Tuesday, 29 August 2006

America: More Like Sweden Than You Thought


One of the joys of my working life is that I get to read papers like “The State of Working America” (http://www.stateofworkingam…) from the Economic Policy Institute. They are, as you may know, the people who urge that the USA become more like the European countries, most especially the Scandinavian ones. Less income inequality, more leisure time, stronger unions and so on. All good stuff from a particular type of liberal and progressive mindset — i.e. that society must be managed to produce the outcome that technocrats believe society really desires, rather than an outcome the actual members of society prove they desire by building it.

I will admit that I do find it odd the way that only certain parts of the, say, Swedish, “miracle” are held up as ideas for us to copy. Wouldn’t it be interesting if we were urged to adopt some other Swedish policies? Abolish inheritance tax (Sweden doesn’t have one), have a pure voucher scheme to pay for the education system (as Sweden does), do not have a national minimum wage (as Sweden does not) and most certainly do not run the health system as a national monolith (as Sweden again does not). But then those policies don’t accord with the liberal and progressive ideas in the USA so perhaps their being glossed over is understandable, eh?

As part of their propagandizing, they produce the above cited reports each year. And this time it’s being released chapter by chapter in the lead up to Labor Day. I can tell you that policy wonks are breathless with anticipation waiting for each part as it comes out (I myself was most excited to get chapter 8 linked above). For there is the great joy of seeing that what they think they’re telling us isn’t, in fact, quite what they are telling us.

To start with, they make some adjustments to the usual measures of the income of a nation, the GDP, by adjusting for different price levels. This gives us the so called Purchasing Power Parity numbers (PPP) and the USA is set as being 100 on the scale. Only one of the advanced industrial nations has a greater income per capita, Norway, at 105. Given that Norway gets some 20% of its GDP from pumping oil and gas out from beneath the North Sea and is, thus, almost a petro-state, it would be fair to say that the USA is, in fact, the large country with the highest income per head in the world without depleting its natural capital. Good, so far something we knew already.

We’re also told on page 6 that if we look at the average of the countries studied without the USA and compare that to the USA’s performance, that income growth rates are higher in the USA. 1.8% to 1.9% in 1989-2000, and 1.1% to 1.3% in 2000-2004. So not only richer but getting even richer faster, as well.
Furthermore:

“The U.S. average from 2000 to 2005 was 1.7%, well above the OECD average of 0.7% in real compensation growth. Four countries fared better than the United States, most notably Norway with 2.3% growth. Note also that Germany had negative real compensation growth from 2000-05.”

Things are actually looking pretty good for the US economy, then — wealthier to start with, getting richer faster and productivity growth is also highest in the USA, meaning that this trend is only likely to continue. Looking at all of that it’s really rather difficult to see that there’s anything wrong with the way things are being managed (or not).

Ah, but, we can always find something nasty in the woodpile. The US has the most unequal distribution of income of all the countries studied. Using the Gini coefficients as our measurement in America it was 0.338 in 1989 and 0.368 in 200, while in Finland on the same dates it was 0.210 and 0.247. Perhaps worth noting that this increasing inequality of income distribution is not exclusive to the US though, it appears to be a more international occurrence than that.

Now if the equality of income distribution is something you worry about this is of course a troubling fact. It is what leads to the statement that while the US might be richer, the poor do worse, that in fact the poor in America are worse off than the poor in Europe. Which leads us to this highly informative little picture.

Now given all the adjustments that have been made to the figures this is actually showing us something very interesting indeed. The use of PPP means that we’ve adjusted for price differences, by using US median income as our measuring stick we’ve given ourselves a view of the actual incomes, not just the relative incomes, of the poor and the rich in each country.

How we’re supposed to read this is that the USA has a very uneven income distribution, that the poorest 10% only get 39% of the median income, that the richest 10% get 210%. Compare and contrast that with the most egalitarian society amongst those studied, Finland, where the rich get 111% and the poor get 38%. Shown this undoubted fact we are therefore to don sackcloth and ashes, promise to do better and tax the heck out of everybody to rectify this appalling situation.

But hang on a minute, that’s not quite what is being shown. In the USA the poor get 39% of the US median income and in Finland (and Sweden) the poor get 38% of the US median income. It’s not worth quibbling over 1% so let’s take it as read that the poor in America have exactly the same standard of living as the poor in Finland (and Sweden). Which is really a rather revealing number don’t you think? All those punitive tax rates, all that redistribution, that blessed egalitarianism, the flatter distribution of income, leads to a change in the living standards of the poor of precisely … nothing.

Such may lead us to a conclusion that the EPI probably wouldn’t like:

If we accept (as I do) that we do, indeed, need to have a social safety net, and that we have a duty to provide for those incapable or unlucky enough to be unable to do so for themselves, we need to set some level at which such help is offered. The standard of living of the poor in a redistributionist paradise like Finland (or Sweden) seems a fair enough number to use and the USA provides exactly that. Good, the problem’s solved. We’ve provided — both through the structure of the economy and the various forms of taxation and benefits precisely what we should be — an acceptable baseline income for the poor. No further redistribution is necessary and we can carry on with the current tax rates and policies which seem, as this report shows, to be increasing US incomes faster than those in other countries and boosting productivity faster as well.

As I said above I’m sure this isn’t quite what the EPI actually wanted to tell us. But there it is, from their own report. Which is why I rather enjoy my working life — sad case that I am — because I get to read all those reports that really don’t tell us what the authors think they are telling us.

By Tim Worstall
Tim Worstall is a TCS Daily contributor living in Europe.

This article first appeared on http://www.tcsdaily.com