"Hayek was wrong" says Jeffrey Sachs. For decades classical liberals have relied on Friedrich Hayek’s 1944 book The Road to Serfdom to warn that tax increases lead to tyranny. But in a recent article for the Scientific American, Sachs argues that high taxing Nordic countries outperform low taxing Anglo-Saxon ones on most measures of economic performance.
Peter Boettke — a professor of economics at George Mason University — admits that "Sachs raises an important empirical puzzle that we must explain". And perhaps the most interesting of Boettke’s suggestions is that Hayek never said that social democracy was the road to serfdom. Instead he argued that socialism was the the road to serfdom. To argue against social democracy liberals should turn to economists like James Buchanan (pdf).
Classical liberals tend to be less worried about rule-governed transfers than they are about other attempts to correct market ‘unfairness.’ For example, Cato’s Will Wilkinson suggests that, "The cause of classical liberalism as a really existing possibility for political reform has been harmed by bundling free markets with a ban on transfers" because it made makes enemies of those who supported transfers on the grounds of justice.
Is there room for a compromise here? Probably not in the near future. The trouble is, most social democrats equate justice with things like labour market regulation and the size of the public service. And most classical liberals just can’t come to terms with the idea of government taking their money and handing it out to poor people. Different views about how the world works mean that debates about taxes, transfers and poverty can get heated.
In the web version of his essay ‘The Social Welfare State, beyond Ideology‘ Sachs says that:
…the low-tax, high-income countries are mostly English-speaking ones that share a direct historical lineage with 19th-century Britain and its theories of economic laissez-faire. These countries include Australia, Canada, Ireland, New Zealand, the U.K. and the U.S. The high-tax, high-income states are the Nordic social democracies, notably Denmark, Finland, Norway and Sweden, which have been governed by left-of-center social democratic parties for much or all of the post–World War II era. They combine a healthy respect for market forces with a strong commitment to antipoverty programs. Budgetary outlays for social purposes average around 27 percent of gross domestic product (GDP) in the Nordic countries and just 17 percent of GDP in the English-speaking countries.
On average, the Nordic countries outperform the Anglo-Saxon ones on most measures of economic performance. Poverty rates are much lower there, and national income per working-age population is on average higher. Unemployment rates are roughly the same in both groups, just slightly higher in the Nordic countries. The budget situation is stronger in the Nordic group, with larger surpluses as a share of GDP.
Commenters at Boettke’s blog offer a variety of explanations for Sachs’ empirical puzzle. One suggested that it was unfair to compare Scandinavian countries to the United States because the US had such a high proportion of Hispanic immigrants and a persistent underclass.
At Marginal Revolution, another classically liberal GMU professor, Tyler Cowen, writes "Sweden (or should I say Stockholm?) remains one of the best places in the history of the world to date, and we are fooling ourselves if we don’t recognize that."
Update: Oz at Decomposing Trees has some thoughts on social democracy. He links to this post and to Mark Bahnisch’s ‘Is social democracy the end of history?‘. Oz also mentions Clive Hamilton’s Quarterly Essay ‘What’s Left?: The Death of Social Democracy.”
Don — you are either grossly ignorant of Hayek’s work, or grossly dishonest. Hayek allowed for the social welfare state, and said nothing about tax increases leading to “tyranny”.
If you are relying on Jeffrey Sachs for your understanding of Hayek then you are relying on the typical academic economist today who knows nothing of the intellectual history of his discipline — and who pulls his intellectual history mostly staight out of his ass. I have complete contempt for you typical economist as someone who is suppose to understand the field of political economy in its rich and historically situated depth. Most all of them are math hacks grossly ignorant the development of the problems and achievements of their discipline.
Again, I count Sachs as an intellectual hack when it comes to this field — and what he helped produced in Russia should permanently disqualify Sachs from speaking as an authoritative economic sage on any economic topic.
Though most classical liberals would dispute the view that the Anglo democracies have low taxes. With the partial exception of the US, along with Scandanavia they have a market economy supporting a high taxing and spending government.
Note too how in your first paragraph you slip from talking about tyranny to talking about economic performance, two radically different things.
I don’t think any of the high-taxing European countries are tyrannies, and some of them have performed well economically. But as a liberal, I would still object to the extent which they, along with Australia, take money away from people and spend it in ways that fit the state’s set of preferences.
Andrew – Do you think Hayek has any argument against a form of government that taxes heavily but uses these resources to fund transfers and services distributed according to a stable set of general rules (eg universal education, access to health care based on need)?
It seems to me that Hayek wouldn’t have liked this kind of arrangement, but it’s not clear to me that he had any strong arguments against it.
And yes, you’re right about the first paragraph. I should have said something like “tyranny and immiseration”.
Andrew Norton says:
Yet on your blog, Andrew, you maintain the attitude that ordinary people are unable to make informed decisions about policy. There’s a big hole in your internal logic that needs to be sorted out.
One thing that has become very clear to me over the past few years is the link between the religious right and the economically conservative. That link is a desire to see that those in society who don’t behave in the way conservatives want should be punished.
What you really meant to say was that you objected to a government taking your money away and giving it to people you don’t like.
Sach’s is a little behind the times , Don. Sweden just fired its leftist government and handed everythign over to the centre right after 80 years in power.
Wasn’t Sachs who advised Russia after the wall came down and almost single handedly sent it back into the ares of the communists qwith dreadful advice? What was the Plan called again?
Sachs is dreaming if he thinks Sweden is doing well.
This report is out of the International Bank Credit Analyst this month. It is more of an investors report but it gives a good feel for what is wrong with the place.
Special Report
Sweden’s September 17 elections will prove to be a watershed event that could mark the beginning of a sea change for the welfare state: The Social Democrats chalked up their worst ever showing in the polls, demonstrating the population’s clear demand for change. The newly elected centre-right alliance of Prime Minister Fredrik Reinfeldt is already planning aggressive fiscal reforms, including SEK 40 billion in tax cuts, a reduction in unemployment benefits and sick pay. These reforms are reminiscent of the “supply-side revolution”
JC,
I think if you check you’ll find that you’re wrong on a point of fact. My understanding is that the Social Democrats grip on power ended a while back with a rival party coming to power. They were subsequently beaten by the Social Democrats who have now been replaced again.
There’s been a fair bit of reform dismantling some excesses of the welfare state in Sweden. In one particularly egregious example, there were all sorts of restrictions on one’s choice of doctor. But the Swedes show every sign of being smart policy makers, capable of facing their mistakes and learning from them.
Nic are you saying this para in the report is incorrect, in that the alliance of Fredrik Reinfeldt is not in power? This report is dated November 3. Are you saying he is no longer in power?
“Sweden’s September 17 elections will prove to be a watershed event that could mark the beginning of a sea change for the welfare state: The Social Democrats chalked up their worst ever showing in the polls, demonstrating the population’s clear demand for change. The newly elected centre-right alliance of Prime Minister Fredrik Reinfeldt is already planning aggressive fiscal reforms, including SEK 40 billion in tax cuts, a reduction in unemployment benefits and sick pay. These reforms are reminiscent of the “supply-side revolution”
Jacques, I was referring to Andrew’s particular double standard of resenting the imposition of nationwide preferences, while extolling the imposition of a different set of nationwide preferences. There’s a particular thread I’m referring to here.
I don’t think it’s endemic to classical liberals, just autocrats.
As for the punishment ideal, the continued call for the rolling back of welfare from “free market nutjobs” sounds fine in theory (and does create poverty traps), but in practice seems little more than an attack on those who can’t help themselves. When applied indiscriminantly, that’s punishment. When they won’t help themselves, you can cut off their entitlements all you like.
Jc, your claim that “Sweden just fired its leftist government and handed everythign over to the centre right after 80 years in power” is factually incorrect, as Nicholas pointed out.
The other side won in 2006, just as they also did in 1991, 1979 and 1976.
That wasn’t my claim, SJ. It was the report I cited.
The right Alliance is in power in Sweden. That’s a fact. I don’t what you are reading, but you are factually incorrect.
Check it out yourself.
http://en.wikipedia.org/wiki/Government_of_Sweden
David
Andrew Norton is quite clearly a classical liberal and not an “autocrat” as you want to label him. The post about which you complain is dealing with generally accepted social science research going back at least to Philip Converse in the 1960s, who found that the vast majority of people don’t possess any coherent political idieology and, when asked questions in public opinion polls, mostly give answers which are unstable, inconsistent and hugely susceptible to the way questions are framed. Andrew’s post, to which you seem to have taken umbrage, was not arguing an “autocratic” position at all, but one which takes Converse’s reasearch (replicated many times since and generally accepted by political scientists) as its starting point and advocates that governments should be guided in policy formation by polling which clearly reveals a genuine strongly held public aspiration (demonsrtated by multiple polls asking the question in different ways), rather than polling which tries to measure opinions on which, almost by definition, the vast majority of people don’t in fact hold any opinion at all in any meaningful sense. Even manifestly non-right, non-autocrats like Don Arthur generally accept this:
This doesn’t mean that either Don or Andrew is an autocrat who believes that politicians should arrogantly ignore public opinion, just that they need to be a bit more sophisticated and discriminating in working out what those opinions actually are.
“Andrew – Do you think Hayek has any argument against a form of government that taxes heavily but uses these resources to fund transfers and services distributed according to a stable set of general rules (eg universal education, access to health care based on need)?”
Don – It’s years since I have read much Hayek beyond occasional re-reads of Invidividualism and Economic Order, which for me is his best book. But that book would certainly contain strong arguments against removing the price mechanism from these services. We are living with the consequences of doing so – shortages in the medical field, and inadequate quality in the education field.
David – I think Jacques and Ken have explained why my position is consistent.
I’ll assume that this isn’t an act, and that you really are thick. Both Nicholas and I are trying to point out to you that Sweden’s Social Democrats have not, in fact, been in power for the last 80 years. This is the fourth time they’ve been voted out.
SJ
So that’s the factual error?
Sorry. didn’t read the last bit of your comment and I wasn’t sure what Nicholas was saying.
I take it you have nothing to say about the body of the report?
I’m not sure now whether you understand the report, and I suspect that you haven’t even read it. Let’s take this slowly. The report is not as significant as you seem to think it is, because this isn’t the first time that the righties have won power in Sweden.
SJ
As I understand it, this is a rudeness free site, so i’ll let you be as rude as you like.
The report is important because Sweden could be a very promising investment opportunity if the reforms take hold. Obviously they haven’t taken any action before or they wouldn’t be in the is fine mess.
The point of the post is that Fred has argued Scandi is a pretty good region for us to copy in terms of policy initiatives. It isn’t. It’s mess like Sweden shows.
What’s your real name, SJ, so I can refer ro you properly…. like you tried with me the other day.
JC actually picked the softest target of the Scandinavian countries. Sweden sits at no.19 on GDP per capita as at 2005 (with Australia at no.14) according to that well known leftist source the CIA World Fact Book (as extracted in Wikipedia), with fairly soft unemployment numbers. As the Wikipedia article on Sweden observes:
OTO Norway is at no.2 on the world’s best GDP table (with the US at no. 3), Denmark at no. 6 and Finland at no. 13. Each have unemployment rates as low as or lower than Australia’s. All have an average tax burden in the mid to high 40% range according to 2003 Australian Treasury figures (with Sweden over 50%), whereas Australia’s tax burden in 2003 was 31.6% – the 8th lowest of all OECD countries.
Interestingly, of the 13 countries with better per capita GDP than Australia, 8 have a higher tax burden than us (Luxembourg, Norway, Iceland, Denmark, Canada, Austria, Belgium and Finland) whereas only 5 have lower tax burdens (US, Ireland, Hong Kong, Switzerland and Qatar). No doubt this is why Boettke concedes that the Scandinavian countries throw up “an important empirical puzzle”. It appears that, contrary to neoliberal orthodoxy, there isn’t a tight, exclusive, positive relationship between low tax rate and unemployment numbers and strong economic performance.
However, as Fred Argy has pointed out in several posts here at Troppo, the 3 undeniably successful contemporary Scandinavian economies share a characteristc of genuinely reciprocal “mutual obligation” in provision of unemployment benefits etc – education, retraining and job search obligations, not womb-to-tomb obligation-free social welfare as has largely been the case in Sweden (and to an extent some other European countries). Perhaps there’s a sliver of truth in JC’s argument, in that one can argue that the success of Norway, Denmark and Finland has been partly due to the fact that all have had coalition governments involving centrist and moderate right elements for most of the time over the last 20 years, which may be part of the cause for the somewhat “harder-edged” and extraordinarily effective version of social democracy they have implemented. By contrast, socialist-dominated coalitions have ruled in Sweden for all but 3 of the last 23 years until the election a couple of months ago.
Ken. The special survey comes out of a (investment) economic analysis unit that is quite repected by money managers around the globe. They’re come out with good fundamental analysis, which lots peopole regard as the best around. Most people don’t really care if they have made a minor mistake of not counting the times the centre right has been in power for the past 80 years.
I thought it was interesting because of the way it spoke about Sweden and recall the discussion that went on some time ago about Scandi.
“It appears that, contrary to neoliberal orthodoxy, there isn’t a tight, exclusive, positive relationship between low tax rate and unemployment numbers and strong economic performance.”
The one thing that is a certainty is that they are pretty open economies in terms of trade.
It could also be fair to say that these countries could be leagues wealthier if they had followed an orhtodox deregulated economy all the while. These are pretty smart countries.
I actually wasn’t ‘picking on Sweden” as you say. I was doing my weekend keep-up to date reading of this subscription service and thought it would ba a useful post as I recall Scandi was a big topic some while ago.
Ken Parish wrote:
The word autocract is, in context I used it, hyperbole (sorry, missed that morning coffee). What I am trying to get my head around is what I see as a paradox: when in government, it is apparently OK to be guided by the gist of public opinion on policy directions but not necessarily policy mechanics, due to the the Converse research cited above in your post. However, in Andrews case as he stated above, he objects to having policy mechanics (or is it directions?) imposed on him. So to my (possibly incorrect logic) he is assuming two different positions depending on whether he is imposing policy or receiving it.
I’m not sure how the two can be separated (for example, the greenhouse debate where the direction is less carbon dioxide emissions, the mechanics might be nuclear power or renewable energy for example). The direction ends up being something of a motherhood statement, the policy mechanics are sharply divisive. More to the topic of this thread, there is a sharp line dividing most people (we want less poverty) on exactly how to achieve it (welfare vs. labour laws).
So, is it inconsistant to desire one thing in office (we know what we are doing), and another thing as a citizen (they are trying to do what I want in a way I don’t like)? I think so.
Jacques Chester wrote:
Ken — according to 2006 statistics, the US has just overtaken Norway in GDP (PPP) per capita. Also, Norway has the advantage of significant oil reserves (3rd after Saudi and Russia).
There are five countries with GDP (PPP) per captial income over $40,000. One is little Luxemburg, but of the 4 real-sized countries, 3 are Anglo (US, Canada, Ireland) and one is the oil-rich Norway.
Nonetheless, there is no denying that the Nords have a high standard of living despite a high tax rate. A paradox worth exploring and one that I have looked at on the ALS blog — http://www.alsblog.wordpress.com
John is correct that Norway and Luxembourg have nothing, empirical or otherwise, to offer Australian planners. Talking about them obscures any useful points that might be derived from the Scandinavian countries generally, unless your desired prescription is either prospect aggressively for a huge oil field or become a semi-pirate state with less than half it’s citizens resident and (relatively) huge EU aid.
Funny that Patrick, I thought Australia had been dealt a reasonable hand in the natural resources stakes, especially lately, but we’re running huge current account deficits whereas Norway is running large surpluses.
True Nick. I guess that means that capital-owners prefer to invest in Australia so we have attracted a strong capital account surplus. I wonder why Norway is not able to attract similar levels of net foreign investment?
Patrick (and John)
I wasn’t suggesting that Luxembourg was even slightly relevant. However Denmark and Finland (like Norway and to a lesser extent Sweden) are also distinguished by tax burdens in the mid-high 40% range, and also exhibit strong economies with high per capita GDP. Moreover, should you really be dismissing the relevance of Norway’s economy? Fifty percent of Norway’s exports are oil, but approximately 33.3% of Australia’s exports are minerals (including oil and gas) while another 20% or so is rural primary produce. Our export profile is no more skewed towards manufacturing and services than Norway’s.
I’m not suggesting, however, that the Scandinavian recipe is a monolithic one, but there are certainly common elements that to a considerable extent contradict the standard neoliberal claim that minarchist (or even relatively small) government and low taxes are the only path to a prosperous economy. The examples of the US*, Ireland and Switzerland indicate that the small government/low tax recipe can work, but a dispassionate look at the evidence indicates that it isn’t the only viable option.
In fact the evidence strongly suggests that there is a fairly wide range of government size/tax level options that is compatible with prosperity, as long as (a) the economy is open in terms of international trade; (b) it has strong rule of law; and (c) that any larger social welfare system is coupled with a strong education, training and retraining system and equally strong “mutual obligation” measures to minimise welfare dependency and maximise active participation in the economy.
I’m not suggesting that Australia should adopt Scandinavian tax rates or the full blown Scandinavian welfare etc system. But I DO suggest that we should be prepared to accept a slightly higher tax burden (maybe a couple of percent of GDP – which would put us roughly equal to Canada and NZ in tax burden and still below the UK) as the price of a substantial boost to education, training and retraining, with ongoing “mutual obligation” sanctions to encourage labour market participation. One might even look at delivering some of that enhanced education etc through private providers via a differential voucher system, as long as it proved feasible to deliver the greatest benefit to those in greatest need (although I have some doubts about whether that really is possible without exaercbating inequality of opportunity and denying access to education to the poor through the operation of market forces).
* To be more accurate, the US is actually an example of low tax with a not especially small government sector supported by large public sector debt.
I don’t (necessarily) disagree with your argument, Ken, I just think it is diluted and weakened by reference to Luxembourg and Norway. I think there is a considerable, indeed huge, difference between 33.3 percent ‘resources’ and 50% oil, as you probably agree.
I’m a relatively big fan of training myself, and I appreciate your ‘sop’ to the likes of me with the vouchers reference :)
I wasn’t trying to dismiss the paradox of rich Nordic countries.
However, some people (eg Sachs) want to pretend that the Nords have outdone the Anglos and I don’t think that’s a fair reading of the evidence.
I agree that Finland and Denmark remain as good examples of relatively rich Nordic countries. About the same wellbeing as UK and Australia. (Incidently, New Zealand seems to be the real odd-man-out and that is perhaps another avenue for exploration.)
And of course Norway and Sweden remain reasonable examples too. Even without oil Norway would be relatively rich and while Sweden is poorer than US/UK/Aust/Ireland/Switz/German/Canada etc, they are still relatively rich themselves.
However, I would argue that none of these examples are low-tax. As I say in my post on this topic (www.alsblog.wordpress.com) the options are between social-democracy-light and social-democracy-plus. The serious low-tax option just doesn’t exist and hasn’t for a while.
I note that you want us to move closer to the UK/NZ tax level (the poorer Anglo countries) and away from the US/Ireland tax level (the richer Anglo countries). But regarding Australian policy — the tax rates of other countries is a very marginal concern. We should do what’s right for us.
John, Re comment 26, the Norwegians could get the foreign investment if they wanted it – but they don’t need as much as we do because they save so much more of their own income. Of course if we can get away with borrowing more money, well and good and at the rates it’s going right now, that’s fine. But some of us wonder if we might be being a tad imprudent in a dangerous world.
nick
I am not so certain the current account deficit/ ie borrowing that problematic.
It only becomes a problem when it becomes a problem… as traders say. let’s not forget that those selling us stuff are just as desperate to be getting rid of stuff.It’s easier for us. We can just export dollars. The others have to actually make things.