Monday, February 6, 2006

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Would the Scandinavian model fit the United States?

Milton Friedman gave a wide-ranging interview with New Perspectives Quarterly editor Nathan Gardels last November. One of Friedman's answers intrigued me:

NPQ | Perhaps the Scandinavian countries are a model to look at. They are high-tax but also high-employment societies. And they have freed up their labor markets much more than in Italy, France or Germany.

Friedman | Though it is not as true now as it used to be with the influx of immigration, the Scandinavian countries have a very small, homogeneous population. That enables them to get away with a good deal they couldn’t otherwise get away with.

What works for Sweden wouldn’t work for France or Germany or Italy. In a small state, you can reach outside for many of your activities. In a homogeneous culture, they are willing to pay higher taxes in order to achieve commonly held goals. But “common goals” are much harder to come by in larger, more heterogeneous populations.

The great virtue of a free market is that it enables people who hate each other, or who are from vastly different religious or ethnic backgrounds, to cooperate economically. Government intervention can’t do that. Politics exacerbates and magnifies differences.

I suspect that Amy Chua would have some issues with Friedman' last assertion, but it is an interesting hypothesis. Could it be that the liberal market economy's primary advantage over the coordinated market economy is not it's better efficiency or productivity, but the fact that it works better over a wider variation of societies?

Check out the rest of the Friedman interview as well -- the dark matter controversy comes up.

posted by Dan on 02.06.06 at 10:59 AM


Adaptability is key both to efficiency and productivity. To expect government to provide adaptability in markets is to expect more than government can deliver.

posted by: Zathras on 02.06.06 at 10:59 AM [permalink]

Excuse my french, but it is bullshit that employment is high in for example Sweden. Our unemployment is about 20 % when including those in government unemployment programs and such.

posted by: Sebastian Weil on 02.06.06 at 10:59 AM [permalink]

Er, perhaps I was mistaken, but I didn't actually see the 'dark matter controversy' in the interview. I am curious to hear Friedman's (an acute thinker) views on off-topic matters such as this. Could you point out the passages?

posted by: Bruce Cleaver on 02.06.06 at 10:59 AM [permalink]

Bruce -- look at Friedman's answer to, "The US Treasury debt is held mainly by China, Japan and South Korea. Is the huge foreign balance of payments deficit a problem for the US and world economy?"

posted by: Dan Drezner on 02.06.06 at 10:59 AM [permalink]

From the NYT magazine this week, a story about the Swedish welfare state and immigration:

Critics of capitalism used to cite Joseph Schumpeter and Daniel Bell to show that the free market is ultimately undermined by its own successes: the wealth the work ethic creates makes people want to work less. The welfare state has its cultural contradictions, too. It rests on consensus, which is another way of saying a lack of cultural variety. The stronger the consensus, the more room a welfare state has to grow.
I've looked over a few econometric studies on the relationship between immigration, diversity, and the welfare state. What seems to matter is the rate of immigration and the type of diversity. Faster rates of immigration are associated with a slower growth of social spending. Racial diversity is associated with lower levels of spending. See this paper and this study as well.

posted by: Javier on 02.06.06 at 10:59 AM [permalink]

The part of the article I have a problem with is the last question that Friedman's ideas have triumphed over Marx & Keynes.

Marx yes, but Keynes no. What we actually have in main stream economics and public policy is a synthesis of Friedman & Keyenes. The entire statement or question is based on a very erroneous view of Keynes. Moreover, it ignores the point that the key policy prescription of Fredman that the central bank only has to target a stable growth of money supply has proven to be incorrect. Because monetary velocity -- something Friedman largly ignored --is inversely related to real interest rates sometimes x money supply growth generates 1.5x nominal gdp growth and sometimes it generates 0.5x nominal gdp growth. Otherwise, it was a very interesting article with some good ideas.

posted by: spencer on 02.06.06 at 10:59 AM [permalink]

In a global economy, isn't this a "market study" in and of itself?

i.e. If the US free market health care system is so great, US firms should be much more prosperous than those in say, Canada, where workers are "slaves" to the government madated system, the Canadian economy should collapse and the US system will be declared the victor.

The problem is that right now, that doesn't seem to be the case.

The free market crowd has been cheering for the collapse of the EU because they say it can't possibly work....the problem is it keeps plugging along...and may actually be on the upswing.

posted by: art hackett on 02.06.06 at 10:59 AM [permalink]

Javier is exactly right. Small, homogeneous, and quite frankly northern European societies can have a high rate of , let's call it state imposed altruism. Part of the reason is that the people within these countries are very closely related genetically -- to support the welfare system is to support ones genes. Unfortunately, immigration tends to destroy this system. Finland will be the last one standing in this regard.

BTW this model also applies to California. Back in the 1960's, when California's population growth was cause by internal migration of mostly 'Anglo' americans, there was a hugh amount of spending on infrastructure, community and state colleges were almost free, even the UCI was cheap. With the rise of immigration, the 'Anglo' middle class is basically saying (or not saying) screw it, I'll put my kids in private school, I'll live in a gate guarded community, etc. Given all this, I predict that Ahnolds big infrastructure push will get drastically trimmed.

posted by: Mitchell Young on 02.06.06 at 10:59 AM [permalink]

I would argue that there was another aspect to the relative success of those northern societies, Mitchell, and that is a lot of infomation about what works. To give an example, I originally come from rural caucasian working poor stock. I could give an informed opinion on the kind of things which work for people like myself.

I would be far less confident in designing a system to help immigrant Muslims from North Africa because I know much less about that subculture.

posted by: Don Stadler on 02.06.06 at 10:59 AM [permalink]

If the US free market health care system is so great, US firms should be much more prosperous than those in say, Canada, where workers are "slaves" to the government madated system, the Canadian economy should collapse and the US system will be declared the victor.

The US health care system is not so great. It has it's own HMO-driven mandates which are as rigid as anything a government can do. I think that US firms are more prosperous than Canadian ones as a general rule, but I'd argue that it is in spite of the US health case system, not because of it.

The argument that because the firms in one country may be more prosperous than those in another that all the firms in the latter will collapse is simply fallacious. I suggest you look up 'comparative advantage' in Wikipedia for an explanation....

posted by: Don Stadler on 02.06.06 at 10:59 AM [permalink]

@Dan -

Re the dark matter controversy: "I don’t think so. It may well be a statistical mirage."


posted by: Bruce Cleaver on 02.06.06 at 10:59 AM [permalink]

I'm in the Detroit area. The Canadian health care system is at least partly propped up by all those cars with Canadian license plates I see in Metro Detroit hospital parking lots, I think.

I'm not wild about the US health care situation, either, but at least there exists the possibility of certain kinds of care that are unavailable to at least some in all the single-payer systems.

posted by: JorgXMcKie on 02.06.06 at 10:59 AM [permalink]

"he Canadian health care system is at least partly propped up by all those cars with Canadian license plates I see in Metro Detroit hospital parking lots, I think."

Did you also check how many American cars were seen in Canada at that time purchasing drugs ? The notion that Canadians come in droves to the US for medical care is just a myth.

posted by: Jon on 02.06.06 at 10:59 AM [permalink]

If the US free market health care system is so great...

What free market health care system? Does US stand for something else besides United States?

posted by: Neema on 02.06.06 at 10:59 AM [permalink]

It seems to me that there's a more general rule here about central planning vs. decentralized markets, and it's related to Hayek's knowledge problem. Socialism, or other centralized government provision, can actually work fairly well over short time frames, small geographical areas, or homogeneous populations – because the knowledge problem, while still daunting, is combinatorically smaller than in larger systems.

A plan can be made and resources efficiently mobilized for a given set of technologies, but time and the march of innovation eventually obsoletes the plan and without the creative destruction of the market the overall performance quickly wanes. NASA may be a good example of this.

This difference between short time frames and long time frames might be mirrored in the difference between small, homogeneous populations and large, heterogeneous ones; and small land areas and large one.

posted by: richard on 02.06.06 at 10:59 AM [permalink]

I suspect that the Scandinavians' ability to achieve labor flexibility and still impose high taxes has more to do with their cultural attitudes toward women and family life than with immigration or relative lack thereof. A crucial part of the labor bargain in these societies-- I think this prevails in Holland as well-- is the extraordinary range of benefits given to working parents immediately after they have a child. For instance, IIRC not merely maternity but also paid paternity leave of up to a year, with no threat of losing one's job as a result. And of course, the Swedish health care system is far, far more efficient than ours, spending only ~7% on administration vs ~20% in the US system, so benefits to working families with newborns and small children are far more generous than under any US insurance plan.

If one were to quantify the economic value of all the support given to parents and children under the Scandinavian approach-- not least, the benefit of greater job security and universal availability of a de facto "mommy track" for women who'd like to have children before age 40 without ruining their career prospects-- I'm sure the total package would be a lot more attractive to most American parents, including professional Americans, than our own zero-loyalty zero-security quasi-free agent labor markets.

posted by: thibaud on 02.06.06 at 10:59 AM [permalink]


I cannot allow your characterization of Dr. Friedman's moneterist views to go unchallenged.

You are right to say that modern macroeconomics is a combination of Keynesian and Moneterist insights, but you downplay the actual insights Friedman brought to the table.

1) Friedman did not ignore Monetary Velocity, he argued that was predictable (whereas Keynes argued it was completely unstable). The evidence prior to 1980 strongly supported Friedman's contention, although after velocity became a bit more erratic.

2) Nevertheless, hardly any economist would argue that money supply is not the main determinant of inflation in the long term. Before Friedman's studies, most "vulgar" Keynesians downplayed the power of the money supply.

3) Also keep in mind that Keynes himself downplayed the ability of the central bank to stimulate the economy via money growth. Friedman's methodology can be used as a counter-point to Keynes. Keynes essentially downplayed the power of money by positing that money supply can only affect output secondarily via speculation (this is liquidiy preference essentially.) First consumers have to choose not to hoard money, then interest rates have to fall...since "savers" are not responsive to changes in the interest rate, monetary policy does not have a powerful effect on the economy (at least compared to the effects that fiscal policy has.)

4) Even given the fact that Friedman's contention was wrong that you can base monetary policy based off of a monetary aggregate, the experience of the US in the 1980's (and I would argue today and the GD) provide powerful evidence that Friedman was right: Money is very powerful.

Now, would Keynes have agreed with Friedman? Hard to say, but Keynes was a great economist and probably would have been moved by the data, as Friedman was. And you are right to point out that Friedman's views do not undo a more sophisticated understanding of Keynesianism. But you need only to read Ben Bernanke's speech in tribute to Friedman to see just how important he has been to monetary economics.

Additionally, here are some other contributions Friedman was a big player in

1) The natural rate of output and unemployment
2) Flexible exchange rates
3) The alternative minimum tax
4) The GD as monetary phenomenon'
5) The phillips curve as upward sloping aggregate supply curve (the inflation augmented phillips curve commonly called the Lucas supply curve actually has its basis in Friedman's thought).

That's just a few, there are others....


Matt Festa
LATAM analyst

posted by: Matt Festa on 02.06.06 at 10:59 AM [permalink]

I'm Swedish. Here are the common goals that I pay (high) taxes for:

- universal healthcare
- decent universal childcare
- universal education
- decent unemployement benefit
- decent retirement benefit

It is worth to point out that while all these programs are financed by taxes, the actual services are provided through a mix of private and state-owned entities.

My question to Friedman is: exactly what is it here that mandates a homogenous culture?

posted by: Dan K on 02.06.06 at 10:59 AM [permalink]

Dan K.

It is an empirical fact, not something spun from deductive dreaming, that welfare spending correlates with homogeneity. Moreover, I bet if you were to do some research, you would find that, to take a group at random, Somali's are gaming your system in many ways. They do not this as mere individuals, but as families and even clans.

Eventually, you fellow citizens will get fed up with paying dispropotionally more for foreigners. They will get sick of paying the health and schooling benefits for a Somali family with 7,8,11 kids while they have been responsible and had 1 or 2 themselves. Eventually, support for the system will decline, despite the best efforts of the state and the 'new class' -- those who live off of administering state benefits -- to maintain the systems stability.

Finland, with its rational immigration policy --practically none, in other words -- will be the last of the 'Nordic system' societies.

posted by: Mitchell Young on 02.06.06 at 10:59 AM [permalink]

To be clearer, welfare spend correlates negatively with diversity.

posted by: Mitchell Young on 02.06.06 at 10:59 AM [permalink]

Mitchell Young,
The Swedish model is not welfare in the American sense. It is rather an insurance scheme, although a mandatory one. Think of it as Social Security on steroids (which it is, actually).

Regarding your example, health care would probably be provided in any rich country. The Swedish model would probably spend some more money on education (but quite a lot would be invested in learning skills useful in Sweden, like learning Swedish - not much to game there). Since the Swedish model is an insurance system, the Somalis have to qualify for income-based compensation. It takes a year and you need to work for a minimum of 6 months. There is a dole, but it's like $25 a day. Not much to game here, either.

You know, we have had this system for 40-odd years. It was tweaked 15 years ago in a less generous direction. There is room for more tweaks, if we have to. But the only political party that actively wanted to gut it and replace it with a more liberal-market approach hit a wall at 20 percent in the polls. And even they have finally caved in.

Personally, I think that one reason for American aversion towards the Swedish model is that it fits uneasily with economic liberty. It's mandatory insurance, after all, and economic liberty is a core value in the American mindset - even when you suffer economically from it. So the main reason USA may not be compatible with the Scandinavian model is cultural homogeneity, rather than heterogeneity.

posted by: Dan K on 02.06.06 at 10:59 AM [permalink]

Dan K,

I bow to your superior knowledge of the Swedish system. And it is interesting to know that it is insurance based. I do remember for undergrad economics that Sweden is quite laissez faire in terms of governing its enterprises, it just has a high rate of taxation.

However, I think this is pretty much a universal. People will collectively finance efforts that help people like themselves. Immigrant groups do it, and their will come a point where the majority or 'dominant' population won't do it, if they see the majority of benefits going to a group that is obviosly not them. Whether its reactionary Denmark or enlightened Sweden, its gonna happen. This might be see in health care funding, in building of private communities, it can manifest itself all sorts of ways. But it will come.

Regarding your example, health care would probably be provided in any rich country.
Not in the US of A, buddy, and having been an expat in Germany, not there either, at least in my experience.

posted by: Mitchell Young on 02.06.06 at 10:59 AM [permalink]

Regarding "Dark matter": I am pretty convinced that this is reflected in the savings and investment choices of Americans. Most maximize their savings in 401K's and minimize bank savings.
We also invest heavily in "overseas equities" Most defined contribution plans nowadays invest their money in proportion to the way their employees invest their selfdirected 401k funds. this increases the money invested in foreign markets. You guys are the experts in this stuff but I think this is why American savings rates are supposed to be so bad but their balance sheets keep growing. We are to busy socking 10 to 15% away in 401ks and unwilling to put our non tax advantaged savings in a bank when we have seen how well our 401k's have done we gotta have mutual funds.
Regarding the US health care system. I don't think you can call it a free market system when the major players are governments. these I think are the current numbers: health care industry size $1,500 billion. Government payments for services 550 billion. Cost of services provided to government paid patients 850 billion. Difference picked up by private insurers forcing rates up and more people out of the insurance system every year. By the way, for non US readers these are middle class and working people. the poor are paid for by medicaid. Other than this the major difference between US and European health systems is elective treatments. In the US you can have them immediately whereas in Europe and Canada you have to wait 2 - 6 years assuming you are under the age limit where you are allowed to get it. But we pay almost exactly twice the price to avoid rationing health care.

posted by: John Surratt on 02.06.06 at 10:59 AM [permalink]

Do the Scandinavian countries REALLY have high taxation? I live in Norway. I just got my tax return (which is pre filled in, I just have to check that it's correct. Last year I earned about US $60000 a year in my job teaching at a university (this is three years after my PhD) and I paid about $17500 in tax out of that - that's 29%. I got to deduct interest paid on my mortgage and student loans from my taxable income. I didn't get deductions for childcare because I have split custody of my child and so we get the single parent deductions on alternate years - this wasn't my year. When I earned less, I paid a lot less in tax, as well.

What I get for this? Well, I get $1000 a month cash family benefit for each child, I get free tuition for me and my children at school and universities, free healthcare (though admittedly there are sometimes waiting lists), social security, parental leave for a year if I have another child, 10 days a year to care for my child if she's ill, however much sick leave I need (I can sign for 8 days at a time myself, more than that I need a doctor to vouch for me), daycare and preschool is subsidised so nobody's supposed to pay more than about $300 a month, etc.

I don't see that it makes any difference at all whether I call this insurance or welfare. After all, I would get all the same benefits if I had never had a job (except paid parental leave, I'd have to make do with a single-payment of about $5000).

Is 29% tax really any higher than what people in most other countries pay? Especially if you figure into that that I don't have to save up for my childrens' college tuition or pay health insurance?

We also have a 25% sales tax (0% on books, 12.5% on food). New York has 19%, don't they? Not that big a difference. Perhaps taxes paid by employers are higher than other places? Employers have to pay 28% tax on the salary of people hired on hourly contracts and 41%, I think, on the salary of people hired on longer-term contracts. I suppose that's similar to US employers paying for their employees health insurance and other "benefits" - and THAT, I suppose, *is* an example of Norway having mandatory insurance.

And thank goodness for that. I love the Scandinavian system. Sure, it has flaws, but its benefits outweigh them many times over.

posted by: Jill Walker on 02.06.06 at 10:59 AM [permalink]

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