There’s nothing I enjoy more than defending the indefensible

Dilip sent me a couple links (here and here) of people trashing a new post by Mankiw.  If they hadn’t done so already, I probably would have attached attacked the post.  But since they have already trashed it, I’m going to defend it.  Seriously.   Mankiw notes that per capita tax revenue in the US is fairly typical of developed economies:

Here are the results for some of the largest developed nations:

— France: .461 x 33,744 = 15,556
— Germany: .406 x 34,219 = 13,893
— UK: .390 x 35,165 = 13,714
— US: .282 x 46,443 = 13,097
— Canada: .334 x 38,290 = 12,789
— Italy: .426 x 29,290 = 12,478
— Spain: .373 x 29,527 = 11,014
— Japan: .274 x 32,817 = 8,992

He argues that this weakens an argument often made by progressives, which is that the US should have much higher taxes.  Apparently, we already have plenty of tax revenue; we just don’t use it very well. 

Mankiw doesn’t mention this, but this example sort of reminds me of the charts that compare public spending on health care as a share of GDP, and total health care spending.  Most developed countries have governments that spend about 8% of GDP on health care, with another 2% from the private sector.  Their public expenditures cover almost their entire populations.  The US public sector also spends about 8% of GDP on health care, but this only covers a modest fraction of the population.  Another 8% or so is spent by the private sector.  Actually, this example is even more surprising that Mankiw’s.  Think about it; because per capita GDP in the US is higher than in other developed economies, in absolute terms our government actually spends more (per capita) on health care than almost any other government.  Even before ObamaCare.  We ought to be able to put the entire US population on Medicare and Medicaid without spending an extra dime.  But that’s another long story.  Here’s Mankiw’s argument:

Some pundits, reflecting on the looming U.S. budget deficits, claim that Americans are vastly undertaxed compared with other major nations.  I was wondering, to what extent is that true?

.   .   .

The bottom line: The United States is indeed a low-tax country as judged by taxes as a percentage of GDP, but as judged by taxes per person, the United States is in the middle of the pack.

And here’s Yglesias’ counterargument:

Mankiw concludes that “the bottom line” is that the United States isn’t actually a low-tax country. But while I’m sure Mankiw believes the conclusion that raising taxes isn’t as viable as I (or, say, Paul Krugman) think, I seriously doubt that he believes this mode of analysis is correct. After all, why should the bottom line relate to the United States at all? Does Mankiw really think that Italy has more scope to increase taxes and the size of its public sector than does the United States? Or consider that in Slovakia per capita GDP is just $20,000. By Mankiw’s logic, Slovakia could raise taxes up to 65 percent of GDP and it would still count as a country with a below-average tax burden!

The bottom line: The United States is indeed a low-tax country as judged by taxes as a percentage of GDP, but as judged by taxes per person, the United States is in the middle of the pack.

That’s pretty persuasive, and it would have been even more persuasive if he’d used the Congo or Afghanistan.  But in the end I think Mankiw might be right.  The clue is when he says:

The most common metric for answering this question is taxes as a percentage of GDP.  However, high tax rates tend to depress GDP.  Looking at taxes as a percentage of GDP may mislead us into thinking we can increase tax revenue more than we actually can.

Mankiw is too sophisticated to mention the Laffer curve in polite company, but what he is really doing here is a sort of cross-sectional test of supply-side economics.  He’s saying higher rates may bring little or no extra revenue to the US government.  So first let’s examine what’s wrong with Yglesias’s argument.  Before considering Slovenia Slovakia, let’s consider the Congo and Afghanistan.  It doesn’t take much thought to realize they don’t lie on the same Laffer curve as the US.  They have lower levels of education, less political stability, and higher levels of corruption.  But Slovenia Slovakia isn’t that different from the other developed countries, so what’s wrong with Yglesias’ counterexample?  Here’s the problem, Slovenia’s Slovakia’s not done catching up.  They abandoned communism a few decades back and since then have been gradually catching up to the West. 

When I started studying economics the US was much richer than Western Europe and Japan, but was also growing more slowly than other developed countries.  They were still in the catch-up growth phase from the ravages of WWII.  But since Reagan took office the US has been growing faster than most other big developed economies, and at least as fast in per capita terms.  They’ve plateaued at about 25% below US levels, when you adjust for PPP.  This is the steady state.  The big question is why.

Take a look at the data for Germany and Italy.  On average they collect .416 of GDP in taxes, as opposed to the .282 ratio in the US.  And yet the average amount collected is only slightly higher than US tax revenues. 

Here’s the $64 dollar question for which I’ve never seen progressives provide a satisfactory answer.  Why is per capita GDP in Western Europe so much lower than in the US?  Mankiw seems to imply that high tax rates may be one of the reasons.  I don’t know if that’s the answer, but if it’s not my hunch is that the factors that would explain the difference are other government policies that the left tends to favor (strong unions, higher minimum wages, more regulation, generous unemployment insurance, etc.)  So I think Mankiw is saying that if we adopt the European model, there really isn’t a lot of evidence that we’d end up with any more revenue than we have right now.  Further evidence for this hypothesis is that the few developed countries that do have much lower tax rates than the US (Hong Kong and Singapore) now have much higher per capita GDPs (PPP) than Western Europe.  Yes, they are small and urban, but Western Europe is full of small countries of about 6 million people that have less than 5% of the population in farming.

Of course the progressives’ great hope is that we’ll end up like France.  But Brazil also has high tax rates, how do they know we won’t end up like Brazil?  For those who like cultural explanations, I’d point out that the US has many people of Spanish, Italian, German and British descent, but not many of French descent.  And those 4 European countries raise about as much revenue as the US, but with much higher tax rates and much lower incomes. 

France is more socialist that the US, but consider those industries where we have tried to emulate the French.  We have nuclear power plants built by heavily regulated utilities.  We have high speed rail built by government-owned Amtrak.  Actually we don’t have high-speed rail, we have “high-speed rail.”  And the reason we don’t is not a lack of money, but a different political system.  Progressives imagine cities like Paris and trains like the TGV.  I imagine Three Mile Island and the Acela.  The French know how to run government projects better than we do, just as we run them better than the Italians. 

In the end, it doesn’t matter what I think.  What matters is what the public thinks.  For several decades the most dynamic part of the US economy has been Texas.  Rich people, middle-class people, and working class people are voting with their feet and moving to Houston and Dallas and Austin.  Whites, blacks and Hispanics are moving to Texas.  Not because of oil wealth (Louisiana has even more oil per capita), and not because of climate (California and Florida are more pleasant), but rather because it best epitomizes the US economic model.   And they are leaving states with fiscal policies more to the liking of progressives like Yglesias and Krugman. 

I’d much rather visit Paris, France than Paris, Texas.  But on a recent visit to Houston I was impressed by how competently they run the place.  It doesn’t have the art or architecture of Paris, but it’s a place where one can have an amazingly high standard of living on a middle income salary.  Just don’t murder anyone.

 


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64 Responses to “There’s nothing I enjoy more than defending the indefensible”

  1. Gravatar of StatsGuy StatsGuy
    31. March 2010 at 19:30

    Thinking about indefensibles – Nick Rowe’s post here:

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/03/do-we-need-a-bubble.html

    reminded me of your old post on money as the ultimate bubble. Thinking of this bubble as an unstable social equillibrium designed to solve intergenerational transfers – a game between overlapping generations – adds some clarity. Of course, we could say the bubble is in government obligations (of which money is a component). If the latter were true – the real bubble is in obligations (the social contract itself), then how again do we separate fiscal/monetary policy?

  2. Gravatar of StatsGuy StatsGuy
    31. March 2010 at 20:01

    And talking about indefensible ideas, let’s briefly consider the fiction of PPP GDP.

    http://en.wikipedia.org/wiki/Quality-of-life_index

    http://en.wikipedia.org/wiki/List_of_countries_by_life_expectancy

    http://current.com/technology/92353129_which-17-countries-have-faster-internet-connections-than-the-united-states.htm

    Has anyone calculated a GDP index that nets out distributional rent-seeking activity?

    And back to HK and Singapore again… the gateway cities to populations of a billion people. This is like comparing New York in 1880 to the entire American Interior.

    And then there’s Texas…

    http://www.businessweek.com/bwdaily/dnflash/content/sep2006/db20060913_099763.htm

    http://www.sleepreviewmag.com/issues/images/2009-03/2009-03_03-02.jpg

    Or we could pull up violent crime, prison population, net federal transfers…

  3. Gravatar of Joe Joe
    31. March 2010 at 20:13

    Professor Sumner,

    I don’t think Mankiw would argue that its Europe’s higher tax rates. I think if you spoke to him it would be higher marginal tax rates (as well as those labor market regulations).

    He has blog posts where he mentions Edward Prescott’s theory that the reason Europeans work less is not because they just prefer leisure to us workaholic Americans, but because they have higher marginal tax rates which discourage work. Perhaps you’ve read it.

    http://www.opinionjournal.com/extra/?id=110005800

  4. Gravatar of Joe Joe
    31. March 2010 at 20:16

    Also, I’m curious how a new value added tax as opposed to an income tax raise would factor into his thesis.

  5. Gravatar of rob rob
    31. March 2010 at 20:23

    Scott, as always, you make great argument.

    and RE houston: we only murder those who were asking for it.

  6. Gravatar of rob rob
    31. March 2010 at 20:29

    hey, this is more up TC’s alley, but do you have a theory on why portions at restaurants in houston are so ridiculously large? is it so they can charge more? if so, why, considering it is too much to eat?

  7. Gravatar of TGGP TGGP
    31. March 2010 at 20:42

    Three Mile Island didn’t kill anybody. And it was decades ago. Give nukes a chance.

    A more relevant Worthwhile Canadian Initiative post is this:
    http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/03/partisan.html

    If you’re really into defending the undefendable, what do you think of Walter Block’s book?

  8. Gravatar of rob rob
    31. March 2010 at 20:53

    when i hear almost anyone else make right wing economic arguments, i am offended. yet when you make them i am persuaded why? my theory is because you have the conscience of a liberal with the education of an economist and dont find those things in conflict like certain others.

  9. Gravatar of Thorfinn Thorfinn
    31. March 2010 at 21:40

    Interesting that Canada has not that much more in the way of taxes, and some of that may be explained by more expansive health coverage.

    I wonder what Krugman thinks of that. Surely racist Republicans didn’t conspire to give Canada an economy and taxes much closer to America than Western Europe.

  10. Gravatar of Lorenzo from Oz Lorenzo from Oz
    31. March 2010 at 23:24

    On the same calculation basis, Australians pay $11,414 per head in tax, with universal health care and all, plus we rate second in the world on the UN’s Human Development Index. Not only do we have a lack of “racist Republicans”, we have had Labor (i.e. social democratic) governments about half the time federally since 1969 (as we do now), and in all but two of our States and Territories at the moment.

    I guess our progressives do not meet the Yglesias/Krugman standard.

    The US spends a lot more on defense than other developed economies. That still makes your health spending dysfunctional for the reasons you say, but it does raise issues about the level of availability of tax revenues for non-defense purposes.

  11. Gravatar of Tom Tom
    1. April 2010 at 01:50

    Don’t mistake Slovenia (part of former Jugoslavia) and Slovakia (part of former Czechoslovakia). People in Slovakia are very proud :)
    Anyway, it’s funny that Yglesias chose Slovakia to illustrate his point. After our countries separated in 1993, they had really bad government till 1998, but after they made some reforms Mankiw would like – low taxes, cuts in spending, investments in future rather than present, attracted a lot of FDI. At first, public reaction was predictably negative, but GDP growth in 2006 was 8,5%, in 2007 10,5%. And now for the first time in history, skilled Slovaks are coming back home.

  12. Gravatar of scott sumner scott sumner
    1. April 2010 at 04:49

    Statsguy, I agree that fiscal and monetary policy are linked, it’s a question of who is the first mover. In the US it’s monetary policy, in Zimbabwe it was fiscal policy.

    Statsguy, I agree that PPP comparisons are problematic, but what’s the alternative? Nominal exchange rates are even worse. I prefer revealed preference—where do people want to move? I once lived in Britain, It’s no surprise to me that most immigrants prefer to come to the US, not Britain.

    You said:

    “And back to HK and Singapore again… the gateway cities to populations of a billion people. This is like comparing New York in 1880 to the entire American Interior.”

    No, it would be more like comparing NYC to Switzerland. Your best argument would not be percent urban, (most European countries are very urban) but rather population characteristics. The people in those cities are a biased sample. But if we are going to use population characteristics, then why not compare the US to a big, diverse, high-tax economy like Brazil?

    Regarding Texas:

    Hot, humid places have lots of murder. The same is true of the deep South, the Caribbean, Central America and the hot, humid parts of South America. Obesity is an input into life expectancy. Texas is in the middle of the pack on life expectancy–not bad for a state with it’s ethnic profile. It makes no sense to compare Texas to a state that is 75% Asian, like Hawaii.
    In the end, it doesn’t matter what you think, or what I think. All that matters is what the people think. And they are voting with their feet for Texas. I plan to move to California.

    Joe, I agree that higher MTRs are the key.

    Joe, Countries that have much higher taxes than the US are forced to rely heavily on less progressive taxes, like the VAT and payroll tax. I think we will move in that direction as we become a higher tax economy.

    rob, I agree, and don’t forget that hot humid weather would make anyone more grouchy.

    Texans eat more because they have much more of a zest for life than us uptight puritans in Massachusetts.

    TGGP, I completely agree on Three Mile Island. But I also think the French nuclear industry is far better than ours. And I think most nuclear experts would tell you the same thing. I have also read Lindert, and agree on his view of taxes (although I favor lower taxes than he does.)

    I have not read Block’s book but I’d guess that I will like it.

    rob, Thanks, I completely buy into the left wing value system, thus you don’t see me make non-utilitarian arguments like “taxation is theft” or “the rich deserve their money.” I debate them on their own terms.

    Thorfinn, Yes, and we may soon surpass Canada, as the two countries are going in opposite directions.

    Lorenzo, That’s a good point. It’s obvious to me that if we spent a lot more, we wouldn’t get the same results as Australia or Canada. Partly it’s defense, but we actually spend only about 2% – 3% of GDP more on defense than other rich countries. So that’s not the whole story.

    Tom, Thanks, I just read it too fast. I am aware that Slovenia is more developed than Slovakia, and I do recall the supply-side policies adopted in the late 1990s that increased Slovakia’s growth. I seem to recall they are now number 1 per capita in auto output, is that right?

  13. Gravatar of Arash Arash
    1. April 2010 at 04:55

    Hi Scott,

    as a European, I agree with your reading of Mankiw (Joe, I think we all agree that marginal rates matter; yet, there may be a correlation between institutions that produce high tax rates and high marginal rates). In general, I would separate the problem of using the right measure of tax burden from its possible consequences. I support Mankiw because his tautological equation relates tax burden not to the cake produces by individuals, but to the individuals themselves. The cake per person ratio is a corrective: why should Americans have a higher burden to pay for their poor, just because Europeans are less productive (for whatever reason)? In a Western democracy tax per capita seems more appropriate than the tax/cake ratio: In a free society, the government relies on public consent. Only a thief directly looks for my money, without asking me first how I feel. Mankiw simply shows that Americans share the average burden of Europeans.

  14. Gravatar of Nate Nate
    1. April 2010 at 05:33

    Scott,

    That was one of the most interesting posts I’ve read from you on your blog. Keep up the good work.

    Nate

  15. Gravatar of Gregor Bush Gregor Bush
    1. April 2010 at 06:05

    Scott,
    I think yours and Mankiw’s posts are an example of the Lucas critique as applied to tax policy/the size of government. The Left tries to estimate the impact of a policy change (static analysis produces an estimate of substantially higher government revenue per capita from raising taxes in a country with higher GDP per capita) but fails to account for the impact of the policy change itself (the act of raising taxes may slow or even lower GDP per capita).

    Btw, have you seen Tino Sanandaji’s posts at Super-Economy where he compares the standard of living of Swedes in the US and in Sweden throughout the income distribution? Interesting stuff.

    http://super-economy.blogspot.com/2010/03/super-economy-in-one-picture.html

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. April 2010 at 06:19

    In your links to various critics of Mankiw you left out DeLong:

    http://delong.typepad.com/sdj/2010/03/flash-must-credit-delong-flash-horrible-tragedy-republicans-read-greg-mankiw-move-to-north-korea-seeking-low-tax-c.html

    No, I don’t find his blithe argument concerning North Korea persuasive either.

    I noticed above that someone mentioned the UNHDI. I took a crack at applying UN HDI to the US states last June:

    http://mapscroll.blogspot.com/2009/06/human-development-in-united-states-part.html

    I then followed up by developing my own HDI, what I like to call the Adavanced Nation Human Development Index (ANHDI). It was intentionally designed to be tough on the US. The US ranks 15th on it because several other advanced countries do better in my choices of representative data on income (GDP per hour worked, aka productivity), education (combined education enrollment rates) and health (life expectancy):

    http://mapscroll.blogspot.com/2009/06/human-development-in-united-states-part_26.html

    Map Scroll is a nice little site if you like geographical data.

    Well, back to the main question: if we adopted the “European model” would we end up with more tax revenue than we have now?
    Not if we did everything the “European model” entails: strong unions, higher minimum wages, more regulation, generous unemployment insurance, etc. just to use your examples. Europeans have a lot more liesure time than Americans and it’s not because they’re all trying to avoid paying taxes.

    However, let’s ask a more specific question: could we raise more tax revenue without impairing our GDP per capita? I think the answer is yes, if you keep marginal tax rates low (less deadweight losses), tax consumption (increased incentives for savings and investment) and tax labor instead of unearned income (the income elasticity of the supply of labor is practically zero for higher income people).

    Am I proposing that we increase taxes? No, I’m just posing and answering a related hypothetical question. Food for thought.

    P.S. Mankiw’s posts are often thought provoking. It would be even more thought provoking if his posts were open to comments.

  17. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. April 2010 at 06:22

    P.P.S. I notice my comments are now being moderated. Will this be standard practice in the future?

  18. Gravatar of Doc Merlin Doc Merlin
    1. April 2010 at 07:03

    @Mark, they are only moderated if you have links in your post (to deal with spammers).

    Also, good article Scott. …and… er, YAY HOUSTON!

  19. Gravatar of StatsGuy StatsGuy
    1. April 2010 at 07:34

    Um, yah, Texans eat more because they have a greater zest for life…

    “Currently, 58% of adults and 39% of children are classified as overweight or obese in the Greater Houston community. Fortunately, many Houston organizations including hospitals, universities, non-profits, and corporations, have developed a wide range of programs to prevent and treat obesity.”

    http://ccts.uth.tmc.edu/ccts-services/resource-lists

    Houston residents also seem to have a greater zest for bariatric surgery.

    BTW, this is one of the best arguments _against_ Obamacare – it’s a happiness transfer to “zesty” obese Texans and away from us uptight puritan Massachusetts folks (and those uptight, obese, murdering residents of Honolulu… oh, wait…).

    Remember this article about health care in McAllen county?

    http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande

    (and yes, I fully concede that this data is polluted by racial/ethnic differences – but I don’t buy the “hot climate = higher murder rate thesis”. Looking at the murder capitals of the US and the world, I think the pattern is quite different…

    http://www.nationmaster.com/graph/cri_mur_percap-crime-murders-per-capita

    The bottom of the list are Qatar, Saudi Arabia, Japan, Greece, and Hong Kong – all of which are sweltering.

    The top has some hot areas, but also lots of former Soviet Republics. I’d say the clearer pattern involves clean/corrupt government and organized crime (especially drugs and weapons trade).

  20. Gravatar of sustain_ability sustain_ability
    1. April 2010 at 07:42

    For those of us who have some free time this holiday weekend:

    http://avoidreversewealtheffect.blogspot.com/
    means to avoid reverse wealth effect caused by asset deflation


    The technology provided here enables to match these people who want to sell a loan and those people who want to purchase a loan…

    The establishment of the NLBS(Non-Performing Loan Bid System) means to acquire new channel for the government and the central bank to cope with B/S recession, which derived from B/S adjustment. The initial gains provided to the first economic unit by central bank diffuse to the other economic units, through NLBS, bringing about offset multiplier effect. The gains works like a catalyzer. Through the disposal of non-performing loan on economic units concerned, it directs assets to exceed debts substantially on B/S. Offset multiplier effect can cope with the case that spiral of insolvent is more effective to depress the economy than the curb by sufficient internal reserve that certain economic units hold, or the stimulation of the economy by lower interest rate or public investment. Because offset multiplier effect works directly to the B/S of economic units, it stimulates the economy together with lower interest rate or public investment, and it enables government to bring more effectiveness for less expenditure. NLBS must be put in operation before the majority of economic units become insolvent, and before the extent of insolvent become terrible.”

    A new role for Central Banks of affected countries?

  21. Gravatar of Alan Vanneman Alan Vanneman
    1. April 2010 at 08:03

    “Just don’t murder anyone.”

    You mean, “Just don’t allow yourself to be accused of murdering someone, whether you actually did it or not, unless you are extremely wealthy and entirely white. Oh, and don’t smoke marijuana either.”

  22. Gravatar of MBP MBP
    1. April 2010 at 08:29

    Scott – I find it interesting and illuminating that economists from the left and right seem to view Mankiw’s argument through their own particular lens. The left sees our low ratio of taxes to GDP as vast untapped potential to increase taxes. the right sees the absolute dollar amount of per capita taxes and says, “see we already pay more taxes than most other countries”…What the left must answer is 1) why do we seeimgly get much less value per tax dollar, and 2) are we willing to risk reducing GDP per capita in return for more taxes and spending? The right may want to try to answer, how can we change incentives and gov’t programs to increase value?

    Also, is the main difference in value or efficiency determined by the civil service in US vs other countries? are civil servants more efficient and productive elsewhere?

    Interesting post.

  23. Gravatar of Eric Baum Eric Baum
    1. April 2010 at 08:40

    I suspect Mankiw made that post in response to a prompt from me, but he left off some of my main points, which are still highly relevant to the discussion here, so I’ll post my email in response here.

    —————————————

    On 3/26 I emailed Mankiw in response to his 3/24 post “A Fiscal Train Wreck” as follows:

    You(Mankiw) wrote:
    My own guess is that the United States will likely raise taxes substantially, and taxes as a percent of GDP will reach levels never seen in U.S. history (although common in Europe).

    The problem with that is that its not clear it will raise more money.
    I suspect that if the US raises taxes, the amount of money raised will go *down* from what would have been raised if instead they cut taxes, and in particular, since it will cut into growth or maybe turn growth into contraction, that it will go down more and more, indeed exponentially, compounding, as time passes over what growth with lower tax rates would have provided.

    Europe may raise much more for government to spend as a fraction of GDP,
    but they surely raise much less per capita. Turning the US into Europe won’t solve or even ameliorate the fiscal train wreck problem, it will exacerbate it.

    ———————
    One more point not in my original email: According to Mankiw’s figures on Taxes/GDP, I was wrong about how much Europe raises per capita, but I was in the ball park. However I ask whether the .282 figure for the US includes local taxes? Is that a purely federal figure? In which case, I may be right after all that the US government at all levels already spends more per capita than Europe.

  24. Gravatar of Matt Matt
    1. April 2010 at 09:27

    Doesn’t this all go back to the liberal emphasis on relative prosperity, while conservative emphasize absolute prosperity? I’m reminded of the EU definition of “poverty,” where somebody is below the poverty line if they’re below 40% or so of a nation’s average income. While the average income of Portugal is below the US’ poverty line, the EU declared poverty “eradicated” because nobody lived below 40% of the country’s average income.

    Similarly, Krugman and Delong don’t look at the absolute value of taxes in the US. They see the millions made by Goldman Sachs executives as millions going to wine cellars and helicopter rather than health care or six-figure public sector salaries.

    But, regardless of what Blankfein makes this year, we spend more on public services and get far less than other Western nations in terms of health care or even transfer payments. There are a couple of reasons for this:

    1. Defense, obviously, but what’s not obvious is that Iraq and Afghanistan alone have not been big burdens as a percentage of US government expenditures. Much of our “defense” goes to pork projects and waste here in the US, protected by the congressmen representing that district.
    2. Medicare and Medicaid, whose high expenditures have the same reasons for the rest of health care being so expensive. Read the New Yorker article on that town in Texas for more information.
    3. Very high salaries for federal government workers, especially compared with typical salaries in Western Europe. The average federal government salary is around 80k, with 40k in benefits. I had a friend who worked for NASA and he said NASA not only would give him leave and pay for his PhD, but pay his full salary for four years while he pursued his PhD.
    4. The criminal system, where we spend something like 40k a prisoner.

    And, as other commenters have said, the US does not do well in any “standard of living” metric despite our high GDP. This is because GDP includes things like all four points above. It includes tests doctors order for CYA purposes, even though nobody really wants that. It includes high salaries for trial lawyers, which nobody really wants either.

    In other words, we have a very dysfunctional political system that generally spends money less efficiently than most of Europe. We need to address these issues head on, especially health care costs, for the nation to reach the prosperity its capable of.

  25. Gravatar of Lord Lord
    1. April 2010 at 09:31

    From
    http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/03/partisan.html

    I will deal first with claims that high ratios of government spending to GDP are necessarily deleterious to economic growth. These claims are wrong. To my knowledge, there isn’t a compelling theoretical foundation for this conclusion. And as far as I can tell, neither does the available empirical evidence support it. In this survey, Xavier Sala-i-Martin (who speaks with a certain amount of authority in this field) observes that “[t]he size of government does not appear to matter much. What is important is the ‘quality of government’.”

  26. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. April 2010 at 10:33

    Eric Baum,
    Mankiw gets his figures from a Wikipedia entry. He uses the Heritage Foundation column (there are three solumns of data) whose source is uncited. Their figures are almost uniformly higher than 2007 OECD figures with the exception of the US (see second column in Wikipedia entry). I don’t trust the Heritage Foundation as a source of data as they have an agenda of making tax burdens in countries whose policies they oppose look higher than reality. Using OECD figures actually would have greatly strengthened Mankiw’s argument as France’s Germany’s and the UK’s tax rates were actually 0.436, 0.362 and 0.366 respectively in 2007.

  27. Gravatar of Jason Jason
    1. April 2010 at 10:57

    Regarding Brazil, maybe taxes are high, but not redistributive.

    This is far from closed, but the Gini coefficient (or similar) might be a better measure: not comparing high tax to low tax, but comparing the effect of redistributive taxation systems. There have been studies that say a Gini coefficient of about 0.3 to 0.4 is optimal for economic growth. Brazil is high ~0.6, the US is a little high ~0.45, Slovakia is low at 0.26. However, most one parameter descriptions of an economy are likely to fail individually.

    I’ve always personally looked at the situation as like that of an engine: Gini measures your air-fuel mixture, whereas taxes measure just air and GDP measures just fuel. You can be too high or too low. But there is so much more that goes into a car — spark efficiency, friction, etc.

  28. Gravatar of William William
    1. April 2010 at 12:01

    Three Mile Island didn’t kill anybody.

    Are you seriously asserting, as a matter of fact, that the large concentration of radon in well water around Three Mile Island as a result of the accident has not caused even a single case of fatal cancer? In the face of reports like, “Study Links Three Mile Island Radiation Releases to Higher Cancer Rates” ?

    Man, people are pretty myopic when it comes to cause and effect. If it didn’t happen immediately, it didn’t happen!

  29. Gravatar of Doc Merlin Doc Merlin
    1. April 2010 at 12:31

    @Statsguy? Have you ever been to Houston?
    The city pastime is eating out, if you are a foodie, its a pretty awesome place to live. The sheer amount of variety and choice in restaurants (chains, independent places, really off the wall places) is really incredible and delicious. Its also what Houstonians do, they love to eat out. This is made worse by a really incredible highway system that allows you to get anywhere within Houston relatively quickly. So you can get Dim Sum in Chinatown or kimchee in the Korean areas, or really whatever you want wherever. Houstonians, also between family and work don’t have much time for entertainment but the food is cheap and delicious so a lot of their entertainment budget goes towards food.

  30. Gravatar of John John
    1. April 2010 at 12:39

    I will gladly assert that TMI has no link to radon levels in well water. The accident had nothing to do with radon levels which are naturally occurring in some geologic formations.

    Why does all radiation assumed to be from nuclear power, is as if people don’t notice the big fire ball in the sky the earth rotates around.

  31. Gravatar of Further reading | Clive Crook’s blog | FT.com Further reading | Clive Crook's blog | FT.com
    1. April 2010 at 13:01

    [...] middling. An unsurprising point, you might think, yet Mankiw has stirred debate by stating it. See Scott Sumner. I continue to believe that the most important thing about the US tax system is that its marginal [...]

  32. Gravatar of Eric Baum Eric Baum
    1. April 2010 at 13:04

    Hey Mark Sadowski,
    did we go to Harvard together ’78?

  33. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. April 2010 at 13:09

    Eric Baum,
    No I was rejected by Harvard in ’82. At least I tried.

  34. Gravatar of A "heavy" burden – Economics - A "heavy" burden - Economics -
    1. April 2010 at 13:33

    [...] tax rates (or whether or not that would be a good idea). It's too clever by half.Scott Sumner basically says that indeed, Mr Mankiw's silly post was worth attacking. But he then unwisely decides to be [...]

  35. Gravatar of StatsGuy StatsGuy
    1. April 2010 at 13:58

    “What the left must answer is 1) why do we seeimgly get much less value per tax dollar?”

    That is a great question – and one that the right has been equally unable to answer. Of course, the right has no interest in answering it (why make government better when it’s failure provides ammunition to reduce government?). But the left does – although some of the answers it does not like.

    There are probably a combination of answers – everything from the Public Choice perspective (McNoll/Weingast – parties cripple institutions because it’s easier than killing them, captured agencies accumulate over time) to anti-union memes. (BTW, the notion that federal pay is lower than private sector is entirely myth these days – not only do they have benefits + hours + security + retirement, but better pay too – except, perhaps, in finance.) This fellow put together a nice summary.

    http://mjperry.blogspot.com/2010/03/blog-post.html

    Obama does not have the political power to take down wages/benefits in the public sector – he’d go against his own party. Note his recent spat over teachers in RI. The problem is, we had the GOP for 8 years and they made it worse – they seem more obsessed with God/Gays/Guns than actual reform, and they like to take the easy way out (cut services) rather than cut wages/benefits and force efficiency.

    Our best chance is probably a split govt., but we’re rapidly approaching the event horizon. In the end, it may be the bond market that does the job.

    Doc – yes, I’ve visited Houston, and they are very particular about their food. The Romans, too, loved food. And vomitoriums. (…says the puritanical elitist)

  36. Gravatar of Howard Howard
    1. April 2010 at 14:00

    Left off the list:

    Norway: $53,269 x .436 = 23225. $10,000 per person more than US.

  37. Gravatar of Danny Black Danny Black
    1. April 2010 at 22:03

    Mark A. Sadowski, I assume he doesn’t have comments because he doesn’t want to spend his life trawling through abuse.

  38. Gravatar of Doc Merlin Doc Merlin
    1. April 2010 at 22:21

    “they seem more obsessed with God/Gays/Guns than actual reform, and they like to take the easy way out (cut services) rather than cut wages/benefits and force efficiency.”
    Yah StatsGuy, this is why I think the tea party movement is so important. Hold republican’s feet to the fire on fiscal issues.

  39. Gravatar of Bob Puharic Bob Puharic
    1. April 2010 at 23:32

    He asks why progressives have no answer to the question about why GDP in Western Europe is lower than the US. A rather strange question, given the repartee recently between Jim Manzi, of National Review, and Jon Chait of The New Republic that addressed this very question (http://www.tnr.com/blog/jonathan-chait/conservative-accidentally-makes-the-case-social-democracy). The question has been asked, and answered.

    So the ball is back in the conservative’s court. Why is there so much inequality in our economy, vs. that of Western Europe?

  40. Gravatar of Quote Of The Day at Hispanic Pundit Quote Of The Day at Hispanic Pundit
    1. April 2010 at 23:54

    [...] of about 6 million people that have less than 5% of the population in farming.”  — Scott Sumner, professor of economics at Bentley University, discussing a post by Mankiw that Yglesias responded [...]

  41. Gravatar of Mark Mark
    2. April 2010 at 06:03

    But he also doesn’t mention that about 40% in the US pay no income tax so the gross amount needs to be divided by only 60% of the people.

    In Europe they have a Value Added Tax so all people pay about 18% on everything they buy. Here the lower income people pay very little and get a free ride on the middle and upper earners.

  42. Gravatar of Brad Brad
    2. April 2010 at 06:20

    “What the left must answer is 1) why do we seeimgly get much less value per tax dollar?”

    I have often heard assertions made that our private healt insurance system subsidizes much of the development of new drugs and procedures, and to some degree this is why our current health system is more expensive then others. Is there any way to test or quantify this assertion?

    We do spend a tremendous amount on defense, and at least some of this would seem to prevent others from spending as much. You can certainly question whether others really want or need the benefit of US defense spending. That said, is there any way to quantify the portion of Defense spending in the US that benefits or offsets the defense spending of others?

    My personal view is that these metrics cannot be taken in isolation, that there is a level of dependence here, that is not accounted for in any of the indexes I’ve seen. I believe but cannot quantify, that Public healthcare spending in Europe and Canada would be higher if it accounted for ALL of the costs, including research and development, of new drugs and treatment.

  43. Gravatar of glasnost glasnost
    2. April 2010 at 07:23

    Amazing to see this kind of ignorance from an economics professor.

    [[[They’ve plateaued at about 25% below US levels, when you adjust for PPP. This is the steady state. The big question is why.]]]

    [[[Take a look at the data for Germany and Italy. On average they collect .416 of GDP in taxes, as opposed to the .282 ratio in the US. And yet the average amount collected is only slightly higher than US tax revenues.]]]

    This isn’t a mystery. It’s a higher percentage of a smaller number. It’s basic arithmetic. But that’s not my, or your, ultimate point as I figure you understand this much.

    [[[Here’s the $64 dollar question for which I’ve never seen progressives provide a satisfactory answer. Why is per capita GDP in Western Europe so much lower than in the US?]]]

    Hello? Population growth? GDP growth persistently tracks this number over time, for obvious reasons. The more people you have, each of them producing some monetary value… etc.
    Europe’s population growth has been flat and ours hasn’t. Thanks largely to our immigrants. Our lead in GDP per capita hasn’t really expanded at all since 1980:

    http://www.tnr.com/blog/jonathan-chait/conservative-accidentally-makes-the-case-social-democracy

    So, let’s look at a straight-up measure. How did the United States perform in comparison with European social democracies? Well, since 1980, the original 15 members of the European Union saw their real per capita income grow by 58%. Real per capita GDP in the United States grew by… 63%

    In conclusion, progressives don’t have to explain something that doesn’t exist. You’ve been bamboozled. The only remaining question is whether you can engage and process new information falsifying your previous beliefs.

  44. Gravatar of Tourist Tourist
    2. April 2010 at 07:23

    No. Mankiw would probably not press hard the Laffer curve which I would say is theoretically possible in a certain context, but generally doubtful for practical economic policy planning. Just by way of example, it is possible but for Reagan’s tax cuts, US tax revenues from 1982 (or 1986) until 2010 would be less. And further, at some point, marginally, it MUST BE so that lower taxes increase government revenue, i.e., 100% taxation … right? So, that’s complicated.

    I think Mankiw is making the argument without really considering it that wrecking GDP in itself is bad public policy for a nation … which it is. And raising taxes that depress GDP hits the poorest the hardest in however subtly invidious ways even if the government gains short-term tax revenue increases.

    For every 1% GDP increase over 50 years, a society is 64% wealthier [better check my math]. Can you imagine how much worse off we’d all be, particularly the poor, if the USA were 64% poorer since 1960? And how much we suffer for our GDP dwindling on average since the 50s/60s from 4% to kind-of 2.25% … for whatever reason, but noting government was 14% of the GDP in the 1958 and I think about 30% now [again, better check my data].

    Tourist

  45. Gravatar of scott sumner scott sumner
    2. April 2010 at 07:35

    Arash, Good point. It is often said by progressives that we are more selfish than Europeans because our government spends less on health care. But our government actually spends more on health care.

    Thanks Nate,

    Gregor, Yes, I have also thought about that distinction. I’m glad he collected data. Of course John Rawls would say the Swedish system is better no matter how small the advantage in the bottom 10%.

    Mark, Thanks for the DeLong tip. Regarding the HDI, the US scores pretty well for such an ethnically diverse country. Certainly there is no indication we could do much better with the European model. Of course progressives might say ethnicity shouldn’t matter, but then how would they explain Sicily?

    You said:

    “Europeans have a lot more leisure time than Americans and it’s not because they’re all trying to avoid paying taxes.”

    I think it is. In the 60s the French had US tax rates, and worked as hard as we did. Did French culture suddenly change? Or French tax rates?

    Doc Merlin, Thanks, I didn’t know the links were the issue.

    Statsguy, Yes, I did a whole post on the New Yorker McAllen story. I argued for making Texas an independent country (again) so it would adopt a more efficient health care regime.

    The link between taxes and obesity isn’t clear to me.

    Yes, other things besides climate affect murder rates, but in the Western hemisphere there does seem to be a strong correlation, even holding race constant.

    Alan, I like California’s drug laws much better than those of Texas. I don’t see the execution of innocents as a big problem, on the other hand I’m not a big fan of the death penalty. I think the entire country only executes about 50 men a year, as compared to about 15,000 murders. So is it really worth all the fuss? I doubt it. Life in prison might be the better way to go.

    MBP, You asked:

    “The right may want to try to answer, how can we change incentives and gov’t programs to increase value?

    Also, is the main difference in value or efficiency determined by the civil service in US vs other countries? are civil servants more efficient and productive elsewhere?

    Interesting post.”

    Good questions. I’ve argued we are much too big, and that there are dis-economies of scale in governance. I’ve touted countries like Denmark, Switzerland and Singapore as examples of places that, holding taxes constant, are more efficient than the US in other areas of economic policy.

    More to come . . .

  46. Gravatar of seguin seguin
    2. April 2010 at 07:43

    “So the ball is back in the conservative’s court. Why is there so much inequality in our economy, vs. that of Western Europe?”

    I’m not an economist, so I can’t answer that…although I do have a question for you – other than mollifying the envious, what positive purpose does equalizing the outcome serve? Provided there is enough to acquire the necessities, why should we care if someone earns more than another?

  47. Gravatar of scott sumner scott sumner
    2. April 2010 at 08:03

    Eric, Those were good questions, and probably did motivate his post. The 28% figure definitely includes all levels (Federal is usually around 19%.) But it may be from a recession year, as it seems a bit low to me.

    Matt, Those are all good points.

    Lord, I’ve studied this issue and concluded that size of government is important. Denmark is number one in the world in economic freedom, ignoring size of government. I believe that if not for its high taxes Denmark would be every bit as rich as lower taxed countries like Singapore, HK, the US, Switzerland, etc. I do agree, however, that if you have an extremely non-corrupt and idealistic culture, like the Nordic countries, then efficient policies in other areas can mostly offset the negative effects of high taxes, and keep you relatively affluent. We don’t have quite that idealistic a culture in the US, and thus wouldn’t do quite as well with high taxes.

    Mark, Shouldn’t total tax revenue figures be uncontroversial? And any differences in GDP exactly offset by differences in tax rate estimates? Just curious.

    Jason, I agree that Brazil’s taxes are not very redistributive, which is partly my point. The same is true for the US, and is likely to be true for any large, ethnically diverse country. I also agree that no one number can completely describe an economy.

    William, Yes, I am suggesting that. Nor did Love Canal cause any fatalities.

    John, I agree.

    Statsguy; You said;

    “‘What the left must answer is 1) why do we seemingly get much less value per tax dollar?’

    That is a great question – and one that the right has been equally unable to answer.”

    I’ve certainly addressed this issue in lots of posts. The federal government has massive dis-economies of scale. If we were 50 countries, we’d get much more bang for the buck.

    Howard, Norway has high tax revenues for exactly the same reason as Kuwait. See my new post.

    Bob, I had read the Chait article, and it doesn’t address the issue of why Europe has much lower GDP per capita. If you say more leisure time, then what explains that difference? The right has an answer–high tax rates— the left does not. The left denies the validity of supply-side economics, so they can’t admit that taxes are important.

  48. Gravatar of Brad Brad
    2. April 2010 at 08:09

    “So the ball is back in the conservative’s court. Why is there so much inequality in our economy, vs. that of Western Europe?”

    I guess I’m not sold at all on the point that inequality is necessarily a bad thing. I think it has a lot to do with how free the society wants to be. No free society will be completly equal in regards to economic success, some either by intelligence or luck will perform better then others. I can imaging a society that is completly equal in economic results, but brutally repressive. I can also imagine a society that has complete freedom with vast differences between the economic outcomes of individuals. Which would be the better society to live in? Wouldnt a better measure then equality be the percent of daily needs met, or exceeded? If there is large inequalities in a society but everyone has work that they enjoy, and enough to eat and a safe place to stay, why would this be worse then a more redistributive society, with more equality but less to eat? In many cases we choose professions that will guarentee lower rewards because we would enjoy that particular work more. What is the answer to address the differences in economic outcome for that choice? In some cases, I would choose a less enjoyable profession, that pays better rewards and would be somewhat less enjoyable then say writing, which I enjoy. I have not seen a better solution then the free market for setting the system of rewards, while allowing a great deal of individual freedom. This will result in natural inequalities, and I don’t see a problem with that.

  49. Gravatar of Mark A. Sadowski Mark A. Sadowski
    2. April 2010 at 08:33

    Scott,
    You wrote:
    “Shouldn’t total tax revenue figures be uncontroversial? And any differences in GDP exactly offset by differences in tax rate estimates? Just curious.”

    Of course they should be. In my experience IMF, OECD, and Eurostat estimates are at least close to each other, if not identical for example. But my point is that Heritage Foundation figures are very much an outlier. Furthermore, where do they come from? (There’s no citation.) Somebody should edit the Wikipedia entry by deleting the Heritage Foundation figures because they’re next to useless.

    Mankiw’s GDP per capita estimates are PPP IMF 2009, thus there is an inconsistency not only in data source but the year. I grant that the use of different years really shouldn’t matter much, that’s not the issue. However, redo the calculations with the OECD tax burden data and you’ll find that US per capita tax is greater than all the nations Mankiw looked at except France. I think that strengthens his argument as his point was the US already has a heavy tax load on a per capita basis. I know it’s a blog posting but frankly that’s a little sloppy for such a high ranked economist.

  50. Gravatar of scott sumner scott sumner
    2. April 2010 at 08:36

    Mark, Partly true, but the lower income people pay sales, excise and payroll taxes here, so they don’t completely avoid taxes. But I agree that the Europeans put a larger share of taxes on the lower classes.

    Brad, Good points, although I agree more with the health care than the military point, at least in today’s world. Others do free-rise on our medical innovations, to some extent.

    glasnost, There are two problems with your argument. I am looking at levels, not growth rates. And I am looking at per capita GDP, which is not affected by differential population growth rates. Or maybe I’m continuing to be “amazingly ignorant.”

    Tourist, I responded to your comment after the new post.

    Seguin, I don’t know if that is addressed to me, or to others. I’m a utilitarian who favors maximizing total utility, not equality.

    Brad, See answer to Seguin.

  51. Gravatar of scott sumner scott sumner
    2. April 2010 at 08:38

    Mark, Thanks for doing that extra work. It is interesting that his argument would have been even stronger with the correct data.

  52. Gravatar of spelling police spelling police
    2. April 2010 at 10:56

    in the second paragraph, i think you meant “attacked” not “attached”

  53. Gravatar of Roderick Beck Roderick Beck
    2. April 2010 at 13:34

    Taxes per capita ignores the differences in the percentage of the population working.

    Labor force participation may differ sufficiently to make per capital taxes meaningless …

  54. Gravatar of ohwilleke ohwilleke
    2. April 2010 at 14:37

    The biggest reason cited in most comparisons of per capita GDP for lower figures in other developed countries is that they work far fewer hours.

  55. Gravatar of Tom Tom
    3. April 2010 at 03:03

    Scott, you are probably right – Slovakia is number one in per capita car production (or if not, then it’s in top three). And my guess is that Czech Republic might very well be second, as a result of a race to attract large FDIs among coutries in the region.

  56. Gravatar of ssumner ssumner
    3. April 2010 at 08:00

    spelling police. Thanks, I changed it.

    Roderick, See my new post today. Hours worked reflects taxes, it is not an exogenous variable.

    ohwilleke. That’s right, although it isn’t the only reason–check out the update at the end of my new post. There is a selection bias problem, so the US does better than it seems at first glance.

    Thanks Tom.

  57. Gravatar of Quote Of The Day at Hispanic Pundit Quote Of The Day at Hispanic Pundit
    4. April 2010 at 23:58

    [...] with fiscal policies more to the liking of progressives like Yglesias and Krugman. ” — Scott Sumner, professor of economics at Bentley University, discussing a post by Mankiw that Yglesias responded [...]

  58. Gravatar of A final reply to Scott Sumner – Economics - A final reply to Scott Sumner - Economics -
    5. April 2010 at 07:20

    [...] high-regulation states on the coasts? No, it's not. Finally, from this post:As I said in my first post on this issue, I think it might make more sense to view the entire progressive policy regime as a [...]

  59. Gravatar of TheMoneyIllusion » Social norms and macro labor supply estimates TheMoneyIllusion » Social norms and macro labor supply estimates
    5. April 2010 at 07:24

    [...] I said in my first post on this issue, I think it might make more sense to view the entire progressive policy regime as a [...]

  60. Gravatar of Micha Micha
    7. April 2010 at 06:34

    Norway:

    tax/gdp .43
    GDP (PPP) 53K

    Not an economist, just wondering how they do it. What explains the dramatic exception? On the surface, it looks like Norwegians work hard in spite of a high tax rate overall. What is their highest (marginal) individual rate? Corporate rate? Vat/GDP? Other taxes? How is the tax burden distributed?

  61. Gravatar of ssumner ssumner
    8. April 2010 at 05:27

    Micha, The explanation is the same as for Kuwait. Oil, and lots of it. They are counting as “income” what is actually the depletion of a stock of natural resources.

  62. Gravatar of Chris Chris
    18. April 2010 at 15:47

    Isn’t one possible explantation for relative ineffectiveness of American social programs Federalism? It has great value in protecting us from bad federal politics but one would suspect it protects us equally from good federal politics. It also creates a messy system of overlap. Plus, are federal programs that are run by the actual feds all that bad? Who is better? Your average FBI agent or your average local cop? Would you rather be in a state or federal prison? Is there any federal program less effective than the Los Angeles Unified School District? I’m no expert but it is worth thinking about.

  63. Gravatar of scott sumner scott sumner
    29. April 2010 at 05:26

    Chris, You asked:

    “Plus, are federal programs that are run by the actual feds all that bad?”

    The IRS. The INS. The Post Office. Amtrak. Medicare.

    Regarding prisons, I believe that private prisons are better than either form of government prisons. I don’t know whether state prisons cost more, or federal prisons cost more.

    I have argued that the LA school system is much too big. It should be broken up into 100 pieces. Smaller systems are less wasteful of taxpayer money. I believe LA spent $300,000,000 on a single high school. In NYC bad teachers are not fired, rather they are paid money to play cards and watch tv. In my view smaller governments tend to do better in most areas.

  64. Gravatar of The political genius of Keynesian economics « Belligerati The political genius of Keynesian economics « Belligerati
    26. July 2010 at 06:09

    [...] (Taxes per Person) and Sumner (There’s nothing I enjoy more than defending the indefensible) that showed that Americans have very typical government spending per capita, which implies that [...]

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