Wednesday, March 31, 2010

The health care bill introduces large taxes on firm growth

The health care bill passed by the Democrats includes a lot of provisions that depend on firm size, and which do not apply to firms smaller than some (arbitrary) limit. Most people like small firms and entrepreneurship. However both the left and the right often misunderstand sensible small business policy:

1. First of all, just because something is good, it does not mean the government should subsidize it. There are benefits (closer management control, fewer transactions costs, more flexibility) to small businesses, but there are also costs (less economies of scale, lower productivity). In a functioning economy some firms will be small and some firms large, depending on their relative advantages.

You need strong arguments, some form of important externality for example, for the government to tip the balance in favor of small firms.

Small firms are more expensive to insure, because of administrative costs, economies of scale and because large firms have the advantage of offering a large and diverse workforce that the insurance companies can pool.

Sure, this is “unfair” for small companies, but it also reflects real costs of the economy. In terms of efficiencies there should be fewer small firms because small firms have higher costs. It is “unfair” for Saab that Toyota has economies of scale and can offer the same quality cars cheaper. But that reflects real costs of the economy, there should be few large car companies because of the economies of scale in the car industry.

2. More important here: The main advantage of entrepreneurship is not that these firms are small, it is that they are growing. There is empirical evidence for this. Fast growing firms (“gazelles”) introduce new innovations into the economy, create new and better jobs and increase competition. We want small firms to grow if possible, not to stay small.

Here are some examples:

* The bill offer tax credits to small businesses who have fewer than 25 employees.

*The bill imposes a $2000 per employee tax penalty on employers with over 50 employees who do not offer health insurance to their full-time workers.

* The bill states that in firms with more than 50 employees nursing mothers must be allowed breaks, a year after giving birth, on the job to express breast milk as often as necessary; they must do so in a private place that’s not a bathroom.

* The bill states that chain-restaurants and food vendors with 20 or more locations are required to display the caloric content of their foods on menus, drive-through menus, and vending machines.

As bad as regulations are, they may have even worse effects if some firms are exempted, because in order to receive the exemptions firms behavior is distorted even more.

What the Democrat bill does is create an incentive for small firms to stay exactly below the limit (25 employees, 50 employees, 20 locations etc). This is similar to the unproductive Italian system, with lots and lots of small firms who escape regulations, but few Googles and Wall-Marts.

Italy, Greece, Turkey and Mexico have a much higher share of self-employed and more small firms than the U.S. But these is a reflection of low productivity, regulatory burdens, high taxes and large transaction costs, not entrepreneurship. The U.S has much more innovative entrepreneurship than these countries.

Helping small businesses stay small is not entrepreneurship policy, it is the exact opposite.

Tuesday, March 30, 2010

Some facts and figures on time use

I am a little busy, so I will do some lazy blogging. I will translate some facts in my Swedish report about time use every day. There is lots of interesting data in here, so it could generate a few decent blog posts.

First, here is the gender distribution of time.

Sweden and the United States are similar in the gender distribution of time worked in the market, men do about 60% of market work. In Europe (which includes most of eastern Europe but not Russia), men do 65% of market work.

For home production Sweden is the most equal, women do 60% of home production, the U.S the second most equal as women do 64% of home production. Europe is less equal, women do 68% of home production. Stereotypes are confirmed as the disparity is especially true for Southern Europe.

Cohabiting men and women have a more unequal distribution of hours worked than the rest of the population.

What is interesting for all groups is that the distribution evens out. Work and home production are similarly sizes. For the U.S and Sweden women and men in total (adding home production to market work) work the same amounts of hours. In Europe women work slightly more in total than men, but even here the differences are not large.

Feminists who claim that women work more and have less free time than men are wrong.

(Europe refers to the weighted average of 6 big Europeans nations Germany, France, UK, Italy, Spain and Poland and the 10 smaller nations Norway, Hungary, Estonia, Latvia, Lithuania, Sweden, Finland, Slovenia, Bulgaria and Belgium.)

Saturday, March 27, 2010

David Frum and Bruce Bartlett are full of it

I have followed David Frum for years. I read probably every post he wrote on New Majority/FrumForum. I have defended him in arguments with friends. Boy do I feel like a fool.

From my reading Frum was genuinely a free marketer, who made the legitimate point that the GOP needs to be more intellectual and advocate more moderate policies on some issues.

Bruce Bartlett in contrast is just another Social Democrat, someone who claims taxes do not affect economic behavior in a major ways, someone who wants people to accept the delusion that the payroll tax is not a tax on the worker’s income, someone who wants the U.S to be impressed by and emulate the French economy, even though the U.S produces 50% more on a per capita basis than France.

I twice took the time to point out errors in Fromforum, once when they claimed there were 1 million Iranians in the U.S (they corrected this), and once when they claimed typical Americans earning 50.000 a year only pay 7.5% in federal taxes, because they are in the 7.5% bracket (they did not correct this).

But the last few days has convinced me I was wrong to trust David Frum.

Regarding the dispute between AEI and David Frum on why he was let go, I am of course no mind reader. However Frum and Bartlett, especially Bartlett, have made claims that were demonstrably false and that they have subsequently had to retract.

Attacks on conservatives by other conservative attract a lot of media. However if the only thing you do is attack other conservatives, and if there is the suspicion that you only refer to yourself as a conservative to be more effective in undermining the right, people get understandably upset. Yet, if the attacks are based on legitimate concerns, conservatives should take them to heart. More importantly, the substance of the criticism tells us something about Frum and Bartlett’s motivations.

So the core issue is whether there is some merit to Frum and Bartlett´s original attacks regarding Obamacare. While I don’t want to waste reader’s time with personal feuds, I can tell you what free-market theory on American health care policy is. Reasonable people can disagree about whether or not the free market side arguments I believe in are correct, but it is nevertheless useful to articulate what my side of the argument believes.

Frum and Bartlett central claim is that free market people at AEI in particular and Republicans in general intellectually like Obamas health care plan (or, they should like if they just were less partisan). From the “intellectual” free market perspective that Bartlett and Frum have, Obama’s plan is decent. Republicans should have worked with Obama to make it even better.

AEI scholars deep inside know the plan is good and that the current system is in need of reform, they are just pressured not to say this. Frum and Bartlett claim that to the extent that the right does not support Obama, it is because they are not intellectuals. They further claim that the intellectual cadre of right wing thinker secretly approve of Obama’s plan, but are just afraid of saying so.

Are these claims plausible? No. They are moronic. Here is the free market view:
We believe there is a massive problem in American Health care, caused by the collective action problem of third party finance. The third party system is arguably caused by government policy.

In 1945 the way Americans paid for health care was the same way they paid for other services, out of their own pockets. Around 70-80% of health finance was out of pocket. Due to wage caps and due to the tax system this system was replaced by insurance tied to the employer (another reason insurance is tied to the employer is adverse selection, but free marketers emphasize the tax reasons). Even in 1960 out of pocket was still 60% of health care finance. At this point the government further entrenched the third party payer system by introducing Medicare and Medicaid, which grew rapidly. These trends completely transformed how health care was produced:

Since almost all of the clients are third party payers. Health producers no longer have functioning systems of buying health care directly. Currently, out of pocket is 13% of health care finance. 87% of the system is third payer.

The health care inflation caused by collective action problems has contributed to increasing the number of uninsured. More problematically, being uninsured is now much worse than being uninsured in 1945, because you no longer can buy reasonably prices health services.

The health care bill passed by Congress only exacerbates the central problem of the American system. If the problem is too much health spending and third party payers, the plan *increases* the government subsidy to employer provided health care. It expands Medicaid, a entitlement plan already trillion dollars in the red long term. It worsens the even larger deficits of Medicaid, by taking out the low hanging fruit in terms of tightening the program and using them to finance more subsidies.

The plan also creates massive implicit tax rate increases. These tax rates are worse even than ordinary taxes for the supply of taxable income. The reason is that the tax increases not only have a negative substitution effect on supply, they are combined with a subsidy, so they also have a income effect that reduces supply.

Bruce Bartlett has repudiated mainstream economics and thinks that taxes do not adversely affect the economy. But remember, we are not discussing what a Social Democrat thinks about Obama’s reform. The claim is about intellectual conservatives. Frum and Bartlett claim that Republicans should like this plan, and that AEI scholars secretly already do. A plan that massively raises implicit taxes on large parts of the middle class, that introduces regulations that incentivize corporations to stay small, that increases the subsidy for third party financed health care.

Milton Freidman was the main pro market intellectual of the century. Do you think, that if Milton Friedman was alive today, he, as an intellectual, would have supported the general thrust of Obamacare? This is essentially what Frum and Bartlett claim. Are we supposed to take these people seriously?

Read how Milton Friedman diagnosis the American Health Care in 2001 and judge yourself what the top free market intellectual would have thought of Obama-care. I guess if Milton Friedman were alive today and criticized Obama, Bruce Bartlett would say that he was not really an intellectual, and David Frum would claim that Friedman was secretly in favor of Obama-care and afraid of “donors” to reveal his true feelings.

The second claim of David Frum is that Republicans should have worked with Obama to make the plan better, and passed it in a bipartisan fashion. Let us say, for the sake of the argument, that this would have made the plan somewhat less catastrophic for the country. Of course with the political balance of power being what it is, the core of the plan would have passed.

But at what long term cost for free-market policies?!? Obama-care is likely to worsen health inflation in the U.S. It worsens the financing problem of Medicare. It probably increases the deficit. It is complex and massive intrusion in the economy, and will probably lead to unintended consequences (but I guess “intellectuals” Bartlett and Frum have not taken this into account).

When those problems inevitably emerge, what position will Republicans have if they helped Obama pass it?!?

With Frum’s political masterplan Democrats will get the political benefits of expanding entitlements to the lower middle class, and Republicans will not even have the benefit of principled free-marketers and the tax-paying groups that oppose the reform. What would libertarians think, many of whom already believe that Republicans are as bad fiscally as Democrats?

Are Republicans suppose to think David Frum has their best interest at heat, given how ludicrous his criticisms is, and how politically disastrous his advice would be? Are free-marketers supposed to think Bruce Bartlett is still a serious intellectual, given his shallow and almost dogmatically Social Democratic views?

And are observers of the AEI-Frum controversy who know the basics of free-market liberalism suppose to believe that intellectual at the AEI secretly admired Obama´s ruinous plan? David Frum would not have wasted my time and that of others had he just beeen more honest about who he has turned into.

Thursday, March 25, 2010

Report on time use

For Swedish readers only:

Today I release a report on the distribution of work, leisure and home production in Sweden, the U.S and Europe. The report is in Swedish. Also a short article in Swedish where we summarize our results.

One of the results is that the poor work less, so that income inequality would be reduced by about 25%. Another result is that female managers and female self-employed work substantially less than male managers and self-employed.

Lots of other results in there, so take a look if you are interested in these topics.

Monday, March 22, 2010

Bait and Switch: Since high-skill immigration is good, let's continue our policy of low-skilled immigration!

Thomas Friedman points out that a disproportional number of the finalists of 2010 Intel Science Talent Search are of immigrant origin. He puts up these names:

"Linda Zhou, Alice Wei Zhao, Lori Ying, Angela Yu-Yun Yeung, Lynnelle Lin Ye, Kevin Young Xu, Benjamin Chang Sun, Jane Yoonhae Suh, Katheryn Cheng Shi, Sunanda Sharma, Sarine Gayaneh Shahmirian, Arjun Ranganath Puranik, Raman Venkat Nelakant, Akhil Mathew, Paul Masih Das, David Chienyun Liu, Elisa Bisi Lin, Yifan Li, Lanair Amaad Lett, Ruoyi Jiang, Otana Agape Jakpor, Peter Danming Hu, Yale Wang Fan, Yuval Yaacov Calev, Levent Alpoge, John Vincenzo Capodilupo and Namrata Anand."

and concludes:

"Indeed, if you need any more convincing about the virtues of immigration, just come to the Intel science finals. I am a pro-immigration fanatic. I think keeping a constant flow of legal immigrants into our country — whether they wear blue collars or lab coats — is the key to keeping us ahead of China."

Is Friedman's list a logical argument in favor of current American immigration policy?

Well, let us note that fully 54% of the foreign born population of the U.S is from Mexico and the rest of Latin America. Only 9% are from India and China. Even if you don't ignore illegal immigrants, there are several times as many legal immigrants from Latin America as there are from India and China.

Yet, of the 40 finalists, not a single one seems to be from Latin America! (correct me if I am wrong. John Vincenzo Capodilupo sounds Italian). His list is almost entirely made up of Indians and Chinese kids.

In 2008 only 15% of legal immigration was based on employment or skills, the remaining 85% is skill unrelated things such as having relatives in U.S. This is Americas current immigration policy: take a few high skilled people and masses of lower skilled immigrants.

Thomas Friedman presents us with a very valuable piece of information, which is that high-skill immigrants are very innovative. He inadvertently illustrated that low-skilled immigrants are not very innovative. Americas current immigration policy is taking mostly low-skilled immigrants, and few high skilled immigrants.

Yet instead of drawing the logical conclusion from it, the NYT farcically wants to use the success of the high skilled as an argument in favor or continuing the current American policy of mass-low skill immigrant.

Sunday, March 21, 2010

The ethnic divide in health care opinion

Some very interesting data in a new poll by Pew.

1. Obama has an approval rating of 46% and a disapproval of 43% (+3%) among all adults. Among registered voters, it is 45-45 (+-0%).

2. The support for Obama based on income is U-shaped. Those earning more than $100.000 and less than $30.000 support him the most, the middle class supports him the least.

3. There are massive racial gaps in Obama's support. Only 35% of non-Hispanic whites approve of the job Obama is doing as President, compared to 85% of African Americans (not surprising), and 61% of Hispanics.

I exclude those who do not answer and compare this with Obama's results in the exit poll reported by CNN:

Loss of support:
Non-Hispanic Whites: -3.2%
African Americans and Hispanics: -2.2%

What is remarkable is if we don't calculate percentage points, but percentage.

Obama started with a paltry 43.9% among non-Hispanic whites. He is down 3.2% points, which is 7.3% of 43.9%.

Loss of Obama support among whites: -7.3%
Loss of Obama support among Hispanics: -5.1%
Loss of Obama support among African Americans: -1.6%

Let me remind you once again: these are percentage of total votes, not percentage points which are usually reported.

This confirms with the theory that Hispanic voters on the margin follow the same trends as white voters, just with a much higher mean for Democrats.

I also predict that regardless of what happens during the Obama-presidency, his support among African Americans in 2012 exit polls will not go below 90%.

4. The support for the health care bill is 38% among all adults, and only 48% among the uninsured. This last figure is really remarkable. Even the constituency Obama is trying to bribe do not love his bill.

5. There are staggering racial gaps regarding the health care bill. Only 30% of non-Hispanic white voters support the Democrat health care bill. Among African Americans the support is 67%, and among Hispanics 59%.

While net support is -28% for whites, it is +33% for Hispanics. Fully 30% of the uninsured are Hispanic. The demographic transformation is driving the U.S towards the left. This is both through making the electorate ideologically more leftist, and through increasing groups in need for government assistance.

My interpretation is that if it would have not been for immigration policy the last 40 years, the takeover of the health care sector voted for today would not have take place.

This is an important lesson for libertarians who support open borders. You have to choose: if you want left-libertarian immigration politics you have to accept the United States slowly turning into a social-democratic welfare state.

This dilemma is part of reality and must therefore be confronted, it is not something you can wish or assume away in a theoretical discussion.

Friday, March 19, 2010

Tea Party protesters do not seem to suffer from tax illusion, but Bruce Bartlett does

Fiscal illusion is a economic term for when the public has systematic misconceptions about the size of government, because of information costs. The error can go both ways, Anthony Downs believed it would lead voters to underestimate the benefits of government, whereas Amilcare Puviani predicted that taxes would be hidden and the burden of taxation underestimated.

For Sweden, more than half of all taxes are hidden (payroll taxes, VAT), and a study I conducted with Björn Wallace showed on a sample of about 1000 people that Swedes underestimate the tax burden on a typical worker by about 1 third (they believed 40% whereas at the time it was about 63%).

FrumForum conducted a survey of 57 tea party protesters, and asked them about the tax burden.

I would have guessed they would strongly over-estimate taxes, given their ideological bias. In fact the tea party people have a pretty good handle on taxes.

1. They were asked:

"What Does the Typical Family Earning $50KPay In Taxes?"

The mean answer was $12.710., or 25.4%.

Fromfurom and former conservative Bruce Bartlett wrongly claim that this figure is incorrect. In fact it is very close to the likely truth.

Fromforum absurdly claims that a typical family earning $50.000 only pays 15% in taxes, because they are in the 15% federal tax bracket. This claim is wrong on several levels. First of all, the questions asks about how much you pay, the average tax ("how much do you typically pay"), not the marginal tax ("how much of your income increase would you pay in taxes"). Second, they ask generally about all taxes, not just the federal income tax.

We are at a point where the biggest tax burden on low and middle income American's are payroll taxes, no longer the federal income tax. This is particularly if you include, and of course you must include, the half of the payroll tax that is nominally "paid" by the firm, but whose burden is on the worker. Lastly Fromforum may be interested to learn that there is such a thing called state and local taxes.

According to the IRS, the average amount of taxes ultimately paid by households earning 40-50.000 was 6.7% of adjusted gross income, and for households earning 50-75.000 8.1%. Let us say 7%. (Bartlett claims it is 1.7%, which I find too low).

In addition to this, someone earning 50.000 will directly pay 7.65% in Social Security and Medicare taxes, and indirectly another 7.65% in Social Security and Medicare taxes "paid" by the employer. It is unclear if Bartlett takes into account the payroll taxes nominally on the employer whose incidence is on the worker. He should.

Lastly we have state and local taxes, which Bartlett completely ignores, even though the question was on "taxes", not "federal taxes".

It is very hard to know what a "typical" American pays in state and local taxes. According to the Census Bureau. in 2008 state and local individual income and sales taxes were $636 billion dollars. Since these are mostly flat, and since pre-tax labor income in 2008 was about 10 trillion dollars, these taxes amount to another 6% on someone making 50.000.

The total taxes are (3500+3830+3830+3000)/(50000+3830)=26.3%

This is very close to the estimate made by Tea Party protesters, Bruce Bartlett is wrong is saying that the Tea Partiers don't know how much taxes they pay. It is he, the intellectual, who underestimates taxes and underestimates the Tea Partiers.

The public is generally not very good at estimating statistics. For example according to Slemrod and Bakijas 2004 textbook while 2% of millionaires do not pay any taxes, the American public had estimated this at 45%. On issues close to them however, the Tea Partiers have a surprisingly good gauge.

That is presumably why they know approximately what the tax burden on someone earning 50.000 and Bartlett doesn't: Many of them actually earn around this, whereas it is just an intellectual game for Bartlett.

It would be very interesting to see the same poll on the general public.

2. FromForum and Bruce Bartlett are also petty in pretending that the Tea Party people are way off on two other questions, taxes as a share of GDP and whether Obama wants to raise taxes.

An extremely important fact about interpreting polls, an insight made by Paul Grice, is that people do not answer what you literary said, they answer what they think you are asking, their best guess of what your question really implies.

So when you ask a Tea Protester if Obama raised taxes, he will not interpret you literary (so far not), but think about the most salient truth: Obama has promised to repeal large parts of the Bush tax cuts, raise indirect taxes on carbon emissions, and is currently in the process of raising taxes through his health care bill.

3. Also the question about "federal taxes as a share of GDP" is very dishonest. Most economist I know would think of total revenue as a share of GDP, not just the federal part, unless you remind them explicitly that you ONLY (why?) want part of the state.

What do we expect of the public, who may only have a vague idea of what even GDP means, let alone taxes as a share of GDP? They will probably just tell you how large they think the government it.

Also, are we to expect the public to take into account that tax revenue as a share of GDP collapses during recessions, even when tax rates stay constant? The prediction from economic science is that the correct burden of government is the tax *rates*, not the tax *revenue*.

Lastly, should they include non-tax government revenue or not? Are we for example suppose to pretend that a future cap-and trade and similar current sources of revenue are not taxes?

The last year before the crisis U.S tax revenue as a share of GDP was 28.3%. As a share of national income, it was 32% (basically you remove destroyed capital from GDP to get national income). Government spending in 2010 is 44.5% of GDP and about 50% of national income.

Milton Friedman usually advocated including deficits as a tax (on the future), and using national income, rather than GDP (excluding depreciations). (To his credit Bartlet mentions the point about the future, although in a snide way). That is why Milton Friedman in 2003 said that government was 40% of the economy.

Who do you think had thought more deeply about the burden of government, Milton Friedman or Bruce Bartlett?

Was Milton Friedman also a know-nothing crazed populist who merely imagined that government was too large, because he was fooled by Fox news?

This is why people reject intellectuals like Bruce Bartlett: the quality of the thinking of the current bunch of intellectuals America has is sometimes simply too low relative to their pretensions (and incidentally relative to the instincts of the public).

I am convinced it is not intellectualism itself the market has rejected, but the actual lazy and left leaning intellectuals America has to offer.

Grice, P., 1975. Logic and conversation. In: Cole, P., Morgan, J. (Eds.), Syntax and Semantics: Speech Acts, vol. 3. Academic Press, New York, pp. 41–58.


See comments. I missed that in the appendix it is specified that it is the federal government that they refer to. Excluding state and local taxes someone earning 50.000 pays about 21%, if payroll taxes are included.

Wednesday, March 17, 2010

Hayek defeats Marx once again.

Justin Wolfers, a clever up and coming economist, thinks that Friedrich von Hayek was not an important enough economist to be included in the company of Adam Smith, Karl Marx, John Maynard Keynes and Milton Friedman.

He basis this on a search on JSTOR, that shows Hayek to have the same influence as Larry Summers.

But Wolfers methodology is faulty. First of all, it seems to be very sensitive to wording. Second, it does not tell us the influence of the most important idea.

I instead use Google Scholar to look at the number of citations for the 20 most cited works of each economist. Since I can see exactly who wrote what, this does not have the problem associated with Wolfer's method.

The result confirms what (at least my) common sense tells me, Hayek is very influential.

First, number of citations of most cited work (regardless of spelling):

1. Adam Smith (15616).
2. John Maynard Keynes (11445)
3. Friedrich von Hayek (5397)
4. Milton Friedman (3528)
5. Karl Marx (3210)
6. Larry Summers (2082)

Which confirms another point, Hayek's theory on dispersed knowledge is more important than any *single* article Milton Friedman wrote, even though Friedman was a broad guy who made contributions in several parts of economics. Marx does not do as well here, because his followers made their strongest impression conducting revolutions (and more recently analyzing language as a tool of oppression) rather than doing mainstream economics.

Second, number of citations of 20 most cited work:

1. Milton Friedman (35867)
2. Adam Smith (22997)
3. Friedrich von Hayek (22668)

4. John Maynard Keynes (21679)
5. Karl Marx (19695)
6. Larry Summers (13039)

(for those curious, and as a measure of how much a "normal" top economist gets, Wolfers himself has 3170 citations).

By Wolfer's own criteria, a quantitative measure of scholarly influence, Hayek beats or ties with Keynes and with Milton Friedman, and beats Marx in both measures. He is far above Larry Summers (an unfair comparison, since prolific Summers is contemporary, which boosts you in this type of count.).

What Wolfers also fails to take into account is the diversity of the idea. Hayek is extremely original, and his insights about decentralized knowledge and spontaneous order are quite different from mainstream neoclassical arguments for the market.

This is a *plus* for putting him in the textbooks. You don't want a dozen more neoclassical intellectuals who make the exact same argument Adam Smith and Milton Friedman made. Hayek had a unique mind and offered unique insights.

Monday, March 15, 2010

A defence of the Spirit Level that is not really a defence

Sociology-professor Denny Vårgerö today writes (in Swedish) an article about inequality and mortality. He has a graph that links income with mortality, showing that lower income people are more likely to die.

1. First a small point: Vårgerö writes that our critique of the Spirit Level is that the choice of countries and the measure of inequality influences the results.

Our critique is much more powerful than that. In ALL definitions of inequality and REGARDLESS if we looked at 21, 23 or 28 countries, there was no statistically significant relationship at conventional levels between inequality and mortality.

The writes or the Spirit Level are deliberately confusing their readers in PRETENDING that we are just nitpicking about inequality measures.
Professor Vårgerö: Don't take their word for it, they are fooling you.

2. A larger point:

This graph does not in itself prove that lower inequality would save lives, because of reverse causality. If you are of poor health, you will earn less, and also be more likely to die. This is extremely important for interpreting his graph.

Vårgerö neglects this problem, which I find astonishing. The left and left leaning social scientists in Sweden really needs to learn about causality.

Furthermore, there are missing variables that co-determine life expectancy and income. A particularly important one is education: more educated people take care of themselves better, and earn more. Vårgerö mentions this second point at least.

3. The most important point:

The claim in the Spirit Level is not that low income kills you as Vårgerö seems to think. It is that the high income for the rich *cause* others people in society to die from stress. That is why they do all those cross country comparisons, they believe the income of OTHER PEOPLE is what is the core of the issue, not your own income (as Vårgerö uses).

It is of course far from common sense observations that educated people take better care of themselves and thus live longer. (and people with more self-discipline are more likely to get educated in the first place).

It is also different than Vårgerös point that lower income causes you to die.

If the Spirit Level was just claiming that low income is bad, it would not have gotten so much attention. Everyone already know that (although the causal effect on mortality in countries with Universal Health care have not been understood).

Vårgerö does not seem to realize that they make a much stronger claim: that the income of other people determined my health, and that high income is bad. That is why they are obsessed with inequality measures, rather than income measures.

Does Vårgerö really want to defend the astonishing claim in the Spirit Level? If so, does he have any casual evidence for it? He only has my own income and my chance of dying in the graph, which leads me to believe he has not studied the argument in the Spirit Level carefully.

I already posted this paper by Magnus Johannesson and Ulf-G. Gerdtham about Sweden, but let me post it again:

"We test whether mortality is related to individual income, mean community income, and community income inequality, controlling for initial health status and personal characteristics. The analysis is based on a random sample from the adult Swedish population of more than 40,000 individuals who were followed up for 10–17 years. We find that mortality decreases significantly as individual income increases. For mean community income and community income inequality we cannot, however, reject the null hypothesis of no effect on mortality."

Lower income is associated with mortality (the causality problem is of course still there), but income INEQUALITY is not. According to Johannesson and Gerdtham Vårgerö is right and the Spirit Level is wrong. But Vårgerö does not understand in his SVD article that he and the Spirit Level are making different, in some terms opposite claims.

He is defending people who actually disagree with him. I suppose one reason is that The Spirit Level argument about inequality killing you through stress is hard to defend scientifically.

A simpler reasons seems to be that Vårgerö thinks The Spirit Level just sais inequality=bad, and we are saying inequality=good, so he wants to defend them.

But I don't think inequality is good, and I strongly believe in raising the income of the poor in Sweden, and even stronger in raising their health status. What I oppose to is the bad science in the Spirit Level, and the claim that lowering the level of the educated will magically help the uneducated health status.

4. Look for a moment at this graph from the Swedish National Institute of Public Health. It shows unhealthy habits and education and income. The lower your education and the lower your income, the more likely you are to have unhealthy habits.

5% of Swedish men with high education smoke, compared with 27% of the unemployed and 32% of those on long sick-leaves.

The first question is, why do we think these people are more likely to die? Because they have low income, or because they have bad health habits?

The second question is: do we think they have bad habits because the rich have high incomes? If the poor stayed poor and uneducated, but I raised the marginal tax on the rich, would mortality of the poor go down?

The answer matters enormously for policy. If you believe the junk science of the Spirit Level, the problem in society are the rich and educated. If we target them, and make them poorer, social problems of the poor will automatically solve, because they were caused by envy and relative status.

The Swedish health policy instead sensibly focuses on the behavior and living standard of the poor, and tried to solve them through education, information, taxes on alcohol and tobacco. If the Spirit Level is correct, we have been silly to do this. The problem are not the poor, the problem is the rich! If you see a kid in school smoking, don't focus on him. Find the kid from a good home not smoking and getting straight A:s, and punish him. This will reduce the stress of the kid smoking, and solve his health problems.

Does this sound insane to you? It should. And if you want to make insane claims like this, at least have some empirical evidence, which demonstrates causation.

The irrationality of the public sector in oil rich countries

Behavioral economist have largely focused on the role of irrationalities in the market. An implicit argument is often that the irrational individual is argument for the rational state to play a larger role.

But the state is not made up of divine angels or logical super-computers, it is also constituted of flawed individuals. Politicians and the public they serve in the political system are as prone to irrationalities as much firms and consumers in the market. Sometimes this problem is even larger, because while in the market the individual get's the entire benefit of making rational decisions, as a voter or member of an interest group they get virtually no personal benefit of being rational, causing a collective action problem in public decision making.

I want to illustrate a clear example of public sector irrationality: the price of gasoline in oil rich countries. What is extra interesting is that these countries are mostly non-democracies. Of course even in non-democracies the state is responsive to public opinion, and it seems in this example that the quality of public and state decision making is particularly low in non-democracies.

The price of gasoline in the U.S in 2009 was about $2.7 per gallon ($0.7 per liter). Since taxes on gas are low in the U.S, this is close to the world market price. In contrast, the cost of gasoline in Saudi-Arabia was $0.6 per gallon, in Kuwait $0.87 per gallon, in Venezuela $0.19 per gallon!

This graph illustrates oil reserves per capita, and the price of gas. What you see is that the more oil you have, the cheaper is gas.

Isn't that what economics predicts? Higher supply means lower price?
No! In a integrated world market, there should be no relationship between quantity in any individual point and price.

This is literary a textbook example from economics of oil rich countries ignoring the opportunity cost.

Oil is traded in the world market, so the cost for oil rich countries in giving cheap oil to their citizens is exactly the same (disregarding minor transportation costs) as countries with no oil. While oil prices are kept up by OPEC, the opportunity cost of giving the oil cheap to your population is waiting and selling it expensive to other countries.

Of course part of the reason they subsidize oil instead of taxing could be that they are richer. I did a regression controlling for per capita income: the result is the same. The more oil you produce and the more oil reserves you have, the lower the price of gasoline.

What happens in these countries, such as Iran, is that the public gets angry if gas is expensive "we have so much oil, why should we pay for it?".

The big exception that proves the rule is rational and well-functioning Norway. Norway has as high, or even higher taxes on gas as other countries. Furthermore, unlike most oil rich nations, Norway saves it's revenues from oil and gas, rather than spending most of it.

The artificially low price of gas in Iran is part the reason they need to import refined petrol. Read this excellent report by Atta Tarki if you want a good case illustrating gas subsidies.

Ironically Ahmadinejad is finally reforming its massive and hugely wasteful gas subsidies as part of the military confrontation with the U.S.

Friday, March 12, 2010

Score one more for Chicago economics

His policies may not reflect it, but President Obama privately took Milton Friedman's life cycle-Permanent Income theories seriously.


When their future income went up, but before their current income went up, the Obamas increased their consumption. Textbook case of Milton Friedman's permanent income hypothesis.

Wednesday, March 10, 2010

The Super-Economy in one picture

We noticed earlier that when Sweden is compared to the U.S, Sweden does better for some part of the income distribution. However, if we want to compare systems, we should look at comparable population groups. For this reason I have graphed Swedish income compared with income of Americans with Swedish ancestry.

Read my previous post on my method, which combines GDP per capita data with income distribution data. Read an earlier post on the rationale of using Swedish-Americans rather than all Americans as the comparison group to Sweden.

The graph is income per capita in Sweden and the U.S (for Americans with Swedish ancestry) for 10 income groups, based on official Swedish statistics and census data. I define you as American with Swedish ancestry if the main ancestry group is Swedish. Americans with Swedish ancestry have a 55.8% advantage in income compared to people in Sweden; very close to the figures I estimated using similar underlying numbers and a somewhat different methodology (is a good sign).

The results of the comparison is striking.

Swedes under the American small-government system beat Swedes in the Swedish welfare system for almost 90% of the income distribution. Among the first 10th percentile the Swedes in Sweden do better. By the 15th percentile or so the Swedes in the U.S have caught up, and vastly outperform Swedes in Sweden for the rest of the income distribution.

Here is the same exact picture with income differences filled in.

The median is 42% higher for the Americans compared to the Swedes.
Overall, the middle 60% of the population earn 46% more in the American Super-Economy versus welfare state Sweden.

Now, these figures are slightly unfair to Sweden, because we are comparing ethnic Swedes in the U.S with total Sweden, which includes immigrants (many of whom have not done well in the job-market). For the aggregate figures this is not important, since immigrants are few. Non-immigrants earn 3% more than average of Sweden, simply since most of the average is made up of non-immigrants. The poor in Sweden are disproportionally immigrant however and I would guess Sweden would do even better in the first and second decile if we excluded immigrants. Nevertheless, the advantage in earnings for Americans is massive, indicating that there are large losses in income associated with having a welfare state.

The claims of the left, such as the claim that welfare state is better for ordinary people, are the results of incorrect comparisons. Sweden is homogeneous, whereas the U.S is not. Second, Swedes are a uniquely productive people (as indicated by their performance under the U.S system, and Sweden’s performance before the expansion of the welfare state), which should be taken into account.

The fact that the aggregate results are not even better is due to homogeneous Sweden having innate advantageous in income distribution. Most of the problems of the U.S are concentrated a few distinct populations and geographic areas (such as Appalachia). When we make apples to apples comparisons, it is clear that the American system is better for almost everyone, and almost as good even for the very poor.

The Swedish system is a losing proposal for almost all the population. Unless someone spends their entire life in the bottom 10% of the population, they are better off under the American system.

Here are the lessons from this comparison:

* The U.S would be even richer and have much less poverty if it was made up entirely of Swedes.

* Sweden would be richer than the U.S if Sweden adopted American institutions.

* A large (Swedish-size) welfare state with an American population would do much worse than Sweden.

If you want one picture to demonstrate that free markets and limited government are better for almost everyone in society, this is it.

Sunday, March 7, 2010

Income distribution in the U.S and Sweden

We know Americans do better on average. But how about the distribution? After all, the left like to claim that in the U.S only a few hedge fund managers and the like are well off, while the masses live in poverty.

I used the Census American Consumer Survey to make American income data comparable to Swedish income data. Swedish income distribution data adjusts household income to household size (with children having less weight). I further use OECD data to adjust for purchasing power. The data for Sweden is the latest available year, 2007, whereas the U.S data is for 2006-2008.

I think this is a pretty good, but of course not perfect, comparison. You should think about it as comparing GDP per capita taking income distribution into account. More about the method in the end.

Up until around the 45th percentile, Sweden does better than the U.S. After this the U.S opens up a substantial advantage. It is clearly better to be poor in Sweden compared to the U.S, and obviously to be rich in America compared to Sweden.

What matters most is that this graph illustrates that it is better to be middle class in America. The 60% in the middle earn 20% more in the U.S than they do in Sweden, even taking government purchases crudely into account. It is a myth that only a few at the top do better in the American system compared to even arguably the most successful of the European welfare states.

Here is the same data with the differences filled in.

This comparison up until now was between Sweden and all the US. That is not the correct comparison. A better comparison, if we think culture and norms matter, is between Swedes in the Swedish system and people of Swedish ancestry in the American system. I will make those comparisons in the next post.

Method: I combine differences in GDP with distribution data, in terms of differences in income for 10 deciles. Swedish income distribution data adjusts household income to household size (with children having less weight), so I did the same for the American data, giving children the weight 0.35. I further use OECD data to adjust for purchasing power. The data for Sweden is the latest available year, 2007, whereas the U.S data is for 2006-2008.

The comparison is close, but not perfect. Fringe benefits are lacking. The U.S data does not include income taxes and fringe benefits, and many government transfers. The Swedish data is with capital gains. The American income data is top coded. Most importantly, the Swedish data does not include the value of government purchases. The average advantage in household income is 42.6% for the U.S, compared to a 24.3% advantage in GDP.

For a thing such as health care, the bias goes both ways, since American worker’s health care is largely paid for by the employer and not included in income. This effects the distribution of income however, since poor workers in the U.S get less health care than rich workers, whereas they get equal or more in Sweden.

To account for all these problems and in order not to bias the comparison against Sweden, I did a crude adjustment of increasing the Swedish average data to reflect government services, so that the average difference is now equal to average difference in GDP. What is great about GDP is that it includes almost everything. Now, for a perfect comparison for the U.S and Sweden we would need to know exactly how much government cervices each income groups gets, data that is very hard to calculate. Another problem is that this assumes that 1$ spent by the state is worth 1$ spent by the individual, where I believe it is worth somewhat less, something that benefits Sweden in the comparison. But since much of government spending has already been taken into account, and since most of the remainder does not differ significantly in the U.S and Sweden in terms of who it is targeted towards (in both countries the poor get more benefits than the rich), the comparison is likely to be a reasonable reflection of the economic status of various groups.

Friday, March 5, 2010

Mormons have higher I.Q than average

As I noted, there is a discussion regarding if atheists are smarter than people from other religions. From the NLY97 I have now included how people with different religions score on aptitude tests, often used by researchers as a proxy for I.Q.

(Of course these are just test score, neither I nor anyone else can guarantee that they are not biased for any religion. Take them for what they are worth.)

It is well known that Jewish people score very high in I.Q tests. What is less well known is that Episcopalians also get astronomical I.Q scors.

Note again that new age types with "personal philosophies" rather than pure atheism are not smarter than average.

The most important thing I note is that Mormons are smarter than average. If you are going to go around saying that atheists are smarter than average, you should know that the same tests show Mormons to be smarter than average as well.

Mormonism is not just a religion. It is a cohesive and self-replicating cultural identity, with strong positive effects on behavior and outcome for its members.

Wednesday, March 3, 2010

Does the lack of economic freedom kill you?

A regression of life expectancy on Gini was, as we established, not statistically significant for the 28 advanced OECD countries, or the 21 (or sometimes 23) that The Spirit Level uses.

But why get bugled up in country selection? Let us include all countries the U.N gives data for! The only problem is that some countries have short life expectancy because they are poor. In order to correct for this, I control for income, which the UN conveniently provides.

In a regression of all 140 countries with data the coefficient for Gini is not statistically significant (p 0.169). GDP is statistically significant, (p-value 0.000).

I also did the same regression, now looking at the association between life expectancy, per capita income, and the Heritage Index of economic freedom.

In a regression of the 169 countries for which there is data, both per capita income AND The Index of economic freedom are statistically significant (p value for both 0.000).

There are more countries with missing data for Gini than the index of economic freedom. If we only look at the 140 countries where we have data for Gini the exact same results hold (pvalue for the Index of Economic freedom now 0.002).

So unlike Gini, the Index of Economic freedom has a statistically significant association with life expectancy, controlling for per capita income, in the full UN sample.

Can we now claim that we have proven that free-market policies increase life expectancy? Or that the lack of economic freedom murder people?

OF COURSE NOT. We only have a correlation, not a causation. There are a million reasons why these two variables could be related. Maybe more democratic countries have better health policies, and also more free-market policies. Maybe more ethnically homogenous countries have less health problems and more free institutions. Maybe there is reverse causality, with more healthy people having better institution.

If you go around with weak evidence, not having established causality, and screaming that you have proven that the lack of Economic freedom kills people, you are an ideologue, and not a scientist.

This example illustrates the two problems of the Spirit Level. First, their basic correlations are much weaker than they give the impression of, and often not even statistically significant. Second, they have not a shred of evidence in terms of inequality actually causing bad outcomes.

Monday, March 1, 2010

Are atheists smarter than average?

There is a discussion about religion and IQ, specifically that of atheists. Are atheists smarter than others?

As luck would have it there are great datasets that can answer questions like this. The NLSY79 and NLYS97 have one of the most accurate measures of general intelligence for large datasets (the surveys are designed so that we can get nationally representative results from them).

From the NLSY97 I have the IQ, and religion as measured in 2005 (where most of the sample are in their 20s).

Atheists and Agnostics have far higher IQ than the average. On average atheists/agnostics have 8 I.Q points higher than the national average, which is half a standard deviation.

However, and on closer inspection not surprisingly, people who don’t believe in god and who identify as instead having “a personal philosophy”, are around average in intelligence. This group is much larger than atheists and agnostics.

Obviously the fact that smart people don’t believe in god does not prove that god does not exist either way.
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