Monday, May 31, 2010

A political map of American voters

Using the 2004 National Annenberg Election Survey (a large super-poll of the American public) I can create a political map of self-described political opinion in 2 dimensions: fiscal and social conservatism/liberalism. We also have data on how each group voted. Sample size is 7000.

This is particularly important for europeans to understand.

Social conservatism was a somewhat stronger predictor of voting for Bush in 2004 than Fiscal conservatism.

Here is a nicer picture with all the data:

Unlike what is implied in libertarian political theory, fiscal and social conservatism are strongly correlated. About 60% of voters are located on a one-dimentional axis.

Still the group who like me is fiscally conservative but socially liberal/moderate is significant, at 16.3% of the voters. Libertarian leaning voters are in this group. The segment that is fiscally moderate/liberal but socially conservative is smaller at 11.7%.

Furthermore, the first group is much more common among the elite and opinion leaders than the second group. That is the direction the Republican party should take.

Fiscal Liberal, Social Conservative is the amusing sounding ideology of 30 Rock character Dennis Duffy, and is the smallest segment in the U.S. The joke works because the educated elite accept fiscal conservatism, some even admitting grudgingly that that is the intellectually superior position. Social conservatism on the other hand is (somewhat) unfairly viewed as having no intellectual foundation.

People who are both Fiscally and socially conservative are dominant at 30% of the population. Fiscal and social liberal is only 11%.

However, in the U.S liberal has become a dirty word (because of the failed liberal experience in the 1960s and 1970s). So many don’t admit to being liberal. Moderates are thus more Democrat than Republican. Many of those who call themselves moderate are really liberal or progressive.

Fiscally liberal, socially moderate/conservative voters did not vote for Bush. The reason is that this group is to large extent made up of minorities.

Friday, May 28, 2010

Conservatives are outbreeding Liberals

Journalist Steve Sailer made the important point that white fertility was substantially higher in Red States than Blue States, something he calls "The Baby Gap". I would like to update and expand on his insight.

First, here is the correlation between total fertility per women in 2008 and McCain's vote share in 2008. The association is strong. In the latest available figure the total fertility rate of non-Hispanic white women is 1.86. You need 2.05 for replacement levels. The total fertility rate of Utah is 2.7, compared to 1.7 in Vermont.

On occasion patterns that are true in the aggregate are not true at the individual level. For example, rich states vote much more Democrat, but voting for President Obama in 2008 was actually negatively associated with income. The reason for the paradox is the *within* Red states in particular and to some extent also within blue state, income is associated with voting Republican.

For this reason I have evaluated the hypothesis using micro-level data. The source is National Annenberg Election Survey, which is essentially a super-poll of tens of thousands of Americans, with lots of questions.

I am looking at women 40-45 to get a good proxy for lifetime fertility. At this age mostly the children have not left home yet, and above this age the probability of having more children is extremely low.

Overall, conservative non-hispanic white women have 26% more children than liberal white women, a sizable difference.

The very conservative have 45% more kids on average than the very liberal.

So what does this imply? Political preferences are strongly related with parental views. This is probably not genetic. The likelihood to vote has been shown to be to some extent genetic, but not who you vote for. The link is cultural. Still how the ideology is transmitted is not important, just that it is.

Let us assume that if you have conservative parents, you become conservative with 70% probability and liberal with 30%, and vice-versa. With this number if you start off equally divided between liberal and conservative (there are more of the later, but many moderates are really liberal who don't want to admit it) in 1 generation the right will be 10% larger than the left.

Of course at the same time because of immigration and very high Hispanic (especially Mexican) birth rates, the Hispanic share is rising. Hispanics and African American voters are far to the left of middle, especially on fiscal issues.

The higher Conservative birth rate slows the demographic ascent of the current, liberal leaning Democrat party. However liberal white voters, who are ideologically very committed, will be replaced by equally left leaning but less ideological minority voters.

Based on these 2 long term demographic trends whites will become increasingly republican and the Democrat party increasingly minority.

Of course these long term trends are dominated by short term events. In 2004 Kerry won the overall young vote (18-29) by 9 points, while Bush won the white young vote by 11 points. In 2008 President Obama won the young vote by 34 points, and the white young vote by 10 points (54-44%).

Tuesday, May 25, 2010

What the Swedish public really thinks about immigration

Sweden takes more immigrants from Afghanistan, Iraq, Somalia and similar countries in a per capita basis than any other nation. Each year about 100.000 immigrants move to Sweden, mostly from the third world, with most not formally qualifying for refugees status. They get to stay because they are relatives of other immigrants, and because Sweden often gives permanent residency to people on a "humanitarian" basis, such as your child being stressed from deportation.

I got to stay in Sweden because of humanitarian reasons, not because we had any legitimate case that our lives were threatened in Iran (my mother was ill). But what benefits me privately is not necessarily what is good policy for society.

Non-western immigrants in Sweden do not integrate well. Their employment rate is about 50%, compared to 80% for native Swedes. They are extremely over-represented in crime and other social problems.

So why does Sweden continue this policy? Because of support amongst Sweden's' liberal voters?

The answer is no. The reason Sweden does this is firm support for immigration among the elite, and the fact that Swedish voters really trust their elite (the media, academics, to a lesser extent politicians).

Every year Swedish population views on a range of issues, including immigration, are measured.

The question asked is: "Is is a good proposal to take in fewer refugees" or "a bad proposal to take in fewer refugees".

If you go to the early part of the 1990, the support was strong for taking fewer immigrants. But massive mobilization of elite opinion, violent crimes committed by racists, and the collapse of the anti-immigration party made the country more pro-immigration 1990-2000. I should add that the early 1990s in Sweden were very bad times economic , because the country had a recession deeper and longer than the one the U.S had recently.

Note though 2 other effects: Immigrants, especially non-western immigrants, are themselves a larger part of the sample now than 1990 (14% are foreign born, with another large chunk second generation. A little more than 10% of the population is first or second generation immigrant from a non-western country).

Also the subject became taboo in Sweden, with everyone who is against immigration currently considered a racist. Thus people are averse to stating or having such opinion. Swedes are exceptionally conformist.

Nevertheless, notice that the declining trend stopped in 2000, and is followed by an increase of opposition to immigration, due to manifestation of problems such as crime and welfare dependency.

If we take only those who have an opinion, the division is 62%-38% for taking fewer immigrants (and on a taboo issue such as this, people who state no opinion are not exactly likely to be especially pro-immigration).

The report also asks people what worried them about the future. In the 1993 survey 38% said "increased number of refugees" was one of the things that worried them. In 2000, only 17% said "increased number of refugees". In 2008 the number had increased again to 26%.

Yet, of the 7 parties in parliament, 0% support cutting immigration. 2 out of 7, the green and the former communist, want completely free immigration from all the world, combined with maintaining the generous welfare state. Good luck with that one...

The result of this political cartel has been the rise of a small, anti-immigration party, with a racist history. The elite has responded with a united front against them.

Sweden has the most pro-immigration public in Europe, but even Swedish opinion is on balance anti-immigration. Only through firm elite-support combined with the Swedish public's blue eyed(sic) trust in their institutions and the elite that runs them has the policy continued. Over 99% of newspapers (weighted by readership) and 100% of television and radio supports current or even more generous immigration policy.

I want to show my non-Swedish readers how the elite manipulates public opinion for their pro-immigration agenda.

The research institute in charge of this data (SOM) released it a couple of day ago as news, as they do every year. Last year, the share who oppose immigration declined. Thus their new-release was titled "increasing support for immigration".

This year however, the share who oppose immigration increased slightly from 45 to 46%, perhaps because of the debate surrounding the growing anti-immigration party.

But the headline did not change, it was presented in Sweden's most important daily newspaper as "Swedes are becoming increasingly positive towards immigrants" (!).

How in gods name did they achieve to give this impression, with the figures being what they were?

Because they are not comparing with 2008, or 2000. They decided to compare 2009 with 1993, as if that was news!!!

The trend that stopped and perhaps was reversed 9 years ago is "news", when it suits their agenda, and when the last year trend does not. They also choose to focus on a different question (something about attitudes toward immigrants, rather than immigration), instead of the standard, policy relevant question they have been asking every year for decades.

All the newspapers and television has reported this as a major news story. Swedes are becoming more pro-immigrant (even though the data suggest otherwise). Since Swedes are conformist, it is very important to bully them into not having dissenting opinion.

Intellectually, I believe demography and culture are underestimated and policy overestimated.

If you live with Scandinavians you soon realize they are a completely unique people in terms of producing positive social externalities (their niceness, cooperativeness, trustworthiness and their naive trust in other people makes them have with the best individual norms and some of the worst collective norms in the developed world).

I am thus bothered by the fact that the American left attribute the high quality of life that results with the extraordinarily good norms, evolved informal institutions and well functioning culture of Scandinavians to the welfare state (which is just a outcome variable among many).

Immigrants who lack Swedish culture but live under the same welfare state have extremely bad social outcomes.

So from an merely scientific point of view the best thing would be if the Swedish left and libertarians gets its wishes, and Sweden completely opens the borders, while maintaining the welfare state.

The subsequent collapse of this well-functioning society would be a good lesson to other countries not to take demographic factors for granted.

And who knows, maybe I am wrong, and filling Sweden with semi-skilled Muslim immigrants will produce some sort of hybrid, well functioning state.

PS. I will also, based on this data, make the prediction that the racist anti-immigration party will get into Parliament this election (they need 4%, they are currently polling 3%). I predict 5-6% of the vote.

However I will definitely not vote for them, due to their racist past.

Sunday, May 23, 2010

Japan's problem is supply, not demand (updated)

Paul Krugman wrote in the NYT that we are talking too much about Greece: "Despite a chorus of voices claiming otherwise, we aren’t Greece. We are, however, looking more and more like Japan."

According to Krugman the U.S risks ending up like Japan, because of "policy makers... doing too little".

First the cheap shot. A year ago, Krugman wrote "Well, I’m sure I’m not the only person to notice this: Japan doesn’t look so bad these days."

Does the U.S risk becoming a new Japan if we don't pursue even more Keynesian spending and borrowing policies?

Let's first look at the lost decade, 1991-2000. When the rest of the world was having rapid, IT-fueled growth, Japan was stagnating. Here are the growth rates in real GDP between 1991-2000:

For all the nice years Japan had 9.6% growth compared to 38.7% for the U.S and 22.7% for the EU.15. The U.S grew by an average of 3.7% per year, Japan only 1.0% per year.

But as most of you know Japan is undergoing a rapid demographic transition. The country was and is aging. Because the old and children cannot work, when we want to compare countries with very different demographic characteristics instead of calculating GDP per capita, it makes sense to calculate GDP per working age adult (people aged 15-65).

Whereas the number of potential workers in the U.S increased by 13% during Japans "lost decade" (1991-2000), and by 3% in for example France, the Japanese potential workforce actually shrank during these years. Adjusting for this, the growth in Japan was 9.8%, compared to 16.9% in Germany, 17.3% in France, 16.3% in Italy and 23.2% in the United States. The U.S grew by twice, not four times of Japan (remember that these were the best years of the U.S and the worst years of Japan).

The importance of the demographic transformation in Japan is even more clear if we include the entire 1990-2007 period.

In non-population adjusted figures, Japan's real GDP grew by 26% in total these years, the lowest in the OECD. In comparison the figures are 63% for the U.S and 44% for the EU.15.

But during this period the U.S saw it's potential labor force (the number of people between 15-65) increase by 23% and the EU.15 by 11%, while Japan had a decrease of 4%.

Between 1990-2007, GDP per working age adult increased by 31.8% in the United States, by 29.6% in EU.15 and by 31.0% in Japan. The figures are nearly identical!

Japan has simply not been growing slower than other advanced countries once we adjust for demographic change.

Also notice Italy (who does better than we think) and Ireland (who does worse, much of the growth was due to their young population).

Nor did productivity grow any slower in Japan than Europe.

Someone could ask why Japan did not outgrow the U.S, since they started at a lower level, or why the old Japanese don't work more to keep up income. But there has really been no dramatic change in institutions during this period, and thus little reason to expect Japan to catch up with the U.S. Japan is already as rich as Europe, so there is no catching up there. And at any case, there is nothing Keynesian deficit policies can do about a shrinking workforce.

Next, to Krugman's point that the problem is "policy makers... doing too little" (by which he means spending too little). Japan has been running Krugman-Obama sized deficits averaging about 5% of GDP for a decade and a half.

Here is their national debt as a share of GDP. Europe 4 are Germany, U.K, France and Italy.

Clearly, it did not work. Krugman is simply dogmatic when he claims that Japan's policy of massive deficits failed because the deficits were not large enough(!). What if someone wrote that the deregulation of the American financial markets did not work just because they did not go far enough? Would Krugman accept this line of reasoning?

Krugman is obsessed with demand, and ignores the (usually) far more important factor, which is supply.

Does the U.S. risk being the next Japan? Probably not, since the American workforce is growing. And at any case adjusting for population Japan has simply not been doing that badly in growth terms. Their problem now is their debt, which they have thanks to Keynesian policies.

Capacity utilization is high in Japan, including a low unemployment rate. Stimulating Demand just won't do it when the problem is supply. If Japan wants growth they have to go for supply factors, including hours worked.


Here are 4 pictures I hope will shed more light on the story.

First, this is the impression of Japan we have been having. This is just the size of the total economy. Notice the U.S and western Europe growing, while Japan is a flat line?

But now look at the picture when adjusted for the size of the potential labor force:

Japan is growing slower than comparable economies in the first half of the period, no doubt, especially since they started of at the top of the bubble. But not much slower than Europe, even though western Europe included initially poor, fast growing regions such as Ireland, Spain, and of course Greece.

Here is the conventional story: Japan's GDP compared to EU/US. Bad years, followed by stagnation:

If only they could jump start demand somehow!

Here is the more nuanced, complex picture, when adjusting for 1 supply factor (potential workers).

Japan also illustrates the problem of over-zealous, imprudent Keynesianism. If they had not undertaken massive deficits in the 2000s (when there was no need, and perhaps not even opportunity, for policies aimed at stimulating demand rather than supply) they would have had dry powder now. There is no guarantee that 2 crisis cannot come within a couple of decades. Instead, the Japanese state is immobilized by their fiscal past.

Saturday, May 22, 2010

Opposition to illegal-immigration is deep and intense among 17% of voters

In 2008 voters were given a choice between amnesty for illegal immigrants or the dramatic choice of deporting them (which I personally find too harsh).

Of those who had a view (most did) 59%-41%, the American public opposed amnesty for illegal immigrants. An identical 59-41% of voters wanted to build a fence on the border. Opposition to illegal immigration was larger in battleground states. This is a large chunk of voters for the republicans to go for.

What I have noticed in the Arizona debate is that the illegal immigration opinion is quite consistent. You get a 60-40% or 65-35% (of those who have an opinion) in most polls. This indicates that people have coherent and mature views on the subject, in contrast to many other issues (say, drilling for oil) where wording is central and where results are volatile.

Some people claim that while opposition for illegal immigration is wide, it is not deep, in contrast to support for amnesty (which the Hispanics care a lot about).

This claim is not true.

In 2008, a year with 2 wars and a weak economy, 15.3% of the public names immigration as the biggest problem facing the country. Of these, almost all (91%) opposed amnesty for illegal immigrants! The people most concerned with illegal immigration are very strongly opposed to amnesty.

Citizens who called immigration the biggest problem and who opposed
amnesty were much more likely to vote than average. Of those who actually voted in 2008, 16.7% were part of the strong anti-illegal immigration vote. (Remember that the pro-immigration Hispanics vote in 2008 was only 5.4% of the total vote and even less of the battleground vote).

Now, to be perfectly honest, Republicans cannot hope to win the presidency based on the strong anti-illegal immigration vote alone. The reason is that this group already voted for McCain-Palin in 2008. Of the voters who considered immigration the biggest problem and opposed illegal immigration, a whopping 91% believed the Republicans were best in handling the problem. Thus of the 16.7 about 14.9% went for McCain and 1.8% went for Obama (note that these are percentage points). But combine the strong anti-illegal immigration vote with the mild anti-illegal immigration vote, and they are half way there.

In the 2008 election, 59% of voters opposed amnesty, of which 16.7 percentage points stated at some point during 2008 (before the crash) that immigration was the biggest problem facing the country.

In the 2008 election, Obama got 52.9% of the popular vote. Of these, 19.5 percentage points (or more than one third) opposed amnesty for illegal immigrants. Of the 19.5 percentage points, 1.8 percentage point considered illegal immigration *the* biggest problem facing the country. For voters in the 18 battleground stats, this figure were 22.0 percentage points (over two fifth of Obama voters) who opposed amnesty and 2.2 percentage points who opposed amnesty and who consider immigration the biggest problem for the country.

In the 2008 election, the Democrats in the house got 53.2% of the vote. Of these, 20.7 percentage points (or close to two fifth) opposed amnesty for illegal immigrants. Of this 20.7 percentage points, 2.7 percentage points considered illegal immigration *the* biggest problem facing the country.

So of the 53% the Democrats got in 2008, when pro-amnesty Mccain was running, about 20% oppose amnesty, with 2-3% having very strong feelings about it. So something between 2 and 20 percentage points of the Democrat voters oppose amnesty and feel strong about it, and can potentially be peeled off. These are pretty big numbers in an otherwise evenly divided country.

Another huge chunk of the electorate are Republican voters who oppose illegal immigration, who can be turned to for money, votes and activism.

Lastly, this just shows the current support, not the latent support. The right have far from fully articulated the case against illegal immigration in the public debate, in which case the opposition will presumably rise even further.

Objective numbers rarely lie, and the numbers are telling us opposition to illegal immigration is deep and wide among the American voters, contrary to the impression the pro-illegal immigration media may be giving you.

Thursday, May 20, 2010

Kurds and Kurdistan

Clifford D. May has a very kind article about Kurds in Iraq.

First, one thing about the large corruption problem in Iraq-i Kurdistan. The kurds have a long and unfortunate history of feudalism. What the leaders have done after the invasion is dividing the region up, feudal-style.

Yes, without Saddam, the region is growing like crazy. But the ordinary people are fed up about corruption, which may lead to anti-Americanism (since the leadership is associated with having American support).

One reason the Kurds can be a counterweight to radical Islam is that they are relatively secular, I would say one of the (if not the) least Islamic of all major Islamic population groups. Kurds lived in the periphery, and were not penetrated as deeply by the Arab invasions and Islam. Furthermore, their nationalistic movement acted as a intellectual counter-weight to political Islam. The Kurdish national anthem thus includes the lines:

"Both our faith and religion are our homeland
Both our faith and religion are Kurd and Kurdistan"

The question is how Kurds in turkey can win independence. Violence is not the answer. First of all it is wrong, and second the Turks are very nationalistic, and will not let the threat of violence from a 15% minority deter them.

Of course, the Turks are also misguided in their nationalism. The Kurdish parts of Turkey are extremely poor, and contain no natural resources or really any strategic importance. They don't want to be part of turkey, so what exactly is the rational explanation of forcing them into the country?

At any case, I have a simple and powerful alternative method for achieving independence: Demographic Bomb. In modern times there are few, if any permissible countermeasures.

Kurds in turkey have much higher birth rates than Turks (who are below replacement). The same is true elsewhere. Just keep your Kurdish identity and these birth rates for another 2-3 generations, and Kurds will be so many that the political and military equation changes.

Noble prize winner Douglas North predicted that because Kurdish nationalism would not die, Kurds would ultimately gain a nation just based on the opportunity arising at some point.

Monday, May 17, 2010

Simple pictures against bad ideas

The Green Party is doing exceptionally well in Sweden right now. Educated voters, especially women, like their mix of environmentalism, social liberalism and perceived economic centrism.

Unfortunately and despite their rhetoric, the Green Party has a lot of bad economic ideas. One in particular is work sharing, a government regulation that forces everyone to work as standard no more than 35-hours per week. Their idea is that if you force people to work fewer hours, there will be more job for others.

The consensus belief among academic economists is that work sharing does not work.
Unemployment does not arise because there are too many people. It is because there is some imperfection in the market (either policy induces or due to market failure) that causes the market to generally not be able to match jobs to people.

We have to remember that normally in functioning economies, there are very strong forces that create jobs for everyone who wants to work. To illustrate this for non-economists, please allow me to put up a graph with a high "duh" factor (but which really is quite important).

This is the relationship between number of working age adults in 2007 and number of jobs in 2007, for the OECD countries. Source is as usual OECD.

The correlation between potential workers and jobs in the OECD is 0.99!

I have also done the same plot without the U.S and Japan so you can see the individual countries better.

To an economist this is trivial, and just says that there is no connection between employment rate and country size among the OECD countries. But savor the pictures for a moment. They have a profound implication. It means that there are extremely powerful forces in market economies that create jobs for ordinary people, no matter how many people we have, and regardless of if we can perfectly understand these forces.

It is not easy to describe this magic when people demand "where will jobs come from?". You may even sound naive if you say that "the market will take care of it", and refer to history or to the graph above. But in this case what sounds naive is in fact the most profound answer. Empirically, we can observe that the market does seem to take care of creating jobs.

The problems that cause unemployment is never the number of people, it is things like the skill composition combined with wage rigidity, cyclical demand conditions, search friction, taxes and regulations, and market imperfections. None of the core economic forces that create unemployment is affected by permanent work sharing for all workers.

Let me also look at this a little more directly. Here is average hours worked for workers and the unemployment rate, again for OECD, and again for 2007.

There is no statistically significant relationship between the typical workday and unemployment rate (p value 0.52). Countries that have reduces the average hours worked have not been able to achieve lower unemployment rate. Now, correlation is not always causation. Maybe the unemployment rate in France would have been even higher if they worked more hours. But I strongly doubt it.

Work sharing is guaranteed to harm the economy, by making everyone earn less and by dramatically lowering tax revenue for health care etc. Meanwhile there is no evidence that it reduces the unemployment rate, and strong suggestive evidence that indicates that it has no effect.

If people choice to work less, great! But legislation to shorten the workweek like the Greens in Sweden propose to do is very bad economic policy.

Thursday, May 13, 2010

What a leftist economists thinks about the deficit

Ezra Klein interviews economist James Galbraith about Greece, and the problems of massive deficits for the U.S. James Galbraith is the son of renowned leftist economist John Kenneth Galbraith and brother of pro-Kurdish diplomat Peter Galbraith.

There are several claims in this interview that are questionable.

1. When asked about the danger of long term deficits, Galbraith responds that "the danger is zero".

His first argument is that the market prices of U.S bonds shows that the market does not think a Greek scenario will happen in the U.S.

Galbraith claims there are only two possibilities. Either a crisis in the U.S is theoretically impossible, or the market "isn't rational".

But of course 20 years ago the markets did not expect Greece to default either! When the markets predict the future they assign low probabilities to unlikely events. Sometimes unlikely things happen anyway. This is absolutely not an evidence that the market is irrational.

The second problem with this argument is that Galbraith interprets it as the markets saying it is impossible for the United States to have a deficit crisis, regardless of what actions America takes. That is not all what the market think. The market simply thinks (I believe correctly) that the U.S will not take the actions Greece has taken. If the U.S starts getting close to disasters, the market expects the deficits will be cut.

This is hardly the same as the U.S deficit somehow being magically incapable of creating a crisis. After all, what has happened in Greece is not unique. In the last 20 years the same debt-deficit happened in Argentina, and was close to happening in Sweden and Finland. If everyone in charge in America ignored the deficit like Galbraight does and believed that by some natural law American deficits could never cause a crises, you can be sure the market would assign a higher probability to default in the U.S.

Now, what exactly is the central differences between the U.S and Greece? There are 4 reasons why a crisis is less likely in the U.S, and 1 reason why it is more likely.

* First, the debt and near term deficits are much lower in the U.S.

* Second, the U.S is much richer. Even given the same debt share of GDP, it is easier to cut government wages from 70.000$ to 60.000$ than from 30.000$ to 20.000$.

* Third, again because the U.S is richer, it has a higher capital to GDP ratio than Greece, when we take into account human capital and intangibles (firm technology). You would be willing to give a higher loan as a share of income to a rich guy than a poor guy.

* Fourth, the U.S has a more responsible electorate. Argentina, Mexico, Russia, Brazil, Turkey and now Greece were big risks because they have a population that would strongly protest if you tried to cut their benefits, even if the country was going under. When in the same situation in the early 1990s, Sweden and Finland acted responsibly and cut the deficits, with broad public consensus. The same thing would happen in the U.S if on the path to insolvency.

Again, notice the difference in Galbraight's interpretation. It is not a magical property about U.S debt which prevents it from default if the problems are bad enough. It is that we would not let problems become that bad.

* One factor that makes the U.S a much bigger risk than Greece. The U.S constitutes almost 30% of the world economy. Greece is less than 1%. The systematic risk of a USA-default would cause a financial meltdown long before where we are with Greece. And obviously no one could bail the U.S out.

2. The United State cannot inflate itself out of a 150% debt/GDP figure. First of all, inflation is an extremely ineffective and unpopular tax. It would be much better just to raise regular taxes.

Furthermore, with the exception of massive unexpected inflation (which is quite close to an actual default on the debt), you can only get a modest amount of revenue from inflation. The reason is that once inflation expectations go up, the nominal interest of the debt follows.

The amount of dollar bills in circulation is only about 1 trillion, far too little to matter much for the debt.

3. Galbraight has a simplistic view of health care. He writes:

"No, it's not reasonable [that health-care costs will continue to rise faster than other sectors of the economy.] Share of health-care cost would rise as part of total GDP and the inflation would rise to be nearer to what the rate of health-care inflation is. And if health care does get that expensive, and we're paying 30 percent of GDP while everyone else is paying 12 percent, we could buy Paris and all the doctors and just move our elderly there."

What he does not realize is that health care "inflation" (really it is mostly higher expenditure, not higher cost for the same procedure) is as high in France and other OECD countries as it is in the United States. The rates of growth are the same, it is just the level from which we are growing that are different.

Take his example, France.

From 1990-2007 (latest available year) according to the OECD health care as a share of GDP in the United States grew by 31%. Health Care went from 12.2% of GDP to 16% of GDP.

From 1990-2007, again according to the OECD health care as a share of GDP in France grew by exactly 31%, going from 8.4% of GDP to 11% of GDP.

By the time health care is 30% of U.S GDP it will no longer be 12% of European GDP.

The second problem is the absurd proposal to buy French health care. Health care is a locally produced, mostly non-tradable good. Are you going to drive people with heart attacks to the airport, fly them 12 hours to Paris and get them surgery there?

No one expects medical tourism to be more than a small share of U.S health spending. It is a bit scary that the leftist transformed the American Health care system, with quite unsophisticated views.

4. Galbraight theories on inflation are equally problematic. He writes:

"Government does not need money to spend just as a bowling alley does not run out of points."

and "the government needs to run a deficit, it's the only way to inject financial resources into the economy."

and lastly "A government deficit means more money in private pockets."

None of this is true. It is a myth that having printing presses means you can never go bankrupt. At some point, quite soon actually, the inflation will be so high people will stop using your currency. That happened in Zimbabwe.

Expected U.S default and the ensuing global meltdown would come as soon as the investors realized the U.S intended to inflate yourself out of the value of the debt. People with money at risk know the difference between real and nominal dollars.

Take his analogy with the bowling alley. Yes, you can give people more "points", but people don't care about points, they want real resources. Bowlers would devalue a bowling alley that give everyone 100 points for a Strike, just as they would devalue a currency of a state that used the printing presses to pay for most of its expenditure (only about 0.2% of GDP is collected through printing money now).

It is a insane leftist fantasy that a government deficit means more money in private pockets. Almost all the deficits comes from the private sector (of course including foreign private sectors). Moving money from the pockets of bond buyers to entitlements does not create any value. It just transfers it.

It is not strange that Obama is borrowing like crazy when this is how parts of the heterodox liberal left thinks about deficits. At the end, I hope for the sake of the world economy that conventional economists will prevail.

Tuesday, May 11, 2010

Tea Partiers are right and the left wrong about the growth of goverment

USA-Today and the cited Center for American Progress is not being serious in its latest analysis about taxes. They are claiming that taxes are only 9.2% of income, and that this is some sort of historical low.

They claim:

"Federal, state and local taxes — including income, property, sales and other taxes — consumed 9.2% of all personal income in 2009, the lowest rate since 1950"

This is nonsense.

According to the Bureau of Economic Analysis total government revenue in last quarter of 2009 was 30.2% of National Income, hardly 9.2%. In the first quarter of 1950 revenue was 23.8% of national income, less than they are now.

How do they cheat the figure down to 9.2%? By excluding most taxes from government revenue. For example, the payroll tax is not defined as a tax, even tough for most individuals it is a bigger burden than the federal income tax. This is not serious analysis. Over time, more of government revenue is coming from indirect taxation. Should this be combined with accounting tricks to give the false impression to the voters that taxes are going down?

Trained journalists and economists should work to inform the public, not use their superior knowledge to obfuscate. For example, the BEA defines the trillion dollars in revenue from payroll taxes as "Contributions for government social insurance". Fine. For all intents and purposes, this is a tax, and anyone who knowingly removes it from taxes without explaining it and tells the public they are paying little in taxes is a simply dishonest.

It becomes extra disgusting when these tricks are used to portray their political enemies as stupid and uninformed. For example, USA-Today portrays Tea Party follower as ignorant, because they are protesting taxes which are only 9.2%, the lowest in 60 years, and declining. The only problem with the story is that taxes are not only 9.2% on average, they are not the lowest in 60 years, and tax rates are not going to decline.

Remember also that during a recession tax revenue goes down even while tax rates stay the same, simply because firms and people are poorer. According to economic theory burden of taxation for society depends on the effective tax rates, not the tax revenue.

Lastly, the burden of government includes deficits, which are only delayed taxes (with interest). Are the Tea Partiers supposed to be mucked because they are prudent and take the future into account?

Within the discipline of economics, introducing forward looking individuals into public finance was considered an improvement. It seems however that the modern left bizarrely enough is accusing you of being cray if you think ahead a couple of years. According to the left smart citizens are supposed to simply ignore the impacts of President Obama's shortsighted and unsustainable policies on Americas future.

I have plotted the government as a share of national income from 1950 until today. First, the graph with revenue. As you can see there is a slow upward trend, combined with some cuts in the Bush years and a collapse of revenue after the crisis.

Second, the graph with the total size of government. Leviathan is growing over time, with acceleration during the last year and a half.

But why let our lying eyes deceive us when the mainstream media and leftist think thanks are assuring us that government is smaller than ever, and that taxes are not going up, despite Obama's own proposals and despite massive deficits?

Sunday, May 9, 2010

Update on employment protection

A few days ago I showed that Sweden did well during the last few years in employment terms, taking the fall in GDP into account.

A couple of readers were concerned that the employment residual reflected employment protection laws.

So I did a regression of employment protection laws from the OECD and the employment residual. No statistically significant relationship can be established.

Employment protection index, from the OECD (2003).

Tur 3.72
Prt 3.67
Mex 3.13
Fra 3.05
Grc 2.83
Nor 2.56
Deu 2.35
Esp 2.34
Swe 2.24
Bel 2.18
EU15 2.14
Nld 2.12
Kor 2.03
Fin 2.02
Ita 1.95
Aut 1.93
Cze 1.9
Jpn 1.84
Pol 1.74
Hun 1.52
Nzl 1.47
Dnk 1.42
Svk 1.42
Aus 1.19
Che 1.14
Irl 1.11
Can 0.78
Gbr 0.75
USA 0.21

Friday, May 7, 2010

Britain enjoyed higher GDP growth post Thatcher

In 1979, when Margaret Thatcher became prime minister, out of the 4 major European countries, the United Kingdom was the poorest. It had a lower gdp per capita than Germany, France and Italy.

But the U.K subsequently grew faster than the other European countries. By 2008, the latest available year, the U.K was the richest out of the 4.

White the U.K in per capita terms was 7% poorer than France in 1979, it was 10% richer than France in 2008.

This graph shows real per capita GDP (from OECD) for the U.K, and a population weighted average of the other 3 major west European nations: Germany, France and Italy. As you see they start of richer than the U.K in 1979, but by the end of the period the U.K is richer than the average (and richer than any individual country).

It will be interesting to see if this advantage is maintained after the crisis.

There is a strong case to be made that Thatcher's pro-market reforms had a lot to do with this remarkable recovery.

Wednesday, May 5, 2010

David Brooks uses some of my figures

He writes:

"Roughly a century ago, many Swedes immigrated to America. They’ve done very well here. Only about 6.7 percent of Swedish-Americans live in poverty. Also a century ago, many Swedes decided to remain in Sweden. They’ve done well there, too. When two economists calculated Swedish poverty rates according to the American standard, they found that 6.7 percent of the Swedes in Sweden were living in poverty.

In other words, you had two groups with similar historical backgrounds living in entirely different political systems, and the poverty outcomes were the same.

A similar pattern applies to health care. In 1950, Swedes lived an average of 2.6 years longer than Americans. Over the next half-century, Sweden and the U.S. diverged politically. Sweden built a large welfare state with a national health service, while the U.S. did not. The result? There was basically no change in the life expectancy gap. Swedes now live 2.7 years longer.

Again, huge policy differences. Not huge outcome differences."

My brother, using figures I prepared for him, wrote in a smaller journal:

"A Scandinavian economist once stated to Milton Friedman: "In Scandinavia we have no poverty." Milton Friedman replied, "That's interesting, because in America among Scandinavians, we have no poverty either." Indeed, the poverty rate for Americans with Swedish ancestry is only 6.7%, half the U.S average. Economists Geranda Notten and Chris de Neubourg have calculated the poverty rate in Sweden using the American poverty threshold, finding it to be an identical 6.7%.

In 1950, before the high-tax welfare state, Swedes lived 2.6 years longer than Americans. Today the difference is 2.7 years."

While I agree with the thrust of Brook's article, he neglects one figure.

"These cultural phenomena do not disappear when Swedes cross the Atlantic to the supposedly inferior “cowboy” country. On the contrary, they appear to bloom fully. The 4.4 million Americans with Swedish origins are considerably richer than the average American. If Americans with Swedish ancestry would form their own country their per capita GDP would be $56,900, more than $10,000 above the earnings of the average American.

The old Sweden, in contrast, has not done as well in economic terms. In 1960 taxation stood at 30 percent of GDP, roughly where the US is today. As taxes rose, economic growth decreased, with Sweden dropping from being the 4th richest country in 1970 to being the 12th richest in 2008. Swedish GDP per capita is now $36,600, far below the $45,500 of the US, and even further behind the $56,900 of Swedes in America."

Swedes are a very competent people. Under the American free-market system, they earn about 50% more than they do in Swede. Despite the fact that the Swedish system is geared towards reducing poverty and income inequality, they manage only the same poverty rate, and much lower average income.

So far I have been linked or cited (directly or indirectly, I frankly don't care) by Greg Mankiw, Tylwer Cowen, The Economist blog, Casey Mulligan, National Review and the New York Times.
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