Semi-Daily Journal

But wait! Social Democrats are thieves who want to punish the productive and reward the lazy! That's a proven fact - Grover and Ayn told me so! They're Old Europeans! They would never use available information to craft a system that minimizes suffering while maximizing economic potential.

Say it ain't so, Pete.

No effect at all? I would have thought a very modest effect - to which a liberal like myself might say the redistribution benefits outweigh the modest inefficiency effects. But no inefficiency effects at all! I have to give his paper a read!

I know like this sounds like the beginning of a bad joke, but what is the difference between social democrats and democratic socialists?

The article doesn't present any new research. He just presents some curious results and some reasons he believes them to be.

I only skimmed the thing, but my first impression is not a good one.

Not a worthwhile read.

The belief in unrestrained markets is based on a political theology, not evidence. The post-1973 decline in profits and real wage growth throughout the developed world has not been reversed by the fashion for 19th Century orthodoxies. Nonetheless, the true believers at The Economist, The Wall Street Journal and elsewhere promise us that yet more sacrifices will usher in a bright shining future. That these sacrifices will benefit them is only a coincidence. Soviet Communists once said the same.

The belief in unrestrained markets is based on a political theology, not evidence. The post-1973 decline in profits and real wage growth throughout the developed world has not been reversed by the fashion for 19th Century orthodoxies. Nonetheless, the true believers at The Economist, The Wall Street Journal and elsewhere promise us that yet more sacrifices will usher in a bright shining future. That these sacrifices will benefit them is only a coincidence. Soviet Communists once said the same.

The belief in unrestrained markets is based on a political theology, not evidence. The post-1973 decline in profits and real wage growth throughout the developed world has not been reversed by the fashion for 19th Century orthodoxies. Nonetheless, the true believers at The Economist, The Wall Street Journal and elsewhere promise us that yet more sacrifices will usher in a bright shining future. That these sacrifices will benefit them is only a coincidence. Soviet Communists once said the same.

On the other hand, given the birth rates in social security countries, the model clearly does not look sustainable.

There should be some inefficiency cost to not having a reliable safety net. With the safety net, people would be more able to use all of their capital productively. Absent a safety net, then people have to have more reserves, insurance, etc to guard against problems. There is also a huge cost savings of treating health problems early and proactively instead of waiting until they require serious intervention.

Other inefficiencies can come with duplication of services. How expensive is it for 1000 home owners to have a pool in their backyard compared to those 1000 investing in a public pool?

Steve: theoretically, a "Democratic Socialist" would have some sort of commitment to public ownership of (at least) major industry (maybe in the long run). The "Social Democrats" of Europe, at least, seem to have abandoned that goal.

bakho wrote:
"There should be some inefficiency cost to not having a reliable safety net. With the safety net, people would be more able to use all of their capital productively. Absent a safety net, then people have to have more reserves, insurance, etc to guard against problems."

Most states have safety nets. Where government sponsored welfare does not exist, a far older form of security takes over: social networking, most especially in the form of the extended family, the clan, the tribe, and religious institutions.

Brief examples would be for instance practices such as widows being married by one of the brothers of the deceased, or patronage, such as where the wealthiest members of an extended family pay for the education of less fortunate members.

On the microscale I suspect that this kind of safety net is more efficient than the welfare state model, for the usual reasons trotted out by enthusiastic supporters of the Hidden Hand. Scaled up it encounters IMO larger problems: the basic issues of asset ownership, identity, and trust operate by necessity in an extralegal fashion, in the sense coined by Hernando de Soto.
(E.g: a farmer cannot sell his plot of land freely: it belongs to his kids and the extended family).

This is an issue the modern welfare state does not face: the government guarantees identity, is responsible for brokering trust, and the legal system oversees asset ownership. The social and religious structures so important in the Third World lose a lot of their influence. Individuals can live and act without the constraints imposed by patrons, religious or social strictures. The net result is, I think, a more efficient market.

I an verify what Lindert claims about the lower end of the income specturm. My American mother-in-law receives SSI and and can not take any sort of work, even part-time or occcasional, even though she is only partially handicapped, because every dollar in income would be taken out of her SSI check. Her marginal income tax is 100%, and as a result she produces absolutely nothing when she could at least be a moderately productive person.

At the other end, however, I find Lindert's claims mysterious. Some of the European welfare states, prehaps most of them, actually have lower capital gains taxes than the US. Belgium's, for example, is only something like 5%. Yet, there seems to be far more income equality at the top of the income spectrum in Europe than in the US. One would think that if his explanation is true, there would be far more billionaires and independently wealthy people in Europe than in the US, yet this is clearly not the case.

If lower tax rates on investment income are the key to sustaining higher levels of growth in Europe than one would otherwise expect, why aren't Europe's richest people growing richer faster than they are in the US? To me, this requires some explanation.

I an verify what Lindert claims about the lower end of the income specturm. My American mother-in-law receives SSI and and can not take any sort of work, even part-time or occcasional, even though she is only partially handicapped, because every dollar in income would be taken out of her SSI check. Her marginal income tax is 100%, and as a result she produces absolutely nothing when she could at least be a moderately productive person.

At the other end, however, I find Lindert's claims mysterious. Some of the European welfare states, prehaps most of them, actually have lower capital gains taxes than the US. Belgium's, for example, is only something like 5%. Yet, there seems to be far more income equality at the top of the income spectrum in Europe than in the US. One would think that if his explanation is true, there would be far more billionaires and independently wealthy people in Europe than in the US, yet this is clearly not the case.

If lower tax rates on investment income are the key to sustaining higher levels of growth in Europe than one would otherwise expect, why aren't Europe's richest people growing richer faster than they are in the US? To me, this requires some explanation.

I an verify what Lindert claims about the lower end of the income specturm. My American mother-in-law receives SSI and and can not take any sort of work, even part-time or occcasional, even though she is only partially handicapped, because every dollar in income would be taken out of her SSI check. Her marginal income tax is 100%, and as a result she produces absolutely nothing when she could at least be a moderately productive person.

At the other end, however, I find Lindert's claims mysterious. Some of the European welfare states, prehaps most of them, actually have lower capital gains taxes than the US. Belgium's, for example, is only something like 5%. Yet, there seems to be far more income equality at the top of the income spectrum in Europe than in the US. One would think that if his explanation is true, there would be far more billionaires and independently wealthy people in Europe than in the US, yet this is clearly not the case.

If lower tax rates on investment income are the key to sustaining higher levels of growth in Europe than one would otherwise expect, why aren't Europe's richest people growing richer faster than they are in the US? To me, this requires some explanation.

I an verify what Lindert claims about the lower end of the income specturm. My American mother-in-law receives SSI and and can not take any sort of work, even part-time or occcasional, even though she is only partially handicapped, because every dollar in income would be taken out of her SSI check. Her marginal income tax is 100%, and as a result she produces absolutely nothing when she could at least be a moderately productive person.

At the other end, however, I find Lindert's claims mysterious. Some of the European welfare states, prehaps most of them, actually have lower capital gains taxes than the US. Belgium's, for example, is only something like 5%. Yet, there seems to be far more income equality at the top of the income spectrum in Europe than in the US. One would think that if his explanation is true, there would be far more billionaires and independently wealthy people in Europe than in the US, yet this is clearly not the case.

If lower tax rates on investment income are the key to sustaining higher levels of growth in Europe than one would otherwise expect, why aren't Europe's richest people growing richer faster than they are in the US? To me, this requires some explanation.

I an verify what Lindert claims about the lower end of the income specturm. My American mother-in-law receives SSI and and can not take any sort of work, even part-time or occcasional, even though she is only partially handicapped, because every dollar in income would be taken out of her SSI check. Her marginal income tax is 100%, and as a result she produces absolutely nothing when she could at least be a moderately productive person.

At the other end, however, I find Lindert's claims mysterious. Some of the European welfare states, prehaps most of them, actually have lower capital gains taxes than the US. Belgium's, for example, is only something like 5%. Yet, there seems to be far more income equality at the top of the income spectrum in Europe than in the US. One would think that if his explanation is true, there would be far more billionaires and independently wealthy people in Europe than in the US, yet this is clearly not the case.

If lower tax rates on investment income are the key to sustaining higher levels of growth in Europe than one would otherwise expect, why aren't Europe's richest people growing richer faster than they are in the US? To me, this requires some explanation.

I an verify what Lindert claims about the lower end of the income specturm. My American mother-in-law receives SSI and and can not take any sort of work, even part-time or occcasional, even though she is only partially handicapped, because every dollar in income would be taken out of her SSI check. Her marginal income tax is 100%, and as a result she produces absolutely nothing when she could at least be a moderately productive person.

At the other end, however, I find Lindert's claims mysterious. Some of the European welfare states, prehaps most of them, actually have lower capital gains taxes than the US. Belgium's, for example, is only something like 5%. Yet, there seems to be far more income equality at the top of the income spectrum in Europe than in the US. One would think that if his explanation is true, there would be far more billionaires and independently wealthy people in Europe than in the US, yet this is clearly not the case.

If lower tax rates on investment income are the key to sustaining higher levels of growth in Europe than one would otherwise expect, why aren't Europe's richest people growing richer faster than they are in the US? To me, this requires some explanation.

Scott, the number of European billionaires is quite respectable in the perspective that they had two very destructive wars in the past century. Somewhere I should have a web page which was published in the course of the past year, I thin it was from Forbes.

DSW

My completely inexpert intuition tells me that these social insurance states are more stable and successful as a result of globalization than they would have been otherwise. After having typed that sentence, I can think of twenty reasons that I could be wrong. Nevertheless, my intution is that the US is hyperproductive, particularly in things closely related to increasing efficiency, and the rest of the developed world takes advantage of this.

Secondly, I'm also not convinced that these nations aren't exceptional.

That said, from my uneducated vantage, this seems to be just another form of the argument that the (vulgar) supply-siders are wrong. Which they are, I think. They'd say that regardless of where the US is, these nations must necessarily be on the other side of that threshhold where lowering taxes actually would result in increased revenue. In other words, if these economies are doing reasonably well now, imagine how much they would expand if taxes were lowered. I'm skeptical. Worse, noting that these economies are, in fact, doing well and the people have a very high standard of living, in many ways superior to that of the US, it diminshes the supply-sider's implicit doomsday warnings of the overtaxes economy that's going to hell in a handbasket. Because, it seems, the examples we have are not.

In any event, I tend to think that high-taxation, wealth redistribution, etc. all almost always have some amount of efficiency cost inherent in them, but it's never been clear to me why it's not perfectly rational to sacrifice a small amount of efficiency at wealth creation in exchange for something that may not be possible otherwise. It's especially not clear to me how people can oppose this when, in fact, we're already doing this in many ways that people never question.

You know, even though it's late in my life for such a thing, I've considered the last few years the possibility of going to grad school and pursuing an academic career in economics (probably in combination with complexity). But, lately, I've had the urge to do something completely immune to any political/cultural ideological pressure. I suppose this is why some of my friends became astronomers.

My take on globalization is more mixed, the USA are acting as a disintegrating force, since they tend to attract capitals that flight from taxes no questions asked. On one other side they are hyper-consumers, so they are the main foreign client.

DSW

Interesting. I have not thought much about the US as a tax haven. However, we do draw a disproportionate amount of foreign investment. Aslo, I do not think we can indefinitely consume at such a disproportionately high level.

Mechanisms have varied widely, but no fertile community in human history (or prehistory) has existed without substantial measures of collective enterprise and income redistribution.

The proportions have also varied, but not to extremes. Mixed systems usually work.

Have not yet read the paper, but a couple of explanations may have been missed.

One, the increased willingness of citizens in a "welfare" state to play be the rules and defend the commonwealth.

Two, the net formation of "cold dark capital" -- non-proprietary productive wherewithal, which (increasingly so in technoculture) dwarfs the aggregate mass of proprietary (private or collective) capital.

Third, increased structural liberty -- the wider array of options -- to vest productive enterprise in entities of more nearly optimal size, shape and location, and reduced incentive to destructive "peacocks at the trough" varieties of competition (maybe this is a separate point).

Fourth, decreased social resistance to external trade and resultant exchange-value generation (though I'll grant this bumps up against some inconvenient empirical countercases).

Fifth, case by case, amassed wealth tends to be corruptly acquired (in the economic sense, if not in the legal or ethical sense) and ineptly managed (by heirs, agents and assigns). Social welfare mechanisms stir economic resources back into the larger mix where true economic forces have a shot at allocating them economically over the long run.

Sixth, the weather is beautiful day hereabouts, and we needn't scrape the bottom of the barrel looking for exhaustive explanations of the obvious ... have a nice day.

The most important victory of the right wing in the last 50 years is to get people to believe in an incorrect model of economic behavior.

The whole paradigm is that there is an absolutely limited amount of economic growth, and that every "expenditure" means a reduction from the amount which would otherwise be spent "growing" the economy. Basically there is a zero sum game, and social insurance is a cost which is a drag on the economy.

As I've outlined before, this just isn't the case. Where the growth of social insurance is coming from is simple: it dramatically reduces the cost of protecting the downside in the economy. Downside protection is economically less productive than upside exploitation. It is the difference between putting money into a completely safe and liquid savings account - which returns at a real 0% versus inflation - and investing it. The more money one has to keep on hand to protect the downside, the less there is available for upside capital growth. The more danger of catastrophic meltdown of investement income - as a track of the Dow between its creation and 1930 will show - the less money can be invested in it, since it has to be completely disposable income with no intent of consumption.

The other part of the model of right wing economics which is wrong, and yet almost universally used, is the failure to understand localized inflation. Different sectors of the economy can be undergoing different rates of inflation. The purpose of the government, and its social system for redistributing liquidity is that it should be taking away from those areas where liquidity supply has exceded selling demand - or if you prefer where excess liquidity has generated more demand than supply - , and are thus undergoing not growth, but inflation.

Now the people who are benefiting from localized inflation are a vocal interest group for keeping it going - was there anyone saying "we need to slow the growth of the NASDAQ" in 1998-1999, and that we should enact tax increases to shift down overheating investment demand? Not that I recall, Alan was trying to jaw bone things, but that is because he was unwilling to use the tools at his discretion to do something about it.

By redistributing liquidity away from overheating sectors, and towards those with lower levels of liquidity, the centralized economy grows faster, since less economic activity is wasted chasing inflation and more is generated to produce real increases in purchasing power. Chasing inflation inevitably generates duplicated work, since the point is not the work, but to own it and be the "first mover" in that area of work. Many thousands of companies wrote code that others were writing, because the point was to have it done first.

The need to reframe economics in a valid paradigm is crucial to changing the political debate.

For those who want a free lunch, er paper:

http://www.econ.ucdavis.edu/faculty/fzlinder/Freelunch/freelunchpage.html

Hal McClure slaps his head in amazement that the wing nut extremist line does not reflect reality: "No effect at all? I would have thought a very modest effect - to which a liberal like myself might say the redistribution benefits outweigh the modest inefficiency effects. But no inefficiency effects at all! I have to give his paper a read!"

Some "liberal."

Surely it's obvious that one of the goods about social goods is that they generally add to economic efficiency. Good roads, social peace, a high level of literacy are all good in large part because they pay off so well.

A general base of people's security is equally such a social good -- a foundation for a healthy economy.

To be surprised at such a thing is to reveal oneself as brainwashed by the extreme right.

Stirling

Fine comment!
Thanks.

I've been hearing about Sweden going bankrupt since 1956. It was one of my Dad's pet ideas. And it still might happen I suppose, but damn! they're slow.

There is a famous paper that measures the point at which the marginal tax rate leads to lower tax revenues. This is the marginal tax rate that makes supply-side correct in theory.

That rate is 70%. In other words, below 70% marginal rates, people will work harder to earn more. Above that, it seems that they satisfice by taking more leisure.

That's half the equation for the so-called social welfare state. On the spending side, it's always possible to spend money in non-productive manners. But given the record, it's difficult to say there was more "waste, fraud and abuse" in the awful old (Nixon-designed) welfare system than in, say, the Pentagon.

At any rate, there is presumably some optimal level of spending on education, health, infrastructure, income security and so on, where spending enhances productivity. Rotten, crowded roads may increase GDP as people spend money on replacing pothole-blasted tires and on gasoline spent idling in traffic, but such roads do not increase the real economic product of society; ultimately GDP is below the level it might attain. So, when roads are bad, spending money on them can help to increase the sustained level of GDP growth. And, as with all things, there is an optimum level of spending, above which spending actually depresses GDP growth.

What is striking is that 57 years after Europe and Japan were reduced to Stone Age levels by war, the standard of living is similar to that of the United States. Japan, unlike Europe, did not receive much in the way of assistance, but even Europe received relatively small loans. And all the societies, whether Japans's Confucian-o-centric approach or Sweden's social democrati approach or America's hyperindividualistic approach all have roughly the same growth levels.

What's different is that America is plagued with violence, poverty, incarceration, and so on. Wealth concentration and corruption on a scale that makes even the Gilded Age look sedate has started to destroy the roots of representative democracy. Perhaps we produce more, but we also destroy more.

The US economy has increasingly been powered
by more mindless irrational consumption. One reason Japans has been soft for a decade is the Asian mindset could not sustain the American style appetite for consumption. Much of the escalation in the promotion of SEX and Violence in all forms of entertainment is to keep the LIMBIC portions of the brain firing day and night.
This keeps the consuming public impulsive and irrational. But, soon enough FATIGUE is bound to set in. The margins will then collapse. And just as children run to their mother in the night
SOCIAL INSURANCE of all stripes will be back in favor.

"Peter Lindert thinks hard about just why it is that the high-tax high-benefit social-insurance states of the twentieth century appear to have managed to redistribute income and provide enormous amounts of social services and social insurance without suffering any measurable penalty in terms of their rates of economic growth."

There is a clear and well-documented penalty in economic growth caused by government spending on social services and social insurance.

For every 10% of GDP in additional total government spending, economic growth is reduced by about 1%.

http://www.house.gov/jec/growth/function/exh-4.gif

In response to Mark Bahner:
The White House graph is tendentious. It doesn't take account of the fact that poorer capitalist countries tend to have smaller governments, and can like Korea grow faster than rich ones by copying best practice. (If poor countries try socialism, it doesn't of course work). You could as easily produce a Blairite refutation showing that most of the world's 20 richest countries are welfare states - and the USA is a welfare state for old age and education, it just hasn't bit the bullet on health.

What if the income elasticity of demand for public goods like a decent environent, income security and a low crime rate just happens to be greater than 1? What if public goods have inherently lower rates ot technical progress (obviously true for nature conservation and income security, possibly so for education and policing, probably not for public health) and so tend to become relatively more expensive over time? What if the marginal utility of private consumption against leisure declines with income, as common sense suggests it must?

An efficient capitalist democracy would thus produce a rising share of government services in GDP against a slowing growth rate and a declining work year. Why do Republicans like Nietzsche genuinely hate such a prospect of tranquil contentment?