Jeffrey Sachs praises the Nordic social welfare states:
American conservatives argue that a large public sector is subject to inefficiency and mismanagement, corruption, and bureaucratic abuse, while the taxation needed to support it blunts economic efficiency. But each of these propositions is refuted by the Nordic experience.
[...]
Several factors appear to explain the Nordic countries’ economic success. Taxation is broad-based and relatively non-distorting, while open international trade, market forces, and private ownership of industry are relied on to maintain incentives. The Nordic countries are not “socialist” economies, based on state ownership and planning, but “social welfare” economies, based on private ownership and markets, with public provision of social protection. Importantly, they invest heavily in higher education and in science and technology, so they remain at the cutting edge of high-technology industries.
19 comments:
Hi Ami, long time.
Kind of a useless article though. The alarms ringing through my head as I read it were -- surprisingly -- raised by Sachs himself in the last paragraph:
"But how replicable are the Nordic successes? These countries have small populations, easy access to international trade, natural resources, and peaceful neighbors. Most notably, they are ethnically homogeneous, so that social divisions are more amenable to compromise. However, this means that the challenge of maintaining a strong social welfare state in ethnically and racially diverse societies such as the US is not economic, but one of promoting respect and inclusiveness."
I don't think that one can overstate the significance of either population size or homogeniety in the determination of the "optimal" level of government in the economy. I think it's perfectly fair to argue that in a case of say, Denmark, the simple requirements of scale lend a strong case for a universal government-sponsored health insurance or a strong role of government in technology research and education. Homogeniety further supports a stronger government role, as it is much more likely that a "one size fits all" government policy decided in such a way as to please the vast majority of the populace. Norway and Sweden have the additional benefits of high per capita natural resources. (which of course would skew the metrics that Sachs uses to judge the outcome success of these countries). The Netherlands has the advantage of being one of the best geographical locations for trade.
(I can also imagine where smaller size and cultural homogeniety would have some influence on the corruption of government)
Given these differences, it's hard to argue that the Nordic experience justifies a similar level of government in the US. I got a nice chuckle out of his implication that the 2 year life expectancy gap between the US and the Nordic countries is somehow largely due to the health systems -- has he no idea that Nordic peoples have far, far healthier lifestyles in terms of diet and exercise than Americans? In that respect, it's stunning the life expectancy gap is ONLY two years!
And it's hard to see how his call for "promoting respect and inclusiveness" -- though certainly a worthwhile goal in it's own right -- can create natural resources, overcome the vast scale differences between a 5-10m population and a 300m one, or more than marginally impact the homogeniety of a 300m population.
While I disagree with Sachs on the optimum level of taxation in the US, I DO agree with his point that the Nordic and other European countries collect their taxes in a less distortive manner (tax levels on labor income, capital, and consumption are much closer together in European countries than in the US, whose tax code falls much more heavily on labor and capital than on consumption -- making it unsurprising that America's economic activity is overly skewed towards consumption). Ironically, it is the Republicans in the US that favor a shift towards more taxation of consumption.
As I continue to ramble, an interesting counter-case to the Nordic countries is that of Ireland. Here is a country that is decidedly not blessed with an abundance of natural resources or an advantaged geographical position, yet it managed to move from one of the lowest European per capita GDP's to one of the highest in two short decades while feverishly CUTTING taxe rates (particularly corporate taxes).
That being said, I would be more amenable to Sachs's overall point if he explicitly encouraged it for a context more like the examples he uses to support it. I am speaking of the American states themselves as opposed to the US federal government. (Each state tending to have a smaller, more homogenous population than the country as a whole; and given that state-level taxes tend to be spread across income, capital, AND consumption). Though neither party on Capitol Hill currently seems to be willing to cede substantial power or budgetary authority to the states.
Sorry to ramble...hope you are doing well. I don't spend much time on these websites anymore, but I will try to drop in from time to time.
--Georgia voter
Hi GAVoter!
Welcome! I haven't forgotten the bet we made last April. I'm down 10 Euros so far - lets see how far it goes.
A few points:
1. The homogeneity argument doesn't convince me. How do health care and education needs change when going from 5M to 300M? And how do they depend on ethnic background? I could see the argument if we were discussing censorship laws or other things that have a strong cultural aspect, but health and education are pretty basic and common to everybody.
2. Note that the U.S. suffers a two year gap in life expectancy despite spending almost twice as much on health care. (Here's an Interesting graph.)
3. The Irish model does suffer from poor economies of scale. Ireland acts as a tax-shelter for European and American companies. A larger Economy (like Germany or the U.S.) couldn't achieve the same effect because there are no sufficiently large economies for them to feed off of.
Ami,
for point 2.)
Not to put words in GV's mouth, but it's not a questions of needs, but of providing. Few people I know would say any society's educational needs are different than anothers ( perhaps Amish are an exception because they WANT to stay in the 17th c.). The debate centers around the means of healthcare (or education) provision. An arguement has been made (I don't have the sources to back it, and don't know to what extent I believe it)... an arguement has been made that smaller countries for a variety of reasons can better support national health care systems. It has been theorized that health care is anti-economies of scale. That is, as the system gets bigger, it gets less efficient, not more. reasons for this include homogeneity of the health (or education) problems and dilemas, as well as social pressures that stem from a small tight-knit community.
Other issues that are rarely mentioned are the incredible costs of R&D that other countries don't come close to matching, and the cost of the US military.
Stryker: I'm very skeptical about the diseconomies of scale argument, but in any case there's no reason multiple organizations couldn't provide healthcare, thus eliminating the problem.
I was curious about the R&D argument, since I've heard it before. I couldn't find detailed data, but I think I've found enough to debunk it:
http://www.nsf.gov/statistics/seind06/c4/c4s6.htm
Note that TOTAL R&D expenditure in the U.S. (in all industries) is less than 3% of GDP, and pharmaceuticals make up about 10% of that spending, coming to about 0.3% of GDP. Of course there will be other health care related R&D, but I can't imagine that it would get anywhere close to 1%, and of course other countries do spend on R&D as well. There's just no way a significant portion of U.S. health care spending could be going into unusually high R&D costs.
I didn't get the point about military spending.
Ami,
Breaking up the healthcare so it is done by the states is something to which I am not totally opposed. (hear the gasp from my co-conspirators?)
As for data, I question the NSF, as they get money in part by "finding" that the US needs more research. However, one of the figures on the right breaks down the research by sector.
Ami,
How many new drugs or medical devices are developed in Finland? How much of Finlands GDP is spent on medical research? I don't know the answers, it would just be nice to compare.
I think the link to military spending is that Finland doesn't spend a significant amount on the military and therefore has more to spend on social programs. It's another side benefit of the US providing the bulk of the defense for much of the free world. It's a variation of free riding and another market failure. 8*)
Brian: Finland's medical research is pretty miniscule. Small countries tend to specialize a lot more than big ones, and Finland is heavy into communications (largely due to Nokia). Overall Finland's R&D expediture is quite large - about 3.5% of GDP, with about half of that going into communications and electronics (probably most of that is Nokia and its suppliers).
Some of this is captured in this graph:
http://www.nsf.gov/statistics/seind06/c4/fig04-37.htm
In fact this is highlights another reason why the R&D case is a little strange. If the U.S. subsidizes the rest of the world with medical R&D, does that mean Finland subsidizes the U.S. with communications R&D? Surely this is just normal specialization.
U.S. health spending is three times military spending, so you could fund your entire military by simply making your health system as efficient as other Western countries.
Of course, most of us in the rest of the world don't consider U.S. military expenditure as a good thing. I'd be quite happy if the U.S. cut it's military by 75% and spent the money in more productive ways.
... Ami.
Hi Ami,
I get your point about Finland having specialized skills. It's something that globalization and free markets allow.
You make a valid point about the US medical spending being inefficient. A large part of that is excessive "protecive medicine". Mostly the excessive testing that is done to protect doctors from malpractice claims.
As for reduced US military spending... you'd probably be singing a different tune if Canada and Finland had to provide 100% of their own defense. These countries can take more pacifist stands (and spend less on their own military) because the US military is there to defend them in the event of an attack. Again you are receiving the benefit of our military without footing the cost. Most of us don't really mind your free riding, but it would be nice if you'd at least acknowledge the benefits you receive.
Ami,
Those graphs have to be read carefully. The first question I had was "Percent of what?". Was this the percent of total R&D spent in the field worldwide? I found it difficult to believe that Finland (even with Nokia) spent 50% of the worldwide research $$ in communications. Was it percent of total research $$$ spent in each country? This is closer. The US spends more per capita on R&D than any other country (almost 8 times the world average):
http://www.nsf.gov/statistics/seind06/c4/fig04-33.htm
But it's the percent of the $$$ spent by the industrial sector in each country. This is a smaller chunk of the research pie, but in the US, corporate investment in research dwarfs all other sources of research money.
So even though Finland spends most of it's research money on communications, it's still a minor amount compared to the US money spent. I'd guess the US is still subsidizing Finland even in their area of specialization...
Brian: Who do you think you're protecting Canada and Finland from? Canada and the U.S. both participate in Norad, but aside from that I think both countries do pay 100% of their own defence.
Sorry I should have been more clear about the graphs. Yes, the U.S. spends more on R&D in total than anybody else. But Finland spends more on communications R&D in proportion to what we consume, so in that sense we're subsidizing the world.
But really I was just trying to demonstrate the absurdity of this "subsidization" idea. Finland makes money from it's R&D industry, just as the U.S. does. It's not charity, it's a business.
... Ami.
Ami,
First, I want to thank you for hosting this conversation. I miss having a "home" like Daly Thoughts.
Second, I hope that there is continual, mutual learning here, and no one gets too defensive (I say that as I am prode to that habit.)
Now, about the points made previously.
Regarding the military:
My point was that the US spends a large amount on the military, which NO other country replicates (save N Korea). I made no value judgement on the US' military spending, as it is out of the scope of the arguement. Just wanted to make a note of where 1/3 to1/2 of the gov'ts money goes.
As far as US healthcare spending, What my main point was is this: the US healthcare dollars go to different places than foreign healthcare dollars (well, not dollars, but Euros, Yen, yuan, etc.) In a brief search, I saw sites saying that the major drug companies spend 20% of their income on R&D. http://www.mult-sclerosis.org/news/Jul2002/DrugCompanyProfitsvsResearch.html
Other costs unique to the US include lawsuits, the FDA oversight, multiple cultures and languages, more complex insurance law, and limited federal healthcare programs.
more I'd like to say, but don't have the time to say it right.
-Stryker
oh, as for Finland being under US mil umbrella, probably not. (see winter war) Canada--eh. Europe in general was, if it hasn't been in the last 15 years.
but here's an interesting question: How would the military/political situation in Europe change if the US moved all military to US soil, and cut spending to European levels?
Ami,
I guess I'm not making my defense spending point clear. I'm not saying that Canada or Finland (or many other countries) are receiving direct military aid. Of course Canada and Finland are paying for 100% of the military they have. My point is that the size of the military needed by both countries is much smaller because the US has a large military. No one would ever consider attacking Canada or Finland unless they were also prepared to take on the US (and only China is realistically capable of doing so right now).
As to why anyone would want to attack Canada or Finland... well Canada has vast resources including oil, gas, metals, lumber, etc. That is reason enough for some countries to covet her. Finland also has resources, but would probably only be invaded for strategic or political reasons (and I can't imagine any since the fall of the Soviet Union). But you don't have to worry about it unless something happens to the US.
I understand about industrial research being supported by the sales it creates. Again, that's capitalism at it's best. It's not really subsidy except in the case of medicines where countries like Canada don't allow research and development costs to be priced in. In the case of medicines, the US is subsidising Canada and any other country with similar price controls. We pay more so they can pay less.
Stryker: The pleasure is mine. It'd good to have a community of people who are willing to discuss things. Unfortunately I can't provide the sort of political "theme" that Gerry did - I'm just not that much of a politics junky - but so far so good.
Regarding military spending: yes it's a lot, but actually not that much compared to your GDP.
Drug company R&D isn't supported by U.S. consumers alone. That's the point I was trying to make earlier. These are global profit-making enterprises that have chosen to do a lot of their research in the U.S. There customers are all over the world.
I think the one area where you might have a good case is your legal system, which seems to be biased towards outrageous damage claims.
I attribute this to a sort of libertarian bent in the U.S. You're afraid of government regulations, so civil lawsuits are needed as an alternative deterrent. The hidden cost of libertarianism.
... Ami.
Stryker: I don't think the situation in Europe would change at all, at least now that the Soviets are gone. Russia is more interested in trade than invasions (another payoff of globalization), and I can't think of anybody else we should worry about.
Brian: The countries with the military power to attack Canada or Finland are our largest trading partners. It's cheaper for them to buy our resources than to invade us. This is true througout the EU as well. Creating this reality was the driving force behind the original creation of the European Coal and Steel Community that eventually became the EU. It's no coincidence that it was France and Germany founded the community shortly after WWII. They wanted to put an end to the wars between the two countries.
Countries build up their own militaries as a reaction to the threat they percieve. If Canada were next to North Korea then we'd probably have a decent military. As it is, we just don't need it.
Do you have support for the statement that Canada doesn't allow drug companies to cover their reseach expenses? I've never heard that claim before. I'm also not sure it's a significant factor in the difference in health care costs.
... Ami.
Hi Ami,
It took a while to find it. It's not in the Health Acts where I expected to find it. It's in the Patent Act.
"(5) The Federal Court may not make an order under subsection (3) if, under the protection of a confidentiality order made by the Court, the holder of the authorization submits to a Court-supervised audit and that audit establishes that the average price of the product manufactured under the authorization does not exceed an amount equal to the direct supply cost of the product plus 15 per cent of that direct supply cost."
In short, if the Patent Drug Prices Review Board believes the price is excessive based on comparison with other drugs in the class, it can recommend the patent be revoked. The patent judge gets the final decision. The company's defense is accepted if the drug price is less than the manufactuing costs plus 15%. The definition of the manufacturing costs in the act does not include R&D and drug approval costs (which are huge portions of the costs of drugs in the US).
http://laws.justice.gc.ca/en/p-4/257618.html
Ami,
You hit on an interesting point with the "not a significant part..." comment. There are three main areas of cost in Healthcare: administration, service, and drug. I have no idea how they break down as far as percent goes.
I am fairly sure that almost all of the costs of drug R&D are covered by the earnings in the US. While the "service R&D" would be a harder number to pin down, I wouldn't be suprised if that was the same way. Shall we move to the newer thread?
Yeah, I'll respond to both posts in the new thread.
... Ami.
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