Which social democracy is better?

Don Arthur and Jason Soon have fired up a discussion about the difference between the American system (free-markets and low tax) and the Nordic system (high tax and a comfortable safety net). Proponents of bigger government often point to the Nordic countries as evidence that big government works well, which is exactly what Jeffrey Sachs did recently. This seems to run counter to libertarian intuition and evidence from the rest of the world, so it is worth exploring in more detail.

First, it is important to note that in the greater scheme of political philosophy there are not huge differences between the two systems. Both groups accept private property and markets as the basis for their economic institutions, both have low corruption and democracy and both have an interventionist government far from a libertarian ideal. Both are social democracy — but the Nords are social-democracy-plus while the Anglos are still social-democracy-light.

One difference is the tax/GDP ratio. The Nordic countries (Finland, Denmark, Iceland, Sweden, Norway) have a tax/GDP ratio of between 42 and 51% while the Anglo countries (US, UK, Australia, Ireland, NZ , Canada) have a ratio between 27 and 37%. I would consider anything between 25-50% to be social democracy.

The first point to note is that, despite the consistantly repeated comments of Sachs & friends, the Anglo countries are generally richer than the Nordic countries. There are five countries that have GDP/capital (adjusted for cost of living) above US$40,000 — Luxemburg, America, Norway, Canada, Ireland. While the Nords do have one country in the top 5, Noway is a stand-out because of their rich oil reserves.

The other Nordic countries fall into the US$30,000 – US$40,000 category and so are certainly rich. But so too do Australia and the UK, as well as several other social-democracy-light countries such as Japan, Germany and Switzerland.

Sachs goes on to say that the Nords have a better budget position and more R&D spending. These are misleading indicators. The budget position is not relevant to decisions about the tax level, and the correct amount of R&D (and who should be doing it) is an open question. And in both cases there is as much difference within groups as between them, so neither variable is helpful in comparing differences between the groups.

Sachs goes on to say that the Anglo countries have double the poverty rate of the Nordic countries. This also is misleading. In developed countries, poverty measures do not measure the objective material wellbeing of people, but rather their relative incomes. To understand why this difference is important — if you double all incomes in a country then relative poverty will actually increase. The relative poverty measure only shows that the Nordic countries are more equal, not that there is less absolute poverty.

But despite these issues, it must be accepted that Nordic countries are relatively rich and this continues to be an anomoly. One reason might be their relatively low corporate tax with the Nordic corporate tax rate (avge = 26.8%) lower than all Anglo countries (avge w/o Ireland = 32.8%) except Ireland (12.5%). I think another part of the answer is immigration.

Anglo countries have traditionally had liberal policies towards immigration. The US famously asked the world to send her their tired, poor and weary and still accept a large number of immigrants. According to 2006 estimates all the Anglo countries continue to accept a relatively high number of migrants, with an average of 3.9 migrants per 1000 population. In contrast, the Nords remain relatively immigrant-free with no significant minority group (except for other Nords) and an average of only 1.7 migrants per 1000 population.

Migrants are likely to be less wealthy than the previous nationals. By including the migrant populations in the Anglo averages this will decrease the average wealth inside Anglo countries and also increase the total inequality. If we adjusted for this difference then Anglo countries would look relatively richer and more equal.

P.S. I should add that while immigration may hurt the average statistics in the Anglosphere, I think it has been a good thing both for the Anglo countries and for the immigrants.

17 thoughts on “Which social democracy is better?

  1. To a large extent it is the capital to labour ratio that determines the material wellbeing of a nations people. If immigrants arrive without capital they will lower the ratio and in the process lower the aggregate well being, at least in the interum. Of course there will be winners and losers in the process. Obviously the immigrants will be winners in general otherwise they would stop coming.

    When China and the Soviet satellite states re-joined the world market it created a big shift in the capital to labour ratio of the world. One would expect that this was good for those that get most of their income from capital.

    India would be an interesting example to look at. It has relatively open borders and has immigrants coming from everywhere.

    The nordic countries are now struggling with the question of immigration. They are quick to remind people about their high levels of tolerance, foreign aid, and international good works. However they live in a racial cocoon. Both my parents are from nordic countries and whilst I love those countries I get annoyed about the certitude of the citizens there over things they have never experienced. Racial diversity and high immigration levels are two such things. Norway, being outside the European Union, can continue to live in a racial cocoon.

  2. The EU hasn’t really opened up the other Nords to lower-wealth migrants yet either as EU countries aren’t yet required to accept migrants from the 10 new entrants.

    Not coincidently, the only countries that have opened up to the new entrants straight away were the UK and Ireland. Reportedly (and I haven’t checked this) over 1 million Poles have already moved to the British Isles and apparently they are being integrated without major problem.

  3. as EU countries aren’t yet required to accept migrants from the 10 new entrants

    Any idea when that is due to change? Any links or references.

  4. I think what all these arguments show is that there are problably much more important factors than overall tax take in determining how successful a country will be economically.

    I also think, to some extent, the type of governments in the Nordic countries are only successful since the people themselves are basically lingustically and cultural constrained to live in the place they are born. Thus all the smart and motivated people have to stay, even if they think the tax rate is too high. Alternatively, if the Australian government tax gets to high, it is easy for people to leave, since they speak English and most Anglophone countries are culturally similar. Once a large enough proportion of the young and motivated population think like this and decide to leave (who are one of the groups that shoulders an unfair part of the tax burden), I don’t really see what options are left to the government.

  5. You couldn’t be more wrong on language conrad. Scandanavians are freaky in how good their English is. They can all speak fluent English and many speak it better than native-English-speakers. On several occasions I have asked Nords whether they are from Canada or New Zealand. For non-native speakers, only the Dutch come close to matching the Nords in English ability.

    And while the Nordic langauges are a bit different from each other, most Nords can speak all other Nordic languages (except Finnish, which isn’t linguistically related to the other Nordic languages, but is related only to Estonian and Hungarian). Many also can speak German. So they have plenty of options about where to live.

  6. They can all speak fluent English and many speak it better than native-English-speakers.

    You have never met my dad have you? Seriously though what John says is true for anybody from those regions that was schooled after WWII. My dad left school at age 12 and when he got to Australia (in his early 20s) he spoke no english. His spoken English is fine these days but he still has some strange writing habits. eg KAT instead of CAT.

  7. I’m surprised. In the parts of Europe I work or visit with some regularity (France & Spain), excluding scientists, people speak almost no English, which means if they are a doctor or some other otherwise mobile professional, it basically traps them there. Given the number of science people that leave (being the only ones that seem to be able to speak English), I would have thought many other professionals would also like to leave apart from this problem.

    A question I wouldn’t mind answered then is why the average Nordic Profession, who could otherwise earn much more in other countries after tax, doesn’t pick up and leave (as, say, the average Kiwi with any brains does, not they live in a socialist country) ) ? Is it that they really like living in socialist countries, or are there are other cultural factors involved?

  8. I suspect that with the French they speak far more English than they will let on.

    According to some sources the Swedes are voting with their feet.

    http://www.brusselsjournal.com/node/1234

    Journalist and writer Kurt Lundgren notes on his blog that Sweden during the past five years has witnessed the largest mass-emigration in the country’s history since the peak of the immigration to the USA more than a century ago. The people leaving are primarily highly educated, native middle class Swedes. Common reasons cited for leaving are rampant crime and a sense of hopelessness and resignation over poor political leadership. At the same time, Sweden receives a large amount of immigrants from Third World and Islamic nations every year. Is this population replacement profitable for Sweden as a nation?

  9. It’s well known that French people speak English but you have to shout at them rudely for them to understand.

  10. Actually, I’ve found the French in Paris to be some of the nicest and most helpful people on my travels. They have often gone out of their way to help me. Their English is not generally great, but often passable.

    The country-side is a different matter. And Spain is probably the worst country in Europe for English. Italy isn’t very good either. Generally speaking, the north is fluent, the centre is passable and the south is crap at English.

    I met a Spainard in German who said: If somebody speaks three languages they’re multilingual. If somebody speaks two languages they’re bilingual. If somebody speaks one language, they’re Spanish. 🙂

  11. Conrad I think it’s just a case of Nordic countries actually being a fairly nice place to live. They have low crime rates and despite the high tax and high prices a very good standard of living.

    You very rarely here a Swede or Norweigan complaining about how shit Sweden or Norway is, unlike the English who come to Australia and universally say England sucks.

    The same goes for Canada. It is a little socialist too but Canadians pretty much all think Canada is great.

  12. Acording to the OECD stats linked to in the post, Canada has a lower tax/GDP ratio and higher standard of living than the UK.

    I agree Canada looks socialist compared to what we would like, but they definitely fall into the social-democracy-light category and not the Nordic social-democracy-plus version.

    But I agree that Nords tend to be generally satisfied with the state of their country. At Marginal Revolution Tyler Cowen suggested that they have other elements of freedom that are very attractive, as well as low crime rates and the brilliant idea of sauna parties.

  13. young french speak passable english although are totally dominated by anyone from germanic countries such as the netherlands, germany, austria, sweden, norway, denmark…

    in my short stay, parisians overturned all the cliche’s about french hospitality and we’re completely friendly, spoke english well, were very polite and happy to see a young australian lad lost in their city…(confirming john’s experience)

    conrad, europe is so variable that its hard to project from certain countries to others. when i said to my swedish friend that europe was backward and had no internet access i was projecting from my german experience (crappy internet) to the whole of europe…then he told me that sweden has one of the highest broadband penetration rates in the world – i realised i was just basing it on the german side of things and that the policies between countries are very different over there.

  14. The problem with Tax-Revenue/GDP ratios is that they can give a false reading of the tax situation. Some taxes essentially ring fence people out of production and create very little revenue or GDP. Lower the tax rate and both revenue and GDP may rise in equal measure. Unfortunately there is no simple aggregate measure of the tax situation within a nation.

  15. For example if tomorrow the government adjusted the income tax scales so that above an income of $100k the tax rate was 100% then I would expect tax revenue to fall by as much as GDP. Esentially I would expect to lose all the revenue previously received from income above 100k however in the scheme of things this would not be a lot. Most of the lost revenue would result from the general decline in GDP brought on by the capital and management vaccum created.

    At the end of the day I would expect the tax revenue to GDP ratio to change little leaving the false impression that tax rates were much the same as before.

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