Super-Economy

Thoughts on current Swedish and American politics

2012-01-26T05:13:00.000-08:00

The Swedish Social Democrats historically tended to get around 40-45% of the vote. Currently they are polling at 23%. Today, they elected a new party leader.

Though the content of the ideologically is diametrically opposed, I think there are important structural similarities between the Social Democrats in Sweden and the Republican party in the U.S.

Both countries are politically polarized, with tribal wars between the right and the left. Both parties are out of power.

In both cases, their opponents have taken control of the elite making institutions in their respective country, the left here in America and the right in Sweden. Because of this, the quality of the leadership available to the Republican and Social Democrats has declined, both in terms of competence and character.

The Swedish Social Democrats chose two low-quality leaders, Mona Sahlin and Håkan Juholt.

The Republicans have chosen or considered had a string of low quality candidates, including George W Bush, Sarah Palin, Donald Trump, Herman Cain, Michele Bachman, Rick Perry and now Newt Gingrich.

When the enemy elites takes over and subverts institutions such as the media or universities, your side naturally becomes hostile to elites in general. This has happened both in the U.S and in Sweden. In both cases, political defeat paradoxically can make the situation worse, since the leaders are blamed, the party closes inward, and since ideological purists gain influence.

Consequently the decision making quality of the grassroots declines. Wiser Republicans believe Mitt Romney is a far superior choice than Gingrich, but are no longer trusted by many voters. Similarly the adults in the Social Democratic party realized early that Håkan Juholt was a drag, but were not initially able to force him out.

In a country engaged in tribal war along political lines, elite who take over institutions have little qualm in abusing their power. For the better part of a year, the Swedish media engaged in mass-hysteria against Håkan Juholt and the Social Democrats. His mistakes were amplified and hammered on, and toward the end the poor guy couldn’t say anything without it turned into a “scandal” by the media. I must say I admire Juholt’s personally by not letting the prejudicial hostility of the press break his spirit. Juholt managed to win most debates during this storm of animosity.

Similarly the American media is mobilizing for political war against their enemies. Reading the New York Times in the plane yesterday, more than half of the “news” articles were thinly disguised leftist propaganda, most containing factual or analytical errors from an economist point of view.
Let me give just one simple example. When comparing the taxes paid by rich investors such as Warren Buffet and Mitt Romney, corporate taxes are simply ignored by the NYT.

Warren Buffet paid almost $1.6 billion in corporate taxes last year alone. Mitt Romney’s tax rate would be twice as high if corporate taxes that he pays were taken into account.

The effective corporate tax rate in the U.S has been estimated at 27%. That means that if you pay 15% in capital gains taxes, your true tax burden taking double taxation into account is 38%. This is a simple and virtually irrefutable point known to most economists, but ignored almost entirely in the debate around the tax rate of the rich.

Björn Wallace and I have termed the tendency of politicians to hide the true tax rate on individuals through indirect taxation and misleading labeling regarding incidence as Fiscal Obfuscation.

These comical biases survive because the elites in the American media and the elites in American academia favor the left.

Another similarity between the Swedish Social Democrats and American Republicans is that demographic change is working against both parties. In Sweden, the working class is shrinking and losing their class-identity. Whereas young Swedes two generations ago aspired to change the world through progressivism, today they aspire to purchase and renovate an apartment in central Stockholm.

In the U.S, politically motivated Democrats and ideologically motivated libertarians managed to shift the American political center of gravity to the left through low-skill immigration policy.

Among non-hispanic white Americans, today 55% are positive towards “Capitalism” and 35% negative (+20%). Among Hispanics, 32% are positive and 55% negative (-23%). Similarly while 68% of whites are negative towards “Socialism” and only 24% positive, Hispanics are evenly divided (49% vs. 44%).

It will be very difficult for a pro-capitalist Republican party to survive in a country that through immigration is becoming increasingly anti-capitalist. Despite what for example Bryan Caplan claims, there is no evidence that Hispanics are pro-capitalism and only vote Democrat because of Republican immigration policy.

Neither party’s situation is entirely hopeless. Today the Swedish Social Democrats choose a new party leader, Stefan Löfven. The decision to replace Juholt out was reportedly made by the party elders. From the little I know Löfven is competent and widely respected. He started as a welder and worked himself up to the leader of the most powerful union in the country.

Because American parties are more democratic (in the sense than voters have far more input in who becomes the candidate), the leadership quality problem is even worse among Republicans. It remains an open question whether the Republicans will choose Romney, the most accomplished guy running for President in 20 years, or Gingrich, probably unelectable and detested by most people who worked closely with him.

In both Sweden and the United States, while the elites tilt, the belligerent tribes themselves are equally sized, which means ultimately anything could happen. This makes tribal politics exciting as the favorite spectator sport for nerds like me. Though I may have stretched the parallels a bit, I think you learn more about the politics of both countries by analyzing them together.

Wrong Juholt: Sweden is still more equal than U.S in 1980s

2012-01-01T06:36:00.000-08:00

Increasingly, newspapers have “Fact-check” sections where they attempt to adjudicate political controversies.

The problem with is that very often, the people who write these articles are journalists, not the arbitrates of the objective truth. But since people trust the newspaper as giving them fact rather than subjective opinion, this becomes a problem when the fact-check itself requires fact-checking.

A couple days ago the leader of the Social-Democratic party argued that Sweden today has higher income inequality than the United States in the middle of the 1980s.

The right-of-center daily SVD has a “Fact-Check” of this claim, and concludes that the Social Democrats are mostly right in their claim that Sweden is as unequal as the U.S was in the mid-1980s.

But the OECD tells a different - and in my view more plausible - story.

Here are international Gini-data from the OECD. The higher the Gini-coefficient the higher income inequality. Since the state taxes the rich and subsidizes the poor, inequality in both countries is lower after taking taxes and transfers into account.

The U.S Mid-1980s Before Tax and Transfers 0.436
The U.S Mid-1980s After Tax and Transfers: 0.337

Sweden Late-2000s Before Tax and Transfers: 0.426
Sweden Late-2000s After Tax and Transfers: 0.259

Even before tax and transfers, Sweden is still slightly more equal. (At any case we should we ignore the effect of the welfare state, since the discussion is precisely about government policy?)

SVD was sloppy in it's “Fact-Check”.

Here is the Gini-coefficient of disposable income 1975-2008, again from the recent OECD report "Divided We Stand: Why Inequality Keeps Rising".

Note, as my brother Nima Sanandaji did, that income inequality was also rising in Sweden during long periods of Social-Democratic rule, for instance 1994-2006. There has been a secular rise in Inequality in most OECD-countries. Likely the cause is common changes in the global economy (globalization, rise in the premium for human capital) rather than the fault of any particular government.

The American Federal Debt

2011-12-19T07:09:00.000-08:00

The President doesn’t control the economy, and should not be blamed for things out of their control. The deficit is however one the components of the economy where the president has lots of direct control. Even this controll is far from complete, presidents can be lucky or unlucky. For instance the deficit declined during the 1990s IT-boom when Clinton was president and was increasing rapidly when Obama took over following the 2008 crash, in both cases having little to do with their actions.

Though the debt numbers alone do not tell how much credit or blame the president deserves, they are interesting. Data from The White House 2012 President's Budget. Since the figure is for the end of the year and the President takes office one month into the year, they correspond well with tenure.

During 20 years of the presidencies of Reagan, Bush I and Bush II, the federal debt as a share of GDP increased by a cumulative 43% of GDP. During the 4 first years of the Obama presidency, it has increased by 36% of GDP.

This is how the Presidents rank in terms of development of the Debt/GDP ratio per year of tenure:

1. Clinton -1% per year
2. Reagan, Bush II: +2% per year
3. Bush I: +3% per year
4. Obama: +9% per year.

Social Expenditure bad measure of Spending

2011-12-09T15:40:00.000-08:00

Ezra Klein argues that “A larger welfare state can mean a lower deficit”.

My main problem is not so much the argument, but that Klein is knowingly or not relying on a trick used by (who else) Paul Krugman, which is to define the welfare state as “Social Expenditure”.

Social Expenditure is a statistical category which sound as if it the welfare state, but in fact includes about half of non-defense spending. For instance education spending is generally not included in “Social Expenditure”. All spending causes deficits, not just the ones somewhat arbitrarily defined as social.

In the U.S, social expenditure is about 45% of total government spending. Even in Sweden, the country which spends most on social expenditure, the category nonetheless only includes 53% of total government spending.

Richer countries tend to have a higher share of Social Expenditure of total welfare state expenditure. It is therefore a trick to use “Social Expenditure” when you are talking about the welfare state. Instead of size of government, they use a sub-category of spending that tends to correlate with good outcomes more than overall government spending does.

But let’s stick with Kleins definition, for now. The last year for which the OECD reports “Social Expenditure” was 2007. Here is a correlation with the public debt that year. It is positive and weakly statistically significant (10% but not 5% level).

Countries that spend more have more debt. The same is true if total spending is used.

P.S

Another trick used by liberals is to use ”Government Purchases” (another sub-category) instead of spending. The left love spending, but apparently don’t like to use spending as a statistical variable.

Evaluating Keynesianism three years after the crash

2011-12-03T14:52:00.001-08:00

I have a new article in The American about why accepting Keynesian theory does not necessitate supporting Keynesian policy.

The missing productivity puzzle

2011-11-25T14:07:00.000-08:00

The Conventional Wisdom is that while productivity has continued to increase, very little of it went to the middle class during recent decades. Since we know inequality was going up contemporaneously, the qualitative-thinking conclusion is that the “the rich” and “corporations” are simply taking the rest.

However, quantitative-thinking shows that no estimates of inequality increase is large enough to account for the mystery of missing output.

This time I start at 1975 since some of the public data doesn’t go back further. Between 1975-2008, real Per Capita GDP increased by 90%. During the same period, real Median Household income increased by merely 17%. The issue is not just with the median, mean household income for the lowest earning 80 percent of the population grows just 21% measured this way. So what’s going on?

Growing inequality is an important part of the story. If we use Pickety and Saez estimates to calculate the share of income that went to the top 10 percent earners, the rest of the population (the “Poorest 90 Percent”) had a real income growth rate of 50%. What about the rest of the gap?

Additional explanations for the disconnect is that the standard inflation measure (CPI-U-RS) may be biased upward, and has at any case increased about 13% faster 1975-2008 than the GDP-deflator used to calculate GDP. Meanwhile average household size decreased by 11%.

Let’s make inflation comparable by using the GDP-deflator also for household income, and hold household size fixed by looking only at 4-person households.

You can see a sizable disconnect between Median Household Income and the “Bottom 90 Percent” growth calculated by combining GDP data with Pickety and Saez distribution numbers. However, once we make two simple (and I hope uncontroversial) adjustments to the Census Median Household Income data the gap vanishes!

While disappointing for such a long period, 50 percent real growth is not quite “stagnation”. The narrative that all productivity increases have been eaten up by the rich is a myth, driven by measurement problem and the unwillingness of many journalists and economists to ruin a good narrative by digging deeper.

Middle Class Income Stagnation is a Myth

2011-11-18T13:31:00.000-08:00

The conventional wisdom is that the middle class, 'The Bottom 99 Percent”, has seen stagnating or shrinking income. Thought inequality has unquestionably been rising rapidly, the conventional wisdom is wrong, a result of measurement problems.

The debate has focused on the exact magnitude of income inequality, ignoring that even the highest estimates are too small to eat up all economic growth. The central problem is underestimation of total growth.

Wages, household earnings and earnings of tax units appear to grow slowly. Between 1970-2008 real wages grew 15%, median household income 16%, and according to Pickety&Saez taxable income of "The Bottom 99 Percent" by 12%.

This contrasts with another more reliable and complete measure. Between 1970-2008 Real Per Capita GDP increased by 108%, based on National Accounts data calculated by the Bureau of Economic Analysis.

How can per capita income double, but the income of the middle class barely go up? According to the Conventional Wisdom, the answer is simple: The rich must simply have taken the rest. Indeed according to Pickety&Saez between 1970-2008 the share going to the top one percent increased from 9% to 21%. Mystery solved!

Wrong. Rising inequality alone cannot account for the gap between output growth and middle class stagnation.

Let’s return to Pickety&Saez and their oft-reported figures. They find that real average taxable income grows only 29% between 1970-2008, when including the top one percent (and including capital gains). This is just a quarter of per capita GDP growth. The discrepancy is not a major problem for their original task of estimating relative inequality, but it poses a problem for estimating growth.

There are at least three measurement problems:

1. Taxable income is only part of total income. In 2008 taxable income as reported by Pickety&Saez was only 58 percent of GDP, a decline from 1970. We can’t just ignore the rest of national income. There is a similar income-base problem with BLS wage data.

2. Average Household and Taxable Unit sizes have been shrinking since 1970, both growing at around one and a half time the rate of population.

3. Inflation is systematically miss-measured, as the Boskin-comission found. When calculating GDP a different and less biased inflation measure is used than CPI-U-RS.

The Congressional Budget Office made their own estimates, accounting for the first two problems, though not for inflation. They confirms that the share of post-tax income going to the top one percent increased from 8% to 17% (a bit lower than Pickety&Saez, perhaps because of household size adjustment and a broader income base). Since the CBO estimate of income growth of 62 percent in the shorter period covered is very close to GDP numbers, their estimates of real middle class income growth are also higher, at 46 percent.

A careful new study by Bruce Meyer and James Sullivan corrects for the aforementioned problems. Similar adjustments are done by Burkhauser et al. (2011) and Gordon (2009). Like the CBO, all these studies correspond better with GDP data, and produce higher estimates of middle class income growth (results summarized bellow).

My simple method is combining the best income-distribution estimate (from Pickety&Saez) with the best income-growth estimates (from GDP numbers). This method shows that that between 1970-2008 the real per capita income of the "Bottom 99 Percent" grew by 80%, and the income of the "Bottom 90 Percent" grew by 60%.

The "Top one Percent" took 25 percent of total growth, half of Pickety&Saez estimate. This is bad enough, so why exaggerate? Let me stress once more that I use their distribution numbers, just a different and more realistic figure for aggregate income growth. Underestimating total growth ironically also leads to an underestimation of how much richer the top one percent became (5 times rather than 3 times richer).

To argue for middle class stagnation one must argue that GDP growth numbers are wrong, and estimates based on smaller income bases right (a claim I have never seen, though I am hardly an expert). More on the topic by the always excellent James Pethokoukis.

Real Median Income around 1970-2008:
Not adjusted, Census: +16%

Adjusted for measurement problems:
CBO: +35%
Burkhauser: +37%
Meyer&Sullivan: +50%
Gordon: +52%

Real Average Income of "Bottom 99 Percent" 1970-2008:
Not Adjusted, Pickety and Saez: +12%

Adjusted for measurement problems:
CBO: +46%
Combining Pickety&Saez with GDP: +80%

Again with the Krugman

2011-11-16T15:18:00.000-08:00

Now Krugman is trying to divert blame for the Euro disaster from his beloved Europeans to the focus of his obsession: The American Right!: “attempt to create a common European currency… was cheered on by American right-wingers… And it was questioned by American liberals, who worried — rightly, I’d say (but then I would, wouldn’t I?) — about what would happen if countries couldn’t use monetary and fiscal policy to fight recessions.”

In 1999, when the Euro was launched, Milton Friedman, the leading right wing economist in America predicted: “The euro will not survive the first major European recession”

The same year Friedman said: “Sooner or later, when the global economy hits a real bump, Europe’s internal contradictions will tear it apart.”

Friedman had already in 1998 speculated with eerie foresight: “there will be asymmetric shocks hitting the different countries. That will mean that the only adjustment mechanism they have to meet that with is fiscal and unemployment: pressure on wages, pressure on prices. They have no way out…Suppose things go badly and Italy is in trouble, how does Italy get out of the Euro system?”

Milton Friedman was not the only right wing American economist warning about the Euro. Martin Feldstein wrote in 1997: “adverse economic effects of a single currency on unemployment and inflation would outweigh any gains from facilitating trade and capital flows".

Now let’s contrast this to with Paul Krugman's lightweight Euro-optimism in 1999: “For all the seven long years since the signing of the Maastricht treaty started Europe on the road to that unified currency, critics have warned that the plan was an invitation to disaster… Well, here we are, right on the brink of the creation of "euroland", and it is now clear that none of the problems EMU critics have warned about will arise, at least for a while.”

Rather than warning against the overly expansionary policies and cheap debt that would eventually lead to this crises, in 1999 Krugman thought the biggest problem was that European were not being expansionary enough: “Instead of an "asymmetric" economy, in which some countries want tight money while others want a boost, the whole zone is a prime candidate for lower interest rates”.

The same year Krugman wrote another article about how the Euro would impact the U.S, titled “Don't worry about the euro”. Instead of warning about the threat the Euro posed to economic stability as Freidman did, Krugman seems to think the problem was that the eventual success of the Euro would worry irrational Americans about the dominance of the dollar: “it was inevitable that the coming of the euro --the common European currency that seems set to be introduced next year, and that may eventually challenge the dollar's dominance--would inspire irrational fear.”

The point is not to the blame Krugman for the Euro experiment, that would be childish, and overall his record is of mild Euro-spectism. Rather it is comical to see Krugman (without evidence) blaming “American right-wingers” for the Euro disaster when the leading American economist on the right warned about the euro harsher and more presciently than Krugman did.

Did the Euro kill Italy?

2011-11-12T13:36:00.000-08:00

Italy has one of the worst growth records of any country. Between 1990 and 2010 the U.S economy grew by 63 percent, compared to 19 percent for the Italian economy. Had Italy grown as fast as the U.S, their debt would be manageable.

One cause of slow growth is demographic transformation. During this period Italy’s working age population (those aged 15-64) grew by less than 2 percent, compared to 8 percent in the rest of Western Europe.

But aging is not Italy’s only problem. In this graph, I have accounted for demographic change by looking at GDP per working age adult, instead of GDP per capita. Italy is compared with the weighted average of the remaining 14 Western European countries.

There are different ways to read the graph, and I don’t want to oversell this interpretation. The hypothesis, not uncommon among Italians, is that Italy started to lag when it joined the Euro and stopped devaluating the Lira. You see, Italy had developed a habit of periodically devaluating its currency to fix whatever cost problem she get herself into. The devaluations lowered the price of Italian exports and jump-started the economy, working as Italy’s “safety valve” (presumably because an internal devaluation through deflation is too hard). The Euro stopped all of this.

Until the early 1980s, Italy was converging to the rest of Europe, as it had done virtually uninterrupted since World War II, during what is referred to as the Italian “miracle”. In 1970 Italy’s output per working age adult was 90 percent of the rest of Western Europe, and ten years later 98 percent, almost fully converged.

Around this point Italy stops converging, but more or less keeps its relative position. In 1996, the year when the Italian Lira is effectively tied to what would soon become the Euro, Italy had the same relative position, 2 percent below the rest of Western Europe. It is after the Euro prevents Italy from devaluating that serious under-performance starts.

There are of course competing explanations, such as Chinese competition or lack of reform, so perhaps the correlation is spurious. You could also put the start of the decline a couple of years earlier. Still, it would not surprise me if Italian growth would re-bound if they leave the Euro.

New article in Swedish

2011-11-06T10:25:00.000-08:00

Approximately 15 percent of the readers of this blog live in Sweden. They can read this article in Swedish by me and my brother about the roles of norms for the economic and fiscal crises.

Max Weber would not have been surprised by a map showing which countries have the biggest problems.

American Mobility is high and increasing

2011-11-02T11:13:00.000-07:00

The process we believe created income inequality matters more for the legitimacy of society than the actual level of inequality. Did the rich become rich by producing value or by exploiting the poor? What determined earnings, ability or inheritance/privilege?

The Occupy Wall Street protesters and their sympathizers in the media are angry about four trends they believe characterizes American capitalism.

1. Income inequality has been going up (true).
2. The Middle Class is stagnating (false).
3. Wealth is taken, not created (I believe false).
4. American income mobility is falling (false).

I will write about the middle class stagnation myth and about value creation next time.

The Bureau of Labour Statistics provides the NLSY97 dataset, tracking a large representative number of Americans. In addition to your current earnings, NLSY97 reports the income of your parents when growing up.

Of the Americans whose average income during the last five years put them in the "Top 1 Percent" richest, 7 out of 10 did not have rich parents (defined as the top 10% highest earning parents).

The richest 1 percent do not come from poor homes, they mostly come from upper-middle class homes. Note that because income is measured imperfectly, these numbers likely overestimate mobility.

Nevertheless, you get a similar result from the Forbes 400 list of the richest people in the United States. Forbes magazine lists the source of wealth :

“Two-thirds of the members of the Forbes 400 have fortunes that are entirely self-made.”

The share of billionaires who according to Forbes Magazine are self-made is higher in the United States than in Western Europe.

In addition to mobility between children and parents, mobility across life for the same worker is important. A recent study by Berkley Economist Emmanuel Saez and coauthors confirms that while income inequality has been getting worse, income mobility has not. Instead, driven entirely by women, upward income mobility has actually improved. Saez writes (emphasis in original) “long-term mobility has increased significantly over the last five decades.”

According to Saez, the probability that someone currently in the top one percent will remain in the top one percent five years from now is only around 60%, where it has remained for a very long time. The notion of a permanent elite taking hold of top incomes during the last few years is entirely a myth. There remains a substantial churn among the top one percent, with almost half dropping out every five years.

One common argument is that inter-generational income mobility in Northern Europe is higher than the United States. But even if that were true, it hardly proves that income mobility is low in the U.S, because those studies they cite find extremely high mobility in for example Scandinavia. Also a homogenous country will always appear to be more mobile than one made up of lots of groups. Not surprisingly, inter-generational mobility among Scandinavian-Americans in the NLSY97 is far higher than the U.S average.

Equally important, I believe these results are a statistical artifact. In Scandinavia, the income distribution is highly compressed. This means that even small and meaningless changes in income between parents and children appear as “mobility”.

Even if true mobility is identical, if one country has less income inequality, and if the amount of statistical noise in the income data is the same, the country with the even income distribution will appear to have more mobility as well. This is because measurement error/noise will move people around more in the compressed distribution.

Indeed the OECD finds that income inequality and inter-generational income mobility is highly correlated. If I am right, concluding that Scandinavia has lower inequality and higher mobility is double-counting equality.

Despite what the left claims, the United States is still a country with high income mobility. Another recent study by Pew found that:

"The vast majority of individuals, 71 percent, whose parents were in the bottom half of the income distribution actually improved their rankings relative to their parents."

The study also confirms that to the extent there is lagging mobility in the United States, it is caused by racial disparities, having to do with skill levels. Pew confirms that American children from low income homes with high test scores have extraordinary high income mobility.

There problem is not with American capitalism as an economic system, but with the lingering inability to make capitalism work as well for African Americans and Hispanics as it does for Whites and Asians. This problem is what I and Reihan Salam focus on the latest issue of National Review, which I encourage you to buy.

The Welfare State and Causality

2011-10-17T19:35:00.001-07:00

My brother Nima Sanandaji has written a report about Sweden for the Finish think tank Libera Foundation which is getting a lot of attention. Go read it.

It includes themes from this blog, namely the importance of thinking about causality for the political debate. Sweden has a welfare state and is successful. The superficial interpretation is that Sweden’s welfare state must have caused Sweden’s success.

But the welfare state is not the only thing which sets Scandinavia apart. Swedes and other Scandinavians have a homogenous population with one of the world cultures best adapted to success. They have high cooperativeness, trustworthiness, work ethic, civic participation, family values and individual responsibility (Scandinavians are politically liberal but personally conservative). You notice this if you live amongst them and think about the importance of norms and culture for economic outcomes.

What I claim is not just an excuse or speculation, but is supported by historical evidence. The Swedish economy had extraordinarily high growth before the creation of the welfare state, the second highest in the world. Swedish 19th century immigrants to the U.S to this day score above the American average in most metrics, despite obviously having no Scandinavian style welfare state. During the last decades when tax rates have been dramatically lowered, the Swedish economy has done great. Though extreme welfare state policies are largely gone, the quality of life has not deteriorated. These are others indications that it was never the welfare state which made the quality of life in Sweden high.

Likely, the strong norms and high productivity of Scandinavians meant that the cost of experimenting with a welfare state was lower. For a while at least, these policies worked, though they tended to quickly cause disaster in other countries.

It is certainly not a coincidence which countries built welfare states. It is precisely the countries where the welfare state works least bad that tried first and went furthest. It wasn’t Nicaragua, Yemen or Cyprus which built welfare state, it was already very well functioning countries in northwestern Europe (in the long run, even rock-hard Lutheran norms were corrupted by the welfare state, and GDP growth lagged).

Of the countries in the Warsaw Pact, the most economically successful was East Germany. Communism didn’t exactly “work” even in East Germany. But because Germans are so competent, have so high social cohesion and such a strong intrinsic motivation to work, they made communism work less poorly than other socialist countries.

If Sweden and Finland would have gone communist, it would probably have worked as well or even better than East Germany. That is not because communism is a great system, it’s because Sweden and Finland are great countries.

Economic Developement in Cuba

2011-10-09T11:27:00.000-07:00

The American far left, such as Michel Moore and Oliver Stone, continue to view Cuba as a role model. The European left is even more admiring of Cuban socialism.

But don't be fooled by the selective propaganda. Cuba is extremely poor. Here is a picture my friend took when on vacation in Cuba a few weeks ago.

One explanation the left offers for Cuba’s poverty is sanctions by the United States. The sanctions imposed by the American capitalists certainly hurt, but there are plenty of other countries Cuba can trade with other than the U.S if it had something to sell.

Another excuse is that Cuba started poor. True, but so did other Latin American countries which developed while Cuba stagnated.

Lets compare Cuban growth with that of Chile and Costa Rica. Similar to Cuba, Chile was led by brutal dictators for long periods in recent history. Augusto Pinochet's right-wing dictatorship murdered at least 3.200 people. Fidel Castro similarly murdered 5.000-12.000 political opponents. Costa Rica instead was mostly a democracy.

Costa Rica and Cuba started at a similar level of development, while Chile was somewhat richer in 1950. Yet while Costa Rica and Chile developed, Cuba’s economy lagged behind. Only in recent years, when the tourism sector was opened to capitalism, has Cuba had some limited growth.

Socialism killed a half century of growth in Cuba.

One defense of Cuba is that it has high life expectancy. Sure, but really no higher than either Costa Rica or Chile. At any case, the Cuban dictatorship is almost certainly manipulating data regarding infant mortality and life expectancy, because those are their “storefront” figures used to manipulate gullible westerners. Communist dictatorships commonly put a lot of resources into boosting a few key statistics to use in propaganda.

For instance, the nice hospitals showcased to sympathetic westerners such as Michael Moore are for the Cuban elite and for foreigner. The health care ordinary Cubans have access to is of far lower quality.

Socialism has been a complete failure in terms of producing a high standard of living for the Cuban people. It is boring to have to kick in open doors like this. But young leftist in the west, such as those demonstrating against Capitalism in New York, desperately want to be fooled. Sadly it appears each generation of young people has to rediscover what a miserable failure socialism is.

Simpson's Paradox in Texas

2011-09-28T12:22:00.000-07:00

I am not a fan of Rick Perry. Unlike President Obama, Perry is not smart. Perry is the worst of both worlds: he unnecessarily alienates leftists and moderates by pushing all their cultural identification buttons, at the same time as he engages in ultra-liberal open border policies with taxpayer’s money.

The media might refer to Perry's policy of using taxpayer money to pay for the college of illegal immigrants as "moderate". But a policy which is opposed by 86 percent of the public even in a rather liberal state such as Wisconsin is hardly "moderate". Compared to the views of voters, Perry's policy is extreme-left. His defense that without having their college education paid for by taxpayers illegal immigrants would live on the "government dole" is unconvincing, since illegal immigrants are not legally entitled to welfare.

Though I feel no need to defend Perry, let me defend the state of Texas itself, which is currently under attack because of Perry's candidacy.

Texas has had rapid job growth. Leftists such as Paul Krugman argue that this is irrelevant, because we have to adjust for demography. Texas also has fast population growth (apparently supply does matter even during recessions). Fair enough, I wrote about the role of population growth for Texas a while ago.

At the same time, left-wing economists such as former U.S. secretary of labor Robert Reich attack Texas for being a state where workers are paid poorly.

“While Texas leads the nation in job growth, a majority of Texas' workforce is paid hourly wages rather than salaries. And the median hourly wage there is $11.20, compared with the national median of $12.50 an hour.”

Reich writes that the Texas model is one of “low wages“ and “lower incomes”, and therefore not right for the U.S.

However, if you want to make demographic adjustment for job growth, you need to make demographic adjustment for wages. Yes, Texas has lower average wages than the U.S. But in fact, Texas Whites, Texas Hispanics and Texas African Americans each earn higher wages than Whites, Hispanics and African Americans in the rest of the country.

The data is from 2011, hourly wages, from the Current Population Survey of the Bureau of Labor Statistics. I look at those ages 20-65. Indeed, I find that average for all groups is slightly lower in Texas than the rest of the country.

But as you see, each demographic groups earns higher hourly wages in Texas. The same is true for mean and median total salary, Texas is on average lower, but Whites, Blacks and Hispanics are each higher in Texas than the other States.

Each group earns more in Texas, yet the average is lower, because the state has a higher share of low-earning groups.

This is an instance of what statisticians refer to as Simpson's Paradox.

The lower wage rates in Texas are entirely due to demographic composition. Texas is 45% white, compared to 64% nationally, and Texas is 38% Hispanic, compared to 16% nationally.

Demographically adjusted, It would be more accurate to say that Texas is characterized by a high wage (and high ethnic diversity) model.

Robert Reich also complains “Texas schools rank 44th in the nation in per-pupil spending.”

Sure, but again, each ethnic group has higher high school test scores in Reading+Math in Texas than the average for the U.S. The data is from the Department of Education NAEP. The graph is truncated at 200 points, to make it easy to read.

The overall average is identical in Texas and the Nation as a whole. Yet all groups do better in Texas than the Nation as a whole. The only reason that the average is not higher in Texas is that the state has a higher share of lower than average performing Hispanics. Even though Hispanics in Texas outperform Hispanics in the rest of the country, their higher share of the overall population depresses the Texas mean and dominates the result.

The Simpson paradox in wages and the near-Simpson's paradox in test scores highlight the increasing importance of demographic composition for social outcomes.

More on Bryan Caplan, ethnic diversity and the size of government.

2011-09-24T15:07:00.000-07:00

Bryan Caplan has now responded to my post arguing that open borders will expand the welfare state. The discussion continues below:

1. Caplan almost entirely relies on Alesina, Glaser and Sacerdote (2001). The paper shows that globally, ethnic fractionalization correlates negatively with social expenditure. I have however shown that this result does not hold for rich OECD countries.

The Alesina et al. paper paper uses “Social expenditure”, a subcategory of the welfare state, which includes transfers but not things like public health care. Social expenditure only constitutes about 40% of total government spending in the U.S. The correct measure of the size of the welfare state is total expenditure, not just one subcategory of spending. I therefore used total public expenditure in my last post. But let’s not let this details distract us.

It turns out that for rich OECD countries, there is no statistically significant relationship with the degree of ethnic fractionalization even if we use OECD “social expenditure” data just as Alesina et al. did. I look at 1990-2000, to correspond with the years the fragmentation data was calculated.

It turns out Alesinia et al. relationship between diversity and a small welfare state is entirely driven by third world countries. But Caplan is discussing immigration to the west; not how tribal fragmentation impacts policy in Africa.

Caplan argues: “instead of throwing away most of the data and variation, it's better to keep the data and add control variables.“

Incorrect. Since we are specifically discussing immigration to the west, we need to throw away the variation that comes from poor African and Latin American countries. Adding dummies does not solve this (though a combination of dummies and interaction variables might have). Even with a regional dummy, the large number of African and Latin countries can drive the results, even when there is no relationship within rich OECD countries.

When I restrict the analyses to rich nations, it turns out that the relationship between diversity and small government does not hold. The results in the paper Caplan builds his entire case on are driven by how fragmentation effects third world countries.

It is logically flawed to have African data generate a relationship, and proceed to argue (as Caplan does) that this proves that more diversity will reduce the size of government in the United States, even though we know the relationship doesn’t hold in rich countries.

Alesina et al. have another misleading graph, which Caplan also relies heavily on. This shows that in the U.S, states with a high percentage of African Americans have lower welfare benefits per welfare recipient. But expenditure is not measured by benefits per recipient; it is measured by the benefit per recipient times the number of recipients. States with more minorities have more welfare recipients. You have to look at both effects, which Alesinas paper neglects to do. This is important, as empirically, it appears that the second effect dominates the first, so that the size of government is bigger in more diverse states (though it is not unproblematic to compare U.S states in this way).

I am glad that Caplan now acknowledges that we need to take into account the effect of demography on the number of welfare recipients, not only welfare per recipient. He has written about the Alesina paper numerous times, and never once pointed out that Alesina graph is only half the story. I might have pointed out this problem to him and his readers if I were not banned from his blog.

Caplan also claims that “AGS's graphs and regressions are better”.

Why? I am using the exact same ethnic fractionalization data that they use (since I downloaded it from their appendix) and standard social expenditure data from the OECD just like they did. The main difference is that I look at rich OECD democracies, since we are discussing policy in those rich countries, and since there are many obvious reasons to believe the mechanisms are not the same as in the third world.

What I do is very similar, so it is hard to escape the conclusion that Caplans objection are not methodological. He just prefers the old result because that produces his preferred ideological outcome.

Aside from all of this, I have to stress that the causal interpretation of the Alesina et. al story which Caplan has made repeatedly is problematic, since the authors only report correlations. There are plenty of differences between the United States and Scandinavia besides how ethnically fractured they are. There are plenty of differences between New England and the South besides the share of African Americans.

2. I write that if ethnic diversity increases poverty and social problems, the left gets more votes, since this increases the demand for government policies to fix the problems. Caplan writes that this is “theoretically confused”. He further writes “the entire political spectrum is indeed irrational, and habitually demands government intervention for no good reason”. (Caplan thinks there is no good reason because according to him poverty in rich countries is merely relative).

I see two problems with this assertion. First, I believe that Caplan is projecting his own atypical preferences to everyone else. People on average have an aversion to relative poverty. This is a preference, not something you can simply dismiss as “irrational”.

Second, more importantly, he is mixing a positive and normative debate. Even if you think that the tendency of voters to demand public intervention as a result of larger social problems of relative poverty is “irrational” or otherwise immoral or confused, this tendency is an objective fact of political reality, not something that you can assume away because you disagree with it.

3. Caplan writes:

“Sanandaji also ignores the possibility that immigrants vote “overwhelmingly for the left” primarily because right-wing parties treat them with such hostility. “

There is no evidence for this claim.

Hispanics did not vote for consistent amnesty supporter John McCain. By no reasonable definition does, say, the Swedish parties of the centre-right or the Republican party of 2008 show “hostility” to immigrants, unless you define opposition to illegal immigration (shared by two thirds of Americans) and to the welfare state as inter-ethnic "hostility". Indeed, that the pro-immigration Swedish centre-right is just as marginalized with third-world immigrants, as is the American right is a rather telling fact.

If you ask Hispanics themselves, it turns out that they are far to the left of American whites regarding economic policy. As I have written, “In the United States, where while only 35% of non-Hispanic whites prefer higher taxes in return for more government services, the figure is 65% for first generation Hispanic immigrants, and 66% for second generation Hispanics.”

This question has nothing to do with the Republican immigration policies (or, say, policing or drug policy), instead directly asking about attitudes regarding fiscal policies. The gap between Hispanics and whites regarding issues relating to the size of government is immense.

When polled, Hispanics are closer to the Democrats regarding public health care and public education than on questions regarding immigration. If Hispanic support for Democrats was "primarily" driven by immigration policies (or some other proxy for inter-ethnic hostility), we would not observe this pattern.

It should also be noted that the countries of origin of Hispanic immigrants, e.g Mexico, Argentina, El Salvador, Peru, Brazil, Bolivia and Venezuela have a long tradition of populism and left wing economic policy. Is this because of GOP “hostility” to illegal immigration? Hardly.

Immigration is a subcomponent of ethnic identity politics, where the left has an inherent advantage. If Hispanics are poorer than whites with worse social outcomes (currently they earn about half much as of whites), they will observe and resent this, and they will believe that the free market is unfair to them.

In addition, the prospect of enacting resource transfers from the majority population, in the form of cash transfers, government services and quotas and preferences, will be a fixed political advantage of the left, as a classically liberal right can never embrace such measures as enthusiastically as the left.

Poor minorities are loyal supporters of the left almost everywhere, including countries such as Sweden where immigration policy has frequently been more generous during right-of-center governments. Between 2000 and 2006, when the Social Democrats were in power, Sweden took an average of 60.000 immigrants per year. After the right took power in 2006, average immigration increased to 100.000 per year. Yet in the 2010 election 77% pf non-European immigrants voted for the left.

In 1986 Republican President Ronald Reagan enacted amnesty to illegal aliens. In the following presidential election, 70% of Hispanics votes for Democrat Dukakis (who got 40% of the white vote). I doubt that Ronald Reagan was somehow showing “hostility” to the millions of illegal Hispanic immigrants he granted amnesty to.

Bryan Caplan likes free markets, and he likes open borders. So he has constructed a story wherein free immigration of unskilled labor can be easily combined with a smaller welfare state. It would be more honest, and more interesting, if Caplan acknowledged that there is no guarantee that the universe is designed in such a way to remove tradeoff for his ideological principles.

Bryan Caplan is wrong about open borders and the size of government

2011-09-18T10:17:00.000-07:00

Bryan Caplan once again claims that open borders would reduce the welfare state. He uses two misleading pieces of evidence, based on Alesina et al. (2001):

1. First, internationally, more ethnically fragmented countries have less social spending as a share of GDP.

This compares underdeveloped third world countries like Peru and Guatemala with Western Europe. Ethnically fragmented societies tend to be poorer and less well organized, which makes a large welfare state hard to finance. But we are discussing immigration to the west, not to Guatemala.

Alesina et al. (2001) further use social spending, a narrow component of government spending which is even more biased towards rich European countries.

I use the total size of government (taxes as a share of GDP 1990-2001), from the OECD, and only for rich OECD countries, as well as fractionalization data from Alesina et al. (2001). The period is chosen to correspond with the years when ethnic fractionalization was calculated.

As you see, there is no statistically significant relationship between ethnic fractionation and the size of government among advanced OECD countries.

2. The second graph of U.S states which Caplan cites is equally flawed. This uses the generosity of welfare expenditure per recipient, controlling for state income.

As I pointed out in my earlier post, generosity per welfare recipient is an improper measure to evaluate diversity and the size of government. More poor minorities mechanically increases the number of those on welfare. Likely, the state will respond by making welfare less generous per recipient. The total cost may however still go up, since there are now simply more people on welfare. New Hampshire can afford to be more generous than Maryland.

This is why I use aggregate numbers, which suggest that American states with more minorities spend more in total. After all, we are discussing the effect of open borders on the overall size of government, which is a aggregate number. Even if open border forces us to be less generous per welfare recipient, increasing the number of poor people tends to expand government.

Caplan doesn't counter any of my other arguments. In particular, let me stress once again that even if open borders makes the majority population more anti-government, after a while their preferences will not matter, since they will inevitably become a minority of voters.

One more point. Looking at third world countries is also misleading for another more subtle reason. Poor countries tend not to have yet developed liberalism, an important mediating factor between ethnic diversity and the size of government.

Non-liberal voters probably become less generous if their taxes are going to poor people from other ethnic groups. This is especially true in poor countries such as Africa or Latin America. However, liberal western voters likely become more supporting of government intervention if poverty is concentrated among disadvantaged racial minorities.

This is because they view a society where the white majority is rich but where blacks and Hispanics are poor as racist and discriminatory, in addition to merely having an uneven distribution of income (I think this view makes some sense). Poverty which is spread out evenly between races is by contrast perceived as more likely to be the result of a reasonably fair market process, and therefore less morally offensive.

I know I can't persuade Bryan Caplan of this, because in my experience he is too ideologically dogmatic regarding open borders to listen to anything other than perhaps hard data. For instance, I was banned from Econlog after I debated the fiscal cost of unskilled immigration.

But the rest of us should simply read the arguments of the American left to test my claim. What are the overwhelmingly white Hufftington Post, New York Times and Daily Kos more bothered by, poverty among rural whites (their co-ethnics) or poverty among African Americans and Hispanics?

Or look at how movies and the media portrays poor Appalachian whites ("rednecks", "white trash") compared to how poor minorities are depicted.

For the same reason, I think using a definition of ethnic fractionation of different white groups (such as different language groups in Switzerland) which Alesina et al. use is misleading. We should calculate the share of racial minorities, since liberals view black or immigrant poverty more problematic than white poverty.

Racism carries a bigger moral punch in our society than the unequal distribution of earnings among whites.

Hispanic vote unlikely to save President Obama in 2012

2011-08-17T15:33:00.000-07:00

Democrats are right when they say that demographic change will eventually make it impossible for a conservative Republican to be elected president.

Following the 1965 immigration reform, the population share of Hispanics is projected to grow from about 4 percent in 1960 to 30 percent in 2050. Hispanics unmistakebly lean Democrat, in part because of low average income and support for redistribtuion. They and other Democrat-leaning minorities which are growing their population share will sooner or later make conservative Republicans nationally unelectable.

However, the left appears to be overestimating the speed of demographic transformation. In many articles about the 2012 election, they argues that rise in the Hispanic population share is the key to President Obama’s re-election. This in unlikely to be the case.

Sure, the Hispanic, Asian and African American vote share is rising, but only very gradually. The Hispanic vote is still surprisingly small. In 2008, according to the Census Bureau - which is more comprehensive than exit poll - estimated that non-Hispanic whites were 76.3% of voters, whereas Hispanics were 7.4%.

The reason for the surpricingly low number is that Hispanics are more likely to be below voting age, more likely not to be citizen or (or even legal resident), and less likely to vote. Thus in 2008 Hispanics were 15.4% of the population, 13.6% of the voting age population, 9.5% of citizens and 7.4% of voters.

Demographic change between 2008 and 2012 is going to be small. The Hispanic population share (and that of other groups) has been growing at a steady rate, a rate not projected to change by Census Bureau. So I just extrapolate the increase in the share of voters four years into the future, using the growth rate between 1996-2008. Using this simple method the Hispanic voting share is expected to be around 8.3% in 2012.

Combining the projected 2012 population share with recent voting patterns, the Democrats are expected to gain about 0.4-0.5% because of demographic change. This advantage will add up over time, but is not fast enough to determine the 2012 election , unless the election is extremely close.

You sometimes read that the Hispanic vote is concentrated in battleground states. While this is true for four battleground states (certainly not to be ignored), it is not true overall.

Take a traditional set of 18 battleground states, namely Ohio, Florida, Pennsylvania, Michigan, Colorado, New Hampshire, Virginia, Iowa, Missouri, Georgia, Indiana, Minnesota, Wisconsin, Montana, Oregon, Nevada, New Mexico and North Carolina.

Out of these 18, only four - Florida, Colorado, Nevada and New Mexico - have a Hispanic vote above the national average. The rest were below the national average. This is not strange once you take into account the fact that half of all Hispanics live in California, Texas and New York, three non-contested states.

In 2008, while Hispanics were 7.4% of the national vote, they were only 4.7% of the vote in the battleground states.

The gains Obama is expected to make on the back of demographic transformation in 2012 roughly cancels out the disadvantage from losing electoral votes following reapportionment. Demographic transformation is a real force, but The President and his supporters must be more patient for the shifting demography to start winning them elections.

Article about taxing the rich

2011-08-16T15:26:00.001-07:00

Togheter with Arvid Malm I write an article about taxing high income individuals in The American, the magazine of The American Enterprise Institute.

Because they are already blessed, taxing the rich is a more equitable and socially less painful way to collect revenue. The flaw in the populist welfare state is however that the rich are also few, and already taxed high, so raising their taxes taxing doesn’t bring in enormous amounts of revenue. Furthermore, in well functioning economies high income individuals also tend to be productive, so taxing them hurts output.

The Bush Tax Cuts lower revenue by 1.7% of GDP

2011-08-09T05:51:00.000-07:00

How big are the Bush Tax cuts? There is some confusion about these numbers. The right uses wildly overstated supply-side arguments to claim that Bush tax cuts didn’t cost anything while the left uses accounting tricks to inflate numbers and to claims that the tax cuts are the main cause of the deficit.

There are two tricks to be aware of.

1. Don’t confuse the “Bush Tax Cuts” with “Bush Tax Cuts For The Rich”. Obama’s plan to repeal the Bush Tax Cuts only for those making $250.000 per year will raise one quarter as much revenue as the entire tax cut.

2. Don’t accept analyses which add the AMT-fix to the Bush-tax cuts. This is an accounting trick. Every modern administration, including Obama, passes an AMT-fix. The Alternative Minimum Tax was designed not to allow the rich to use too many deductions, but wasn’t inflation indexed. Therefore in order to prevent it from hurting the middle class each administration has to pass a law postponing it.

Over the next decade, the Total Bush tax cuts reduce revenue by about 1.7% of GDP per year (0.4% of which represents tax cuts for the rich). During this period the deficit is expected to average about 6.7% of GDP.

Over ten years, the deficit is expected by the CBO to be about $13 trillion dollars. Repealing the Bush tax cuts on the rich as President Obama proposes will raise $0.7 trillion. Repealing *all* Bush tax cuts would raise $3.3 trillion. In addition, if all tax cuts are repealed, the U.S will save $0.7 trillion in interests on debt.

The Bush tax cuts on the rich (the part Obama wants to repeal) barely makes a dent on the deficit. If you include the cuts for the middle class the Bush tax cuts is a non-negligible cause of the deficit, but even then not the main cause.

Yet the left often inflates the role of the tax cuts, I suppose in order to give the impression that easy choices can fix the deficit. CNN;s Fareed Zakaria for instance claimed recently that allowing the Bush tax cuts to expire would:

“provide the federal government with $3.9 trillion in revenues over the next decade and basically solve the deficit problem.”

Fareed Zakaria’s revenue numbers are somewhat incorrect. I think he is mixing increased revenue with reduced deficits (which is not a major error, since he is concerned with the deficit, not revenue, though he writes "revenues").

Another example of exaggerated numbers is Obama former car szar Steven Rattner who claimed yesterday that tax cuts represented $400 billion of the current deficit. The figure for 2011 is less than half of that. My guess is that he includes the AMT fix, the Obama payroll tax cuts and some other accounting tricks to arrive at this inflated figure.

Zakaria’s claim - common among the left - that the Bush tax cuts would “basically solve the deficit problem” is an exaggeration, seventy percent of the ten year deficit and an even larger part of the long term deficit would remain even should all Bush tax cuts be repealed, since the main cause of the fiscal imbalance is expanding expenditure as a share of GDP.

For the long term deficit the Bush tax cuts are even less important. The tax cuts represent about 1.7% of GDP in increased revenue per year, while the federal deficit on its current path is projected to explode to above 10% of GDP by 2026.

Let me finish by citing the Congressional Research Service:

“The Obama Administration has proposed allowing the Bush tax cuts to expire for high income taxpayers and permanently extending the tax cuts for middle class taxpayers….this proposal is projected to increase tax revenues by … $678 billion over 10 years, but still leaves federal debt on an unsustainable path.”

UPDATE:

Reader Tim correctly pointed out that I was making a misstake by not including the interaction effect with the AMT. If we both keep the tax cuts and pass an AMT-fix (which almost certainly will happen), that adds about a quarter to the cost of the tax cuts. I have adjusted the figures.

The Obama Hockey Stick

2011-08-06T07:29:00.000-07:00

Last night for the first time in history U.S debt was downgraded. The Left still denies that President Obama has a lot of responsibility for this situation, instead laying blame on Republican refusal to raise taxes on the rich.

As I have written previously, it is dishonest to give voters the impression that tax increases on the rich is a solution to the deficit. In the latest projection by the Congressional Budget Office, the ten year deficit is estimated at 13 trillion dollars. By contrast, Obama’s various tax increases on the rich will only bring in 1 trillion in the same period.

The 13 trillion dollar deficit which the President helped create and long terms entitlement deficits are the main reason why S&P downgraded U.S debt, not the 1 trillion in tax increases which Republicans prevented.

As a response to the economic crises and based on ideological conviction, President Obama decided to expand federal non-defense spending more than any President in recent history. This unprecedented expansion of government can perhaps be justified by orthodox Keynesianism. But we should not allow the left to deny the magnitude of expansion itself, which they are trying to do.

Let me illustrate how much of a departure from history the Obama Presidency represents in terms of spending. I will graph non-defense federal spending as a share of GDP since 1975.

What emerges is what I refer to as the Obama Hockey Stick, parallel to the IPCC global warming Hockey Stick. While federal Non-defense spending was quite constant previous to Obama, it has risen rapidly under his administration.

The 2008 crisis was used to justify the expansion of government. But if the expansion was merely temporary, it would not have caused the U.S debt to be downgraded. As the Presidents chief of staff said: "Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before." Using the crises as a pretext, the plan was to expand the size and score of government permanently.

Thus according to the latest CBO long term budget outlook, and using the Whitehouse own estimate for defense spending, non-defense federal spending is projected to be 19.6% in 2016, when the recession is projected to be long over. Spending in 2016 is projected to be 4 percentage points higher than the historic average, with deficits of 6% of GDP.

Bruce Bartlett, a former libertarian Reagan advisor who in recent years converted to hard core liberalism, has described President Obama as a “moderate conservative”. Most of Bruce Bartlett’s recent writing is about promoting Social Democratic European policies as a role model for the U.S. He writes:

“an honest examination of his [Obama’s] presidency must conclude that he has in fact been moderately conservative”

Paul Krugman makes the same argument here. (Unlike Bartlett, Krugman is at least honest enough to call himself a liberal, though he doesn’t consider the President one.)

Bruce Bartlett innumerate argument ignores actual spending data. Instead his hilarious evidence for conservatism is that just like famously conservative Massachusetts Democrats and Mitt Romney, Obama-care was enacted instead of fully socializing health (not a joke, Bartlett actually writes this). Bartlett’s other equally hilarious evidence is that Obama’s advisors wanted a stimulus twice as large, i.e. 2 trillion dollars.

Taking over the U.S health care industry and the biggest fiscal stimulus in human history is the evidence for Obama being a “moderate conservative”. Bartlett incidentally also does not appear to understand that Obama did not have the votes and popular support to go much further in either case. This reminds me of an old communist joke (just a joke, don’t interpret it otherwise):

“Lenin’s widow, Krupskaya, is telling a group of young Pioneers:
-Lenin was so kind to children! One morning, he was shaving near an open window. And then a little boy walked past. And Vladimir Ilyich looked at him as he was passing by… and then the boy went away.
-So where is the kindness here, Nadezhda Konstantinovna?” one of the kids asked.
-Don’t you see!? With his razor, he could easily slit the boy’s throat! But he didn’t! That’s how kind Lenin was”

Well Bruce, perhaps in today’s’ Cuba or 1968 Paris President Obama would be considered a “moderate conservative” and you as a “libertarian”. But in America expanding government by more than a quarter and doubling the long term deficit deficits is rarely what we mean by fiscal conservatives.

Why don’t you guys on the left stop pretending to be “conservatives” and “libertarians”, and just defend the left-wing policies you are advocating and the deficits your policies are causing?

UPDATE

Interestingly, some readers do not accept my uncontroversial claim that President Obama raised spending. Instead, they seem to accept the excuse that everything is due to the 2008 crises and therefore temporary.

Let me expand by showing you some data from the 2011 Congressional Budget Office Long-Term Budget outlook. (GDP numbers are not identical, in part since the BEA recently updated historic GDP). I also added a proper inflation adjustment to defense spending. 2016 projected Non-Defense expenditure is even higher than I first wrote.

The CBO anticipates that the economy will have recovered by 2016, with unemployment at 5.3%. If the expansion of government we observe is only because of the crises, surely Non-Defense spending will go back to its historic rates of about 16%. Right?
Wrong. Non-Defense spending is projected to be 20.0% in 2016.

I added the projected years to a new graph.

What makes this a Hockey Stick is not only the fact that spending goes up in 2009, it's that spending stays at those elevated levels.

In 2008, the CBO projection for Non-Defense spending in 2016 was 16.3% of GDP.

In 2011, after the crises and President Obama’s policy changes, the CBO projection of Non-Defense spending in 2016, when they predicts the economy has fully recovered, is 20.0% of GDP.

A small part of this is the crises itself; depressing GDP, though it appears the CBO projection of real GDP in 2016 (still assumed to be a recovered economy) has not changed much from 2008. I don’t know if they have re-estimated the cost of entitlements.

A significant component of the increase represents active policy choices by the President, such as expansion of education and social programs in his budgets, the Stimulus, the Health Care plan, and interest for the deficits that are financing current spending.

Paul Krugman’s further Descent

2011-08-02T07:28:00.000-07:00

Those who have followed the career of New York Times columnist and Economics Nobel Prize winner Paul Krugman have witnessed a once brilliant man become increasingly unhinged.

The last chapter in this fascinating story took place today. Paul Krugman took one more step in his journey, now questioning “American Democracy” itself after losing a political battle to the GOP. Krugman complains: “What Republicans have just gotten away with calls our whole system of government into question”.

When questioning “our whole system of government”, Krugman is hopefully not advocating abolishing the franchise. What Paul Krugman has come to oppose is not democracy, but “American Democracy”, i.e. division of power. Still, abandoning support for our system of government it is a major step to take, even for Paul.

One interesting aspect of Paul Krugman’s assault on American Democracy is the timing. We need go no further than back to 2005, when a Republican was in the White House and Democrats used division of power to slow him down, Krugman was enthusiastically defending division of power. Thus he wrote that the “religious right” and "extremists" were threatening the Filibuster: “the big step by extremists will be an attempt to eliminate the filibuster”. The filibuster in the Senate is a unique part of American Democracy.

A cornerstone of democracy is accepting when your side loses democratic battles, such as the 2010 house election when 53.5% of the two-party vote went to Republicans in part in opposition to deficit spending. Paul Krugman’s support of democratic principles is selective: American Democracy and division of power is good when it gives Democrats more power, but bad when it gives Republicans the same advantages.

This is hardly the first time we witness Paul Krugman do a 180 degree shift of views. As a recent example, Krugman first argued that the IT-boom in the 1990s should be personally attributed to President Clinton. As late as 2008 he made the case that:

“Bill Clinton’s fiscal restraint in the 1990s helped fuel the great U.S. investment boom of that decade, which in turn helped cause a resurgence in productivity growth.”

But of course now that Obama is in office, running deficits with a lagging economy, the President doesn’t automatically get credit/blame for the economy. Krugman wrote a few days ago:

“By the way, I don’t give Clinton credit for that revival; it was about learning to use technology. But in any case, there is no hint of a Reagan miracle in the data.”

The problem with Krugman is not only that he shifts opinion when it suits him, but also that his obsession to score maximum points in every short-term political battle trumps his intellectual honesty as an academic economist. Let us continue with the example above.

Professor Krugman proceeds to charitably write that colleagues Michael Bosking and John Taylor have began to “lose” their “mind”, because they use the Reagan Years as example of economic prosperity. The data Krugman cites to prove the Reagan Presidency an economic failure is multifactor productivity growth in the period 1973-1990.

Not only it is nuts to use a 17 years period to evaluate Ronald Reagan’s 8-year presidency, Paul Krugman is relying on an ill-suited outcome variable. Multifactor productivity measures the residual productivity growth you have once you remove the growth of factors of production, labor and capital. If a president, for example, raises growth by raising labor supply through tax cuts, that will not show up in multifactor productivity growth (in fact, it will probably lower it). The current rate of technological change as reflected in multifactor productivity growth is probably the economic factors a president can least effect.

Here are real per capita GDP growth rates in the post 1973 period, as measured by the Bureau of Economic Analysis, recently updated.

I will simply plot average annual real per capita growth rate of GDP during the years someone was president. This is 1981-1989 for Reagan, 1993-2001 for Clinton etc. This is the most standard measure of economic growth. For President Obama the first half of 2009 will be compared to the first half of 2011, the latest available data.

During the years when Ronald Reagan was President, the United States experiences its fastest rate of per capita growth in the post 1973 era, as fast as the Clinton years.

There is no way to determine if the growth was caused by Ronald Reagan, or if this is a historical coincidence. But nor is it any mystery, neither a sign of dementia, that economists such as Michael Boskin and John Taylor are impressed by the Reagan years.

Krugman claimed there was “no hint of a Reagan miracle in the data” because he was picking a silly period and an odd outcome variable, relying as usual on the ignorance and trust of his adoring liberal readers to get away with it.

Paul Krugman likes to claim his opponents are mentally ill. Above, we saw him accuse Michael Bosking and John Taylor of having lost their minds for reporting objective facts, that the Reagan Years were associated with high growth. Here is another recent article where he accuses most of the Republican party of being “crazy”.

It is not void of comedy that Krugman – a pundit so unbalanced that he questions “American Democracy” when he loses one political battle - constantly accuses others of being “angry”, “extremists”, to “lose” their “mind” and of being “crazy”. Project much Paul?

On a personal note

2011-07-21T05:33:00.000-07:00

Yesterday my thesis defense was approved, so I am soon going to get my PhD from the University of Chicago. It appears as if next year I will be a Post-Doc at the University of Chicago. I will also continue to be a research affiliate the Research Institute of Industrial Economics (Institutet för Näringslivsforskning) in Stockholm.

For those who don’t know, the talent in the family is my younger brother, Nima Sanandaji. He is President and founder of the flourishing Think Tank Captus in Sweden.

My brother recently wrote this topical article, about Sweden’s fascinating transformation from a Socialist Example to a role model for Pro-Market reform.

He had developed the article further into a full report in English, which is finished. However the American publisher of the report fell through, for idiosyncratic reasons.

So my brother is looking for another English speaking Think Tank or the like to publish the report. Read the article, and if you like it, email me about it. You can find my email here.

Multiculturalism is dead

2011-07-12T02:42:00.000-07:00

Last week I participated in a debate about the failure of Sweden to successfully integrate immigrants, in Swedish, on Axess -television. If you speak Sweidsh you can see it here.

I said that multiculturalism has failed, and been replaced among the elites who themselves no longer believe in it by anti-anti-multiculturalism, a reflexive reaction on all critique of the multiculturalists project.

In this context I define culture as the informal rules of the game of society, informal institutions, etiquette, traditions, norms and values, as opposed to superficial cultural expressions such as what food you eat and what music you listen to. If multiculturalism was about what food people eat and how they dress it would be no problem at all.

The rules imbedded in culture are to a large extent there in order to reduce transaction costs in a society. If you have different rules for different people society doesn’t function smoothly. Multiculturalism is an attempt to recreate the Ottoman Empire, with separate rules for separate ethic groups, and with institutionalized segregation. The fanatical proponents of multiculturalism may not intend this, but this is the consequence of their poorly thought out social experiment.

I said that the people hurt most by multiculturalism are immigrants, many of whom are unable to integrate. They do not learn all the many subtle rules which guide life in Sweden, they do not feel welcome and they are unable add a Swedish identity to the one they already have. Instead many are embittered, and react by adapting the ghetto-culture of the United States, as a way to mark distance to mainstream society.

Multiculturalism is a lie. It is a lie by the left and left-libertarians to promise immigrants that they can migrate to Sweden and maintain all their traditions and norms and behavior from Afghanistan and Albania, without any cost to themselves. The personal consequence for immigrants from being unable to integrate is mass unemployment, low income, crime ridden neighborhood, and social isolation.

I propose that the solution to the obvious failure of multiculturalism is for Sweden to regain the cultural self-confidence it requires to integrate immigrants. As an immigrant it is impossible to integrate into nothingness, you need a clearly defined pole of Swedish culture, which must be open to immigrants, in order for more to gravitate towards Swedish culture and be accepted into society.

Integrating does not mean you have to destroy your identity. Learning Swedish doesn’t mean you have to forget your native language. Learning the informal rules which guide work and social life doesn’t mean you have to forget the rules from your home country. You can be proud of your Kurdish heritage, but simultaneously proud of your Swedish upbringing and citizenship. Indeed hundreds of thousands of immigrants in Sweden have integrated and adapted multiple identities, which proves my point. We just need the other half to do the same. The historical American ideal, E pluribus Unom, is the only path to successful immigration.

In the following debate I repeat arguments familiar to readers of this blog, especially against left-libertarians and their dogmatic obsession with completely open borders combined with a welfare state. I point out that Classical Liberalism does not support this insane idea.

Some people have come up to me, said that they agreed with me, but expressed concern that I was helping the anti-immigration party The Sweden Democrats.

The truth is the opposite. The left-libertarians have bullied the right into proposing open borders, in order to prove they are not racist. This policy has never been attempted by any country in modern history. Open borders is a social experiment on the grandest scale, yet its proponents have hardly thought it through, other than through clichés and slogans. Not surprisingly, open borders does not have any electoral support in Sweden. By pushing open borders as the only alternative on the right and shouting down any problematization of immigrant segregation as racist, some young voters are forced into the Sweden Democrat column, even those who are not xenophobic.

I attempt to offer an alternative to the Sweden Democrats, to keep voters who observe that Sweden’s current policies are not working but who do not dislike immigrants from being forced to abandon the right. By radicalizing the right, branding any dissent as racist and beating the drums of open borders libertarians are the ones who are helping the Sweden Democrats.

John Stuart Mill would turn in his grave if he saw what his acolytes on the right did to the tolerant, open minded and popular Per Gudmundson for citing some government statistics. We all know Per Gudmundson does not have a racist bone in his body, yet the left-libertarians merely joined with the socialists in demonizing him online, apologetic about the mindless anger Gudmundson was subjugated to. Would anyone deny that this shamefull behavior helped the Sweden Democrats take even more voters from us? If the right had taken the concerns of voters about crime, welfare dependency and segregation into consideration, the Sweden Democrats would not even be in parliament in the first place, joining with the socialists left in sabotaging the urgently needed reform agenda of Fredrik Reinfeldt and Anders Borg.

Why do we still allow a small number of shrill ideologies to erode electoral support for the Right, by driving all those who don’t share their extremist and unpopular "abolish-all-borders" positions into the open arms of the Sweden Democrats? Didn't we learn our lesson in 2002 about what happened when you let dogmatic libertarians dictate the policies and rhetoric of the center-right coalition?

P.S

I am still busy writing my book, so I do not expect any new posts until mid September. Please come back then.

SuperEntrepreneurs, And how your country can get them.

2011-06-16T01:44:00.000-07:00

As you have noticed, postings have been thin lately. The reason is that I am busy writing a book, called "SuperEntrepreneurs, And how your country can get them." I am writing with my brother Nima Sanandaji and with Swedish economist Stefan Fölster.

The book is based on my dissertation. All previous cross-country indices of entrepreneurship to my knowledge have relied on self-employment or measures very similar to self-employment (such as business startups, which is entry into self-employment).

The problem with this is that self-employment is quite different from innovative, high growth entrepreneurship. Policy makers are often more interested in the latter; in having more firms like Google, Microsoft, Wal-Mart and Apple, not more taxi drivers and dentists.

The policies and the institutional environment that fosters innovative entrepreneurship turn out to be quite different from the institutions and policies that drive small-scale self employment. High taxes for example inhibit innovative entrepreneurship, but might even encourage self-employment, since the self-employed can more easily evade taxes.

Similarly, stricter regulations on startups, is associated with more firms. The countries with the highest self-employment rate in the OECD are Greece, Italy, Mexico, South Korea, Turkey and Portugal, all regulated, with low-quality institutions relative the rest of the developed world, and lower per capita income. I argue that this paradoxical result is in part caused by evasion of regulations and in part by dampened competition. In countries with more regulations and worse institutions, it is harder for the best firms to grow rapidly and to absorb and outcompete the least effective firms.

The United States is the world’s most entrepreneurial major economy, with 31 percent of the largest 100 public firms having been created in recent history by entrepreneurs, compared to merely 7 percent in Western Europe. At the same time, the United States has the second lowest self-employment rate among developed countries. Western Europe has twice the self-employment rate of the United States. Similarly the self-employment rate in Silicon Valley is lower than the U.S national average and half that of California.

This book creates the first international index of high-impact entrepreneurship by compiling a comprehensive list of self-made billionaire entrepreneurs during the last two decades, relying on Forbes Magazine's list of billionaires. In this way the world's 1000 or so most successful entrepreneurs are identified in 53 different countries. Entrepreneurship is the most common source of great wealth.

It turns out that 58% of the world’s richest individuals and 65% of America’s richest individuals are self-made entrepreneurs. My idea in picking these measures was simple - since we care about Google, Microsoft, Wal-Mart and Apple whenever we talk about entrepreneurship, and use these firms as archetypes and examples, why not create an empirical measure which corresponds as much as possible with such firms and their creators. Billionaire Entrepreneurs are more common than people realize, which made it possible to create a cross-country index.

In the book we find that institutional quality, property rights protection, tax rates, regulations on startups, financial sophistication and human capital are the most important factors associated with having a high number of SuperEntrepreneurs in your country. We also show that these measures typically are related in an opposite way to self-employment, which may explain why previous studies have struggled with identifying the determinant of entrepreneurship. By contrast many common policies aimed at promoting small business and self-employment seem to have no effect, perhaps in part because small business and self-employment are so different from innovative entrepreneurship.

I discuss this in a paper with Peter Leeson. While weak property rights protection is associated with having fewer billionare entreprenurs, it is associated with having more self-employment.

The book further describes the stories of many of the less well-known SuperEntrepreneurs and their firms. Entrepreneurship is a complex phenomenon, and is better understood and its importance for the economy easier shown when illustrated through examples.

Examples of American firms that appears in our indices of entrepreneurial firms are Intel, Microsoft, Google, Apple, Yahoo, Oracle, Cisco, Sun Microsystems, Bloomberg, PayPal, AOL, Facebook, E-bay, Dell, Hewlett-Packard, Gateway, inc, Priceline.com, Amazon, Wal-Mart, Home Depot, Best Buy, Family-Dollar stores, The GAP, Urban Outfitters, Ralph Lauren, Nike, Trader Joe's, Starbucks, Subway, Blackstone, Bridgewater, KKR, CNN, Fox News, Univision, HBO, The Weather Channel, Black Entertainment Television, DreamWorks, Lucas Arts, Ultimate Fighting Championship, Ty Inc. (Beani Babies), Conair, Enterprise Rent-A-Car, Dolby Laboratories, Bose, University of Phoenix and FedX. Europeans firms include IKEA, Aldi, Zara, H&M, Armani, Benetton, Red Bull GmbH, Virgin group and Ryanair. Other examples are Japanese Sony, Honda and Softbank, Canadians Research in Motion (Blackberry) and Cirque du Soleil, Israeli Check Point Software and Hong Kong's Cathay Pacific Airways.

Now you know what I am doing and why I am not writing much on the blog until the book is done.

Work-sharing is not a solution to the unemployment problem

2011-06-03T12:38:00.000-07:00

Among the European left, it is common to demand legislation which mandates that each worker may work maximum 35-hour or even 30-hours per week. The French Socialist President managed to pass this reform a decade or so ago. The idea is that forcing workers to work fewer hours will lead to more jobs for the unemployed, and also that this is good for workers.

One implicit assumption here is that workers do not know their own best or have no power over hours worked, and prefer the government force them to work less. Another assumptions underlying this view is that jobs are like stones on the ground or chairs around a table, there is a fix number of jobs in the economy (exogenously determined, somehow), and if one person works more, someone has to work less.

In fact other than the extreme short run and during periods of economic crisis, this view is wrong. Economists view jobs as a matching of a resource (time and knowledge of the worker) with a firm which demand this resource to produce things. This is why we don't observe a bigger population causing higher unemployment.

The French experiment with 35 hours workweek was therefore doomed to fail, since it ignored fundamental economics. In fact this is exactly what happened. Unemployment did not decrease, employment did not increase, firms had all sorts of problems, and the reform was ultimately abandoned.

The Swedish left has learned nothing from the French failure. Consequently the envirimentalist Green Party and the leftist Socialist party still demand that the government forces workers to work fewer hours, promising that this will lower unemployment.

To evaluate this claim, let us graph average hours worked per worker and the unemployment rate among developed OECD countries. I look at 2007 before the crisis, although the results are identical if we pool 1997-2007 to get rid of some of the business cycle.

As you see, there is no relationship whatsoever between unemployment and average hours worked. Germany, France and Belgium with their short workweeks and long vacations have high unemployment.

Countries with many hours worked, such as the United States and Japan have comparatively low unemployment (remember this is before the crisis). One thing that may surprise readers is that workers in Italy and Greece work lots of hours. I have seen the same phenomenon elsewhere. What you have to remember is that this is hours worked for those who work. Greece and Italy have lots of people (mostly women) out of the labor market, but those who have jobs work long hours. Furthermore, these are comparatively poor countries, and workers in poor countries tend to work more hours, because they value money over time.

The demand for fewer hours pushed by unions in Europe is to large extent a result of extremely high marginal taxes, rather than reflection of the true wishes of the workers. If you only get to keep 35% of a negotiated wage increase, but 100% of more vacation days, the choice may be different than what the worker would do in an undistorted economy where he got to keep everything he earned.

I know this is a provocative statement for many, but because of high taxes, I believe many Swedes if given the choice would actually prefer to get 10-20.000 kroner ($1100-2200) in their pockets than have one additional vacation week. This is approximately the true full economic cost of the vacation for a typical worker, of course higher still for a high-skill worker.

Since we are on the subject, let me point out that the often heard claim that Americans only have 2 weeks of vacation is a myth. According to calculations by Harvard professors Alberto Alesina and Edward Glaeser, Americans on average take 3.9 weeks of vacation per year.

The Green party is wrong that their reform would lower unemployment. They are however honest and acknowledge that reducing hours worked would lower income and tax revenue. However some in the European left -including the Swedish Socialist party - promises voters that Sweden can go from a 40 hours to 30-hours workweek without any wage cuts! Even before I went to college to study economics I remember I found this claim absurd, a sign that the extreme left in Europe lacks economic common sense.

Income comes from production. How can society cut hours worked by 20-25% without lowering production? The left argues that this can be done by lowering firm profits.

Even disregarding the fact that cutting hours worked would lead to less investment and capital moving out of the country, firm profits are too small to finance the utopia of socialists. In Sweden, as well as the United States, total corporate profits are only about 10% of GDP, and therefore not enough to finance such a reform. In addition, if production goes down tax revenue will also go down, hurting the poor.

Lowering hours worked is sometimes popular among workers, although decreasingly so in Sweden with the increasing realization among the public that the Swedish economy has too few hours, not too many. The popularity of cutting hours has been taken as evidence that this is a good reform. However, when polled, people are simply asked if they would enjoy work fewer hours, whereas the correct question should be “would you want to work fewer hours and have your wage cut dramatically?”.

This is a version of the Fiscal Connection, good poll questions should explicitly link costs-with benefits of the choice asked about, because ordinary people will usually not make the connection themselves.

Who owns Sweden: Nine million Swedish citizens or seven billion citizens of the world?

2011-05-20T09:39:00.001-07:00

Adam Cwejman, current chairman of the Liberal Youth of Sweden, responds to my article arguing against open borders in a welfare state (in Swedish).

I don't personally know Adam, but he has a reputation of being a brilliant guy. I thought his response was well argued and intellectually serious, which I appreciated a lot.

1. Adam argues against a fiscal view on immigration. He notes that some studies find that because smoking kills people early and saves on pension costs it is beneficial for the state. Adam argues that we do not consider this sufficient reason to promote smoking, so why should we consider the costs of immigration sufficient reason to limit the free flow of immigrants?

The difference lies in that promoting smoking obviously has massive costs for Swedish society (lost years in life), which outweigh the small benefits for the state. The social cost of smoking is estimated to over $100 billion in the United States. There are no corresponding costs for not having open borders. If anything, unskilled migration has led to large negative social externalities, in the form of crime, reduced trust and cooperation.

Adam is erroneous in saying that smoking is beneficial socioeconomically ("samhällsekonomiskt"), since the social welfare function would include the cost of lost life. It would be better to say smoking may be beneficial fiscally ("statsfinansiellt").

The smoking paradox is about accounting. The central effect of smoking - the cost of the individual dying - is not included in the budget. But no such costs are associated with reducing immigration, so the same paradox does not arise.

2. Adam uses a similar argument as Niclas Berggren, which is that there are groups in our society that have fiscal costs too. Adam believes that I am inconsistent, because I take the cost of immigration into account, but don't want to deport Swedish citizens with "low I.Q".

He also calls me "inskränkt" (paraochial), because in the immigration debate I distinguish between the "nine million" Swedish citizens and the "seven billion" inhabitants of the world.

The difference is ownership rights. Swedish citizens, regardless of gender and race, are collective and equal owners of Sweden. This type of ownership is as legitimate and as absolute as private ownership. It developed in the same way as private property, organically through the formation of spontaneous order.

The rights associated with citizenship are equivalent to ”acquisition of title” associated with private property rights, as discussed by Nozick. They are legitimized by Swedes and their heirs ultimately having created Swedish society, again parallel to how we tend to derive private property rights.

Consequently no citizen has the right to deny another citizen their inalienable rights (i.e deportation) using fiscal costs as an argument. Because citizens are equal, and because citizenship is absolute, there is simply no room for a policy discussion about one citizen denying another citizens voting rights or deporting other citizens, based on I.Q or gender or anything else.

Foreigners by contrast have no ownership right over Sweden, just as Swedes don't have any right to own Albania. It is up to Swedish citizens to decide who gets to come to their club and who doesn't.

Similarly private homeowners decide who gets to enter their home and who doesn't, but they don't have the right to kick out other owners living on the same street if they feel their presence is detrimental. Corporate shareholders get to decide not to bring in a new partner for any reason they like, but they can't kick out a pre-existing owner, barring really extraordinary circumstances.

Swedish citizens therefore have the right to take the fiscal costs of immigration into account when deciding which foreigner to invite, while no Swedish citizen can be denied her rights and deported based on fiscal considerations. There is nothing strange or paradoxical or hypocritical about this.

Modern liberals and libertarians get confused when discussing immigration because they do not acknowledge that Sweden and the United States are associations owned solely by their respective citizens. This is ironic, since libertarians are obsessed with private ownership, which is a (useful) social construction, just as the concept of citizenship is. Without a theory of citizenship and the nation, immigration becomes hard to discuss.

Our unwritten social contract stipulates that we should organize the state around the nation, as the nation is the entity in which the sense of fellowship is the strongest, which makes it the optimal level of collective decision making. This is true for Sweden and virtually every other country.

I am here crudely articulating these principles, which are deeply ingrained in the collective consciousness in Sweden and around the world. Indeed, I have met few immigrants who would deny Sweden the right to make the decision whether to take them in or not! Immigrants of course like to come to Sweden, but almost always acknowledge that this decision is the prerogative of Swedes, just as the decision of Iran to take Afghan immigrants belongs to Iranian citizens. The view that Sweden has no moral right to decide who gets to come to Sweden is something that Swedish libertarians and socialists have invented.

Classical liberal theory is quite clear about the issue of national sovereignty, citizens have the right to make decisions about the nation based on their self-interests. It is modern left-liberalism and left-libertarians, influenced strongly by cultural Marxism, which has deconstructed the nation and citizenship. Adam Smith would not find anything strange in affording Swedish citizens rights of control over Sweden ahead of foreigners, but Adam Cwejman does.

3. More importantly, this view is one of honesty. If Adam and other Swedish intellectuals don't believe that Swedish policies should benefit Sweden, and want to base policies on the welfare of the entire world, they have the responsibility to communicate this very clearly to voters. Intellectuals and politicians have been delegated their power and influence by the public, they have no god-given right to make decision over the collective welfare of Swedish citizens based on their private ideology.

Adam is a bright guy, and will go far. At some point, when he is a member of the government or a member of parliament, he will be faced with decisions where there is a conflict of interest between the "seven billion" foreigners, and the Swedish citizens who elected him. At such a point, I believe Adam has the responsibility to choose based on the welfare of those voters who delegated authority to him, rather than based on personal ideological preferences. Liberals and libertarians in positions of power simply do not have the right to give away the collective assets of Swedish citizens based on their private ideological axioms and their private altruism toward the world.

If Adam wants to give away his own money, no one will stop him. But Sweden is not his to give away to the world, at least not without the explicit approval of the Swedish public.

Politicians who in the interests conflict between the people who elected them and foreigners would choose the welfare of foreigners should at the very least be honest about this during the electoral campaign. Swedish voters still naively believe that the politicians they have elected and the rest of their elites have Sweden's best interests in mind, rather than some private ideological axioms and a personal desire to benefit the world using collective resources.

4. Adam questions my "national perspective", which only takes the welfare of Swedes into account. What about the gains of the immigrants?

My answer is in part the same as above, the national perspective is the correct perspective from the point of view of classical liberalism because of property rights. We accept that a homeowner has the right to make a decision about taking in guests or not based solely on his private welfare. Why should we deny Swedish citizens the same right to act based on self-interest?

The welfare of immigrants does matter for immigration policy, but only to the extent that Swedes are altruistic and care about the rest of the world.

4. He uses the example of remittances. Immigrants send home money and benefit their home country. Shouldn't we take this into account?

Sure we can. But relying on immigration to send remittances back home for economic support is extremely inefficient. According to the world bank, Swedish remittances are 0.15% of Swedish GDP. (Much of this goes to Eastern Europe, rather than the third world).

It is obviously much more expensive to take someone from Bangladesh and house him in Sweden in the hope that he will send back a few percent of what he receives back to Bangladesh. If the aim of immigration is to send aid, why not just cut the middleman and send aid directly ?

Better yet, why don't the people who really care about the third world and believe foreign aid works give away some of their own money, rather than collective assets? Foreign aid is after all a private good, there are very few public good aspects of it, and little reason why aid should be socialized.

5. Adam believes that my views on immigration are not based in principles, but are only consequential. That is incorrect. Using the principle of ownership, Sweden belongs to Swedes, and they get to decide if they want immigration or not based on their own self-interest. I develop my view on this principle more in the debate with Niclas Berggren.

Since it is obvious to me and to the majority of Swedes that Sweden belongs to Swedish citizens, I focused my original article on the consequential effects of open borders. Even if it was not obvious to me, this is what the Swedish public believes, and my responsibility as an amateur pundit is to represent the welfare of the public, not to advance my personal beliefs and self-interest (for libertarian intellectuals to ideologically play around with the welfare of Sweden based on their whims as if it were a toy is indeed a reflection of selfishness, not altruism).

Adam is incorrect in writing that Hayek does not have a "deep" analyses based on principles regarding sovereignty and immigration. Hayek has an rich theory of the state which in my view is quite clear on who owns and has decision rights over society, and more importantly why. Since Hayek already has a well developed theory about rights, it is easy for him to discuss immigration.

Regarding Milton Friedman, Adam provides a link to a libertarian that tries to prove that Friedman "really" believed in open borders.

The truth here is that Milton Friedman's view evolved. Friedman is sometimes portrayed as dogmatic, but this is untrue. He was a fundamentally empirical and pragmatic thinker, in the University of Chicago tradition. American immigration worked quite well historically, but worse and worse after the 1965 reform and as society changed. Late in his life, as Milton and Rose Friedman increasingly observed that modern immigration combined with the welfare state and multiculturalism were having negative effects, their views changed. This is clear in interviews about the topic I have seen, where they contrast today's ill-functioning immigration with their own experience.

After all, as Keynes is reported to have said:

"When the facts change, I change my mind. What do you do, sir?"

Ethnic Diversity and the Size of Government

2011-05-11T13:41:00.000-07:00

In recent posts I formulated the Sanandaji Principe, which stipulates that due to the left-leaning voting patterns of unskilled immigrants, we can at most have two out of three of Open Borders, Libertarianism and Democracy.

Open Borders and Democracy will inevitably lead to a welfare state, as non-libertarian immigrants sooner or later become the majority of the voters and vote themselves benefits.

One objection that people such as Swedish libertarian Economist Niclas Berggren made is that mass migration causes native voters to turn against redistribution. The reason is that economists believe that solidarity is diminished in ethnically heterogeneous societies. According to this theory voters care more about people with the same race and ethnicity as themselves, and are less willing to help the unfortunate if they have a different skin color. This theory is most prominently suggested by Harvard professors Alesina and Glaeser.

Some libertarians want to rely on this mechanism to tear down the welfare state through open borders and the ethnic tensions they believe that migration will cause.

My first reaction if that is the price of limiting the welfare state, is that I would oppose it. Milton Friedman famously stated that he would oppose reducing the welfare state unless the public was convinced in a democratic fashion that this was in their best interests. I understand that some free-marketers have turned against the very notion of "solidarity", because the left has exploited the term so much. However this should not let us lose sight of the fact that solidarity and national cohesiveness are social goods, not something that we should want to destroy through an immigration shock doctrine.

Leaving my preferences aside, I also believe that Berggren and other libertarians and liberals who rely on the Alesina-Glaeser theory are substantively wrong. Ethnic diversity overall tends to expand the welfare state, not reduce it. While the research only focuses on one effect of unskilled immigration (reduced fellowship), there are at least three effects that go the other way. Here are the main effects of increasing the share of low income minorities:

1. Solidarity is diminished and social ties are wakened, so that the majority population becomes less willing to pay taxes to help "the other". This limits the size of government. The ethnic-diversity-and-redistribution-literature has almost entirely focused on this sole effect.

2. Increasing the share of low income individuals increases the welfare state through a mechanic effect. This means even if you don't vote for any changes to the welfare state, the use of preexisting welfare programs such as unemployment insurance and public health care increases.

For instance, 71% of Hispanic immigrant households in the U.S use at least one form of public welfare, compared to 39% of native households. In Sweden, according to the latest figures around 40% of all unemployed individuals are immigrants.

Even if you don’t make unemployment insurance more generous, having groups with a higher unemployed rate automatically expands the size of government.

3. More disadvantaged citizens increases the need for a welfare state. To the extent that the welfare state reflects a desire to reduce social problems, having more deprived individuals increases the demand for more government to solve problems. The welfare state exists largely because the middle classes and the rich feel sorry for the poor. The left is not stupid or irrational, they rarely demand government intervention where there are few problems.

As immigration increases poverty and social problem, demands for government intervention grow. Note that this is consistent with lower solidarity across ethnic lines, as long as solidarity is not zero (If the new poor immigrants were your co-ethnics, voters would be even more inclined to help them).

To give you a recent example, the majority of the long term uninsured in the United States are ethnic minorities. (Long term uninsurance is a better measure, since many uninsured are just between jobs.)

According to the Medical Expenditure Panel Survey, Hispanics "represented 42.8 percent of the long-term uninsured for the period 2005-2008"

The media does not understand and will not tell you this, but the long-term uninsurance rate of non-Hispanics whites’ above 25 in the United States is merely 3%. This is incidentally one explanation why the white Tea Party activists don’t like President Obama's health care reform, they and their families already have health insurance.

The American uninsurance ”crisis” would likely never had arisen without a high percentage of minorities with extremely high long term uninsurance rates.

Similar, in Sweden the social problem currently most emphasized by the Social Democrats is child poverty. As I explained, 65% of poor children in Sweden are immigrant children (interestingly about two thirds of poor children in the United States are minority children).

Without immigration, there would be no child poverty "crisis" in Sweden for the left to mobilize politically against.

4. Though ignored by proponents of the ethnic-diversity-and-redistribution, minorities also get to vote, and they vote overwhelmingly for the left. This effect is dominant when we are discussing free migration, because with open borders in a world where 700 million people have told Gallup they would like to migrate right now, sooner or later the immigrants will become the majority of voters and make the political preferences of the natives irrelevant.

Pew recently conducted a large survey with lots of questions on economic and social issues. It shows as all other polls that African Americans and Hispanics minorities are far to the left of whites. While 12% of Non-Hispanic whites in America have views that Pew classifies as Libertarian, only 3% of American minorities are libertarian. As America becomes increasingly minority, it will become less libertarian.

The proponents of the Alesina-Glaeser theory tend to focus entirely on point one and ignore points 2, 3 and 4.

It is difficult to test the theory empirically. I will however give you two pieces of suggestive evidence. I am not going to claim that this is definitive proof, just that it is consistent with my view that the net overall effect of diversity is bigger government.

Libertarians like the Alesina-Glaeser theory, because it tells them with more immigration they can reduce willingness to pay for the welfare state. Liberals similarly love the theory because it quite explicitly states that the main reason Americans deny themselves the benefits of a European style Social Democratic system is the racism of Republican voters.

First, I plot the vote share of Obama among non-Hispanic whites with the share of non-hispanic whites in each state. The Alesina-Glaeser theory would predict that whites in states with lots of minorities should vote less Democrat, because of racially motivated lack of support for leftist policies.

In fact, there is no such overall trend. The correlation is not statistically significant, and if anything goes in the opposite direction as their theory would predict.

Sure, there are states with high share of minorities in the South - such as Georgia and Alabama - where whites came out strongly against Obama. Similarly, some very white states in New England went solidly for Obama.

On the other hand, other lily-white states such as Wyoming, Kentucky, West Virginia, Utah and Idaho voted against Obama. Similarly whites in minority states such as Maryland, New York, Nevada, New Mexico and California strongly supported Obama.
A more parsimonious explanation which corresponds better with the observed pattern than the ethnic-diversity-and-redistribution literature is that whites in conservative states voted against Obama, and whites in liberal states voted for him, with little connection to the racial makeup of the state.

A second graph plots per capita spending State and Local spending in 2007, from U.S Census State and Local Government Finances, with the share of state population that are non-Hispanic whites.

Contrary to the prediction of Alesina-Glaser, the overall effect appears to be that states with more minorities spend more per capita.

Thus minority states such as D.C, California, Maryland, New York, Illinois, New Jersey and even Louisiana and Mississippi stand out as spenders, whereas white states such as New Hampshire, South Dakota and Idaho spend the least.

While this is not definitive evidence, I believe points 2-4 tend to dominate point 1, so that the net effect of more diversity is bigger government and less solidarity. At the very least, points 2-4 should be taken into account in the ethnic-diversity-and-redistribution-literature.

P.S

A reader suggested I include my RSS-Feed. I belive it is:

http://super-economy.blogspot.com/feeds/posts/default?alt=rss

Does the United States have a Revenue problem or a Spending Problem?

2011-04-27T14:50:00.000-07:00

There is a debate about the causes of the record deficits in the United States. Republicans argue that we have a "spending problem", by which they mean spending is increasing too fast, while the left argues that we mainly have a "revenue problem", by which they mean taxes are too low.

The outcome of this debate will determine whether the most reasonable solution to the structural deficit will be tax increases or slowing the growth of spending. President Obama and liberals such as Paul Krugman like to give the public the impression that the deficit is entirely or to a large extent caused by Bush tax cuts for the wealthy (which is false, since Obama's proposed tax increase on the rich would only collect 0.3% of GDP). If that were the case, the most fair solution to the deficit would be - as the President put it - to raise "a little bit more" revenue from the rich.

It is easier to motivate tax hikes if you convince the public that the deficit was caused by tax cuts, rather than by an unparalleled expansion in spending.

When Republicans such as Paul Ryan say that the deficit is caused by a spending problem, they mean that once the recession is over, a federal tax revenue target of 19% of GDP (the historical average for the U.S) is sufficient to finance federal spending if spending is also kept at historical levels. Throughout, keep in mind that we are talking about Federal revenue and expenditure, the U.S public sector spends about 40% of national income if states and municipalities are included.

Slate columnist David Weigel attacks the Paul Ryan argument. His evidence is that revenue in 1981 was higher than later years of the Reagan presidency, which according to him proves that the Reagan tax cuts reduced revenue. Weigel is wrong. Revenue is highly volatile, because a lot of it depends on corporate profits, capital gains and other variables determined by the business cycle. Weigel is simply cherry-picking the year, 1981 was one of the highest revenue years in post-war history.

Similarly liberals like to pick the peak of the IT-boom at 2000 as the norm, where 20.6% of GDP was collected as revenue, even though it was the highest year in post-war history, and the second highest in American history overall. The highest year was 1944 during World War II, when Federal revenue briefly reached 20.9% of GDP.

In order to give a better picture, I have plotted the average revenue, deficit and spending as a share of GDP for all presidential terms in the post-war period.

First, this exercise shows us that Weigel is mistaken. Tax revenue during both Reagan terms was virtually identical with the Carter years, even though Reagan cut tax rates dramatically.

Second, revenues during the second Clinton term, the highest of the post-war periods, was 19.9%, only a little higher than the 19.0% level Paul Ryan has suggested (which liberals claim is far too little).

Lastly, President Obama has increased spending to levels never witnessed in American post-war history.

Let's move to President Obama's budget, as calculated by the esteemed Congressional Budget Office.

The President likes to give the impression that the deficit debate is about repealing the tax increases for the wealthy. But let us imagine what would happen if revenue during the coming years would be what is was during President Clinton's second term, long before the Bush tax cuts. During those years revenue was 19.9% of GDP.

The overwhelming majority of Presidents Obama's budgeted deficit would remain even if he collected Clinton-era record revenue. By the end of his term, when the recession is projected to be long over, 80% of the deficit caused by President Obama spending plan would remain even if we assume Clinton-era record revenue.

This is not strange, since during the second Clinton term, federal spending as a share of GDP was 18.8%. President Obama has already increased spending to levels unheard on in peacetime. Federal spending with Obama's budget will be 23.4% in 2016, when the recession is projected to be completely over. These numbers show us that President Obama and his defenders cannot use the recession as an excuse for their expansion of government and the immense deficits it is causing.

Clinton-era record revenue would be nowhere near enough to fund Obama-era record spending.

I want to illustrate a final point. Let's ignore the Obama years, and focus on the long run deficit. The figures for spending are from the Long Term Budget Outlook, again calculated by the Congressional Budget Office. These figures take into account the projected increase of Medicare, Medicaid and Social Security spending. This is primary spending, which means that interests on the debt is not included in spending, the numbers would look even worse if we included these.

Let us also be more generous to the left. Instead of assuming revenue for the highest presidential term, let's assume revenue for the record year. As pointed out previously this was the boom year 2000, where revenue was 20.6% thanks to unusually high capital gains and corporate profits.

This picture illustrates what would happen if Federal revenue as a share of GDP increased to the record high of the post-war period and remained there forever, and we continued at the currently projected levels of Federal expenditure.

Because of ever expanding government, the deficit would explode even when assuming record levels of revenue, with the debt growing to several hundred percent of GDP. Jon Stewart was therefore misleading his trusting and economically unsophisticated viewers when he showed them a graph where the deficit appears to vanish if only the Bush-tax cuts were repealed.

The only reasonable conclusion that the United States primarily has a spending problem, not a revenue problem. It is the expansion of the government - some already carried out by Obama, some projected to occur - that is causing the long term structural deficit to grow beyond control, not a reduction of revenue caused by lowering the taxes on the rich.

If liberals want to argue that government spending is too low, and that we should increase it for reasons of social policy and raise taxes to pay for it, they should feel free to do so. But please do not claim that the long term deficit is primarily caused by taxes being too low relative to historical levels, because that is simply not true.

The rich in Europe are poor.

2011-04-19T16:48:00.000-07:00

Most of the focus of the policy discussion is the income of the poor and working class. As I have written previously, the American working and middle class is economically better off than their European counterpart. The poorest five percent have it better in Sweden compared to Swedish-Americans, whereas all other income groups earn more in the United States.

It is reasonable to focus on the well being of poor as a central measure of fairness and overall well being in a country. However, this focus can go to far, the poor are not the only group in society.

Today I want to discuss a different social group, the currently much maligned top ten percent of income earners. The group includes managers, successful business owners, professionals such as lawyers, doctors, consultants, civil engineers and also workers without a college degrees who are very good at what they do.

There are several reasons why we should care about the rich and upper middle classes.

The top percent of income is a non-negligible share of the population whose well being shouldn't be ignored just because they score low on the victimhood scale. Keep in mind that the share of the population who will be in the top ten percent at some point in their life-cycle is much higher than ten percent. The right over-exploits this argument (obviously not everyone has an equal chance of becoming rich, and many in society have close to zero opportunity). However the completely static view of the left is also an exaggeration.

More importantly, creating an environment where the most productive in society have incentives to acquire a lot of human capital, work hard, put their carrier ahead of leisure, work intensively and if necessary with unrewarding tasks, take risks and aim for the top is good also for everybody else.

* The more the high-skilled earn, the more we can tax them and fund welfare for the poor. According to the OECD, the top ten percent of American income earners pay 45% of taxes (this includes payroll taxes). In Sweden, the corresponding figure is only 27%, and in France 28% . Wouldn't ordinary Swedes be better off if our most talented worked more and paid more taxes?

* When you put a lot of skilled people together in knowledge industries and entice them to work hard, productivity appears to go up exponentially. This is what we observe in cities such as New York, and in elite organizations such as Mckinsey, Google or Harvard. These high-skilled individuals and organizations create a great deal of so-called innovation spillovers. The people who developed the microprocessor thus only captured a small fraction of the societal value created as private wealth. This is one reason I believe the standard estimates underestimate the negative effects of taxes on the economy, since they neither include innovation and knowledge spillovers or the effect skilled people have on the productivity of other skilled people.

* The high-skilled likely not only raise the productivity of each other, but also of the rest of society. When someone created a new venture he or she raises the productivity of the people hired. Similarly good managers are needed for companies to be productive.

* Lastly the high-income raise the wages of the poor by bidding up demand for their labor. Thus busboys in the U.S earn much more than busboys in El-Salvador, even if they perform the exact same task. The left tends to become angry whenever you point this out, although I have never seem them offer any arguments why this simple implication of economics doesn't hold.

Needless to say, raising the labor supply of the high-skilled generally does not imply theft from the poor. If a doctor or civil engineer postpones retirement for one year and earns more, that reflects more value created, not exploitation. There are examples when the high-skilled earn "rents" rather than create value (such as many lobbyist) or engage in zero-sum activity (some but far from all people in finance), but this is a minority of overall economic output of the professional classes.

We should be honest and admit that skilled professionals contribute more to society than the bottom ten percent. However I also believe that those at the top tend to have had a more privileged life and hence should feel a stronger social obligation.

In would guess that the behavior of the top ten percent is one of the most important reasons for the success of the U.S economy compared to that of Europe. Highly skilled Americans work crazy hours, are professional and motivated, and tend to be quite good at what they do. Probably mainly due to lower taxes and a better business climate, the top ten percent earn far more in the United States than in Europe.

An exciting new database by economists Facundo Alvaredo, Tony Atkinson, Thomas Piketty and Emmanuel Saez amongst others has data on the income level of the tenth percentile for several countries. This measure, P90, is the level of income that would make someone richer than exactly 90% of the population.

I have adjusted the figures for inflation and PPP based on OECD data. For a couple of countries the data was a few years prior to 2005, so I assumed their income share remained constant and their income increased with GDP.

These are not perfect estimates, because the data comes from different sources, have different units and different standards, you should just view them as illustrative. These are pre-tax income. Payroll taxes are not included, nor is employer funded benefits such as health insurance and pensions. These are mainly based on the statistics gathered by the tax-agency, so unreported income will not be included.

In 2005 the P90 threshold in the United States was $105.000, which means that ten percent of Americans had income at or above that level.

The same year the P90 threshold in Sweden was $43.000 (37700 kr), so if you earned this paltry sum you were among the top ten percent highest earners. In fact, less than 1 percent of Swedes earn more than $100.000 per year, about 880.000 kronor per year purchasing power adjusted.

This is confirmed by the Swedish Statistical Agency, which reports that in 2005 there were 61.000 Swedes who earned more than 800.000 kronor per year, or merely 0.8% of the adult population. 10.2% earned more than 360.000 kr, which again indicates that the figures are almost identical to the Top Income Database.

No doubt, those at the bottom are better off in Sweden than in the United States. However the middle class in Sweden is still somewhat poorer than the middle class in the United States, while high-skilled Swedes are far poorer than high-skilled Americans.

I don't think having few poor people requires us to keep the rich down. The left considers the relative poverty of the top earners in Sweden a good thing for Sweden, while I believe it is a problem. The comparative poverty of the rich is problematic both from the perspective of those hired by entrepreneurs, those who benefit from new technologies and products developed by skilled workers, those who sell their goods and services to the rich and not the least from the perspective of tax collection and the welfare state.

Open borders and the Welfare State

2011-04-15T06:33:00.000-07:00

Today I write an article about classical liberal theory and compleatly free immigration in Svensk Tidskrift, a journal tied closely to the center-right Swedish Moderate Party. The text is in Swedish. It is pushing the boundaries of what is permitted to say in Sweden and may get me into trouble, but I made the choice to take the hit, hoping for intellectual honesty from those who disagree with me.

My hope is that as someone who grew up for ten years on welfare, who lived close to two years in refuge camps and the rest of his childhood in so called "Millionprogram" housing, in foster-care and "ungdomshem", who in school was physically assaulted several times by skinheads and Neo-Nazis, who had Neo-Nazis come to his home and yell "sieg heil" in the buzzer, who lived in 99% immigrant Ronna while he commuted an hour and a half each way to Handelshögskolan, I can get away with a tiny bit more on this contentious topic than a blond bourgeoisie Swede would.

I argue against open borders in a modern welfare state based on classical liberal principles.

First I demonstrate that unskilled immigration to current welfare states has led to sizable transfers of wealth from and reduction of freedom of the current owners of the state. These owners are of course citizens, needless to say regardless of race or ethnic origin.

Libertarian theory which is used to derive the principle of completely free immigration tends to make the unrealistic assumption that the welfare state and voting rights over the properties of others do not exist. Libertarians sometimes acknowledge the problem of combining a welfare state and open borders, but proceed to declare that they support open borders and no welfare state.

I argue that this is a logically flawed proposal.

Immigrants from third world countries tend to earn less than for example native Swedes or Americans, and furthermore tend to come from countries with no tradition of classical liberalism.

Hence 77% of non-European immigrants voted for the left in the 2010 election, a year when only 43% of native born Swedes voted for the combined left. In the United States whereas only 35% of whites prefer raising taxes and expanding government, the figure is 65% for Hispanic immigrants and 66% for second-generation Hispanics.

These patterns are completely rational, immigrants earn less and unlike Anglo-Saxons have no traditional preference for limited government.

The way immigrants vote and their political preferences cannot simply be assumed away in any serious ideological discussion.

Open borders in a affluent welfare state leads to unskilled immigrants soon becoming the majority of the voters. Since unskilled immigrants in the reality we live in generally do not support libertarian style limited government, the Sanandaji Principe states that you can only pick 2 out of 3 of:

1. Limited Government
2. Open Borders
3. Democracy

Even if Swedes and Americans abolished the welfare state tomorrow (something which I would oppose), with open borders the welfare state would reemerge as soon as the immigrants became the majority of voters. Ignoring the voting patterns of immigrants when you propose abolishing the welfare state and fully opening borders is subsequently a violation of the Lucas Critique. Open borders and an abolished welfare state can only be combined in a nightmare society where immigrants and their children are never allowed to vote.

For me the choice is simple, I prefer Democracy to Open Borders. If a country decides to take immigrants, they have to be included 100% with full rights, and not permanent second-class citizens.

The three most important Libertarian intellectuals of the last century who thought deeply about the subject all concluded that open borders in our societies with welfare states was a bad idea.

Friedrich Hayek thus wrote ”a recognition of collective ownership of the resources of the country which is not compatible with the idea of an open society”. The minimum standard of living that Hayek believed the state should guarantee even its poorest citizens ”necessitates certain limitations on the free movement across frontiers”.

Milton Friedman also recognized this, and stated ”You cannot simultaneously have free immigration and a welfare state”.

Late in his life, Robert Nozick become skeptical about open borders, saying (in an interview with a libertarian Swedish journal no less!): ”Why do we not have completely free immigration everywhere? One reason is the welfare state".

Swedish Libertarians such as Johan Norberg, Mattias Svenssson and Henrik Alexandersson by contrast support open borders combined with keeping or if need be expanding the welfare state. Thus Norberg, Svensson, Alexandersson and others in the "Frihetsfronten" who for decades fought to abolish tax financed health care and schools for Swedish citizens supported the recent decision to grant the same services to illegal immigrants. Mattias Svensson's comment on this historic expansion of the Swedish welfare state in scope to potentially the entire planet was "This is what solidarity is about". Johan Norberg similarly gave the decision a thumbs up in his column.

Remember, a simple libertarian solution would have been to allow illegal immigrants to pay for health care and education services out of their own pockets, just as Frihetsfronten wants Swedes to do. But being pro-immigration has become so important for Swedish libertarian identity that they are cheering expanded welfare state services for illegal immigrants. If you wanted to be unkind, a suitable name for this novel ideology would be Libertarian-Socialism.

Limits on free migration is not just an arbitrary state construct, it is necessary to uphold ownership rights imposed by owners (citizens), just as a fence is necessary to uphold private property. Organizations such as condo-associations who produce social externalities for their members and make decisions about collective matters always limit membership. Since we have chosen to organize ourselves in a nation-state and grant some rights over our lives to fellow citizens, we need to restrict who has coercive power over us. Borders are limits on expanding the necessary-evil which coercion through voting represents.

Voting rights of citizens over common decisions and collective assets should therefore best be viewed in this context as form of property. If you accept this premise, abolishing borders in a modern welfare state is a form of socialism, just as abolishing fences would be. Note that both private property and citizenship rights evolved gradually through the spontaneous order and were not "created", that both serve to increase societal efficiency, and that both are common to all modern societies. Libertarians should remember that that private property also limits free mobility. This theoretical view confirms with reality, where the consequence of unskilled immigration to the welfare states such as Sweden have been an expansion of government and a reduction of the freedom of the existing citizens.

Classical Liberals should take after Hayek, Friedman and Nozick and think deeply about these issues. The discussion should take real world empirical patterns into account and use a richer model than the simple neoclassical model with assumes away voting, the public sector and social externalities. We have to first have a theory of what a nation-state is, what citizenship is and what voting rights are, before we propose to abolishing these rights through open borders.

P.S

I had to cut parts of my article [In Swedish] due to space limitations, so I will put it here:

"Ett något tyngre vägande argument än det ekonomiska är att invandring gjort Sverige kulturellt rikare. Men även det påståendet brister. Visst har Sverige berikats enormt mycket av globaliseringen. Men dessa extremt viktiga influenser utifrån har till överväldigande del inte kommit genom invandring, utan genom utbyte av information (och i mindre utsträckning genom handel). Steve Jobs och Jerry Seinfeld var inte tvungna att flytta till Sverige för att vi skulle kunna påverkas av dem.

Det land som Sverige utan jämförelse har tagit mest kulturella influenser ifrån under efterkrigstiden är USA, ett land som vi har få invandrare från i Sverige. I jämförelse är de kulturella influenserna på vanliga svenskar från t.ex. Afghanistan, Irak, och Somalia i det närmaste noll. Sverige har visserligen fått matinfluenser från Mellanöstern, men vi har också fått ännu större matinfluenser från Frankrike, Japan, Thailand och Indien, utan att ha någon omfattande invandring från dessa länder.

Med tanke på att matkultur består av information och råvaror är detta egentligen självklart, på grund av frihandel och informationsrevolutionen behövs det ytterst få individer för att sprida matkultur. Italiensk och fransk matkultur har i och med globaliseringen erövrat hela världen, utan någon storskalig utvandring. Johan Norberg påstod nyligen att Sverige inte skulle ha haft olivolja eller espresso i affärerna utan invandringen. Detta är fel – trots allt finns olivolja i t.ex. finska mataffärer, trots att Finland haft avsevärt lägre invandring än Sverige.

Om invandring inte stärker Sveriges ekonomi, är det åtminstone inte det bästa sättet att hjälpa andra till ett bättre liv? Svaret är tyvärr troligtvis nej. För det första är tredje världens problem för stora för att lösas av invandring, invandringen till väst är en droppe i havet satt i relation till totalbefolkningen i dessa länder. Inget land har i modern tid blivit rikt på att dess invånare flyttat utomlands. Kina och Indien började i slutändan inte utvecklas genom extern utvandring, utan genom interna liberala reformer (precis som i Sverige på 1800-talet, all romantik kring utvandringen till trots). Inte heller är invandring effektiv biståndspolitik. Sverige skulle kunna rädda miljoner liv med mat och medicin för de stora summor invandringen kostar.

Det går inte att täcka in alla aspekter av ett så brett fenomen som invandring i en artikel. Jag är kanske något mer ensidigt pessimistisk än jag borde vara. Å andra sidan är det ytterst sällan sakliga negativa argument lyfts fram på ett samlat sätt. Invandringspolitikens inverkan på samhället börjar nu bli så pass påtaglig att det inte längre räcker med att konstatera att ”som liberal är jag givetvis för en generös invandrings- och flyktingpolitik”."

Doing the math: President Obama's plan to tax the rich will hardly make a dent in the deficit

2011-04-13T13:11:00.001-07:00

The President will give a speech tonight on how he plans to solve America's deficit problem by taxing the rich.

From a distributional point of view, I have nothing against taxing the rich. Further, while it true fact that taxes tend to shrink the tax base (the only question is how much), let's ignore the Laffer-curve controversy. Let us instead accept the left's own calculations about tax revenue.

The centerpiece of President Obama's plan is to raise taxes on the rich (households making $250.000 or more). There is no doubt that the rich have become richer over the last few decades, and hence could afford this tax increase. If taxing them would solve the deficit crisis, I would support it in a heartbeat.

The only problem with this "solution" is that it is dishonest. President Obama likes to give the impression that his plan to tax the rich can significantly reduce the deficit, a claim which is false and which Obama knows is false.

Everybody knows that the rich have a lot of money, so it may appear reasonable to non-economists that taking some this wealth can fill the hole in the budget. What the public doesn't know, and what President Obama will not tell them, is that there are just too few rich people in America for this plan to work.

According to the Congressional Budget Office, over the next 10 years the Obama budget will produce a deficit of $10.900 billion, or 5.3% of GDP on average.

According to the left's own calculations and as reported by the New York Times, Obama's plan to raise taxes on the rich will generate $700 billion in additional revenue over the next decade, or just a pathetic 0.3% of GDP.

In other words, the plan to raise taxes on the rich will only cover one out of fifteen dollars of deficit spending. Where is President Obama going to get the other fourteen out of fifteen?

To the $10.9 trillion in deficits we need to add the unfunded liabilities of Medicare and Social Security. According to the Trustees of these programs, the unfounded liabilities are a staggering $52 trillion.

Again, any honest economist who knows the facts can tell you that a measly 70 billion in revenue per year from the rich will not come close to cover Americas fiscal hole of at least 63000 billion dollars.

Sometimes you hear from the left that repealing the Bush tax cuts will raise 3.7 trillion over the next 10 years. That certainly sounds better! What is the difference between this figure and the 0.7 trillion figure I reported for the rich?

The answer is that the 3.7 trillion figure includes the Bush tax cuts for the middle class, which amount to 3 trillion over the next decade. The key to remember is that the Bush tax cuts mainly went to households making less than $250.000. Obama has no plan to repeal that part of the Bush tax cuts. The Democrats and their allies in the media who cite the 3.7 trillion figure are playing bait and switch and trying to confuse the public. I saw this trick used recently by John Stewart to deceive his economically unsophisticated audience.

A graph with the next ten years of deficits with and without the tax hike for the rich:

But what if we taxed the rich even more? Didn't Warren Buffett promise taxing the wealth of billionaire's like him could solve the problem or something?

Forbes Magazine lists all American billionaires. Going by their 2010 numbers, American billionaires have around 800 billion in net worth.

Even if we could take confiscate all their assets without any risk to the economy, this one-time solution would just pay for around six months of the 2011 deficit Obama is running.

By opposing the tax increase for the rich based on the argument that it would hurt growth instead of pointing out how little revenue it generates, the Republican party has given President Obama a gift. The Democrats give voters the impression that the only obstacle in the way of fiscal balance are the Republican's, their rich friends and their supply-side ideology. This strategy works, because the public is as economists say "fiscally ignorant". Ordinary people simply don't know the relative magnitudes of the deficit, they only know the rich have lots of money.

The media meanwhile has only a selective interests in educating the American public. When miss-perceptions help the left the media suddenly loses interest in their duty to inform the policy debate.

Red State Rising

2011-04-08T12:41:00.000-07:00

Richard Florida is a urban theorist, famous for his book "The Rise of the Creative Class". The book argues that since liberal cities with a large concentration of high-tech industries such as San Francisco and Boston have plenty of street musicians and gay bars, street musicians and gay bars must be causing the high-tech sector.

Because of its politically correct message, the book is popular among politicians and in the media. But due to the unsubstantiated claims of causality and shaky statistical evidence, it is not very well respected among economists. Harvard professor Edward Glaser reviewed Florida's statistical analysis, and found that Florida's correlations vanish or even reverse signs once you simply take the level of education in a city into account.

Richard Florida is back with an attack on conservative America in The Atlantic. He writes:

"Conservatism, more and more, is the ideology of the economically left behind. The current economic crisis only appears to have deepened conservatism’s hold on America’s states."..." American politics is increasingly disconnected from its economic engine [liberal states]. And this deepening political divide has become perhaps the biggest bottleneck on the road to long-run prosperity."

Is conservatism the ideology of losers? Is the Republican Party the party of those who cannot make it on their own in the marketplace, and are hence bitter? Are liberal states the "economic engine" of America?

Well, let us start with the fact that a "state" doesn't take an ideological position, individuals do. Although rich states tend to vote Democrat, within states the richer you the more likely you are to vote Republican. So while Mississippi is poor, the poorest groups in Mississippi are Democrats. This is true for whites as well as minorities. This paradox been established by Columbia University's Andrew Gelman (whom Florida cites, so he can't be unaware of it).

Overall, the within state tendency of the economically successful to vote Republican is far stronger than the between state tendency of rich states to vote Democrat. In the United States, it is still true that the economically successful are more likely to vote for free-enterprise Republican and the unsuccessful to vote for welfare-state Democrats.

In 2008 in Georgia 70% of the voters who earned less than $30.000 voted for Obama, whereas only 40% of Georgia voters who earn more than $100.000 voted for Obama. The affluent in Georgia are Republican, whilst Democrat voters are those who are dragging down the state average. In Mississippi 66% voters who earned less than $30.000 voted for Obama, compared to only 23% of high income voters.

In poor white West Virginia, Obama got 62% of those making less than $30.000 but just 39% of those making more than $100.000. In other words, those WV Appalachian "Rednecks" that the media loves to demonize and portray as Republicans on closer observation turn out to vote Democrat. I could go on, the pattern is the same across all Red Stats.

This paradox that poor states vote Republican while poor Americans vote Democrat may be too subtle to understand for journalists, foreigners and causal observers of politics. We should however expect a professor writing in the Atlantic to make the effort. But of course we know why he didn't. The liberal audience of the Atlantic likes to be told that they belong to the party of wealth and success, while Republican voters are losers. Why spoil a good story with facts?

Let's go from states to the national averages. This is how individuals voted in 2010.

Of American voters who earn less than $30.000 per year 40% voted Republican, and the rest for Democrats.

Of Americans voters who earn more than $200.000 per year 64% voted Republican!

Does the Atlantic seriously want to claim that people who makes more than 200k per year are "economically left behind"?

None of this is really new, although Professor Florida apparently needs the reminder. Let's more forward to Florida's claim that liberal areas are the "economic engine" of America.

Red States, by which are mean states that voted for Bush in 2004, are on average poorer than Blue states, mainly due to having more poor Democrats.

However, during the last few decades the less regulated and taxed Red States have had faster growth than Blue states. According to the Bureau of Economic Analyses Regional Economic Accounts Between 1970 and 2010, real output increased by an average of 3.4% per year in Red States compared to 2.6% per year in Blue States. The real per capita growth rate of personal income in the Red States was 2.0% per year, compared to 1.8% per year in Blue States.

The graph below shows the convergence of per capita income. Note that this does not adjust for the cost of living, which is lower in Red States. One reason Red States have been growing faster is that they started at lower levels and are converging. Another likely explanation is pro-growth economic policies.

Job numbers in Republican states are even more impressive. Red States have been creating far more new jobs than Blue States. Part of this is that Red States have had enjoyed a better economic climate and consequently have been attracting more people over this period. Americans are voting with their feat, leaving Blue States for Red States.

The most striking number is that between 1990 and 2009 the Red half of America created 24 million new jobs, compared to only 12 million new jobs in Blue States. This means that Red States created two thirds of all new jobs in the United States between 1990 and 2009. These are the very states which Richard Florida claimed were increasingly falling behind. The Blue States, which Florida calls the "economic engine" of the United States, not only had lower income growth, but only added half as many new jobs as Red States.

Richard Florida's claims in the Atlantic may confirm liberal stereotypes, but have little support in economic data.

David Brooks and Malcolm Gadwall wrong about I.Q, Income and Wealth

2011-04-01T09:48:00.000-07:00

In his book "The Social Animal", reviewed here, David brooks writes:

"Once you get past some pretty obvious correlations (smart people make better mathematicians), there is a very loose relationship between IQ and life outcomes."

Brooks further cites a study claiming that there is "no correlation between accumulating large wealth and high IQ."

Both claims are wrong. The result Brooks cites is after "controlling" for education and income. But education and income are themselves functions of I.Q, so you shouldn't control for them if the question you want to answer is how I.Q effects life outcomes.

I have not seen this graphed online, so let's visualize the relationship between an estimate of I.Q and income and wealth so you can see for yourself. The source is NLYS79, a dataset which tracks a representative sample of the U.S population. Intelligence is approximated by the military when the individuals in the sample were mostly teenagers, while income and wealth data is for the same guys in their 40s. The sample is restricted to non-Hispanic white men.

For this group the lowest decile is people with I.Q below 84, and the highest decile above 116, which is not a very high cutoff. So keep in mind that we are not talking about only super-geniuses, in which case the results would be even stronger. Also remember that the middle of the distribution have very similar I.Q scores, the 5th decile is around 101-104, and the 6th decile around 104-108.

As you can see Americans men lucky enough to be born either with genes or a home environment that facilitates high I.Q earn more and accumulate more wealth.

The strong link between I.Q and earnings is well known by labor economists, but perhaps not by the affluent and high-I.Q readers of the New York Times. Obviously most of it goes through education. As technological development makes I.Q more valuable and unskilled labor less valuable, this disparity is increasing.

Another common claim of Brooks and of Malcolm Gladwell is that I.Q may matter, but only until around 130, after which it becomes meaningless. This is also wrong. Many previous samples have had too few observations to make reliable inference about the effect of I.Q above 130. Of course not having sufficient data hardly justifies Gladwell confidently claiming that I.Q above 130 is irrelevant even for scientists in technical fields (which I and others who are not smart enough to handle advanced mathematics could have told you from personal experience was a bizarre theory). After all, 130 is not that high, around the mean for a Harvard or SSE student.

This recent paper by Heckman, Gensowski and Savelyev studies the life outcomes of the Terman sample, which entirely consists of American men and women with I.Q above 135 (in some cases far above 135). They find that I.Q has a significant effects on earnings and educational outcomes, also for those above the 135 I.Q threshold. Another Malcolm Gladwell myth busted.

There are some policy implications from this realization. One is that smart and successful people shouldn't congratulate themselves so much. They didn't so much "earn" their talent than were lucky in the gene/environment lottery. If you are born healthy, with high I.Q genes and with educated parents and a good home environment you are expected to earn more than a more disadvantaged child who exerts the exact amount of effort through life.

Unlike libertarians, Conservatives believe that those who were the recipients of good fortunate have a moral obligations towards the rest of society, in particular to the people who do their best but just have less marketable skills.

Another is that the left is wrong about the market allocating income mainly based on chance, connections or "power". In fact, earnings are strongly linked to intelligence, which indicates that they are linked to productivity, just as economic theory predicts. Poor people are on average less productive than rich people, a claim which may sound obvious (almost tautological) to an economist but which outrages a lot of people on the left.

Denying the link between productivity and earnings is very important for the modern left, as their entire source of outrage is based on the view that the capitalist system "exploits" the poor. More likely, because of the modern welfare state and because of the growing importance of human capital, more resources are transferred from the productive rich to the poor than vice-versa. There is so little demand in the labor market for unskilled people that the poor in industrialized countries increasingly don't even work full time.

The fact that the rich don't exploit the poor doesn't mean the rich shouldn't help the poor. But it's one thing to claim you are rich because you are stealing from poor people, and another to believe you have an obligation to help all members of society due to randomly having being granted more valued skills. Fairness perceptions are not only a function of the type of distribution we desire, but to an even greater extent a function of the process we believe creates inequality.

I suppose David Brooks and Gladwell give an inaccurate impression about I.Q and income/wealth in order to make their readers feel warm and fuzzy. But that is not an accurate depiction of the world we live in, we live in a much harsher and more unfair reality.

The "Mystery" of Child Poverty in Sweden.

2011-03-27T09:57:00.000-07:00

Yesterday Håkan Juholt, the new leaders of the Social Democratic party, gave his opening speech to the party congress where he outlined the future direction of policies.

Juholts chief identified social problem and number one priority was child poverty. He stated:

"We will not be a country where several hundred thousand children live in child-poverty. It is a shame for Sweden...It only belongs in [conservative leader] Reinfeldt's Sweden, not in Social Democratic Sweden".

Child poverty is measured by non-profit group "Rädda Barnen", and is defined as either children in families who receive welfare ("socialbidrag") because they are below the poverty norm defined by the state, or children in families who live below the poverty norm but for various reasons do not receive welfare. I would therefore have been counted among the sample of poor children between 1989-1999 when we lived on welfare.

It is therefore a reasonable measure that approximates absolute child poverty (although welfare payments and these minimum norms increase slightly over time in real terms).

The standard critique of the right is that these measures are relative poverty which can give misleading results. For example with relative poverty the poverty rate could bizarrely rise even if when the real income of the poor increases, just as long as the real income of the rich increases even faster. However this critique is not valid here, since the measure is closer to absolute poverty. This is incidentally also true of the American poverty rate, which contrary to perception among many libertarians measures absolute poverty, not relative poverty.

First, let's note that child poverty has declined. In 1997 there were 432.000 poor children in Sweden, and in 2008 the number was 220.000 (so Juholt was technically wrong when he said "several" hundred thousand, but let's not be picky). In percentage terms child poverty went from 22.3% to 11.5%.

But Sweden has experienced rapid income growth in the last decade and a half. So why isn't child poverty declining more? Surely it must be due to the heartless neo-liberal policies of the right!

I think this graph can give us some a hint of what's going on.

In 2008 the child poverty rate of Native Swedish children was only one third of what is was in 1997, a massive reduction from 243.000 to 78.000. The only reason Sweden's' total child poverty rate has not declined more is that during these years politicians to the right and the left brought several hundred thousand poor immigrants to Sweden to swell the ranks of the impoverished. While first and second generation immigrants constituted 44% of the poor children in 1997, they were 65% of all poor children in Sweden in 2008.

Only 5% of native Swedish children live in poverty. For immigrant children with both parents born outside of the Sweden, the child poverty rate is 39%, a miserable number which may shock and should dishearten liberal Americans. The Swedish model appeared to produce amazing results as long as the country was completely homogeneous and full of Swedes. But the much admired welfare state was unable to deal with even moderate levels of ethic diversity (still far below the levels of the United States) without a collapse in social outcomes.

Demographic change, not economic policy, is what is preventing child poverty from declining (if it were the fault of economic policy the child poverty rate of ordinary Swedes would not have declined so much).

The leader of the Social Democrats said "Child poverty shall be combated every day and with all available means!"

One fool-proof method would be slowing the importation of tens of thousands of more poor people every year until he has solved child poverty among Swedes and immigrants already here. I am guessing however that this is not among theoretically possible "available means" in Mr. Juholt's universe.

On the Swedish voucher system

2011-03-25T09:40:00.000-07:00

Swedish test-scores are deteriorating, both among native Swedes and immigrants.

The left is blaming this on Sweden's popular system of vouchers. The Swedish private schools ("friskolor") are funded by public vouchers but privately owned and managed, which the left dislikes. In this article for example "ideological...market-experiments" are accused of having caused a decline in the "level of knowledge in schools".

However if we look at PISA-test-scores 2000-2009, it is apparent that 8th-grade test scores are dropping like a rock in public schools, but actually increasing in private schools.

Between 2006-2009 the results fall declined in private schools, but even during this period they fell more in public schools. It is sometimes argued that the higher test-scores of private schools in Sweden is due to grade inflation. However the PISA scores are internationally standardized, so they are a fair metric.

Keep in mind that there may be composition changes going on here, which the averages don't tell us about. It is also theoretically possible that the decline in public schools is caused by private schools. One claim of the left is that if the smart and motivated kids leave, the other children become worse students. The Swedish left also accuses private schools of draining public schools from resources, which go towards detested profits. However it is unlikely for several reasons that pubic school failure is the fault of private schools.

First, the private school sector remains small, with less than 10% of 8th graders tested by PISA in 2009.

Second, in Sweden private schools cost taxpayers 8 percent less per public on average than public schools, so they are not draining financial resources. The average profit margin of all Swedish private schools is only 5% (and much of this is the return of injections of capital into the schools).

Third, studies seem to indicate that there is little sorting in Swedish private schools, that is to say it is not mainly the richest or brightest kids who go to private schools. (e.g Böhlmark and Lindahl, 2007, 2009).

Lastly international research has generally failed to detect a negative effect of school choice on those who stay behind. (having more girls in your class may help, but that's another issue).

Studies of school choice suffer from methodological problems, because children who choice private schools may be different in ways we cannot control for. Therefore probably the best study are those like this one, which uses lotteries. There is no comparable study for Sweden. They generally find that school choice does not lower outcomes, contrary to the claims of the Swedish left. While they also don't detect major increases in test scores, they detect improvement in outcome variables such as arrest rates.

Voucher funded schools have more satisfied teachers and parents and students. They cost less for taxpayers. They don't appear to hurt public schools. In addition, they have been improving their test-scores in a period where public schools scores are declining.

Despite all of this, the Social Democrats blame the crisis of Swedish education on private schools, even though it is the 90% or so of children in public schools who are doing particularly poorly, and even though they present no evidence whatsoever that this long term decline is caused by private schools. If anyone is being blindly "ideological" on this issue, it is the left. This is especially clear with regards to their emotional aversion to and overestimation of profits.

Having written all this, let me criticize the right.

This will pain them to learn, but they are putting too much faith in private schools, and too much weight on test scores in evaluating private schools. The sad truth is that test-scores are mostly determined by I.Q and home environment, not by which school you attend.

Let me show you this depressing graph from a recent paper by James Heckman for white children in the U.S:

You will notice that gaps in child test scores emerge early (age 3) and persist through age 18. Schools contribute little to closing these gaps.

The Swedish right has accepted the quasi-Marxist view of the left and liberals, which is that people are blank slates, that ability is equally distributed and that schools consequently can easily raise cognitive skills.

The left deludes itself into believing society can do this just as soon as we give schools a little more money (meanwhile real spending per pupil has more than doubled in a period where test-scores have declined). The right instead deludes itself into believing in this Utopian vision just as soon as we make schools capitalist (meanwhile decades of private choice in Sweden and Chile have only moderate improvements in outcomes).

It would be one thing if private schools were able to dramatically change the curriculum and drill students like military schools or (horror horror) Swedish schools in 1965. American catholic schools successfully improve the life outcomes of minority students where public schools fail.

While raising everyone's I.Q dramatically through capitalist schools is a fantasy, there is in principle no reason Sweden cannot return to historical test score levels.

But this would require going back to historical curriculum and historical norms. The power vacuum that has emerged in Swedish schools and leads to mini Lord-of-the-flies classrooms has to be filled by adults. Repetition and memorization (both of which do not require the child to have above average I.Q to work) should again become the foundation of learning. The post-modern pedagogic theories taught to teachers in the universities must be discarded into the trashcan of history.

There is a lot of rhetoric from the Swedish right on education reform, but no sign of any of this happening. Making schools private in form without allowing them to depart from the current curriculum is not going to magically fix the problems. This faux-capitalism would not truly utilize the advantages of free-enterprise, and making promises you cannot deliver on will only discredit capitalism among the public.

If the right keeps promising better education outcomes without fixing the core problems voters will sooner or later wise up and punish them. Education minister Jan Björklund should close the rhetoric to reform gap, either by shutting up or by actually doing something about the situation.

The Economic Performance of Europe and the United States

2011-03-12T04:33:00.000-08:00

British Member of the European Parliament Daniel Hannan has a powerful article in the Wall Street Journal about President Obama and the Europeanization of the American economy. He writes:

“My guess is that if anything, Obama would verbalize his ideology using the same vocabulary that Eurocrats do. He would say he wants a fairer America, a more tolerant America, a less arrogant America, a more engaged America. When you prize away the cliché, what these phrases amount to are higher taxes, less patriotism, a bigger role for state bureaucracies and a transfer of sovereignty to global institutions.”

Politicians on the left rarely admit this goal, I guess since it is not popular. There is little doubt however that a large portion of the American left believes that Western Europe has higher quality of life than the United States (probably wrong), and that the higher level of income equality and lower crime is primarily caused by welfare state policies (almost certainly wrong).

Americans two most important liberals outside of elected office are John Stewart and Paul Krugman, and they have both made it clear that they consider Europe a superior society compared to the United States. Most young liberals I have met also believe this, with an almost utopian view of Western Europe.

This despite the fact that Europeans have lower average income, lower median wages and higher unemployment rates. Europeans are more likely to vote with their feet and emigrate to the United States than the opposite. Contrary to popular claims, Europeans have lower self-reported happiness (a measure that I personally don’t believe in) and somewhat higher absolute poverty. Europe has much higher tax rates, but the same tax revenue as the United States.

There is one problem with Hannan’s article, which is using total GDP growth rather than per capita growth of income. This is misleading, since the United States has higher population growth than Europe. But having more people doesn’t mean your people are better off.

The growth of per capita income the last 3-4 decades have been similar in the United States and Europe. Of course this does not imply that the welfare state and high taxes is a free lunch. Economists have longed recognized that the adverse effect of taxes is mainly on levels of GDP, not the growth of GDP. I write about this here and here.

What is remarkable is that Western Europe appears to be “stuck” at a permanent lower level of income than America, even though poorer countries tend to conditionally grow faster than richer countries, due to “low hanging fruits”.

These two graphs illustrate what has been going on. The two most archetypical European welfare states, Sweden and France, were rapidly converging to American output levels for three decades following the war. However this stopped in the late 1970s/early 1980s, and even reversed.

This is a big deal. Richer countries on the technology frontier are not supposed to maintain their advantage for long or even outperform less avancerad nations. However the American economy managed to do exactly this, which is one reason I refer to it as the Super-Economy.

My interpretation is that Europe slowed and America gained ground because of expanded welfare policies in France/Sweden and supply side reforms in the United States.

Sweden (but not France) later implemented its own far reaching supply side reforms as a response to the poor economic performance. Sweden (but not France) is again converting to American levels.

Since we don’t have controlled experiments for entire nations, this historical analysis is speculative, and reflects my ideological biases. But at the very least we can conclude that the growth patterns of Western European welfare states and the United States is consistent with what Chicago style economics would predict.

The intellectual meltdown of libertarianism in Sweden

2011-03-03T11:26:00.000-08:00

Yesterday the right-of-center coalition together with the environmentalists voted to guarantee tax-funded health care and schooling for illegal immigrants (In Swedish media the term used to obfuscate is "papperslösa", "those with no papers"). In addition, illegal immigrants will be allowed to start businesses. This decision is today cheered by Swedish libertarians, who also supported amnesty a couple of years ago.

The most prominent libertarians of intellectuals of the 20th century - Milton Friedman, Friedrich Hayek and Robert Nozick - all opposed open borders for welfare states. But today's libertarians are not as thoughtful. They are motivated by simplistic arguments, such as borders being created by politicians and therefore automatically bad, or that since free trade with China is good, free trade with people must also be good to. But unlike Chinese plastic toys, immigrants collect welfare, impose negative social externalities such as crime on others, and vote themselves even more benefits.

Historically socialists fought to abolish private rights and property, while modern socialists and libertarians fight to abolish our collective rights and properties. The most prominent of these are rights we have granted each other in democracies to vote over common decisions, backed by the threat of coercion.

One Swedish libertarian thus wrote about expanding the welfare state to illegal immigrants: "This is what solidarity is about". (Ayn Rand would surely have been proud to read this).

A blogger at the most important libertarian journal, Neo, fervently defends this latest expansion of the welfare state, with the argument that Sweden is already spending a lot on other stuff. By this logic, the bigger the government already is, the more we should expand it.

Modern libertarianism is a self-destructive ideology. This is because the unskilled immigrant population that open borders invites is an exceptionally infertile ground for libertarian values. Consequently open borders in a democracy will automatically lead to a welfare state as the immigrants sooner or later become the majority of voters.

To no ones surprise, rather than becoming libertarian, immigrants loyally support the Social Democratic welfare state, as their economic self interests and the political culture of their societies would predicts. In the latest Swedish election, only 43% of Swedes but 77% of non-western immigrants voted for the left (this was an unusually bad year for the left, who got 92% of the immigrant vote in 2002!). In the United States, where while only 35% of non-Hispanic whites prefer higher taxes in return for more government services, the figure is 65% for first generation Hispanic immigrants, and 66% for second generation Hispanics.

Benefits to illegal immigrants are unpopular among ordinary swedes, but popular amongst the elites. The elites in Sweden no longer believe or act as if they have been delegated their power and position in life by the public. Instead, they look down at ordinary Swedes as unwashed rubes, identifying instead with elites in other countries. This is the basics of what I call the "The Economist" Class [sic]. This is incidentally the reason why the European Union is ever expanding, elites in Europe identify more with other elites in Europe rather than with non-elites in their respective country.

The ideology of the elites tells them that since all humans are equal, they owe no more to the Swedes than to any random inhabitant of the earth. This despite the fact that it is the Swedes they represent, they are the one who voted for them (if they are politicians), who pay their membership dues (unions), who work for them (industry), who read their texts and trust them to provide the truth (media) or who pay our grants and financed our educations (academia).

Pundits who have only absorbed Adam Smith, Milton Friedman and Hayek on a superficial level (many seem to just have read the abstract) today view the virtue of noblesse oblige as obsolete.

A minority of libertarians in Sweden realize that these laws have negative consequences for our country, but feel compelled to support open borders because of ideology, which tells them that the government has no right to control borders. Those to the left who don't like this law are also stuck in their ideology, since that tells them that because all humans are equal, it must be racist to give free health care to Swedes but not to an Albanian who broke our laws and crossed our border.

Hayek and other idea-historians consider Anglo-Saxon conservatism a sub-category of classical liberalism (what Swedes simply call liberalism). However, unlike libertarianism, intellectual conservative theory does not have any problem reconciling policies that benefit society with policies derived from ideological axioms.

The nation state is a mutual defense and cooperation pact, something we have created through the implicit social compact to improve collective decision making. We therefore have more obligations and responsibilities towards other citizens (needless to say regardless of their race), than we do towards other random people on the planet. This is particularly true for anyone who has been entrust elite status in politics or academia or intellectual life, and particularly true for people like me who have been given the gift of citizenship by Swedes. The responsibility for the welfare of Albanian children meanwhile belongs to Albania.

Any ideology that leads you to a conflict what you believe is good for society and what your ideology compels you to believe is flawed by design. This is why Anglo-Saxon conservatism at its finest is the lack of an ideology.

The New York Times on Sweden's immigration problem

2011-02-27T12:26:00.000-08:00

Overall, the article is excellent, you should read it if the subject interests you. Random comments:

* The article exaggerates the problems by focusing on Rosengård, the worst (major) ghetto in Sweden. Yes, in Rosengård 80% of adult don't work, but for Sweden as a whole the figure for non-western immigrants is about 50%.

* While the first and second generation immigrants are about 25% of the population, many of these are Finns and Scandinavian. The relevant figure - the number of 1st and 2nd generation non-western immigrants - is around 10% based on my calculations from the latest demographic reports.

* The funniest and most revealing part of the article is a Iranian "rapper" quoted as saying "I want to be able to become president [of Sweden]." Sweden is a Monarchy and thus has no President. What this illustrates is that most multiculturalists ideas are directly imported to Sweden from the United States.

Both "rap" and the dream of becoming "President" are from American popular culture. The majority of television programming and movies in Sweden are American. This is not the first time I have heard the "President of Sweden" dream from immigrants.

Immigrant-right activists in Sweden also quote Martin Luther King a lot, which I find quite offensive. You simply *cannot* compare refugees like me who come to Sweden and are granted asylum and receive generous welfare with African Americans who were enslaved, exploited and forced to live in brutal segregation for generations.

The story also shows how isolated some immigrants in the ghettos are from Swedish society. This guy dreams of running for office, and demands that Swedish society elevate him to this position, but doesn't even know the form of government of the country he lives in.

* Because the media seldom reports the numbers and often gives anecdotal evidence to the contrary, most Swedes are not aware that immigration has accelerated the last few years to about 100.000 per year, of which about 2/3 are non-western. We are now taking in as many every year than the record year of 1993 (War in Bosnia), and more as a share of the population as the United States during the 19th century. But if a tree falls in the forest and the Swedish media ignores it, did it really happen? Instead the conventional wisdom claim (lie) is that "it has become much harder to migrate to Sweden".

* Towards the end the article become more misleading, as the New York Times trusts Swedish social scientists. They write "Some experts believe the support for the far right has already reached its limits in Sweden."

First, anyone who believes that the anti-immigrant Swedish Democrats are going to go away either doesn't understand Swedish politics or is engaging in wishful thinking. They are only going to grow, if for no other reason because the immigration problem is not going to go away. While "movement" parties with roots in the early 20th century such as the Social Democrats and Center-party are withering away, energized Sweden Democrats are building a new grass-root movement. Furthermore, now that they are in Parliament, they receive more media attention and are slowly becoming more mainstream.

The "experts" quoted don't seem to realize that the Swedish Democrats have already grown from 5.7% to 8% in some polls since the election no more than six months ago.

Another example is a Swedish political scientists who gives the classic misleading comparison of immigrant sentiment with the 1990s to "prove" Swedes are becoming more pro-immigration. I have written about this method of cheating at lenght here.

The 1990s was a period of severe economic crisis, and also the beginning of the first wave of anti-immigration sentiment (with New Democracy, the first anti-immigration party). As New Democracy imploded due to leadership conflicts and as the economic crisis ended, anti-immigration sentiment declined. It has since gone up again.

The correct comparison would be with 1970 or 1980 or even 2000, not the peak of a frenzy in 1992. That is a little like writing that American anti-Islamists sentiment has been declining, by comparing to September 12th 2001.

And why not just provide the numbers so the NYT readers can make up their own minds? Of those Swedes who offer an opinion, 62% want to reduce immigration. Instead they avoid the subject by writing that most Swedes don't have immigration as their single biggest political concern.

* The immigrants interviewed are indignant and resent Swedish society. They don't accept even the mild criticism of radical Islamism that the Swedish media occasionally lets through. Worse still, they take it personally.

"“It’s hard to watch the news,” he said. “It’s Muslim this, Muslim that. Everything is about how bad we are. The Swedish won’t say anything to your face. But they say things.”"

This guy perceives Swedish television news being anti-Muslim! I worked briefly in Swedish Television when I was in college, the ideological atmosphere was exactly what you would expect. According to a recent survey 87% of journalists in Swedish television are liberal, leftist or socialist. I guess the reason that the guy is upset is that media grudgingly reports terrorist attacks and immigrant riots.

I have long been aware of and concerned by this deep resentment against Swedes and Swedish society among a large number of immigrants. It may be the most under-reported aspect of the problems (no poll has ever been conducted on this). When I was a child, I remember feeling this dark feeling myself. It is a bitter, dangerous sentiment that will never allow you to successfully integrate.

* This article could not possibly be written in a major Swedish Newspaper in the current intellectual atmosphere. The liberal New York Times is way too honest about the problems caused by non-western immigration to Sweden.

You have to admire America as effectively more democratic than conformist Sweden, where a small group of like minded people decide what facts the public can be trusted to handle.

Islamists caused overwhelming majority of terrorist deaths in Europe during last decade

2011-02-20T12:27:00.000-08:00

This is the blog post that has taken me the longest to write. I went through every single terrorist attack in Europe and North America in the comprehensive RAND Database of Worldwide Terrorism Incidents for the last 10 years (close to 4000 incidents). Terrorists were divided between Muslims or non-Muslims. When RAND does not provide information on likely or confirmed perpetrators and we have no strong suspicions, I assume they were non-Muslim, to err on the side of caution.

Most of Islam is of course non-violent. Surveys show that less than 10-30% of Muslims are openly sympathetic to violence in the name of Islam. I am therefore not writing about Islam, I am writing about Islamism, a minority political sect within Islam.

Looking at all people killed by terrorist attacks in Europe and North America during the last 10 years, 97% was committed by Muslim terrorist, or 4703 of 4873 killed. Most of this is September 11 alone.

Still, even if we exclude the September 11 attacks, the share of casualties due to Muslim terror is 91%.

A lot of the remainder are a number of deadly (and under-reported by western media) Muslim terrorist attacks in Russia. If we just look at Western Europe, the share of terrorist deaths caused by Muslim terrorists during the last 10 years is 79%.

The remaining 68 deaths out of 319 were committed by The IRA and other domestic terrorist. By comparison, the Madrid attacks in 2004 alone killed three times as many people than all attacks by ETA, The IRA, Corsican separatists, right-wing terrorists and all other non-Muslim terrorist attacks in Europe during the last ten years combined.

Remember, I do not include any Islamists terrorist attacks in the Middle East or South Asia or Africa or anywhere else other than Europe and North America. Based on State Department Data and to unimaginable horror these attacks appear to have killed in excess of 10,000 people per year during the last decade.

Unlike Neo-cons, I do not believe that radical Islamism is a threat to our civilization the same way Nazism or Communism ever was. The reason is that militant Islamism is too disorganized.

Lack of organization makes it hard to eradicate militant Islamism, as is no center of power you can knock out to end the war. However it also means Islamists are unable to concentrate the force required to really threaten us. At worst, they can kill a few thousand innocent civilians, which is of course horrible, but hardly on the same civilization-threatening level as Nazis exterminating millions or Communists threatening to eradicate Europe with nukes.

Second, unlike Communism and Fascism, militant Islamism has little attraction as an ideology in the West. During the cold war communist sympathizers infiltrated governments and other key institutions in the United States and Western Europe. Communist American scientists stole U.S military technology and helped Stalin build nuclear weapons. The same will not happen with regards to radical Islam. Today there are very few American scientists who are True Believers (Useful Idiots) and likely to steal nuclear secrets and give them to Bin Laden.

However what does annoy me is when the elite uses statistics to manipulate the public.

In Sweden the public is currently worried about Islamic terror, after two recent incidents with Islamist terrorist. Once again the elites, (media, politician and academics) have ganged up against the public and are trying to downplay the terrorist threat from militant Islam.

You see, while ordinary citizens may have gotten the impression from the nightly news that adherents of militant Islamism are statistically overrepresented in terms of international terrorism, the Enlightened Classes know better. The real reason the poor fools in the public believe there is a link between militant Islam and international terrorism is "islamophobia".

There was a debate in the parliament recently. Both the Social Democrats and the other parties in the left claimed that the main terrorist threat to the Swedish public today is not radical Islam, but right wing extremism...

The Green party representative explained that terrorism "is about emotional and social aspects rather than ideological ones".

This is the left, but the right is not much better.

So how in god's name would you convince the public of the preposterous claim that militant Islam is not the main terrorist threat in Europe? Their method is interesting, both in showing ingenuity in finding ways to trick the public, and stupidity in what they are willing to convince themselves of. The solution is namely to rely on the number of terrorist attacks, rather than on casualties from terrorism!

In Spain and Northern Ireland in particular, there are lots of tiny terrorist attacks by domestic terrorists every year. These attacks typically don't kill anyone, and often don't appear aimed at killing anyone. Characteristic examples from the RAND database:

"The headquarters of the Spanish Socialist Workers' Party (PSOE) in Baranain had several windows broken when it was attacked with stones. The damage is estimated at 50,000 pesetas."

"A group of radicals attacked a Renault dealership by setting a fire which damaged three vans belonging to the firm. A container of flammable liquids and firework rockets were used to start the fire."

Al-Qaida on the other hand specialized on a few spectacular attacks aimed at killing as many as possible.

Thus if we ignore the deaths and treat each attack as equal, you can show that Islamists commit a smaller number of terrorist acts than domestic terrorists. This method absurdly assumes that bringing down the Twin Towers on September 11 is equal to ETA vandalizing some property in Spain (each is one attack after all).

This is for instance what Sweden's largest daily DN does, using a report from Interpol about the number of terrorist incidences in Europe, and concluding that "Islamists terror attacks are unusual in Europe".

My calculations show that DN is misleading it's readers. As usual, when it comes to issues shrouded in political correctness, the public is better off relying on their own impression than "scientists" and "experts" in the media.

The crisis of Social Democracy in Scandinavia

2011-02-17T11:53:00.001-08:00

The Swedish Social Democrats are currently in disarray. A party that alone held power virtually uninterrupted for most of the 20th century currently only has support of about 25-28% of voters.

I am not going to offer them advice how to recover, since I am their ideological opponent, and I myself would never trust advice from my ideological opponents to be in my best interest.

Most of the explanations offered for the meltdown relies on uniquely Swedish events and recent phenomenon. However the exact same thing happened in Denmark and Norway. Moreover, the Swedish Social Democrats have been slowly declining for decades, which was obscured by a couple of odd victories following the 1990s financial crisis. So most likely the explanation for the decline has a systematic component and is common to all three Scandinavian countries.

One explanation is reduced class-consciousness among the working class, who are also becoming a smaller share of the population. There is not much the Labour parties can do about this.

Another explanation is resistance of working class voters to immigration. The Scandinavian working class have been hit hardest by the adverse impact of non-western immigration.

* First, working class neighborhoods have turned into ghettos, forcing them to either move out or live with high crime, troubled schools and other negative social externalities.

* Second, unskilled immigrants put downward pressure on wages and employment.

* Third, immigration costs billions of dollars, which means less money over to welfare state services.

* Lastly, the immigrants don't have Lutheran work ethics and strong social pressure not to abuse the welfare state like the Scandinavians. Many non-western immigrants take full advantage of all the generous benefits, and some cheat if they can. This behavior has forced the Scandinavians to make social insurance payments less generous for everybody, and to introduce harsher controls. The unintended consequence is that a 55 year old Swedish working class women with health problems cannot get early retirement as easily as she could in 1985, because the system has become less trusting to everyone due to abuse.

Working class voters are also less likely to benefit from immigration in the form of cheaper services (working class Scandinavians cannot afford maids), and unlike the middle class they don't even pretend to enjoy Iraqi and Albanian cultural expressions.

Instead of reforming policies, the reaction of the Social Democrats to failed integration has been to ratcheted up pro-immigration propaganda. As a consequence, many of the working class feel abandoned by the Social Democrats, and are in turn abandoning them in favor of populist anti-immigration parties.

These graphs illustrate the development since the start of the Era of Social Democratic Dominance in 1936.

In Denmark the Social Democrats are expected to make a come-back in the next election. This lends support to my hypothesis, since the Danish Social Democrats have gone the furthest in giving up on multiculturalism and mass-immigration.

Are we worse off than in 1973?

2011-02-13T14:42:00.001-08:00

Tyler Cowen has a new book out, called The Great Stagnation. It is reviewed by anti-immigration pundit Steve Sailer.

Sailer makes a familiar argument, which is that while the rich are getting richer, ordinary Americans have experienced no improvement in their standard of living since 1973, and perhaps even a detritions (1973 is used because that was the height of the post-war boom).

He argues that while entertainment and plastic toys have become cheaper, the things that provide deep life satisfaction for the middle and working classes have become more expensive. This includes a nice home in a safe neighborhood and college for your children.

It is common for free-market economists to dismiss this line of reasoning. I don't want to do that, so let me note from the beginning that:

* While technological change, unskilled immigration and trade/outsourcing have helped the upper half, they have likely hurt working class Americans.

* The standard of living was improving rapidly for all between 1946-1973, whereas 1973-2008 at best provided slow and uneven improvement.

* When measuring standard of living, it's not enough to look at the price of consumer products such as laptops. The cost of keeping yourself and your children socially in the middle class - for example sending them to college or even having a stay at home mother - should be included.

However, I disagree with the claim that things are worse than 1973. This is based on relying on one data-set, which is the median hourly wage for non-supervisory production workers as measured by BLS, inflation adjusted by the CPI. But these wages for in total account for less than 40% of national income, and CPI-adjustment is not perfect.

Other data-series tell us a less pessimistic story.

Adjusting for inflation, the Census Bureau measure of median household income increased by 10% between 1973-2008. This is a broader and in my view better measure of income than BLS wages.

Contrary to popular perception, aggregate hours worked per adult are no higher than in 1973. Furthermore, this comparison does not take into account changing demographics. Compared to 1973, America has taken in millions of unskilled Hispanic workers, who earn less and depress the median. If we look at non-Hispanic white households, real median income increased by 15%. For African Americans, real median household income increased by 22%.

Sailer, liberals and paleo-conservatives are convinced that the CPI under-estimates inflation (so that using CPI over-estimates growth). However the Boskin Commission which studied the CPI carefully concluded that the CPI massively over-estimates inflation (and thus leads to underestimation of growth). This is because CPI cannot fully measure technology driven quality improvement, the value of completely new products, and cheaper outlets such as Wal-Mart.

Here is one area where I am not willing to back off even one inch from economist-conventional wisdom. On inflation of consumer goods, Boskin is right and Sailer is wrong.

Another data point is the Survey of Consumer Finance, which measures wealth. Real Median household wealth was $40.000 in 1970 and $88.000 in 2009 (after the crash).

You might argue that it is becoming cheaper to buy "stuff", but more expensive to buy truly "important things" like housing, health care, education for your children, and that the latter matters more for your well-being than I-pods. But people still spend a huge share of their income on "stuff", before they spend on "important things". Here I rely on The Consumer Expenditure Survey. Unfortunately it doesn't go back to 1973, so I will use the last available comparable year, 1984.

I will look at the middle 20% of the population. One result that jumps at you is that the middle class now pays much lower taxes, taxes are down by about $2.000 per household.

Let's define "stuff" as food, clothing and services, transportation, utilities, fuels, and public services, household furnishings and equipment, housekeeping supplies, personal care products and services and entertainment.

The price these has decreased, and the quality improved. In 1984 "stuff" was 62% of expenditure, compared to 52% in 2009. In absolute numbers, it declined from $25.000 to $21.000. Of course $21.000 in real dollars today for instance buys you a better car than in 1973.

Expenditure on "important things", which is housing, health care and education, increased from 37% to 45%. In absolute numbers it went from $15.000 to $18.000. This underestimates the increase, because employer provided health care is also paid through forgone wages. Still, since people spend such a large share of income on it, you can't just dismiss "stuff" when discussing the quality of life. Even if you believe that it is unimportant, reduced cost of "stuff" means people can more money over to spend on the things they truly care about.

I have also calculated my preferred comparison of income between 1973 and 2008. This relies on measures of aggregate personal income from National Account, calculated by the Bureau of Economic Analysis. These figures have a broader definition of income (I believe the broadest available), and a different inflation adjustment.

I have used measures of the share of national income that goes to the rich from Saez and Pickety. The ten percent richest were those who, in real dollars, earned more than $86,000 in 1973 and more than $112,000 in 2008. I remove the share of income that goes to the ten percent who make more than this. I call the remaining 90% of the population "Lower and Middle classes".

Per capita national income closely follows the rate of GDP growth. Between 1946-1973, overall per capita income increased by 2.4% annually, and 2.6% for the Lower and Middle classes.

Between 1973-2008 per capita income increased by 1.9% per year. This confirms that Tyler Cowen is right about lower growth rate than the Post-War Golden Age, but also that people who suggest zero growth are wrong. However inequality increased during these years, so the per capita income of the Lower and Middle classes only increased by 1.1% per year. Still, 1.1% is not zero, the per capita personal income of the Lower and Middle classes is now one and a half time higher compared to 1973, adjusted for inflation.

Lastly Sailer anecdotally discusses the cost of going to college and buying a home when he was young.

The Median home in 2010 dollars went from $160.000 in the 1970s to $221.000 in 2010. This does not guarantee that the quality is the same, but overall prices have only increased somewhat.

I looked up the cost of higher education from the College Board.

In 1980, Full Tuition plus Room and Board cost $14,700 in Private College and $6,700 in public college (in 2010 dollars). In 2010, the figures were $37,000 and $16,100. For my non-American readers it could be important to keep in mind that most students don't pay full tuition, that this does not include all the public subsidies for higher education, and that two thirds of Americans go to public universities.

So if you have two kids, and send one to public and one to private school, and pay for everything in undergraduate (they will borrow for graduate school themselves), the real cost went from $86.000 in 1980 to $213.000 in 2010. If we add the increase of the cost of a median house, this is close to $200.000 more a middle class family has to pay to stay in the same place they were four decades ago. Or force their children to do what I did, borrow yourself for your own cost of education.

I find a mixed picture, but also pretty strong arguments that "ordinary people are worse off than 1973" is not quite true. In particular, I want to warn people that the BLS median hourly wage figure is not the only measure of income, and likely not the best. It would be more fair to say that ordinary people are worse off compared to what they had a right to expect. They are perhaps also worse off compared to what alternative economic policies would have resulted in, most obvious being a high-wage policy which limits unskilled immigration.

America wrong continent for High-Speed Trains

2011-02-08T14:49:00.000-08:00

Today the White House released a plan to invest anther $53 billion in High-Speed rail.

The New York Times headlines this "U.S. Plays Catch-Up on High-Speed Rail", admiring High-Speed trains in China and Europe. Basically, the American Left argues that since Western Europe and China have high-speed rail, and since they believe that Western Europe and China have better economic policy than the United States, we should emulate them and build fast trains.

I often argue that European style policies will not work in America because of demographics and cultural differences. I can understand that not all readers are convinced that Americans are that different from Europeans. However, I hope every reader accepts that the U.S is geographically different from Europe and Asia.

High-Speed train countries Spain and France have 3 times higher population density than America. China has 4 times higher, Germany 7 times higher, Japan 10 times higher, South Korea 15 times higher and Taiwan 20 times higher population density than the U.S. Germany is more densely populated than New York state, and China more densely populated than California.

Countries that like America have a lot land compared to people, such as Canada, Scandinavia, Russia and Australia have not made any large scale investments in high-speed trains.

Let me illustrate this graphically. I take the total high-speed miles from The International Union of Railways, and plot the density of the high-speed-rail network with population density.

The United States is not an outlier as the White-House suggests, the U.S is exactly where our population density would predict. Only after President Obama's plan will the U.S become a outlier, a country with more High-Speed Train that population density would predict (the figure after Obama's plan is my estimate based on White House material).

High-Speed trains are not only expensive, they are slow when compared to air-travel. Take one of the least crazy high-speed train projects, connecting Los Angeles and San Francisco. The White House estimates are that this trip will take 2 hours 40 minutes. The same trip by commercial flight takes 1 hours 20 minutes. Even if you add an extra one hour for security check, the trip is faster by air (you also have to drive to the airport, but the same is true for trains).

After the first terrorist attack against high-speed trains, the security advantage would diminish. If we really wanted to and had an extra $53 billion over, we could invest in flying faster, in making the security process more effective, or (most sensibly) improving the high-way system.

Another fact Liberals ignore is that air-travel is cheaper in the U.S, costing about half per mile of what it does in Europe (perhaps due to economies of scale and higher competitiveness).

Investing in High-Speeds trains is likely a "White Elephant", a massive visible project that gets politicians attention, but is a bad deal for tax-payers. I hope we are not building it just to fulfill juvenile fantasies of making the U.S more like Europe.

Blue State and Red State IQ is identical

2011-02-06T15:00:00.000-08:00

The American left often congratulates itself on being smarter than the right. On the surface, this claim sounds plausible, since academics are disproportionally Democrat, and since some of the states most associated with poor educational outcomes (such as Mississippi) are solidly Republican.

The first problem with this line of argumentation is that it is lazy. The assumption is that if smart people vote Democrat, that in out of itself proves Democrats are right, without needing to prove the Republicans wrong in substance. However, like everyone else, the educated vote based on class interests, cultural identification and the ideological atmosphere of college, not just cold rational analysis of policy differences.

Second, there is actually no scientific evidence for the claim that Democrats are smarter, since no American political science database of voting to my knowledge collects IQ-data. Data on education and voting shows that Democrats and Republicans have identical average years of education. Democrats are over-represented among the most educated but also among the least educated, while Republicans have the middle.

Third, these voting patterns are constantly shifting, and differ across countries (and even within U.S states). As late as 1988 the educated voted overwhelmingly Republican. Through friends in Sweden have access to a high-quality dataset of IQ and voting, which confirms that Swedish Social Democrat voters have lower test scores than Swedish conservative voters. The fundamental arguments between pro-market and pro-government are the same in Europe and the United States. But the American left would never accept that the European right has superior arguments just because their voters have higher IQ than the European left (nor should anyone accept this premise). Yet the same liberals try to bully people in the U.S to vote for them based on the claim that Democrats are smarter than Republicans.

To make things worse, unlike Europe the American left have not taken the time to demonstrate their claim using actual test-score data. Democrats instead simple assume that they are smarter than everyone else!

This theory can ultimately only be evaluated using individual level data. The next best thing is analyzing proxies for state I.Q. Let me caution that this is problematic. Regarding income Andrew Gelman and others have shown the paradox that while Democrat States are on average richer than Republican States, Democrat voters are on average poorer than Republican voters.

Part of the explanation is that in Red states the poor vote Democrat and the rich Republican. Uneducated whites in the South, the demographic group the media likes to paint as bigoted Republicans, actually went close to 45% for Obama, perhaps because they earn little and didn't mind a little redistribution. McCain's margin in the South came from educated whites, a detail the media prefers to ignore since it contradicts their stereotypes.

I will use this paper in the prestigious journal Intelligence to get estimates of state I.Q, based on NAEP test scores.

If you just glance at the list, you might get the impression that the Blue states are indeed smarter than the Red states. I define Red states based on the 2004 Bush map, so New Hampshire is defined as blue and New Mexico as Red.

4 out of the top 5 are Democrat:

1. Massachusetts (D)
2. New Hampshire (D)
3. North Dakota (R)
4. Vermont (D)
5. Minnesota (D)

And 3 out of the 5 bottom states are Republican. Although the author doesn't include the District of Columbia, which would have had the bottom slot if included.

46. New Mexico (R)
47. Hawaii (D)
48. California (D)
49. Louisiana (R)
50. Mississippi (R)

However, looking more carefully at the list, the results are not that consistent. Red Midwestern and Mountain states such as the Dakotas, Montana, Kansas, Nebraska, Wyoming and Idaho do quite well. Meanwhile, large blue states such as California, Maryland and Illinois have unimpressive scores. So let's just estimate the average for all the Red states, and all the Blue states, weighted by the population of each state.

The result is not really surprising: The average I.Q level of Blue and Red States is identical: Blue States have an average IQ of 99.5 and Red States have an average I.Q of 99.4.

It would be strange if we found large differences, since we know from exit polls that Republican voters are on average no less educated than Democrat voters, and since I.Q and education are strongly correlated.

If the District of Columbia is included, the Red States would score slightly higher than the Blue states (although with I.Q a 1 point difference is meaningless).

Unless Democrats can produce a micro-study of adult voters that demonstrates that Democrat voters have significantly higher I.Q than Republican voters, they should respect the state of science and stop spreading the myth that they are smarter than everyone else.

P.S.

Here is the full list of states and estimated IQ:

1. Massachusetts 104.3
2. New Hampshire 104.2
3. North Dakota 103.8
4. Vermont 103.8
5. Minnesota 103.7
6. Maine 103.4
7. Montana 103.4
8. Iowa 103.2
9. Connecticut 103.1
10. Wisconsin 102.9
11. Kansas 102.8
12. New Jersey 102.8
13. South Dakota 102.8
14. Wyoming 102.4
15. Nebraska 102.3
16. Virginia 101.9
17. Washington 101.9
18. Ohio 101.8
19. Indiana 101.7
20. Colorado 101.6
21. Pennsylva. 101.5
22. Idaho 101.4
23. Oregon 101.2
24. Utah 101.1
25. Missouri 101
26. New York 100.7
27. Michigan 100.5
28. Delaware 100.4
29. N. Carolina 100.2
30. Texas 100
31. Illinois 99.9
32. Maryland 99.7
33. Rhode Island99.5
34. Kentucky 99.4
35. Oklahoma 99.3
36. Alaska 99
37. W. Virginia 98.7
38. Florida 98.4
39. S. Carolina 98.4
40. Georgia 98
41. Tennessee 97.7
42. Arkansas 97.5
43. Arizona 97.4
44. Nevada 96.5
45. Alabama 95.7
46. New Mexico 95.7
47. Hawaii 95.6
48. California 95.5
49. Louisiana 95.3
50. Mississippi 94.2

Moderate Tax Sweden

2011-01-24T14:25:00.000-08:00

The economic success of Sweden has been one of the most powerful arguments of the left. If taxes are bad for the economy, why does the country with the highest tax rates in the world have an widely admired standard of living?

My argument, that Scandinavians due to their culture (work ethics, cooperativeness, trustworthiness, civic-mindedness etc.) are more productive than other westerners, doesn't work in Sweden. The reason is that Swedes are like fish in the water with regards to their norms and culture. They are generally not aware that they and other Scandinavians are much better behaved than other westerners. Instead the public and the elites naively attribute Sweden's better functioning society to the Social-Democratic welfare state.

This makes it difficult to argue against the welfare state for true believers. As for foreign liberals, the challenge is even harder, since outsiders can only remember a few facts about any small society (Sweden=blondes=well organized=affluent=welfare state).

So how did free-marketers ultimately convince the Swedish public to reform the welfare state? The answer lies in the details of modern Swedish economic history, something which Swedes are aware of but outsiders often are not.

You see, Sweden had very high rates of growth when the welfare state was only slightly larger than other developed countries. The period 1870-1970 is sometimes mentioned, when Sweden had the second highest growth rate in the world, below only Japan.

For simplicity, let's focus on the post-war period. At that time, the Swedish public sector was only slightly bigger than other developed European countries. And for the next two decades, Sweden's Golden Age, the expansion of the welfare state was no faster than average. Around 1960, Sweden was not an outlier in terms of economic policy. The welfare state only exploded in the late 1960s when the left was ideologically radicalized and the right marginalized.

What happened consequently turned out to be the doom of Social Democracy. The rate of growth slowed. This is not only relative to poor European countries that were catching up after the war, but also countries on the technology frontier such as the United States. Sweden lost ground in terms of living standards, while exports slowed and employment stagnated.

The expansion of the welfare state stopped by 1990, and slowly the country began to reform. There was economic and political chaos because of the (largely coincidental) 1991-1993 economic crisis, which makes it hard to tell a consistent story for those years. However it is undeniable that the Swedish state has been in retreat from 2000 onward, not the least thanks to Fredrik Reinfeldt and Ander Borg.

Coincidentally or not, economic performance is back up.

Sweden is becoming a moderate tax country again. This has made my life much easier when debating taxes and economic performance with leftists who refuse to acknowledge the innate superiority of Swedish work ethics. Soon, it will be very hard to paint Sweden as a Socialist Utopia. This is not because it is no longer Utopian, but because the country is no longer that socialist (at least in economic policy). This development also means my personal taxes have gone down a lot, although to be honest as a tax-nerd I care much more about the implications for the policy-debate.

Breaking Matt Yglesia's Heart

2011-01-20T15:16:00.000-08:00

Matt Yglesias is one of the smartest left-of-center pundits. He is rare because he is both knowledgeable about social science and capable of applying it to public policy. Informing policy is the main purpose of social science, so it's good to have a few guys around who can act as links between scientists and pundits.

Yglesias is clearly fascinated by the Nordic countries. He belongs to the majority in the American (and Scandinavian) left who believe that favorable social outcomes in Nordic countries are caused by welfare state policies. If America copied Nordic policies, America would achieve roughly the same outcomes.

I belong to the people who believe that Scandinavia, like Japan, is a cultural outlier. Scandinavians score unbelievably high on things such as work ethic, trustworthiness and cooperation. This interpretation of causality is different: Scandinavians has a large welfare state because they are homogeneous and culturally unique. When other countries (say, southern Europe) copy Nordic policies, the results tend to be worse, because the population is different.

Perhaps the most important social outcome is educational attainment. The fact that the United States has a large achievement gap in education is the root cause of many problems and injustices (the only comparable inequality is crime, but crime is probably to a large extent due to the lack of human capital). In comparison, lack of material wealth is not a major problem in the United States, as African-Americans and Hispanics earn about the same income as the average in Western Europe.

If liberals are right about the fact that America could eradicate the ethnic education gap through copying Scandinavian policies, it would be a disgrace if we didn't do it immediately.

However, empirical evidence suggests that liberals may be wrong about this interpretation of causality. The reason I can claim this with confidence is because I know that the achievement gap in Scandinavia is roughly the same as in the United States. Until recently ethnic minorities were very few in the Nordic countries, so the achievement gap didn't influence the mean score, and was not apparent to outsiders. But not anymore.

During the last 3 decades, the foreign born population in Sweden, Norway and Denmark (but not so in Finland and Iceland) has grown exponentially. First and second generation immigrants from outside of Europe are now over 10% of Sweden's population.

It turns out that the Nordic school system and society at large is no better at closing the achievement gap than America, or at least not yet. One reason may be time. Contrary to conventional wisdom among liberals, the United States has been trying hard to close the achievement gap since at least the 1960s, with a lot of resource and some success. Scandinavia is just starting to become aware of this issue.

Let's also repeat the obvious: The American public school system is simply superior to the Scandinavian system, because America is richer and can afford to spend much more on public education.

Before presenting you with statistical evidence, let me cite Scandinavian sources; if you don't trust me perhaps you will trust them:

DN (largest daily newspaper in Sweden), 2010:
"Only 25 percent of students born in Somalia finish primary education with grades sufficient to qualify them for entering college, compared with 82 percent of students born in Finland. [and 91 percent of native Swedes]"

Swedish National Agency for Higher Education 2009:
"Few students with African origins continue to college"

Skolvärlden (Swedish Teacher Union Journal) 2010:
"Children who have immigrated to Sweden leave the ninth grade with significantly worse scores than children born in Sweden. This is regardless of whether they have received throughout their primary education in Sweden or not."

OECD, The Labour Market Integration of Immigrants in Denmark, 2007:
"the gap in educational attainment between the second generation and persons of Danish origin has grown substantially over the past decade....there is a divergent trend, similar to what has been observed in Germany"

"the second generation in Denmark has an about 20% lower chance of completing a qualifying education than Danes without a migration background."

"about twice as many students from the second generation drop out of upper secondary education as do students of Danish origin"

Statistics Norway, Immigration and immigrants 2008:
"Large differences [between immigrants and natives] in education levels"

"Source Country Differences in Test Score Gaps: Evidence from Denmark"
"even adjusted [for socioeconomic characteristics] gaps [in PISA between native Danes and first and second generation immigrants] remain sizeable and statistically significant. The adjusted gap is largest for students from Lebanon (0.80 SD), somewhat smaller for students from Turkey and former Yugoslavia and Afghanistan (about 0.55 SD), and smallest for Pakistan (about 0.25 SD). Thus, while the results indicate that a major portion of the test score gaps can be attributed to less favorable socioeconomic background factors of immigrant students, educational achievement of young immigrants is poorer than that of native Danish youngsters even after conditioning on the socioeconomic status of their family."

Most of the immigrant population with social problems in Scandinavia is from the Middle East and Southeastern Europe. These groups have few problems in the United States.

However when I pointed this out, many readers remained unconvinced. They want me to look at African-immigrants in Europe, the group considered most comparable to African-Americans. When data is available I will present the figure for all Africa, and when it is not for whatever large group that is available. There are few Mexican immigrants in any Scandinavian country so while a good comparison group for Hispanics is hard to find, I will show you some figures for Chileans.

I will attempt as much as possible to look at children who were born or grew up in Scandinavia, and not recent immigrants. I will look at both Sweden and Norway. From what I understand the situation is even worse in Denmark.

Let's start with the biggest problem in America, the ethnic achievement gap. For High-School, I use Heckman's figures rather than Census data, because there is reason to believe that Census figures under-estimate the gap due to the GED. For college I use Census data.

This we already knew. But how about Scandinavia? Not a pretty picture.

There are some exceptions, such as the high-School enrollment rate of Ethiopians/Eritreans in Norway. However the overall results cannot be denied: There is a massive Majority/Minority achievement gap in Scandinavia, comparable in size with the gap in the United States.

Keep in mind, Scandinavia is doing so poorly despite the fact that the minority population is small, no more than 5-10% of the student population. In the United States, the figure is closer to 40% of pupils.

It would be interesting to see how the left explains this pattern, given that they believe that the Nordic social system (rather than Scandinavian norms and culture) is superior to the American one. If that's the case, why are those without Scandinavian culture doing so poorly under the exact same system? And why are Scandinavians doing so well in the United States, under another system?

My contrarian conclusion is that the Nordic countries should be learning from the American public school system and how it deals with disadvantaged students. In particular, it is important to spend much more, put a lot of emphasis in teacher education, and build external support structures outside the classroom. Another important task is to make sure immigrants children speak the language as well as possible. The politically correct emphases on home-country-language instruction in Swedish schools may be harmful.

One important thing America can learn from Scandinavia is daycare, as James Heckman has argued.

One reason immigrants are doing poorly in Sweden and Denmark is ironically that their parents don't take advantage of day-care, even though it is virtually entirely tax-financed. One reason is that daycare is linked to having a job, which is a terrible idea (children of parents without jobs need daycare most). Another reason is that Muslim immigrants don't want their kids to adapt Swedish values. Perhaps in time we should move to make daycare mandatory in Sweden, with exceptions where it is needed.

Education spending in U.S states and Test-Scores

2011-01-14T13:36:00.000-08:00

Some readers wanted me to adjust for the cost of living when comparing education spending and test-scores. To my knowledge no perfect state by state adjustment exists, so I used this one produced by MERIC. The figures seemed plausible (D.C high, Tennessee low).

What I am doing here is comparing education spending per pupil with test scores of 8-graders in different American states, as measured by NAEP (which is considered a reliable comparison of pupil knowledge in different states). I use the average of math and reading.

I repeat that correlation does not equal causality. It may for example be that states who spend the most have the best educated parents. However, establishing statistically significant correlation is a necessary first step in arguing for causality, especially when we don't have controlled experiments.

First, let's start with where the debate between liberals and libertarians is currently: the correlation of state spending and test scores.

At least the correlation is clearly positive, unlike last time when I included other nations as well as U.S states. But the correlation isn't statistically significant, and no self-respecting Libertarians would let liberals get away with using a non-significant relationship in a debate.

Now let us do two simple adjustments. First, I divide the students into three demographic groups. The first group is The Majority, the weighted average of non-Hispanic White and Asians. I add those because the sample size of Asians are too small in many states (Whites alone produce roughly the same results).

Whites and Asians are 60% of the U.S student population. The second sample is Hispanics, 22% of students, followed by African-Americans who constitute 17% of the U.S student population.

First, White and Asians:

Similar results for Hispanics:

Lastly Black pupils:

Notice again the parsimonious power of the crude demographic and cost adjustments: the correlations are about twice as strong, and the relationship is now statistically significant for Whites, Asians and Hispanics.

Admittedly the correlation between spending and test-scores is still weak for African-Americans. I suspect the reason is selection: that the best scoring African-Americans tend to live in rural states with few minorities. (The seven highest are Montana, Vermont, North and South Dakota, New Hampshire, Wyoming and Hawaii). These states spend less than the national average. However the African American parents who move to Hawaii are probably different from the ones who remain in Detroit or the South. Also, states with a large disadvantaged population have their resources spread thin compared to Montana and Wyoming.

So I removed all states where the Black student population is small. This is not strictly kosher, especially since I did it after observing the results. In my defense I did a OLS-regression of the full sample and weighted by state population, and the relationship between spending and test-scores is the same for blacks and whites.

Even though they are passionate about increasing education spending, liberals have not used these simple and effective arguments against anti-education spending libertarians.

P.S

Let me put the top 10 and bottom 10 states for African Americans. The Star* signifies a Red-State (a state that was won by Bush in 2004):

Top:

1* Montana
2 Vermont
3* North Dakota
4 New Hampshire
5* South Dakota
6* Wyoming
7 Hawaii
8 Massachusetts
9* Texas
10 Delaware

Bottom:

42* Nevada
43* Nebraska
44 Rhode Island
45 California
46 Wisconsin
47* Mississippi
48 District of Columbia
49* Alabama
50* Arkansas
51 Michigan

Before I did the comparison, I assumed that since Blue-States are richer and probably more tolerant towards African-Americans, they would have higher scores. But it turns out the opposite is true, the population weighted NAEP score of African-Americans in the 2004-Republican states is 2 points higher than Democrat states.

This is despite the fact that Blue-States spend significantly more than Red-states on education, both before and after controlling for the cost of living. Yes, the Deep South still has low scores, but this is compensated by above average performance in Texas, the Mountain States and the Midwest.

Ironically, the Blue-States are equivalent to the United States in the PISA debate (more resources, worse outcomes) and the Red-States the equivalent of Scandinavia or North-East Asia (less resource, better outcomes). If we were as prone to jumping to conclusions that support our ideological biases as the left or libertarians, the debate would be over. This "proves" once for all that lower-spending on education causes better outcomes for minorities!

However I suspect the reason for this contradiction has to do with insufficient demographic adjustment, just like the PISA-debate. Blue-state are more urban, so that their schools have to deal with more disadvantaged students. The schools are not necessarily worse, or at least this comparison cannot tell us if they are. We need much more careful studies to determine this, controlled experiments or at least a before-and-after methodology that takes into account the background characteristics of the students. Just reporting average scores is not enough.

Liberals are rarely willing to cut the United States slack for having a different population mix than Scandinavia. In the education debate, the are getting a dose of their own causality-ignoring medicine from libertarians.

California vs. Texas

2011-01-07T15:07:00.000-08:00

Paul Krugman is now claiming Texas doesn’t have a well managed economy or something. To be frank, I didn’t read his column, because I have grown tired of the man and his dogmatic and predictable views. He has been caught cheating so many times that I now trust Krugman's figures as much as I trust Glen Beck's.

But at least I have an excuse to write an easy post comparing California and Texas. A lot of people have done this, so here are my two cents.

I use budget data from the Census Annual Survey of State Government Finances and job and per capita income data from the Bureau of Economic Analysis.

Last year, high-tax California had a population about 50% larger than Texas, a deficit 220% higher, and a debt 380% higher. It's safe to say that low-tax Texas is in a better fiscal shape.

Since 1970, Texas has added 60 percentage points more jobs than California. A lot of this is due to faster population growth. But not entirely. In 1970, the employment to population ratio was 1% higher in California, while in 2009 it was 6% higher in Texas.

In 1950 the Golden State had 40% higher per capita income than Texas. In 1970, the advantage was still over 30%. By 2009, the difference had shrunk to only 10%, without taking into account the higher cost of living in California.

(this is how to read the graph: Texas is about twice of what Texas was in 1970, and California 60% higher than California in 1970. The graph shows that Texas has grown faster since 1970, not that it has surpassed California in terms of levels).

It appears that Texas is doing better than California not only fiscally, but also in terms of aggregate job and income growth.

One thing I would warn about is exaggerating California’s debt problem. It’s true that they have mismanaged their finances, and expanded government beyond what they can afford. However California is still extremely wealthy, with a total GDP of about 1900 billion dollars in 2009. This is about the size of the entire Italian economy, and still larger than Brazil, India, or Russia.

So while their tax base may appear narrow, their entire economic base is very wide. The debt to GDP ratio for California alone is still below 10% (or 80%, if you add the national debt).

Also, let's not make too strong policy-inference from the short-term mortgage-bubble that is currently distressing California. Policy should be based on evaluations of long term performance. I argue above that the long term trend also favors Texas.

The relationship between education spending and test scores

2011-01-03T15:01:00.000-08:00

Good public policy is impossible without understanding causality. The most common logical mistakes in the policy debate is the tendency of confusing correlation with causality. One common reason correlation is confused with causality is the failure to make demographic adjustments.

A demographic adjustment without some form of exogenous variation can rarely tell us what the definitive truth is. But it can often be used to discard weak arguments. Usually, I focus on criticizing the left in this regard, but let's make an effort to be intellectually honest and scrutinize the right for once.

The argument of the right is that educational spending is wasteful, and doesn't produce outcomes. They base this on the fact that the United States already spends more on education than almost all other nations, and more than ever in history.

John Stossel for instance writes that:

"If money were the solution, the problem would already be solved"

The difficulty is that education spending goes up when social needs go up. This is the classical head-ache pill example: just because people with worse head-aches take more pills, it doesn't mean the pills are ineffective or even causing the pain. The same argument is also true of spending on the police. Cities with more crime have more police, not because the police are causing higher crime rates, but because they are a response to high crime.

So for instance the entity that spends the most on education and has the worse test scores in the U.S is the District of Columbia. This doesn't prove anything, because D.C also has much more poverty and many more disadvantaged students. The relevant policy question is what would happen to test scores if D.C spent less.

Let's start with a simple cross-country regression of the normal, unadjusted PISA-scores (the ones the media keeps reporting) and education spending per pupil, as measured by the OECD.

It turns out that the correlation is negative (-0.2). The United States spends the second most of any country, and has below average test-scores. Ethnically homogeneous Japan, South Korea and Finland spend at average rates and have the best test scores. Tiny, ethnically homogeneous and "hungry" Estonia spends less than half as much as the United States and Norway on education but has far better test scores.

Argument over. Doing the comparison in the New York Times way, Conservatives win, and Liberals lose.

But what if we do it my way instead? Let's do a crude demographic adjustment, and compare European-origin groups to other European-origin groups, just as I did before. The methodology is explained and defended in detail here.

For Europe, I remove first and second generation immigrants. For U.S, I remove Latinos, Asians and all other groups than non-Hispanic whites (two thirds of the U.S population is non-Hispanic white).

Now, prepare to witness the power of the simple demographic transformation.

The relationship between spending and outcomes is now reversed. More spending is indeed associated with better PISA scores. The United States does well, as predicted by how much she spends on education. Finland with her admired education system is still an outlier, which I guess indicates there really is something special about Finland and their school system.

The graph suddenly makes more intuitive sense, doesn't it?

But we have more variation in data we have not used. Why not break out each U.S state and treat it as a separate observation? We have comparable data on 8-grader test scores for each state from the NAEP which I have converted to PISA-equivalents (method explained here).

We also have access to education spending per pupil for each U.S state, courtesy of U.S Census.

Again first we do the standard, unadjusted PISA-scores for this pooled sample of countries and U.S states.

A flat, slightly downward sloping curve, countries and states that spend more don't appear to score any higher.

Notice that Utah, Finland and South Korea outscore California, even though they spend half as much (they don't need to spend more, because they lack California socially disadvantaged masses). Minnesota beats Sweden, but generally U.S states do poorly, even though they spend more than Europe.

Another victory for Republicans. Clearly doubling money on education has no effect, and may even - somehow - make your countries children score a little less.

Now, look at the exact same graph, only with my standard crude demographic adjustment (For Europe, first and second generation immigrants are removed. For U.S states, all demographic groups other than non-Hispanic whites are removed from the sample).

Again the results are reversed after a demographic adjustment. The advantage of the U.S and the advantage of rich U.S states that spend a lot on education suddenly becomes apparent. More public spending on schools is associated with better outcomes. The mystery of the missing correlation is solved.

Lastly, let's look at test scored of African Americans and state educational spending.

Of course these graphs alone do not prove that the driving factor is education spending itself. In theory, it could be because students in rich states are different, for example in terms of family income. But the relationship still represents powerful suggestive evidence in favor of public expenditure on education.

However the left in the United States doesn't use this argument, because they are ideologically averse to demographic adjustments having to do with race and ethnicity (most of them consider all statistical generalizations about race and ethnicity somehow offensive, regardless of why you are doing it).

The result of liberals political correctness is that they are depriving themselves of a very important argument in a very important debate.

Nicholas Kristof makes a fool of the New York Times

2011-01-02T21:42:00.000-08:00

Nicholas Kristof has given a raving review of the book "The Spirit Level" in the NYT. He is clearly unaware of the debate in Europe, where the "Spirit Level" has largely been debunked due to poor scientific quality.

I have written about this, and would like to remind you of 3 facts about the book "The Spirit Level" (links at the end):

1. The book is scientifically dishonest by never telling the readers that it represents a minority opinion within social sciences. Higher ranked researchers in better schools using more rigorous methods have come to the opposite conclusion about income inequality causing lower life expectancy. Yet the reader of the book, or readers of the New York Times, would never even know the other research existed.

Wilkinson and Picket give their trusting readers the impression they are reading novel research results. In fact, they are reading claims that were debunked years ago.

Let me refer to scientific authority, because that's what Kristof does. Princeton Professor Angus Deaton is currently the 57th highest ranked economist in the world. He is an expert in health economics, statistical methods and one of the foremost expert in determining causality. He is in often mentioned as in the running's for the Nobel prize. Deaton is a typical center-left academic, not some right-winger.

In 2004, Angus Deaton reviewed the research on income inequality and life expectancy for the Journal of Economic Literature, the most authorities such journal in economics. Deaton in particular looked at the empirical evidence for the claims of Wilkinson. He concluded:

"it is not true that income inequality itself is a major determinant of public health. There is no robust relationship between life expectancy and income inequality among the rich countries, and the correlation across the states and cities of the United States is almost certainly the result of something that is correlated with income inequality, but is not income inequality itself"."

Kristof repeats the claim in the New York Times that income inequality causes poor health outcomes in American states and cities. This particular hypothesis was looked at by Deaton and Lubotsky in 2003. They analyzed the link between income inequality and mortality, controlling for demographic differences. They found (from abstract):

"Conditional on the fraction black, neither city nor state mortality rates are correlated with income inequality"

2. Those nice convincing graphs in Spirit Level graphs are to a large extent based on manipulating and cherry-picking.

For instance, I, some blogger in his pajamas, forced Wilkinson to admit publicly in the Wall Street Journal that he had established no statistically significant relationship between life expectancy and income inequality across countries.

Most of their other claims could not be replicated either (although I didn't test everything). For instance, Wilkinson and Picket assert that they have proven that income inequality cases lower innovativeness. I was suspicious of their claim that the United States was one of the least innovative countries in the world, at the same technological level as Portugal.

It turns out the "distinguished" scientists who convinced Kristof by citing "mountains of data to support their argument" picked the innovation data from amateur internet site Nationmaster! Their claims was not supported using patent data from the World Intellectual Property Organization.

3. Wilkinson and Picket confuse correlation with causality.

Sure, they pay lip-service to causality. But they never tell the readers that among all the papers they cite, there is not one single article that has shown any causal effect of income inequality on health or social problems.

Every single article Wilkinson and Picket cite (and they are lots of them), is some version of a correlation studies, sometimes with few and sometimes with more controls, but never with identified causal links.

You don't believe me? It's true.

Wilkinson and Picket rely on 2 meta-studies to create the impression of massive external scientific support for their view. The big one, with close to 200 papers, was written by no other than themselves (!). You can read it here:

In the paper Wilkinson and Picket explain their criteria for determining if a paper is evidence for their hypothesis (inequality causes poor health).

“We classified them as wholly supportive if they reported only statistically significant associations between greater income inequality and poorer population health”

Did you catch the key word? "association". In terms of causality, "association" is the equivalent of correlation (although association doesn't have to be linear). Association is what researchers write when they have failed to establish causality.

This is how Wikipedia explains the term:

“In quantitative research, the term "association" is often used to emphasize that a relationship being discussed is not necessarily causal”

Wilkinson and Picket gather a bunch of articles (87 have a statistically significant relationship) where there is some form of correlation between inequality and health. But of course, poor health can cause inequality, and third factors (say, drug use or unemployment) can cause both inequality and poor health. Establishing causality here is not trivial, such as from smoking and mortality, its central to the debate.

In fact, it is hard to think about any social problem that doesn't depress income for those afflicted (and thus create income inequality) as a side effect. So typically what will happen is that there is a weak and not very robust correlation between inequality and poor social and health outcomes, which vanishes when researchers do a more careful analysis with more controls.

So proving a causal link between inequality and health/social outcomes is not a detail, it's essential to accepting their story.

But Wilkinson and Picket never establish causality. They never even claim to in the scientific version of their paper. There, facing a less gullible audience, they admit that they are not showing causal effects, just statistically significant "associations".

But in the book, and on the internet, and to their audiences, and to trusting suckers such as Nicholas Kristof, Wilkinson and Picket give the dishonest impression that the papers they are citing contain causal evidence.

Wilkinson and Picket are relying on the lack of scientific sophistication among the general public. The public doesn't always understand the difference between correlation and causality, and can obviously not be aware of the studies in economics that already debunked the claims in the Spirit Level. But isn't it the job of the New York Times to ensure scientific standards for their readers?

Whenever pushed into a corner, Wilkinson and Picket rely on the number of citations in their book. However the number of studies happens to be irrelevant when the problem is reverse causality. 20 or 200 or 2000 correlation studies of the same spurious relationship will give the same answer. If you have failed to identify a causal link, all the 200 correlations are equality worthless.

The New York Times is allowing Nicholas Kristof to embarrass their newspaper. Don't simply trust everything Wilkinson and Picket claim because you dislike inequality (so do I) and are easily impressed by academics (I used to, but than I grew up). Academics sometimes fall to the temptation to abuse their authority and our trust to package their opinion as science or to sell books. Do your homework.

From the start I noticed that these two are dishonest people, which I don't like. I have thus gone after them aggressively. Since the book is such a house of cards, it was not hard.

http://super-economy.blogspot.com/2010/02/spirit-level-is-junk-science.html
http://super-economy.blogspot.com/2010/02/spirit-level-is-junk-science-part-deux.html
http://super-economy.blogspot.com/2010/02/breaking-wilkinston-admits-there-is-no.html
http://super-economy.blogspot.com/2010/02/spirit-level-loses-more-credibility.html
http://super-economy.blogspot.com/2010/07/spirit-level-writers-caught-lying.html
http://super-economy.blogspot.com/2010/08/wilkinson-and-picket-in-full-retreat.html

How well do above average American States do compared to above average countries in test scores?

2011-01-01T15:02:00.000-08:00

Over at National Review Online, Reihan Salam has some complaints about my PISA-comparison.

First, he notes that even if European-Americans and Asian-Americans are doing well, minorities are not, and they are going to be a larger and larger part of the U.S population. This is completely true.

However my analysis tells us two new things:

* The problem is not likely to be the American public school system itself. If it was the education system that constituted the problem, Asian- and European-descended students (70% of the U.S population) would not be performing so well relative to other nations. After all, they are in the same government controlled system. Studies that use more sophisticated methods to control for school quality come to the same conclusion: It's not the schools.

* Europe has a similar achievement test gap between majority/minority. It's just that the size of the European minority population is still small, so it doesn't affect the national average as much.

But if your aim is to isolate the treatment effect of a policy (in this case the design of the school system), the size of the group impacted is irrelevant. Turks in Sweden have approximately the same gap with Swedish natives as Mexicans in California to California natives. This should conclusively end one discussion: the Scandinavian school system has not discovered how to solve the majority/minority achievement gap.

If you want to explain why Sweden has less aggregate economic and social inequality, the relative size of the minority groups in question matter. If you want to compare the efficiency of school systems, it doesn't. It is immaterial for what we are doing, a comparison of how well the school system closes the achievement gap, that Turks are less than 1% of the Swedish population and Hispanics 30% of the Californian population. It is sufficient to show that they have the same gap. If anything, European schools should be doing better considering the smaller size of the disadvantaged groups.

Jumping up and down in excitement, and congratulating Swedish and other Social Democratic school systems for having "solved" the achievement gap while sending fact finding teams there to learn from their system is ridiculous. Their system hasn't solved anything, the same gap is there, they just have few minorities so the gap influences national averages less and is less apparent to outsiders.

So under closer scrutiny it turns out that the "secret" of Scandinavia's lack of a achievement gap is that until recently, they didn't let many minorities into their countries. Once they started to, the achievement gap among socially disadvantaged groups emerged, a little smaller in magnitude but likely due to the same causes.

In the 1960s, a naive liberal in the U.S could be excused for assuming that Sweden's success was due to their education or welfare policy, and that Sweden had "solved" societal problems such as ethnic achievement gaps. Other countries could just copy whatever Scandinavia was doing in order to deal with their social problems.

Now that we have all seen footage from Scandinavian ghettos, as well as national statistics from Sweden and the rest of Europe confirming an achievement gap with minorities, it should be clear that this theory was wrong. So why are we still spitting on American public schools and congratulating Social Democratic ones for producing roughly the same outcomes?

2. Salam believes that the U.S should be doing even better, and asks about the performance of Greenwich (Connecticut).

"The NEA, and Tino, would have you believe that it is very, very impressive that Greenwich is treading water with Yazoo...."the United States, in terms of GDP per capita, is closer to being the Greenwich [Connecticut] of the OECD than the Yazoo City [Mississippi]."

He has two points here. First, he believes that with America's resource advantage, the U.S should be outperforming other countries even more. I might write more on this in detail later.

The resource gap of the U.S vs. Western Europe is not the same as that between Connecticut and Mississippi. As I have written here, Connecticut has 110% higher per capita income than Mississippi. Meanwhile the United States has "only" 36% higher per capita income than Western Europe.

If we instead of Mississippi compare Connecticut with the U.S average, it fits better. Connecticut is 35% above the U.S national average in per capita income, and the U.S national average is about 35% above Europe. In this sense the United States is equivalent of a (albeit much larger) 'Connecticut of the OECD', which is what Salam wrote.

Nationally, Connecticut as a whole scores a little less than 0.2 standard deviations above the U.S mean. Well, my analysis suggested Americans of European-origin score a little less than 0.2 standard deviations above Western Europeans in Western Europe.

So if this is the criticism, it turns out that the U.S educational advantage is approximately what the U.S economic advantage would predict.

I can't fault Mr. Salam for wanting more output for the input American tax payers are spending. However my analysis suggests that unlike conventional wisdom on the political right, public education spending is not just wasted. It appears successful in buying America better test scores, for each given demographic group, and of course with diminishing marginal returns.

Second, Salam is not sufficiently "impressed" by the average American advantage. Let's see if we can impress him.

The data I presented was national averages. In the case of the U.S, this was the average of rich cities such as Greenwich Connecticut and poor cities such as Yazoo Mississippi. When you aggregate a large group (200 million people) the variance goes down, as Greenwich and Yazoo cancel each other out.

This is important to keep in mind when comparing with small outliers such as Hong-Kong and Finland. Even if the U.S beats Europe on average, the best performing tiny part of Europe will likely beat the average of the U.S. What I was impressed by was the fact that one large group (all Americans from Europe) beat another large group (all Western European native born) by a sizable margin, as well as beating most of the small, top performing outliers.

But I would be happy to disaggregate to defend my argument.

PISA doesn't report the score of U.S states, because the sample sizes are too small. However there is another similar international test of math and science of 8-graders that does have data on individual states, TIMSS. They also have data on 2 U.S states, Minnesota and Massachusetts (both are similar to Connecticut in terms of test scores nationally, according to other data).

Remember that the United States scores relatively worse on TIMMS than PISA, especially compared to Asian countries, because PISA includes reading (which Americans are good at), whereas TIMSS is only a test of math and science.

Massachusetts and Minnesota each score higher than every single European country, although Finland is not included.

The achievement gap between Minnesota and Sweden is as large as the gap between Sweden and Bulgaria!

Keep in mind that this is the average of Minnesota and Massachusetts, including immigrants and minority students. If you were for example to break out only Asian-Americans in one of those states, the results are going to be stratospheric.

For fun, I also used a third large test of 8-graders (NAEP) which allows me to break out Asian-Americans in Connecticut, but requires more work to make it comparable with PISA. If Asian-Americans in Connecticut score as high relative to other Americans on PISA as they do on the NAEP relative to other Americans, they would beat every single Asian country in PISA. So would Asian-Americans in Texas and New York and several other states.

Note: this second graph relies on translating scores on one standardized test of 8-graders (NAEP) to PISA-equivalent scores, assuming that your group scored 10% (in standard deviation terms) above the American national average on the NAEP means your group would also score 10% above the American national average on PISA. I know that those readers who are resistant to my argument are going to nit-pick and are going to to be reluctant to accept the comparison.

However regardless if you buy my second graph, what is very important for readers to understand is that the first graph with TIMSS is not based on me doing any sort of adjustment of the data. It's simply the average of the scores, as reported by the Department of Education, on a test that is internationally standardized.

This doesn't definitively settle the debate about the quality of education system, because of biased selection of Asian immigrants. But I hope this example illustrates that affluent groups in the United States destroy the international competition, and are competitive even when compared to small rich countries such as Hong-Kong.

How much time do American kids spend doing homework?

2010-12-30T17:13:00.000-08:00

The American Time Use Survey is valuable dataset operated by the Bureau of Labor Statistics. Each year it asks a large, representative sample of Americans to keep time-diaries, writing down exactly what they do during the day.

I am going to rely on time survey data to give us hints about PISA test-scores. PISA is taken only by those aged 15-year, but let's examine all kids aged 15-18, both to increase the sample size and because high-school is more important. I will only include 15-18 year olds who are enrolled full time in high-school.

I think the graph and the implications for educational outcomes are pretty self-explanatory, even though I will admit that I was (again) surprised by just how large the differences are.

The only thing I would like to caution is not to assume a 1-1 causal relationship between input and output: kids who are better at school anyway may also study more, getting a double-advantage so to speak.

This graph is worth keeping in mind next time you read that the Asian school system rather than Asian culture explains Asian educational outcomes. These are Asian-Americans under (largely) the same American public school system that the media has decided is the cause of Americas problems. With American teachers, American teacher unions, with typical American levels of education funding, and facing the same American lack of school choice.

The Asian school system was if I understand the history correctly originally a carbon-copy of western school systems. They may have retained more class-room discipline, and more memorization, but other than that there appears nothing magic about the schools themselves.

We have to look at the society outside the classroom if we want to explain the differences in outcome. Instead of mindlessly assuming all variation in output is due to education policy, one single input of the human capital production function.

The amazing truth about PISA scores: USA beats Western Europe, ties with Asia.

2010-12-22T15:51:00.000-08:00

What I have learned recently and want to share with you is that once we correct (even crudely) for demography in the 2009 PISA scores, American students outperform Western Europe by significant margins and tie with Asian students. Jump to the graphs if you don't want to read my boring set-up and methodology.

The main theme in my blog is that we shouldn’t confuse policy with culture, and with demographic factors.

For instance, education scholars have known for decades that the home environment of the kids and the education levels of the parents are very important for student outcomes. We also know that immigrant kids have a more difficult time at school, in part because they don’t know the language.

Take me as an example. The school me and my brother attended was in a basement in Tehran, had no modern resources, and largely focused on religious indoctrination. But we had a good home background. Our father attended a college in the west a few years (our mother didn’t, despite stratospheric scores test scores, because at the time you didn’t send a good Kurdish girl to another city to study). So we did well in school. Conversely, the first few years in Sweden I had bad grades, in part because I didn’t master the language.

The point I am trying to make is that the school in Sweden was objectively superior to the school in Iran. But I scored lower in Sweden, because of factors outside the control of the education system. If you want to compare the effect of the school, you have to isolate those external factors and make an apples-to-apples comparison.

However, this is not at all how the media is presenting the recent PISA scores. For example there is a lot of attention of the score of the kids in Shanghai, the according to the NYT is supposed to “stun” us or something.

It's dumb to compare one of the most elite cities in a country with entire nations, and to draw policy-inference from such a comparison. Shanghai has 3 times the average income of China! It is also naive to trust the Chinese government when they tell us the data is representative of the entire nation. Either you compare Shanghai to New York City, or you compare the entire country of China, including the rural part, with other large nations. Most of the news and policy conclusions we read about PISA-scores in the New York Times is thus pure nonsense.

1. Correcting for the demography:

In almost all European countries, immigrants from third world countries score lower than native born kids.

Why? No one know exactly why. Language, culture, home environment, income of parents, the education level of the parents and social problems in the neighborhood and peer groups norms are among likely explanations. But it is generally not true that the schools themselves are worse for immigrants than natives. In welfare states, immigrants often (thought not always) go to the same or similar schools and have as much or likely more resources per student.

So the fact that immigrant students in mixed schools do worse than Swedish kids used to a few decades ago in homogeneous schools does not it out of itself prove that Swedish public schools have become worse.

Of course, the biggest myth that the media reporting of PISA scores propagates is that the American public school system is horrible.

The liberal left in U.S and in Europe loves this myth, because they get to demand more government spending, and at the same time get to gloat about how much smarter Europeans are than Americans. The right also kind of likes the myth, because they get to blame social problems on the government, and scare the public about Chinese competitiveness.

We all know that Asian students beat Americans students, which "proves" that they must have a better education system. This inference is considered common sense among public intellectuals. Well, expect for the fact that Asian kids in the American school system actually score slightly better than Asian kids in North-East-Asia!

So maybe it’s not that there is something magical about Asian schools, and has more to do with the extraordinary focus on education in Asian culture, with their self-discipline and with their favorable home environment.

There are 3 parts to the PISA test, Reading, Math, and Science. I will just make it simple and use the average score of the 3 tests. This is not strictly correct, but in practice it doesn’t influence the results, while making it much easier for the reader. (the reason it doesn't influence the results is that countries that are good at one part tend to be good at other parts of the test.)

The simplest thing to do in order to get an apples-to-apples comparison is to at least correct for demography and cultural background. For instance, Finland scores the best of any European country. However first and second generation immigrant students in Finland do not outperform native Swedish, and score 50 points below native Finns (more on this later).

On PISA, 50 points is a lot. To give you a comparison, 50 points is larger than the difference between Sweden and Turkey. A crude rule of thumb here is that 50 points is 0.5 standard deviations.

The problem is that different countries have different share of immigrants. Sweden in 2009 PISA data had 17%, and Finland 4%. It’s just not fair to the Swedish public school system to demand that they must produce the same outcome, when Sweden has many more disadvantaged students. Similarly schools with African-American students who are plagued by racism, discrimination, crime, broken homes, poverty and other social problems are not necessarily worse just because their students don’t achieve the same results as affluent suburbs of Chicago. In fact, the most reliable data I have seen suggests that American minority schools on average have slightly more money than white schools. It’s just that the social problems they face are too much to overcome for the schools. It is illogical to blame the public school system for things out of its hands.

So let’s start by removing those with foreign background immigrants from the sample when comparing European countries with each other. I define immigrants here as those with a parent born outside the country, so it includes second generation immigrants. This is fairly easy for Europe.

In the case of America, 99% of the population originates from other countries, be they England, Italy, Sweden, India, Africa, Hong-Kong or Mexico. If we want to isolate the effect of the United States public school system, we should compare the immigrant groups with their home country. For those majority of Americans whose ancestors originate from Europe, we obviously want to compare them with Europe. For some groups, such as Indians, this is inappropriate. The reason is that mainly the most gifted Indians get to migrate to America to work or study.

However, as I have argued previously, there is strong reason to believe that this problem of so called biased selection does not apply to historic European migration to the United States at the aggregate level. The people who left Europe were not better educated than those who stayed. Immigrants were perhaps more motivated, but often poorer than average.

So similar to my comparison of GDP levels, let us compare Americans with European ancestry (about 65% of the U.S population, and not some sort of elite) with Europeans in Europe. We remove Asians, Mexicans, African-Americans and other countries that are best compared to their home nations. In Europe, we remove immigrants.

The results are astonishing at least to me. Rather than being at the bottom of the class, United States students are 7th best out of 28, and far better than the average of Western European nations where they largely originate from.

The mean score of Americans with European ancestry is 524, compared to 506 in Europe, when first and second generation immigrants are excluded. So much for the bigoted notions that Americans are dumb and Europeans are smart. This is also opposed to everything I have been taught about the American public school system.

For Asian-American students (remember this includes Vietnam, Thailand and other less developed countries outside Northeast Asia), the mean PISA score is 534, same as 533 for the average of Japan, South Korea, Singapore and Hong Kong. Here we have two biases going in opposite directions: Asians in the U.S are selected. On the other hand we are comparing the richest and best scoring Asian countries with all Americans with origin in South and East Asia.

2. Policy-Implications

Libertarians in the United States have often claimed that the public school system (which has more than 90% of the students) is a disaster. They blame this on government control and on teachers unions. However, it is completely unfair to demand that a public school in southern California where most of the students are recent immigrants from Mexico whose parents have no experience in higher education (only 4% of all Mexican immigrates have a college degree, compared to over 50% of Indian immigrants) should perform as well as a private school in Silicon Valley.

The libertarians have no answer why European and Asian countries that also have public school systems score higher than the United States (unadjusted for demography). Top scoring Finland has strong teacher unions, just as California.

Similarly, the left claims that the American education system is horrible, because Americans don’t invest enough in education. The left has no answer when you point out that the United States spends insanely more than Europe and East Asia on education. According to the OECD, the United States spends about 50% more per pupil than the average for Western Europe, and 40% more than Japan.

Another policy implication is that Europe can learn from American public schools, which appear to be better than most European countries. I can only compare Sweden with the U.S, but I can tell you that from my experience, the American system is superior. I always thought this was just anecdotal evidence, but I am beginning to realize that American schools are indeed better.

For example, we don’t have any real equivalent to Advanced Placements classes. We have cheaper and worse textbooks. The teachers on average have far less education. I could go on.

Nor is it any longer a mystery to me why Americans spend so much more on education and (falsely appear) to get out less in output.

But of course the biggest implication is that most Europeans and all American liberals have lost the bragging right about their side being smarter than Americans.

3. Immigrant PISA scores compared to natives

This is again the mean difference of the 3 parts of PISA.

Australia is the only country with a negative gap, which means Australian immigrants actually score better than natives. Canada is similar. The Australian-Canadian skill based migration system is at work here, generating less inequality (even short term).

The other pattern appears to be that the gap is almost constant in the remaining Western European countries. This may be important to keep in mind, whenever people claim that uniquely Swedish policies are causing poor immigrant educational outcomes.

The new 2012 electoral map after 2010 reapportionment

2010-12-21T14:46:00.000-08:00

A Constitutional principe is that the Census determines the number of electoral votes for each state. The 2010 census numbers are now out.

The net result is that Republicans gain about 6 electoral seats, or one Nevada sized state.

Let us analyze the 2012 electoral map that I drew with the new electoral votes:

If the election is not close, such as in 2008, these details will not matter. But what if the election is close again?

I start with the Bush-Kerry 2004 map. It’s anyone’s guess what the swing states will be in 2012, and the colors in this map reflects mine.

Since Obama only managed to carry Ohio and Florida with small margins in a very Democratic year, and given his approval rating in those two states, I assume Ohio and Florida will be lost to him if the election is close (he will of course take them again if he wins with a large national margin again).

Republicans have targeted Pennsylvania, Wisconsin, Michigan and Washington State in the last elections. Since they failed every time, let’s assign those to Obama. I added New Hampshire to possible Republican pickups, because Bush is not on the ballot anymore.

The Red and Red-leaning States, plus the 6 new electoral votes after reapportionment, leave the Republicans with 253 electoral votes.

Since Republicans are likely to control the house in 2012, they need 269 electoral votes to win. So they need to get 16 electoral votes from the states in light purple (or from Pennsylvania, Wisconsin, Michigan or Washington) to defeat Obama.

Assuming they keep the red states, plus Virginia, the Republicans need to win only one of the following swing states:

Colorado (Cook Partisan index 0), or
Nevada (D+1), or
Iowa (D+1), or
New Hampshire (D+2), or
New Mexico (D+2)

For the first half of 2010, Gallup has calculated Obama's approval rating by state. I will just compare each state with the national average:

New Hampshire (-8).
Colorado (0)
Iowa (-1)
Nevada (-1)
New Mexico (+2)

Without reapportionment, the GOP would have to win two of the mid-sized ones, but now only one is enough. It seems New Hampshire and Colorado are the most likely swing states. If Obama carries all of those states; he also need to hold Pennsylvania and Michigan and Wisconsin and Washington. If he does this, he is re-elected.

Let me also give you the Cook partisan index and current approval rating for the less likely but still possible pickups mentioned above:

Wisconsin: Obama Approval (-1). Cook index (D+2)
Pennsylvania: Obama Approval (-1). Cook index (D+2)
Michigan: Obama Approval (+2). Cook index (D+4)
Washington: Obama Approval (+2). Cook index (D+5)

If the Republicans keep the core states plus Virginia (Cook R+2, Obama approval -1), and miss all of purple CO,NH,IO,NV and NM, they will still win by just carrying one of the four blue states above.

Here is a another way of understanding the effect of the 2010 reapportionment:

Before this, if Republicans would have won all the States with a Cook Partisan Index that leans Republican and the Democrats all the states that lean Dem, the Republicans would get 260 electoral votes, Dems 269, and 9 neutral. With must-have Colorado (which is the only state currently with a completely neutral partisan leaning), the Republicans would get 269 and win the presidency *if* they control the house.

Thus the Republicans had a slight structural disadvantage, the combined red and red-leaning states had 9 fewer electoral votes than the blue and blue-leaning states.

After reapportionment, winning the Cook republicans leaning states would give the Republicans 266, and the dems 263. If the Republicans also win neutral Colorado, they would have 275. The Republicans now enjoy a slight structural advantage over Democrats.

First of all, the Republicans no longer need to control the house in order to win with just the red states. Second, reapportionment gives them the strategic possibility to “trade” Colorado with one of the smaller light blue states such as New Hampshire, Nevada, New Mexico or Iowa. With reapportionment Colorado is no longer a must-have.

Lastly this is the list of States losing and winning, plus the Cook measure of how they lean (for example Texas got 4 more electoral votes, and has been +10 points more Republican than the national average in the two last presidential elections). The second number reflects the change in the number of house seat for the State, which naturally also leads to the same change in the number of electoral votes.

Republican Leaning states:
Utah (20R) +1
Texas (10R) +4
South Carolina (8R) +1
Georgia (7R) +1
Arizona (6R) +1
Florida (2R) +2
Louisiana (10R) -1
Ohio (1R) -2
Missouri (3R) -1

Democrat leaning States:
Washington (5D) +1
Massachusetts (12D) -1
New York (10D) -2
Illinois (8D) -1
Michigan (4D) -1
New Jersey (4D) -1
Pennsylvania. (2D) -1

Swing States
Iowa, (1D) -1
Nevada (1D) +1

Did Karl Rove manipulate Fredrik Reinfeldt to get Julian Assange arrested?

2010-12-20T15:56:00.000-08:00

Today the Huffington Post, the flagship of the American liberal left, has an article claiming that Karl Rove had Sweden arrest Julian Assange.

It is clearly written by someone who understands little about Sweden:

1. The article claims that Karl Rove is a paid advisor to Fredrik Reinfeldt. This is simply not true.

Karl Roves involvement with the Swedish Conservative happened in the beginning of the 1980s, when Fredrik Reinfeldt was a teenager. Rove visited Sweden a couple of days to teach them about fundraising. This is according to Aftonbladet, Sweden’s largest anti-Reinfeldt paper.

Karl Rove also traveled to the Swedish vacation island of Gotland a couple of days in 2008 as a publicity stunt of the Swedish right-libertarians (Timbro). In fact, I was in the audience and chatted with Rove for a few minutes. However Fredrik Reinfeldt had absolutely nothing to do with this, and was not even present at the conference.

This trip appears to be the height of Karl Rove’s connection with Fredrik Reinfeldt!

If Rove has been an advisor to Reinfeldt, that would be huge news in Sweden. So where are links to the legitimate news stories? The “source” for the Huffington post is instead speculation from some paranoid Swedish leftist blogger.

2. The Huffington post gives their readers the impression that Reinfeldt is some sort of Swedish Republican, or at least very Republican friendly (which would make cooperation with Karl Rove realistic). This is an ignorant claim.

Reinfeldt is popular because he took the Swedish conservative party to the left, even changing the name to the “The New Moderates”. He famously cleansed the party of the right, abandoned the opposition to the welfare state, and changed its policy platform and rhetoric to the center (and obviously the center in Sweden is to the left of the center in the U.S).

The Huffington post is correct that Reinfeldt wrote a book criticizing the Swedish welfare state. However they neglect to tell their readers that he did this when he was 28, and that Reinfeldt repudiated his positions when he years later came to power .

4. Reinfeldt has always presented himself as a fan of President Obama, perhaps partially because Fredrik Reinfeldt himself has some black American ancestry, which he likes to point out.

When asked directly on TV before the 2008 election who he would prefer as the president of the United States, Reinfeldt alone of the seven Swedish party leaders said Barrack Obama. Everyone else prefered Hillary (naturally McCain got zero votes).

That Reinfeldt would prefer the Democrats is just logical, since Swedes both on the right and the left love Barrack Obama and hate George W Bush. Swedes are not only economically left, they are ultra-secular as well as pacifist.

When the Swedish public was polled in 2008 about Obama vs. McCain, the two party divide was 91% Obama vs. 9% McCain. Does that sound like a country where Karl Rove has a lot of influence over the judiciary?

5. The women who accuse Assange of rape are both anti-American, feminist activists. That’s how Assange met them.

I suppose it is theoretically possible for Karl Rove (directly or through Reinfeldt) to bribe two socialist Swedish girls to seduce Assange. But is that a realistic theory? Does Karl Rove control a privately owned espionage agency which has more reach than the CIA? For example, what if one of the leftist women Karl Rove approached would have chosen to reveal the operation instead?

So, where exactly is the E V I DE N C E for The Huffington Post's unlikely theory?

You still need evidence to make extraordinary claims, right?

If the Huffington Post has this evidence, I for one would love to read it. If they don’t, it’s a useful story to keep in mind the next time the Huffington Post decides to write about “The Paranoid Right” or about the “the paranoid, conspiracy-laden, resentful, self-hating troglodytes that form the foundation of the modern GOP”.

P.S

Picture from Sweden 2008, Almedalen Gotland (I am the second person from the left).

Iranian academic achievements

2010-12-17T12:50:00.000-08:00

As a result of recent Iranian success in science and engineering there is some discussion about Iranian educational outcomes in the blogosphere.

Two semi-related comments:

1. Iranians in Sweden are currently the only major immigrant group that significantly outperforms native Swedes in higher education. Of course this is partially or entirely due to selection, but most other immigrant groups are also selected, and do not perform as well.

About 45% of native Swedes start college. The figure is a little over 30% for non-european immigrants as a whole. By contrast, 60% of Iranian immigrant kidds in Sweden start college. The figure for Iraqi immigrants is 26% and for Somali immigrants 16%.

Iranians are also overrepresented in selective programs, such as in medical school and in engineering. About 4% of all of Sweden's medical students and 2% of Sweden's PhD students originate from Iran.

Naturally, the success of this single non-European immigrant group (the exception) is used by the Swedish media as an argument to take in more unskilled immigrants from unsuccessful countries such as Iraq and Somalia (the rule). Classical Bait and Switch.

2. For some reason a lot of Americans are under the impression that Azeris constitute some sort of Iranian intellectual elite.

It is certainly true that Azeris are not second class citizens in Iran. It is also true that they are as stanchly nationalistic as most other Iranians and have little separatist tendencies (in both cases unlike Iranian Kurds).

But in my opinion it is misleading to describe Azeris as an elite.

The Mede provinces of Iran - Azeri and Kurdish - both have lower than average per capita income, even excluding the oil producing provinces.

Furthermore, I have never seen any evidence that Azeris are over-represented in Iranian academia, and some evidence that they are under-represented.

According to Iran’s Statistical Yearbook, the Azeri provinces are underrepresented in their national share of college students. This alone doesn’t tell us much since they could move to other cities to study, and because those Azeris who have already migrated to Tehran are not included.

Azeris are a little less than 20% of the population. The American estimate of 25% is often circulated, but self-identified survey data shows a smaller share. Non-Farsi speakers are probably a little less than half the population. Yet, according to this guy, research by Alireza Sarafi shows that only 10% of Iranian PhD students are non-farsi speakers.

Obviously Iranian official statistics is not all that reliable. However we need more than anecdotal evidence to claim that Azeris are over-represented among the Iranian elite.

My job market page

2010-12-02T14:55:00.000-08:00

I will be done with my PhD by the summer of 2011, so I am going on the job market this year. I am looking for academic jobs and for think tank positions.

Here is the link to my job market page. It includes the current version of my dissertation which I have been working on the last year, which is called: "Self-Employment does not measure Entrepreneurship".

Innovative Entrepreneurship and the growth of new firms is believed to be important by economists and by policy makers. However we generally lack good quality data on entrepreneurship, while there is plenty of data on self-employment. Therefore economists use the later to test theories on the former.

But how well does self-employment do as an empirical tool? During the two lasts years I have attempted to assemble two new datasets of entrepreneurship in order to contrast it with self-employment.

The first dataset is the per capita number of self-made billionaires who became rich by founding a new company. I investigate the source of wealth for around 1700 billionaires on Forbes list of the world's richest, identifying 996 entrepreneurs in 53 countries.

Second, as part of a large Swedish survey on twins, I added questions about aversion towards ambiguity (economists believe that entrepreneurs face more ambiguity or incalculable risk than salaried workers) as a question where I ask business owners to self-identify as entrepreneurs or self-employed based on the ambition to grow and innovate. Surprisingly, 80% of the self-employed do not consider themselves entrepreneurs.

What I find is that in many important applications, using self-employment as a proxy often gives you the opposite result you would get from using entrepreneurship data. Across countries, the rate of entrepreneurship is reversely related to the rate of non-agricultural self-employment.

Here is a picture for industrialized countries (the pattern is the same across all available countries).

The United States has 4 times higher rate of per capita entrepreneurs as western Europe. Using a different metric, 31% of the largest American firms were founded by individual entrepreneurs since World War II, compared to only 7% of the largest western European firms.

In contrast, the self-employment rate of western Europe is twice that of the United States.

Taxes, the level of regulations, the level of trust and the quality of institutions are examples of variables that are related in reverse ways between entrepreneurship and self-employment.

Within the United States, I point out that geographic locations with lots of entrepreneurship such as Silicon Valley and Boston have lower rates of self-employment, fewer employed in small firms, lower entry into business start up and lower firm density than the national average.

I find that immigrants, who tend to have higher rates of self-employment, have lower rates of high-impact entrepreneurship. 11% of Americas most successful entrepreneurs were born outside the U.S, even though the workforce is 16% foreign born.

While self-identified Swedish entrepreneurs indeed have higher tolerance of ambiguity than salaried workers, the self-employed do not. This is not that surprising once you consider that innovative entrepreneurship is faced with hard to calculate uncertainty about technology and demand, while self-employed, who are predominately carrying out familiar tasks, have higher risk but probably not much higher ambiguity as ordinary workers.

I develop a model to account for some of the patterns, pointing out that successful entrepreneurship tends to reduce self-employment as part of the process of economics development. This happens as more productive entrepreneurial firms absorb less productive self-employed. Similarly, in countries with business-friendly policies, the most talented individuals and firms grow and absorb many of the mom-and-pop operations, increasing entrepreneurship and reducing self-employment.

Similarly, when taxes are high and the economy regulated, it will be more difficult for entrepreneurial companies to emerge, and to grow rapidly and absorb less efficient companies. Instead such economies have lots of self-employed (who can more easier evade taxes and regulations). The empirical regularity that high tax levels and a heavy regulatory burden tend to be associated with high levels of self-employment (think of southern Europe and third world economies) should not be miss-interpreted as implying that taxes do not effect entrepreneurship.

Rather than treating small business and innovative Schumpeterian entrepreneurship as more or less synonymous, policy makers should be aware that they face a trade-off: either we pursue policies that give us more small business or we aim to encourage entrepreneurship.

The Decline of the Left in Europe

2010-11-18T12:18:00.000-08:00

As America has been moving left, Europe is taking the opposite course. Social-Democratic parties have lost some of their dominance.

These two maps plot political power. For countries with coalition governments, the holder of the Prime Minister or being the largest party in the coalition is used.

Purple is where the Prime Minister and President are from different blocks (for countries where the President has some actual power).

I follow European tradition by using the color red to signify leftwing control. In November 2000, the center-right controlled only countries representing 16% of the population in west and central Europe (with divided power in France and Poland).

In November 2010, the right holds power in countries that constitute 83% of the population(!). A different map of Europe, to say the least.

Spain and tiny Iceland are the only country that went from right to left control between these two dates.

Germany, UK, Italy, France, Poland, Czech Republic, Netherlands, Denmark, Finland, and Sweden switched from full or partial left control to complete right control. Even in Switzerland, a decade ago the largest political party was the Social Democrats. As of the last election, the largest party is the ultra-conservative Swiss People’s party.

So why has this been happening?

Part of it is cyclicality and coincidence. Particularly in Central Europe there is still a lot of chaos in terms of who gets to be in power (voters are constantly dissatisfied and vote out most governments). And because of reversion to the mean in competitive political systems, the more countries your side control compared the historical average; the more likely are you to lose some in the following elections.

Still, a large portion of the decline is systematic, with 3 trends that comes to mind:

1. Working class voters have less class consciousness, and don’t vote as a block to the same extent.

2. Voters are punishing the left as a reaction to the failures of mass immigration and multiculturalism.

3. Middle of the road voters as well as the European elites are ideologically abandoning Social Democratic economic policy.

The last tendency crucially depends on the center-right parties accepting the popular parts of the welfare state (a safety net for the poor, publically financed health care and higher education) but opposing the less popular ones (long term welfare dependency, high tax level, deficits).

During the last decade, the expansion of size of the government in Europe stopped, and even slowly started to reverse. The main exception is the U.K, where the welfare state expanded rapidly during Blair/Brown. But if we look at the other traditional western European welfare states (Germany, France, Italy, Spain, Portugal, Greece, The Netherlands, Belgium, Austria, Sweden, Norway, Denmark, Finland and Iceland), the government is in full retreat, decreasing its share of the economy in 10 out of the 14 above mentioned countries.

As a whole, total government expenditure in these countries decreased from 49% of GDP to 47% of GDP during the last decade. In Sweden, total government expenditure declined from 59% of GDP to 52% of GDP.

Needless to say, it is quite ironic for the left in America and in Europe to champion an Europeanization of the American economy during the same period when Europe is abandoning those exact same policies.

The Iranian Economy

2010-11-12T14:39:00.000-08:00

It’s common to read western analysis about Iran's economic situation, especially in the context of foreign policy. While the level of interest is natural, there are many misperceptions about the Iranian economy.

In my opinion, on the whole it is not true that the Iranian economy is getting worse. While the standard of living fell sharply after the turmoil of the 1978-1979 revolution and Saddam Hussein’s subsequent invasion of Iran, it is forgotten the economy eventually recovered. Iran currently enjoys the same or higher standard of living than before the Islamic Revolution.

Here is per capita income as measured by the late Angus Maddison, in purchasing power adjusted numbers.

The economy grew rapidly from 1950-midd 70s, declined until the end of the Iran-Iraq war, but recuperated since. The end of the war coincided with a period of free-market and fiscal reform, lauded for example by the IMF. Obviously the last few years of growth is closely linked to increasing oil prices (although the volume of oil exports has stagnated).

1. If Iran’s economy is growing, why do we constantly hear about the problems in the Iranian economy, but not about the progress?

One reason is mismanagement and squandering of the nation’s wealth. Having zero per capita growth for 30 years is nothing to be proud of, and all around you in Iran you observe signs of misallocation, poor policies, rationing, inflation, asset bubbles and corruption. The cost of family formation is prohibitively high for some young people in larger cities. Iran’s economy is doing relatively well despite, not because of Iranian economic policy.

Another reason may be that the group that was most hard hit economically by the revolution was the educated middle class, who are the people who moved to the west and whose voice is heard loudest. The biggest benefactors were islamists followed by the rural and urban poor. These are not exactly groups well represented in western media.

A third, probably most important reason is the ratio of expectations and outcome. The standard of living in Iran is growing, but nowhere near as rapidly as people want it to.

The Iranian middle class for example has rapidly expanded, as many more people have entered the middle class. With being middle class comes middle class values and middle class expectations.

This growing group and their growing complains have been misinterpreted by westerners as a sign of Iranians being increasingly squeezed.

Lastly there may be an element of wishful thinking behind some of the more negative assessments about Iran’s economy by foreign policy hawks.

2. Oil is very important, but it’s not all about oil. Oil prices started to be high in 1973, yet Iran was growing at a rapid rate throughout the 1950s and 1960s.

One factor that is now virtually completely forgotten is the foreign aid Iran received during this period as an important regional ally against the Soviet Union, mostly from the U.S. If I remember correctly for a long period this aid was as important as oil exports.

Also, Iran is not Saudi Arabia or Kuwait. There are too many people to live completely off oil. On the other hand you have a large labor force that (unlike Gulf Arabs) has no problem doing hard manual labor. Iran is more similar to a slightly less developed version of Mexico or Russia, which is to say an oil economy + a large lower middle income economy.

During the 1960s, when Iran’s growth was second only to Japan, there was a lot of industrial development, and a great deal of non-oil entrepreneurship.

Since than Iran has developed its service economy. If you have lots of oil to export, it is not as crucial to be able to compete in global markets with reasonably high quality manufactured goods (which Iran is still not capable of). You have enough currency to important high tech products, capital goods and whatever else you can’t produce at reasonable prices yourself.

Instead the remaining capacity of the economy is geared towards what Iran can compete in, namely import substitution and local services.

3. Iran has experienced a dramatic expansion of physical and human capital. Most importantly, Iran’s rise as a regional power cannot be understood without taking into the expansion of the educated workforce. This process started before the revolution, but was a priority of the leadership and continued afterwards.

The investment rate recreated during the decade of turmoil following the revolution, but later recovered to very high levels, closer to that of China than to the West.

The gross saving rate has now been around 40% for two decades.

I have further downloaded some statistics on education levels from the World Bank. Public education expenditure is currently 5% of GDP in Iran, above the world average, partially because the population is so young. This figure is in comparison 3% in Turkey, 3.7% in Egypt and 2.8% in Pakistan, other large Middle Eastern countries with many young people.

Part of the explanation for is the strong tradition of learning in Iran relative to other countries in the region, dating to pre-Islamic times.

The illiteracy rate witnessed an astonishing decline from 63% in 1976 to only 18% in 2006.

The share of the working age population with completed tertiary education quadrupled from about 2% in 1975 to about 10% in 2010 (it's about 20% in the west). Iran now has around 9 million college graduates to replace the two million or so expatriates. Meanwhile the share with at least completed high scool roughly increased from 19% to 64%.

This kind of explosion in human capital would transform any economy. Notice also the type of education. The share of college graduates in Iran who study engineering and manufacturing was 31% is, one of the highest in the world (in comparison the figure is 14% in Turkey and 7% in the U.S).

It is perhaps in part because of all these new technically educated individuals that Iran has been able to regionally challenge the U.S.

4. Social indicators have improved following the revolution.

The absolute poverty rate has declined (click on this link) from about 30% to a little over 10%.

The mortality rate for children under 5 declined at impressive and fairly steady pace before and after the revolution. It went from 0.29 in 1960 to 0.155 in 1975 to 0.032 in 2008.

Life expectancy continued to increase, again it appears with little interruption, after the revolution. Health expenditure as a share of GDP is also fairly high in Iran at 6.4% of GDP. Some of this is private spending and under-the-table payment to doctors, but the poor do have access to health care.

Illiteracy was targeted both before and after the revolution, and is largely gone.

Electricity production was more than ten times higher in 2007 than 1977, in a period when the population doubled. This is interesting for two reasons. First, if you don’t trust GDP estimates in a country such as Iran, electricity production is a reasonably objective measure of economic activity (although keep in mind that energy is heavily subsidized in Iran).

Second, much of rural Iran did not have electricity until about a generation ago. They do now, as the regime made this into a priority. Anecdotally, when my father installed an electric generator for his horse breeding farm just prior to the revolution that was the first time anyone in that Kurdish village had any electricity. Having access to electricity for the first time in your life is a concrete and sizable improvement in the standard of living. One third of Iran’s population is still rural.

5. The Iranian economy is dysfunctional, but has some safety valves. Corruption is a huge problem, but it does grease the wheels on occasion and the high degree of corruption, nepotism and overall inefficiency in the state is ironically one of the reasons that Iran is not a totalitarian country (it is “merely” authoritarian).

Furthermore, Iranians adjust their behavior in response to poor policies. For example, the labor market is heavily regulated, and (like many developing countries) you have a constant problem of underemployment.

However, this major inefficiency is mitigated by the very high rate of self-employment. Iran has a remarkable rate of non-agricultural self-employment of 37% according to the ILO.

If regulations and poor institutions make work in large organizations difficult, people can sell their labor directly through self-employment.

Granted, this motivation for self-employment is not a sign of health for the economy. However it is what economists refer to as a second best solution. Sure, Iran would be richer if the 500 best entrepreneurs and managers in the country got to expand their firms and absorbed much of the remaining mom-and pop operations, small scale family firms and the like (or if large, efficient foreign firms increased their presence in Iran). But having all these tiny firms is clearly superior to the alternative, which is unemployment induced by regulations and poor institutional quality.

Again, for all the talk about there being no jobs, the employment to population ratio in Iran has remained fairly constant during the last 20 years, increasing from 46% in 1991 to 49% in 2008.

Comparatively little is known about the Iranian economy. One obvious reason is the lack of hard data, but another reason is pervasive misinformation. We would learn and understand more about Iran’s economy, future growth perspectives, investments opportunities and similar issues if Irans economy was analyzed more by disinterested parties. Furthermore, it would be preferable if the discussion on Irans economy was decoupled from the sensetive and ideological foreign policy debate.

Median Voter Theorem winner of the 2010 election, Extreme left and Tea Party losers.

2010-11-03T10:30:00.000-07:00

Turning sharply to the left in rhetoric and economic policy cost the Democrats over 60 house seats.

Nominating under-qualified rightwing extremists in Delaware, Nevada, Colorado, Alaska and West Virginia cost the Republicans 4 Senate seats or 5 if Murkowski caucuses with the Democrats.

Meanwhile, moderate and qualified Republicans won in Illinois, New Hampshire and North Dakota. A Moderate Republican did unexpectedly well in blue Washington state, on a night when most Republican Senate candidates underperformed.

The first lesson is that most of the time, going to the center wins you votes. There are some exceptions, such as if you need a clear message to be percieved as an alternative or if you are winning anyway, like Rubio. But the rule works, on average.

The second lesson is that 100% of the time, with no exception, you win by nominating qualified candidates. Nominating individuals with little ability and second-rate cognitive skills such as Christine O'donnell and Sarah Palin always costs you votes. This is particularly true if these candidates combine this with extremist positions on social issues.

I hope the 2010 results at least means Sarah Palin has less power and is less likely to run for President.

Some demographic trends in the 2010 election.

2010-11-02T17:34:00.000-07:00

Looking at the CNN exit polls from this and the last two elections, here are a couple of interesting fact:

Compared to 2006, the share of Hispanic voters has not increased (8% of voters in both years). Don’t pundits keep telling us the Hispanic vote is going to be dominant any day now?

Compared to 2006, African American turnout has not increased (10% of voters in both years). We all knew those voters they would be less enthusiastic than 2008. But in 2010 Obama did not manage to enthusiast African American voters relative to the pre-Obama period.

In the last midterm, 32% of voters identified as Conservative. This year it is 41%.

In 2008, first time voters went an amazing 69% to Obama compared to 30% for McCain. This year Republicans actually won first time voters, 48%-47%.

Compared to 2006, the youth vote has decreased, from 12% to 10% of the vote. In 2008 it was 18% of the vote! Even John Stewart didn’t manage to engage the youth vote.

Krugman Wrong About Cause of Growing Deficits

2010-10-27T18:00:00.000-07:00

Paul Krugman asks why deficits have grown. He gives the impression that the explosion in the deficit is due to tax revenue being too low, rather than spending being too high.

I have re-created the graph on his homepage using BEA data. From 2008 we observe tax revenue plummet, whereas spending just seems to continue its “natural” historical trend.

Looks pretty convincing, right? But we hopefully have the dear-bought wisdom at this point not to trust data from this particular source.

In fact, lower tax revenue - because of the recession, not because tax rates are lower - explain only one third of the increase in the deficit. Two thirds of the increase in the deficit is due to more spending. I will try to convince you of that in a moment.

First, let’s understand how Krugman's trick works.

Most importantly, notice that the graph is in nominal dollars. Krugman neglects to adjust for the overall size of the economy.

Here is the same exact graph, in terms of % of GDP, not cutoff to make small changes look bigger, and starting at the year 2000 rather than 2005 (which obscures longer trends).

Notice that the “natural” increase in spending isn’t there anymore. Between 2000 and the period of the crisis in late 2007, spending is essentially flat, while revenue decreases (thanks to the IT-bubble bursting and the Bush tax cuts). Between late 2007 and now however, spending rises sharply as a share of GDP.

This brings us to the most subtle trick Krugman uses. Go back to the original picture. Notice that during the crisis, tax revenue in nominal dollars drop, whereas spending just continued its path.

But wait a second. During the crisis, the American economy was shrinking rapidly. This helps explains why tax revenue dropped. Yet, government spending continued to increase at the same rate it did before the crisis! This political choice to continue expanding the government despite a shrinking economic base is what explains the lion share of the increase in the deficit.

Now it’s one thing to agree with this policy. I certainly believe the government should spend more during recessions. It is something quite different to – once you discover that the deficit spending policy you were the main cheerleader for was not popular – trying to trick people into believing it just never happened.

Here is the exact same graph Krugman used, with the same period, and the only difference that I plot Revenue and Spending as a share of GDP, rather than in nominal dollars.

I have plotted what would happen if the U.S. would be spending at late 2007 rates, as a share of GDP. The difference constitutes the share of the deficit due to increase in spending (red) and due to less revenue (blue). Remember that there was a deficit already there in 2007, which is not counted as an increase.

It is hopefully clear from the picture that Krugman is trying to hide why the U.S has such a big deficit: Mostly due to more spending. Particularly compare the size of the red and the blue line I added at the end.

Let me also give you the figures so you don’t have to trust a picture.

In the third quarter of 2007, according to the Bureau of Economic Analysis seasonally adjusted figures as a share of GDP spending was 31.4%, Revenue 29.6%, and the deficit 2.2%.

In the second quarter of 2010, the latest they report data for, spending was 36.1%, Revenue 27.0%, and the deficit 9.2%.

So the deficit grew by 7.0%, out of 4.7% was increase in spending and 2.7% a decline in Revenue.

So simple arithmetic tells us that 67% of the increase in the deficit as share of GDP between late 2007 and mid 2010 was due to spending going up.

Second generation Immigrants in Europe are de-assimilating

2010-10-13T19:23:00.000-07:00

An important policy question about immigration is to what extent the children of immigrants assimilate. Not only does this tell us a lot about the forces at play, but because of the numbers second generation immigrant outcomes help determine our future.

I just read an important new paper about immigration and assimilation in Europe, that (if the information in it is correct) contains surprising results. The paper includes data on employment rate of first and second generation non-European immigrants in the 3 major European countries of France, Germany and U.K (the 4th largest European country - Italy - has few non-European immigrants).

Looking carefully at the data in some of the tables, we can see that non-European immigrants in Europe are de-assimilating, with the second generation doing worse than the parents.

I focus on the share of immigrants that work compared to the natives, and only on non-European immigrants (we all know that European immigrants usually assimilate).

First the data confirms that both first generation and second generation immigrants in all 3 countries work much less than natives, both for men and women.

For women, the second generation is slowly assimilating. Whereas the first generation works 35% less than natives, the second generation works 27% less than natives, an improvement of 8 percentage points. (the figures are the non-weighted, arithmetic mean of the 3 countries, below I have put data in each one).

For men however the trend is the opposite. The second generation non-European immigrants are less likely to work than the previous generation! While the first generation work 10% less than natives, the second generation works 24% less, a deterioration of 14 percentage points.

So things are getting worse in the 3 largest European countries, not better. (The paper had no data on second generation immigrants to Sweden, but I am pretty sure they do better than the first generation).

Why is this happening? One reason may be that the first generation contains people who moved to Europe in order to work. Because they were selected on this trait, they have above average work ethic for their group. The second generation only has some of this advantage left.

Perhaps these are not actually parent-children pairs, and the only cause of the results is that the composition of first generation immigrants changed for the better before they had time to have children (I doubt this).

Another, more troubling possibility is that the second generation are assimilating into a completely new culture. This is not the standard, successful western-European culture, but a new kind of mixed ghetto culture that emphasizes grievances, hostility to the host society, weak norms and a lack of a work ethic.

What the trends suggests is happening that for men, the immigrant culture that has emerged in Europe is worse even than the culture they brought with them from Turkey, Algeria etc. Women instead are less oppressed, and work more than their mothers.

Appendix

Comparing Second generation male immigrant relative employment rates with the first generation immigrants:

UK -10%
France -13%
Germany -19%

Comparing Second generation female immigrant relative employment rates with the first generation immigrants:

UK +15%
France +8%
Germany +2%

Employment rates (the figure in the parenthesis compared immigrants to the native born):

U.K

Native Men: 79.0%
First generation non-European immigrant Men: 67.8% (-14%)
Second generation non-European immigrant Men: 60.0% (-24%)

Native women: 66.5%
First generation non-European immigrant Women: 43.3% (-35%)
Second generation non-European immigrant Women: 53.5% (-20%)

France

Native Men: 66.3%
First generation non-European immigrant Men: 61.6% (-7%)
Second generation non-European immigrant Men: 53.0% (-20%)

Native Women: 58.9%
First generation non-European immigrant Women: 37.6% (-36%)
Second generation non-European immigrant Women: 42.4% (-28%)

Germany

Native Men: 75.3%
First generation non-European immigrant Men: 68.5% (-9%)
Second generation non-European immigrant Men: 53.9% (-28%)

Native women: 65.8%
First generation non-European immigrant Women: 42.5% (-35%)
Second generation non-European immigrant Women: 43.8% (-33%)

Immigration to Europe is not a human right

2010-10-08T15:21:00.000-07:00

A democratic principle shared by most people is that sovereign countries have the right to determine their immigration policy. The elites are increasingly abandoning this position. Swedish bishop Eva Brunne in her opening of the parliament made statements that have been celebrated by the Swedish media:

"Yesterday evening thousands of people gathered in Stockholm and in various parts of the country to make their voices heard. To call out their disgust at that which divides people. The racism which says that you don’t have as much worth as I do; that you shouldn’t have the same rights as me; aren’t worthy of living in freedom, and that is the only reason – that we happen to born in different parts of our world – that is not worthy of a democracy like ours to differentiate between people."

Reading this carefully you will see that the text extolled by the Swedish elite contains a radical left agenda that denies the nation any sovereign rights. She is saying it is "racism" to tell people that they don't have the same right to live in Sweden as someone born to Swedish parents, because they "happen" to be born somewhere else.

But Sweden is the collective property of Swedish citizens, just as Brazil belongs to Brazilians, just as GM belongs to its shareholders and just as a condo-association belongs to the owners. While there are human rights that are inalienable, (such as the right to live your life in peace without oppression), there is no "right" to come live in Sweden because your own country is bad.

Intellectuals noticed that when Socialists allocated more and more "rights" to people, they were simultaneously taking the freedom away from the people who were assigned the responsibility to fulfill those rights. Positive rights such as the right to a job doesn't increase freedom, it reduces freedom because it imposes on others the obligation to create a job for you.

The "right" to immigrate to Sweden similarly forces Swedish people to give away their property right (to the collective assets of Sweden, such as its land), forces Swedes to finance the living standard of poor immigrants, up to Swedish levels, and most importantly forces Swedes to give away much of their own political power, because the immigrant is given the right to vote, with the vote carrying the power of political coercion.

The classic socialists wanted to give away private property that successful people had created to the poor in our own nations who had not managed to create wealth of their own. The modern, multi-culturalist socialists (including many who call themselves liberal, classically liberal or libertarian) demand that we give away the collective property that the west has created (wealthy, free societies with a high standard of living) to the poor in the rest of the world that have not managed to create good societies of their own.

This absurdity is what happens when you take concepts designed for one society (the "right" to freedom and a good life) and apply them to everyone everywhere.

This is why deep philosophers such as Friedrich von Hayek who thought carefully about the issue defined individual "rights" as relevant within a society, not across societies. Within a society rights, even positive rights, can be absolute (say the right not to starve), but between societies, rights are reciprocal, and we decide what right we grant others. As free people we simply do not have an obligation to, say, invade and pacify Somalia in order provide Somalians with the right to live in peace.

These "rights" that Eva Brunne so generously bestowed on the entire world dramatically reduced the rights and freedoms of Sweden.

As a side note, the example of Somalia above is not merely made in jest. George Bush's argument, for instance, was simple: If people in another country lack "freedom", then they have the right to expect that the west will fix that problem for them, either through migration or invasion.