Denmark GDP

Bank assets as a percentage of gdp

Via Megan McArdle (from a good post on why it's hard to leave the euro), we are offered this list:

Bank assets as a percentage of GDP

Luxembourg 2,461
Ireland 872
Switzerland 723
Denmark 477
Iceland 458
Netherlands 432
United Kingdom 389
Belgium 380
Sweden 340
France 338
Austria 299
Spain 251
Germany 246
Finland 205
Australia 205
Portugal 188
Canada 157
Italy 151
Greece 141

(For comparison, total banking assets in the U.S. are equal to approximately 82 percent of GDP.)

File under "Too Big To Save."  Do be a little careful, however, since countries such as Ireland have financial institutions based there, for tax reasons, without the Irish government feeling responsible for them. 

Friday assorted links

Has the time come and passed for negative interest rates?

That is the topic of my latest Bloomberg column, here is one excerpt:

Step back and consider the cultural context. Germany is still scarred by the memories of two world wars, fascism, communism, deflation and hyperinflation: in general, huge instability. Since the end of World War II, however, personal savings and the banking system have been an oasis of predictability and a driver of growth. Many Germans treasure their frugality, perhaps excessively or irrationally, and it has become an important part of the narrative Germans tell themselves about the economic order they have built.

Now enter the ECB, in essence telling Germans (and others) that savings are a bad thing, to be taxed and penalized. The very word “negative,” as in “negative interest rate,” makes the policy hard to sell politically. The German word “Strafzinsen” refers to a penalty rate, but the root “Straf” also refers to punishment, and it was used effectively by Franz Kafka in his famous torture-laden short story “In the Penal Colony” (the German title is “In der Strafkolonie”). One German newspaper referred to the “final expropriation” of the German saver, noting that the ECB’s decision to deviate from its inflation target carries “grave consequences.”

More generally, a significant segment of the German population is upset or outraged by the policy. There is even a claim that the revenue from the negative interest payments will be used to finance other EU countries.

Most economists and central bankers view negative interest rates as an acceptable tool of macroeconomic management. Maybe so. But in an era when trust, including trust among nations, is much lower than previously thought, it probably isn’t a good idea to place a punishing new tax on the German national virtue of saving. Central bankers must also be sensitive to public relations.

I find it striking how many people are responding to this column by insisting that Merkel should do more fiscal stimulus.  She should (though I don’t find “stimulus” to be the most instructive word here), as I suggest in the piece, because the Germans have been letting their infrastructure run down for a good while now — internet speeds anybody?  But at the end of the day, I don’t think that spending will eliminate the basic macroeconomic problem facing the EU, nor is most of that spending likely to land on the doorstep of the countries which most need it (though Huawei may benefit a good deal).  There is also this:

So if a policy of negative interest rates is just a Band-Aid, it is one that should be ripped off. And if monetary policy is insufficiently expansionary, that is going to require an increase in the ECB’s inflation target, or a move to nominal GDP targeting, not a jerry-rigged tax on deposits.

There is also an argument that Germans are saving too much. But by some measures, they have a level of national wealth relatively low for their per capita income, in part because Germans are less likely to own their own homes. According to the OECD, Germany’s near neighbors Sweden, Denmark, the Netherlands, and Switzerland all save more in percentage terms than Germany does.

German savers: underrated.

Bryan Caplan on Spain

He spent a bunch of weeks there, there are many good observations, here is one of them:

17. Big question: Why is Spain so much richer now than almost any country in Spanish America?  Before you answer with great confidence, ponder this: According to Angus Maddison’s data on per-capita GDP in 1950, Spain was poorer than Argentina, Chile, Mexico, Peru, Uruguay, and Venezuela, and roughly equal to Colombia, Bolivia, Costa Rica, Cuba, Ecuador, Guatemala, and Panama.  This is 11 years after the end of the Spanish Civil War, and Spain of course stayed out of World War II.

And this:

The worst grocery store I saw in Spain offered higher quality, more variety, and lower prices than the best grocery store I saw in Denmark, Sweden, or Norway.

Do read the whole thing.

Is Democracy Doomed?

Democracies are much richer than non-democracies and their wealth has made them the envy of the world. The close correlation between democracy, high GDP per capita, and economic, military, and cultural power has made modernity appear to be a package deal. When people look at rich, powerful countries they typically see a democracy and they think, “I want that.”

At the same time, however, the academic literature on the causal effect of democracy on growth has shown at best weak results. Here is the all-star team of Acemoglu, Naidu, Restrepo, and Robinson (ungated) in the JPE summarizing:

With the spectacular economic growth under nondemocracy in China, the eclipse of the Arab Spring, and the recent rise of populist politics in Europe and the United States, the view that democratic institutions are at best irrelevant and at worst a hindrance for economic growth has become increasingly popular in both academia and policy discourse. For example, the prominent New York Times columnist Tom Friedman (2009) argues that “one-party non democracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. ”Robert Barro (1997, 1) states this view even more boldly: “More political rights do not have an effect on growth.”

Although some recent contributions estimate a positive effect of democracy on growth, the pessimistic view of the economic implications of democracy is still widely shared. From their review of the academic literature until the mid-2000s, Gerring et al. (2005, 323) conclude that “the net effect of democracy on growth performance cross-nationally over the last five decades is negative or null.”

Acemoglu et al. continue, “In this paper, we challenge this view.” Indeed, using a multitude of sophisticated econometric strategies, Acemoglu et al. conclude “Democracy Does Cause Growth.” In their sample of 175 countries from 1960 to 2010, Acemoglu et al. find that democracies have a GDP per-capita about four times higher than nondemocracies ($2074 v. $8149). (This is uncorrected for time or other factors.) But how much of this difference is explained by democracy? Hardly any. Acemoglu et al. write:

Our estimates imply that a country that transitions from nondemocracy to democracy achieves about 20 percent higher GDP per capita in the next 25 years than a country that remains a nondemocracy.

In other words, if the average nondemocracy in their sample had transitioned to a democracy its GDP per capita would have increased from $2074 to $2489 in 25 years (i.e. this is the causal effect of democracy, ignoring other factors changing over time). Twenty percent is better than nothing and better than dictatorship but it’s weak tea. GDP per capita in the United States is about 20% higher than in Sweden, Denmark or Germany and 40% higher than in France but I don’t see a big demand in those countries to adopt US practices. Indeed, quite the opposite! If we want countries to adopt democracy, twenty percent higher GDP in 25 years is not a big carrot.

As someone who favors democracy as a limit on government abuse, I find this worrying. One optimistic response is that the nondemocracies that adopt the policies necessary to make a nation rich, such as support for property rights, open markets and the free exchange of ideas, may not be such bad places. These beasts, however, appear to be rare. But if they are truly rare there must be more to the democracy-GDP per capita correlation than Acemoglu et al. estimate. So what are they missing? I am uncertain.

If democracies don’t substantially increase growth, why are they rich? Acemoglu et al. don’t spend time on this question but the answer appears to be reverse causality (from wealth to democracy) and the fact that today’s rich democracies adopted capitalism early. But don’t expect the wealth to democracy link to be everywhere and always true, it’s culturally and historically bound. And catch-up is eliminating the benefits of the head start.

If much of the allure of democracy has been higher GDP per capita then the allure has been a mistake of confusing correlation for causation. A fortunate mistake but a mistake. The literature on democracy and growth implies that there is no reason to reject an alternative history in which the world’s leading industrial economy was a nondemocracy. Nor why we could not see some very rich nondemocracies in the future–nondemocracies that would be as on par with the United States as say Sweden, Denmark and Germany are today. If that happens, the case for democracy will look very much weaker than it does now as the correlation between democracy and wealth will be broken and the causal effect more evident even to those without sophisticated econometrics.

Hat tip: Garett Jones for discussion.

Poland fact of the day

When it comes to contingent government pension liabilities as a percentage of gdp, Poland appears to be above 350%.

France, Denmark, and Germany are next in line, with figures well over 300%.  For purposes of comparison, the United States is considered to have a serious pension problem but the corresponding number is only slightly above 100%.

Here is the John Authers and Robin Wiggelsworth FT story.  Australia seems to be doing best.

One reason for this high Polish sum is that the Polish government has semi-nationalized a lot of the private sector pension liabilities.  In 2014, this procedure (FT) did not receive much discussion:

As part of an overhaul of the country’s pension system, Warsaw will next week transfer from privately-managed funds to the state 150bn zlotys (€36bn) of Polish government bonds and government-backed securities, which will then be cancelled.

I believe this idea will reenter the broader policy debate sooner or later.

Friday assorted links

What if there are no more economic miracles?

Here is my Bloomberg column on the passing of the economic miracle, here is one excerpt:

Most of the world’s wealthiest and best-governed countries got there without super-rapid bursts of growth. Denmark, which has a per capita income of about $52,000 and is frequently ranked as one of the happiest countries in the world, never experienced what anyone would call an economic miracle. If you Google that phrase, the main entry will be a research piece detailing how, in the 1990s, the country lowered its unemployment rate without having to dismantle its welfare state.

Denmark’s overall economic record is gloriously boring. From 1890 to 1916, per capita growth averaged about 1.9 percent per year, and if in 1916 you had forecast that this pace would continue for another 100 years, you would have been off by only about $200. Denmark had positive growth about 84 percent of the time and no deep recessions, according to a recent study by Lant Pritchett and Lawrence Summers.

And this:

…the experience of Denmark and other “no drama” growth stories provides some clues to the future of developing economies. The East Asian growth model, for all its wonders, belongs to history. Slow and steady may be the only option left. For whatever reasons, few countries have been able to scale up their educational successes as rapidly as the East Asian tigers. Trade growth, which exceeded overall output growth in the late 20th century, now seems stagnant. Many export industries are automated and hence don’t create as many middle-class jobs as they used to.

In other words, today’s world may resemble the 19th century more than the last few decades.

Do read the whole thing.

Is there a market liberal case for Brexit?

Jacob Levy has a very good post on this topic, here is one bit from it:

There’s a level of popular belief that the EU enforces illiberal and market-unfriendly policies on Britain. On the fiscal side, here’s a comparison of British public spending as a share of GDP just before entry into the EU, and just before the Brexit vote:

1971: 42.0
1972: 40.8

2014: 41.8
2015: 40.8


Even when you add in the <1% of GDP that is paid to Brussels, this is just not a picture of a system that has forced Britain to become a big-spending social democracy. (Neither, of course, is it a picture of a system that has forced Britain into neoliberal austerity, a charge one hears from the left.)

Here is another:

According to the 2015 Economic Freedom of the World report’s overall measure for regulatory burden, Czech Republic, Denmark, Estonia, Lithuania, Sweden, Ireland, and Romania are all less regulated than the UK. The most recent Heritage index of “business freedom” ranks Denmark, Finland, Germany, and Sweden ahead of the UK; for labor freedom, Denmark, Austria, and Ireland. In all these cases, these relatively-liberal EU countries compare favorably with other developed countries in or out of the EU.

Do read the whole thing, here are comments from Ilya Somin.

To where should you vote with your feet?

Mark Brown asks me:

If voting with your feet was your preferred method, what would be the best country to immigrate to from the United States for: A) Progressives B) Social Conservatives C) Libertarians

As a follow up, a common expression in the US among adults as I was growing up was “its a free country”. That expressed both disdain of the expressed course of action and a willingness to let the fool do what he wanted. Tom Sawyer and Huck Finn are literary representatives of that, what should I call it, frontier freedom? Are there countries that even if the official line is restrictive, the feeling of liberty might be much greater? Am I nuts to feel that in many ways the US is less free than it was a couple of generations ago?

For Progressives I’ll pick Denmark.  They have high taxes and ultimately they are not too friendly toward immigration, instead preferring to keep their social policy comprehensive and expensive.  Sweden may not quite manage the same, although they are still a fairly high pick on this list.  Another direction to look would be Australia, where government spending is most likely to actually be redistributive.

For Social Conservatives, I say Singapore.  They are tough on drugs and the citizens are expected to work and required to save.  Parents are treated with respect, at least relative to the West, and when it comes to births at the very least they are trying hard with subsidies and ads on buses.  An underrated pick here would be France, by the way.

For Libertarians, I say the United States.  For all of the statist intervention in this country, it remains the place where markets are capable of exercising the most power for the better.  And it is no accident that such a huge chunk of the world’s libertarians are also Americans, or at least heavily American-influenced.  Singapore is in the running for this designation, with its government at eighteen percent of gdp, but so many things there are planned so comprehensively and the attitude of the country is more technocratic than free market per se.  Hong Kong is no longer such a free economy, having come under increasing Chinese influence not to mention law-enforced cartelization, and that is on top of their government-supplied housing stock and single payer health care system.

As for the last part of this question, the relatively peaceful parts of Mexico, in my view, very often feel freer than the United States.  But I am never sure how much that is worth.

Which countries will have the next financial crisis?

Here, from Peter Levring, is a discussion of high private household debt in Sweden and Norway and Denmark, along with some remarks by Paul Krugman.  Here is an excerpt from Levring:

In Denmark, consumers owe their creditors 321 percent of disposable incomes, a world record that the Paris-based OECD said in November demands a policy response. In Sweden, debt by that measure is close to 180 percent, a level the government and central bank say can’t be allowed to rise. Norway’s central bank has struggled to find a policy mix that addresses its 200 percent private debt burden.

Here is a sustained argument, from Jesse Colombo, that Singapore is due for a crash:

This chart from Nomura shows that Singapore’s loan growth has far outpaced its nominal GDP growth in recent years, making for the worst credit-GDP growth gap in Asia…

The optimistic stance of course is to focus on Singapore’s net asset position, quality governance, and its new and enhanced role in an “Average is Over” world.  The same can be said for the Nordics as well.

Those inclined to pick on Malaysia can read the argument here, or try the Philippines.

China seems more like 2015 at this point, if that.  And the Russian bailout bought some time for Ukraine.

Or, from Alen Mattich, Canada may be the next victim:

Canadian house prices are very clearly bubbly. By one estimate Canada’s house price to rent ratio–an important metric–is the furthest from historic trends than any country in the world right now. Various estimates have Canadian house prices at between a third and two-thirds over-valued.

I am myself inclined to think Thailand and Turkey are most vulnerable over say the next year, maybe Greece too, in part because of the accompanying political dysfunctions in each case.  And is India’s recovery already over?  Indonesia still has troubles ahead.

One key question is the relative worry weights you assign to private debt vs. bad institutions.

What about the rest of the world?  The eurozone is seeing ongoing credit contraction and perhaps deflation too.  Japan just announced a surprisingly large and apparently persistent current account deficit.  And the United States?  Things look pretty good, but in fact by the standards of historical timing we are soon due for another recession.

I’ll put my money on Turkey.

What’s wrong with Britain?

Scott Sumner has the microphone:

I was curious to see just how tight British fiscal policy actually is, so I checked the “Economic and Financial indicators” section at the back of a recent issue of The Economist.They list indicators for 44 countries, including virtually all of the important economies in the world.  Here are the three biggest budget deficits of 2011:

1.  Egypt  10% of GDP

2.  Greece:  9.5% of GDP

3.  Britain:   8.8% of GDP

Egypt was thrown into turmoil by a revolution in early 2011.  Greece is, well, we all know about Greece.  And then there’s Great Britain, third biggest deficit in the world.

I suppose some Keynesians work backward, if there is a demand problem it must, ipso facto, be due to lack of fiscal stimulus.  If the deficit is third largest in the world, it should have been second largest, or first largest.

A slightly more respectable argument is that the current deficit is slightly smaller than in 2010 (when it was 10.1% of GDP.)  But that shouldn’t cause a recession.  Think about the Keynesian model you studied in school.   If you are three years into a recession, and you slightly reduce the deficit to still astronomical levels, is that supposed to cause another recession?  That’s not the model I studied.  Deficits were supposed to provide a temporary boost to get you out of a recession.  At worst, you’d expect a slowdown in growth.

To get a sense of just how expansionary UK fiscal policy really is, compare it to France (5.8% of GDP), Germany (1.0% of GDP), or Italy (4.0% of GDP).  Lots of people blame ECB policies for the recession, but Britain is not in the eurozone.  Outside the eurozone you have Denmark (3.9% of GDP), Sweden (zero), Switzerland (1% surplus).

Obviously there must be some problem in Britain that isn’t affecting some of its more prosperous northern European neighbors.

Most blogosphere writings on this topic do not demonstrate nearly enough sophistication, fact, or detail.  The rest of Scott’s post discusses ngdp for Britain.  I have a piece in the Sunday Times (of London) this weekend on these topics and TGS, though no link because the whole system is gated.  If you have a pdf, I would be appreciative if you could send it to me, for my private use only.

“The moral superiority of the Germans”

Ryan Avent tweeted:

Dear @tylercowen, Germany and the periphery ARE morally equivalent.

How might a response go?  Not an argument that German citizens are morally superior to other Europeans; that would be false and indeed repugnant.  I mean the kind of “system-wide” moral judgments that progressives offer up when they judge the institutions of Denmark to be superior to the institutions of Mexico, of course without ever judging the residing individuals per se.  Let’s play at intellectual Turing test — with no commitment to endorsing these views — and draw up a short list of, dare I so label them, (ostensible) German moral superiorities:

1. When it comes to default, there is no moral equivalence of debtor and creditor.  The debtor is the one breaking the agreement and breaking his word.

2. When it comes to debt, the periphery countries simply don’t want to pay up.  Their national wealth is many times their gdp and thus much much greater than their debts, even for Greece.  It’s amazing how many people won’t come out and utter or recognize this simple truth.  Italy for instance doesn’t have to make a huge fiscal adjustment.

3. It is a privilege for a poorer country to be in an economic union with Germany, France, the Netherlands, and other wealthy EU countries, just as you might feel privileged to co-author a piece with a great scholar.  If the poorer countries have to engage in some economic sacrifice to stay on good terms in such a union, so be it.  There is also such a thing as catch-up growth, and it is robust in the broader world today, at least if a country is willing, like the East Asian countries have been, or for that matter Turkey and Brazil these days.  The sacrifices being asked from the periphery countries are quite small in comparison.

4. We did a deal with East Germany, and the terms of that deal violated a lot of precepts of economic theory.  It even included an overvalued currency for the poorer region and a long period of adjustment.  Yet we insisted up front that all dealings be done on the terms of the more successful region and culture, with very little compromise.  This transition, for all of its short-term flaws, will go down in the history books as a great long-run success.  In part it succeeded because it was all done on the terms of the values of the successful nations of northwestern Europe.  (I am surprised that this angle is not discussed more in the press, given Merkel’s own story.)

5. Economic unions do not succeed by lowering all members to the standards of the economically less successful and less responsible members.

6. If it wasn’t for us, would Greece, Spain, and Italy (plus Ireland and Belgium) all currently have technocratic, reform-oriented governments as they do?

7. If you are trying to estimate the future economic fate of a country, shouldn’t you put aside a bit gdp drops and the like, and instead look at what do people in that country esteem and which values are transmitted by their system of education?  Do read the Estonia story at the previous link.

8. The German emphasis on rules, and the attachment to the idea of an abstract order, worthy of loyalty in its own right, above and beyond any immediate personal connection or loyalty, is exactly what makes them able to run such a successful economy and successful social welfare state.  When it says “Don’t Walk,” they don’t cross the street, even if no cars are coming.  An economic union should be set up to support those principles, not tear them down, and social democrats should value this most of all.

Even if you disagree with these perspectives, they shape real world behavior.  And might you still bet on a country which stuck to them?  Be honest now.  Let’s go back into intellectual Turing test mode:

9. One clear warning sign of trouble is when you see “trade imbalances” put at the center of the argument, as if “being very productive” and “not being productive enough” were somehow the same kind of disease.

10. There is a view something like “Germany has benefited from the eurozone, and therefore it is obliged to…”, as if those arguments were stronger than the nine principles outlined above.  By the way, might left-wing American intellectuals occasionally engage in a bit of transference and view Germany as a stand-in for the American top earners, the American financial system, and so on?  It isn’t.

11. Another doozy is to think the problem is due to some weird German obsession with Weimar-era inflation, as if there is a need to apologize for an elderly uncle who went bonkers.  I would instead start with the simpler point that Germany does not want to transfer resources to countries which do not wish to pay back their creditors, and which will not commit to good economic policy in the future.

Let’s move out of Turing mode and back to Tyler.  I believe that the Germans have approached this crisis with some bad economic theories, a lack of understanding of how government spending cuts can be self-defeating in the short run, and a good deal of more or less deliberate self-deception about its partners in the union, not to mention Germany’s own ability and willingness to act “fully European.”  I’m also not sure that Germany has a path out of this which leaves their own financial system intact.  You can rack up the moral and practical minus points there in considerable number.  That said, I see a lot of intellectuals dismissing the perspective outlined above, rather than figuring out why it makes so much sense to so many people, not just in Germany.  I think the financial elites in the periphery countries themselves actually see it quite clearly.

The result is significant misunderstandings about what can happen and will happen in the eurozone.  Germany cannot and will not drop its moral perspective, even if there is some theory — and yes theory is the right word here, because no one knows these broad guarantees will work — of how a broader and far more costly commitment can set things right.

In reading American discussions of the eurozone, I am frequently reminded of earlier discussions of the Soviet Union.  Most outsiders simply didn’t realize how little social capital was left in the system, though some of the Soviet insiders did.  Might the same be true of the eurozone?  I’m not calling these countries corrupt, rather there may be remarkably little cross-national cultural capital, and remarkably little deep public support for a costly EU bargain, so little that many German (and other) insiders know that no grand bargain can be sustained or even seriously attempted.

I believe we need to be exposed to this moral perspective, and this intellectual Turing test, as a bracing slap in the face, as a wake-up call, and I see our unwillingness to do anything with this perspective, other than summarily dismiss it as a kind of tragic juvenile moralizing, as a sign of our own decline, right here in the USofA.

Addendum: This piece is actually pretty good.

Measuring fiscal policy and evaluating its results

There are two measures of fiscal policy: the sum total of everything a government does and the "ramp-up-the-spending-quickly" component which gets labeled "stimulus" by politicians and the media.

In the blogosphere, economists argue mostly about the latter yet it is the former which is more important.  (On this question, among others, I credit Yglesias for being ahead of most of the economists.)

The most important, most effective, and least controversial forms of fiscal policy are the automatic stabilizers.  Let's say you have two countries, A and B.  In country A government spends 50 percent of gdp, mostly on a well-designed welfare state.  When the downturn comes, there is only enough extra borrowing to make up for the lost revenue, and there is no designed "stimulus" per se.  In country B, government spends 25 percent of gdp, mostly not on a well-designed welfare state.  When the downturn comes, country B does an extra three, four, or even five percent of gdp "ramp-up" borrowing and spending.

Which country has a better, more active, and more AD-stabilizing fiscal policy?  Well, it depends on the details and the numbers but I would encourage you to consider country A for this honor.

I don't agree with Krugman's recent interpretation that "Korea and China both engaged in much more aggressive stimulus than any Western nation – and it has worked out well."

In South Korea the welfare state is smaller and more of the government spending is corporate and military, compared to Western Europe, plus government spending is lower overall.  In China central government spending is 19.9 percent of gdp (beware those numbers, though) and the social welfare state institutions, and automatic stabilizers, are very weak, both in terms of quantity and quality. 

For purposes of contrast, in Germany government spending is about 44 percent of gdp and you'll find similar or higher number across Western Europe.

I think of Korea and China as having more "ramp-up" stimulus to make up for what is initially a weaker fiscal policy all things considered (you can add Russia to that list, which also has a high measured "ramp-up" stimulus).  Overall, despite the bigger "make-up." it is quite possible Korea and China are doing less with fiscal policy to stabilize aggregate demand than are the more substantive welfare states.  (Also see Sumner's comment on Krugman here.)

Or think about the fiscal variation within Europe.  "Ramp-up" spending measures of zero vs. 1.5 percent of gdp are portrayed as big differences, but as a chunk of the broader metric — the variation in AD-stabilizing properties of the public sector – it's not such a big deal, especially once you take "crowding out" into account.  Whichever quantity of ramp-up spending you prefer, it's not reason to preach doom and gloom for the welfare state countries with the smaller ramp-up plans.  (Have I mentioned that ramp-up spending is often of lower quality?)

The best fiscal policy — for cyclical and not just growth reasons — is a steady stream of permanent and high-quality government expenditures.  That's true no matter what you think the absolute size of this flow should be.

Sometimes you will see this point acknowledged, such as when U.S. federal transfers to the states are praised as the most effective part of ARRA (which they were).  But again, that's just a constant stream of spending.  And that's in the particulars, not just the aggregate, and it matters because you don't want the federal spending having to rehire the people the states laid off.  The praise is correct, but rarely are its complete implications thought through and presented.

Let's say we measure the efficacy of fiscal policy correctly.  The countries with the most stabilizing fiscal policies would be the big government welfare states with high quality governments.  That means Sweden, Denmark, Germany, Netherlands, and so on, the usual list.  In addition to their relatively high quality governments, they also have relatively strong real economies and healthy institutions.

When this whole episode is over, I would not be surprised to see that same list of countries as having had relatively good recoveries (of course we don't know yet).  A regression could positively correlate "good final outcomes from the crisis" with "total fiscal policy, properly measured."  Such a regression also would be picking up the quality of the institutions and of the real economy.

One way of reading those (potential) numbers would argue that strong real economies, strong governments, and healthy institutions all go together and that such combinations help drive healthy recoveries.  That's actually not so far from real business cycle theory, a favorite whipping boy but in its more sophisticated forms alive and well.  

In the blogosphere, most of what you hear about "fiscal policy" — pro or con — is misconceiving and mismeasuring the concept and then drawing incorrect conclusions.  There's no good reason to focus our economic attention, or perform the informal (or formal) econometrics, on the "ramp-up spending" component.  The ramp-up spending attracts a lot of symbolic interest in the more partisan political debates because it has Obama's or Merkel's or whosever name on it, but it is better to see through such labeling.

Keep your eyes on the ball(s): high quality governments, stabilizing long-run expenditures, well-designed welfare states, robust real economies, and healthy institutions.  In principle there's plenty of room for those concepts in Keynesian economics, but right now they're getting…crowded out…in the intellectual debate.

Is the VAT a money machine?

This is a very useful paper, full of facts and figures on VATs around the world.  Here is one bit:

As shown in the first column, all OECD members other than the U.S. have adopted the VAT over the last 30 years or so, beginning with France continuing through adoption by Australia in 2000. The (unweighted) average standard rate of VAT is about 17 percent, but with considerable variation. Within the EU, it varies between 15 percent (the minimum permissible under the union’s rules) in Luxembourg, and 25 percent (the maximum) in Denmark and Hungary. And several non–EU countries apply far lower standard rates than this, the most striking being the fi ve–percent rate in Japan. Most also apply a reduced rate to some commodities, with domestic zero–rating being quite widespread. The fourth column shows that revenue from the VAT is also typically substantial– averaging a little over seven percent of GDP–but again with considerable variation, from a high of over 12 percent of GDP in Iceland to a low of around 2.5 percent in Japan.

The authors — Michael Keen and Ben Lockwood — conclude that a VAT is a "weak" money machine in the sense that increases in a VAT are partially offset by declines in other tax rates.  They also note:

In a purely statistical sense, there is, thus, no strong evidence that the VAT has in itself caused the growth of government.

I saw this on Twitter somewhere, though now I forget whom to thank; sorry! [Update: It is probably "the wisdom of Garett Jones"]

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