Speak English, lower taxes

by on December 28, 2007 at 9:32 am in Political Science | Permalink

Megan McArdle writes:

It is hard for high levels of taxation to survive a right of exit;
Europe has mostly been protected (so far) by its many languages, which
make it harder to move. But as the EU increases labor mobility, expect
to hear more about harmful tax competition.

The story is about skilled Danes leaving the country so as to avoid higher taxes.  The last time I was in Denmark I was struck how many service workers could not speak Danish (will a Spaniard or Hungarian really learn that language?) and in the workplace communicated in English.  Greater policy competition is one of the most important results of so many Europeans speaking good English.  High taxes and differential incomes, in turn, increase the incentive for people to learn good English, thereby creating a self-reinforcing dynamic.  I’ve long thought that Europe will become more like the United States than vice versa, most of all through mobility and diversity, but I don’t think that is a very popular view.

David Zetland December 28, 2007 at 10:06 am

Tyler — you are right. Euro politicians have taken their citizens for granted as a source of taxes, soldiers and workers. Some evoked real/fake nationalist emotions to keep their citizens on-side, but as the wages of peace have multiplied, Euro people have begun to see their neighbors as more than just holiday spots: The bleeding-edge emigrants have visited with limbs intact — setting an example for others to follow. Hopefully, policies aimed at retained the most mobile and valuable workers on the margin will benefit those unwilling to pay the costs of moving out. This is an optimistic view, but expect some nationalist backlash against “cowards” who leave…

Christopher December 28, 2007 at 11:05 am

Slightly off topic, but that website on the difficulty of languages you linked to is a joke. To take an example just from the intro: “Chinese speakers will probably pick up Japanese faster than people whose first language uses the Roman alphabet. In fact, Chinese has no grammatical system per se, which makes it easier to learn than many Western languages once you have memorized the basic characters.”

1. Chinese does indeed have a grammatical system, as anyone who has studied the language at all could tell you. I thought the absurd notion that you could learn Chinese by memorizing “the basic characters” died out a hundred years ago. Apparently not.

2. Chinese and Japanese are in completely different language groups. They are as closely related as Chinese and English (and less closely related than, say, Japanese and various Turkic languages). It is as difficult for a native Japanese speaker to learn to speak Chinese as it is for a native English speaker to do so. As written Japanese has used Chinese characters as one of its character systems for over a thousand years, it is easier for someone who reads Japanese to learn to read some forms of Chinese, especially the classical written language.

3. Any site that is about languages and conflates written scripts and spoken language (see #2 above), should really be ignored.

The state department ranks languages based on difficulty for native English speakers and does it well. The rankings are based on the hours of classroom instruction needed to reach given levels of proficiency. Danish is actually one of the easiest languages for a native English speaker to learn (and probably close for native Spanish speakers, but probably not for native speakers of Hungarian). See “http://www.nvtc.gov/lotw/months/november/learningExpectations.html”

Finnsense December 28, 2007 at 11:54 am

Hmmm. I find it very hard to believe many skilled Danes are leaving the country because of the taxes. Denmark is a tiny country and it is natural that a lot of people cannot find the opportunities they want there. If you’re born in Wisconsin and want to be an actor you move to LA, or if you want to be a tech entrepreneur, you go to Silicon Valley. The point is you can do most things within the same country. Danes will leave for other places because that’s where the skills they have are valued most. It’s not about money.

Will Europe become more like the US than visa-versa? On a trivial level certainly. The US will never adopt a welfare state model to rival even the British version – which is the weakest one if we ignore Ireland and the newbies. That said, things will have to get very bad indeed for us to give up our welfare states. If the US goes into a prolonged downturn now and Europe keeps its head above water rather than following the US down, the 25% wealth gap between the US and EU15 will be narrowed considerably. It’s hard to see us giving up our holidays and job security for 10% rise in purchasing power.

Raul December 28, 2007 at 12:02 pm

Finnsense:

But do you think the Scandinavians can keep up their model of high taxation running a welfare state for too long?

I’ve heard the opinion that the unique racially homogeneous demographic (almost bordering on clanship ) of Denmark etc. over the centuries made it possible to tax people so much without invoking huge resentment.

People don’t seem to mind high taxes so much when they see the money helping “one of their own”. But immigration breaks it down. I wonder if this is a tested theory….?

Robert Olson December 28, 2007 at 12:33 pm

Increasing tax competition can be mostly offset by greater transnational institutional power…like, say, the EU. If the EU gains greater latitude over taxation policy over the next 30 years, which isn’t entirely outside the realm of possibility, then individual European nations will have less ability to compete via taxation policy. Competition will still exist, as the factors that are driving it will still be there, but it’ll be along different lines.

Also: “People don’t seem to mind high taxes so much when they see the money helping “one of their own”. But immigration breaks it down. I wonder if this is a tested theory….?”
If I recall correctly, Thoma posted some studies on this a few months back. The consensus of them was that they are indeed true.

Raul December 28, 2007 at 1:07 pm

Barkley Rosser:

Sure; probably before I was born! And so, the consensus is…….what? I was only curious.

Tom December 28, 2007 at 1:44 pm

“Danes will leave for other places because that’s where the skills they have are valued most. It’s not about money.” How do the Danes get compensated for their skills, if not money?

CWuestefeld December 28, 2007 at 2:38 pm

Contra others posting here, I’m skeptical of this theory. I’m shocked that in America we see so LITTLE interstate migration. Sitting here in New Jersey, with punitive property taxes and some of the worst business regulation in the country, there remains a pile of highly-skilled workers.

Some of this is non-monetary motivations, such as staying near family and friends, etc.

Perhaps some of this is just the flip side of happyjuggler0’s chicken and egg problem. The people would like to leave, but do so in much less volume because the jobs are here; and vice versa for the businesses.

One would expect this throttling effect to eventually work itself out, but perhaps it prolongs the death throes of the state, allowing it to dig itself into a deeper hole.

Cliff December 28, 2007 at 3:05 pm

“There are a lot more skilled workers in the world than there are countries with forgiving tax rates.”

Oh… is the rule one skilled worker per country?

Barkley Rosser December 28, 2007 at 3:38 pm

To Raul and happyjugglar,

Well, the point is that this is not a new issue at all. The Nordic
countries have for decades had higher tax rates than anywhere else
and also very high rates of Anglophonia, making it relatively easy
for them to migrate to the US or UK or other lower tax locations that
have a high demand for high skilled workers. And, indeed, lots of US
commentators have been going on and on for decades now about how at any
minute the whole region (or at least especially naughtily high tax Sweden)
is going to just implode at any minute if it does not wise up and get into
a race to the bottom of world tax rates with Reagan and Thatcher and
Switzerland and Hong Kong, and Guatemala, and Malawi, and, well, and it
has not happened so far.

Not only that, the high tax rates are popular in both Sweden and
Denmark. How do we know this? The main reason that referenda in
both countries to join the euro have been rejected has been exactly
the fear that this would subject them to greater pressure to conform
to the lower tax levels and lower levels of welfare states that one
finds in the rest of the Continent, even as both of those are viewed
as also wickedly and horrifyinly high by most US commentators. Instead,
as Buggy Professor notes, they are one of the few areas where growth is
doing just fine, thank you, despite the horrors of their high tax rates
(eeeeeek! run for your life!!!).

And Finnsense is also right. These countries are magnets for highly
skilled workers and continue to perform at the top in terms of generating
R&D and innovation. The scare stories amount to a lot of deluded
propaganda from people who simply cannot deal with the fact that these
places are doing very well, as well as pretty much any places on the planet.

Actually, I really am waiting for some of these clowns who were rattling
on about the impending death of the Swedish welfare state back in the 1970s
and even earlier, to publicly fess up that they were just plain wrong. But
then they might not be allowed back onto the editorial pages of the WSJ…

Oh, and just as a reminder from another thread: the net flow of migration
between the US and Sweden is that more people are going to Sweden from the
US than the other way around, and I doubt those emigrants from the US are
a bunch of illiterate Muslims or whomever, almost certainly high skilled.

Peter Schaeffer December 28, 2007 at 4:04 pm

Steve Miller,

Try to liberate your mind from the prison of political correctness and the answer will be obvious.

jim December 28, 2007 at 4:50 pm

It will be interesting to see how the Nordic countries fare over the next half century. I have family in Sweden, a Thai women that a Swedish guy met on holiday and took back to marry and start a family. Sweden has been very generous to her, including free training to become a pharmacist. She’s smart and speaks English (as well as Swedish and Thai). She does say that she and her children have faced more racism lately than when they first moved there 15 years ago. Her fellow classmates at pharmacy school in particular were resentful (she went to school after just raising kids for the first decade she lived in Sweden).

Will resentment of the welfare state being offered to non-Swedes like her grow? Seems plausible. She went from a rural Thai village to middle class Swedish life, a dramatic improvement except for the weather.

A friend of mine is Finnish-American, but he goes back to Finland regularly. He describes Finland men as the most openly racist people he’s known. I know his own mother strongly objected to him dating an Italian woman on the grounds that only northern europeans are really white. I realize Finland is the typically the outlier among the Nordic countries, and perhaps my friend’s family is just unusually racist.

US December 28, 2007 at 6:12 pm

As a Dane only a few years away from graduation I thought I might as well leave a comment, especially as I don’t think I’ll be staying in Denmark after graduation. Some random observations that might be of interest:

a) I agree with Tyler that the language barrier is smaller than it used to be and labor mobility has increased much over time. An important fact to keep in mind when having this discussion is that, at least in Denmark, the language barrier is in general decreasing in income/productivity – that is, the taxpayers the Danish government would most like to keep in the country are at the same time the ones most likely to leave.

b) A lot of Danes are quite happy with the high taxes, there’s no way around this fact. But then again, quite a few of those working very hard are not very happy with the high tax rates. Point being that what the median voter thinks is not all that interesting here, they are not the ones moving. It is true that there are also in the top of the income scale some Danes who claims that they have no problem paying very high taxes, but there are a lot of discontent Danes up there too, even if most of them stay in the country.

The way I see it (or rather, a much simplified version of the argument) is this: There’s a big difference between a marginal tax rate of around 40 and a marginal tax rate of 60-65+. One might argue that you get something in return for the higher taxes, but the validity of this argument decreases with the age of the taxpayer in question. The Danish system is not, the way it works to day, fiscally stable in the long run, something that the Welfare Commission (Velfærdskommissionen) spent a great deal of trouble telling us two years ago, when they finally released their conclusive report that had been underway for more than 4 years. What happened after the release of the report, the reactions to it and the consequences it had, incidentally illustrates very well one of the main problems with the Danish consensus-approach. So what happened? Pretty much nothing. Our PM went out the same day and said that all the suggestions relating to taxes and user pay would not be included in the political welfare negotiations that were to follow the release of the report, which pretty much undermined the whole purpose of the report. In the end, only a few of the 50 economic reform suggestions that the commission had presented were implemented.

c) One of Barkley Rosser’s main points in his responses above is that it goes quite well in the Scandinavian countries. He’s right of course, it goes quite well, at least compared to our neighbours. However, we don’t know how much better it might have gone had the taxes been lower.

d) The Danish welfare state is bad for innovation and entrepreneurship. OECD recently ranked Denmark 12 out of a sample of 25 countries in a study on entrepreneurship. Foss and Bjørnskov had an article in Public Choice on the same subject not long ago.

michael gordon December 28, 2007 at 8:11 pm

Barkley:

1) Yes, on the whole Swedish economy overall has done a good job of revitalizing itself except in one crucial sense: job creation, or really lack of it. Its official unemployment rate — 5.6% in 2006 — is widely regarded even by Swedish and foreign specialists as drastically under-reported.

The chief economist for the Swedish Trade Union Confederation, LO, after a careful study, reported in 2005 that the actual unemployment rate wasn’t 6.0%, but rather 22% —- a figure that would put it at US Great Depression levels! The local Swedish Social Democratic governments would simply inflate, with central government complicity, the early retirement rolls, sick-leave medical rolls, and job-retraining programs that led nowhere, not to mention endless university studies with no jobs at the end, but all of which manipulations are funded by taxes. When the LO balked at publishing the economist’s results, he resigned, and a public outcry ensure. A well-known American consulting firm, the McKinsey Global Institute — which carries out outstanding comparative studies of economic performance of various countries (using both US and foreign specialists) — used American and Swedish economists and put the real unemployment level lower, but roughly 17% . . . still Great Depression levels for the most part. The electorate voted out the Swedish Social Democrats in the 2006 election. A major reason: everyone seemed to know at least one person who was unemployed.

2) A very good study carried out by Sweden’s most prominent economist, Assar Lindbeck (with a couple of colleagues) found three years ago that 50 years of welfare-state cushiness had eaten away at the once legendary Swedish work ethos. The same was true of the impact of high taxes on Swedish workers and the rest of the employed population: the once legendary civic discipline of the Swedes had eroded too, and Sweden (along with Denmark and Finland) were found in an impressive Austrian study — using a variety of cross-checking techniques — to have fostered an underground economy of tax evasion (along with other criminality) that added up to about 15-16% of GDP. The US underground economy was reckoned to be the lowest of the industrial countries, at 7.0%. Britain’s was about Scandinavian size. France, Germany, Spain, Italy, and some smaller countries averaged around 20%.

Given all this, the Swedes have done well in GDP growth by tapping the technical and scientific skills of their small population (9 million), itself all the more impressive in view of theses problems. Note though. A startling study by a Swedish Institute showed in 2005 that if Germany, France, Britain, or Italy suddenly joined the US Federal Union, they would rank with the four poorest states in the Union: along with Arkansas, West Virginia, Mississippi, and West Virginia . . . all sparsely populated rural states. Sweden would be ranked 7th from the bottom.

3) Enter Denmark.

Its job creation is much better than Sweden’s, and unemployment is probably close to US figures, using standardized international calculations. That’s impressive. But Denmark has only 4 million people, which means it’s smaller in population than Los Angeles, with a remarkably homogeneous ethnicity (that, however, is also rapidly changing, courtesy of a low Danish birth rate and an explosive rate among Muslim immigrants). Denmark, too — note appreciatively — is a gutsy little country led by a center-right coalition, which refused to kowtow to extremist Muslim rage and rampage over cartoons a couple of years ago.

4) Finland falls in between its Scandinavian counterparts. Unemployment is reckoned to be officially 7.0%, a rate that the US hasn’t experienced since 1941 except for a few months, in the deep but short-lived recession of 1980-81.

5) Note that the real economic miracle in the EU is Ireland, historically one of the three poorest West European countries in the EU (1972 on for the Irish), along with Greece and Portugal. In the mid- and late-1980s, the Irish government revitalized its economy with low business taxes and other pro- free market policies of sorts that have made Ireland by far the richest country in the EU except for tiny Luxembourg (200,000).

Its per capita income in purchasing power parity terms is actually about US levels today: $43,000! Germany, France, and Britain come in around $33,000 each, and Italy slightly behind. Britain, by the way, has outgrown its three major Continental competitors since the pro-market reforms of the Margaret Thatcher era of the 1980s: it was about 15% in PPP terms in the mid-1980s below Germany and France, and is a tad richer today in per capita income. More to the point, its unemployment level is half that of Germany, France, and Italy, and hundreds of thousands of Continental young people work in London, Dublin, and elsewhere in the British Isles, escaping permanently high structural unemployment in their countries . . . above all for young people under 30 years.

6) Observe finally that like Ireland and Britain and the US, Australia and New Zealand — foundering with oppressive regulations and high taxes in their economies since 1945 — scrapped most of their welfare state, pruned their taxes and regulations, and have revitalized themselves impressively since then too. Meanwhile, the gap between the US and virtually all of West Europe (and Japan) continues to widen yearly in productivity growth, per capita income, and GDP growth.

The Buggy Professor, Michael Gordon

PS These sketchy points set out here, by the way, are part of a lengthy 7 article series published at the buggy web site in 2005, which also explains the historical reasons for the lack of a socialist tradition on one side in American life and, on the other, the absence of statist conservatism of the sort that emerged in virtually all of West Europe and Japan in the 19th and early 20th centuries . . . the latter rooted in pre-industrial, pre-democratic values and beliefs hostile to free-market capitalism. In some places during the 1930s, like Germany, Austria, Italy, and to an extent Portugal and Spain, this statist conservatism merged with Fascism or racist Nazism, all militaristic, all ultra-nationalist, all claiming a heritage of organic corporate unity as opposed to rampant capitalist individualism, money-grubbing, and atomistic destruction of the national community. A similar ideology took root, of course, in Japan in the 1930s and early 1940s.

If you want to read these bugged out articles, go to Google and run a search for “Yankee-Twit vs. Euro-Jerk: Or Why the EU’s Work Ethos Is Shot†. That will take you to an article in the series that will highlight many of these matters, with lots of evidence. You can then do an archives search for its predecessors and its successors.

Jake December 28, 2007 at 10:08 pm

Contra others posting here, I’m skeptical of this theory. I’m shocked that in America we see so LITTLE interstate migration. Sitting here in New Jersey, with punitive property taxes and some of the worst business regulation in the country, there remains a pile of highly-skilled workers.

When presented with evidence that contradicts a theory, sometimes it pays to re-evaluate the theory. California has some pretty impressive income taxes and business regulation, but like New Jersey, there’s no shortage of skilled workers. Some of this may be regulations that favor employees at the expense of businesses; California’s refusal to enforce non-compete agreements is just one example. Another may be that skilled workers are more likely to value the services that the money raised by “punitive” taxes gets spent on; I certainly like UC Berkeley and bridges that don’t fall down in earthquakes. And finally, there may be something similar to the Alchain-Allen Theorem at work here, where a general increase in the cost of employing someone favors employing the highly skilled at the expense of the less skilled.

Barkley Rosser December 28, 2007 at 10:50 pm

I just wasted an hour and a half trying to post a long comment responding
to the very capable remark by Michael Gordon and the Danish emigrant, but failed.

Very short: cannot find reliable stats on US-Danish migration but remind all
here that between Sweden and US, it favors Sweden. I bet it favors Denmark,
or does not substantially favor Denmark when we get the numbers, and they are
out there somewhere, just waiting to embarrass Meagan McArdle, who tends to
discount acutal data on these matters.

Ireland is a special case, with skewed data, lots of corporatism, and a lot
of other special circumstances that should warn most away from making too
much of it. After all, NZ did most of the same, and it is a loser.

Congrats to Michael Gordon on a high quality comment.

Jive_Turkey December 28, 2007 at 11:16 pm

“Chinese speakers will probably pick up Japanese faster than people whose first language uses the Roman alphabet…”

This is correct, but it isn’t because of the Chinese grammatical system. It is because about half of Japanese vocabulary comes from Chinese, indirectly or directly, and is written using the same, or slightly modified characters. The meanings are not always identical but they are at least similar enough that they are significantly easier to learn (than unrelated word-meaning pairs). This also makes learning Chinese vocabulary (some, not all) easier if you already know Japanese.

Jody December 29, 2007 at 12:29 am

On US state migration: there is actually a massive native migration out of CA and other high tax locations. In some places (like CA), it’s offset by massive foreign immigration; in some places it’s not (like Michigan).

I couldn’t quickly find a good recent academic article, but here’s a more political article using census data from 2000 and 2006.

He’s breaking it down by metropolitan area and some of the trends are perhaps more influenced by affordable family formation (read as cost of housing), but in any event, people flow from high cost locations to low cost locations.

Bob Smith December 29, 2007 at 1:32 am

Is Megan trying to say the EU lowers taxes? I’d say that’s wrong. Putting aside the unnecessary costs of the EU superstructure itself, the EU’s “tax harmonization” rules, including such things as minimum VAT rates, destroys tax competition. It doesn’t matter if you can speak English and move, you still can’t escape to a lower tax jurisdiction while you remain in the EU. What little tax-related migration remains is an artifact of the rules, which places no maximum on tax rates, so you can still get something by moving, but not nearly as much as you could if there were still tax competition in Europe. Ireland is being wooed with huge subsidies from the EU to join. It remains to be seen if it will be smart enough to resist.

Similar words have been spoken about the US. I have no doubt that if California, under the guise of “tax harmonization”, could force Nevada or Texas to adopt its 9.3% income tax it would in a heartbeat.

Finnsense December 29, 2007 at 1:58 am

Michael Gordon,

“Britain and the US, Australia and New Zealand — foundering with oppressive regulations and high taxes in their economies since 1945 — scrapped most of their welfare state, pruned their taxes and regulations, and have revitalized themselves impressively since then too.”

You have to be kidding me. Britain, having experienced a brutal recession after 18 years of conservative rule, elected Tony Blair’s Labour government in 1997. Growth since then has been impressive as has the rise in government spending. The UK now takes close to 40% of GDP in taxation compared to Finland’s 43%. The US takes 25%. Some scrapping of the welfare state. You may also wish to explain why the UK, with its minimalist welfare state, has only managed to get its GDP to parity with France and Germany too.

I have also yet to meet an Irishman that can believe their purchasing power is so high. Life in Ireland, as in the UK, is pretty irritating for most people. One reason I would move to the US (from Finland) is that you have a lot of space and better weather. In terms of brain drain, no amount of economic reform is going to alter the fact that the UK is a crowded island and Finland is cold and dark.

US December 29, 2007 at 5:05 am

Barkley, as you didn’t find the numbers you were looking for, I just made a quick search on the subject. I thought it would be a lot easier for me, as I have access to Danish data sources as well. The result:

In 2006, 3582 Americans emigrated to Denmark. 3348 Danes moved to the US the same year. No time series are available as far as I can see, so I don’t know how these numbers have changed over the years.

Source: Danish Bureau of Statistics (Danmarks Statistik, Statistikbanken)

http://statistikbanken.dk/statbank5a/default.asp?w=1280 – table: VAN211

http://statistikbanken.dk/statbank5a/default.asp?w=1280 – table: VAN222

These numbers don’t say anything about education level or median wage of the migrants, and the only numbers I can find on these things are almost a decade old, making them somewhat obsolete as Danish migration policy has changed a lot since then. The Confederation of Danish Industries (Dansk Industri) recently released a study showing that Denmark has a somewhat large net outflow of people earning more than 400.000 crones/year (80.000$). However they are partisans in this debate, the study did not go through any kind of peer review and third, well I haven’t been able to find it online anyway.

When it comes to the emigration of highly educated Danes, almost 70 percent move back to Denmark within 5 years of departure, and almost 80 percent returns within 10 years. The return rate does not vary much across countries.

Source: The Danish Globalization Council (Globaliseringsrådet)

http://www.globalisering.dk/multimedia/7_-_Faktabilag_om_ind-_og_udvandring_af_h_jtkvalificerede.pdf

anon December 29, 2007 at 10:43 am

High-taxes are viable only under high racial and financial homogeneity in the demographic. That seems to be the not-oft-mentioned underlying current.

JSK December 29, 2007 at 4:01 pm

@anon: Commenters have (implictly or explicitly) mentioned it about ten times in this thread alone now.

@Gordon:
In the mid- and late-1980s, the Irish government revitalized its economy with low business taxes and other pro- free market policies of sorts that have made Ireland by far the richest country in the EU except for tiny Luxembourg (200,000).

Its per capita income in purchasing power parity terms is actually about US levels today: $43,000!

I believe you are confusing product with income. Yes, Ireland’s GDP per capita is quite high but that does not mean the Irish get to consume or save all that production themselves. According to OECD stats, per capita Gross National Income of Ireland is only slightly higher than that of France and Germany, and somewhat lower than of the Netherlands and Denmark. I guess that a relatively large portion of Irish GDP flows to the American companies who spurred Ireland’s rapid growth in the first place.

happyjuggler0 December 29, 2007 at 7:10 pm

Barkley Rosser,

Until you manage to point out the income levels of the migrants, you have far from demolished the thesis that incentives matter.

I’m also inclined to say that all countries involved with migrants to and from Denmark are the relevant data set, especially with such a small and apparently variable sample.

michael gordon December 30, 2007 at 12:13 pm

JSK:

1) Thank you for your comments, which are food for thought. Yes, it is quite possible for two countries to have equivalent per capita incomes — always adjusted by a PPP index — but different disposable incomes on the average. How so? For one thing, as in the EU, high taxes can clearly reduce household income; and even if government transfers are then considered, the household’s disposable income in an EU country would be lower than a hypothetical country of a similar per capita income but different tax rates (average and marginal) and transfers.

2) The EU countries have very high indirect taxes compared to the US. That would further reduce the buying power of, say, Irish, Swedes, Britons, French, and so on.

3) In addition to higher income taxes and indirect taxes — and transfer benefits (lots of US benefits are in-kind, not money) — certain key goods can be more expensive in the EU than the US. That’s notoriously the case with gasoline, taxed extremely high in the EU (for good or bad, mind you). Food prices are notoriously higher in the EU too, thanks to the economic absurdities of the Common Agricultural Policy that subsidizes even more blatantly a dwindling number of small farmers for the benefit of much bigger, increasingly corporate-like farm businesses (less so in dairy products).

4) Housing prices can also vary noticeably across countries, and hence rents too. It all depends on land restrictions and, possibly, population densities. The latter do matter, but not as much as the restrictions on housing developments. Thus Holland, the most densely populated country in the world, has less restrictions on suburban developments than Germany, and the price of housing is generally lower there. One clear sign: lots of Germans who work in Germany near the Dutch border have moved their chief residences to Holland.

5) If, then, you add up high income taxes, different transfer benefits from the government — US in-kind transfers reduce generally income poverty in this country from about 12-13% by about a third — add in too high indirect taxes, high food pricers, and excessive land restrictions that raise the price of housing, then clearly a typical if prosperous country like Ireland can leave its citizens feeling much poorer in income than American citizens with a per capita income (PPP adjusted) of similar value.

6) Incidentally, Norway — 4 million people outside the EU — has a per capita income slightly higher than the US in PPP terms, but Norwegians who move to the US (and the few Americans who work in Norway for Norwegian wages) find that their incomes in Norway are far below American buying power at similar PPP-adjusted “real” exchange rates.

The Buggy Professor, AKA Michael Gordon
http://www.thebuggyprofessor.org

PS(1) It just dawned on me. Those posters here talking about emigration from the US to Denmark or Sweden need, I believe, to see if these are permanent residents in those countries or there temporarily, say studying or working for US multinationals. I suspect that Danes and other EU immigrants to the US are much more inclined to be seeking permanent residency here. Mind you, that’s only a conjecture, nothing else; but when 52% of German university students say that they would like to live outside Germany, Germans — to take one example — who move to the US are likely seeking to stay here permanently.

PS2 As violent crime continues to increase all over the EU — even as US cities have just been found to have a near all-time low in homicides for the last 40 years — I suspect that more EU middle class families will seek refuge in North America or elsewhere to start a new life. And that’s likely to be doubly the case as native EU populations with very low birth rates — in effect, all the EU countries — tends to experience ever higher numbers of aggrieved and alienated Muslim minority communities.

When a Swedish Minister, apropos of all this, openly said a year ago that “If we are nice to the Muslims today, perhaps they’ll be nice to us when they’re the majority in the future”, that kind of semi-defeatist, semi-fawning attitude is further food for thought. (The words in quotes are from my memory and may not be exactly those uttered by the Swedish Minister.)

michael gordon December 30, 2007 at 12:47 pm

A brief follow-up.

A sudden thought is worth adding to the comments about why disposal household income can be less — maybe even much less — in a EU country with an equivalent per capita income in PPP terms as the US has.

I mentioned higher income taxes, higher indirect taxes, higher food and fuel prices, and higher housing prices — not compensated for by different kinds of government transfers (or, in the US, not considered income if they are in-kind like food stamps) — as the reasons for this gap.

1) Another reason, which might not be fully accounted for in PPP indexing — itself much better than using nominal (existing) exchange rates across countries, but still at best an approximation — is different kinds of wholesale and retail businesses. US businesses in these areas, generally more efficient than their EU counterparts anyway owing to government regulations in Europe, exprienced the biggest gains in labor productivity of all industries in the US during the 1990s. Even in the EU, it was reckoned in a French study in the 1970s (or 1980s) that more efficient retailing in Germany reduced prices to households by about 20% there compared to France. In principle, you’d think these differences — a separate French franc and German Mark — might have been captured by PPP indexing, but probably weren’t fully.

2. Household incomes in the US are likely to be increased on a yearly basis compared to the EU if, as seems to be the case, credit facilities are much more generous here. In the EU, a household that loses its credit card rating will generally find it hard to even obtain credit of any kind. In the US, indebtedness, bankruptcy, or failed businesses for that matter are far more easily forgiven.

3) You could generalize further on this score. From what I found studying and teaching in EU universities — in Britain, France, Switzerland, and Germany — failures of any sort, even a decision to drop out of the usual structured schedule of schooling, travel the world, and return to university, are or were severely punished. The same is true of failed businesses. Credit ratings are unforgiving. All this may explain, at least in part, why entrepreneurialship is so circumscribed in EU countries.

4) None of this is to deny that it may be cultural too, this risk-aversion. Europeans were markedly willing to emigrate to the New World for religious, political, and economic reasons from the 16th through the early 20th centuries. Tens of millions moved out of the British Isles alone after 1815 for a good century. Did all the risk-takers in Europe leave by the start of WWII? Well, those who stayed might have mainly been killed off by the Nazis and their European collaborators. The entrenchment of an advanced welfare state — which continued to transfer and redistribute income (not necessarily across income quintiles as between age groups, health or sickness-groups, and ethnic groups) for decades — was then followed after 1975 by ever greater transfers that made no sense economically, they weren’t dealing with hardships, but reflected rather huge differences in political power. France is notorious here. Though trade-union membership as a percentage of the population is no higher there than in the US — it may even be lower — it is concentrated in all the communication, transportation, medical, media, educational, and civil service areas, and hence an aggrieved group in these areas can practically bring the economy to a standstill.

What goes on in France or Italy may be more blatantly visible than elsewhere, but powerful unions and associations in the state sectors are found throughout the EU (with Britain something of an exception now), and they are deft at transferring privilege and benefits from their fellow citizens by virtue of their market and political power.

The Buggy Professor AKA Michael Gordon
http://www.thebuggyprofessor.org

Barkley Rosser December 30, 2007 at 2:06 pm

Buggy Professor,

Hmmmm. You kind of damaged the favorable impression I had of you with these additional comments,
which contain some serious whoppers.

Certainly taxes are higher in just about all of Europe than in the US, therefore one can expect
higher disposable incomes for equivalent PPP per capita incomes. Also, there are lots of goods
that are more expensive in Europe than in the US, and you have provided a list of some of the more
important ones.

However, first of all, those higher prices for those commodities are captured in the PPP numbers.
A lot of these countries (and Japan also) actually have higher nominal per capita incomes than in
the US, especially given the current euro/dollar exchange rate. That the US does much better than
most of these under PPP estimates is precisely because of the high prices of these goods in Europe.
I also note that whatever productivity problems Europe has, these will show up in higher prices and
are already accounted for in the PPP adjustments.

Of course, the tradeoff for those higher taxes is something that you fail to mention but is pointed
out by Mogens, the high quantity and quality of the public services provided. The one that really
sticks out here is medical care, with the US spending on the order of 15% of the national income, far
higher than is spent in any of the European countries, on medical care that by and large delivers
lower life expectancy and higher infant mortality rates in the US than one finds in pretty much all
of Europe.

This also applies to your claims about in-kind transfers in the US, probably your single
biggest whopper. These are far greater and more extensive in pretty much all of Europe than in the
US. They are what those high taxes are delivering, which you only want to count on the negative side
for Europe while counting on the positive for the US when it comes to in-kind transfers paid for by
taxes.

Where did you get this claim about what people earn in Norway or the US?

Aside from that comment, I note that none of what you say is directed at Nordic countries. Your
teaching experience does not include such countries. They have been reported to have more efficient
systems in many ways than other parts of Europe, and also more entrepreneurship and R&D. I would
remind that these were the main foci of the original posting, the claim, never substantiated, and
quite doubtful in the end, that all these highly skilled people are pouring out of Denmark, thereby
dooming its system. As Mogens points out, the evidence for this doomedness, is just not there. It
is the US that is in serious danger of having a major economic collapse because of its pileup of
foreign indebtedness to levels well beyond those of most less developed countries, and even getting
to their levels in percent of GDP terms, not Denmark or any other of the Nordic countries (note: “Nordic”
includes Finland, whereas “Scandinavian” does not, being a linguistic category).

michael gordon December 30, 2007 at 6:28 pm

Mogens:

1) Thank you for your comments, but I fear that no serious economist in the world believes that nominal exchange rates — which can vary abruptly in short periods of time — captures differences in living standards (proxied by per capita income roughly) across countries. Consider the euro. It was introduced in 1999 at a nominal exchange rate of $1.18 or so; then fell the next three years to $0.84; then has risen since 2002 to a little less than $1.50. Nobody really believes that between 1999 and 2002, the EU standard of living fell about 30% in dollar terms; if anything, it rose somewhat. Similarly, nobody believes that the EU standard of living has risen more rapidly than the US’s, which has outpaced virtually all the EU-15 countries since the start of 2002 in GDP and per capita income growth.

About all that one can say is that the EU-12 countries in the euro-zone are wealthier now than in 2002, insofar as they could — if their citizens wanted and trade barriers of all sorts were removed — substitute away from domestic produced goods to imported ones (where they exist) at probably lower prices . . . certainly, at far lower prices than between 1999-2002 when the euro was dipping steadily in dollar terms.

2) The whole rationale for PPP indexing — which was developed in the 1970s in its modern forms by a Univ. of Penn. team of economists for the UN — was to try making more sense of these
fluctuations in nominal rates that had begun with the end of fixed exchange rates of the original Bretton-Woods sort.

Barkley and Mogens:

(I.) I don’t doubt that the vast number of EU Continental citizens in West Europe prefer the existing welfare state, and are willing — where they can’t cheat in vast quantities — to pay the high taxes to finance it. Similarly, I doubt whether most EU citizens would like the more rough-and-tumble nature of American competitive life, and not just in economics but practically all spheres. Conversely, most Americans would no doubt dislike the regulations and restraints on life — from education on — that exist in West Europe.

(II.) Contrary to your claim, Mogens, income mobility is not likely higher in Denmark or probably anywhere in the EU than in the US. Note the stress on “not likely†. Denmark might be exceptional, but that said, a mass of studies put out for two decades by EU and US scholars that find equal patterns of mobility on the two sides of the Atlantic have, to put it bluntly, been based on tangled confusion.

In particular, looking at upward mobility as measured by advances in income, they have confused two entirely different things: an improved standard of living for Europeans and Americans thanks to economic progress for most people in any industrial country, plus any welfare benefits as income supports on the one hand; and on the other — what most of us mean by upward mobility — a re-ranking in the economic and social hierarchies, the movement upward of any one individual that moves others downward. It’s an extraordinary mishmash of scholarly work, decades old now. For an excellent study by a EU scholar that clears away the confusions here, see Philippe Van Kerm, “What Lies Behind Income Mobility: Reranking and Distributional Change In Belgium, West Germany, and the USA”

Kerm finds that upward mobility is 33% higher in the US than in West Germany and 56% higher than in Belgium across all ages. For those older than sixty years, upward mobility in this country was 60% higher than in West Germany and 65% higher than in Belgium.

A recent study put out by the US Dept. of Treasury — Income Mobility in the US from 1995 to 2005 found:

†¢ There was considerable income mobility of individuals in the U.S. economy during the 1996through 2005 period with roughly half of taxpayers who began in the bottom quintile moving
up to a higher income group within 10 years.
†¢ About 55 percent of taxpayers moved to a different income quintile within 10 years.
†¢ Among those with the very highest incomes in 1996 – the top 1/100 of 1 percent – only 25 percent remained in this group in 2005. Moreover, the median real income of these
taxpayers declined over this period.
†¢ The degree of mobility among income groups is unchanged from the prior decade (1987
through 1996).
†¢ Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to2005. Median incomes of all taxpayers increased by 24 percent after adjusting for inflation.The real incomes of two-thirds of all taxpayers increased over this period. In addition, the median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the higher income groups.
The degree of mobility in the overall population and movement out of the bottom quintile in this study are similar to the findings of prior research on income mobility.

(III.) Needless to say, I don’t know the equivalent figures for Denmark or Sweden, but this high level of upward and downward change in the income hierarchy for individuals is all the more impressive given two huge changes in American life since 1975:

1] A marked shift from an industrial society to one based on information and communications technologies (along with the rapidly growing sectors of biotech and alternative fuels) that entailed the social upheavals first identified by Joseph Schumpeter and that he called creative destruction. Meaning? You can’t shift to new major industries and exploit their potential without freeing capital, skilled labor, and ordinary labor in large numbers for those new industries and jobs. Hence the rapid shrinking of the US industrial base since then and the emergence of entire new industries, with their ability to diffuse new productivity (labor and multi-factor) throughout each industry and across the national economy. Whether EU national societies can absorb these big costs — really, upheavals in economic life — in order to push through toward the technological frontier is more difficult to say. It takes tremendous labor mobility to do this, and most labor market reforms in the EU — as a very good French study found two years go — are largely offset by counter-changes such as raising minimum wages. Denmark has done well in fostering such mobility; so has Ireland; Sweden, it appears, lags way behind, what with its large suppressed unemployment.

2] A steady change in the ethnic composition of the US population, with most of the immigrants poorly educated and not doing well in the US school system — this, despite almost 55 years of compensatory educational reforms, including for three decades compulsory bussing to integrate schools racially and ethnically. The bussing, fortunately, stopped in the late 1980s and early 1990s. Why? Very little changed in the comparative performance of ethnic/racial groups. Essentially, there was and remains a four-year gap in educational performance for African Americans compared to “white† Americans that shows up by the 8th grade and remains throughout future schooling . . . always, you understand, on an average, nothing else. Hispanic Americans do a little better, but not much more on an average. In the L.A. school system, the drop-out rate in high school for Hispanic Americans (including illegal immigrants) is near 60%, and in the low 50% range for African Americans.

3]East Asian immigrants and those form India, by contrast, do unusually well. The entering freshman class at UC Berkeley is close to 45% filled with East Asians — the entrance requirements not quite comparable to Stanford’s or Cal Tech’s, but very selective all the same.

And yet those Hispanic Americans (who have generally a very strong work ethos) and African Americans who get through high school move up steadily and often rapidly in income too. (Note finally that US Muslims — roughly 2-3 million — are very different in education and income from those in West Europe: they are better educated than average Americans (most have some university education) and have generally a slightly higher than average household income. Small wonder very few feel alienated, the opposite of the case in the EU).

(IV.) It’s futile, finally, to argue who has better welfare or educational or other social services across countries. These reflect a combination of different cultural heritages, citizen preferences, political catering to them (or pandering or both), interest group pressures, and diverse power among the groups involved. Whether Americans — who live in safer cities and towns — would like to live in the increasingly unsafe urban areas of West Europe is doubtful. Whether Americans would like European state-run or state-sponsored medical systems is doubtful. Like West Europeans, Americans have problems with our medical system: rising costs, problems of financing health care for older people, the tax burdens to finance these etc. What is special is that Americans — 89% of whom are happy with their own medical insurance scheme in recent surveys (but 69% of whom say there is a health crisis) — worry about portability of their insurance if they lose a job with an employer-sponsored one and get a job without it.

Whether similarly Americans would like the far more structured — even rigid — nature of European educational systems is also doubtful. We also, by the way, contrary to what you say, spend more as a percentage of GDP on education — private and public – than the EU average or probably the average even in Scandinavia; and we spend roughly 2.5 times as much as a percentage of GDP than the EU average for higher education.

Similar comments, I suspect, can be made about the satisfaction of most New Zealanders and Australians — possibly too Britons — with the much greater reduction in welfare regulations and to an extent welfare spending since the early 1980s. They have more jobs, their incomes are rising faster than before the free-market reforms, and they have somewhat lower taxes. In short, their economies have been revitalized in line with the traditional Anglo-American heritage of limited government and fairly free markets (compared to Continental West Europe and Japan), and there isn’t evidence of Britons moving in any noticeable manner to the Continent to get (non-existent) jobs in order to obtain more welfare benefits. The movement is in the other direction, no?

(V.) In the end, when all is said and done, a prediction here is fairly risk-free: tersely put, the countries in the industrial or post-industrial world will continue to vary in their institutions and policies — including the balance between public and private spheres of life — owing to far different histories and cultural heritages. It’s futile again for American economists to argue that the EU would be better off economically by free-market reforms of the labor market or much lower taxes without taking these differences into account. Equally it’s futile for EU economists and others to say that Americans would be better off if they had EU taxes and welfare programs. What, I think, EU citizens might consider is why the underground economies even in Northern Europe — where cultural heritages entailed traditionally civic discipline and paying taxes honestly — have grown so large the last few decades.

One final comment, and I’m through. It reflects my hunches speaking now as just an American citizen — and not a political scientist with a Ph.D. in both that discipline and economics. Namely, I doubt whether the growth of violent crime and alienation among a rapidly growing Muslim minority almost everywhere in West Europe — at a time the EU native populations will be aging and shrinking rapidly in numbers — bode happily for the future of EU stability and tranquility.

Quite a lot of comments for thought too, yes?

The Buggy Professor, AKA Michael Gordon

Mogens:

1) Thank you for your comments, but I fear that no serious economist in the world believes that nominal exchange rates — which can vary abruptly in short periods of time — captures differences in living standards (proxied by per capita income roughly) across countries. Consider the euro. It was introduced in 1999 at a nominal exchange rate of $1.18 or so; then fell the next three years to $0.84; then has risen since 2002 to a little less than $1.50. Nobody really believes that between 1999 and 2002, the EU standard of living fell about 30% in dollar terms; if anything, it rose somewhat. Similarly, nobody believes that the EU standard of living has risen more rapidly than the US’s, which has outpaced virtually all the EU-15 countries since the start of 2002 in GDP and per capita income growth.

About all that one can say is that the EU-12 countries in the euro-zone are wealthier now than in 2002, insofar as they could — if their citizens wanted and trade barriers of all sorts were removed — substitute away from domestic produced goods to imported ones (where they exist) at probably lower prices . . . certainly, at far lower prices than between 1999-2002 when the euro was dipping steadily in dollar terms.

2) The whole rationale for PPP indexing — which was developed in the 1970s in its modern forms by a Univ. of Penn. team of economists for the UN — was to try making more sense of these
fluctuations in nominal rates that had begun with the end of fixed exchange rates of the original Bretton-Woods sort.

Barkley and Mogens:

(I.) I don’t doubt that the vast number of EU Continental citizens in West Europe prefer the existing welfare state, and are willing — where they can’t cheat in vast quantities — to pay the high taxes to finance it. Similarly, I doubt whether most EU citizens would like the more rough-and-tumble nature of American competitive life, and not just in economics but practically all spheres. Conversely, most Americans would no doubt dislike the regulations and restraints on life — from education on — that exist in West Europe.

(II.) Contrary to your claim, Mogens, income mobility is not likely higher in Denmark or probably anywhere in the EU than in the US. Note the stress on “not likely†. Denmark might be exceptional, but that said, a mass of studies put out for two decades by EU and US scholars that find equal patterns of mobility on the two sides of the Atlantic have, to put it bluntly, been based on tangled confusion.

In particular, looking at upward mobility as measured by advances in income, they have confused two entirely different things: an improved standard of living for Europeans and Americans thanks to economic progress for most people in any industrial country, plus any welfare benefits as income supports on the one hand; and on the other — what most of us mean by upward mobility — a re-ranking in the economic and social hierarchies, the movement upward of any one individual that moves others downward. It’s an extraordinary mishmash of scholarly work, decades old now. For an excellent study by a EU scholar that clears away the confusions here, see Philippe Van Kerm, “What Lies Behind Income Mobility: Reranking and Distributional Change In Belgium, West Germany, and the USA”

Kerm finds that upward mobility is 33% higher in the US than in West Germany and 56% higher than in Belgium across all ages. For those older than sixty years, upward mobility in this country was 60% higher than in West Germany and 65% higher than in Belgium.

A recent study put out by the US Dept. of Treasury — Income Mobility in the US from 1995 to 2005 found:

†¢ There was considerable income mobility of individuals in the U.S. economy during the 1996through 2005 period with roughly half of taxpayers who began in the bottom quintile moving
up to a higher income group within 10 years.
†¢ About 55 percent of taxpayers moved to a different income quintile within 10 years.
†¢ Among those with the very highest incomes in 1996 – the top 1/100 of 1 percent – only 25 percent remained in this group in 2005. Moreover, the median real income of these
taxpayers declined over this period.
†¢ The degree of mobility among income groups is unchanged from the prior decade (1987
through 1996).
†¢ Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to2005. Median incomes of all taxpayers increased by 24 percent after adjusting for inflation.The real incomes of two-thirds of all taxpayers increased over this period. In addition, the median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the higher income groups.
The degree of mobility in the overall population and movement out of the bottom quintile in this study are similar to the findings of prior research on income mobility.

(III.) Needless to say, I don’t know the equivalent figures for Denmark or Sweden, but this high level of upward and downward change in the income hierarchy for individuals is all the more impressive given two huge changes in American life since 1975:

1] A marked shift from an industrial society to one based on information and communications technologies (along with the rapidly growing sectors of biotech and alternative fuels) that entailed the social upheavals first identified by Joseph Schumpeter and that he called creative destruction. Meaning? You can’t shift to new major industries and exploit their potential without freeing capital, skilled labor, and ordinary labor in large numbers for those new industries and jobs. Hence the rapid shrinking of the US industrial base since then and the emergence of entire new industries, with their ability to diffuse new productivity (labor and multi-factor) throughout each industry and across the national economy. Whether EU national societies can absorb these big costs — really, upheavals in economic life — in order to push through toward the technological frontier is more difficult to say. It takes tremendous labor mobility to do this, and most labor market reforms in the EU — as a very good French study found two years go — are largely offset by counter-changes such as raising minimum wages. Denmark has done well in fostering such mobility; so has Ireland; Sweden, it appears, lags way behind, what with its large suppressed unemployment.

2] A steady change in the ethnic composition of the US population, with most of the immigrants poorly educated and not doing well in the US school system — this, despite almost 55 years of compensatory educational reforms, including for three decades compulsory bussing to integrate schools racially and ethnically. The bussing, fortunately, stopped in the late 1980s and early 1990s. Why? Very little changed in the comparative performance of ethnic/racial groups. Essentially, there was and remains a four-year gap in educational performance for African Americans compared to “white† Americans that shows up by the 8th grade and remains throughout future schooling . . . always, you understand, on an average, nothing else. Hispanic Americans do a little better, but not much more on an average. In the L.A. school system, the drop-out rate in high school for Hispanic Americans (including illegal immigrants) is near 60%, and in the low 50% range for African Americans.

3]East Asian immigrants and those form India, by contrast, do unusually well. The entering freshman class at UC Berkeley is close to 45% filled with East Asians — the entrance requirements not quite comparable to Stanford’s or Cal Tech’s, but very selective all the same.

And yet those Hispanic Americans (who have generally a very strong work ethos) and African Americans who get through high school move up steadily and often rapidly in income too. (Note finally that US Muslims — roughly 2-3 million — are very different in education and income from those in West Europe: they are better educated than average Americans (most have some university education) and have generally a slightly higher than average household income. Small wonder very few feel alienated, the opposite of the case in the EU).

(IV.) It’s futile, finally, to argue who has better welfare or educational or other social services across countries. These reflect a combination of different cultural heritages, citizen preferences, political catering to them (or pandering or both), interest group pressures, and diverse power among the groups involved. Whether Americans — who live in safer cities and towns — would like to live in the increasingly unsafe urban areas of West Europe is doubtful. Whether Americans would like European state-run or state-sponsored medical systems is doubtful. Like West Europeans, Americans have problems with our medical system: rising costs, problems of financing health care for older people, the tax burdens to finance these etc. What is special is that Americans — 89% of whom are happy with their own medical insurance scheme in recent surveys (but 69% of whom say there is a health crisis) — worry about portability of their insurance if they lose a job with an employer-sponsored one and get a job without it.

Whether similarly Americans would like the far more structured — even rigid — nature of European educational systems is also doubtful. We also, by the way, contrary to what you say, spend more as a percentage of GDP on education — private and public – than the EU average or probably the average even in Scandinavia; and we spend roughly 2.5 times as much as a percentage of GDP than the EU average for higher education.

Similar comments, I suspect, can be made about the satisfaction of most New Zealanders and Australians — possibly too Britons — with the much greater reduction in welfare regulations and to an extent welfare spending since the early 1980s. They have more jobs, their incomes are rising faster than before the free-market reforms, and they have somewhat lower taxes. In short, their economies have been revitalized in line with the traditional Anglo-American heritage of limited government and fairly free markets (compared to Continental West Europe and Japan), and there isn’t evidence of Britons moving in any noticeable manner to the Continent to get (non-existent) jobs in order to obtain more welfare benefits. The movement is in the other direction, no?

(V.) In the end, when all is said and done, a prediction here is fairly risk-free: tersely put, the countries in the industrial or post-industrial world will continue to vary in their institutions and policies — including the balance between public and private spheres of life — owing to far different histories and cultural heritages. It’s futile again for American economists to argue that the EU would be better off economically by free-market reforms of the labor market or much lower taxes without taking these differences into account. Equally it’s futile for EU economists and others to say that Americans would be better off if they had EU taxes and welfare programs. What, I think, EU citizens might consider is why the underground economies even in Northern Europe — where cultural heritages entailed traditionally civic discipline and paying taxes honestly — have grown so large the last few decades.

One final comment, and I’m through. It reflects my hunches speaking now as just an American citizen — and not a political scientist with a Ph.D. in both that discipline and economics. Namely, I doubt whether the growth of violent crime and alienation among a rapidly growing Muslim minority almost everywhere in West Europe — at a time the EU native populations will be aging and shrinking rapidly in numbers — bode happily for the future of EU stability and tranquility.

Quite a lot of comments for thought too, yes?

The Buggy Professor, AKA Michael Gordon

Mogens:

1) Thank you for your comments, but I fear that no serious economist in the world believes that nominal exchange rates — which can vary abruptly in short periods of time — captures differences in living standards (proxied by per capita income roughly) across countries. Consider the euro. It was introduced in 1999 at a nominal exchange rate of $1.18 or so; then fell the next three years to $0.84; then has risen since 2002 to a little less than $1.50. Nobody really believes that between 1999 and 2002, the EU standard of living fell about 30% in dollar terms; if anything, it rose somewhat. Similarly, nobody believes that the EU standard of living has risen more rapidly than the US’s, which has outpaced virtually all the EU-15 countries since the start of 2002 in GDP and per capita income growth.

About all that one can say is that the EU-12 countries in the euro-zone are wealthier now than in 2002, insofar as they could — if their citizens wanted and trade barriers of all sorts were removed — substitute away from domestic produced goods to imported ones (where they exist) at probably lower prices . . . certainly, at far lower prices than between 1999-2002 when the euro was dipping steadily in dollar terms.

2) The whole rationale for PPP indexing — which was developed in the 1970s in its modern forms by a Univ. of Penn. team of economists for the UN — was to try making more sense of these
fluctuations in nominal rates that had begun with the end of fixed exchange rates of the original Bretton-Woods sort.

Barkley and Mogens:

(I.) I don’t doubt that the vast number of EU Continental citizens in West Europe prefer the existing welfare state, and are willing — where they can’t cheat in vast quantities — to pay the high taxes to finance it. Similarly, I doubt whether most EU citizens would like the more rough-and-tumble nature of American competitive life, and not just in economics but practically all spheres. Conversely, most Americans would no doubt dislike the regulations and restraints on life — from education on — that exist in West Europe.

(II.) Contrary to your claim, Mogens, income mobility is not likely higher in Denmark or probably anywhere in the EU than in the US. Note the stress on “not likely†. Denmark might be exceptional, but that said, a mass of studies put out for two decades by EU and US scholars that find equal patterns of mobility on the two sides of the Atlantic have, to put it bluntly, been based on tangled confusion.

In particular, looking at upward mobility as measured by advances in income, they have confused two entirely different things: an improved standard of living for Europeans and Americans thanks to economic progress for most people in any industrial country, plus any welfare benefits as income supports on the one hand; and on the other — what most of us mean by upward mobility — a re-ranking in the economic and social hierarchies, the movement upward of any one individual that moves others downward. It’s an extraordinary mishmash of scholarly work, decades old now. For an excellent study by a EU scholar that clears away the confusions here, see Philippe Van Kerm, “What Lies Behind Income Mobility: Reranking and Distributional Change In Belgium, West Germany, and the USA”

Kerm finds that upward mobility is 33% higher in the US than in West Germany and 56% higher than in Belgium across all ages. For those older than sixty years, upward mobility in this country was 60% higher than in West Germany and 65% higher than in Belgium.

A recent study put out by the US Dept. of Treasury — Income Mobility in the US from 1995 to 2005 found:

†¢ There was considerable income mobility of individuals in the U.S. economy during the 1996through 2005 period with roughly half of taxpayers who began in the bottom quintile moving
up to a higher income group within 10 years.
†¢ About 55 percent of taxpayers moved to a different income quintile within 10 years.
†¢ Among those with the very highest incomes in 1996 – the top 1/100 of 1 percent – only 25 percent remained in this group in 2005. Moreover, the median real income of these
taxpayers declined over this period.
†¢ The degree of mobility among income groups is unchanged from the prior decade (1987
through 1996).
†¢ Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to2005. Median incomes of all taxpayers increased by 24 percent after adjusting for inflation.The real incomes of two-thirds of all taxpayers increased over this period. In addition, the median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the higher income groups.
The degree of mobility in the overall population and movement out of the bottom quintile in this study are similar to the findings of prior research on income mobility.

(III.) Needless to say, I don’t know the equivalent figures for Denmark or Sweden, but this high level of upward and downward change in the income hierarchy for individuals is all the more impressive given two huge changes in American life since 1975:

1] A marked shift from an industrial society to one based on information and communications technologies (along with the rapidly growing sectors of biotech and alternative fuels) that entailed the social upheavals first identified by Joseph Schumpeter and that he called creative destruction. Meaning? You can’t shift to new major industries and exploit their potential without freeing capital, skilled labor, and ordinary labor in large numbers for those new industries and jobs. Hence the rapid shrinking of the US industrial base since then and the emergence of entire new industries, with their ability to diffuse new productivity (labor and multi-factor) throughout each industry and across the national economy. Whether EU national societies can absorb these big costs — really, upheavals in economic life — in order to push through toward the technological frontier is more difficult to say. It takes tremendous labor mobility to do this, and most labor market reforms in the EU — as a very good French study found two years go — are largely offset by counter-changes such as raising minimum wages. Denmark has done well in fostering such mobility; so has Ireland; Sweden, it appears, lags way behind, what with its large suppressed unemployment.

2] A steady change in the ethnic composition of the US population, with most of the immigrants poorly educated and not doing well in the US school system — this, despite almost 55 years of compensatory educational reforms, including for three decades compulsory bussing to integrate schools racially and ethnically. The bussing, fortunately, stopped in the late 1980s and early 1990s. Why? Very little changed in the comparative performance of ethnic/racial groups. Essentially, there was and remains a four-year gap in educational performance for African Americans compared to “white† Americans that shows up by the 8th grade and remains throughout future schooling . . . always, you understand, on an average, nothing else. Hispanic Americans do a little better, but not much more on an average. In the L.A. school system, the drop-out rate in high school for Hispanic Americans (including illegal immigrants) is near 60%, and in the low 50% range for African Americans.

3]East Asian immigrants and those form India, by contrast, do unusually well. The entering freshman class at UC Berkeley is close to 45% filled with East Asians — the entrance requirements not quite comparable to Stanford’s or Cal Tech’s, but very selective all the same.

And yet those Hispanic Americans (who have generally a very strong work ethos) and African Americans who get through high school move up steadily and often rapidly in income too. (Note finally that US Muslims — roughly 2-3 million — are very different in education and income from those in West Europe: they are better educated than average Americans (most have some university education) and have generally a slightly higher than average household income. Small wonder very few feel alienated, the opposite of the case in the EU).

(IV.) It’s futile, finally, to argue who has better welfare or educational or other social services across countries. These reflect a combination of different cultural heritages, citizen preferences, political catering to them (or pandering or both), interest group pressures, and diverse power among the groups involved. Whether Americans — who live in safer cities and towns — would like to live in the increasingly unsafe urban areas of West Europe is doubtful. Whether Americans would like European state-run or state-sponsored medical systems is doubtful. Like West Europeans, Americans have problems with our medical system: rising costs, problems of financing health care for older people, the tax burdens to finance these etc. What is special is that Americans — 89% of whom are happy with their own medical insurance scheme in recent surveys (but 69% of whom say there is a health crisis) — worry about portability of their insurance if they lose a job with an employer-sponsored one and get a job without it.

Whether similarly Americans would like the far more structured — even rigid — nature of European educational systems is also doubtful. We also, by the way, contrary to what you say, spend more as a percentage of GDP on education — private and public – than the EU average or probably the average even in Scandinavia; and we spend roughly 2.5 times as much as a percentage of GDP than the EU average for higher education.

Similar comments, I suspect, can be made about the satisfaction of most New Zealanders and Australians — possibly too Britons — with the much greater reduction in welfare regulations and to an extent welfare spending since the early 1980s. They have more jobs, their incomes are rising faster than before the free-market reforms, and they have somewhat lower taxes. In short, their economies have been revitalized in line with the traditional Anglo-American heritage of limited government and fairly free markets (compared to Continental West Europe and Japan), and there isn’t evidence of Britons moving in any noticeable manner to the Continent to get (non-existent) jobs in order to obtain more welfare benefits. The movement is in the other direction, no?

(V.) In the end, when all is said and done, a prediction here is fairly risk-free: tersely put, the countries in the industrial or post-industrial world will continue to vary in their institutions and policies — including the balance between public and private spheres of life — owing to far different histories and cultural heritages. It’s futile again for American economists to argue that the EU would be better off economically by free-market reforms of the labor market or much lower taxes without taking these differences into account. Equally it’s futile for EU economists and others to say that Americans would be better off if they had EU taxes and welfare programs. What, I think, EU citizens might consider is why the underground economies even in Northern Europe — where cultural heritages entailed traditionally civic discipline and paying taxes honestly — have grown so large the last few decades.

One final comment, and I’m through. It reflects my hunches speaking now as just an American citizen — and not a political scientist with a Ph.D. in both that discipline and economics. Namely, I doubt whether the growth of violent crime and alienation among a rapidly growing Muslim minority almost everywhere in West Europe — at a time the EU native populations will be aging and shrinking rapidly in numbers — bode happily for the future of EU stability and tranquility.

Quite a lot of comments for thought too, yes?

The Buggy Professor, AKA Michael Gordon

PS I almost forgot. As Barkley noted, various costs of goods and services across countries ought to be captured in the use of a good PPP index. Not only do I think he’s right, I said so in the earlier comment. But disposable income reflects what’s left to a household after taxes and transfers have been made, and these can definitely vary considerably across society.

As for the comments about Norway, there was a good article in the NY Times about the self-questioning in that country on why — if they’re so rich in GDP per capita — they don’t feel they’re rich and wonder why things are so expensive such as eating out in a restaurant. The article is probably about three years old, and if you want, I will try to find it. There was another article on the subject by Bruce Bawer, an American writer who moved to Norway and earlier Holland and who was struck by the same discrepancies in personal standards of living. Click here for his web site: http://www.brucebawer.com/

By the way, for what it’s worth, the current Norwegian Ambassador to the US is a former student of mine, and we had lunch together a couple of years ago. A very admirable man, who also headed the EU role in the former Yugoslavia after the Kosovo war of 1999. I’m hardly anti-Norwegian, anti-Swedish, or anti-Danish and respect their achievements, but I’m also glad that we have a different economic, social, cultural, and political set of institutions here — educational too, come to that.

Mogens December 30, 2007 at 7:10 pm

Thanks for your comments.
The PPP is not very accurate, because depending on what you put in the basket, you get different results.
Health care in Denmark costs about 24000 DKR pc with all covered. In the USA 85% are covered, and the cost pr covered is about 7000 USD. That gives an exchange rate of 3.43 DKR to 1 USD. The exchange rate is 5.10 DKR to 1 USD.
I have tried for 6 weeks to compare supermarket prices in catalogues in the USA and in Denmark. When you remove sales taxes, the spending power of 1 USD is about 4.40 DKR.
If you compare IKEA-catalogues in Denmark and in the USA without sales taxes, IKEA values 1 USD to 3.91 DKR.
Energy prices without taxes follows the exchange rate as does most prices on raw materials.
The world bank consider the USD PPP to be about 7 DKR, the danish banks says about 6 DKR, the exchange rate says 5.10 DKR and my little highly unscientific survey says about 4-4.50 DKR.
Actually I think that the USD in the coming period will decline to about 0.60€, because that’s the only way to get writ of the large and increasing foreign debt.
My personal opinion is, that the size of the US economy is overvaluated, that the GDP pc and standard of living in the EU15 is at par with that of the US, and that the overall economy in the US is about 70% of that of the EU.
In the USA you have a negative saving rate of -2% (2006) compared to a positive saving rate in the EU15 of about 12% plus a foreign trade deficit of about 4%, while the EU has a balanced trade.
The US overconsumption vs the EU15 is largely financed by that difference, and that can only work for a while.
The US economy has for many years gained by the USD being the international reserve valuta, so that other countries had to have large amounts of USD, but that is coming to an end in the coming years, unless the US government makes a responsible economic policy.

Barkley Rosser December 30, 2007 at 9:58 pm

Michael Gordon aka b.p

Much more reasonable and thoughtful these last sets of remarks.
Given that this is coming to an end, I shall simply note that there
are lots of sets of happiness studies, and that one should always
be careful about making any cross-country comparisons. Given that,
I do not know what study you are referring to when you claim at the
end that Americans are the “happiest people in the world,” according
to “internatational surveys.” I have seen lots of this data, and in
most of the ones I have seen the Scandinavian countries come out
ahead of the US on measured happiness, for whatver that is worth.
That would of course be consistent with the reported data showing
more Americans moving to Sweden and to Denmark than people moving
from those countries to the US, which does seem to be a bottom line
directly connected to the original point of the posting here.

not_scottbot December 31, 2007 at 8:30 am

‘…resists the changes needed to switch their economies from making things to creating, using, and manipulating information and innovating new high-tech businesses whose productivity surges are diffused throughout the national and regional economies.’

You know, the world’s largest exporting economy, Germany, hasn’t followed your strategy, which was whole-heartedly adopted by the world’s largest debtor nation.

I wonder why? Any guesses?

As a side note – I know a German doctor who moved to England two years ago, with his family (he has worked in Britain several times since becoming a MD). He moved back at the beginning of this school year. Does he count as an emigrant twice, or none at all? I think the current statistics of European ‘outflow’ are very inadequate in handling EU integration. In this region, many Germans have moved to the Alsace because it is much less expensive – and yet, their children go to German schools on the German side of the Rhine (after all, as German citizens they are entitled to a German education seems to be the attitude on both the part of the French, who spare the expense, and the Germans) and they continue to work for companies such as Mercedes, Siemens, John Deere, BASF, etc. in Germany. A similar situation tends to exist with Switzerland, France, and Germany in terms of people choosing one nation to live and another to live. Apparently, the Swiss have a hard time finding ‘skilled’ workers (or to put it a bit more cynically, workers willing to be paid less than their fellow Swiss citizens), and Germans happily work for higher wages in Switzerland while living in lower taxed Germany. The same is true for the French, both in Germany and Switzerland – and not just skilled, this often applies to people working in big box retailers like Real or Bauhaus. And yet, I am not sure that the number of people who fit into these situations (easily thousands, though certainly less than hundreds of thousands) are ‘emigrating’ in any realistic sense of the term, even if the statistics demonstrate it.

Jon –
a Finnish forest worker spends several months each winter, with his family, in the town I live in near Karlsruhe – since his car is suitably dirty and equipment stuffed, I assume he is working here. My wife’s best friend is half Swedish – her Swedish mother works as a therapist near Heidelberg.

michael gordon December 31, 2007 at 11:43 am

Finnsense:

1) Many thanks for your general comments, unusually balanced in their pros and cons about the US and Scandinavian economic systems. A similar compliment is due Mogens, I believe. Barkley Rosser, I fear, is a convinced socialist idealist or ideologue, who will reject automatically any contrary evidence that conflicts with his ideological hopes and the solace that such a surrogate religion brings. To dismiss the work of Assar Lindbeck and his Swedish colleagues — or with Dennis Snower, a British economist — by a sneer is hardly an argument. Lindbeck, by the way, is regarded as Sweden’s most prominent economist world-wide.

2) Keep in mind that the average Scandinavian country is 4 million in size (Sweden 9 million). On top of that, the four Scandinavian countries are historically very homogeneous in population even if that homogeneity is now rapidly changing, with the high birth rates of the Muslim minorities compared to the very low birth rates of native Scandinavians. The upshot? It’s not clear that what works well in Scandinavia can be transferred easily, if at all, to the larger economies in the EU like France, Italy, Spain, and Britain, let alone the US.

3) The US, to clarify briefly, is 75 times larger than the average Scandinavian country in population, the latter historically very heterogeneous and increasingly so over the last four decades. Similarly, it draws on an Anglo-American tradition of limited government, common law (as opposed to the Roman legal traditions underpinning statism in Continental West Europe), a preference for free markets (with variatons), and an aversion to entrenched state power. Then, too, the US system was originally designed to diffuse such power by means of several devices: federalism, a separation of judicial, legislative, and executive powers, and judicial review of all legislation and, at times, bureaucratic and executive behavior. Nor is that all.

There is no tradition of pre-democatic, pre-industrial conservatism of the sort that existed and still exists in its legacies in Continental Europe and traditionally in the Tory wing of the British Conservative Party . . . at any rate, with the destruction of the agrarian and militarized slave-holding Southern plantation-owners in our Civil War. On the left, likewise, there is no socialist tradition of note. What we have in the economic realm is essentially reformist and half-statist liberalism of the late 18th and 19th centuries in the Democratic Party (especially its left-wing) and an anti-statism liberalism in the Republican Party, with neo-Conservatives bringing in the acceptance of a limited welfare statism in the 1970s and 1980s. The result of an intermingling of libertarians, neo-conservatives, and evangelical movements — along with the leanings of more and more of the white labor force as Democrats have espoused and pushed identity politics at their expense — is an unstable Republican coalition that has its counterpart in the no less split Democratic Party.

4) Back to Lindbeck and his colleagues. What their work has shown, in well over a dozen studies now, is how the incentive systems of advanced welfare states has altered over the decades desirable social norms for the worse. An ever larger underground economy even in Scandinavian countries — reckoned by the best study (Austrian) to be twice as large as the US’s, or 15% of GDP — is a clear sign of this, what with the traditional civic discipline in those Scandinavian countries. Another, based on empirical work (which could be better, but at least breaks with the traditional refusal of economists to do observational studies of human behavior or to carry out experimental studies as social psychologists do) shows that senior union members are hostile to younger members and do not transfer the same “learning-on-the-job† lessons to these younger members as well as they did in the past.

If this goes on too long, then firms and agencies have only one choice: in place of spontaneous cooperation, they will have to enforce ever stricter incentive systems of demotion, lay-offs, or more rigorous performance-criteria for advancement. Whether and how far that tendency is at work in Scandinavian firms, just to stay in the private sphere, isn’t clear from the Lindbeck group’s studies, but you can safely predict this: as the minority Muslim communities grow in size, there will likely be ever more erosion of the habitual spontaneous cooperation for common purposes that marked Scandinavian life, and not just in the work place. You can even predict with a fair degree of likelihood that there will be less and less sense of cultural identification with minority groups demanding ever greater welfare benefits that include “affirmative action† policies in the name of egalitarian justice. If, in addition, violent crime and delinquency and other undesirable forms of behavior continue to flourish and grow in these minority communities (especially among an increasingly alienated young), then it won’t be hard to foresee a stronger erosion of spontaneous empathy and identification with those communities, along with big political repercussions.

Are these predictions overdone? Possibly, but I wonder when — outside of certain sectors of Danish political life — mainstream politicians in Denmark, Sweden, Norway, and Finland will deal openly and discuss frankly these simmering social problems and conflicts.

5) One final point, by way of clarification. None of you has dealt with the point that an earlier set of buggy comments made here identified.

In particular, whatever motivated the formal institutionalization of an advanced welfare state in Scandinavia and West Europe more generally — starting with the Swedes in the early 1930s and after WWII elsewhere — a growing concern about poverty and unemployment in ever more complex urbanized societies was one major motivating force. So too was the desire to end the ideological hostilities in West Europe that had led to the extremist ones like Communism, Fascism, and Nazism in interwar Europe and WWII. These were exemplary motives. Over time, though, as the welfare state became entrenched, groups naturally organized to influence the dispensations by politicians in their direction. Since the end of the 1970s, as a result, we find more and more group competition among and between unions, business associations, farmers’ groups, minorities, small businesses (vs. big multinationals), and age-groups for the largesse of the welfare state.
What remains are less and less desirable and exemplary motives in this group competition, and more and more outcomes decided by market and political-based power. As West European countries continue to experience continued or even lower birth-rates among native Europeans, more and more aging populations, and ever larger and alienated Muslim communities — along with increasing citizen concerns about violent crime, property crime, and threats to traditional national identities — it’s not hard to predict that the group competition for state largesse will become increasingly strife-laden. Will this happen in the next decade? No one can say for sure, just the contrary. In the next two decades?

Here, I fear, one can be surer.

The Buggy Professor, Aka Michael Gordon

Barkley Rosser December 31, 2007 at 5:41 pm

Michael,

Hmm. I complimented you on your last post and have agreed with many of
the points you made, plus made most of the ones that these other gentlemen
have made. I do not see where your snidely dismissing comments are appropriate
or what they are based on particularly. Maybe it is OK for Danes and Finns
to express certain ideas, but when an American agrees with them, then he is
some kind of mindless ideologue. Oh well…

I am not going to say anything negative about Lindbeck publicly, but will just
say that just because someone is very well known does not mean that they are
always right.

Anyway, happy new year everybody, including you, buggy prof.

Barkley Rosser January 1, 2008 at 8:13 pm

Buggy Prof,

I am always open to evidence. I do not generally start taking
after somebody harshly unless I see them doing so to begin with.
I did so over on the thread about uncertainties, where some folks
have come in who have flamed people before while repeating things
that are simply factually untrue and seemed to be at it again.
Given that I could see that the discussion there was degenerating
(partly due to my own comments), I announced I would comment no
further there and have not. I prefer to keep things civilized.
Usually they are around here, but sometimes things get heated.

Mogens January 2, 2008 at 2:36 am

sorry not to have answered earlier.
I will make a couple of points to the PPP-system.
The theory behind is, that when you buy a basket of goods in a country and compare the prices be-tween the same goods obtained in another country, it give you an idea of the purchasing power parity between the two economies, and thereby the real strength of the currency. Then you can make a more meaningful comparison of the economic performance of the economies involved.
If you compare for instance India with Germany it gives good meaning, but the PPP-approach has some serious flaws, when you compare open economies on the same level of development.
A Swedish economist Sten Ljunggren shows, that the size of the public sector and the size of the VAT or other sales taxes has a marked effect on the PPP-GPD without any change in real economic performance.
In a statistic regression-analysis he shows, that by changing the size of VAT from 25% as in Sweden to 21% as in Belgium and cutting the public sector from 22% to 14%, leaving the same tasks to be solved by private enterprises, the price level fell from 121 to 108, which with the same economic performance would increase the PPP-GDP with more than 10%.
So financing the a larger part of the public sector with income taxes instead of sales taxes and letting people pay for their health privately instead of publicly means, that your economy looks more than 10% more productive without having produced as much as a nail more.
If I use the above mentioned analysis from Sten Ljunggren on Denmark vs. USA the prices are more or less alike. I have used an average sales tax in the USA at 6%, and estimated the public sector to 14%, given the difference in overall taxation. USA overall taxation is about 30% and in Denmark it is about 50%. In Denmark the VAT is 25% and the public sector size is 22% of the economy.
The productivity of the public sector is normally understated, which can be seen in the difference in the Danish and the American health systems. The total Danish health costs with full coverage are 128 billion DKR a year. That is around 21.3 billion $, and it gives cost pr citizen of around 4.025$ with the exchange-rate of 2006, which was around 6 DKR pr US$.
The total US health system covering about 85% of the population costs 1800 billion $ or about 6000$ pr citizen, and if only the covered are counted in it would be more than 7000$.
That means that the American private health system pr. covered citizen is around 74% more expensive than the Danish public system.
That hardly adds to the wealth of the nation as a whole.
If you on top of that claims, that the value of the Danish Krone(DKR) is overestimated with 29% according to the American dollar if you convert the exchange rate to the PPP-rate, the real costs of the Danish health system would be 3120$ pr. citizen or less that half of the price pr. covered of that in the USA for virtually the same service, given life length and child mortality in the two countries. That sounds directly ridiculous.
The most primitive variant of the PPP-theory was the so-called Big Mac index, that was very popular a couple of years ago.
The idea of taking one item and using the pricing on that to decide the “real† strength of a nations economy shows exactly all the weaknesses in the theory.
The first problem is that some countries have another percentage of sales tax on food than on other items or has no sales taxes at all.
The second problem is that some countries have an extra sales tax on food bought in restaurants compared to food bought in a supermarket.
The third problem is that in some countries the competition in the restaurant area is fiercer than in other areas leaving restaurant food relatively under-priced.
The fourth problem is whether it is the same product. I know that the theory states that a McDonald-product is uniform throughout the world, but in Denmark the limit for the amount of trans-fats in food is max 2%, and those restrictions don’t exist in the USA, making it possible to use cheaper meat and other fats.
The fifth problem is that the standards on food safety and workers safety can be different giving additional costs that maybe makes the product more expensive, but in the long run is an economic advantage for society, giving less damages and more security.
The sixth problem is the exotic effect. While there is nothing exotic by McDonalds in the USA, for many Europeans it was seen as something different, and therefore in periods attractive, making it possible to prize the products higher.
There are more problems like for instance the contribution of the company to society in general and so on, but I think the above mentioned signals, that using one indicator is meaningless and can only be used to blur the vision.
Another problem that tends to blur the figures is the difference in the work load. In Europe the amount of hours worked during a year has been steadily declining during the last 30 years.
In USA the hours worked has actually been steady if not increasing.
Today the average work load in USA is 1777 hours while in Denmark it is 1423 hours.
There is no maximum workload in USA, but with a 40 hours working week and 2 weeks of vacation plus holidays like Christmas, 4th of July and so on should give 49 working weeks of 40 hours, and that is a theoretical maximum working year of 1960 hours, but actually the average work load for full time working family fathers in the middle income quintile was in 2002 2181 hours, giving about 44.5 hours in 49 weeks, and for their wives it was 1385 hours or 64% of the male workload pr year giving a yearly workload for the family of 3566 hours.
In Denmark the maximum work load for employees without overtime is 1643 hours, so a family with 2 working parents, one full-time and the other on 2/3 time, has a yearly workload of 2738 hours.
Even if both the parents in Denmark worked full time, the workload of the family was lesser than that of an American family with one of the parents working 64% of the other. Two full time work-ing parents would together deliver 3268 working hours a year, while the above mentioned American family would deliver 3566 or 298 additional hours at work. It amounts to almost 2 extra weeks of vacation a year for the whole family.
If they had the same amount of working weeks as in Denmark, namely 44.4 a year, the family fa-thers average weekly workload would be 49 hours a week or 2.4 hour more a day.
That is quite a lot.
In the years between 1973 and 2005 the real income in USA for the 10% wealthiest increased with 45% while the real income pr hour worked for the rest of the population fell with 7%.
In the same period the working hours per employee in USA increased with 26% while in France it fell with 23%, and the productivity per worked hour increased in USA 38% while in France it increased with 83%.
So in 2005 the production per employee in USA was 174% of what it was in 1973, and in France it was 164% of the 1973-level, so even though the production of an American employee has increased with 38% pr. working hour, his salary was lowered by 7%.
The median income per household increased 15% in real prices in the 32 years covered in the period, but only because the households delivered more working hours because the participation of women in the workforce increased.
Alone in the years from 1979 – 2000 married couples in the 3 lowest quintiles had an increase in working hours of 16%. Their real income went up with 24% for the middle quintile, 10% for the second lowest quintile and about 5% for the lowest quintile. If we reduce for the longer working hours, the real income development in that period would have been 6%, -6% and -9% respectively, or on average a decline on 3%.
If you compare to Denmark, median income increase in real prices in the 1973 – 2005-period was about 40%, and the working hours decreased form 43 hours per week to 37 hours per week, and the vacation increased from 3 to 6 weeks, totally from 2064 hours to 1643 hours per year, or a decrease of 20%.
In Denmark the median income pr worked hour increased with 75%. If you compare that to a decrease of 7%, as was the average for 4/5 of the population in the USA, you can see, that the development for the American middle class is totally different than his European/Danish counterpart.
The last is, that money paid in taxes don’t disappear.
The items paid by taxes in Europe you have to pay privately in the USA, but as you can see in the health care system, it can actually be more effective and cheaper for the consumer.
At the same time it frees you from using a lot of mental energy in worrying, and that surely adds to your quality of life.
Mogens.

Mogens January 2, 2008 at 8:18 am

I want to show that a welfare state is able to perform economically as good as a non-welfare state, and that public service is not bad for economic development.
Also I want to show, that increasing inequality and decreasing of the middle class is not a necessity for having a modern well functioning economy.
And yes; lower working hours is better especially when the increase in workload is followed by a decrease in real income pr worked hour. It’s better for the family life, it’s better for the children, and it enables people to take part in the democratic process or in cultural activities after their own choice. We don’t live to work, but work to live.
In 1975 the difference between the median income and the mean income in USA was about 15%, which is the same as in Denmark today. But in the USA today it is more than 45% signaling a stark increasing inequality. And who benefits from that; the former middle class? hardly.
In 1975 the average American worker was far better off than his European counterpart.
Today that difference is eroded away. not because the American economy don’t perform well, but because the increase only benefits the richest part of the population.
Some European politicians is praising the American model, and that is why I try to demonstrate, that it has serious drawbacks.
It is other factors than increasing inequality that decides the future development of the economies.
Regarding the demografic problems in the EU, the birth rate differs from country to country, but in the countries with the best possibilities for young parents it is relatively high like in Denmark and France, and in countries with low possibilities like Germany and Italy it is low.
So the right cure is better maternal leave, better day care systems and better economic support for young families.
We cannot go back to earlier days, because educated women wants to use their education and make a professional career.
And that is a development I think is good.
At last; globalization is apparently the big monster in modern economy. Denmark is actually much more globalized than the USA. Our foreign trade exceeds our Private consumption, and a lot of danish workplaces is outsourced. But for every 100 jobs we lost we got 102 in return. Jobs with higher skills and higher salary. You can make globalization to mutual benefits, if greed is not your only parameter of success. Nothing forbids you to pay a decent salary for non- outsourceable jobs.
We have different priorities, but in a system like ours, you can have a fairly high and secure standard of living without working round the clock.
You can also make many money by working round the clock, but you have a choice.
I know some people think that it is a moral problem being able to live a relatively carefree life without toiling; but then again that is a moral discussion and not an economic discussion.
I like our system and I think it makes it easier for us all.
Mogens

Mogens January 2, 2008 at 10:28 am

The point is that you don’t need to have a 8-10% unemployment because you have a welfare state. In Denmark the unemployment is 3%.
The French probably voted for Sarkozy because they wanted a chance also in foreign policy, but maybe you should ask some French about that.
Besides, where are the generalizations? actually I think that my facts are rather precise.
Mogens

Comments on this entry are closed.

Previous post:

Next post: