The efffects of functional socialism, comparing Sweden and Switzerland

If one wants to measure the impact of functional socialism, the social democracy,you should compare Switzerland with Sweden. The so called Swedish model is what I call functional socialism, “central directive and regulation socialism”. Ronald Reagan called it “control and regulations socialism”. Sweden is also a near perfect example of the corporatist (fascist) state economics, the running of the country by the state in cooperation with labor unions and confederations of employers. (By fascist economic policies I don’t mean its pejorative meaning but its text book meaning.)

Sweden and Switzerland had after WWII an identical starting point, a workforce that was intact, no devastation of factories and great natural resources and industries.

Switzerland’s median income earner PPP per capita is today is USD 27.228 and Sweden’s is 19.895 i.e. the cost of the functional socialism Sweden is a reduction of GDP some 30 % over time. Sweden went from pragmatic to ideological functional socialism 1970-1990, it ruined the Swedish economy. Sweden feel in GDP ranking in those years from number 3 to number 17.

Because of Sweden’s corporatist and functional socialist polices the very rich, top 1 % was left intact, income redistribution did not affect them i.e. Sweden has one of the world’s highest wealth GINI factors, measuring wealth inequality, far more wealth inequality than the US. On the surface income GINI, income equality, is low in Sweden but it is a false perspective, income mobility is lower to the top 10 % than in the US. To move to the top deciles is very difficult. Studies in Sweden show that admissions to universities from the top 10 % is the same as it was in the 1920s, 50 % of the students.

Sweden reversed the disastrous ideological functional socialist policies in the 1990s, drastically cut marginal taxation, abolished wealth and gift tax, privatized social security and sold of all federal owned utilities as well as banks and railroads. Massive deregulation took place and school vouchers was introduced. Unfortunately Sweden still suffers from the excesses and the expansion of the sclerotic welfare state. It’s impossible to shrink the public sector, government subsidies dependence and the extreme taxation it demands. Public spending as well as taxation is above 50 % of GDP and will stay there.

As a result of having tax even low income earners, among other things a VAT of 25 %, Sweden has one of the world’s most regressive taxation systems whilst for instance the US has one of the most progressive taxation systems.

Sweden can be seen as an example of the “Road to Serfdom” Hayek warned us about, the point of no return. So what road should the US take?

There is no difference between men and women in risk taking, altruism, fairness concern or trust

Anne Sibert discusses as one of the causes is the impact of the banking crises as a result of gender inequality i.e. too much testosterone leading to risky behavior.

I am so sorry to have to tell her that that hypothesis ha now been proven wrong. A study done by Stockholm School of Economics and a leading the research hospital Karolinska.

Sex hormones do not affect economic behavior

4/7/2009
A new study published in the April 6 advanced online issue of the Proceedings of the National Academy of Sciences (PNAS), shows that neither testosterone nor estrogen had any effect on financial risk taking.

Neither had it no effect on other “economic behavior” (altruism, fairness concerns or trust).

It is well established that women are more reluctant to take financial risks than men are; women for instance are less prone to invest their retirement savings in the stock market. It has been argued that these differences are due to sex hormones. Particularly, testosterone has been thought to increase risk taking and estrogen has been thought to decrease risk taking.

To test the hypothesis that sex hormones affect economic behavior a team of researchers at the Stockholm School of Economics and Karolinska Institutet conducted a double-blind randomised clinical trial. In the study women in the ages 50-65 years were randomly allocated to treatment with, testosterone, estrogen, or placebo. After 4 weeks of treatment, the women participated in a series of economic experiments to measure financial risk taking, altruism, fairness concerns, and trust. But no difference in behavior between the groups was discovered.

Thanks to Freakonomics

“Those that manage their credit well will in some degree subsidize those that have credit problems”

The hard paternalist do not deny themselves. As soon as a small minority fails to manage their lives, the imprudent; regardless of it is about sex, alcohol, drugs, dropping out of schools it is those that can handle their lives, the prudent get hit. It seems that the 90/10 rule is universal.

The hard paternalist legislator refuses to address the issue at source i.e. address the issue of lack of skills and adequate behavior. They instead punish the hard working and prudent by tougher rules and restrictions making life more difficult and more expensive. Not only that the bill for these further restrictions as well as the bill for bailing out the imprudent is burdening the prudent and the careful.

in a just society the bill for these costs in form of higher taxes, higher interest rates, higher fees and more restrictions should fall more havely on those causing it. In a paternalist society the prudent get hit, time after time.

Från NY Times: Overhaul Likely for Credit Cards

Banks are expected to look at reviving annual fees,
curtailing cash-back and other rewards programs and charging interest
immediately on a purchase instead of allowing a grace period of weeks,
according to bank officials and trade groups.

“It will be a different business,” said Edward L. Yingling, the
chief executive of the American Bankers Association, which has been
lobbying Congress for more lenient legislation on behalf of the
nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.” [min kursiv]

 Thanksto CalculatedRisk

Sustainable Energy without Hot Air

I am an incurable techo-optimist I have always held that most of humanities problems can be fixed with an application of scientific knowledge och scientific methods. I have even thought that the issue of global warming could be solved with the application of more efficient solar panels as well as with the development of fusion energy. Tim Harford apparently had the same thoughts but after reading, download it,  Sustainable Energy – Without the Hot Air, by Professor MacKay. Tim Harford writes in his blog post Switch to renewable energy? If only it were that simple:

Professor MacKay makes this point very simply by sidestepping the
economics altogether. Technological progress and economic growth loosen
the corset of cost-benefit analysis, but not the laws of physics. No
matter how cheap and efficient solar collectors become, there is only
so much solar power available per square metre of land. Hydroelectric
energy is constrained by the quantity of rainfall and the height of
reservoirs above sea level. The most perfectly designed windmill is
limited by the energy of the wind. It would barely be possible to make
the numbers add up even if renewable energy generators were free.

To predict politics by Game Theory

Political scientist  Bruce Bueno de Mesquitas game theory models can with a 90 % accuracy predict complex business and political scenarios. He presents his technique and at TED.

Thanks to inslag.se

Has the Rule of Law been abandoned in the US?

I have always admired the US Constitution in general but most of all the strict adherence to the principle of Rule Of Law. This principle now seems fast to be eroding. During George W Bush the Rule of Law as regards to individual privacy all but disappeared  and now the Obama administrations behavior in the Chrysler bankruptcy has made it go away in business life as well.

Todd Zwycki writes in today Wall Street Journal and it makes me aghast, totally horrified.

Chrysler and the Rule of Law-The Founders put the contracts clause in the Constitution for a reason.

The rule of law, not of men — an ideal tracing back to the ancient Greeks and well-known to our Founding Fathers — is the animating principle of the American experiment. While the rest of the world in 1787 was governed by the whims of kings and dukes, the U.S. Constitution was established to circumscribe arbitrary government power. It would do so by establishing clear rules, equally applied to the powerful and the weak.

Fleecing lenders to pay off politically powerful interests, or governmental threats to reputation and business from a failure to toe a political line? We might expect this behavior from a Hugo Chávez. But it would never happen here, right?

Until Chrysler.

The value of the rule of law is not merely a matter of economic efficiency. It also provides a bulwark against arbitrary governmental action taken at the behest of politically influential interests at the expense of the politically unpopular. The government’s threats and bare-knuckle tactics set an ominous precedent for the treatment of those considered insufficiently responsive to its desires. Certainly, holdout Chrysler creditors report that they felt little confidence that the White House would stop at informal strong-arming.

And what if the next time it is a politically unpopular business — such as a pharmaceutical company — that’s on the brink? Might the government force it to surrender a patent to get the White House’s agreement to get financing for the bankruptcy plan?

Renewing classical liberalism? Part 1. The libertarian Democrat Manifesto

Terry Michaels on what he thinks liberalism ought to be if you are a Democrat.

He writes:

What’s the story behind today’s Democrat brand? I continue to be a partisan Democrat, but I’m not sure. I believe it’s something like: “Government isn’t all that bad; look at Social Security and Head Start. America isn’t always that good; we try to impose our will on a multi-cultural world. The marketplace is full of bad guys who need to be restrained, including their greed-driven political speech. Hey, we’re religious, too. And, not just equal opportunity for all, but re-distributive social justice entitlements for special “minority” victims, because, except for me and my friends, racism endures.”

Terry Michaels asks about a renewal of the Democrat party.

1. Centrist

2. Old time religion , offered by the economic policy reactionaries overly represented in the party’s congressional wing, preaches a return to an “old-time religion,” “complete-the-New-Deal” ideology.

That Fifties and Sixties battle cry might have made sense once. But it is mis-matched for today’s smarter voters, who want to make decisions from their homes, or at least their states.

Social welfare left-liberals often peddle a kind of middle-class neo-populism, a William Jennings Bryan appeal to folks with SUVs and satellite TV, with selective-memory imagery of the good life of the 1950s (again, see Bob Samuelson’s book.)

Sometimes they push class warfare, a version of which the ultra-ambitious John Edwards now seems to be selling as the self-appointed trial lawyer for the underclass.

Old-time religion seems to move (or at least receive lip service from) the Dupont Circle, K Street and AFL-CIO Washington-based wings of the base, but usually leaves the hinterland center cold. And the Beltway-based lefties have lost their nerve on non-interventionist foreign policy, so afraid of that “soft-on-defense” Cold War scarecrow the DLC neo-cons have been peddling for two decades that they allowed Bush’s elective war to commence without engaging any real debate.

So what is Terry Micheals suggestion. Become Jeffersionain liberals or as he in his libertarian Democrat Manifesto says;

We need a new story. Here’s a rough cut, a little more than can fit on a bumper sticker, assembled around the three fundamental issue frames of politics – economic, social, and foreign policy:

“Government: assure liberty by staying as far away as possible from our bank accounts, our bedrooms, and our bodies. Spread pluralistic democracy and free markets by example, understanding that neither can be planted by force on political real estate lacking indigenous cultivators for their growth. Restore the moral authority of mid-20th century “civil rights,” fashioning public policy around individuals, not tribal identity groups.”

The Blind fighting the Blind – Obama Keynesians vs Bush Keynesians

The nearly unimaginable problem we find us in now was caused by Keynesian and Neoclassic macroeconomic theories. The belief that by adjusting levers and micro tinker the economy you can smooth the economy i.e. cooling a overheating economy and heating up a recession. Both Neoclassic and Keynesian economics theory uses as its base the rational individual. The Neoclassic believe in Homo Economicus on an individual level and the Keynesian, nowadays also Behavior Economic theory, believe in the rational politician, bureaucrat, the illusion I call Homo Illuminatus.

In fact we are all individuals and we all behave, and if an individual is not behaving rationally how can an individual that is a politician, bureaucrat be assumed to behave more rationally? This is the fallacy of the Neoclassic theory that individuals always behave rationally but an even greater fallacy is the assumption that individuals always behave irrationally. Individuals in fact behave rationally most of the time, irrational behavior is rare but it exists and causes problems.

We have seen time after time since WWII that the effects of trying to manipulate, adjust the economy has led to the opposite of the intended effect. Overheating an already hot economy and supercooling an already cold economy. In fact in the US since Bill Clinton have had two types of Keynesian, conservative and liberal. The Conservative Keynesians has cut taxes to stimulate the economy but has not cut spending, George W. Bush Liberal Keynesians, as we have now, focus on public spending and has no focus on cutting future deficits.

We are now witnessing the Obama NeoKeynesian and Behavior Economic theorists talking down Neoclassical theories. They perceive that Neoclassic theory has brought us her and refuse to see that Keynesian ideology is equally or perhaps even more at fault. Instead of a moratorium on tinkering, manipulating they once more is intending to to impose the Enlightened planner, the Homo Illuminatus. Hayek has already explained that there can be no individual nor politician, bureaucrats that can no all preferences over time for all individuals.

The Use of Knowledge in Society
F.A. Hayek AER, 1945
I

H.1

What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic. That is, the answer to the question of what is the best use of the available means is implicit in our assumptions. The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.
H.2

This, however, is emphatically not the economic problem which society faces. And the economic calculus which we have developed to solve this logical problem, though an important step toward the solution of the economic problem of society, does not yet provide an answer to it. The reason for this is that the “data” from which the economic calculus starts are never for the whole society “given” to a single mind which could work out the implications and can never be so given.

The strange research of John Bates Clarck medal winner Emmanuel Saez

The case for higher taxes is based on the (false) assumption that the top tax payers in the US have more than doubled their share of income since 1980. The statistics is from the research of John Bates Clarck medal winner Emmanuel Saez with Thomas Piketty.

He has made has made his research available to the general public in his article Striking it Richer:The Evolution of Top Incomes in the United States. He claims that the top tax payers income has gone up dramatically, doubled. However if you scrutinize his research as Alan Reynolds has in WSJ article The Top 1%…of What? You find that the effect is imaginary, only an effect of changes in tax law, the actual underlying income is the same since 1980. Instead of having corporate income business owners changed the status of the corporations from C-corp to S-corp status. income reported as corporate income no was reported as individual income, however the total sum of income is the same. See Piketty/Saez rebuttal, extremely weak in my opinion.

To try to legitimize income redistribution with research is  in my opinion necessary but to try to do it with misleading research is dishonest, it is much more fair to use pure ideological arguments of class warfare. But unfortunately the American people does not support income redistribution unless you can substantiate it.

If Saez won the John Bates Clarck medal for this, his research one must wonder what the prize committee was thinking? Political maybe or just populist as was the Nobel Committees selection of Paul Krugman, a brilliant economist but a populist and biased partisan propagandist.

US the Sweden of the 1970s? A rematch between responsible liberalism vs social democracy

In the US we are now seeing the debate that Sweden had in the 1970’s. Should you have a Big Government, statist state or should you keep the system as it is but put into place legislative frameworks for the citizens to make their own choices within these frameworks or should you take away choice altogether because a small minority cannot make rational choices?

I am extremely disturbed that the US seems to be going the way of Sweden in the1970’s. It led to disaster from a point of economic power and prosperity but also for individual liberty. In Sweden there used to be a saying that Sweden have a capitalist economic system for corporations but have socialized the individual. It was before 1990 a near perfect corporatist state.

Up until 1968 the political opposition in Sweden, mainly Folkpartiet, the Responsible Liberal Party, had been in fierce opposition to socializing polices. However the SocialDemocrats changed tactics and abandoned pure socialism to what Nobel Laureate and party leader Bertil Ohlin called “central directive and regulation socialism”.

During the student and worker uprising of  1968, intellectuals became infatuated with Maoism,  all parties en Sweden became radicalized and the opposition against socializing policies and corporatism stopped. Sweden’s decline started, taxes were raised by 50 % overnight and the Public Sector tripled in size.

Sweden was in 1970 the world’s third strongest economy and declined to the 17th, our welfare system could not be sustained because of lower growth the lead to lower tax revenues than calculated. Entrepreneurs and venture capital had been run out of the country because of the extreme, punitive tax system and the constant attention of the Swedish Tax Authorities. In fact tax evasion and avoidance had become a national pastime for all and the Shadow Economy sector prospered.  

By the 90’s and small and medium sized business owners had all but been eradicated, as result Sweden still has least small and medium sized business owners in all of the developed countries (OECD). Not only that in Sweden because of the corporatist polices of strong interaction between labor and  large corporations and government not one single new job has been created in the Private Sector, all new jobs were created in the Public Sector.

So should the US steer the course that Sweden did 1970-1992 semi-socialized statism, massive intervention  as well as high taxes or should we adopt polices Sweden applied after its banking sectors financial meltdown in 1990-1992 and that lead to the Swedish model being the envy of most US liberals i.e. tax cuts, deregulation and abandoning the corporatist model of cooperation between labor and large corporations ?

From Bertil Ohlin’s Memoirs “Socialistisk skordetid kom bort”(“The Socialists crop was never harvested”) 1940-1951 Bonniers 1975.

Bertil Ohlin was not only a party leader but also a professor of Economics as well as Nobel Laureate. He won the prize for the Heckscher-Ohlin theorem.. He was the founder of The Stockholm School of Economics a forerunner to Keynes.

In particular, responsible liberalism saw it as a danger to the liberty of its citizens the development of the growth of an increasingly centralized political power. The SocialDemocrats [Swedish Big Government statists,] were always adherents of such practices that increased the political influence.

Only when a very strong case could be presented could we in Folkpartiet [Swedish Responsible liberal party] agree to such measures. We preferred makings laws that put a framework in place and with full freedom within this
framework. The SocialDemocrats always wanted to increase what they called “the Societies influence” and minimized the individual’s right to self-determination both in private as well as in business life. Instead of the old “nationalization policy, pure socialism” we now saw on the horizon the beginnings of a new “central directive and regulation socialism” [In the US called Statism] emerging which, however – it must be stressed – was strongly opposed by us and the other parties in opposition and only developed very slowly after1948.