On or about December 1978, the world’s ideology changed

We all know about dates that historians consider turning points in history; 1914, 1789, etc.  I’d like to add 1978 to the list.  Maybe it’s just because I was a young adult in 1978.  Things seem very important when we are young.  (Do NOT ever talk to a baby-boomer about 60s pop music.)

It seems like almost everything that crosses my desk reminds me of 1978.  Three items in just the last week.  I’ll discuss those three, and a fourth from a bit further back. 

Part 1.  This quotation from Joan Robinson did not seem insane in 1977

From the Economist:

Before the last Korean war in 1950, the North was home to most of the country’s heavy industry. As late as 1975, its income per head still exceeded the South’s, according to Eui-Gak Hwang of Korea University in Seoul. “Obviously, sooner or later the country must be reunited,” wrote Joan Robinson, a Cambridge economist, in 1977, “by absorbing the South into socialism.”

Within about 5 years a comment like that would have seemed far-fetched, and today it would seem completely loony.  I’m not saying I necessarily would have agreed with her in 1977, but North and South Korea were about equally developed at that time.  North Vietnam had just taking over the South.  No communist country had ever gone non-communist.  And even non-communist countries seemed to be getting more statist every day.

Part 2:  How’s this for an event study:


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That’s what happened after they deregulated America’s railroads.  (Transport deregulation began with the airlines—in 1978.)
 
Part 3:  Quantum uncertainty and the issue of who’s #1
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Imagine the US and China as being like two race cars.  They enter a long tunnel with the US in the lead, and exit the tunnel with China ahead.  There is no way of knowing when China actually passed the US.
 
A few weeks back I speculated that they would enter the tunnel in 2012 and exit in 2019.  Last year I expected them to enter the tunnel in 2010.

I think the best way to approach this issue is to use Rorty’s maxim “truth is what your colleagues let you get away with.”  Truth is socially constructed.  So imagine a timeline with a bell-shaped distribution above it.  The distribution shows the point in time when each economist thinks China has surpassed the US.  At the left end in 2010 is me, a China booster who (shamelessly) wants to get credit for being first to notice that America’s more than 100 year reign as number one is over.  The mode occurs when the World Bank says that China has achieved what Italians call “Il Sorpasso.”  And at the far right of the distribution, well into the 22nd century is Lester Thurow.  The mode occurs around 2016.  Mark your calendars.

I should have stayed with that prediction, but forecasters always like to push the date forward if their predictions don’t seem to be coming true.

Arpit Gupta sent me an article by Arvind Subramanian that suggests China did pass the US at some point in 2010.  I find his argument quite plausible, although I certainly wouldn’t claim it is “True,” as there is no fact of the matter.  The US and China produce a vastly different set of goods.  China produces much more “stuff” and we produce much better “stuff” (on average.)  Who produces more RGDP?  That depends on how one defines RGDP, and I’ve never seen an even half-way plausible definition.  Have you?

What does this have to do with 1978?  A little village in Anhui province started the most momentous economic reforms in world history in December 1978, without official permission and at great personal risk.  That’s why the US is about to be overtaken for the first time in more than 100 years.

Part 4:  Let’s make a deal.

Jeremy Horpedahl sent me this Heritage Economic Freedom data, which shows that Denmark has finally surpassed the US in the race to be the most capitalistic economy on Earth.  If you look at the table, you will see just how impressive Denmark’s achievement really is.  They did this despite scoring relatively “low” on the fiscal freedom and size of government components of the survey.  Because the Heritage Foundation is a right wing think tank, they believe big government implies a lack of economic freedom, and thus is “bad.”  Think of the US as the Usain Bolt of capitalist nations.  The archetype, the quintessential free market economy.  Little Denmark approaches the starting line and is suddenly asked to strap a 5 pound weight onto each leg.  And they still beat Bolt in the 100 meter dash!  (Time for a drug test.)

OK, we know life is never like a fairy tale.  It’s boring, there’s always some “reasonable” explanation.  Denmark is more neoliberal than the US in most of the other dimensions of economic freedom; and as Statsguy pointed out a few months back, some of those seem suspiciously more like “good governance” than freedom. 

Still it’s the Heritage Foundation’s survey, so I’d like to treat it as if it’s true; or more precisely as if the people at Heritage think it’s true.  Here’s one possible implication; why not have the US adopt Denmark’s economic model?  After all, Heritage says it would be an improvement, and I don’t think the Paul Krugman’s of the world would object. 

Now progressives would argue that conservatives merely pretend to care about all sorts of issues, whereas in reality they only care about tax cuts for the rich.  The conservatives would never agree to the deal.  So here’s a compromise.  Have the US adopt Canada’s tax and government spending model (which Heritage says is much better than the US model), and in all other respects adopt Danish policies.  I still say the progressives would do that deal in a heartbeat.  I did some calculations and the US score would soar to 85.5, putting us into 3rd place, far ahead of Australia.  Since many people argue Hong Kong and Singapore are just “city-states” and hence not real countries, you could even argue that the US would become the most capitalist country on Earth.  I’d think the people at Heritage would be thrilled, after all this is their survey, their method.

Obama and Boehner; there’s a deal that will put you both in the history books.  A win-win.  Git er done!

Back on planet Earth, there are a few problems with my pleasant dream:

1.  Conservatives would never agree to Canadian-level defense spending.  Ditto for prisons.  But even allowing for an extra 3% on GDP on the military and 1% on prisons, we could probably move up quite sharply in the rankings.  (BTW, I favor much lower defense spending.)

2.  Denmark is much more decentralized.  The same sort of policies adopted in Denmark would work less well in the US, because we are much more centralized, and hence far less democratic (if you define democracy properly, where people can affect their government.)  Denmark has nothing like the LA school system or the McAllen, Texas, Medicare system.

3.  Denmark is much more civic-minded that the US.  That’s not to say we aren’t civic-minded, we are near the top.  But Denmark is simply off the charts.  Yet even they recently found it necessary to cut unemployment benefits from 4 years to 2, because too many Danes were taking advantage of the system.  (Something rotten . . . )  With our somewhat less honest culture, the Danish/Canadian economic model would work less well. 

I don’t see any of these problems as deal-breakers, it’s just that things would be more messy that what I have sketched out.  Obviously what I propose won’t happen.  But it’s an interesting way of thinking about the problem, and illustrates how politics can be a positive sum game. 

What does this have to do with 1978?  In 1978 a large black slab was placed on the moon.  It began emitting signals than made earthlings more favorably inclined toward free market reforms.  Those countries that were most under-performing (like China and Britain) and most idealistic (like Denmark) reformed the most.  Denmark went from being far more socialistic than the US in 1978, to slightly more capitalistic in 2011.  Indeed a study showed that the speed at which the 32 developed countries adopted market reforms is highly correlated with how civic-minded they are.  Only New Zealand reformed faster than Denmark among the developed economies.  Which developed country is least civic-minded?  Greece.  And which developed country is least capitalistic?  Greece. 

1978:  Disco, big hair, and a mysterious transformation of the zeitgeist that will shape the 21st century. 

PS.  Why December?  That’s when it started in China, and it’s roughly midway between the US airline deregulation and Thatcher’s election in Britain.  And of course it was the month chosen by Virginia Woolf.


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47 Responses to “On or about December 1978, the world’s ideology changed”

  1. Gravatar of Brett Brett
    14. January 2011 at 15:39

    2. Denmark is much more decentralized. The same sort of policies adopted in Denmark would work less well in the US, because we are much more centralized, and hence far less democratic (if you define democracy properly, where people can affect their government.) Denmark has nothing like the LA school system or the McAllen, Texas, Medicare system.

    I’m not sure of that. Assuming we are going for a Canadian-ish system, we could also borrow their health coverage federalism, and shift all welfare programs down to the state level (with the federal government mainly being a Sugar Daddy with occasional rules).

  2. Gravatar of Liberal Roman Liberal Roman
    14. January 2011 at 16:37

    I am afraid to know what Heritage means by “Monetary Freedom” which is a category in their rankings.

  3. Gravatar of marcus nunes marcus nunes
    14. January 2011 at 16:55

    Scott: You can talk to me (a babyboomer) about 60´s pop. It was the first wave of globalization. I remember listening on the radio in Timonium (MD) lots of french, italian and brazilian music. 30 years later, living in the US for 3 years, there was NOTHING. Obviously the quality of music went way down!

  4. Gravatar of marcus nunes marcus nunes
    14. January 2011 at 16:59

    Shortly people will tune in to 1997, which is the year that all the sh–that has been going on began. It all started with 3 things happening simultaneously: A positive productivity shock, the asian crisis and no capital gains taxes on homes sold every 2 years!

  5. Gravatar of Dustin Dustin
    14. January 2011 at 17:06

    Liberal Roman,

    http://www.heritage.org/index/monetary-freedom

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. January 2011 at 17:33

    Scott,
    I was only 14 in 1978 and it seemed to me even then that something important was happening (I was consumed by economics even when young). The numbers tell the (hi)story.
    Mark

  7. Gravatar of Greg Ransom Greg Ransom
    14. January 2011 at 17:34

    The turning point was 1974.

    Nixon’s wage and price controls and the economic collapse of Britain vindicated Hayek and refuted Keynes — just the year when Hayek returned with the Nobel prize to tell the world prices are signals and money is the cause of inflation.

    By 1976 the game was up, Friedman took Hayek’s mantle, and the world changed.

  8. Gravatar of Morgan Warstler Morgan Warstler
    14. January 2011 at 17:54

    I’m trying to remember the last invention that came of Denmark. I’m a bit of an Internet snob, but its hard for me to remember anything anyone else invented other than Skype.

    One thing I find funny about measuring PPP is that it functions to wave away the very thing that you insist is real: sticky wages.

    If we can hop on a plane to India and get our hair cut for $.25, and a haircut here bankrupts someone in China, they really truly are not equal: 50″ TVs, I-Phones, Steak Dinners, none of these things are cheaper there.

    Another note of sticky wages: By my decree, no economist who wants to use “stick wages” as an excuse for printing money is EVER allowed to argue for any policy that obviously keeps wages sticky. Doing so is a tacit admittance that they are a figment. We asked the UAW about it when we gifted them GM, and it turns out sticky wages have been imaginary all along. I think they are a function that no one ever walks in tells tenured economics professors that they are taking a 20% wage cut, which we should do as policy so they forget this damn thing.

  9. Gravatar of Morgan Warstler Morgan Warstler
    14. January 2011 at 17:58

    One more thing Scott:

    “A buyer of $100 billion a month is always going to be paying top prices,” Mr. Crandall said of the Fed. “You can’t be a known buyer of $100 billion a month and get a good price.”

    http://www.nytimes.com/2011/01/11/business/economy/11fed.html?_r=1&em=&adxnnl=1&adxnnlx=1295053326-B7tNpBXaMtfYTFgDv8SnQw

    You will PLEASE now admit that the banksters are making $$$, because they touch the newly printed money first?

    It’s so annoying that you always play stupid on this front.

  10. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. January 2011 at 18:19

    Morgan,
    I’ll go ahead print you some money if it will make feel any better. After all you always lump academics with banksters.

  11. Gravatar of cassander cassander
    14. January 2011 at 19:13

    If you ask progressives “should we be more like Denmark” they’ll almost certainly say yes. But if you said “should we weaken the central government and strengthen the states, cut taxes on corporations and capital gains, reduce consumer protection and financial regulation, and privatize social security” they will scream bloody murder and call you a right wing lunatic.

    Also, according to Wikipedia, none of the Nordic countries have more than 6 million people, except Sweden, which has 10 million. Governing a country of that size is a lot easier than one with 300 million, or even 50 million. I don’t think it’s at all a coincidence that most of the countries that top the list have relatively few people in them.

  12. Gravatar of scott sumner scott sumner
    14. January 2011 at 19:21

    Brett, I’m all for that sort of decentralization. But it may not be easy. Even LA county has twice the population of Denmark, and much more ethnic diversity. Good governance may be harder to achieve.

    Liberal Roman, I hear you. But if Denmark scores high it can’t be that bad. I think it is fairly low and stable inflation, but I’m not sure. Lack of exchange controls may figure in as well.

    oops–see Dustin below.

    BTW, my post should appeal to the left, as it is a sort of critique of conservatism. They rate places like Canada and Denmark quite highly in the indices, but then dismiss them as “socialist” when Obama bashing rears its ugly head. I think they are partly right about Obama, he is on the wrong track, but they are wrong to dismiss the Nordic model, or the Canadian model.

    Marcus, Yes 1997, and also 1989, but I think 1978 was the real turning point, when the tide shifted directions.

    I am also a boomer, and I like artists like Dylan and the Stones. But if I were younger I would be absolutely sick of hearing boomers describe how great the 60s were. And I was actually a bit too young myself. For me the “60s” were 1964-74, I don’t recall anything earlier than Beatlemania.

    Dustin, Thanks, that’s actually a reasonable definition, as price controls are disguised inflation.

    Mark, Glad you agree.

    Greg, Good points. But note that the 1974 election (November) was the most liberal in my lifetime. The first time I noticed the change was 1976, when I discovered there were dorms at the University of Wisconsin (where I was a student) which gave lots of support to Gerry Ford. I was a senior and that was the first time I sensed a younger cohort that was to the right of my age group. Until then I always assumed that younger meant more liberal.

    Yes, the Nobel Prizes to Hayek and Friedman were a turning point, and indicative of a change in the profession. Political changes came just a few years later.

    Morgan, Denmark produces some nice “moderne” furniture. It’s only got 5 million people, so you can’t expect as many inventions as the US or Japan. But I believe it has a thriving high tech industry.

    I agree about wages—direct that at Krugman.

    If I sell a bond and convert the check to cash, I am getting the same deal as the “banksters” selling bonds to the Fed. it’s a liquid market and everyone sells at roughly the same price.

  13. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. January 2011 at 19:21

    Cassander,
    Count me as a left wing lunatic. But based on my research on Europe I would be in favor of eliminating the corporate income tax.

  14. Gravatar of scott sumner scott sumner
    14. January 2011 at 19:23

    cassander, Yes, I have made those arguments in other posts. I totally agree.

    Once I called for breaking the US up into 50 countries. The post is called “The American Union”

  15. Gravatar of scott sumner scott sumner
    14. January 2011 at 19:25

    Mark, I’m glad you agree. Can you share the punchline of your research? Was it a cross-sectional/time series study?

  16. Gravatar of Lorenzo from Oz Lorenzo from Oz
    14. January 2011 at 19:30

    Morgan: if you cannot tell the difference between cross-section and time-series comparisons, there is no help for you.

    Didn’t Milton Friedman get a Nobel Prize in part for explaining why there was a difference in results between the two? Aka the permanent income hypothesis? Which was about “sticky spending”.

    Here’s an exercise for you Morgan. Work out how unemployment would fluctuate in response to an economic downturn if wages were not sticky and then if they were, and compare that to actual results.

    As it happens, I argue that one of the reasons that Australia handled the Great Recession better than comparable countries is that economic liberalisation had meant more people received income in a way that allowed them to take an income “hit” without losing their job. In other words, economic changes had made wages less sticky. The Reserve Bank deserves most of the credit, but those institutional changes helped.

  17. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. January 2011 at 19:35

    Scott,
    “Can you share the punchline of your research? Was it a cross-sectional/time series study?”

    Indeed. I’m doing a study of EU states from 1995-2007.

    I’m finding that each 10% increase in marginal corporate tax rates reduces GDP per capita growth rates by approximately 2%. This is entirely consistent with Lee and Gordan (2005).

    But why am I revealing my results prematurely before they are published?

    Because I love your website. Keep it up!

  18. Gravatar of cassander cassander
    14. January 2011 at 20:02

    Mark> I sympathize with you. I’m a right wing lunatic who thinks that the Nordic model has a lot to offer the US, so I know what it is like to be a heretic.

    Scott> I’ve read that post and quite liked it. I have a similar pet proposal I like to call lustration. Swear in a new congress, then dissolve the Federal government. Repeal all the laws, settle all outstanding debts, sell off or remit to the states all the assets outside DC, and fire everyone. Let the President spend 2 years as mayor of DC then, after the next election, start over with a clean slate. Then repeat every 80ish years.

  19. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. January 2011 at 20:18

    Cassander,
    You wrote:
    “Mark> I sympathize with you. I’m a right wing lunatic who thinks that the Nordic model has a lot to offer the US, so I know what it is like to be a heretic.”

    Do you? One of my heros, who is also one of my disseration advisors views me as a traitor right now (he gave me an incredibly hard time at my proposal defense). I am having difficulty explaining to him how my beliefs haven’t changed, only that my beliefs as how to achieve the ends we both believe in have changed.

  20. Gravatar of Dan Sherry Dan Sherry
    14. January 2011 at 21:40

    Scott,

    My father once told me that anybody who says they had a good time at Woodstock was either stoned out of their mind or just lying.

    To be fair, “60′s” music is darn good, and has yet to be matched by any popular music before or since.

  21. Gravatar of Greg Ransom Greg Ransom
    14. January 2011 at 21:45

    I’m going to stick with 1974. Things were already beginning to role in the 1969-1971 period.

    Leszek Kołakowski’s 1971 essay Theses on Hope and Hopelessness brought “spontaneous order” ideas to Poland, and by 1974 Poland’s price system was beginning to fail, leading to the government price change effort — which failed — of 1976.

    In 1969 and 1970 stagflation and a reconsideration of his Hayekian roots led uber-Keynesian John Hicks to declare the death of Keynesian economics. Friedman’s famous challenge to the Keynesians came at the same time.

    Thatcher took over the Conservative party Feb. 1975 — in the wake of Hayek’s 1974 Nobel prize Thatcher read Hayek’s The Constitution of Liberty and began attending regular sessions at the IEA.

    In 1974 Reagan set his eye on the White House, setting up his 1976 conservative challenge to Ford’s mainstream Republican party.

    By 1974 Hayekian George Will had became a new and major intellectual presence on the national scene.

    In other words, the non-optional significance of the price system was crystal clear by 1974 — and the ideas needed to understand that phenomena were suddenly readily available and on the march.

    By 1976 even undergraduates were aware of something underfoot.

  22. Gravatar of K K
    14. January 2011 at 22:36

    Morgan: it’s not just about iPhones. Sweden and Finland do of course produce an enormous amount of consumer electronics and cars per capita. Denmark is has large high end industrial design industry, but also high end consumer electronics (Bang & Olufson). And as Scott says, they are only 5 million people. All the Scandinavian countries have vastly higher rates of patents per capita than the US for what it’s worth.

    Scott: Denmark has been part of the EMU since the start. The krone is currently pegged to the euro. I don’t remember the peg moving in years.

    If Denmark and Canada are models then the it’s hard to see how the principal achievement of the Obama administration (healthcare reform) can be a step “in the wrong direction.” It is far more timid than either (both Denmark and Canada have universal government plans; Canada has a single payer system) but definitely not moving away from them. The pro-market adjustments that need to be carried out in the US are not within control of the white house. The US practices special interest rather than free market economics, and this is principally a result of the pork barrel politicians in congress of all stripes.

    Coincidentally, I have lived for quite awhile in all three countries. All fantastic places to live, but by comparison US politics are utterly dysfunctional at this point which gives me far greater hope, both socially and economically, for the other two.

  23. Gravatar of Morgan Warstler Morgan Warstler
    14. January 2011 at 23:24

    Let’s just compare Boston to Denmark… (drum roll) Boston wins! Next internal bias argument you people want to make? Seriously, if you aren’t going to start of enamored with what we do here (like all the clamoring wannabe immigrants) its more about digging into your brains to figure out whats wrong, than it is about having a discussion. There are some things we can stipulate to, the superiority of American style “who cares about disparity” capitalism is one of them.

    Lorenzo, I advocate ZERO unemployment immediately:

    http://biggovernment.com/mwarstler/2011/01/04/guaranteed-income-the-christian-solution-to-our-economy/

    Proving very quickly the silliness of sticky wages and unemployment… why is it so hard to get people to take this seriously?

    If there’s a real problem, it calls for a real answer.

  24. Gravatar of CA CA
    15. January 2011 at 00:13

    “To be fair, “60’s” music is darn good, and has yet to be matched by any popular music before or since.”

    I’m inclined to agree with you. Although, the 90′s were pretty good as well, and probably come closest to rivaling the 60′s. Pearl Jam, Soundgarden, Nirvana, Alice In Chains, Dave Mathews, Smashing Pumpkins, and many others. There really was some fantastic song writing then, and the musicianship was first rate. For example, there’s nothing Jimmy Hendrix or Clapton could do that Mike McCready(Pearl Jam) can’t do. Youtube McCready if you don’t believe me.

  25. Gravatar of Rune Kramer Rune Kramer
    15. January 2011 at 01:18

    A short comment from Denmark on the cut unemployment benefits from 4 years to 2.

    We’re a bit flabbergasted that you make such a big deal out of it in the US. In 1993 when a Socialdemocratic lead government took over power from the right side of parliament, unemployment benefits could be collected for ca 9 years. Yes, 9 years.

    The unions and the new government agreed to cut that level to 4 years and now it has been reduced again.

    First of all this cut affect few unemployed as the emphasis for the last decade has been to push unemployed to work ASAP.

    Only the real odd-balls and no skill-types and similar heavy social baggage have collected unemployment benefits for 4 years.

    The changes are just good governance. The purpose of the cut is to:

    1) bring Denmark into line with our neighbours; Norway & Sweden (both with a max of 2 years unemployment benefits)And save some money.

    2) prepare for the oncoming old-age burden which will start to become noticeable ca 2020. We need those extra hands on the job market due to the demographic shift with more elderly.

  26. Gravatar of W. Peden W. Peden
    15. January 2011 at 02:17

    Greg Ransom,

    Good call on 1974. In 1974, one has a clear correlation in Britain between high monetary growth in 1972-1973 and high inflation; the long-run Philipps Curve is in terminal crisis; expansionary budgets in 1974 and 1975 fail to bring Western economies out of recession, as monetary tightening took precedence over fiscal policy.

    In other words, the three most distinctive features of pre-1980s mainstream Keynesianism (money doesn’t matter; there is a trade-off between inflation and unemployment; fiscal policy as such is more powerful than monetary policy) were all made very disreputable within less than five years. It’s no wonder that even John Hicks was writing books like “The Crisis of Keynesianism”.

    I think that Prof. Sumner is right that 1978-1979 is the key period of reaction. It’s also in that period that corporatism loses its shine in Britain, with the Winter of Discontent. By June 1979, the British Labour Party’s two sellable economic policies (statist Keynesianism and corporatism) were increasingly in disrepute, leaving just pseudo-Marxian socialism and welfarism.

    In Britain, 1976 is another important year, because it’s when the government officially rejects the Philipps Curve and when the British monetarists get a bit of a boost from Milton Friedman winning the Nobel Prize 200 years after the publication of the Wealth of Nations.

    Morgan,

    I’m with you 100% on an income-top-up scheme to abolish unemployment and make any job a livable job. The trade unions would hate it, because it would make them largely unnecessary (except perhaps as Hayek envisioned them operating) but as a measure to (a) eliminate idleness and (b) eliminate poverty, it’s an excellent one. There are a number of proposed ways of doing it (“guaranteed incomes”, “negative income taxes”, “universal credits” etc.) but the principle is what’s really sound.

  27. Gravatar of W. Peden W. Peden
    15. January 2011 at 02:18

    Morgan,

    Also, the link you make between a guaranteed income and better monetary policy is very insightful.

  28. Gravatar of Why we like deregulation Why we like deregulation
    15. January 2011 at 03:41

    [...] Pretty good, hunh? [...]

  29. Gravatar of Jeff Singer Jeff Singer
    15. January 2011 at 05:23

    Scott,

    You say, “With our somewhat less honest culture, the Danish/Canadian economic model would work less well.”

    Understatement of the day! You need to acquaint yourself with the notion of human biodiversity and get back to me when you do. Let’s just say there is a good reason those states closer to the Canadian border do better on all sorts of social measures/school performance.

  30. Gravatar of Jeff Jeff
    15. January 2011 at 05:45

    I was in South Korea from June 1975 through July 1976, and by then it had already long been clear that the South Korean economy was far superior to the North Korean one. You are far too charitable to Joan Robinson — she’s wrong on almost everything and always has been.

    I’m also with Greg Ransom on 1974, as it featured what had to be the dumbest campaign ever, the amazing “Whip Inflation Now” effort by the Ford administration. Yes, children, some of your ancestors actually thought that inflation could be brought under control by wearing WIN buttons.

    But for me personally, the real turning point was 1975, as that’s I first read Capitalism and Freedom.

  31. Gravatar of Indy Indy
    15. January 2011 at 08:24

    “BTW, I favor much lower defense spending”

    Careful what you ask for. Neither Canada nor any other developed country plays the sui generis gift-to-the-world role that the US currently plays in preserving the global order through our system of alliances and umbrellas – and it is this which eats up a surprising fraction of the military budget but which you never hear about (by law). Actual warfighting capability is cheap by comparison.

    People can debate that role, but if we don’t play it, no one else will, and the world will likely become a much more dangerous place. My judgment is that it already is – that we’ve just enjoyed a nice peace-and-stability bubble (compared to WW-I and WW-II, anyway), and without hegemony or equilibrium in the balance of power, the bloody jostling of the rest of History will recommence.

    Orson Scott Card has a highly debatable essay on a somewhat related topic of Rome (and I suppose the implication of their retreat from maintaining the capability of securing peaceful commerce throughout the civilized word), but I find this part interesting:

    “Specialization

    Ward-Perkins also cites the example of a Syrian village that thrived in rocky country whose soil was good only for growing olive trees. This village sustained a ridiculously high population for many, many years — a population that was far higher than could be supported from the agricultural yields of that area.

    So what were they living on? Trade. They grew their olives and shipped the oil abroad. Apparently their oil was so highly regarded throughout the Mediterranean that it enabled them to import almost all the food and wine they required to sustain their population.

    They had specialized. It worked very well for them — until the whole system of trade broke down and there was no way for them to get their goods out to their potential markets. Either it was no longer safe enough to transport their oil and sell it profitably, or the markets had dried up because of the crash of the economy elsewhere. Whatever the immediate cause, the result was predictable: Without the revenues to let them import food, the population crashed back to the very low levels that could be sustained by the miserable local farming. “

  32. Gravatar of Morgan Warstler Morgan Warstler
    15. January 2011 at 09:50

    W,

    I think the upside to the plan is huge. In beat up poor neighborhoods, the sub-minimum wage drug market proves the case.

    I like the negative income tax, tax credit, but think this is smarter… in a true register online jobs environment, there will be NO unemployed.

    I mean, someone nationally will bid $1 per hour for 40 hours, sight unseen, work from home, and quickly someone else will push to $2, and the culling will begin at $2-3.

    But to people who say “I want to work” they have a debit card, they are registered online, its for all intensive purposes a bank + job board + feedback on both sides (employer employee) – all the data is exposed, and its mined, modeled in any number of ways.

    This helps kill off cash too. Which I favor immensely.

    It also lays the ground work for running all other aid through the same program: housing assistance, energy assistance, food stamps, all of it is deposited – and we can say things like, “oh you want food stamps? are you registered in the GI program?”

    We can catch bad shit like people on aid having more disposable income than people making $50K per year.

    We can FOCUS on catching free riders, disability milkers, professional social baggage int he word of our friend from Denmark.

    But to the employees they aren’t making $2 per hour, they are making $7, and they KNOW hey this job pays more than this one, because suddenly we have all those manual labor, call center, low cost jobs back here. So we get back real signalling on labor returns.

    And all those low end services make my mouth water! The idea that child care gets cheaper for families, and that house cleaning gets cheaper, etc. it puts us on a glide path to a service based economy – and all but ENSURES we have an easier time moving big brains here to work and spend.

    Meanwhile, we can instantly end the dual mandate, which gets us much closer to turning the fed into a computer.

  33. Gravatar of scott sumner scott sumner
    15. January 2011 at 14:05

    Mark, Thanks, And don’t worry. When I was younger I worried about people stealing my research. Later I realized that know one gave a damn what I was studying.

    cassander, That sounds like a good idea. I think we call it “sun-setting” here.

    Dan, That sounds right.

    Greg, We are not far apart. I agree that the intellectual change came before the policy change. You are describing the intellectual change. But I can tell you that as late as 1977 Milton Friedman was viewed as a bit of a lunatic at the University of Wisconsin. I doubt that was true 5 years later.

    K, You said;

    “If Denmark and Canada are models then the it’s hard to see how the principal achievement of the Obama administration (healthcare reform) can be a step “in the wrong direction.” It is far more timid than either (both Denmark and Canada have universal government plans;”

    You can have a private system or a government system (like Canada). Obama proposes the worst of both worlds. I favor the Singapore approach (HSAs.)

    You said;

    “The US practices special interest rather than free market economics, and this is principally a result of the pork barrel politicians in congress of all stripes.
    Coincidentally, I have lived for quite awhile in all three countries. All fantastic places to live, but by comparison US politics are utterly dysfunctional at this point which gives me far greater hope, both socially and economically, for the other two.”

    I agree.

    Morgan, You said;

    “Let’s just compare Boston to Denmark… (drum roll) Boston wins!”

    But Boston isn’t America. It has attracted lots of highly skilled people due to its industry mix. I suppose if you compared West LA to South Dakota, West LA would win. Does that prove California has a better fiscal model than South Dakota?

    CA, I think the talent today is higher, but the difficulty is getting out from under the shadow of earlier decades.

    I recall Kurt Cobain once suggested he was borne 30 years to late–all the good stuff had been written.

    Rune, I think your comment supports my argument that Denmark has very good governance. I appreciate the heads up on the 9 year limit in the past, that strengthens my argument about the ability of the Danes to reform.

    W. Peden, Your comment reminds me that there were two intellectual revolutions. Against old-style Keynesianism, and against statism. The latter came in the late 1970s.

    Jeff Singer, Yes, but I don’t think it is quite that clearcut. Texas is south of Ohio and more diverse, but also better governed. But yes, on average you are right.

    Jeff, Yes, I was thinking of ridiculing her. I already did that earlier for when she said (in 1938) that the German hyperinflation couldn’t be due to easy money, as interest rates were not low.

    I could also see by 1977 that South Korea was moving well ahead of the North. In retrospect, the data from the North may have been flawed. But it’s also true that things really have gone downhill since the 1970s up there.

    Indy, I no longer believe we preserve world order. I once sort of believed that when the Soviets were a threat. But our only threat today is terrorism, and you don’t need a $700 billion military with hundreds of billions spent on fighter aircraft to fight terrorism.

    I still think that Syrian village did the right thing. They had a nice run, and in the ancient world life was very tenuous anyway.

  34. Gravatar of cassander cassander
    15. January 2011 at 16:56

    Mark> Yeah, it’s a thankless task, but one that suits my natural inclination to play devil’s advocate. I can’t say I have any advice, if I was good at it I wouldn’t call myself cassander, but every once in a while you manage to change someone’s mind, and that’s just fantastic.

  35. Gravatar of cassander cassander
    15. January 2011 at 17:26

    Scott> That we spend way more money than we ought on the military doesn’t mean that we don’t also preserve order in the process. Say we cut most of the Army and Air Force, beefed up the navy and marines a bit, and ended up spending half as much and doing a better job policing the seas. Would you say that was money worth spending?

  36. Gravatar of Morgan Warstler Morgan Warstler
    15. January 2011 at 18:29

    Scott, we are a nation of states, built out of a nation of global immigrants. We trust each other accordingly.

    A commenter perfectly summed it up describing the social baggage they dealt with cutting from 4 years to 2 years unemployment.

    Our worlds are totally different, and in the wash, ours is superior. Simple things like when you grant birthright citizenship, you are locking yourself into providing less safety net.

    Our inventions are the engine of the world and our thought leadership is born from cowboy capitalism, and when the chips are down, we need to double down on the one that brung us… not ask a bunch of eggheads if they have a thing for the Nordic tribes.

    We have nothing to learn from a society of socially well adjusted folks concerned in their bones about disparity than winning.

    That’s not to say these aren’t nice little countries, and maybe I should have compared them to our own Swedish Socialist state, not Boston – but the point is the same. Denmark and Greece combined tells us what we need to know.

  37. Gravatar of Doc Merlin Doc Merlin
    16. January 2011 at 07:27

    So I take it you are a strong proponent of a very small federal government and very strong States’ Rights? If the federal government was maybe 1/10 its current size and scope, very many US states would be much more like Denmark.

  38. Gravatar of scott sumner scott sumner
    16. January 2011 at 18:40

    cassander, Does the Navy really police the seas? I don’t think so. An aircraft carrier doesn’t help much against Somali pirates.

    Morgan, I agree that the US has some important advantages over the Nordic states. You need to take up your argument with the conservatives at Heritage, They are the ones with the soft spot for the Danish/Canadian model.

    Yes, Minnesota would have been the right comparison, and I think Minnesota comes out looking pretty good against the Nordic countries. It is much richer, and also lacks huge social inequities. I read about some Somali refugees who went to Sweden, didn’t like it, then went to Minnesota, where they did fine. We aren’t as far apart as you assume.

    Doc Merlin, Google my post “The American Union” which calls for a EU type set up in the US.

  39. Gravatar of Morgan Warstler Morgan Warstler
    16. January 2011 at 20:04

    States can be whatever they want, and I can I move to any of them.

    From 1913-1980, we lost our soul. We’re getting it back, but it is ugly.

  40. Gravatar of cassander cassander
    16. January 2011 at 21:38

    >Does the Navy really police the seas? I don’t think so. An aircraft carrier doesn’t help much against Somali pirates.

    Yes: http://en.wikipedia.org/wiki/Combined_Task_Force_150 (how do you code links in the comments here?)

    But not as much as they should. And I wouldn’t understate the value of deterrence. If it weren’t for the US Navy, do you think there is any chance that China wouldn’t have invade Taiwan by now?

    More generally, if it weren’t for the US defense bubble, do you think we would see more or less regional military competition? US defense spending is about 40% of the global total, which means that if we cut back to pre-ww2 levels (~1.5% gdp) it only takes the rest of the world increasing spending about 30% from current levels to make it a net wash.

  41. Gravatar of malavel malavel
    17. January 2011 at 03:54

    “1) bring Denmark into line with our neighbours; Norway & Sweden (both with a max of 2 years unemployment benefits)And save some money.”

    Sweden has either a one year limit or no limit at all, depending on your definition of unemployment benefits. At first you get one year (a-kassa). After that you can get jobb- och utvecklingsgaranti (work and development guarantee), but after some time you might have to do some menial work to continue to get money (not sure about the details here). You can do this until your retirement.

  42. Gravatar of malavel malavel
    17. January 2011 at 04:05

    As for the monetary freedom score, a country with deflation during the last three years would get an imaginary (in the mathematical sense) score.

    But why should zero inflation be better than 2%? Shouldn’t they use some kind of floor / ceiling instead? Anything below 1% or above 3% gets a penalty.

    Or why not check for NGDP fluctuations compared to the historical average? =)

  43. Gravatar of ssumner ssumner
    17. January 2011 at 19:56

    cassander, I don’t see why alliances aren’t good enough. No one would take on Nato regardless of how much they spent.

    Having the Navy go after pirates is absurd overkill.

    No, China would not invade Taiwan just because they could “succeed.” They could have invaded Hong Kong at any time and did not. Taiwan considers itself part of China, it’s in their constitution. The mainland is playing a long game there.

    Mattias. Those are good points. I’m not impressed with their methods.

  44. Gravatar of A Picture Is Worth A Thousand Words | motorcitytimes.com A Picture Is Worth A Thousand Words | motorcitytimes.com
    18. January 2011 at 18:42

    [...] isn’t it. When government interference is removed, the economy flourishes. Share this: This entry was posted in Democrats, History, Progressives, economy. Bookmark the [...]

  45. Gravatar of Joan Robinson on the two Koreas in 1977 « Knowledge Problem Joan Robinson on the two Koreas in 1977 « Knowledge Problem
    8. February 2011 at 04:23

    [...] Sumner wrote, “On or about December 1978, the world’s ideology changed,”explaining that “this quotation from Joan Robinson did not seem insane in [...]

  46. Gravatar of Jack-of-all-Trades Jack-of-all-Trades
    24. July 2011 at 12:46

    As far as I heard, the Heritage Foundation was the institution who has established the scoring system for countries in order to decide their level of economic freedom. It has determined that a score below 80 results in that country not being economically free. In recent times Denmark and the US were above 80. Now they have dropped below 80, causing their status as economically free to be lost.
    In fact, only seven countries are considered free according to these parameters. Hong Kong and possibly Singapore are the only ones that seem to have a reasonable degree of freedom. The rest seem quite restrictive in many ways.

  47. Gravatar of Scott Sumner Scott Sumner
    25. July 2011 at 06:47

    Jack, And how does that relate to my post?

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