Social Spending and GDP per Capita

These are countries whose per-capita incomes are greater than the OECD average. The point here is that there's no trade-off between high levels of national income and high levels of social spending. [more here]

Comments

[ilsm]

War machine support spending as percent of GDP is four times anyone else on this short list.

[anne]

Mark Thoma, can these graphs be dated?

[reason]

Anne,
why don't you ask of the original blog? I think the author is quite responsive.

[Outside the Box]

I found this quote interesting with regard to free trade:

It would appear that the other rich countries' policy-makers have learned this lesson: countries that are more open have found that they are obliged to keep corporate taxes low, while those that are less open can have higher rates.

Worthwhile Blog

Countries with free trade policies need to compete on the international market with respect to tax policy, if they want attract the best (highest wage) businesses. I suspect other policies/regulations also play a part in attracting the best business, as well as the general cost of living. Otherwise, a country will find itself with low return projects being financed by low real interest rates, and the highest profit (high wage) business going overseas. Full employment, but falling real wages.

[spencer]

You also need to look at the nature of the tax systems in these countries. The European tax consumption ( think VAT) much more while the English systems tax income that places a higher tax on capital. why do you think the right wing want to shift to European type tax systems?

[Outside the Box]

That's true. The tax on capital gains and dividends is especially damaging. Many Western nations have a zero capital gains tax. Using tax receipts more efficiently would also help. That way more helpful things could be accomplished with the taxes raised.

[reason]

Spencer et al,
read the whole thing and this related blog post:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2007/06/why_focus_on_pr.html

I happen to agree with him by the way. I understand where you are coming from, you are thinking in terms of what is politically feasable in the US. But surely it is the NET result that counts, not the details of how you go about it.

says...

mmmmm... I wonder if anybocy thought about the sizes of those countries. did anybody notich that the US alone bigger (in terms of population and GDP) as all of this countries put together:

Austria
Belgium
Denmark
Finland
France
Germany
Italy
Netherlands
Norway
Sweden
Switzerland

If you do a weighted by population OLS regression you will find a negative correlation between GDP and social spending. Just notice that the country that looks so great when compared to the US is Norway which has less than 5 Mil. people living in it!!!!

[SanFranciscoJim]

Can we get a least squares fit here?

[reason]

says...
And if you leave the US out of your regression?

says...

reason said...

And if you leave the US out of your regression?

I say...

If you had any reason you wouldn't want to do that. Droping information is not a good strategy to follow (unless that information shows you are wrong). Counting each EU nation as one observation each is not relevant here, unless you want to count each US state as one observation to (California alone is bigger than most of the EU countries).

[robertdfeinman]

Just to restate a frequent theme: is GDP even a good measure to use when trying to decide on social policy?

We all know the defects:
Counting repair of damaged infrastructure as a positive economic activity while not subtracting the loss in the first place.

Ignoring non-paid labor, including home tasks and volunteerism.

Ignoring the social costs of the legal-prison system.

Counting militarism as a positive expenditure.

I could go on...

Perhaps a bit more attention should be paid to alternative measures which try to capture quality of life issues instead.

[evagrius]

Perhaps a bit more attention should be paid to alternative measures which try to capture quality of life issues instead.

Nope. Wouldn't do. Quality of life is too subjective. Can't have that.

Besides, wouldn't you rather have a giant sized big mac rather than some small petty, although quite tasteful, piece of meat.

[Karl Smith]

The thing is that graph does say what the author alleges.

If you take out Norway there is clearly a downward slopping relationship between GDP and social spending. If you take out Japan as well it will slightly increased.

Why do that.

1) Take out Norway because its much of its GDP comes from oil. Or conversly one could use GDP - Natural Resources for all countries.

2) Take out Japan because a huge portion of spending is on public works whose sole purpose is to give people a job.

In other words Norway has a lower econmic product than GDP per capita would show and Japan spends much more on citizen welfare than social spending would show.

As a side note how is it that Canda and the US have roughly the same percetn of GDP on social services. Is that correct?

[Scott Ferguson]

I say...

If you had any reason you wouldn't want to do that.

It was my understanding that re-running an analysis with different data points removed allowed the researcher to detect skewing of the data by out-lying points.

If a trend disappears with the US data taken out, it does not represent a real trend at all. Kinda like the joke about Bill Gates walking into a bar and making the average patron a millionaire!

[anne]

Ah, thank you, Reason. Brad DeLong has recently discussed dating for these comparisons, and I am mildly bothered by the graphs but want more precise comparisons to know how to approach the data show.

[anne]

Thanks to Reason and Stephen Gordon, the graph date to 2002.

[btgraff]

canada, norway and denmark all have petroleum resources - (north sea, alberta, etc.) and so this skews any regression... plus, traditionally, one of the reasons why the US has been wealthy is because it is a huge market without internal barriers to trade (or minimal ones) unlike japan, canada and australia.

[Barry]

Two comments - IIRC, Ireland was getting some substantial EU subsidies, until quite recently.

Also, my first impression of that graph is that there is one big cluster, a second one with two countries (USA, Ireland), and an outlier - Norway.

[anne]

Mark Thoma and Stephen Gordon,

Beyond side issues of why Ireland parallels America, the reason being subsidies for social benefit programs from the European Union, and so on, what difference does exchange rate change make for this graph? Brad DeLong asked just this question, as well.

[Stephen Heyer]

btgraff: "canada, norway and denmark all have petroleum resources"

So has the USA as I keep being reminded by my European friends. For 150 years virtually free energy ran out of the ground in the USA. Even now I gather the USA still provides about half its own oil.

This is something Americans always sort of forget when lecturing others on how USA brilliance and virtue made them so rich. I kind of wonder how the US would have turned out without oil.

[german_reader]

I think most of the commenters got one thing right. You must be very careful when using "comparable" data. Looking at the details, the picture often changes. And comparisons between european countries and the United States are difficult, because the United States are much larger and heterogeneous, than any european country. So why not comparing US-state to US-state. As far as I know they differ very much. Find out what works best by looking at the single states.

Credibility of data:

For example two graphs in the article ( "Social spending and CIT rates"/ "Social spending and effective CIT rates" ) put coporate income tax rate for Germany at 35-39%. These are "nominal" rates ( "effective" does not mean, what companies really pay. It's the base for taxation, that often is restraint by other tax regulations. ) There are a lot of exceptions. "Real" corporate taxation in Germany is the in the range of 17-22%. Germany already has one of the lowest real corporate taxation worldwide. ( You can compare tax returns and reported corporate profits. ) I'am sure you can find similar results for other countries.

Social spending:

Many european countries have more older people compared to the United States, Canada or Australia. Pensions are part of social spending, which cannot and should not be reduced at will. Should we let starve our older people to increase economic growth?

Lower social spending doesn't mean lower spending at all. For example Germany has a very low level of regular government employment - 14% of the workforce. Other countries have much higher rates. In the United States it's 16%, in Canada and the United Kingdom 20%, in Scandinavia around 30%. Unemployment in Germany is higher than it should be, because the government runs a very restrictive policy in regard to public employment. Other countries invest more in defense , education, public infrastructure, which are not part of social spending. According to the Stockholm based SIPRI-Institute there are 3.4 million workers in ( private ) defense related industries in the United States . By far the highest rate of any western country. Mainly government financed. And this does not include the 1.4-2.3 million people on active military duty.

Government spending can decrease unemployment in many ways and so social spending. If Germany had the same rate of public employment like the UK, there would be 2 million additional jobs, lower unemployment and less social spending.

Social spending in this article concentrates on "public" expenditures. What about "private" spending. Think of healthcare, pensions in the United States. Adjusted for demographic factors total spending ( public + private ) may be very similar in high and low ( public ) spending countries.

Nevertheless the main idea of the article seems to be correct. Tax structure is more important than tax level. Tax productive capital lower, speculative capital ( like trading ) higher. Tax managers more, corporations less. Have a progressive consumption tax. Tax basic needs like food very low or not at all, luxury goods, tobacco alcohol higher...

[reason]

German_reader
you are welcome addition. Erudite, clear and topical. And your politics fit well with others here. I'm an expat living in Germany, but I must say I lack your deep knowledge of the data. I need to study some more.

[reason]

Scott Ferguson,
thankyou. My point expressed better than I possibly could have.

[btgraff]

btgraff: "canada, norway and denmark all have petroleum resources"

heyer: "So has the USA as I keep being reminded by my European friends. For 150 years virtually free energy ran out of the ground in the USA. Even now I gather the USA still provides about half its own oil.

This is something Americans always sort of forget when lecturing others on how USA brilliance and virtue made them so rich. I kind of wonder how the US would have turned out without oil."

if i recall correctly, the US was actually a major petroleum exporter in the 1930s and even through the second world war. the texas railroad commission actually sought to limit new exploration by companies other than the majors, because there was such a glut of oil during the 1930s.

[Lorenzo]

I'm not sure what period the graph relates to, but EU transfers from Brussels to Ireland are no longer significant.

Using GDP for any Irish statistics will produce strange results because it is around 20% higher than GNP due to a large negative net factor income from the rest of the world. See http://www.cso.ie/statistics/nationalingp.htm for exact figures.