Monday, March 25, 2013

Policy Convergence of U.S, Canada, Sweden, U.K

The appeal of treating countries as experimental laboratories is clear. When people want to figure out how well the welfare state works, the first thing they do is to compare countries with bigger and smaller welfare states.

One of the problems with comparative policy analysis is that policy regimes change over time. Sweden is still viewed as the archetypical welfare state. The United States is viewed as the classic laissez-faire, neo-liberal model. Canada is sometimes portaged as a “socialist” country, and contrasted with the U.S. In the European context, the U.K is perceived as operating an “Anglo-Saxon” model similar to the United States.

There is some truth to these stereotypes. However it is also important to update our beliefs from time to time. During the last decades, the countries mentioned above have converged substantially in their economic policies.

Between 1990-2010 governments expanded In the U.K and U.S, while shrinking in Sweden and Canada.

I will plot graphs Government Expenditure as a share of GDP. The data is mostly from the IMF, with a few years of missing data for the U.S imputed using Bureau of Economic Analysis data. The graphs show a 3 year moving average.



 
In 1990 the difference between Sweden and the United States countries was so large that one could reasonably talk about different economic systems. In the subsequent two decades, government declined in Sweden and expanded in America. The differences in the size of the welfare state declined from 21 percentage points in 1990 to 7 percentage points in 2010.

 
Sweden looms large in the public policy debate in the United Kingdom, often as some sort of welfare state utopia. It is therefore important to point out that the large difference between the two countries in terms of the size of government that existed in 1990 has all but vanished.



In 1990 the "socialist-Canada" stereotype had some validity. Canada had a substantially bigger state sector than the United States. However the government retreated in Canada and expanded in the U.S, so that by 2010 the two countries were pretty close to each other. I predict that with the current trends of liberal political hegemony and demographic transformation, within a decade the U.S will have a bigger government sector than Canada.

This new reality is important to keep in mind, for example when trying to figure out why “socialist” Canada and Sweden have rapid economic growth if socialism is so bad. The answer is that these two countries are far less socialist than they were until pretty recently, especially when compared to the United States.

20 comments:

  1. This comment has been removed by the author.

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  2. Funny how demographic transformations have different effects, depending on starting conditions. There are studies on Swedish municipalities which show that ethnic diversity reduces willingness to support the welfare state. No doubt the typical Swede's (poorly hidden) unease with the fast growing Muslim population has something to do with the suddenly fashionable fiscal restraint. However in the U.S., where the transformation is further along, the effect have been to bring government spending up, seemingly.

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  3. Yes, initially increased diversity reduces willingness to pay for the welfare state. The pro-welfare state minority population is small, and shifts in the large majority population dominate.

    After a tipping point the majority population becomes less and less relevant. Even if 100% of Non-Hispanic Whites vote Republican Democrats might by 2100.

    The Non-European immigrant vote share is 2% in Sweden. 77% if the group voted for the left, but the voting block is too small to decide elections. If immigration makes the 98% majority vote block a bit less altruistic and more rightwing, the effect is a reduction of the welfare state (perhaps in part what we are observing).

    In California in 2012 Obama only got 44% of the Non-Hispanic White vote, but won the state almost 2-1, since 75% of the Minority voter went for Obama.

    This tipping point argument (after sufficient immigration the native vote is to small to matter, regardless of prefrences for redistribution) is not understood by libertarians who claim that open borders will reduce the welfare state.

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    Replies
    1. I'm not sure that you're right about the growth in Sweden. According to the very interesting economic site, Cornucopia, he claims that the growth per capita has been much better when Sweden was runned by the Social Democratic party (from 1994 to 2006). The growth since 2006 has been only because the Swedes has consumed a lot by taking more and more loans.

      http://cornucopia.cornubot.se/2013/03/ekonomifakta-svensk-bnp-per-capita.html

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    2. You are right, but it got nothing to do with who controlled the economy. Most of the time the right and left would do exactly the same. That is even the case in America where the left and right is very far apart.

      I believe the reasons the right wins during economic crisis is because Swedes normally vote for the left as they are left wing, and only vote for the right as a protest vote

      Its no wonder, during 07 - 09/10 the world had a crisis. Then Sweden had rapid growth for one year as businesses revover.

      Then the economy stagnates. In the Swedish media they talk about 1% growth like it is impressive, but its not. The population is increasing by 1% as well. If you take into account population increase, the growth rate this year has actually been 0% and might be 0.5% next year if the predictions are right. That is very low by historical standards.

      The whole western world is stagnating. The more responsible countries are slowly growing, the irresponsible ones are declining. I believe it has a lot to do with China. Previously the economic model was build up on buying cheap goods from China and exporting high-tech goods. Eventually China has learned how to produce many of those goods themselves. Then both the government and private companies/individuals started borrowing on credit.

      Eventually that is going to fail, and many countries have acted very irresponsible to the problems. Trying to ignore them and muddle through. That is not going to work. Real reform is needed.

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  4. The so called common knowledge is generally speaking quite weak, so people still tend to talk and think economic left and right - or even socialism and neo-liberalism - in regards to for instance the current Swedish party system's situation, where one is expected to vote for either the socialist "left" or the liberal "right". (Even if these concepts are used as ideal types for the sake of simplicity in debates, many actually use them as an unproblematic dichotomy.) Everyone with a three digits IQ, however, knows at least something about third way economics and what it means for convergence. You don't even have to read economics - Anthony Giddens works just fine in this respect. Thanks for the data, though.

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  5. Hansa:

    You should be suspicious of any growth accounting which begins in 1994. 1994 was around the bottom of the biggest economic crisis in Sweden since the great depression. Naturally growth is higher the years following a recovery from a deep crisis, as the economy returns to normal output levels.

    The link points out that when there is a non-Social-Democratic government in Sweden, there is often an economic crisis. In fact, this appears to be true. However what is the causal link? My interpretation is that Social-Democratic-leaning Swedes voters historically elect the right mostly at times when the economy is bad.

    For example the right won the 2010 election because of the Euro-crisis. However, does anyone think that the Swedish right-wing government *caused* the Euro-crisis? Sweden has had good growth numbers compared to the rest of Europe.

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  6. The growth since 2006 has been only because the Swedes has consumed a lot by taking more and more loans.

    nobel prize economics

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  7. ***When people want to figure out how well the welfare state works***

    As I think you've shown in a number of posts showing outcomes for Americans with Swedish ancestry, you also need to account for demographics, culture & maybe gene-culture coevolution. You can't just assume policies will have similar results with different groups.

    http://www.nytimes.com/2006/03/12/weekinreview/12wade.html?pagewanted=all

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  9. Eventually China has learned how to produce many of those goods themselves. Then both the government and private companies/individuals started borrowing on credit.

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