Wednesday, April 25, 2012

Baselines Matter for Comparisons

I read an opinion piece by Samuelson in today's Washington Post that I found interesting but a bit strange. In it, he tried to show how both the left and the right could learn from Sweden's approach to insure higher growth. I agree that making the comparison is a beneficial exercise for thinking about US policy, however I find some of the specifics baffling.

In particular, he mentions benefit reductions, weakening union power, and market deregulation as something the right would embrace about Sweden's economic reforms and supposedly something we could learn as well. He states that about a third of deficit reduction came from higher taxes, I'd guess the implication is the rest came from cut spending (I'm feeling too lazy tonight to look up the precise figures, it is plausible that economic growth, probably export led, may have also been credited aside from spending cuts and taxes).

I have some doubts about the comparison as it is presented. Sweden was spending an enormous amount of its GDP on social transfers, I have no doubt that cutting some of these transfers was socially efficient in Sweden. Also, Swedish unions were highly powerful, weakening them may have been beneficial.

The US, however, has one of the smallest states in the developed world as measured by either spending or taxation. We also have very low social transfers and weak unions. Because of a different baseline, it doesn't follow that copying Sweden's reforms would spur our economy the same way, we have a very different starting point.

It probably is true that our composition of social spending needs to change drastically, I advocate for this rather frequently, but it doesn't follow from the success of Sweden's reforms that transfers have to be reduced here, where they are already lower (though selling a presentation in Washington probably requires throwing a bone out to say it does). I find it impossible to figure out how we could improve the work incentive aspects of our social spending in this country without substantially raising transfers, we simply spend too little to not run into increased costs as we broaden the base of people receiving benefits, which is a necessary step if we intend to increase work effort while lowering poverty.

I don't disagree that the US can learn a lot from Sweden or that Sweden probably doesn't have a few things to learn from the US (though the seem to be paying more attention and have learned rather a lot of what we have to teach already). However, learning in either direction takes acknowledging the differences in starting points rather more explicitly, Sweden remains has one of the top five biggest states in the developed world while the US is among the five smallest (by taxation and excluding the very smallest developed countries that aren't really comparable). Of the conservative goals mentioned by Samuelson, the only ones that I see as being applicable once different starting points are acknowledged is balanced budgets becoming a popular goal and base broadening. As for the rest, I think the Swedish model shows that we're already on the other side of efficient regarding them rather than them being something that needs to be decreased. All the comparative evidence tends to lead me to thinking that many government's in Europe are too large and powerful and need to be reduced while many US problems originate in too small and weak of a state. Starting points matter and we're in almost a precisely opposite place that Sweden was during its economic crisis in regards to unions, transfers, and income tax levels (specific policies may be more similar, I have broad categories in mind).

No comments:

Post a Comment