Paul Krugman wrote a misleading post comparing U.S. wages and productivity growth to Scandinavia without admitting that Scandinavia’s test scores are much higher than America’s.
Comparing Scandinavia to Scandinavian-Americans instead of to Americans more broadly is a simple way to factor out the benefit of higher Scandinavian test scores. (If anything, Scandinavians with lower socioeconomic status immigrated to America.) On average, Scandinavian-Americans earn substantially more than their Scandinavian counterparts. Said differently, for a given test score, Americans are much more productive than Scandinavians.
Despite differences in social spending, the incomes of Scandinavian-Americans are higher than Scandinavians at all but the lowest income level.
Even at the lowest income levels, U.S. incomes are likely comparable. With highly regressive VAT taxes and such, Scandinavia taxes welfare benefits more heavily than America. According to the Peterson Institute for International Economics, a full accounting of these and other differences finds, “the true level of U.S. social expenditures is fully comparable to European spending.” Other studies reach similar conclusions.
Others, including a recent report by the Council of Economic Advisors, “The Opportunity Costs of Socialism,” reach the same conclusions about Scandinavia.
The difference between the earnings of Scandinavian-Americans and Americans more broadly (shown at the bottom of the first graph) is an indication of the benefit of higher Scandinavian test scores. On average, Scandinavian-Americans earn 30 percent more than Americans.
America’s demographics are radically different than other high-wage economies. According to the OECD, 8.5 percent of adult Americans score at the highest skill levels on internationally administered numeracy tests—levels 4 and 5. Twenty-nine percent of Americans score at level 1 or below. America has one high-scoring adult for every 3.5 low-scoring adults. In contrast, 18 percent of Scandinavian men score at level 4 or 5. Only 14 percent score at level 1 or below. Scandinavia—the darling of liberal comparisons—has over 4-times as many high-scoring adults per low-scoring adults as America, an astonishingly large difference.
According to Krugman, Scandinavians (excluding Norway) earn less than Americans (after taking their slightly higher workforce participation into account) because they work about 11 percent less than Americans and are about 10% less productive on average. But if Scandinavian-Americans similarly worked 11 percent less (and participated 3 percent more) they would earn almost 45% more than Scandinavians. When they work, Scandinavians are 30% less productive than Scandinavian-Americans.
In truth, Scandinavia wastes its talent like the rest of Europe. High-scoring Americans are better trained, work longer hours, take more entrepreneurial risks, and ultimately produce higher incomes for lower-scoring Americans than their counterparts in other high-wage economies—exactly what we want them to do. From the perspective of low-scoring workers, perhaps more leisure for talented workers isn’t something Krugman ought to exult.
Given the enormous shortage of American talent and their outsized success, perhaps liberal economists, like Paul Krugman, ought to be less recklessly cavalier about taxing and regulating America’s uniquely productive economy. If he had truer arguments than the misleading ones he employs here, wouldn’t he make them?