Tuesday, October 17, 2006

Jeffrey Sachs On Nordic Countries

First I received an e-mail from an American Physics Professor asking me to reply to a recent article in Scientific American by Jeffrey Sachs on the Nordic countries, and then I saw Jeffrey Tucker also bringing attention to the article on the Mises blog.

My mises.org article on Sweden answers much of Sach's arguments, including the deceptiveness of official unemployment statistics in Sweden (a deceptiveness that to only a slightly lesser extent exist in the other Nordic countries). But there are a few additional points in his article that needs further comments, although there are a lot of question marks as I have been unable to find the background paper that the article refers to, on Sach's web site.

Anyway here is just a few of the shortcomings of Sach's article:

First, his use of the Nordic countries and English speaking countries as comparisons of the effects of welfare statism is highly questionable as it is not the case that the Nordic countries are the most welfare statist and the English speaking the least welfare statist. Particularly if you adjust for differences in the extent to which government transfer payments are taxed, there are a lot of continental European countries which have higher spending than Norway and Finland, and in the case of France also Denmark and Sweden.

Second, his use of budget surpluses and R&D spending as measures of economic success are misleading. Regarding budget surpluses, decisions on whether to run surpluses or deficits are run independently on the issue of whether to have high taxes for high spending or not. And it is hardly self-evident that running massive budget surpluses, i.e. having massive forced saving is really a good thing. As for R&D spending, since when did that become a self-end. It isn't, at most it is a means to achieving prosperity and not a self-end. And not even that is BTW really clear. As I pointed out in a previous post on this blog, there is no evidence to support that R&D spending have more positive effects than other investments.

Third, including Norway in the Nordic sample is highly misleading as its per capita income is artificially boosted (and its poverty rate suppressed) by its massive oil wealth.

Fourth, Sachs completely neglects a key scientific requirement: holding other relevant factors constant when testing the effects of something. One of the key reasons why the U.S. has a higher poverty rate is the immigration of low-skilled Latin Americans. These immigrants have it far better in the U.S. than in their countries of origin, but as their incomes are relatively low by American standards, they push up the official poverty rate. Had the U.S. instead pursued Swedish immigration policies, i.e. made immigrants unemployed and dependent on lavish welfare benefits or Danish and Finnish policy of accepting almost no immigrants then the official domestic poverty rate would have been lower but world poverty higher. And regardless of which immigration policy you prefer on other grounds, it has nothing to do with the issue of the effects of an extensive welfare state.


Blogger AC said...

Thanks! I get tired of what feels like the typical austrian response of "does anyone else think this guy is too stupid to bother picking apart his argument". It's nice to see a rational response to what to a casual reader could easily be seen as 'proof' that social programs work wonders.

7:22 PM  
Anonymous Anonymous said...

Most people including many Danes don't realise that Denmark also has a proportionally large oil income, which counts for a large part of the government income.

Just like Sweden the official unemployment rate is nonsense as well. You can't even compare the poverty rates as they are measured in completely different ways.

American and Danish poor are more similar than you might think

I've written about Sach's unhealthy obsession with Scandinavia before:

Bad lessons from the North

His arguments haven't changed to be anymore factual since then.


11:17 AM  

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