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.)

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.

This is a follow up to my previous post.

Part 1:  Capitalism later

When I was young I believed the GOP was more supportive of small government than the Dems.  I’m not sure why I believed this; when I came of age Nixon was president, and he was arguably the most anti-libertarian president of my lifetime (with the important exception of ending the draft.)

Supporters of the GOP always used to say that the president (Nixon, Ford, Reagan) wanted smaller government, but the Congress wouldn’t go along.  When the GOP finally took Congress in 1994, the alleged roadblock was President Clinton.  Finally, in 2001 nirvana arrived for us libertarians; the GOP took all branches of government, and we got . . . one of the biggest new entitlement programs in history, a massive increase in the National Security State, and a much greater Federal involvement in education.  The fastest growth in Federal spending since LBJ was president (for several years.)

That should have ended any illusions about the GOP being the party of small government, except to the most hopelessly deluded.  But with the rise of the Tea Party movement we are again hearing this meme—the GOP wants to trim the size of government.  For instance, the GOP has spent the last two years bashing Obama for not reining in Fannie and Freddie.  And now that they have taken Congress, the Wall Street Journal says they are ready to act:

Earlier this year, leading House Republicans proposed to privatize mortgage giants Fannie Mae and Freddie Mac or place them in receivership starting in two years.

Now, as Republicans prepare to assume control of the House next week, they aren’t in as big a rush, cautioning that withdrawing government support in the housing market should be gradual. . . .

Republicans were backing a bill by Rep. Jeb Hensarling (R., Texas) to start cutting the government’s ties to the mortgage giants or begin winding them down in two years; if they were deemed financially viable, they would become fully private within five years.

“Of all the dumb regulation that caused our economic crisis, none was dumber than that which created the (Fannie and Freddie) monopolies,” Mr. Hensarling said in March. . . .

Many Republicans now concede that a speedy exit may not be practical, because Fannie Mae and Freddie Mac have such a dominant position in the nation’s housing market. Mr. Garrett said he has “not established a specific timeframe for winding them down.”

[Insert obligatory Claude Rains exclamation here.]

Some might argue that the GOP is simply facing reality, the economy is weak and a drop in the housing market might further depress aggregate demand.  But since when is the GOP worried about AD?  They have been insisting that the Fed is making a mistake in trying to boost AD with a more expansionary policy—that this would merely bail out the Obama administration’s failed big government policies.  No, the GOP is not motivated by a desire to boost AD.  And neither are they opposed to more intervention in the free market.

The mostly like explanation is that the GOP’s paymasters in real estate and banking quietly had a word with them after the election.  I’d guess it went something like this:

“We greatly appreciate the help from the Tea Party in getting you guys back into a position of power.  But now these neophytes need to step aside and let the big boys take over.”

So which is it?  Is the GOP lying when they say we don’t need more AD, and that Fed policy is too easy?

Or are they lying when they say we need smaller government, and that the housing fiasco was caused by people like Barney Frank, who promoted the GSEs?

Part 2:  Regulation later

And then there’s the Dems.  They used the subprime fiasco to rail against unregulated free market capitalism, the so-called “market fundamentalism” of people like . . . well people like me.  Of course the true market fundamentalists were always opposed to the housing/banking system, which was riddled with moral hazard.  Unfortunately there were plenty of so-called market fundamentalists who cheer-leaded the “deregulation” of banking the the US, Ireland, Iceland, etc, thereby discrediting the entire movement.

In any case, the Dems did get around to “re-regulating” the housing mortgage system in the US.  More than a kilo-page of re-regulation.  There’s just one thing, they forgot to ban un-insured subprime mortgages.  That’s right, the alleged cause of the entire mess, which is already banned in many countries the Dems seem to hold up as models, was given a free pass.  There is no requirement that buyers put at least 20% down.  Indeed there is no requirement that they put even 5% down.  Nor are there any plans to phase in such a ban over a 5 or 10 year time frame.

So if regulation isn’t really the motivation of the Dems, what is?  The same WSJ article provides one answer:

Democrats tend to favor a more active role for the government in housing to ensure that underserved communities have access to mortgages.

So there you are.  The GOP doesn’t favor small government and the Dems don’t favor regulation.  Instead the GOP favors a bloc of people who vote for the GOP and contribute money to their campaigns, and the Dems favor a bloc of people who vote for the Dems and contribute money to their campaigns.

I’m not so cynical (yet) that I would deny there are some idealists in politics.  My hunch is that some politicians (even some I don’t like such as Barney Frank) are driven partly by idealistic motives.  After all, Frank recently mentioned abolishing Fannie and Freddie.  But whatever idealism exists is not strong enough to overcome the special interest groups.

Fortunately, good governance is not a zero-sum game, so once and a while the two parties come together and strike a deal that is win-win (such as the 1978 deregulation bill, or the 1986 tax reform, or the 1996 welfare reform.)

The most one can hope for is that some creative politician will be able to cobble together another such compromise sometime in the next 10 years.   Of course it would be much easier to do if we were Switzerland, Denmark, or Singapore.  Heck, if we were even Canada or Australia.  But we are a nation of 310 million people with very diverse cultural values and perspectives on economics.

Happy New Year!

When I was young I thought I was experiencing a series of events.   Now I understand that I was experiencing the feeling of being young.  Sure you can go back and revisited a bunch of European countries, but it won’t seen the same as when you first tramped around Europe with a backpack, and the world seemed charged with mystery and meaning.

I think of public policy in similar terms.  Obviously there are cases where we can literally go back—the 21st Amendment restored the status quo ante of before the 18th Amendment.  But it’s never quite the same.  Indeed in just the last 10 years we’ve lost the ability to drink alcohol at our Bentley holiday party (I suppose due to fear of lawsuits.)

How I think about the past often depends on whether my mood is that of an ornery reactionary or a hopeful progressive.  Whether listening to talk radio or NPR.  Sometimes I think both the left and right miss something important when they visualize the past.  The right tends to romanticize a golden age that was ruined by statism, whereas the left sees a period of misery, which progressive legislation has lifted us above.  I believe the right has lots of blind spots, and the left often attributes change to legislation that actually reflects the fact that we are vastly richer than 100 years ago.

As a macroeconomist I often think of the spring of 1929 as a sort of golden age of policy, when there didn’t seem to be any significant macro problems and we had a pretty efficient policy regime.  But how should a pragmatic libertarian like me think about 1929 vs. today?  It’s not quite as obvious as you might think.  In some ways things have certainly got worse; Federal spending has grown from 3% to over 20% of GDP.  We have an alphabet soup of regulatory agencies that do more harm than good.  But there are also many changes for the better.  The rights of blacks, women, and gays are much better protected than in 1929.  And even many of the changes that would be vigorously opposed by more dogmatic libertarians, are somewhat ambiguous to a pragmatist like me:

1.  Social Security and Medicare really do help older people, but the systems were set up in a way that discourages saving.

2.  Some environmental regulations really do improve our lives, but they are often implemented in an inefficient way.

3.  We have lower tariffs, but many more non-tariff barriers.

4.  We’ve gained the right to drink alcohol, but also suffer from a new reign of paternalism

5.  We are more willing to tolerate immigration from non-European countries, but must suffer under the abominable TSA and INS.

6.  There is less regulation of transport pricing and entry, but more rent controls and minimum wages

7.  We have unlimited bank branching, but much more moral hazard in the system.

8.  There is more annoying paperwork today, but also less governmental corruption

I suppose for a dogmatic libertarian things are clearly worse, but for a pragmatist like me that’s not so clear.  Which finally brings me to monetary policy.  Are we better off today than in 1929?  How about compared to 1912?  I pick those dates because our monetary system has undergone two revolutionary changes in the past century; we’ve added a central bank and dropped the gold standard.  There’s only one thing I am really sure of; it’s a really, really bad idea to have both a central bank and a gold standard.  If you don’t believe me, check out the macro performance of the US between 1913 and 1941.  Both inflation and output were extraordinarily unstable.

In my view we are better off without the gold standard.  We can’t afford to leave the price level and NGDP to chance, where an increase in the demand for gold could cause severe deflation and depression.  Admittedly the worst example of this occurred under a gold standard that was far from pure (1929-33) but there are two strong arguments that cut the other way:

1.  The gold standard was also far from pure during the so-called classical period (up to 1914.)

2.  The whole point of the gold standard is that it’s supposed to work automatically, to protect you against foolish governmental decisions—indeed to prevent governments from printing too much or too little money.  If we need sensible government to make the gold standard work, then why not just attach the sensible government to a fiat regime, that will work even better (and did between 1983-2007.)

So far I’ve been emphasizing my progressive side, but now I’m going to do a 180 degree pivot.  I think a very strong case can be made that we’d be better off if the Fed had never been created.  Indeed a recent paper by George Selgin, William D. Lastrapes, and Lawrence H. White makes exactly that case.  It’s a very long paper and it marshals an impressive array of evidence against the Fed.  The focus in on two areas; whether the Fed has actually made the economy more stable (unlikely), and the effects of its regulatory actions,particularly in the recent crisis.  As far as I am concerned, their new paper becomes the definitive critique of the Federal Reserve System, which any academic researching the issue will have to address.

If you are a pragmatist like me, don’t write off the paper as a hopelessly utopian attempt to re-create a mythical gold age.  Their arguments are much more subtle and nuanced:

“Coming up with alternatives to the Fed today takes more imagination. Assuming that there is no political prospect of replacing the fiat dollar with a return to the gold standard or other commodity money system, for the dollar to retain its value some public institution must keep fiat base money sufficiently scarce. [..] [T]he Fed’s poor record calls for seriously contemplating a genuine change of regime. In particular it strengthens the case for pre-commitment to a policy rule that would constrain the discretionary powers that the Fed has used so ineffectively. Whether implementing such a new regime should be called “ending the Fed” is an unimportant question about labels.”

That’s exactly where I am on the issue.  It’s not a question of going back or staying where we are, it’s about moving forward.  Here’s an analogy.  The left and right have been debating whether we need a government-run postal service for decades.  Long before that debate is resolved technology will have eliminated the need for snail mail (except packages, which can be easily delivered by Fedex or UPS.)  It’s likely that long before we solve the problem of whether to use interest rate or money supply control, we will go to a cashless society with all electronic money.  That will make possible Robert Hall’s (1983) visionary scheme to index interest on reserves in such a way as to automatically stabilize the expected future price level (or NGDP.)  No Fed discretion is required.  Even Woodford once had nice things to say about the idea.

The debate over “ending the Fed” is pointless.  There will always be something called “the Fed.”  What we need to do is not to end it, but emasculate it.  Take away its discretion and simply give it a nominal mandate, and let the market implement the mandate.

I see the human race as like that runaway train in the new Hollywood film.   Technology is hurtling us rapidly toward a future that we can’t envision, and which would both horrify and dazzle us if we could.  (Just as the ancient Greeks would be both horrified and dazzled by our current culture.)  We don’t study the past to try to recreate the past, but rather to learn lessons that we hope will make the ride on this runaway train a bit smoother.

PS.  Thanks to William for sending me the quotation.  I’ll try to have more to say about other issues raised in the Selgin/Lastrapes/White paper when I have more time.  David Beckworth, Tyler Cowen, Alex Tabarrok, Bryan Caplan, and Arnold Kling also make comments.  I agree with some of the points made by Cowen, although I’d point out that while it’s true that if we’d had no Fed in 2008 there might have been a Great Depression, it’s also true that if we had no Fed in 2002 there would have been no sub-prime fiasco.  Banks don’t do that sort of thing without a safety net.  I will be at another conference this weekend, so blogging will again slow to a crawl.

Reihan Salam has requested my thoughts on a recent Economics 21 editorial:

Keep in mind that this editorial is part of an ongoing conversation. It is very possible that the Italy analogy is flawed. I’m hoping that Scott Sumner, Karl Smith, and others who favor a more aggressive use of monetary accommodation will weigh in on the editorial.

I’ve seen Salam on Bloggingheads.tv, and he always struck me as a very thoughtful and innovative conservative.  [Any jokes using the term ‘oxymoron’ will be stricken from the comment section.]   So I decided to respond to the Economics 21 piece:

Rather than focus obsessively on the inapt comparison to Japan, the Fed should be more concerned about the growing similarities between the U.S. and 1970s Italy. Italy experienced financial crises in 1974 and 1976 spurred by large current account deficits, excessive public spending, and a central bank that acquired Italian government debt by printing money. These crises required external financial assistance, led to abrupt and disorderly swings in public finances, and bred political instability. The country moved from economic stimulus, to severe fiscal and monetary contractions, back to expansionary policy. Balance of payments difficulties were persistently addressed through currency depreciation to gain competitive advantage. From June 1972 to August 1977, the Italian lira fell from 579.71 versus the dollar to 884.76 – a depreciation of more than 34%.

The chart below compares recent U.S. public financial data to that of Italy in the 1970s. Relative to 1970s Italy, the U.S. has run larger current account deficits and generated slower economic growth. The U.S. investment rate has barely exceeded Italy’s anemic 13.5% average, and the dollar’s depreciation against gold has been only somewhat less steep than the lira’s fall in the 1970s. The U.S. budget deficit is much larger, although this comparison is difficult to make because official Italian budget deficits tended to understate the government’s true financing needs, which exceeded 12% of GDP in 1977.

[click on Economics 21 link above to check out table of data here]

Between 1974 and 1976, the Italian central bank printed lira in mass quantities to buy Italian government debt. This “large scale asset purchase” program led to a more than 100% increase in the monetary base. This was actually a much smaller increase in the monetary base than that engineered by the Fed’s money printing operations. From February 2008 to February 2010, the U.S. monetary base increased by more than 150% – from $822.54 billion to $2.11 trillion. The Italian central bank accelerated its money printing in conjunction with a “large fiscal reflation” package adopted in August 1975, much as the Fed’s quantitative easing began roughly the same time as the fiscal stimulus.

Although the stimulus and money printing succeeded in generating positive growth in 1976, it also precipitated a crisis in the lira. Mario Monti, later competition commissioner of the European Union, predicted the crisis in late 1975 based purely on observed growth in base money. Foreign creditors – responsible for financing 7.2% of GDP in domestic Italian borrowing during 1973-76 – fled Italian securities causing the value of the lira to fall by 35% in less than five months. Less than two years after the last crisis, the Italian financial system was again embroiled in a panic as printing money to accommodate spending in excess of income at both the government and national levels widened current account deficits and triggered a foreign investor revolt.

There are certainly some similarities to Italy, but are they the important ones?   Relying on memory, I think Italy’s problems were roughly as follows:

1.  In the 1970s growth slowed dramatically from the 8% of the go-go 50s and 60s (remember La Dolce Vita?) to a sub-par rate ever since.

2.  If one combines this sharp economic slowdown with a rather dysfunctional political system, you get a fiscal crisis.  When there is political gridlock, the easiest way out is printing money.

3.  The base rose rapidly and this contributed to high inflation and currency depreciation.

How does this compare to the US?  There are some obvious similarities.  We had a real shock in our real estate industry (perhaps comparable to the 1973 oil shock.)  We seem to be adopting bad tax and regulatory policies that will slightly slow our trend rate of growth (but nowhere near as much as in Italy.)  We have political gridlock, which leads to big budget deficits.  And we have current account deficits.  But I think the differences are much more important.

1.  The monetary base in the US has risen for exactly the opposite reason as in Italy, but the same reason as in Japan.  In Italy the base was monetizing the debt, and this produced high inflation.  In the US the base growth is a response to the demand for liquidity during the banking crisis, the payment of interest on reserves, and the very low nominal interest rates and inflation rates.  I doubt we’d have suddenly started paying interest on reserves if the goal was monetizing the debt.

2.  In the 1970s Italy did not suffer from a shortfall in AD.  I am pretty sure that NGDP grew at a robust rate–their problems were supply side.  They did have occasional crises when high inflation led the government to tighten policy, leading to a boom/bust cycle.  In contrast, in 2009 the US saw the sharpest fall in NGDP since 1938.  Even if there had been no banking problems, a fall in NGDP that sharp (relative to trend growth) would have created a severe recession.  And the slow recovery of NGDP (as compared to 1983-84) makes a slow recovery in RGDP and employment almost inevitable.

3.  Despite all the QE in the US, the market indicators of inflation expectations remain quite low over the next 5 years.  In contrast, if TIPS and CPI futures had existed in Italy, I am certain they would have showed a loss of confidence in the domestic purchasing power of the lira.

4.  They did not cite the Rogoff data on banking crises, but I always like to remind people that the US banking crisis of late 2008 was a relatively rare version of what is otherwise a quite common phenomenon.  In the vast majority of banking crises the currency falls in the foreign exchange market.  Three counterexamples were the US in the early 1930s, Argentina around 1998-2002, and the US in late 2008.  In all three cases the currency rose strongly in trade-weighted terms, even in the midst the crisis.  That suggests that tight money (lack of AD) is either the root cause of the crisis (the US in the 1930s and Argentina in the late 1990s) or greatly aggravated a pre-existing banking crisis (the US in the second half of 2008.)

5.  I believe the fundamental problem in Italy was that some real economic problems were poorly handled by the government, and this led to irresponsible fiscal and monetary policies.  The US situation was much different.  Some real problems in the banking and real estate sectors led to a mild slowdown in late 2007 and early 2008.  But this wasn’t enough to lead to highly irresponsible fiscal and monetary policies.  Instead, a severe drop in NGDP relative to trend after mid-2008 (due to Fed errors of omission) led to a severe recession.  The recession was misdiagnosed as banking-oriented, and we first tried to fix banking.  Then we correctly noted AD (i.e. NGDP) was falling fast, but erroneously assumed the Fed could do no more, and went for fiscal stimulus.  Only recently have we realized that the Fed is the key, and we are doing what we should have done 2 years ago.  But even this seemingly large QE has only modestly raised inflation expectations over 5 years (from about 1.2% to 1.7%.)  Conservatives who draw comparisons with Italy are missing the AD problem, the elephant in the room.

Having said all that, I do agree that the recent trend toward higher taxes and regulations are causing “real” problems for the US economy.  I support many conservative ideas such as deregulation, abolishing the GSEs, vouchers, health saving accounts and tax and entitlement reforms that encourage savings.  But even if in the long run those issues are more important than AD shortfalls, we need to keep in mind that these reforms will be harder to achieve if an NGDP growth shortfall worsens the budget deficit and leads to inefficient programs like 99 week unemployment benefits.  In that respect Japan is an important cautionary tale.  They reacted to a monetary problem with inefficient fiscal actions.

Over the past two years I’ve warned conservatives that Paul Krugman would be able to gloat that he was right and they were wrong about our policies leading to high inflation and high interest rates.  Not many conservatives took my advice, and now Krugman has started gloating.  (Which will be the subject of my next post.)

Be careful what you wish for.  Tim Worstall sent me this interesting post about the Nordic countries:

The UK’s centre left just doesn’t seem capable of understanding what it is that makes what they claim to want work: imagine the horror there would be if I suggested that Group 4S took over the majority of fire and ambulance services in the UK? Yet that is what Denmark does (really: it’s actually Group 4S that runs them). We can hear the screams already as Gove tries to bring the Swedish school system with its funding following the pupil, essentially a market, to the UK. Can you imagine the piteous wails if someone suggested importing the Finnish schools system (often ranked as the world number 1)? With its division at 15 into academic sheep and vocational goats?

Compare and contrast the the Swedish health care system with the NHS: taxes are raised in county and spent in county (on average, 400,000 people, it’s as if a PCT raised and spent its own money), there are copayments to see the doctor…no, we couldn’t imagine the British centre left allowing such a system to exist, could we? Nor the localism of Denmark: the national income tax rate is 3.76%: the top national one 15%. The vast bulk of the money is raised by the communes which can be as small as 10,000 people. You and I would think that money so raised will be better spent when any and every taxpayer knows exactly who is spending it and where they have a snifter on a Friday night.

This reminded me of a post I did a while back, which discussed an interesting article in the New Yorker on health care in McAllen, Texas:

In 2006, Medicare spent fifteen thousand dollars per enrollee here, almost twice the national average. The income per capita is twelve thousand dollars. In other words, Medicare spends three thousand dollars more per person here than the average person earns.

. . .

I was impressed. The place had virtually all the technology that you’d find at Harvard and Stanford and the Mayo Clinic, and, as I walked through that hospital on a dusty road in South Texas, this struck me as a remarkable thing. Rich towns get the new school buildings, fire trucks, and roads, not to mention the better teachers and police officers and civil engineers. Poor towns don’t. But that rule doesn’t hold for health care.

I had this to say about the New Yorker quotation:

Suppose McAllen was an independent country with universal health care.  How much would it cost the government to insure the entire population?  If independent, McAllen would be poor relative to the US, but it certainly wouldn’t be poor in any absolute sense.  My guess is that it would come in somewhere around Portugal or Slovenia.  And I would also guess that it would spend less insuring the entire population than we now spend insuring the relatively small share of the population covered by Medicare.

Many on the left say we should adopt the European health care system.  A good place to start would be federalism.  The EU is roughly the size of the US, but has 27 members, each with their own health care system.  If we are to copy Europe, the first thing to do is to delegate health care to the 50 states.  No more Medicare and Medicaid.  Any public health care should be fully funded at the state level, just as in Europe.  My guess is that the good citizens of Houston and Dallas are not going to be enthusiastic about spending $15,000 per enrollee in McAllen, when the prestigious Mayo Clinic spends $6688 per enrollee.  If those on the left aren’t enthused about this idea, then let’s not hear any more talk about copying Europe’s health care system.  (After completing this post I noticed that Robin Hanson had an even better idea.)

Liberals often tell me that Swedish vouchers wouldn’t work here, our population isn’t as homogeneous and civic-minded.  I’d think that’s a much better argument against the more socialist aspects of the Nordic system, like generous unemployment benefits.  Reading this stuff I can’t help but think back to posts by people like Paul Krugman, praising our Medicare system for its low administrative costs.  He’s right; they spend very little preventing the health care industry in places like Texas and Florida from systematically looting the taxpayers.  By all means, let’s let each county run and pay for its own health care system.  If not, then stop talking about how the Swedes are superior to us.

A few weeks back I complained that Obama was trying to force me to divorce my wife.  According to The Economist, the Swedish government doesn’t do that:

In Sweden 88% of women aged between 25 and 54 take part in the labour market. It helps that the country’s extensive day-care facilities for children are largely reserved for workers, and that couples file their tax returns separately so that households do not get hit by higher marginal tax rates on their second incomes.

A larger share of Sweden’s older people, too, remain in the labour force than anywhere else on the continent, not least because they accrue higher retirement benefits for each year they work after the age of 61. If other Europeans aged between 55 and 64 were as industrious as older Swedes, the continent could reduce the gap in hours with America by almost a quarter, according to the MGI.

The rest of Europe could also learn from Denmark’s efforts to beat unemployment and from the Netherlands’ success in getting youngsters into work. To echo an old joke, heaven is where women and older people work like the Swedes, the young work like the Dutch and the unemployed find jobs like the Danes. Hell is where workers get into unemployment like the Americans and out of it like the Italians.

And we are falling behind them in neoliberal reforms.  Again, from The Economist:

Sweden offers a more encouraging lesson. In the aftermath of its banking bust in the early 1990s it not only cleaned up its banks quickly but also embarked on a radical programme of microeconomic deregulation. The government reformed its tax and pension systems and freed up whole swaths of the economy, from aviation, telecommunications and electricity to banking and retailing. Thanks to these reforms, Swedish productivity growth, which had averaged 1.2% a year from 1980 to 1990, accelerated to a remarkable 2.2% a year from 1991 to 1998 and 2.5% from 1999 to 2005, according to the McKinsey Global Institute.

Sweden’s retailers put in a particularly impressive performance. In 1990, McKinsey found, they were 5% less productive than America’s, mainly because a thicket of regulations ensured that stores were much smaller and competition less intense. Local laws restricted access to land for large stores, existing retailers colluded on prices and incumbent chains pressed suppliers to boycott cheaper competitors. But in 1992 the laws were changed to weaken municipal land-use restrictions, and Swedish entry into the EU and the creation of a new competition authority raised competitive pressures. Large stores and vertically integrated chains rapidly gained market share. By 2005 Sweden’s retail productivity was 14% higher than America’s.

The restructuring of retail banking services was another success story. Consolidation driven by the financial crisis and by EU entry increased competition. New niche players introduced innovative products like telephone services like https://www.circles.life/au/plans and internet banking that later spread to larger banks. Many branches were closed, and by 2006 Sweden had one of the lowest branch densities in Europe. Between 1995 and 2002 banking productivity grew by 4.6% a year, much faster than in other European countries. Swedish banks’ productivity went from slightly behind to slightly ahead of American levels.

.   .   .

Even in America there would be benefits. But, alas, the regulatory pendulum is moving in the opposite direction as the Obama administration pushes through new rules on industries from health care to finance. So far the damage may be limited. Many of Mr Obama’s regulatory changes, from tougher fuel-efficiency requirements to curbs on deep-water drilling, were meant to benefit consumers and the environment, not to curb competition and protect incumbents. Some of the White House’s ideas, such as the overhaul of broadband internet access, would in fact increase competition. The biggest risk lies in finance, where America’s new rules could easily hold back innovation.

I didn’t always agree with President Clinton, but at least he did deregulation, welfare reform, NAFTA and cut the capital gains tax.  I can’t recall a single thing that Obama has done that a classical liberal would approve of.  Even where his private views may be libertarian (free trade with Cuba, gays in the military, ending the abuses of the national security state, medical marijuana, a smaller military, etc) he seems to lack the courage of his convictions.  No wonder he generates so little enthusiasm.

Tea Partiers complain that Obama wants to make us like Sweden.  If only that were true.  I fear we are headed toward Brazilian-style “big government.”  Lots of spending and lots of poverty.