Who has the best political system in the world?

Dylan Matthews says New Zealand has it.  A mixed member proportional representation system (like Germany) and a constitutional monarch head of state (like Australia and Canada.)  And only one house, i.e. unicameralism.  I’ve argued for Switzerland, the world’s most democratic country. But Matthews has convinced me that the Kiwis have the second best system on Earth.

In case anyone is interested, the Fraser Institute has a ranking of Economic Freedom in the World. New Zealand comes in #3, between Singapore (#2) and Switzerland (#4.) Alternatively, it’s the freest economy in the world with cows and sheep.  Personally, I don’t think one should argue that a political system is optimal because it happens to produce policies that YOU prefer, rather than policies that much smarter people with Nobel Prizes prefer (Krugman, Stiglitz, etc.) The world is not set up to please YOU.  It’s set up to efficiently aggregate the Wisdom of Crowds. That’s how political systems should be judged.  Still, you wouldn’t want you’re favorite system to produce Somalia or Iraq.  And the optimal system might well depend on the cultural attributes of the population.

BTW, the US is #17 on the Fraser economic freedom list, between Estonia and Cyprus. Our political system has some good points (lots of democracy and decentralization), and some bad points (big states, non-proportional representation, and filibusters.)

[In the Heritage rankings New Zealand is #5, below Switzerland and above Canada, while the US is #12, below Estonia and above Bahrain.]

Over at Econlog I did posts discussing the recent elections in Sweden and New Zealand.  Both countries were ruled by reformist right-of-center governments, which did lots of good things. New Zealand had much better monetary policy than Sweden, where the Riksbank went after imaginary “bubbles.”  The New Zealand government was re-elected over a left-of-center alternative party advocating taxes on capital gains and higher minimum wages.  The Swedish government lost, and was replaced by a left-of-center coalition.  I wonder what explains the difference?



55 Responses to “Who has the best political system in the world?”

  1. Gravatar of John Hall John Hall
    24. September 2014 at 08:22

    Do you know any good papers about Swiss political institutions?

  2. Gravatar of Kenneth Duda Kenneth Duda
    24. September 2014 at 08:33

    Scott, totally off topic:

    Are you aware of any serious efforts to form an NGDP futures market? This strikes me as a key step in promoting NGDPLT as a monetary policy regime. Please let me know. I would be interested in supporting the effort financially.


    Kenneth Duda

  3. Gravatar of ssumner ssumner
    24. September 2014 at 09:54

    John, I don’t know of any, but I do know that more that half of all national referendums in the 20th century occurred in Switzerland.

    Kenneth, Yes I do, and I expect to be fundraising for it in the very near future.

  4. Gravatar of Kenneth Duda Kenneth Duda
    24. September 2014 at 11:15

    That’s great, Scott. I hope you’ll contact me when the time is right. My number is 956-433-3339. I have a well above average ability and inclination to contribute.


  5. Gravatar of Anthony McNease Anthony McNease
    24. September 2014 at 12:14

    What the best political system is or should be has been debated at least since Plato. I’d say he didn’t think very highly of democracy. And your subsequent point about the Riksbank reminds me of Alan Blinder’s column in the WSJ yesterday on the Fed. I made the mistake of reading the comments. Unbelievable. They combined complete ignorance with cynical distrust. Depressing. And those people probably all vote.

  6. Gravatar of Bababooey Bababooey
    24. September 2014 at 12:39

    It seems like there isn’t much to loot in NZ politics so the govt doesn’t attract U.S. type politicians (vapid egoists with no scruples, morals, brains or really any positive attribute besides ambition). And I’m not sure NZ breeds those kind of bossy student body types, though I’m not sure. Kiwis’d probably be fine with a strict monarchy or anarchy etc.

    For overseeing U.S. Federal wealth and power, only sortition makes sense.

  7. Gravatar of Joe C Joe C
    24. September 2014 at 12:39

    “And the optimal system might well depend on the cultural attributes of the population.”

    I think this is true. The Founders tried to do exactly this when designing the Constitution but making sure to include check and balances as well.

    “It’s set up to efficiently aggregate the Wisdom of Crowds. That’s how political systems should be judged.”

    Perhaps I am misunderstanding but on this point I do not necessarily agree. The best political system protects essential freedoms and liberties for everyone. This is why most of the Founders did not support a completely democratic government or “pure” democracy. It’s possible for a majority of the people to subvert the rights of a minority – even though it’s viewed as “wisdom”. I reject the idea that the “crowd” or majority knows best. E.G. NGDPLT.

    I will say however that there are many things that have crept into our political system, such as the filibuster and super-majority, that are not technically part of our Constitution.

    I’d like to add also that in most situations, I dislike referendums – we vote for representatives to make policy within a confined set of rules. It’s really supposed to be a division of labor. Most people are ignorant on a great many things and the job of legislators is to find the best and most accurate information and make policy based on it. At least that is the way it’s designed to happen.


  8. Gravatar of Philippe Philippe
    24. September 2014 at 13:00

    “Kiwis’d probably be fine with a strict monarchy or anarchy etc”

    they’d be fine with polar opposite social systems?

  9. Gravatar of Boutagy Boutagy
    24. September 2014 at 13:09

    NZ does many things right but MMP is not one of them. Our crucial reforms (Reserve Bank Act and Fiscal Responsibility acts in particular) came in before MMP. Under the current system it is hard to see that these would have been enacted. So in many ways NZ succeeds despite MMP.
    What we now need is a Regulatory Responsibility Act. However under MMP that is much more unlikely than under the previous (FPP) system. Even with the new government having an absolute majority (i.e. not having to depend on coalition partners)it will not, because of the nature of MMP, govern without the support of other parties.

  10. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    24. September 2014 at 13:22

    Speaking of very smart people with Nobel Prizes, Vernon Smith co-authored a book last May that managed to get overlooked by me until now.


    Which looks interesting–I haven’t read it yet–since it seems to support the idea that inside traders and futures markets can help stabilize asset markets.

  11. Gravatar of Bababooey Bababooey
    24. September 2014 at 14:15


    Kiwis will be fine with polar opposite government systems because of their culture. The monarchs and royal families of Netherlands, Morocco and Saudi Arabia are vastly different from one another.

  12. Gravatar of Matt Waters Matt Waters
    24. September 2014 at 14:50

    Dylan sort of lost me when he said “all upper houses are useless,” which is true. But the fact that the US has a Senate at all shows how and why the US is not New Zealand or Switzerland. The South knew that they were a minority and leveraged representation at the state level in the Senate as well as the population level in the House.

    The same issue exists today, but more for rural voters in general versus urban voters. Rural states have disproportionate sway in politics and many policies reflect that.

    In short, there’s not a simple solution to GEOGRAPHIC heterogeneity that doesn’t somehow betray majoritarian, democratic ideals. If there’s a substantial difference between different geographical divisions and government always reflects the wishes of geographical division with the majority, then the minority geographical division always has an incentive to leave. Sometimes that minority geographical division is so powerless that they stay with only the general defense of the hosting country as compensation. But often the minority division has enough leverage to get some undemocratic policies.

    There is not a real good solution to this issue. The way America does it is basically forcing an agreement between representation by population (House, usually President) and representation by mixture of population/geography (Senate). It works…sort of.

    The first thing I would fix would be some alternative to the debt ceiling. A constitutional amendment should rework the powers to give Congress all spending authority, with power for the president to raise debt up to that spending authority. They need to be one and same thing.

    Then there is gerrymandering, where the constitution unwittingly gave way too much power to state legislatures. So, political change (like with Sweden) is even more hamstrung than the bicameral legislature. You have this three-, four-, five- or six(!)- cameral legislature. The lines in most states are drawn with the same process as passing legislation. That means the two houses and governor has to approve the new district lines, in addition to the two houses and president at the federal level. Moreso than the existance of the Senate, this is an accident of history which should be undone.

    Without gerrymandering, the Republicans would have had only two years of power in 1/3 of the government in the last six years. Such sustained losses would have gotten the Republicans to retool and regroup more than they have. Many people my age (~30) would be more enthusiastic for the Republicans if they went to a more generally libertarian policy. But their libertarian goals have been really badly targeted. Essentially they’ve entirely focused reducing government in safety-net programs for the poor or environmental regulation, with very little for reducing much more distortive spending or taxes. Make-work projects, both transportation and defense, have remained very popular. The health care system remains a mess because many entrenched interests like it that way (various pharma, device, hospital, doctor and insurance special interests are the top campaign contributors).

    There is monetary policy as well, but thankfully the Fed policy does in fact represent a consensus of economists rather than the general public. A lot of the general public just sort of hears giving free money to Goldman Sachs when talking about monetary policy, especially at the zero-bound. The Fed conspiracy stuff was around before the zero-bound, but it really took off as people wanted to blame unemployment on something. The power of monetary policy also all follows from a market failure (sticky wages), and a lot of the public has a lot of difficulty swallowing any market failure after a lot of market mythology.

    By the Fed, I should say the Federal Reserve Board, which are approved democratically. Most economists at “salt water” schools have at least some flavor of New Keynesian with Monetarism. The really irrational, hard money FOMC members always come from the individual bank level, with elections by 9-member boards that are usually a bunch of local bank chairmen and CEO’s. The FRB has to approve them, but it’s a lot easier for somebody like Fisher to get appointed.

    The real issue on monetary policy is that the consensus of salt water economists is generally New Keynesian, with too much invested in concrete steppes and too little in understanding the power of expectations. The difficulty lies in expectations not really coming out except at the zero-bound, at least in America since World War II. Expectations have been there, such as the inflation being lower in 90’s/00’s than the 70’s “despite” interest rates being lower. But economists have all convinced themselves that monetary policy worked through interest rates or fiscal policy, and many still don’t see how that doesn’t match the evidence.

  13. Gravatar of Major.Freedom Major.Freedom
    24. September 2014 at 16:18

    “Personally, I don’t think one should argue that a political system is optimal because it happens to produce policies that YOU prefer, rather than policies that much smarter people with Nobel Prizes prefer (Krugman, Stiglitz, etc.) The world is not set up to please YOU. It’s set up to efficiently aggregate the Wisdom of Crowds. That’s how political systems should be judged.”

    What if Nobel Prize winners are reading that statement?

    Krugman and Stiglitz are not smarter than me when it comes to understanding the optimal social structure. I am smarter than they are, because I understand the destructive ethics they advocate, whereas they do not.

    I don’t care if anyone or everyone else in the world rejects the above statement.

  14. Gravatar of ssumner ssumner
    24. September 2014 at 16:35

    bababooey, The size of the US is a problem. I admit that I haven’t given any thought to sortition.

    Joe, The first amendment gives us no more protection than if it was a law passed by Congress. The protection is widely ignored in all sorts of areas.

    Boutagy, I can’t follow your logic. The new government has an absolute majority, but you say it won’t enact the law you favor. Why would it with FPP?

    Matt, I agree that it would be difficult to implement the NZ system here, I was just considering who had the best system, not whether it was feasible in all countries. I agree with many of your other comments.

  15. Gravatar of benjamin cole benjamin cole
    24. September 2014 at 16:41

    Matt W–Congratulations! You are one of the few people to realize that rural America is a pink wonderland.

  16. Gravatar of Major.Freedom Major.Freedom
    24. September 2014 at 18:27

    Personally, I don’t think one should argue that a political system is optimal because it happens to produce policies that Nobel Prizes prefer (Krugman, Stiglitz, etc.), rather than policies that THE INDIVIDUAL prefers. The world is not set up to please Nobel Laureates. It’s set up to efficiently aggregate the Wisdom of Individuals. That’s how political systems should be judged.

  17. Gravatar of Major.Freedom Major.Freedom
    24. September 2014 at 18:30

    The idea that the world should be politically led by Philosopher Kings is the Platonic seed responsible for fascism, communism, and despotic governments.

    Supporting the Philosopher Kings if they just so happen to today agree with some modicum of individual liberty, is trusting the reed simply because it happens to be bending the right way at this time.

  18. Gravatar of cassander cassander
    24. September 2014 at 19:55

    New zealand would be a relatively nice place under any political system, like all the anglophone countries are. Ditto the nordics. Singapore doesn’t have a system of government so much as a culture of government gifted to them by one of the smartest benevolent autocrats in history.

    switzerland is the correct answer because switzerland is an entity that shouldn’t exist. it was a region surrounded by powerful enemenies, utterly riven by internal strife over religion, languange and culture. the system it has evolved to survive incredibly difficult circumstances, and it not only maintain its territorial integrity without descending into tyranny and producing exceptionally good government in the process. its system (at least up until the recent changes), extremely decentralized mix of proportional and representitive democracy, is the only democractic model of government I think is broadly generalizable.

  19. Gravatar of Alexei Sadeski Alexei Sadeski
    24. September 2014 at 20:29

    Why is requiring supermajority bad?

    (you put filibusters in the “bad” section)

  20. Gravatar of Joe C Joe C
    24. September 2014 at 20:50

    Prof Sumner:

    “Joe, The first amendment gives us no more protection than if it was a law passed by Congress. The protection is widely ignored in all sorts of areas.”

    Your right, this is true. But, at least the first amendment would be much harder to do away with! Plus, your point illustrates one reason why some Founders, such as Wilson and Madison, believed that no amendments were necessary in the first place.


  21. Gravatar of TravisV TravisV
    24. September 2014 at 20:55

    Report: China May Push Out Its Central Bank Head


  22. Gravatar of Lorenzo from Oz Lorenzo from Oz
    24. September 2014 at 21:22

    Actually, Australia’s system works better. It has single member preferential voting lower house which produces full-term governments. It has proportional representation upper house, so the range of opinions is reflected.

    All upper houses are not useless, if they allow the same system to do different things.

    So, Australia does not have the wild swings in policy NZ does. Which probably has something to do with ending up with better monetary policy, as things have to be argued through.

  23. Gravatar of TravisV TravisV
    24. September 2014 at 21:24

    U.S. five-year TIPS spreads are crashing……

  24. Gravatar of TravisV TravisV
    24. September 2014 at 21:28

    Interesting analysis of China’s supposed growth target:

    “The services sector absorbs more jobseekers than the manufacturing sector. According to Cao Yuanzheng, chief economist of the Bank of China, for every one percentage point growth in the economy, it creates 1.8 million jobs. However, the same pace of growth only created 1.2 million jobs in the past six years, according to an interview with the Southern Weekend, a respected Chinese-language newspaper.

    This means that if Beijing wants to create about 10 million new jobs, it needs less than 6 per cent annualised GDP growth to achieve that.

    Cao explains the reason that Beijing needs to maintain around about 7.5 per cent growth in the face of a stable employment situation is to prevent a widespread debt default. The government’s effort to rein in the ballooning debt problem cannot be solved within a short period of time, so Beijing needs more time. This requires maintaining a reasonable growth speed……”



  25. Gravatar of Ben J Ben J
    24. September 2014 at 22:04

    Travis V,

    They’re still look well above their run for the year to me:


    Am I missing something?

  26. Gravatar of Saturos Saturos
    24. September 2014 at 22:24

    “John Galt is a sad, conflicted figure played by Michael Vassar (obvious). Galt convinced Scott Sumner to drop out of pushing NGDP level targeting, after Galt realized that faster world economic growth was just pushing along the timeline to unFriendly AI. Galt doesn’t _like_ everything he does to keep the Great Stagnation in place, he certainly doesn’t gloat about it, he just doesn’t see anything else he can do.”


    This is why you follow Yudkowsky on Facebook.

  27. Gravatar of Saturos Saturos
    24. September 2014 at 22:25

    Of course the Great Stagnation is supposed to be in everything *except* infotech, but still.

  28. Gravatar of Saturos Saturos
    24. September 2014 at 22:38

    Apparently the world’s second-best political system isn’t good enough to kick the PM out of office after blatantly lying to his public about domestic surveillance.

    “rather than policies that much smarter people with Nobel Prizes prefer (Krugman, Stiglitz, etc.)”

    prefer while they are still academics, of course. Otherwise we’d just appoint them as philosopher kings.

  29. Gravatar of Saturos Saturos
    24. September 2014 at 22:40

    Oh, I see MF already has a rant on that.

  30. Gravatar of W. Peden W. Peden
    25. September 2014 at 01:38

    Interesting post. So much for the idea that economic freedom and democracy are incompatible!

    I think that second chambers can be good things (e.g. the House of Lords in the UK is in many ways a much better chamber than the House of Commons) but I see little point in having two ELECTED chambers. One might argue that representing different areas of the country is important, but why privilege representing geographic areas over other forms of identity?

    Though I don’t defend all aspects of “British democracy”-


  31. Gravatar of mbka mbka
    25. September 2014 at 02:52

    Why is NZ so poor? In the freedom category they are in the company of Switzerland and Singapore, and with added natural resources. But the NZ per capita GDP isn’t exactly impressive.

    In the GDP/capita at PPP list of Wikipedia, NZ comes in barely above Italy and Spain, and way below socialist paradises such as Belgium,Germany and France, with their 55%-ish share of government in GDP.

  32. Gravatar of W. Peden W. Peden
    25. September 2014 at 03:33


    New Zealand has a history.

    The New Zealanders’ liberalization came in the 1980s, and they only stabilised macroeconomically in the 1990s. Since then, they have had a very enviable performance. One could say the same thing about Germany: these days its economy is well-regarded, but I can remember 10-15 years ago before the labour market changes when the question in Europe was “How can we AVOID becoming like Germany?”.

  33. Gravatar of W. Peden W. Peden
    25. September 2014 at 03:39

    I also suspect one would find that economic freedom tends to be higher in economies that (a) have a long history of poor economic performance and (b) have a recent history of very good economic performance. Georgia is an extreme case, but most of the countries that did a lot of liberalization in the 1980s had got into a real mess by that point. Ditto Sweden and the Baltic states in the 1990s.

    Spain, France and Italy are coasting on glories of old. I was just reading a book yesterday praising France (in 1983) for its strict approach to welfare, in that it capped benefits as a percentage of average incomes, and comparing this to the UK system which had no such cap (and has only recently introducd a per household benefits cap of any sort).

  34. Gravatar of Johnny Johnny
    25. September 2014 at 03:41

    mbka, New Zealand was ranked sixth in the 2013 Human Development Index

  35. Gravatar of Johnny Johnny
    25. September 2014 at 03:54

    mbka, idk, but I speculate that perhaps them may not have as high economic freedom in their main comparative advantage, which would guarantee a high growth, but taking everything else – along with some redistribution – guarantees a high human development.

  36. Gravatar of Johnny Johnny
    25. September 2014 at 03:58

    brain drain for australian shall significantly reduce the human capital also.

  37. Gravatar of ssumner ssumner
    25. September 2014 at 05:23

    Alexei, It dilutes the Wisdom of Crowds. Imagine a supermajority of 90% required. Or 99%.

    Lorenzo, Does the NZ government really have that much control over monetary policy? I thought they had an inflation target.

    Saturos, You said:

    “Apparently the world’s second-best political system isn’t good enough to kick the PM out of office after blatantly lying to his public about domestic surveillance.”

    Yes, and in 2012 America was not able to kick out of office a President who promised to end the abuses of civil liberties in Bush’s War on Terror, and then kept them in place.

    My God, what would happen if we kicked out of office every politician who lied! The various houses of parliament would be almost empty.

    MBKA, I’ve wondered about that too. In fairness, they are certainly growing faster than the countries you mention, a few years back they were even further down the list.

    Perhaps a combination of remote location, small population, and more rural population than usual. And their resources are much less profitable than Australia’s resources. Food exports are not very profitable in a world where agriculture is highly subsidized. But that’s just a guess.

  38. Gravatar of OysterClubber OysterClubber
    25. September 2014 at 06:56

    That last paragraph echos my own thinking precisely. Being swedish and a supporter of the former government, I have been surprised that our media has paid no attention to the political impact of the Riksbank’s “mortgage brake” policy. The unnecessarily high unemployment has arguably been one of the drivers of protest votes for the Sweden democrats, which ultimately cost the government re-election.

    Thanks for paying attention. It is a pity no one in Sweden does.

  39. Gravatar of Chuck E Chuck E
    25. September 2014 at 07:21

    “My God, what would happen if we kicked out of office every politician who lied! The various houses of parliament would be almost empty.”

    Perhaps the lying would be curtailed? No penalties for lying have hurt freedom most of all.

  40. Gravatar of J Mann J Mann
    25. September 2014 at 07:31

    Scott, Kenneth – I am personally hoping that Scott plans to use Kickstarter, and that there will be some choice gifts for early funders of an NGDP futures market. I’d probably contribute, but only if there was a t-shirt or ball cap involved.

  41. Gravatar of W. Peden W. Peden
    25. September 2014 at 08:02

    Chuck E,

    It all depends on the supply-elasticity of political lying.

  42. Gravatar of W. Peden W. Peden
    25. September 2014 at 08:02

    Or the price elasticity, depending on how you look at it.

  43. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    25. September 2014 at 09:00

    ‘I see little point in having two ELECTED chambers.’

    It’s part of the checks and balances, especially in the U.S., designed to make it difficult to accomplish anything through politics. The WORST thing about democracy is that temporary majority enthusiasms can get enshrined in law. Which are then difficult, if not impossible, to repeal.

  44. Gravatar of W. Peden W. Peden
    25. September 2014 at 09:07

    Patrick R. Sullivan,

    Oh, I’m all for checks and balances, but if you have two elected chambers, then I’m not sure what checks are supposed to be made, since both are open to “temporary enthusiasms”.

    I like some features of the US political system. Having an elected second chamber isn’t one of them.

  45. Gravatar of TravisV TravisV
    25. September 2014 at 09:49

    Lars Christensen: “The dollar rally is testing the Fed’s credibility”


  46. Gravatar of TravisV TravisV
    25. September 2014 at 09:50

    Prof. Sumner,

    Matt Yglesias just called this “The most important chart about the American economy you’ll see this year”


  47. Gravatar of mikef mikef
    25. September 2014 at 10:21

    We are reminded by the vote in Scotland of the importance of decentralized government and decision making. The original constitution is setup to have a government to represent the states and their key common needs, like a national defense, it was not a system setup for an absolute one man, one vote, but a system to ensure that both the population as a whole and the majority of states that made up the union were represented. Switzerland and New Zealand are small countries. Their governance system does not necessarily scale. I just read that the 1/3 of Texans would like to secede from the union…many liberals in the NE support seceding as well..

  48. Gravatar of Alexei Sadeski Alexei Sadeski
    25. September 2014 at 10:56

    ssumner, you said, “Alexei, It dilutes the Wisdom of Crowds. Imagine a supermajority of 90% required. Or 99%.”

    The US Senate’s filibuster requires a supermajority of 60%. The dilution suffered by a 60% supermajority may be counterbalanced by the advantage of guarding agains ‘weakly confident’ 51% crowds.

    Still don’t see any argument for placing the filibuster in the “bad” category.

  49. Gravatar of dbeach dbeach
    25. September 2014 at 12:26

    I actually think the big problem with the filibuster is that it undermines accountability. If one party controls both houses of Congress and the White House, the other can *still* stop them from implementing their legislative program. Then people don’t know whom to blame if things don’t go well. That’s why a unicameral legislature that selects the executive is superior. Everyone knows who should get the credit or blame for what happens.

    On the subject of country rankings, I find that the Corruption Perceptions Index is highly correlated with country economic performance and with economic freedom: http://cpi.transparency.org/cpi2013/results/

    Obviously the same small, mostly cold countries dominate all of these lists.

  50. Gravatar of Boutagy Boutagy
    25. September 2014 at 13:24

    To clarify my point. Under FPP a government is more likely to pass laws/regulations that it deems important. However under MMP, even with a clear majority, it will want to keep in with its minority partners – ACT, United Future and the Maori party in this case (perhaps with an eye on future elections) and will therefore be less willing to pass its preferred laws/regs if 1 or more of these partners objects.

  51. Gravatar of Kevin Erdmann Kevin Erdmann
    25. September 2014 at 14:02

    Travis, isn’t interesting how he only has a chart for the recoveries. It would be informative to see how behavior has changed during downturns, since the last couple have been especially hard on capital. Some of this is rebounding. I’m sure yglesias’ readers vaguely assume that the downturns are also harder on the 90%, but you never see that graph. Even then, it might take panel data to see what’s going on.

  52. Gravatar of Lorenzo from Oz Lorenzo from Oz
    25. September 2014 at 16:43

    New Zealand pioneered inflation targeting! I just meant that the RBA approach fits in with a political culture that has to deal with getting wider agreement than just whoever has the government benches in the House of Representatives.

  53. Gravatar of TheNumeraire TheNumeraire
    25. September 2014 at 20:09

    Travis, there is no reason to find the chart Yglesias linked to as important.

    First, the source of the data is the Piketty/Saez income estimates culled from IRS tax returns. This is a pre-tax income measure which actually excludes transfer payments. Transfer payments within the BEA’s National Income and Product accounts have grown rapidly in the past 35 years (from 10.7 percent of personal income to 16.3 percent) because of the ageing demographics and expansion of programs like Medicare. It is entirely reasonable and not shocking to observe that the average market income of the bottom 90 percent grows slowly or not at all due to the fact that the increasing share of retirees within the population earn far less market income when they are not working.

    Secondly, the Piketty-Saez data measures income of tax units, not individuals or households. Over time, the percentage of tax units represented by working couples has decreased, although such tax units are obviously highly represented in top income groups. Market income per tax unit has grown slower than personal income simply because these tax units on average work less; the average tax unit is increasingly smaller and more likely to contain retirees whose only earnings using the Piketty-Saez formula would be from private pensions and capital income.

    An additional source on muted average income growth of the bottom 90 percent would be the constant influx of low-skilled immigrants from poorer regions of the world. The market incomes of such groups will tend to bring down average income even as they have no effect on market incomes of other tax units in the bottom 90 percent.

    Furthermore, a large chunk of the alleged growth in top incomes is due to the elasticity of market incomes in response to changes in marginal tax rates. Lower tax rates on personal income, capital gains and dividends have induced the highest earners to shift business income from standard C-corps to pass-through entities, increase realized capital gains and own more dividend-paying stocks in taxable accounts. Piketty and Saez even support this assertion – they co-authored a paper on optimal taxation which found large elasticities in personal income across many countires in response to change in top MTR.

    The progressives lean heavily on the Piketty-Saez data to supposedly prove that income inequality is extreme and then conclude that greater income redistribution is needed. The irony of couse is that the Piketty-Saez does not take into account taxes and transfers and therefore would show no change in income equality upon greater redistribution.

  54. Gravatar of Lorenzo from Oz Lorenzo from Oz
    26. September 2014 at 00:08

    Second chambers are not useless: Australia having a proportional representation federal Senate means a wider range of opinion gets represented than in the government-forming House of Representatives. Having a chamber the Government of the day does not dominate broadens the seeking-information aspect of Parliament and creates something of an actual majority effect–that is, to get things done requires the support of the representatives of an actual majority of the electorate. It tends to select for better argued and wider supported measures.

    But the House of Representatives is single-member, preferential voting, so who is in Government is typically known on election night and their occupation of the Government benches is (usually) not hostage to minor Parties.

    I am just not keen on “elected dictatorships”.

  55. Gravatar of ssumner ssumner
    27. September 2014 at 08:06

    Oyster, Thanks.

    Chuck, Good point.

    Travis, Regarding that chart, what possible reason would there be to focus on the expansion years, rather than all years?

    Mike, Good point, but I think Switzerland scales somewhat better than New Zealand.

    Alexei, I’m more worried about the “weakly confident” 41% than the weakly confident 51%.

    dbeach. Good point about accountability. On your second point, google my paper “The Great Danes” from 2008, I tested your hypothesis and found support for it.

    Boutagy, My mistake, I thought this government had a full majority, and didn’t need small party partners. The advantage of small parties is they prevent radical change supported by only 40% of voters.

    The Numeraire, Good points.

    Lorenzo, There are good arguments both ways on elected dictatorships. It’s also partly cultural. Even where laws prevent elected dictatorships (Russia, Latin America) the governments just ignore the term limit laws. No substitute for good political cultures.

Leave a Reply