The Chait-Manzi debate

by on January 11, 2010 at 8:20 am in Economics | Permalink

Paul Krugman links to some of the key pieces, or trace through Chait's blog or Manzi plus Krugman has a NYT column today on this.  I won't go through the debate as a whole (i.e., no mention of military spending or ideas as an international public good), which covers many of the basic "U.S. vs. Europe" issues, but here are a few relevant points:

1. For this debate, "levels" are more important than growth rates.  The United States has higher per capita income than most of Europe, although I don't mean to suggest that Europe is an economic disaster.  You also can try to "argue back" some of that difference by citing social indicators or leisure time, but don't focus on the growth rates.

2. If you see the United States compared with Europe, ask if the same analysis also compares the United States to the highly successful Singapore or for that matter Brazil.  If not, be wary.

3. It would be an interesting exercise to construct an "imaginary Europe," so instead of the current gdp of Italy you would sub in the output of a comparable number of Italian-Americans, and so on.  The Swedish-Americans in Minnesota get subbed in for the Swedes in Sweden, and so on.  I've never seen that done but I would like to know the answer, both with respect to per capita income and social indicators.

4. One question is whether the U.S. or Europe does a better job of elevating poor immigrants to higher income levels.  You would think egalitarians would be obsessed with this issue, but they're not.  In fact most of them hardly mention it.

5. There has never, ever been a well-functioning social democracy — in the European sense — with the size, population, and diversity of the United States or if you wish make that any two of those three.  How about any one of those three, noting that Canada isn't really such a large country?  That doesn't mean it's impossible, but keep that in mind the next time you hear talk about evidence-based reasoning.

6. Per capita growth rates or levels can be misleading, for some of the reasons mentioned above.  A country which adds a lot of low wage labor through immigration, for instance, will look worse than it ought to.  And if you cite "higher average productivity" in some parts of Europe, you are neglecting the differences between average and marginal and also the allergies to low-wage jobs in places such as France.

7. One view is to see significant pockets of poverty in Appalachia and decry there is nothing comparable in Denmark.  Another view is to see those same poor people and compare them to the poor of the European continent, which includes places such as Belarus and Albania.  Both approaches can be misleading exercises.

8. Countries have to start from where they're at.  If you're constructing policy advice, you can either build on what a country is really good at or you can try to revise the internal culture of the country.  If you're going to do the latter, come out and say so.  Most of my policy recommendations are based on the former approach, namely strengthening what (the better-functioning) countries already are good at.  I'm not suggesting that countries never change, but getting such changes right by deliberate policy interventions is very hard to do.  I wish to stress this point applies to the pro-U.S. as much as the pro-Europe side.

I'd like everyone to have a sign, which they would hold up when appropriate: "My policies seek to revise the internal culture of my country."  That's OK, but you're raising the bar for your own ideas and don't fool yourself into thinking otherwise.

Addendum: You'll find related points here.

Sam January 11, 2010 at 8:37 am

RE: “I’d like everyone to have a sign, which they would hold up when appropriate: ‘My policies seek to revise the internal culture of my country.’ That’s OK, but you’re raising the bar for your own ideas and don’t fool yourself into thinking otherwise.”

You realize this policy would seek to revise the internal culture of the country, right?

Colin January 11, 2010 at 8:46 am

It would be an interesting exercise to construct an “imaginary Europe,” so instead of the current gdp of Italy you would sub in the output of a comparable number of Italian-Americans, and so on. The Swedish-Americans in Minnesota get subbed in for the Swedes in Sweden, and so on. I’ve never seen that done but I would like to know the answer, both with respect to per capita income and social indicators.

Reminds me of the story of when Milton Friedman was told by a Swedish official: “In Sweden we have almost no poverty.” To which Friedman responded “Interesting, among Swedish-Americans we also have almost no poverty.”

On a related point, I’ll note that the life expectancy of Norwegians (79.78 years) is almost the same as people in South Dakota, which has is the state with the greatest percentage of Norwegian-Americans (79.8 years).

john January 11, 2010 at 8:55 am

Isn’t there some middle ground available somewhere? DOes all of the market risk need to be born by the worker?

Millian January 11, 2010 at 9:02 am

Apologies, I skipped the part where Tyler reasons that “Canada isn’t really such a large country” to get out of that glaring contradiction. Hilariously, he then appeals to “evidence-based reasoning” at the end of that point. I guess it’s easier to engage in evidence-based reasoning when you change the evidence to suit your argument.

This may be the most sub-par MR argument of the year so far.

LC January 11, 2010 at 9:08 am

It would also be interesting (albeit impossible) to see how US would perform without Europe, and Europe without US. My point is: how much of European growth (and per capita GDP) is led by US growth (and viceversa)?
If we look at technological progress, I’ dare do say that most of the revolutionary changes of the last 20 years come from US; Europe is quite too often merely adopting american technology (think of the pc and internet revolutions, for instance, or new healthcare treaments).
I don’t think this is something possible to do, but it would be very interesting to know how much of the welfare of european countries comes from free-riding on US technology and economic growth (and, of course, how much of american well-being comes from free-riding Europe). All in all, as a european, I am willing to admit that we owe more, in terms of (economic and technological) growth and well-being, to US than what US owe to Europe.

Tom January 11, 2010 at 9:22 am

Uh, Canada has 33 million people compared to the US’s 300 million.

Re: “3. It would be an interesting exercise to construct an “imaginary Europe,”

This is the best point. I would also love to see this comparison.

dearieme January 11, 2010 at 9:35 am

“There has never, ever been a well-functioning social democracy …with the size, population, and diversity of the United States..” I have seen the size of the USA advanced as an explanation for several problems lately. Is is a cack-handed way of saying that the Civil War should never have been fought, or is it simply an all-purpose excuse?

DanC January 11, 2010 at 9:47 am

To NC

But giving greater power to the state reduces both economic and political freedom.

Giving create power to the state leads to abuse by the state, look at the former communist countries as an extreme model. State actors use the power to reward friends and punish enemies (just like a Chicago politician).

Are Founding Fathers understood the dangers of giving too much power to elected officials one would think they would be even more fearful of less accountable government agencies.

NC January 11, 2010 at 10:01 am

DanC

Ah, yes, that devious slippery slope. However, the examples of countries who didn’t go down that slope is large. Health care is really far from being the main reason for the presence of corruption in Italy’s government.

Your Founding Fathers also lived in the XVIIIth century and there were no examples of social democracies at the time. Since I’m not US American, it’s hard for me to understand their prophet-like status.

anonymous January 11, 2010 at 10:10 am

“There has never, ever been a well-functioning social democracy — in the European sense — with the size, population, and diversity of the United States or if you wish make that any two of those three. How about any one of those three, noting that Canada isn’t really such a large country?”

Canada is certainly just as diverse than the US, and if you don’t think the country is large then you have a very hazy grasp on geography. Then again, we wouldn’t want facts to get in the way of polemic, would we?

mojo January 11, 2010 at 10:20 am

7. One view is to see significant pockets of poverty in Appalachia and decry there is nothing comparable in Denmark. Another view is to see those same poor people and compare them to the poor of the European continent, which includes places such as Belarus and Albania. Both approaches can be misleading exercises.

http://www.guardian.co.uk/society/2006/jan/21/health.politics

In Iraq, life expectancy is 67. Minutes from Glasgow city centre, it’s 54

In deprived inner city area of Calton, the chance of surviving to old age is lowest in UK

There are ghosts sitting in the Cottage bar in Glasgow’s Calton area. The locals call them the missing generation, the men who died before their time. Sometimes the drinkers dip their heads or lift their pints to them. They may not see them but all the drinkers know they are there. Jimmy, Swifty, Davy and many more.

For here in this multi-deprived inner city area, the average life expectancy of a male is just 53.9 years. In Iraq, after 10 years of sanctions, a war and a continuing conflict, suicide bombs and insurgency, the average man has a good chance of making it into his 60s; the life expectancy of a male there is 67.49. In Iran it is 69.96, in North Korea, 71.37 and in the Gaza Strip it is 70.5.

Andrew Edwards January 11, 2010 at 10:29 am

Agree on the Canada dodge. It is probably easier to argue that Canada is sui generis – few other countries share a massive undefended border with the most powerful country in the world.

To the extent we are distinguishing “size” from “population”, Canada is larger than the US.

It is also similarly diverse. I believe Toronto may be the most ethnically diverse city in the world:

http://www.toronto.ca/toronto_facts/diversity.htm

“Half of Toronto’s population (1,237,720) was born outside of Canada…. 47 per cent of Toronto’s population reported themselves as being part of a visible minority”

“The top five visible minority groups in Toronto were:

South Asian at 298,372 or 12.0 per cent of our population;
Chinese at 283,075 or 11.4 per cent;
Black at 208,555 or 8.4 per cent;
Filipino at 102,555 or 4.1 per cent;
Latin American at 64,860 or 2.6 per cent.”

mojo January 11, 2010 at 10:55 am

I have read that Native Americans live longer in the USA than Canada. Aborigines in Australian have a very low life expectancy. Japanese American live even longer than Japanese in Japan. Longevity could a trait that is linked to nationality.

dolo January 11, 2010 at 11:29 am

I think Tyler’s post misses the point of Krugman’s argument. Krugman creates a straw-man argument (“social democracy necessarily leads to economic stagnation”) and then points out that the evidence in Europe does not support that argument. Tyler’s point that European demography is different from American demography actually supports Krugman’s point. Krugman says that there isn’t good evidence from Europe to show that American social democracy will fail, Tyler says that the evidence from Europe isn’t applicable to the US for demographic reasons.

Krugman is not arguing about what the data says, he’s arguing about what the data does NOT say — and if the data is bad, Krugman’s point still stands.

josh January 11, 2010 at 12:22 pm

Re Canada:

What is wrong with you people?

Canada 33 million. US 309 million.

Canada is 2.5% black and 1% Latin American compared to 12.4 and 15.4 for the US. Percentage of Asians both SE and E and “other”s are fairly comparable.

That’s not to say Canada isn’t large or “diverse”, but it is in a completely different ballpark from the US.

If you want to argue that the size and diversity issue is a dodge, you need to make a cogent argument as to why size and diversity don’t matter, not that such issues don’t exist. Hence, Tyler says “That doesn’t mean it’s impossible, but keep that in mind the next time you hear talk about evidence-based reasoning.”

Yancey Ward January 11, 2010 at 12:31 pm

It will be interesting watching the social democracies of Europe change over the next 30 years as most of them face the demographic problems of a rapidly aging population- problems that are much deeper than those faced by the US.

For the commenter that asked “must all market risk be borne by the worker?” Given that most people either work, are married to workers, are the children of workers, or are aged and retired, I fail to see to whom you want to pass the risk.

David January 11, 2010 at 12:57 pm

I collected some data for your Imaginary Europe hypothetical, though I agree that there are limits to what conclusions one can draw. The conclusions are pretty predictable. U.S. ethnic groups do better than European counterparts. They would have had to perform significantly below average for it to be the other way, since the U.S. has higher GDP (PPP) overall.

If anyone is curious, you can see my blog post and spreadsheet here: http://stonesoup.wordpress.com/2010/01/11/imaginary-europe/

Colin January 11, 2010 at 1:26 pm

@mojo

You are correct, I meant North Dakota. And some people would argue the low homicide rate is because of, not despite, the high gun ownership rates.

Popeye January 11, 2010 at 2:11 pm

I’d like everyone to have a sign, which they would hold up when appropriate: “My policies seek to revise the internal culture of my country.” That’s OK, but you’re raising the bar for your own ideas and don’t fool yourself into thinking otherwise.

And other times we could hold up signs that say: “I recommend letting events unfold completely naturally and without any interference. ” That’s OK, but you’re putting the bar for your own ideas on the floor and it’s not really clear why you’ve bothered to show up.

Blackadder January 11, 2010 at 2:42 pm

My question would be how the difference in income levels between the U.S. and Europe came about in the first place. Did the U.S. have faster growth at some point in the past, or is it mainly a carryover from the devastation of WWI and WWII?

mulp January 11, 2010 at 2:55 pm

For those mentioning race/ethnicity in the justification for inequality, your are either claiming genetic inferiority, or ethnic and racial discrimination for the inequality.

Please state either the evidence for genetic inequality if that is your position, or the justification for allowing the illegal discrimination to be perpetuated.

Or state the rationale justifying perpetuating the racial and ethnic discrimination which have been codified in American law since 1500.

The earliest economic developments in the Americas were all based on creating inequality of rights, and thus inequality of circumstance, all in the name of economic development and increased wealth. Slavery of blacks in the Americas was done because the American landowners refused to be enslaved by the criminal immigrants who stole everything using their guns and swords, people who were able to live off the land based on their cultural heritage, and based on their culture, preferred to die instead of live enslaved. Blacks were taken from their lands and dropped into an alien land where their culture gave them no means of escape superior to that of those criminal immigrants. Indian tribes that had followed Jefferson’s advice and established Western ways of law, dress, farming, technology, culture had their land taken from them in violation of treaty, so one can’t argue these tribes were discriminated against because they were savages; they were no more savage than those who took their land based on racial rationalization. The Indian tribes ceased to be a “problem” after they had their land, culture, wealth, and strongest individuals taken from them in a government takeover of all the land they owned so the government could redistribute their wealth to those the politicians favored.

mulp January 11, 2010 at 3:12 pm

I’d like everyone to have a sign, which they would hold up when appropriate: “My policies seek to revise the internal culture of my country.”

My sign reads “let’s be honest about the American culture of refusing to recognize the rights of those who are not white males of the right heritage.”

dollared January 11, 2010 at 3:19 pm

I loooovvveeee these discussions. So many liberals say “look at Europe for x (e.g successful healthcare regimes).” Then the naysayers, usually Republicans and/or glibertarians, say “No! Europe is all different! We must have our own, original, unique solution!!”

And then those R/G’s go back to their place of work, and yell at people for “re-inventing the wheel,” and fire people who “don’t seem to know or care about implementing best practices from the field.”

What would it take to get us to implement German health care? A Mckinsey study? I’ll fund it.

If we cannot figure out that there are solutions to our problems, right in front of us, and then go and implement them, then we deserve what we get as a nation. Some of those solutions are in Europe. Many of those solutions will hurt the US corporations that have raised rent seeking in Washington to a high art. Tough.

Dan H. January 11, 2010 at 4:05 pm

The biggest objection I have to the use of Canada as evidence of a large, effective ‘social democracy’, is that Canada really isn’t a social democracy in the European sense. Only our health care system really stands up to the ‘social democracy’ test, and even that is moving back towards more private care. On most other economic matters, Canada is much closer to the U.S. than it is to Europe. In addition, we are definitely benefiting from free-riding on the U.S. military.

Most people do not realize this, but the current Canada is not the one you might remember from the Trudeau years. Canada now has about the same level of government spending as a percentage of GDP as does the U.S., and within a couple of years Canada will have a smaller government than the U.S. does. It has a less progressive tax system (we fund more of our government through sales taxes and sin taxes), it has lower rates of business, dividend, and capital gains taxes. It has no inheritance tax.

Furthermore, Canada is much more diverse economically than is the U.S. The Fraser Institute in conjunction with an American think tank issues an annual report surveying economic freedom in North America. In the past, all the Canadian provinces landed dead last except Alberta, which would be in the middle of the pack. Today, Alberta is ranked as the second freest political district in North America, while most Canadian provinces are still dead last. Ontario and BC, however, have climbed above a number of U.S. states. Alberta is also driving most of Canada’s economic growth.

When Canada was more statist, we definitely under-performed compared the U.S. We had problems with brain drains, our GDP growth and standard of living lagged the U.S. quite substantially. But Canada began reforming in the early 1990′s, and now is one of the most fiscally sound countries on the planet. We’ve gotten there by holding the growth of government below the growth of GDP, so government has been taking a smaller bite out of the economy every year. We’re the only major democracy I can think of to have cut the size of government so drastically over the past 20 years. We’ve cut the size of government from 53% of GDP in 1990 to 39% in 2007. It’s gone up slightly because of the recession since then. We also did it while running balanced budgets.

Here’s an interesting article talking about the role reversal of Canada and the U.S. in terms of economic freedom: http://www.brusselsjournal.com/node/3924

I think a better study would look at a variety of countries and track their individual growth rates as they move from socialist to market economies or vice-versa. That way, you’re dealing with the same population cohort, the same geography, the same culture, and the same mix of resources and industry.

Anotherstudy could look at the breakup of the Soviet Union, and track the performance of the various splinter states. Some of them embraced markets more thoroughly than did others. Let’s see how their economic performance compared.

Or, now that Canada and the U.S. seem to be switching places in terms of economic freedom, it would be very interesting to look at the results ten years from now and compare them to what they were before the roles switched.

TGGP January 11, 2010 at 5:10 pm

Tyler has repeatedly said levels are more important than growth rates, but has provided no support for that statement. Over the long run, shouldn’t growth rates be more important?

mulp, it could be a cultural thing. Who knows. But those are certainly relevant facts.

Peter Whiteford January 11, 2010 at 6:42 pm

As far as i could see one of the main problems with Manzi’s original claim was that he included Russia in his definition of Europe, so that the argument that social democracy is inimical to economic growth includes a large country that never was a welfare state, and isn’t really one now. You also have the problem of including Russia and a lot of other Eastern european countries where there very large reductions in GDP in aggreagate and per person post 1990, and which again can hardly be said to be related to the development of their welfare states.

On the immigrant position, there is actually a paper that has done this for Australia, and also compared Australia, the USA, Germany and canada, and then looks at the position of Italian immigrants in Australia compared to individuals with the same characteristics living in Italy. see http://www.lisproject.org/publications/liswps/123.pdf

It’s main conclusions are

- Using data from the Luxembourg Income Study, the analysis indicates that immigrants perform considerably better, in terms of distributional outcomes, in Australia and Canada than in
either Germany or the United States.

- Finally, comparisons are made of the
1986 wage incomes of two groups of working-age Italians, one still residing in Italy and another which had emigrated to Australia. Using a
human capital earnings function, the analysis indicates that those Italians who emigrated to Australia had earnings which were generally well above what is estimated they would have been earning if they had remained in Italy.

ziel January 11, 2010 at 7:12 pm

Mulp – could you help us out here and point to a country or region in the world where these ethnic groups’ economic performance is a model for how they could be performing in U.S. if the U.S. did not discriminate against them?

Leigh Caldwell January 11, 2010 at 8:58 pm

Mostly good points. On item 4:

One question is whether the U.S. or Europe does a better job of elevating poor immigrants to higher income levels.

Something the EU has done pretty well in recent years is elevating the income of poor Polish, Hungarian and Slovakian (and in earlier decades Greek, Portuguese and Irish) people. Romania and Bulgaria are heading that way, but it remains to be seen for sure. I’d love to see more immigration to both the EU and US from poorer countries, but as a second-best benefit this isn’t bad.

dollared January 12, 2010 at 1:29 am

Medical innovation must be supported by American taxpayer/premium payer paying 3X the cost of drugs elsewhere in the world? That is e-x-a-c-t-l-y what I mean by “rent-seeking corporations.”

That my free market friend, is a “subsidy.” You can look it up in the dictionary.

Oh, and by the way, basic medical research comes from governments all over the world, including the US government. Drug and device R+D? It’s important, but it is also done all over the world. The subsidies you and I pay are simply not necessary. They support stock prices, not innovation.

You want innovation? Make the pot of money smaller.

jk January 12, 2010 at 4:32 am

I wonder if the US is just a entrepreneur suck on Europe and Canada – what fraction of billionaires have foreign origins (I can give the number for denmark – zero) – also what fraction of human capital units – i.e. illegal immigrants in the US – are not even counted when computing per capita GDP in the US. So I am not at all that convinced that the USA is a better GDP producing machine than social democracies such as Scandinavian countries etc. These countries might perform even better if the USA became more similar.

I also dont think there are implicit reasons why social democracy cannot be supported in a large country. Care for the sick and the elderly; The education of all children; and Equality I think are all universal values. I also can’t see any obvious diseconomies of scale in their implementation.

So my prior is that this is mostly a problem of differing political institutions.

dollared January 12, 2010 at 11:53 am

Hi Doug,

I’m not sure what you mean by “cross your fingers and hope everything works out?” What is at risk? A subsidy? If there is meaningful medical research that needs to be done, it can be funded out of the SIXTEEN PERCENT OF GDP we now spend on healthcare. In fact, let’s cut it to 14%. There is no need for additional subsidies on top of that.

As far as “make the pot smaller” forcing innovation. Have you heard of Wal-Mart?

Why is it that the Conservatives, Glibertarians and Republicans don’t believe in standard market theory when it comes to health care?

Paul January 13, 2010 at 8:34 am

> Europe is quite too often merely adopting american technology (think of the pc and internet revolutions, for instance)

Packet switching technology was invented in both the US and the UK and the web was developed in Europe.

For a long time now most of the graduates in science and technology in the US have been from overseas (and increasingly these people have been returning home). Innovation is an increasingly global business. Open any “American” IT product and this is perfectly obvious.

Is America too often merely passing off as American the results of innovation by non-Americans?

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