Saturday, July 16, 2005

Paying people not to create wealth creates wealth?

Is the best way to ensure that more wealth are created to pay people not to create wealth and finance those payments by taking money from those who stubbornly insists on creating wealth?

Sounds like a absurd contention? If you think so, then you're right, but that is what leading Swedish social democrats actually asserts. In for example this op-ed column in Sweden's third largest news paper, Dagens Nyheter, social democrat Lotta Fogde claims this. The column is written in Swedish which I know most of my readers probably don't understand so I'll summarize its assertions for you:

-Sweden has had far better growth since 1994 than the rest of Western Europe and this is something which the ruling Social Democrats can take credit for.
-Sweden's alleged sucess rests on 3 foundations: openness to the outside world, allowing failed industries to fail and security for the individual [euphenism for welfare payments].
-Cut unemployment benefits and other welfare payments and people will turn protectionist, will demand subsidies to failed industries and wages will fall, something which will throw Sweden into a hopeless competitive race with third world countries where people work for a few dollars a day.

Regarding the first point it is simply false. Adjusted for the deteriorating terms of trade, Swedish growth have actually been slightly lower than the EU15 average during the latest decade.

And in any case, even if her assertion had been true (which it again isn't) it is simply absurd to use such a comparison to defend the welfare statist system of Sweden since most other Western European countries have a similar system with high taxes and high unemployment benefits. It is like saying that because East Germany were more successfull than other communist countries this proves that communism is a superior system, even though East Germany where far less successfull than West Germany. If you are going to empirically "prove" a theory (dubious methodology in any case BTW since there are so many different factors affecting growth that simply comparing one factor and total growth between two countries could be misleading) then at the very least you should compare with countries who have a different system. And if you sompare Swedish growth to the least welfare statist Western European countries, Britain, Ireland, Luxembourg and Spain or to most Eastern European and non-European countries, you'll find that Swedish growth is far lower.

Regarding her second point she is of course right that free trade and absence of subsidies to failed industries are good for the economy, although it is not really true that the Swedish government has refrained from such industrial subsidies.

Her claim that unemployment benefits are good for the economy rests on the assertions made in the third point: namely that it is necessary to prevent the other destructive forms of government intervention. But the increased tendency of people to become less anxious to losing their jobs is on the other hand likely to be largely counteracted by the increased statist mentality that follows with the welfare state. Remember that Sweden was relatively free trade oriented decades before the Social Democrats rose to power in 1932 and started to create the welfare state. Also remember that France whose welfare state is as bloated as Sweden's is relatively protectionist and has a extensive industrial policy, while Hong Kong with almost no welfare state is more free trade oriented and more laissez faire regarding industrial policy than Sweden.

Moreover, the lower fear of being out of work in Sweden has resulted in people being increasingly out of work. Both measured as hours worked and the number of employed , employment has steadily fallen in Sweden for the last few decades while the total unemployment rate (including those who have been hidden in early retirement and sick leave) is nearly 25%. That the fact that people are being paid very much not to work while people who do work are punished is behind this fact should be fairly obvious, but she typically refuses to discuss this issue.

Regarding her claim that the lower wages that lower unemployment benefits are likely to result in is meant to be part of a hopeless strategy to compete with China and India with low wages, this is a pure straw man. The low wage jobs meant to be created this way is not meant to come in export industries, but in business which are non-tradable, like domestic services.


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