Monday, October 17, 2011

The Welfare State and Causality

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.

7 comments:

  1. Tino,

    What does this mean?

    "Swedish 19th century immigrants to the U.S score far above the American average in most metrics, despite obviously having no welfare state"

    At least two possibilities come to mind...

    1. Swedish immigrants were more successful than other immigrant groups in the 19th century when America had no welfare state

    2. The current day descendants of 19th century Swedish immigrants to America are more successful now, than other groups either because of or in spite of the lack of a welfare state.

    ReplyDelete
  2. Tino,

    In what sense does America have no welfare state? Less of a welfare state than Sweden? Of course. But no welfare state? At the Federal level we have AFDC/TANF, CCDF, Head Start, SCHIP, Medicaid, housing vouchers, public housing, food stamps, WIC, EITC, SSI, EITC, Medicare, Social Security, etc.

    ReplyDelete
  3. Skeptical:

    Its a continuous variable, so no point discussing the exact cutoff for "welfare state". But would you agree the U.S had nothing remotely the size of current European welfare states in, say, 1955?

    Yet Swedish-Americans had few social problems and low poverty, which is my point.

    ReplyDelete
  4. Tino,

    "But would you agree the U.S had nothing remotely the size of current European welfare states in, say, 1955?"

    Yes, of course. Quite a few of the programs listed above actually existed in some form back then. However, utilization was minimal by today's standard.

    ReplyDelete
  5. Nice study: your brother should be congratulated. I believe, however, that the graphs mislabel 'hidden' and 'visible' taxes.

    ReplyDelete
  6. If think some of the best ways to explain our success - based on mixed economy - is tripartite:

    1. The Weber argument (Protestant work ethics).

    2. The Lynn/Vanhanen argument (high average g-intelligence - about 98-99 today, probably about 102-104 before non-European mass immigration).

    3. The Putnam argument (high social capital).

    In fact, these three factors may have lived in a positive dialectic relationship with each other.

    Best regards,
    Swedish Dissident

    ReplyDelete