Economics

Doing Business 2017

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The World Bank’s latest Doing Business report has been released. The report “measures regulations affecting 11 areas of the life of a business. Ten of these areas are included in this year’s ranking on the ease of doing business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. Doing Business also measures labor market regulation, which is not included in this year’s ranking.”

Its key findings are as follows:

  • Doing Business 2017: Equal Opportunity for All finds that entrepreneurs in 137 economies saw improvements in their local regulatory framework last year. Between June 2015 and June 2016, the report, which measures 190 economies worldwide, documented 283 business reforms. Reforms reducing the complexity and cost of regulatory processes in the area of starting a business were the most common in 2015/16, as in the previous year. The next most common reforms were in the areas of paying taxes, getting credit and trading across borders. Read about business reforms.
  • Brunei Darussalam, Kazakhstan, Kenya, Belarus, Indonesia, Serbia, Georgia, Pakistan, the United Arab Emirates, and Bahrain were the most improved economies in 2015/16 in areas tracked by Doing Business. Together, these 10 top improvers implemented 48 regulatory reforms making it easier to do business.
  • Economies in all regions are implementing reforms easing the process of doing business, but Europe and Central Asia continues to be the region with the highest share of economies implementing at least one reform—96% of economies in the region have implemented at least one business regulatory reform.
  • Doing Business includes a gender dimension in four of the 11 topics sets. Starting a business, registering property and enforcing contracts present a gender dimension for the first time this year. Labor market regulation already captured gender disaggregated data in last year’s report.
  • This year’s report expands the paying taxes topic set to cover postfiling processes—what happens after a firm pays taxes—such as tax refunds, tax audits and administrative tax appeals.
  • This year’s report also includes an annex with analysis on a pilot indicator on public procurement regulations.
  • The report features six case studies in the areas of getting electricity, getting credit: legal rights, getting credit: credit information, protecting minority investors, paying taxes and trading across borders as well as two annexes in the areas of labor market regulation and selling to the government. The case studies and annexes either present new indicators or provide further insights from the data collected through methodology changes implemented in the past two years. See all case studies.

A number of things jumped out at me. First off, the rankings of the oft-praised Nordic countries, particularly Denmark and Sweden. See how those two countries compare to the U.S. below.

World Bank Rankings Denmark Sweden U.S.
Overall 3 9 8
Starting a business 24 15 51
Construction permits 6 25 39
Getting electricity 14 6 36
Registering property 12 10 36
Getting credit 32 75 2
Protecting minority investors 19 19 41
Paying taxes 7 28 36
Trading across borders 1 18 35
Enforcing contracts 24 22 20
Resolving insolvency 8 19 5

Denmark ranks higher than the United States with Sweden only a spot behind.[ref]Full rankings found on pgs. 203 (Denmark), 242 (Sweden), and 248 (United States) of the full report.[/ref] Yet, in both Denmark and Sweden it is easier to

  • Start a business
  • Get a construction permit
  • Get electricity
  • Register property
  • Protect minority investors
  • Pay taxes
  • Trade across borders

As Will Wilkinson put it, “[Y]ou cannot finance a Danish-style welfare state without free markets and large tax increases on the middle class. If you want Danish levels of social spending, you need Danish middle-class tax rates and a relatively unfettered capitalist economy.”

However, the next few graphs are probably some of the most interesting bits of the report:

As the report explains,

research shows that where business regulation is simpler and more accessible, firms start smaller and firm size can be a proxy for the income of the entrepreneur. Doing Business data confirms this notion. There is a negative association between the Gini index, which measures income inequality within an economy, and the distance to frontier score, which measures the quality and efficiency of business regulation when the data are compared over time (figure 1.8).

Data across multiple years and economies show that as economies improve business regulation, income inequality tends to decrease in parallel. Although these results are associations and do not imply causality, it is important to see such relation. The results differ by regulatory area. Facilitating entry and exit in and out of the market—as measured by the starting a business and resolving insolvency indicators—have the strongest link with income inequality reduction (figures 1.9 and 1.10). These two Doing Business indicators are focused on equalizing opportunities and access to markets (pgs. 11-12).

In short, lower income inequality is correlated with simpler, business-friendly regulations. Anyone worried about income inequality should take note.

I recommend taking a look at the data for yourself. Lots of good stuff.

The Rich Are Selfish, Right?

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Image result for greed is good gif

“[The rich][ref]It should, of course, be noted that “the rich” are not a monolithic group.[/ref] evade taxes more often, flaunt traffic laws that protect pedestrians and donate less frequently to charity. In the aftermath of the Great Recession, there has been no shortage of reports in the popular media on their selfishness and opportunism,” write three economists at The Conversation. “…But are the rich really so different from the rest of us? In recently published research, we used a natural field experiment to try to find out.”

Their first focus is incentives and opportunities:

For instance, because rich people face a higher tax bracket, every dollar of income they hide from the tax collector benefits them more than it would a poor person. Similarly, although both rich and poor get the same penalty for a traffic law violation, a fine that would be devastating for a person in poverty amounts to a pinprick for someone who’s wealthy. And while the rich are less likely to give to charity in any one year, they instead tend to make large gifts later in their lives. So even if the rich often do behave more selfishly than the less well off, their behavior might be more the result of different circumstances rather than differing moral values.

But what does their experiment show?:

[W]e designed a field experiment in which we “misdelivered” transparent envelopes with money to over 400 rich and poor households in a medium-sized city in the Netherlands. Returning envelopes is individually costly (mostly in terms of time) but benefits the rightful recipient, making this an altruistic, “pro-social” act.

All the envelopes contained €5 (US$5.34) or €20 as well as a card with a message from a grandfather to his grandson explaining the gift. We sent the money, however, in two variations: either as banknotes that could be easily seen by anyone handling the envelope, or as a bank transfer card, which is a slip of paper that orders a bank to send money from one account to another. In other words, the cash acted as “bait,” while the bank transfer card would have had no value to the individual.

Our setup had two advantages over other studies on the topic. First, participants did not know they were being studied as part of an experiment. They were, therefore, not changing their choices for fear of what we might think of them. Second, there was no “selection bias” in our data that might have skewed the results because the rich tend to shy away from participating in experiments (possibly because they don’t have much time to participate or don’t like the idea of researchers having data on them). In our setup, every rich or poor household was randomly selected.

The overall results showed that the rich returned roughly 80 percent of all envelopes, regardless of whether it contained cash or a card. When cash was used, the rich returned only slightly less. So the rich were somewhat sensitive to the money bait, but not much. The poor, however, were much less likely to go to the trouble of returning the money and were much more vulnerable to the bait inside the envelope. They kept roughly half of the noncash envelopes and roughly three-quarters of the cash envelopes.

Does this mean the poor are the truly selfish ones? Not necessarily. In line with the point about incentives and opportunities above, the researchers used “a theoretical model” to “measure a household’s “neediness” of the cash and how financial stress changes over the course of a month. When we do so, as one might expect, we find big differences in needs and stresses between rich and poor. But what is more important is that, when we statistically remove the influence of these factors, we no longer find differences in the relative altruism of the rich versus the poor.”

They conclude,

These findings show the perils of inferring deeper motives from casual behavior. While our raw data show clear differences between the rich and poor in terms of pro-social behavior, digging a little deeper erases them. Our conclusion is that incentives are the biggest determinants of pro-social behavior and that neither the rich nor the poor are inherently kinder or more selfish – in the end all of us are susceptible to behaving this way…This is not to absolve those who evade taxes or break the law. What it suggests is that the rich are no different than the rest: If we were to put the poor in their place, they would likely behave similarly.

The Rise of Occupational Licensing

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I’ve written about occupational licensing and its negative effects on economic mobility before. In May 2016,

the Bureau of Labor Statistics released its first-ever data on certification and licenses, providing the most comprehensive and reliable look to date at occupational licensing in the United States. In 2015, over 22 percent of U.S. workers held an occupational license at the State, Federal, or local level, while around 26 percent held a license or a certificate. While licensing and certification seek to ensure that workers have the necessary qualifications, especially for occupations impacting consumer safety and well-being, overly-broad application of licensing requirements can create costly and unnecessary barriers to entering a profession. Licensing can lead to higher wages for those able to obtain a license, but can also lead to inefficiency and unfairness, including reducing employment opportunities and depressing wages for excluded workers, reducing workers’ mobility across State lines, and increasing costs for consumers. 

Here are some of the highlights from the data:

  • Nearly one-quarter of U.S. workers require a license to do their jobs.

Share of Workers with an Occupational License

  • About two-thirds of the growth in licensing over time stems from an increase in the number of professions that require a license.

Percent Licensed Over Time: Estimated and Counterfactual

  • While licensing is more prevalent in high-income professions such as healthcare and law, it is common in many middle- and lower-income professions as well.

Percent Licensed by Occupation Group

  • Unlicensed workers earn less than licensed workers in the same occupation with similar demographics and educational attainment, and the wage gap is similar across high and low-wage occupations.

Hourly Wages of Licensed and Unlicensed Workers By Occupation

 

There’s more. Check out the entire White House post.

Want Fewer Deaths and Fewer DUIs? Ride Uber

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Remember when people were peddling that #deleteUber nonsense? Well, here’s a few more reasons to hate Uber[ref]Sarcasm on high.[/ref] according to a 2016 study:

Using a differences-in-differences specification and controlling for county-specific linear trends, we find that the entry of ride-sharing tends to decrease fatal vehicular crashes. Our (unweighted) estimated 1.1 percent decline in vehicle fatalities for each additional quarter are smaller than those found by Greenwood and Wattal (2015).

We…observe declines in arrests for assault and DUI. Specifically, we find that Uber’s entry lowers DUIs rates by 6 to 27 percent. The magnitude of our findings are smaller than those found by Jackson and Owens (2011) who show that DUIs decreased by 40% when the Washington DC Transit Authority expanded late night Metro transportation services. In many cases, these declines become larger the longer the service is available in an area. These beneficial declines are somewhat offset by increases in arrests for motor vehicle thefts (pg. 15).

Here are the specifics on fatal accidents:

Our unweighted estimates are consistent with Uber leading to larger declines in fatal accidents the longer the service is available. Fatal crashes decline by 0.5 percent for each additional month or 1.5 percent for each additional quarter Uber is available. Night-time fatal crashes decline by 0.9 percent for each additional month or 2.7 percent per quarter. The number of fatalities decline by 0.37 percent for each additional month or 1.1 percent for each additional quarter Uber is available. Our estimates are a third of the size as those in Greenwood and Wattal (2015) who find a “3.6% – 5.6% decrease in the rate of motor vehicle homicides per quarter [or 0.9% – 1.4% per month] in the state of California.” In the weighted regressions, the estimated effect over time tends to be smaller and statistically significant. We observe statistically significant and economically meaningful declines in fatal accidents, fatal night time accidents, and the number of fatalities the longer Uber is available.

…Overall, our findings suggest that Uber does not increase overall fatal crash rates and, for some specifications, is associated with a decline in fatal crash rates (pgs. 12-13).

And for various crimes:

The results are similar with and without weights: counties with Uber experience statistically significant declines in arrests for other assaults and DUIs. The magnitudes are economically important and typically larger for the weighted estimates. For other 14 assaults, the entrance of Uber is associated with a 11 to 18 percent decline. The availability of Uber is associated with a 6 to 27 percent decline in DUIs. Counties experience a 55 to 157 percent increases in arrests for motor vehicle thefts after the introduction of Uber. This may come from an increased propensity for Uber passengers to leave personal vehicles parked in public locations.

…For DUIs, we witness a 2.8 to 3.4 percent decline for each additional month of Uber service. We continue to observe declines in arrests for assault; each additional month of Uber availability is associated with a 2.4 percent decline in assaults in the unweighted estimate. The results for motor vehicle thefts are also consistent across specifications with some evidence of increasing thefts over time.

Because we are concerned that Uber may enter areas with characteristics that are correlated with crime rates, we restrict the sample to only those areas where Uber services have been offered…[A]rrests for DUI decline by 17 percent with the entry of Uber. Including both the entry and trend effects, the…estimates reveal a 2.7 to 3.9 percent decline in DUIs for each additional month Uber service is available. Motor vehicle thefts increase following the entry of the ride-sharing service. The results for assaults, however, become statistically insignificant.

Our estimates reveal that the introduction of Uber lowers arrests due to DUIs and may lower assaults. Overall, this suggests that the introduction of Uber increases the safety of citizens. We also witness little to no change in liquor law violations, fraud, or embezzlement. This suggests that our findings are not due to overall declines in crime rates. We do, however, witness an increase in the theft of vehicles (pgs. 13-15).

Safer societies with fewer deaths: not a bad trade-off for “selling out” at JFK airport.[ref]Doesn’t mean there aren’t other things worth criticizing Uber for (as noted in the comments below). For this post, think of Uber as proxy for “taxi competition.”[/ref]

Modern Lessons from 18th-Century Scottish Colleges

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Last year, Ro had a brief piece about how Germany offers free college, not the “college experience”. The results of free college are arguably underwhelming. But the debate over college isn’t new, but can be found in the writings of Adam Smith. As The Atlantic explains,

While extravagances such as hot tubs, movie theaters, and climbing walls may seem to make this discussion distinctively modern, parts of today’s college-cost dilemma are recognizable, in fact, in an 18th-century debate about how best to finance a university’s operations. It was so important that Adam Smith took time out of analyzing more traditional economic subjects like the corn laws to devote a long section of The Wealth of Nations to it. And with cause: The Scottish universities of the 18th century, much like America’s today, had been quickly becoming the universally acknowledged ticket to social advancement.

Smith, despite accusations of Connery-esque misplaced nationalism, was justly proud of the Scottish system of universities, which ran on a radical (by today’s standards, at least) system in which students paid their professors directly…But by the end of the century, it had five of the most cutting-edge universities in Europe, one of the world’s best medical schools, and a booming professional class from which its southerly neighbor and occupier frequently drew its doctors, lawyers, and professors. It had pioneered the study of English literature as a subject, having perceived that for many of its students, raised speaking Scots or Gaelic, English actually was a foreign language. It offered up world-class Enlightenment philosophes such as David Hume, Adam Ferguson, and Adam Smith, all of whom were at least partially educated in its universities.

Smith noted the differences between the universities of Scotland and Oxford where later attended:

Image result for adam smithIn Scotland, students exercised complete consumer control over with whom they studied and which subjects they deemed relevant. Oxford—and in fact most other European universities—employed a system similar to the way that American universities handle tuition payments today: One tuition payment was made directly to the university, and the university decided how to distribute what came in…Smith points out how [Oxford] often fell short of the Scottish system, where direct payment of fees served as motivation for faculty responsibility. “The endowments of [British] schools and colleges have necessarily diminished more or less the necessity of application in the teachers,” Smith writes in his opening sally against bundling the costs of education. “In the university of Oxford, the greater part of the publick professors have, for these many years, given up altogether even the pretence of teaching.” In the the Scottish system, “the salary makes but a part, and frequently but a small part of the emoluments of the teacher, of which the greater part arises from the honoraries or fees of his pupils,” he explains.

What’s wrong with the Oxford (and contemporary universities generally) approach?

Prices are information about what people need and want, so the trouble with bundling together a large number of services on a single bill is that it becomes difficult to tell exactly what one is paying for, or for the people sending out that bill to determine what students in fact want to pay for. In the current American system, such decisions are based on fluctuation in enrollment—a very high-level piece of data that can encompass any number of students’ preferences—but not on the micro-level of whether the students of Texas Tech University, for instance, really wanted a water park instead of more or better Spanish-language instructors.

There are potential problems to the Scottish approach. For example,

evidence has recently pointed to the patent unfairness and sexism of student evaluations of their professors. Many an academic has bemoaned the growing “customer” mentality of their students, and with good reason: It can lead to grade inflation and a subsequent lowering of standards. But as Smith would surely have appreciated, the right incentives could bring 18-year-olds to seek out the highest-quality teachers rather than the most forgiving graders. That’s how it worked in Scotland in the 18th century, where there was a simple way of dealing with the problem that the best professors were not always the easiest fellows: rigorous, frequent, and comprehensive oral and essay examinations, which were administered in lieu of evaluations in individual courses. Students were allowed to select which university services and which university teachers they would pay for, but in the end if they could not pass a university-wide exam, their choice to take the 18th-century equivalent of Rocks for Jocks would have been swiftly punished.

The entire article is interesting. Check it out.

Unsatisfied Retirees

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Retirement may not be all it’s cracked up to be. A MarketWatch article reports,

More retirees than ever say they are “not at all satisfied” with retirement, according to a study published this year from the Employee Benefit Research Institute. The institute used data from the University of Michigan’s Health and Retirement Study, collected from 1998 to 2012, in which more than 20,000 people are interviewed every two years.

The number of retirees reporting just moderate satisfaction with retirement increased from 31.7% to 40.9% and those who are completely unsatisfied with retirement climbed above 10%, up from fewer than 8% in 1998. Meanwhile, the number of retirees who say their retirement is “very satisfying” has dropped from 60.5% in 1998 to 48.6% in 2012 — the first time it’s ever dipped below half.

The study authors did not investigate the reasons behind these satisfaction dips, but other studies suggest that some of the reasons may be financial. Research published in 2004 by Constantijn Panis, who has a Ph.D. in economics and is also an expert in demographic issues, found that getting payouts from a pension was positively related to retirement satisfaction. But as the number of retirees drawing on traditional pensions declined — from 1980 to 2008, the proportion of non-government, salaried workers who got a traditional pension fell from 38% to 20% — retirement satisfaction may be dipping accordingly.

…Studies show that today’s retirees want more and varied activities in retirement, including flexible jobs, than did previous generations of retirees. Plus, surveys show that boomers — who are retiring in droves in recent years — are in general less happy than members of the so-called silent generation, and that may be reflected in these numbers.

Of course, it’s worth noting that the overwhelming majority report being satisfied with retirement. We shouldn’t create a crisis where there is none. Nonetheless, the uptick may be something we want to keep an eye on. In the Gallup-published Wellbeing: The Five Essential Elements, the authors Tom Rath and Jim Harter explore five elements to overall well-being:

  • Career Wellbeing – how one’s time is occupied.
  • Social Wellbeing – the strength of one’s relationships.
  • Financial Wellbeing – effectively managing one’s economic life.
  • Physical Wellbeing – having good health and enough energy on a daily basis.
  • Community Wellbeing – engagement with the area in which one lives.

In regards to Career Wellbeing, Rath and Harter reveal this significant point about the need to work:

One of the more encouraging findings [of one study] was that, even in the face of some of life’s most tragic events like the death of a spouse, after a few years, people do recover to the same level of wellbeing they had before their spouse passed away. But this was not the case for those who were unemployed for a prolonged period of time — particularly not for men. Our wellbeing actually recovers more rapidly from the death of a spouse than it does from a sustained period of unemployment. This doesn’t mean that getting fired will harm your wellbeing forever. The same study also found that being laid off from a job in the last year did not result in any significant long-term changes. The key is to avoid sustained periods of unemployment (more than a year) when you are actively looking for a job but unable to find one. In addition to the obvious loss of income from prolonged unemployment, the lack of regular social contact and the daily boredom might be even more detrimental to your wellbeing.

This is likely why the MarketWatch article encourages retirees to “find things you love to do” and “plan how to use your time.” Wise advice.

Is the EPI Correct About Wages and Productivity?

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Image result for epi wages productivity

The above chart from the Economic Policy Institute has become a staple in the “wage stagnation” debate. I talked about it before a couple years ago, but I thought I’d revisit it since there have been a couple responses to the EPI since then. Scott Winship, formerly of Brookings and now at the Manhattan Institute, writes,

The Economic Policy Institute (EPI)…has created a widely cited chart indicating that productivity rose 72 percent during 1973–2014 while median hourly compensation rose by a measly 9 percent. The implication is that rising inequality and declining employer generosity mean that policies that promote economic growth will fail to lift middle-class living standards and that more redistribution is necessary to assist working families.

In arriving at this conclusion, EPI makes numerous faulty methodological decisions. It understates growth in median hourly compensation by using a deficient inflation adjustment and by undervaluing benefits other than health insurance. It overstates the divergence between productivity and median hourly compensation trends by using different inflation adjustments for each. It includes imputed rents in national income, which exerts a downward pull on labor’s share of income. It includes the self-employed in its analyses, for whom it makes little sense to distinguish between labor income and capital income. And it includes government and nonprofit workers, whose productivity is not well measured (pg. 4).

Winship instead finds the following:

  • During 1973–2007, U.S. hourly compensation rose 71 percent, while productivity rose 74 percent.
  • In 1973, U.S. workers received 70 percent of the income produced by businesses; in 2007, they received 69 percent.
    • For the past 70 years, labor’s share of income has fluctuated—almost without exception—between 67 percent and 71 percent.
  • Since 1929, the U.S. business cycles with the highest productivity growth have also featured the highest growth in hourly compensation.
  • Male and female middle-class workers saw faster growth in pay during 1989–2000 and 2000–07 than during 1973–79, when productivity growth was slower.
  • Middle-class pay has not stagnated: during 1997–2011, productivity rose by 35 percent, aggregate compensation rose by 32 percent, median hourly compensation increased by 20 percent, median female pay climbed by 25 percent, and median male pay grew by 18 percent.

According to the Heritage Foundation’s James Sherk,[ref]Before dismissing Heritage as Koch-bought, right-wing hackery, it might be worth pointing out that 27% of the EPI’s funding comes from unions and its Board of Directors chairman is the president of AFL-CIO. Heritage isn’t my go-to source for much of anything, but this is the most in depth analysis I’ve read of the EPI’s claims.[/ref]

Academic economists largely reject this analysis and the conclusion that salary no longer grows with productivity. Harvard professor Martin Feldstein, the former president of the National Bureau of Economic Research, concluded that the apparent divergence results from comparing the wrong data. Using the correct data, he finds that pay and productivity have both grown together. Staff at the Federal Reserve Bank of St. Louis found the same result.

Even prominent liberal economists who have examined this question agree. Dean Baker, director of the Center for Economic and Policy Research, finds that pay growth tracks productivity growth when comparing the same groups of workers and using the same measure of inflation. Harvard professor Robert Lawrence served on President Bill Clinton’s Council of Economic Advisers; he comes to the same conclusion. George Washington University professor Stephen Rose—a former Clinton Administration Labor Department official currently affiliated with the Urban Institute—likewise finds that the apparent gap between pay and productivity collapses under scrutiny. He concludes that productivity growth continues to benefit working Americans.

Most economists who examine the issue conclude that firms pay workers according to the value they produce.

In my view, one of the most glaring errors of the EPI’s methodology is the following:

EPI compares compensation for production and non-supervisory employees—which covers about five-eighths of the total economy—to the productivity of all workers in the economy. Economic theory does not predict that the pay and productivity of different groups of employees will necessarily track each other, especially in the presence of barriers to mobility.

Even abstracting from analytical errors, EPI can claim no more than that pay and productivity have grown differently among different groups of workers. EPI’s data say nothing about whether workers’ pay has grown in step with their own productivity.

Check out the full analyses by both Winship and (especially) Sherk.

The Great Enrichment and Social Justice

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“The suddenness of the Great Enrichment is nuts,” writes Will Wilkinson at the Niskanen Center. “Graphs like this one actually conceal how nuts it is. Imagine a linear horizontal axis that is nothing but a flat line hovering above zero for, like, a mile. And then, about a second ago in geological time, wham! And here you are, probably wearing pants, reading about it on a glowing screen. Nuts is what it is.”

What caused it?

Joel Mokyr says it was the development of science and technology. Douglass North and his followers, such as Daron Acemoglu and James Robinson, say it was a matter of stumbling into the right political and economic “institutions”—of getting the “rules of the game” right. Acemoglu and Robinson say institutions need to be “inclusive” rather than “extractive.” They become more inclusive when ruling elites take a little pressure off the boot they’ve got on people’s backs (which they do mainly when cornered by effective collective action from below) and allow economic and political rights to expand. Deirdre McCloskey says the Great Enrichment came about from a shift in beliefs and moral norms that finally lent dignity and esteem to the commercial classes, their “bourgeois” virtues, and the tasks of trade and betterment. This revaluation of values was the advent of what has come to be known as “liberalism.”

Each of these views is part of the truth. The debate is mainly a matter of how beliefs and norms, institutions and incentives, scientific knowledge and technical innovation all fit together. Which are the causes and which are the effects? There’s no way to adequately summarize  the involuted nuance of the debate. But it’s not wrong to sum it up bluntly like this: humans rather suddenly got immensely better at cooperating and now a lot of us are really rich.

But you know what’s also nutty?

What’s nuts is that nobody kicks off a discussion of justice, distributive or social, with the fact of the Great Enrichment. Because the upshot of our best accounts of the most important thing that has ever happened to the human race seems to be that equalizing the distribution of rights and liberties, powers and prerogatives, respect and esteem led to an increase in the scope and productivity of cooperation, generating hugely enriching surpluses.

And these gains spurred further demands for and advances in inclusion and dignity—that is to say advances in giving people what they’re morally due, in virtue of being people—which led in turn to broader, more intensive, more creative cooperation, producing yet more enrichment, and so on. There appears to be a very happy relationship of mutual reinforcement between what is very naturally called “social justice” and the sort of enrichment that is known to produce longer, healthier, happier, human lives.

How come? Why doesn’t this mass improvement in the lives of millions get mentioned much?

The 20th century socialist-leaning left misdiagnosed the sources of the economic growth. The Great Enrichment was rooted in the exploitation of labor and the depredations of colonialism, while ongoing post-capitalist production was largely a matter of technology and rational state management. Poverty is toxic and the effects of widespread wealth are beneficial. But wealth in excess of potential-realizing sufficiency isn’t improving. Stable equality is improving, and brings out the best in us. Continuously rising market-led prosperity, on the other hand, encourages uncivic avidity and generates inequalities that undermine the amiable stability of egalitarian social justice.

The left-leaning 20th century literature on the distributive aspects of social justice as often as not treated wealth like manna from heaven. It’s as if the astonishing bounty of the Great Enrichment was something we’d just stumbled upon, like a cave full of naturally-occurring, neatly-stacked gold ingots in a newly-discovered cave beneath the village square. How do we divide up the gold among the villagers? Equal shares seems fair!

Or else wealth was something workers produced automatically by working only to have it stolen by the idle rich, who control the state’s goons. Or wealth was something that mechanical and social engineers could get together to produce with the right combination of workers and machines. Since it was no problem whatsoever producing more than enough for everybody (our best men are on top of it!), there was no good reason for anybody to have more than everybody else.

Wilkinson takes a swipe at both Rawlsian leftists and Hayekian libertarians, but especially the latter for their rejection of the concept of social justice. He concludes,

[M]any advocates of economic liberty…reflexively badmouth the welfare state with little regard for the possibility that the welfare state is an efficiency-enhancing institution that helps maintain popular support for relatively free markets by ensuring they more or less benefit everyone. Meanwhile, people who like social insurance, and worry about bad luck and the human costs of capitalist creative destruction—that is to say, mostpeople—turn away in contempt or bemusement from what’s advertised to them as the politics of freedom.   

More importantly, and more disastrously, rejecting the very idea of social justice, letting it harden into principle, hobbled classical liberalism’s ability to make the argument it has always been making, in less attractive terms, all along: that social justice is, first and foremost, a supply-side concept; that social justice is about the moral equality, respect, and rights that call forth cooperation and foster the creativity and cultivation of potential that generates ever larger surpluses, which, once they’ve been created, we can worry about divvying up; that social justice is a cause and effect of the Great Enrichment; that increasing social justice will make us greater and more greatly enriched.

It’s a potent and beguiling argument. It is an important argument. I’m convinced that it is, in broad strokes, a sound argument. The failure of our forebears to make it shouldn’t stop us from making it now.

I think he’s on to something.

Be Like Sweden

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This is a common rallying cry among Americans (e.g., Bernie Sanders) who are disturbed by income inequality in the U.S. and the supposed excesses of capitalism. So what can the United States learn from Sweden? Swedish author Johan Norberg writes,

As a native of Sweden, I must admit this makes me Feel the Bern a bit. Sanders is right: America would benefit hugely from modeling her economic and social policies after her Scandinavian sisters. But Sanders should be careful what he wishes for. When he asks for “trade policies that work for the working families of our nation and not just the CEOs of large, multi-national corporations,” Social Democrats in Sweden would take this to mean trade liberalization—which would have the benefit of exposing monopolist fat cats to competition—not the protectionism that Sanders favors.

In fact, when President Barack Obama visited Sweden in 2013, the three big Swedish trade unions sent him a letter requesting a meeting. Their agenda: a discussion of “how to promote free trade.” The chairman of the largest Social Democratic trade union scolded the American president for his insufficient commitment to the free flow of goods.

Norberg acknowledges that Sweden is “still-high public spending and high taxes, at least compared to the U.S….The governments provide the citizens with health care, child care, free colleges, and subsidized parental and medical leave. We Scandinavians have our quarrels with these systems and how they function, but at least they have not ruined our societies; indicators of living standards and health are impressive.” So how come this amount of government services doesn’t cripple the economy? Norberg explains,

One reason is that we compensate for them with a more open economy than others. In the summary Fraser Institute rankings, Sweden and Denmark are more economically free than the United States when it comes to legal structure and property rights, sound money, free trade, business regulation, and credit market regulations. We don’t have the multitude of occupational licensing laws that block competition in the United States.

We also pay for the welfare state in a fairly brutal way, but one that doesn’t hurt production as much: by squeezing the poor and the middle class. Unlike the rich, poor and middle-class people don’t flee or dodge when they’re taxed aggressively.

The Social Democrats knew all along that they couldn’t fund such a generous government by taking from the rich and the businesses—there are too few of them, and the economy depends on them too much. So Sweden and Denmark take in lots of revenue via highly regressive value-added taxes at a normal rate of 25 percent of sales—the only tax where the rich and poor pay exactly the same amount in kronor. On the other hand, the corporate tax is just 22 and 23.5 percent respectively, compared to the U.S. rate of 35 percent.[ref]Check out this analysis of the Scandinavian tax systems at the Tax Foundation.[/ref]

In fact, rich people in Sweden enjoy several economic advantages not offered to their lower-class counterparts. Sweden always admitted very generous tax deductions for capital costs. Labor regulations are tailored to benefit big companies. To attract highly educated specialists from abroad, Sweden now has a beneficial “expert tax” for them, which shields 25 percent of their wages from taxation for a three-year period. “Sure, it is unfair, but we have no better solution,” the Social Democratic minister of finance said in 2000, when he implemented special tax exemptions for individuals and families who owned a large share of a listed company.

Unlike Sanders, Scandinavian socialists have concluded that you can have a big government or you can make the rich pay for it all, but you can’t do both.

The shape of welfare state also has roots in Swedish culture:

Two Scandinavian economists, Andreas Bergh and Christian Bjørnskov, have documented that a high degree of trust is an old legacy, and that descendants of those who emigrated from Scandinavia 100 years before the welfare state are also more trusting. Their conclusion is that trust in others and social cohesion creates the welfare state rather than the other way around, since it is more tempting to give power to politicians and money to strangers if you believe that they are decent people who would never cheat the system.

Scandinavians have always frowned on those who take money they are not entitled to. Sweden is, after all, the country where the leading candidate for prime minister in 1995 had to resign because it was revealed that she had used her official credit card to pay for some small private expenses, even though she always, every month, paid the credit card debt herself.

When asked, “Under what circumstances is one justified in accepting government benefits to which one is not entitled?” in 1991 and 1998, the Nordics led the world in saying “never.” (Only Malta says it is more upstanding, and a brief canvass of Maltese of my acquaintance suggests that they are rather likely to have lied on the survey.) Oh, and the United States is 16th, lower on the list than even the Italians.

Unfortunately, Sweden has recently seen “increased unemployment among immigrants. Now the employment gap between natives and foreign-born in Sweden is twice the European Union average, even though we express less racist and discriminatory attitudes than others. In response, Swedish politicians have recently decided to abandon liberal immigration policies and do whatever they can to scare people away. It was easier to have a one-size-fits-all approach when we were all alike, from the same background, with the same faith and attitude and a similar education. We need a more flexible model now that we are becoming a little bit more like…well, the United States.”

Economist Andreas Bergh mentioned above has documented the economic history of Sweden in hopes of answering the following questions:

  • How did Sweden become rich?
  • What explains Sweden’s high level of income equality?
  • What were the causes of Sweden’s problems from 1970 to 1995?
  • How is it possible that Sweden, since the crisis of the early 1990s, is growing faster than most EU countries despite its high taxes and generous welfare state?

His conclusions?

In many aspects, Sweden is not very different from other countries. The accelerating economic growth in Sweden around 1870 was most likely largely a result of liberalizations and well-functioning capitalist institutions. In this respect, there is no Swedish exceptionalism.

When it comes to equality, the most important conclusion is that most of the decrease in income inequality in Sweden occurred before the expansion of the welfare state. A number of seemingly unrelated reforms, such as land reforms, school reforms and the occurrence of unions and centralized wage bargaining, are likely explanations. Interestingly, at least parts of gender equality in Sweden seem to be an unintended consequence of the need to increase labor supply by using women in the workforce.

Thus, when it comes to the roots of prosperity and equality, the lessons from Sweden are not very different compared to the lessons from mainstream institutional economics: Well-functioning capitalist institutions, especially property rights and a non-corrupt state sector, promotes prosperity. Primary schooling, risk sharing social insurance schemes and labor unions contribute to a more equal distribution of income (pg. 21).

He notes that Sweden’s lagging economy between 1970 and 1995 was due to a

combination of unsuccessful macro-economic policies and a very generous welfare state…During the period of lagging behind, excessive state interventionism hampered structural adjustment and economic development in general. The economy was much less capitalist, rules were unstable, policy unpredictable, and work incentives were weakened by the design of taxes and benefits. This leads to the conclusion that to successfully combine a large welfare state with economic growth, macroeconomic factors are crucial and a high degree of economic openness may actually foster policies that promote competitiveness. Analyzing the fact that Sweden was ranked the second most competitive country in the world according to the Global Competitiveness Index 2010–2011 (just slightly behind Switzerland). Eklund et al. (2011) emphasize the role of market deregulations, inflation control and stricter budget rules – but also some lowering of taxes and benefit levels. The upshot is that the policy implications from the case of Sweden are hard to classify along a simple right-left scale: the welfare state seems to survive because it coexists with high levels of economic freedom and well-functioning capitalist institutions (pg. 22).[ref]You can read about the Swedish reforms since the 1990s here.[/ref]

So, be like Sweden. But be like it in the right ways.

Have Worker Wages Truly Stagnated?

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It depends on how you measure it. According to a recent NBER paper by Dartmouth economist Bruce Sacerdote, most estimates use the CPI-U as a price deflator. Sacerdote instead

calculate[s] real wages using either the Fed’s preferred inflation measure of PCE (Personal Consumption Expenditures) or using simple adjustments to CPI using magnitudes suggested by the Boskin commission (Boskin et al 1996) and Costa (2001). This adjustment reverses the finding of wage stagnation. Using the PCE to deflate nominal wages suggests real wage growth of 24 percent from 1975-2015 or about .54% growth in real wages per year. Importantly that growth is significantly less than the 1.18% annual growth in real wages (using PCE inflation) seen in the earlier decade 1964-1975 and is significantly less than GDP per capita growth of 1.8 percent over the 1975-2015 period. But 24 percent growth over the 1975-2015 is substantially better than zero growth and the PCE inflation could itself still contain upward bias. Adjusting for the Hamilton (1998) and Costa (2001) estimates of CPI bias implies real wage growth of 1 percent per year during 1975-2015 and GDP per capita growth of 2.7 percent per year.

In short, “PCE adjusted wages appear to have grown at .5% per year during 1975-2015 while the de-biased CPI adjusted wages grew at 1% per year over the same time period.”

So why do so many Americans feel worse off? Sacerdote hypothesizes,

First, I am only examining consumption within very large sections of the income distribution and there may be specific groups (for example less than high school educated men) for whom consumption is actually falling. Second, it’s possible that the quality of some services such as public education or health care could be falling for some groups. Third, the rise in income inequality coupled with increased information flow about other people’s consumption may be making Americans feel worse off in a relative sense even if their material goods consumption is rising. Fourth, changes in family structure (e.g. the rise of single parent households) , increases in the prison population, or increases in substance addiction could make people worse off even in the face of rising material wealth. A deep future research agenda would be to understand how America has lost its sense of optimism about living standards and whether the problem is one of consumption, relative consumption (relative to other people) or something entirely different.

On top of this, Harvard’s Martin Feldstein points out that innovation and new products are often ignored when measuring economic growth and the state of living standards:

Ignoring the introduction of new products is therefore a serious further source of understating the real growth of output, incomes, and productivity. New products and services are potentially valuable in themselves and are also valued by consumers because they add to the variety of available options. In an economy in which new goods and services are continually created, their omission in the current method of valuing aggregate real output makes the existing measure of real output even more deficient and more of a continually increasing underestimate of true output. Hulten (2015) summarizes decades of research on dealing with new products done by the Conference on Research in Income and Wealth with the conclusion that “the current practice for incorporating new goods are complicated but may miss much of the value of these innovations.” …[T]he official statistics ignore the very substantial direct benefit to consumers when new products and services become available, causing an underestimate of the rate of increase in real output and an overestimate of the corresponding price index…The failure to take new products into account in a way that reflects their value to consumers may be an even greater distortion in the estimate of real growth than the failure to reflect changes in the quality of goods and services. There is no way to know (pgs. 11-12, 14).

Feldstein has made this argument before in more popular writing. A good number of economists agree. While growth in real wages could be better, it seems to be inaccurate to say that they have stagnated.