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:

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

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.