The capitalist welfare state

Here, in EER, is paper that is interesting in many ways. The authors:

Albanese, Giuseppe, Guglielmo Barone, och Guido de Blasio. "Populist Voting and Losers’ Discontent: Does Redistribution Matter?" European Economic Review 141 (01 januari 2022).

From the abstract:

We show that fiscal redistribution matters by comparing Italian municipalities equally hit by the economic shocks leading to populism but, at the same time, very differently exposed to the generosity of the EU structural funds, because of their locations on the two opposite sides of the geographical border that determines eligibility. Estimates resulting from a spatial regression discontinuity design show that in 2013 general election larger EU financing caused a drop in populism of about 9% of the mean of the dependent variable.

In many ways, the paper is a crystal clear paper with a credible identification strategy. Because transfers from EU structural funds are targeted to "Convergence Objective regions", there are strong discontinuities between municipalities:

and it seems that populist voting is more common in municipalities that do not recieve transfers:

[Parties coded as populist: Movimento Cinque Stelle (Five Stars Movement), Rivoluzione civile (Civil Revolution), Lega Nord (Northern League), Sinistra Ecologia Libert` a (Left Ecology Freedom), Fratelli d’Italia (Brothers of Italy), Partito Democratico (Democratic Party), Centro Democratico (Democratic Centre]

Using a regression discontinuity design, a clear result is identified:

As can be seen, average populist vote share falls from about 61 to 58 percent at the eligibility cutoff. Their conclusion:

We have shown that financial transfers injected by the EU regional policy toward Italian lagging areas have had the ability to reduce the anti-establishment component of populism.

That interpretation is indeed possible. But it seems to me that another interpretation is also possible:

Not receiving EU-grants when neighbouring municipalities (or when some parts of the country) receive grants causes resentment and fuels populism. If there were no structural funds granted to any municipality, how much populism would there be? We do not know.

Thus, despite being a crystal clear paper with a credible causal identification, we do not know if EU-grants cause or mitigate populism - because we do not know the counterfactual.

Good news: If things work out as expected, my graphic non-fiction book on markets and economic freedom, released in Swedish last year, will be published in English (with the Swedish publisher Idealistas) later this year.

The book is an illustrated book that explains the benefits of markets and economic freedom. It is based on research but it is non-technical and accessible. The book is similar to Bryan Caplan´s Open borders, but my book is much broader: It deals with the market economy in general, and discusses several misperceptions about the market economy.

The basic message of the book is that the market economy is a tool that helps people work together to achieve their goals. Here is a sample:

I am now raising money for the final stage of the production. Thanks to th Institute for Humane Studies and the Hayek fund, I have a very good translation to work with. The english version will be paperback, rather than hardcover (I actually thinks that woks better for a graphic non-fiction book). Hopefully, you will soon be able to order it on Amazon.

Delayed by one year, it now seems this event will actually take place at Kennesaw State University in November:

For those interested in reading more, here is the paperback version of my book, and here is my latest related paper on Hayekian welfare states.

1. It is remarkable how the reputation of e.g. Sweden and Denmark lags compared to the actual development.
2. Compared to democrats, Republicans seem to be much more correct in their ranking of countries .
3. Democrats seem to confuse socialist countries with countries they like, which suggests they see socialism as something good - while the opposite seems to be the case for republicans.

• We summarize research on specific reforms that increase economic freedom and causally affect income or productivity
• We note that these reforms have ambiguous implications for inequality as measured by the Gini-coefficient, because they could benefit high-income earners by increasing the returns to capital (at least in the short to medium run), and simultaneously benefit low-income earners by lowering barriers to entry and promoting competition more generally.
• We estimate the association between economic freeom and income growth for each quintile of the income distribution, and show that economic freedom affects seems to affect all parts of the income distribution roughly equally. However, in democracies, the point estimate is indeed larger for the lowest and the highest quintile:

New paper out, in Scandinavian Political Studies:

This note describes how research on the link between economic openness and government size has changed over time. Early interpretations suggested that countries develop welfare states to compensate for volatility caused by economic openness (the compensation hypothesis). Recent findings have cast doubts on this interpretation. For example, more open economies are on average not more volatile, and economic openness does not unambiguously increase the social security demands from voters. Some recent studies suggest that economic openness is particularly beneficial for countries with high taxes and high‐income equality. A re‐interpretation of the compensation hypothesis is thus possible: Through trade, the citizens in large welfare states enjoy some of the benefits associated with cheap labour and high wage dispersion despite their domestic economy being characterized by high real wages, high taxes and a compressed wage distribution.

It's open access!

What the reviewers said about the initial submission:

presents a new and interesting perspective on the cross-country relationship between trade openness and government size and structure

"inspiring"

conceptually unpersuasive [R2. Always R2...]

We the Internet TV produced a video on the idea that Sweden has "democratic socialism", featuring Johan Norberg, myself and many others.

It's very good, given the format an concept - but of course I recommend reading my book for the full story :-)

James Pethokoukis blogs at AEI.org

Let’s stop pretending that Bernie Sanders wants to duplicate Scandinavia

He writes:

Bernie Sanders supporters are quick to make clear that their guy doesn’t want to turn America into Cuba or Venezuela or the old Soviet Union. By "democratic socialism," the US senator from Vermont means Scandinavia, more or less. And what’s wrong with that? The Nordic nations are pretty nice. Even President Trump has conceded that Norway produces a quality immigrant.

His point is that the scandinavian countries are in many aspects more capitalist and have higher economic freedom than the US, citing my text in the Milken Review.

Here is a summary of a new working paper that I just published with Anders Gustafsson.

We start by citing Francic Fukuyama:

I concur with the commonplace judgment that the rise of populism has been triggered by globalization and the consequent massive increase in inequality in many rich countries

We believe that Fukuyama is right in his description of the "commonplace judgment", and there are some papers that seemingly support that view, such as the Importing Political Polarization paper by Autor et al. These papers typically identify clear causal effects, such as rising trade with China leading to lower employment in US manufacturing and that districts exposed to larger increases in import penetration elected politically more extreme political candidates.

It is, however, a big step to jump from these partial effects to the conclusion that populism has been triggered by globalization. Trade with China may have had more beneficial consequences elsewhere in the US economy, and economic globalization is more than just trade with China. Similar points have also been made by Paul Krugman in a comment on the Autor papers.

One might also worry that papers that identify interesting effects of economc globalization are more likely to be published, while papers with imprecicely estimated zero-effects might not even be completed and/or submitted.

Our working paper checks if there is a pattern across countries such that populist parties have grown more in countries where globalization has increased more. We do so using the KOF globalization index and the compilation of election results for populist parties in Europe produced by Swedish thinktank Timbro. The compilation covers 33 European countries (included when they become politically free) during the period 1980-2018).

As it turns out, the commonplace judgement alluded to by Fukuyama is not visible to the eye when comparing increases in populist parties' voteshares and increases in globalization over different time periods:

A nice feature of Timbro's compilation is the separation of populist parties into right-wing and left-wing populism. Dividing data into 4-year intervals and running regressions using KOF:s measure of economic globalization de facto (that combines trade in goods, services and trade partner diversity with financial globalization) and right-wing populist vote shares with country and time fixed effects reveals no significant correlation between the two. does in fact reveal a significant positive correlation between the two. The reason is, however, that EU-countries have more economic globalization and also more right-wing populism. Once EU-membership is controlled for, there is no positive association between economic globalization and right-wing populism.

Here is what the fixed effect panel regression with right-wing populist voteshares as dependent variable looks like:

[EDIT March 2020: Oops, time-FE was not included in column 1 - fixed now]

In the working paper, we show results also for left-wing populist parties (typically smaller in more globalized countries), random effects instead of country fixed effects (almost identical results) and other types of globalization. The main result is always that once EU-membership is controlled for, more globalized countries if anything have slightly smaller populist parties.

Note also that income inequality (measured using the Gini-coefficient for disposable income taken from Swiid) is typically negatively associated with populism.

Needless to say, these are only correlation. But even if Fukuyama is right that income inequality somehow causes populism, it seems that countries with more inequality for other reasons still end up with less populism on average.

Finally, the fact that EU-membership is associated with about 7 percentage points bigger right-wing populist parties is pretty interesting. It suggests that the European Union does not fully succeed in promoting its official goals (among which we find tolerance, inclusion, justice, non-discrimination as well as social and territorial cohesion and solidarity). The EU-effect is very much in line with a pattern recently noted by Dani Rodrik, that right-wing populists in Europe portray the EU and the elites in Brussels as their enemy, not free trade.