principles are “laissez faire”, and still held as sacred by most monetarists.

    Friedman was one of the people who did more than anyone else last century to advocate all forms of freedom, in the sense of protection against force by others. He defended freedom in very general terms, see his clips on YouTube for a start. None of us could hold a candle to the humane impact he has had on the lives of millions. (I’m counting many in Russia and China as well as Eastern Europe, not to mention heading off sclerosis for the West.)

    Rothbard and Mises did more in this area than Friedman, intellectually speaking.

    He was against all forms of excessive power and authority of one man over another.

    Yes, except for designing withholding taxes and making it much easier for the state to use force to confiscate people’s earnings, advocating for guaranteed income financed by state force, and attacking free market money.

  46. Gravatar of Major_Freedom Major_Freedom
    18. October 2012 at 22:09

    Woah

  47. Gravatar of Saturos Saturos
    18. October 2012 at 22:12

    Interesting course list, Shane. Scott will be flattered you’ve put him on! Just wanted to point out though, don’t know if you’re aware but your Krugman links are in tension with the Sumnerian view. Scott has repeatedly emphasized that monetary policy failure has been bad for everyone, as has costly fiscal stimulus, contra Krugman’s rentiers theory. And the baby-sitting co-op essay by Krugman, whilst much touted is actually a poor model of recessions (his coupons are actually credit, not money). They would do better to read Nick Rowe: http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/04/walras-law-vs-monetary-disequilibrium-theory.html

  48. Gravatar of Saturos Saturos
    18. October 2012 at 22:12

    Speak of the Major.

  49. Gravatar of Saturos Saturos
    18. October 2012 at 22:12

    (Try closing your blockquotes mate, it helps.)

  50. Gravatar of Major_Freedom Major_Freedom
    18. October 2012 at 22:16

    Saturos:

    The “states are always using force” argument seems like just another rationalization.

    No, the argument is that force will always exist, because of human incentives, so we should push (intelligently) for arrangements in which force will be minimized, to maximize “aggregate” welfare (also to satisfy the ethical proclivities of people like me for whom abhorring harm is a first-order concern – which might be called “libertarianism”, although I increasingly don’t like the label).

    Boy are you lucky that Major_Freedom was not around to answer that one.

    There is a difference between minimizing force, and believing that if force will always be around then let’s try to harness it and initiate its use for “good.”

  51. Gravatar of Saturos Saturos
    18. October 2012 at 22:17

    Oh, and Shane, if you’re going to quote Enlightenment liberals on money, Hume is way better than Smith.

  52. Gravatar of Major_Freedom Major_Freedom
    18. October 2012 at 22:18

    I thought I did close the blockquotes. oh well.

  53. Gravatar of Major_Freedom Major_Freedom
    18. October 2012 at 22:19

    Oh, and Shane, if you’re going to quote Enlightenment liberals on money, Hume is way better than Smith.

    Yup, and Turgot was better than Hume, IMO.

  54. Gravatar of Saturos Saturos
    18. October 2012 at 22:20

    Interesting MF, previously you have argued (re central banking) that even non-initiation isn’t enough, merely having any connection to pre-existing force (supposing that states are inevitable, and that the state may as well promote a form of money tied to the taxes it already collects, which its bank then manages) is wrong.

  55. Gravatar of Saturos Saturos
    18. October 2012 at 22:20

    Turgot? The Physiocrat?

  56. Gravatar of Major_Freedom Major_Freedom
    18. October 2012 at 22:45

    Saturos:

    previously you have argued (re central banking) that even non-initiation isn’t enough, merely having any connection to pre-existing force (supposing that states are inevitable, and that the state may as well promote a form of money tied to the taxes it already collects, which its bank then manages) is wrong

    I still hold that. Is there a contradiction somewhere?

    ———-

    Turgot? The Physiocrat?

    Yes. If you ask me, economics as a distinct science starts with him. He didn’t write much, but what he wrote packed a wallop.

  57. Gravatar of Shane Shane
    19. October 2012 at 05:27

    I don’t think Friedman made a huge mistake in writing to Pinochet. I think it would have been better if he was at least gently critical in his letters. Chile already had a robust liberal tradition. Pinochet was a deviation from it,

    The Dean Baker book is to introduce students to a style of writing that is both left-leaning and pro-market (rather than pro-business or pro-rich).

  58. Gravatar of ssumner ssumner
    19. October 2012 at 05:53

    Shane, You said;

    “I’m someone who is sympathetic to Friedman’s arguments, but most people on the left aren’t, because they associate the terms “neoliberal” and “free market” with the contexts in which they were often deployed in Latin America in the 70s and 80s: as excuses to distribute income upward (hierarchy and authoritarianism by other means) and as rationalizations for political oppression (“just be patient, freedom will eventually come.”)”

    Have you ever looked at the “socialist” models that the left likes? Have you ever seen a Che poster on the wall of a faculty office? (I never saw any Pinochet posters at Chicago) I see no evidence that the “people on the left” care about human rights any more than people on the right.

    You said;

    “If Krugman wrote a letter to Deng, praising reforms that were part and parcel of his Tiananmen policies, because they represented standing firm against those who were critical of reform, many would rightly jump on him.”

    You really have to stop reading Klein, she knows nothing. She claims the Tiananmen policies were pro-market, but anyone with even a passing knowledge of recent Chinese history knows they were anti-market, the reform drive went into reverse after Tiananmen. It’s not even an issue under dispute.

  59. Gravatar of ssumner ssumner
    19. October 2012 at 06:03

    Shane, Sorry if I overreacted earlier, I get annoyed by people who try to link Friedman and Pinochet. I don’t know why he wasn’t more critical in that letter. Perhaps he thought is advice was more likely to be taken if he wasn’t crtical. Maybe he doubted reports of atrocities. During the Cambodian genocide most on hte left denied it was going on. Indeed even today some on the left deny the Cambodian genocide–there was a recent article in (Counterpoint?) praising Pol Pot for making Cambodia more equal.

  60. Gravatar of Shane Shane
    19. October 2012 at 06:29

    And sorry for the suggestion that you might be authoritarian. I like your blog precisely because it combats the idea that free markets are incompatible with egalitarianism and personal freedom.

    Incidentally, I don’t really Klein either, and I don’t actually read her that much. The Krugman thing was a hypothetical for comparison.

    Yes, the left is I think very illiberal unfortunately. I wish they read your blog–it would help them see that Friedman really was in good faith. Others though have used free markets as more of a pretext. That is responsible for a lot of residual bad blood.

  61. Gravatar of Contemplationist Contemplationist
    19. October 2012 at 10:34

    Shane

    I agree that what Friedman did was not _optimal_ though it was in no way evil or bad. However, lets get one thing straight. It’s not a stretch to imagine that in Chile, one was choosing between the military authoritarianism of Pinochet and the socialist totalitarianism of the Allende regime (Democratic or not makes no difference). In a civil war between a potential Castro-like Cuba state vs what Pinochet offered, I will choose Pinochet every single time. And anyone who doesn’t is despicable.

  62. Gravatar of Shane Shane
    19. October 2012 at 11:27

    Contemplationist,

    This is the exact attitude I’m talking about. “Of course I’m not for authoritarian states, but…” It’s a ruse to try to rationalize something that needs to be wholly denounced.

    BTW: FDR and Churchill chose Stalin, Henry Ford and Charles Lindbergh chose HItler. History generally records one choice as dead right, the other as dead wrong.

  63. Gravatar of Shane Shane
    19. October 2012 at 12:00

    Contemplationist,

    I realize that kind of sounded like I was calling you out as an authoritarian or a Nazi…didn’t mean it that way. :)

    I just meant to say:

    1. it’s a bit ironic to claim someone didn’t rationalize something and then to rationalize that thing.

    2. And that it’s far from clear that one would always go with the rightwing authoritarian. I’d go with the socialist over Franco, too.

  64. Gravatar of Flávio Flávio
    19. October 2012 at 22:53

    Shane said in his first comment: “But then, hey, Hayek and Thatcher and Friedman were both huge fans of Pinochet.” Why are people taking this troll seriously?

  65. Gravatar of Saturos Saturos
    20. October 2012 at 04:25

    “Others though have used free markets as more of a pretext.”

    For something bad that was logically consistent with free markets? How?

    So anyone who presents a right-wing option (with many great flaws) as superior to a left-wing alternative is “rationalizing evil”? I see you weren’t actually quoting Contemplationist, I suggest rereading his precise comment. I think you are feeling threatened whenever “leftism” is denounced by someone presenting an alternative which is also “evil”. Now, not everyone thinks like an economist, ranking everything ordinally according to preference without trying to squeeze things into categories of “good” and “evil”. Certainly Pinochet was preferable to Allende (or rather the associated regimes). And certainly the regime I live under here in Australia is much, much better than both.

    It’s not at all clear that supporting Stalin was “dead right”. I’m afraid you have a simplistic picture of history: http://econlog.econlib.org/archives/2006/03/the_misconcepti.html

  66. Gravatar of Saturos Saturos
    20. October 2012 at 04:35

    WWII, widely seen as the proof of the necessity of an active foreign policy, left half of Europe under Soviet rule, and put Mao Zedong, the century’s greatest murderer, on the Chinese throne. Is that what counts as “American success”? In a similar vein, it seems likely that the U.S. wouldn’t have to worry about terrorism if it had simply stayed out of the Middle East altogether.

    From http://econlog.econlib.org/archives/2009/04/econlog_book_cl_16.html

    Would you also call this “rationalization”?

    While it’s true that the U.S. can be a truly barbarous combatant, abject surrender to American occupation leads to amazingly good results. The American occupation of Germany and Japan clearly paved the away for the most libertarian policies these countries had ever known, not to mention peace and prosperity.

    On the other hand, Soviet occupation almost invariably led to mass murder, mass deportations, wide-scale slave labor, collectivization, famine, and other horrors. Abject surrender was no protection, as the citizens of the Baltics learned in 1940-1. To say that sovietizing Eastern Europe was all part and parcel of rolling back Hitler’s invasion is absurd. The creation of the Soviet bloc may have been opportunistic, but it was still a clear-cut case of an “expansionist” foreign policy.

    To be blunt, the main thing decent people around the world have had to fear from the U.S. is that they’ll get killed in the crossfire if their government or fellow citizens resist. The main thing decent people around the world had to fear from the U.S.S.R., in contrast, was that they would experience the standard treatment the Soviets dealt to everyone under their control.

  67. Gravatar of J.V. Dubois J.V. Dubois
    20. October 2012 at 08:34

    Saturos: “Taking thousands of dollars from every citizen in order to pay them back thousands of dollars of in-kind benefits is obviously welfare-reducing …”

    No, it is not – or to be precise it could be actually welfare increasing in two ways.

    1. Most of the time, the actual redistribution that we are talking about consists of three major things: pensions, health-care and social security (unemployment insurance etc.). The key for government being effective in giving the money back to people who are taxed is if it is to prevent some market failure.

    2. Externalities: if government takes so much money from smokers so that this tax covers healthcare costs associated with smoking (most of which can be actually used by smokers themselves) I would consider it welfare increasing.

    The same goes for congestion tax, that can be used either to improve road infrastructure so that there will be less traffic jams, or to pay to invest in mass transit so that those who remain driving cars will be given a benefit of jam-free roads – and since they are willing to pay for that it is a benefit worth the money they are taxed.

    Much of the same argument can go for other tax-financed government services, such as taxes financing waste disposal etc.

  68. Gravatar of Saturos Saturos
    21. October 2012 at 08:56

    J.V. Dubois, true market failures are rarer than you think. None of the examples you mentioned qualify. Without regulation, insurers can price according to risk – the purpose of mandates is really more about redistribution than about correcting the proposed market failure of lost consumer surplus (to the healthier patients!). The private sector can finance toll roads and waste disposal on its own, when those services are not crowded out. The market cannot be blamed for the “externality” of others having to pay for a smoker’s treatment, in a socialized healthcare system. And how is imposing costs on yourself by smoking an externality? Irrational, perhaps, but not market failure.

    My point still stands. True market failures and public goods only require a few thousand dollars per person to address. Instead states “churn” tens of thousands of dollars worth of funds back to citizens in the form of in-kind benefits more efficiently purchased on their own – not just healthcare, but in reality most of what governments do fits this bill. This much activity without even the pretense of economic justification (there is a big disconnect between the rationales taught in schools and what government in fact does) is indeed obvious waste. Again, a smart egalitarian (like Sumner) could only really complain about small government states like Hong-Kong and Singapore, which do fantastically, by suggesting there be more redistribution – but they would obviously worry about high MTRs, which is the real tradeoff.

  69. Gravatar of The Meaning of Taxes And Spending | squarelyrooted The Meaning of Taxes And Spending | squarelyrooted
    7. March 2013 at 09:51

    [...] in practice, there will be differences. Scott Sumner’s thought experiment about the society that taxes 100% of GDP by taxing 100% of income then writing welfare checks equal to taxed income demonstrates that, since [...]

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