Did the World Bank modify its ratings to manipulate the outcome of an election in Chile?

Jan 21 JDN 2458140

(By the way, my birthday is January 19. I can’t believe I’m turning 30.)

This is a fairly obscure news item, so you may have missed it. It should be bigger news than it is.
I can’t fault the New York Times for having its front page focus mainly on the false missile alert that was issued to some people in Hawaii; a false alarm of nuclear attack definitely is the most important thing that could be going on in the world, short of course of actual nuclear war.

CNN, on the other hand, is focused entirely on Trump. When I first wrote this post, they were also focused on Trump, mainly interested in asking whether Trump’s comments about “immigrants from shithole countries” was racist. My answer: Yes, but not because he said the countries were “shitholes”. That was crude, yes, but not altogether inaccurate. Countries like Syria, Afghanistan, and Sudan are, by any objective measure, terrible places. His comments were racist because they attributed that awfulness to the people leaving these countries. But in fact we have a word for immigrants who flee terrible places seeking help and shelter elsewhere: Refugees. We call those people refugees. There are over 10 million refugees in the world today, most of them from Syria.

So anyway, here’s the news item you should have heard about but probably didn’t: The Chief Economist of the World Bank (Paul Romer, who coincidentally I mentioned in my post about DSGE models) has opened an investigation into the possibility that the World Bank’s ratings of economic freedom were intentionally manipulated in order to tilt a Presidential election in Chile.

The worst part is, it may have worked: Chile’s “Doing Business” rating consistently fell under President Michelle Bachelet and rose under President Sebastian Piñera, and Piñera won the most recent election. Was that the reason he won? Who knows? I’m still not entirely clear on how we ended up with President Trump. But it very likely contributed.

The World Bank is supposed to be an impartial institution representing the interests of global economic development. I’m not naive; I recognize that no human institution is perfect, and there will always be competing political and economic interests within any complex institution. Development economists are subject to cognitive biases just like anyone else. If this was the work of a handful of economic analysts (or if Romer turns out to be wrong and the changes in statistical methodology were totally reasonable), so be it; let’s make sure that the bias is corrected and the analysts involved are punished.

But I fear that the rot may run deeper than this. The World Bank is effectively a form of unelected international government. It has been accused of inherent pro-capitalist (or even racist) bias due to the fact that Western governments are overrepresented in its governance, but I actually consider that accusation unfair: There are very good reasons to make sure that your international institutions are managed by liberal democracies, and turns out that most of the world’s liberal democracies are Western. The fact that the US, France, Germany, and the UK make most of the decisions is entirely sensible: Those are in fact the countries we should want making global decisions.

China is not underrepresented, because China is not a democracy and doesn’t deserve to be represented. They are already more represented in the World Bank than they should be, because representing the PRC is not actually representing the interests of the people of China. Russia and Saudi Arabia are undeniably overrepresented. India is underrepresented; they should be complaining. Some African democracies, such as Namibia and Botswana, would also have a legitimate claim to underrepresentation. But I don’t lose any sleep over the fact that Zimbabwe and Iran aren’t getting votes in the World Bank. If and when those countries actually start representing their people, then we can talk about giving them representation in world government. I don’t see how refusing to give international authority to dictators and theocrats constitutes racism or pro-capitalist bias.

That said, there are other reasons to think that the World Bank might actually have some sort of pro-capitalist bias. The World Bank was instrumental in forming the Washington Consensus, which opened free trade and increase economic growth worldwide, but also exposed many poor countries to risk from deregulated financial markets and undermined social safety nets through fiscal austerity programs. They weren’t wrong to want more free trade, and many of their reforms did make sense; but they were at best wildly overconfident in their policy prescriptions, and at worst willing to sacrifice people in poor countries at the altar of bank profits. World poverty has in fact fallen by about half since 1990, and the World Bank has a lot to do with that. But things may have gone faster and smoother if they hadn’t insisted on removing so many financial regulations so quickly without clear forecasts of what would happen. I don’t share Jason Hickel’s pessimistic view that the World Bank’s failures were intentional acts toward an ulterior agenda, but I can see how it begins to look that way when they keep failing the same ways over and over again. (I instead invoke Hanlon’s razor: “Never attribute to malice that which is adequately explained by stupidity.”)

There are also reports of people facing retaliation for criticizing World Bank projects, including those within the World Bank who raise ethical concerns. If this was politically-motivated data manipulation, there may have been people who saw it happening, but were afraid to say anything for fear of being fired or worse.

And Chile in particular has reason to be suspicious. The World Bank suddenly started giving loans to Chile when Augusto Pinochet took power (the CIA denies supporting the coup, by the way—though, given the source, I can understand why one would take that with a grain of salt), and did so under the explicit reasoning that an authoritarian capitalist regime was somehow “more trustworthy” than a democratic socialist regime. Even in the narrow sense of financial creditworthiness that seems difficult to defend; the World Bank knew almost nothing about what kind of government Pinochet was going to create, and in fact despite the so-called “Miracle of Chile”, rapid economic growth in Chile didn’t really happen until the 1990s, after Chile became a democratic capitalist regime.

What I’m really getting at here is that the World Bank has a lot to answer for. I am prepared to believe that most of these actions were honest mistakes or ideological blinders, rather than corruption or cruelty; but even so, when millions of lives are at stake, even honest mistakes aren’t so forgivable. They should be looking for ways to improve their internal governance to make sure that mistakes are caught and corrected quickly. They should be constantly vigilant for biases—either intentional or otherwise—that might seep into their research. Error should be met with immediate correction and public apology; malfeasance should be met with severe punishment.

Perhaps Romer’s investigation actually signals a shift toward such a policy. If so, this is a very good thing. If only we had done this, say, thirty years ago.

No, Scandinavian countries aren’t parasites. They’re just… better.

Oct 1, JDN 2457663

If you’ve been reading my blogs for awhile, you likely have noticed me occasionally drop the hashtag #ScandinaviaIsBetter; I am in fact quite enamored of the Scandinavian (or Nordic more generally) model of economic and social policy.

But this is not a consensus view (except perhaps within Scandinavia itself), and I haven’t actually gotten around to presenting a detailed argument for just what it is that makes these countries so great.

I was inspired to do this by discussion with a classmate of mine (who shall remain nameless) who emphatically disagreed; he actually seems to think that American economic policy is somewhere near optimal (and to be fair, it might actually be near optimal, in the broad space of all possible economic policies—we are not Maoist China, we are not Somalia, we are not a nuclear wasteland). He couldn’t disagree with the statistics on how wealthy and secure and happy Scandinavian countries are, so instead he came up with this: “They are parasites.”

What he seemed to mean by this is that somehow Scandinavian countries achieve their success by sapping wealth from other countries, perhaps the rest of Europe, perhaps the world more generally. On this view, it’s not that Norway and Denmark aren’t rich because they economic policy basically figured out; no, they are somehow draining those riches from elsewhere.

This could scarcely be further from the truth.

But first, consider a couple of countries that are parasites, at least partially: Luxembourg and Singapore.

Singapore has an enormous trade surplus: 5.5 billion SGD per month, which is $4 billion per month, so almost $50 billion per year. They also have a positive balance of payments of $61 billion per year. Singapore’s total GDP is about $310 billion, so these are not small amounts. What does this mean? It means that Singapore is taking in a lot more money than they are spending out. They are effectively acting as mercantilists, or if you like as a profit-seeking corporation.

Moreover, Singapore is totally dependent on trade: their exports are over $330 billion per year, and their imports are over $280 billion. You may recognize each of these figures as comparable to the entire GDP of the country. Yes, their total trade is 200% of GDP. They aren’t really so much a country as a gigantic trading company.

What about Luxembourg? Well, they have a trade deficit of 420 million Euros per month, which is about $560 million per year. Their imports total about $2 billion per year, and their exports about $1.5 billion. Since Luxembourg’s total GDP is $56 billion, these aren’t unreasonably huge figures (total trade is about 6% of GDP); so Luxembourg isn’t a parasite in the sense that Singapore is.

No, what makes Luxembourg a parasite is the fact that 36% of their GDP is due to finance. Compare the US, where 12% of our GDP is finance—and we are clearly overfinancialized. Over a third of Luxembourg’s income doesn’t involve actually… doing anything. They hold onto other people’s money and place bets with it. Even insofar as finance can be useful, it should be only very slightly profitable, and definitely not more than 10% of GDP. As Stiglitz and Krugman agree (and both are Nobel Laureate economists), banking should be boring.

Do either of these arguments apply to Scandinavia? Let’s look at trade first. Denmark’s imports total about 42 billion DKK per month, which is about $70 billion per year. Their exports total about $90 billion per year. Denmark’s total GDP is $330 billion, so these numbers are quite reasonable. What are their main sectors? Manufacturing, farming, and fuel production. Notably, not finance.

Similar arguments hold for Sweden and Norway. They may be small countries, but they have diversified economies and strong production of real economic goods. Norway is probably overly dependent on oil exports, but they are specifically trying to move away from that right now. Even as it is, only about $90 billion of their $150 billion exports are related to oil, and exports in general are only about 35% of GDP, so oil is about 20% of Norway’s GDP. Compare that to Saudi Arabia, of which has 90% of its exports related to oil, accounting for 45% of GDP. If oil were to suddenly disappear, Norway would lose 20% of their GDP, dropping their per-capita GDP… all the way to the same as the US. (Terrifying!) But Saudi Arabia would suffer a total economic collapse, and their per capita-GDP would fall from where it is now at about the same as the US to about the same as Greece.

And at least oil actually does things. Oil exporting countries aren’t parasites so much as they are drug dealers. The world is “rolling drunk on petroleum”, and until we manage to get sober we’re going to continue to need that sweet black crude. Better we buy it from Norway than Saudi Arabia.

So, what is it that makes Scandinavia so great? Why do they have the highest happiness ratings, the lowest poverty rates, the best education systems, the lowest unemployment rates, the best social mobility and the highest incomes? To be fair, in most of these not literally every top spot is held by a Scandinavian country; Canada does well, Germany does well, the UK does well, even the US does well. Unemployment rates in particular deserve further explanation, because a lot of very poor countries report surprisingly low unemployment rates, such as Cambodia and Laos.

It’s also important to recognize that even great countries can have serious flaws, and the remnants of the feudal system in Scandinavia—especially in Sweden—still contribute to substantial inequality of wealth and power.

But in general, I think if you assembled a general index of overall prosperity of a country (or simply used one that already exists like the Human Development Index), you would find that Scandinavian countries are disproportionately represented at the very highest rankings. This calls out for some sort of explanation.

Is it simply that they are so small? They are certainly quite small; Norway and Denmark each have fewer people than the core of New York City, and Sweden has slightly more people than the Chicago metropolitan area. Put them all together, add in Finland and Iceland (which aren’t quite Scandinavia), and all together you have about the population of the New York City Combined Statistical Area.

But some of the world’s smallest countries are also its poorest. Samoa and Kiribati each have populations comparable to the city of Ann Arbor and per-capita GDPs 1/10 that of the US. Eritrea is the same size as Norway, and 70 times poorer. Burundi is slightly larger than Sweden, and has a per-capita GDP PPP of only $3.14 per day.

There’s actually a good statistical reason to expect that the smallest countries should vary the most in their incomes; you’re averaging over a smaller sample so you get more variance in the estimate. But this doesn’t explain why Norway is rich and Eritrea is poor. Incomes aren’t assigned randomly. This might be a reason to try comparing Norway to specifically New York City or Los Angeles rather than to the United States as a whole (Norway still does better, in case you were wondering—especially compared to LA); but it’s not a reason to say that Norway’s wealth doesn’t really count.

Is it because they are ethnically homogeneous? Yes, relatively speaking; but perhaps not as much as you imagine. 14% of Sweden’s population is immigrants, of which 64% are from outside the EU. 10% of Denmark’s population is comprised of immigrants, of which 66% came from non-Western countries. Immigrants are 13% of Norway’s population, of which half are from non-Western countries.

That’s certainly more ethnically homogeneous than the United States; 13% of our population is immigrants, which may sound comparable, but almost all non-immigrants in Scandinavia are of indigenous Nordic descent, all “White” by the usual classification. Meanwhile the United States is 64% non-Hispanic White, 16% Hispanic, 12% Black, 5% Asian, and 1% Native American or Pacific Islander.

Scandinavian countries are actually by some measures less homogeneous than the US in terms of religion, however; only 4% of Americans are not Christian (78.5%), atheist (16.1%), or Jewish (1.7%), and only 0.6% are Muslim. As much as In Sweden, on the other hand, 60% of the population is nominally Lutheran, but 80% is atheist, and 5% of the population is Muslim. So if you think of Christian/Muslim as the sharp divide (theologically this doesn’t make a whole lot of sense, but it seems to be the cultural norm in vogue), then Sweden has more religious conflict to worry about than the US does.

Moreover, there are some very ethnically homogeneous countries that are in horrible shape. North Korea is almost completely ethnically homogeneous, for example, as is Haiti. There does seem to be a correlation between higher ethnic diversity and lower economic prosperity, but Canada and the US are vastly more diverse than Japan and South Korea yet significantly richer. So clearly ethnicity is not the whole story here.

I do think ethnic homogeneity can partly explain why Scandinavian countries have the good policies they do; because humans are tribal, ethnic homogeneity engenders a sense of unity and cooperation, a notion that “we are all in this together”. That egalitarian attitude makes people more comfortable with some of the policies that make Scandinavia what it is, which I will get into at the end of this post.

What about culture? Is there something about Nordic ideas, those Viking traditions, that makes Scandinavia better? Miles Kimball has argued this; he says we need to import “hard work, healthy diets, social cohesion and high levels of trust—not Socialism”. And truth be told, it’s hard to refute this assertion, since it’s very difficult to isolate and control for cultural variables even though we know they are important.

But this difficulty in falsification is a reason to be cautious about such a hypothesis; it should be a last resort when all the more testable theories have been ruled out. I’m not saying culture doesn’t matter; it clearly does. But unless you can test it, “culture” becomes a theory that can explain just about anything—which means that it really explains nothing.

The “social cohesion and high levels of trust” part actually can be tested to some extent—and it is fairly well supported. High levels of trust are strongly correlated with economic prosperity. But we don’t really need to “import” that; the US is already near the top of the list in countries with the highest levels of trust.

I can’t really disagree with “good diet”, except to say that almost everywhere eats a better diet than the United States. The homeland of McDonald’s and Coca-Cola is frankly quite dystopian when it comes to rates of heart disease and diabetes. Given our horrible diet and ludicrously inefficient healthcare system, the only reason we live as long as we do is that we are an extremely rich country (so we can afford to pay the most for healthcare, for certain definitions of “afford”), and almost no one here smokes anymore. But good diet isn’t so much Scandinavian as it is… un-American.

But as for “hard work”, he’s got it backwards; the average number of work hours per week is 33 in Denmark and Norway, compared to 38 in the US. Among full-time workers in the US, the average number of hours per week is a whopping 47. Working hours in the US are much more intensive than anywhere in Europe, including Scandinavia. Though of course we are nowhere near the insane work addiction suffered by most East Asian countries; lately South Korea and Japan have been instituting massive reforms to try to get people to stop working themselves to death. And not surprisingly, work-related stress is a leading cause of death in the United States. If anything, we need to import some laziness, or at least a sense of work-life balance. (Indeed, I’m fairly sure that the only reason he said “hard work” is that it’s a cultural Applause Light in the US; being against hard work is like being against the American Flag or homemade apple pie. At this point, “we need more hard work” isn’t so much an assertion as it is a declaration of tribal membership.)

But none of these things adequately explains why poverty and inequality is so much lower in Scandinavia than it is in the United States, and there’s really a quite simple explanation.

Why is it that #ScandinaviaIsBetter? They’re not afraid to make rich people pay higher taxes so they can help poor people.

In the US, this idea of “redistribution of wealth” is anathema, even taboo; simply accusing a policy of being “redistributive” or “socialist” is for many Americans a knock-down argument against that policy. In Denmark, “socialist” is a meaningful descriptor; some policies are “socialist”, others “capitalist”, and these aren’t particularly weighted terms; it’s like saying here that a policy is “Keynesian” or “Monetarist”, or if that’s too obscure, saying that it’s “liberal” or “conservative”. People will definitely take sides, and it is a matter of political importance—but it’s inside the Overton Window. It’s not almost unthinkable as it is here.

If culture has an effect here, it likely comes from Scandinavia’s long traditions of egalitarianism. Going at least back to the Vikings, in theory at least (clearly not always in practice), people—or at least fellow Scandinavians—were considered equal participants in society, no one “better” or “higher” than anyone else. Even today, it is impolite in Denmark to express pride at your own accomplishments; there’s a sense that you are trying to present yourself as somehow more deserving than others. Honestly this attitude seems unhealthy to me, though perhaps preferable to the unrelenting narcissism of American society; but insofar as culture is making Scandinavia better, it’s almost certainly because this thoroughgoing sense of egalitarianism underlies all their economic policy. In the US, the rich are brilliant and the poor are lazy; in Denmark, the rich are fortunate and the poor are unlucky. (Which theory is more accurate? Donald Trump. I rest my case.)

To be clear, Scandinavia is not communist; and they are certainly not Stalinist. They don’t believe in total collectivization of industry, or complete government control over the economy. They don’t believe in complete, total equality, or even a hard cap on wealth: Stefan Persson is an 11-figure billionaire. Does he pay high taxes, living in Sweden? Yes he does, considerably higher than he’d pay in the US. He seems to be okay with that. Why, it’s almost like his marginal utility of wealth is now negligible.

Scandinavian countries also don’t try to micromanage your life in the way often associated with “socialism”–in fact I’d say they do it less than we do in the US. Here we have Republicans who want to require drug tests for food stamps even though that literally wastes money and helps no one; there they just provide a long list of government benefits for everyone free of charge. They just held a conference in Copenhagen to discuss the possibility of transitioning many of these benefits into a basic income; and basic income is the least intrusive means of redistributing wealth.

In fact, because Scandinavian countries tax differently, it’s not necessarily the case that people always pay higher taxes there. But they pay more transparent taxes, and taxes with sharper incidence. Denmark’s corporate tax rate is only 22% compared to 35% in the US; but their top personal income tax bracket is 59% while ours is only 39.6% (though it can rise over 50% with some state taxes). Denmark also has a land value tax and a VAT, both of which most economists have clamored for for generations. (The land value tax I totally agree with; the VAT I’m a little more ambivalent about.) Moreover, filing your taxes in Denmark is not a month-long stress marathon of gathering paperwork, filling out forms, and fearing that you’ll get something wrong and be audited as it is in the US; they literally just send you a bill. You can contest it, but most people don’t. You just pay it and you’re done.

Now, that does mean the government is keeping track of your income; and I might think that Americans would never tolerate such extreme surveillance… and then I remember that PRISM is a thing. Apparently we’re totally fine with the NSA reading our emails, but God forbid the IRS just fill out our 1040s for us (that they are going to read anyway). And there’s no surveillance involved in requiring retail stores to incorporate sales tax into listed price like they do in Europe instead of making us do math at the cash register like they do here. It’s almost like Americans are trying to make taxes as painful as possible.

Indeed, I think Scandanavian socialism is a good example of how high taxes are a sign of a free society, not an authoritarian one. Taxes are a minimal incursion on liberty. High taxes are how you fund a strong government and maintain extensive infrastructure and public services while still being fair and following the rule of law. The lowest tax rates in the world are in North Korea, which has ostensibly no taxes at all; the government just confiscates whatever they decide they want. Taxes in Venezuela are quite low, because the government just owns all the oil refineries (and also uses multiple currency exchange rates to arbitrage seigniorage). US taxes are low by First World standards, but not by world standards, because we combine a free society with a staunch opposition to excessive taxation. Most of the rest of the free world is fine with paying a lot more taxes than we do. In fact, even using Heritage Foundation data, there is a clear positive correlation between higher tax rates and higher economic freedom:
Graph: Heritage Foundation Economic Freedom Index and tax burden

What’s really strange, though, is that most Americans actually support higher taxes on the rich. They often have strange or even incoherent ideas about what constitutes “rich”; I have extended family members who have said they think $100,000 is an unreasonable amount of money for someone to make, yet somehow are totally okay with Donald Trump making $300,000,000. The chant “we are the 99%” has always been off by a couple orders of magnitude; the plutocrat rentier class is the top 0.01%, not the top 1%. The top 1% consists mainly of doctors and lawyers and engineers; the top 0.01%, to a man—and they are nearly all men, in fact White men—either own corporations or work in finance. But even adjusting for all this, it seems like at least a bare majority of Americans are all right with “redistributive” “socialist” policies—as long as you don’t call them that.

So I suppose that’s sort of what I’m trying to do; don’t think of it as “socialism”. Think of it as #ScandinaviaIsBetter.

What is socialism?

JDN 2457265 EDT 10:47

Last night I was having a political discussion with some friends (as I am wont to do), and it became a little heated, though never uncongenial. A key point of contention was the fact that Bernie Sanders is a socialist, and what exactly that entails.

One of my friends was arguing that this makes him far-left, and thus it is fair when the news media often likes to make a comparison between Sanders on the left and Trump on the right. Donald Trump is actually oddly liberal on some issues, but his attitudes on racial purity, nativism, military unilateralism, and virtually unlimited executive power are literally fascist. Even his “liberal” views are more like the kind of populism that fascists have often used to win support in the past: Don’t you hate being disenfranchised? Give me absolute power and I’ll fix everything for you! Don’t like how our democracy has become corrupt? Don’t worry, I’ll get rid of it! (The democracy, that is.) While he certainly doesn’t align well with the Republican Party platform, I think it’s quite fair to say that Donald Trump is a far-right candidate.

Bernie Sanders, however, is not a far-left candidate. He is a center-left candidate. His views are basically consonant with the Labour Party of the UK and the Social Democratic Party of Germany. He has spoken often about the Scandinavian model (because, well, #Scandinaviaisbetter—Denmark, Sweden, and Norway are some of the happiest places on Earth). When we talk about Bernie Sanders we aren’t talking about following Cuba and the Soviet Union; we’re talking about following Norway and Sweden. As Jon Stewart put it, he isn’t a “crazy-pants cuckoo bird” as some would have you think.

But he’s a socialist, right? Well… sort of—we have to be very clear what that means.

The word “socialism” has been used to mean many things; it has been a cover for genocidal fascism (“National Socialism”) and tyrannical Communism (“Union of Soviet Socialist Republics”). It has become a pejorative thrown at Social Security, Medicare, banking regulations—basically any policy left of Milton Friedman. So apparently it means something between Medicare and the Holocaust.

Social democracy is often classified as a form of socialism—but one can actually make a pretty compelling case that social democracy is not socialism, but in fact a form of capitalism.

If we want a simple, consistent definition of “socialism”, I think I would put it thus: Socialism is a system in which the majority of economic activity is directly controlled by the government. Most, if not all, industries are nationalized; production and distribution are handled by centrally-planned quotas instead of market supply and demand. Under this definition, the USSR, Venezuela, Cuba, and (at least until recently) China are socialist—and under this definition, socialism is a very bad idea. The best-case scenario is inefficiency; the worst-case scenario is mass murder.

Social democracy, the position that Bernie Sanders espouses (and I basically agree wit), is as follows: Social democracy is a system in which markets are taxed and regulated by a democratically-elected government to ensure that they promote general welfare, public goods are provided by the government, and transfer programs are used to reduce poverty and inequality.

Let’s also try to define “capitalism”: Capitalism is a system in which the majority of economic activity is handled by private sector markets.

Under the Scandinavian model, the majority of economic activity is handled by private sector markets, which are in turn regulated and taxed to promote the general welfare—that is, at least on these definitions, Scandinavia is both capitalist and social democratic.

In fact, so is the United States; while our taxes are lower and our regulations weaker, we still have substantial taxes and regulations. We do have transfer programs like WIC, SNAP, and Social Security that attempt to redistribute wealth and reduce poverty.

We could define “socialism” more broadly to mean any government intervention in the economy, in which case Bernie Sander is a socialist and so is… almost everyone else, including most economists.

The majority of the most eminent American economists are in favor of social democracy. I don’t intend this as an argument from authority, but rather to give a sense of the scientific consensus. The consensus in economics is by no means as strong as that in biology or physics (or climatology, ahem), but there is still broad agreement on many issues.

In a survey of 264 members of the American Economics Association [pdf link], 77% opposed government ownership of enterprise (14% mixed feelings, 8% favor) but 71% favored redistribution of wealth in some form (7% mixed feelings, 20% opposed). That’s social democracy is a nutshell. 67% favored public schools (14% mixed feelings, 17% opposed); 75% favored Keynesian monetary policy (12% mixed feelings, 12% opposed); 51% favored Keynesian fiscal policy (19% mixed feelings, 30% opposed). 58% opposed tighter immigration restrictions (16% mixed feelings, 25% opposed). 79% support anti-discrimination laws. 68% favor gun control.

The major departure from left-wing views that the majority of economists make is a near-universal opposition to protectionism, with 86.8% opposed, 7.6% with mixed feelings, and only 5.3% in favor. It seems I am not the only economist to cringe when politicians say they want to “stop sending jobs overseas”, which they do left and right. This view is quite popular; but the evidence says that it is wrong. Protectionism is not the answer; you make your trading partners poorer, they retaliate with their own protections, and you both end up worse off. We need open trade. I’ll save the details on why open trade is so important for a later post.

One issue that economists are very divided on right now is minimum wage; 47.3% favor minimum wage, 38.3% oppose it, and 14.4% have mixed feelings. This division likely reflects the ambiguity of empirical results on the employment effect of minimum wage, which have a wide margin of error but effect sizes that cluster around zero. Economists are also somewhat divided on military aid, with 36.8% in favor, 33% opposed, and 29.9% with mixed feelings. This I attribute more to the fact that military aid, like most military action, can be justified in principle but is typically unjustified in practice. And indeed perhaps “mixed feelings” is the most reasonable view to have on war and its instruments.

Since Bernie Sanders strongly supports raising minimum wage and some of his statements verge on protectionism, I do have to place him to the left of the economic consensus. A lot of economists would probably disagree on the particulars of his tax plans and such. But his core policies are entirely in line with that consensus, and being a social democrat is absolutely part of that. Compare this to the Republicans, who keep trying to out-crazy each other (apparently Scott Walker thinks we should not only build a wall against Mexico, but also against Canada?) and want policies that were abandoned decades ago by mainstream economists (like the gold standard, or a balanced-budget amendment), or simply would never be taken seriously by mainstream economists at all (the aforementioned border wall, eliminating all environmental regulation, or ending all transfer payments and social welfare programs). Even the things they supposedly agree on I’m not sure they do; when economists say they want “deregulation” Republicans seem to think that means “no rules at all” when in fact it’s supposed to mean “simple, transparent rules that can be tightly and fairly enforced”. (I think we need a new term for it, though there is a slogan I like: “Deregulate with a scalpel, not a chainsaw.”) Obama has done a very good job of deregulating in the sense that economists intend, and I think in general most economists view him positively as a leader who made the best of a bad situation.

In any case, the broad consensus of American economists (and I think most economists around the world) is that some form of capitalist social democracy is the best system we have so far. There is dispute about particular policies—how much should the tax rates be, should we tax income, consumption, real estate, capital, etc.; how large should the transfers be; what regulations should be added or removed—but the basic concept of a market economy with a government that taxes, transfers, and regulates is not in serious dispute.

Indeed, social democracy is the economic system of the free world.

Even using the conservative Heritage Foundation’s data, the correlation between tax burden and economic freedom—that’s economic freedom—is small but positive. (I’m excluding missing data, as well as Timor-Leste because it has a “tax burden” larger than its GDP due to weird accounting of its tourism-based economy, and North Korea because they lie to us and they theoretically have “zero taxes” but that’s clearly not true; the Heritage Foundation reports them as 100% taxes, but that’s also clearly not true either.) See for yourself:

Graph: Heritage Foundation Economic Freedom Index and tax burden

Why is this? Do taxes automatically make you more free? No, they make you less free, because you have to pay for things you didn’t choose to buy (which I admit and the Heritage Foundation includes in their index). But taxes are how you manage a free economy. You need to control monetary policy somehow, which means adding and removing money. The way that social democracies do this is by spending on public goods and transfers to add money, and taxing income, consumption, or assets to remove money. Even if you tie your money to the gold standard, you still need to pay for public goods like military and police; and with a fixed money supply that means spending must be matched by taxes.

There are other ways to do this. You could be like Zimbabwe and print as much money as you feel like. You could be like Venezuela, and have government-owned industries form the majority of your economy. Or, actually, you could not do it; you could fail to manage your country’s economy and leave it wallowing in poverty, like Ghana. All of the countries I just listed have lower tax burdens than the United States.

Within the framework of social democracy, there are higher taxes so that spending and transfers can be higher, which means that more public goods are provided and poverty is lower, which means that real equality of opportunity and thus, real economic freedom, are higher. It’s not that raising taxes automatically makes people more free; rather, the kind of policies that make people more free tend to be the kind of social-democratic policies that involve relatively high taxes.

Worldwide, US is 12th in terms of economic freedom and 62nd in terms of tax burden. We currently stand at 24%. That’s quite low for a First World country, but still relatively high by world standards. The highest tax burden is in Eritrea at 50%; the lowest is in Kuwait at an astonishing 0.7% (I don’t even know how that’s possible). Neither is a really wonderful place to live (though Kuwait is better).

Indeed, if you restrict the sample to North America and Europe, the correlation basically disappears; all the countries are fairly free, all the taxes are fairly high, and within that the two aren’t very much related. (It’s been a long time since I’ve seen a trendline that flat, actually!)

Graph: Heritage Foundation Economic Freedom Index and tax burden, Europe and North America

Switzerland, Canada, and Denmark all have higher economic freedom scores than the United States, as well as higher tax burdens; but on the other hand, Greece, Spain, and Austria have higher tax burdens but lower freedom scores. All of them are variations on social democracy.

Is that socialism? I’m really not sure. Why does it matter, really?