The capitalist welfare state

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.

Slides from my talk for the Student's Association at the Stockholm School of Economics are now available at slideshare.

Immediatly after the talk, I discovered yet another book on how to become more like Sweden:

From Kevin Vallier's new blog reconciled:

Today I’m launching a blog to talk about issues surrounding reconciliation, particularly how people with diverse perspectives, tempted to live at odds with one another, can cooperate nonetheless

This project seems very promising, and Kevin will share his thoughts on various papers that deal with social trust, starting with the well-cited Bjørnskov 2007 paper "Determinants of generalized trust: A cross-country comparison".

The workshop is generously supported by the Arne Ryde Foundation. Accommodation (including breakfast) and a conference dinner will be provided free of charge. We kindly ask participants to make and pay their own travel arrangements.

I honestly thought the idea that Sweden somehow proves that socialism works had disappeared by now. Still, Michael Munger writes:

I am astonished at how many students, and for that matter adults, in the U.S. honestly believe that the U.S. should model itself after Sweden because Sweden has shown that socialism works.

He goes on to nicely demonstrate why this is simply not true (citing among other sources my book, Sweden and the revival of the capitalist welfare state).

In particular, Munger makes an important point regarding regulation, where I would encourage Swedish policymakers to use other nordic countries as a benchmark, not the U.S.

In terms of deregulation of business freedoms, measured in the Fraser Institute’s "Index of Economic Freedom," Denmark, Finland, and Norway are the 7th, 8th, and 9th most free; Sweden is 12th.

The U.S.? It is 15th. The U.S. is rapidly regulating new industries, and further restricting old ones, at the state level in particular. The expansion of professional "licensing" rules, supposedly for the benefit of consumers but in fact in support of organized corporate interests, is making the U.S. less capitalist every day.

A related question is if the U.S. could become more like Sweden if they wanted to. I think it might be difficult, because even for Sweden, becoming what the country is today, was a bumby road and involved a lot of trial-and-error as well as unintended consequences. I expand on those topics in my follow-up paper on Hayekian welfare states, currently being revised after some conference presentations and feedback. Here is the the most recent wp-version.
From the concluding section:

The lesson for other countries from the Nordics is thus not to copy the blueprint for the Swedish welfare state, for example, but rather to foster the state capacity needed for successful learning from experimentation. Trying to build a fiscally large welfare state without the fundamentals of state capacity and social trust may turn out to be a dangerous strategy. The fact that some countries succeed in combining a large public sector with high levels of economic freedom does not mean that all countries are able to do so.

Downloadable from Repec is a paper that describes the concept of a Hayekian Welfare State, and illustrates using several examples from Sweden.

Abstract:

The idea that all types of economic freedom – including limited government – promote prosperity is challenged by the fact that some countries successfully combine a large public sector with high taxes and otherwise high levels of economic freedom. To explain the co-existence of economic freedom and big government, this paper distinguishes between big government in the fiscal sense of requiring high taxes, and in the Hayekian sense of requiring knowledge that is difficult to acquire by a central authority. The indicators of government size included in measures of economic freedom capture the fiscal size but ignore the Hayekian knowledge problem. hinking about government size in both the fiscal and Hayekian dimensions suggests the possibility of Hayekian welfare states, where trust and state capacity facilitate experimentation and learning, resulting in a public sector that is big in a fiscal sense but not necessarily more vulnerable to the Hayekian knowledge problem. Pensions in Sweden are used as a case to illustrate the empirical relevance of the argument. The new pension system represents big government in a fiscal sense, but by relying on decentralized choice it requires relatively little central knowledge.

Johan Norberg and the Free to choose network have produced a new film on whether Americans would be better off if the United States was more like Sweden. I was interviewed for the film last summer and now it is out on youtube.

This is an interesting paper (HT: @nonicoc )

Nikolaev, Boris, Christopher Boudreaux, and Rauf Salahodjaev. 2017. “Are Individualistic Societies Less Equal? Evidence from the Parasite Stress Theory of Values." Journal of Economic Behavior & Organization 138: 30–49. https://www.sciencedirect.com/science/article/pii/S016726811730094X (May 18, 2018).

They start by noting that...

In individualistic societies the ties between individuals are loose and everyone is expected to look after themselves and their immediate family ( Hofstede et al., 1991 ). Such societies place value on personal freedom, self-reliance, creative expression, intellectual and affective autonomy, minimal government intervention, and reward individual accomplishments with higher social status. Higher rewards generate productivity that makes societies richer by channeling entrepreneurial talent into experimentation and innovation ( Gorodnichenko and Roland, 2012 ), the newly created wealth is inevitably distributed unevenly as entrepreneurs enter new markets and generate extraordinary wealth for themselves.

However, the country level correlation between individualism and inequality is the opposite:

The correlation survives several controls and also an IV-analysis where:

the historical prevalence of infectious diseases, [is used] as a source of exogenous variation for individualistic values

The authors conclude:

even if people in more individualistic cultures are more likely to accept and encourage greater individual differences, they end up living in far more equal societies at the end of the day

My comment:

I wish the authors had explored the role of trust a bit more. We suggest (and find support that) trust causes a more eqaul distribution in a related paper:

Bergh, Andreas, and Christian Bjørnskov. 2014. “Trust, Welfare States and Income Equality: Sorting out the Causality." European Journal of Political Economy 35: 183–99. http://dx.doi.org/10.1016/j.ejpoleco.2014.06.002.

As the map reveals, trust and individualism is closely related