Macro Roundup

Going through the CEA report now, haven’t seen anything specifically on the Swedish liberalization.

So Richard Freeman (the Harvard Labor Economist) did an NBER chapter that did a good job capturing the Swedish experience with structural reforms,

"...The first important policy change was that Sweden adopted flexible exchange rates and inflation targeting. This caused an immediate and substantial weakening of the currency, leading to a prolonged period of export- led growth. The growth of exports put the current account into surplus for over a decade. Other critical policy changes included a contraction of the public sector, reduced generosity in social insurance systems, and the deregulation of many markets. The accompanying appendix provides a broad overview of important reforms and shows that the country adopted more market- oriented policies in many domains. In the government sector, Sweden sought to eliminate its budget deficit through expenditure cuts, tax hikes, and a slimmer public sector. These policies and the rapid economic growth in the recovery reduced government spending to 52 percent of GDP in 2006—higher than in most advanced countries, but significantly below the pre-crisis level—and reduced central government debt from nearly 80 percent of GDP in 1996 to about half that in 2006—bringing Sweden in line with other advanced economies and well within EU guidelines.....We began this introduction by noting that the Swedish welfare state was arguably the most ambitious effort by a capitalist market economy to reduce inequality and eliminate poverty. The 1990s crisis and the slow economic growth that preceded it highlighted the Swedish model’s deficiencies and fragility. During our first study, there was fear that the Swedish model was no longer viable. If the pre-crisis assessment of the Swedish model was overly optimistic, the crisis- period assessment was overly pessimistic. Sweden’s recovery shows that it is possible to run a reasonably successful market economy while still devoting considerable resources to a welfare state that maintains economic equality and to surmount an economic crisis. This is probably easier to do in smaller economies than in larger ones and in more homogeneous countries than in more heterogeneous ones, so Sweden’s experiences are not easily transferable to the United States or other large economies. It is also easier to do so in a society where the vast bulk of the citizenry is committed to egalitarian goals, as in Sweden, rather than in societies where the polity is divided over the weight to place on equity compared to efficiency. Faced with crisis, Sweden modified policies and reduced some benefits that had substantial efficiency costs. It became more market reliant and open to competition and to individual choice, giving a stronger economic base for maintaining the welfare state. Sweden’s market- oriented reforms arguably had a first- order impact on efficiency but only a second- order impact on equity, buttressing the welfare state while improving the general economic welfare of Swedes..."

Richard Freeman, Birgitta Swedenborg, and Robert Topel, "Reforming the Welfare State: Recovery and Beyond in Sweden," National Bureau of Economic Research, February 2010, https://www.nber.org/chapters/c5357.pdf

Fernández-Villaverde is the Penn professor you've traded emails with "Just your opinion man" according toOECDin 2015 general government spending was 49.6% of GDP versus 63.48% in 1995

"... By the early 1990s,government spending and transfer payments ballooned to 70% of gross domestic product,and debt had increased to 80% of GDP. Between 1966 and 1974, Sweden lost some 400,000 private jobs—proportionate to 16.7 million in today’sU.S.In1991 a market-oriented government came to power and undertook far-reaching reforms. Policy makers have privatized parts of the health-care system, introduced for-profit schools along with school vouchers, and reduced welfare benefits. Since 1997, government ministries that propose new spending plans have been required to find offsetting cuts in their budgets. As a result, public debt has declined from 80% of GDP in the early 1990s to 41%...."
Jesús Fernández-Villaverde and Lee E. Ohanian, "How Sweden Overcame Socialism,"Wall Street Journal, January 9, 2019, https://www.wsj.com/articles/how-sweden-overcame-socialism-11547078767

How Sweden Overcame Socialism

Nearly half of millennials say they prefer socialism to capitalism, but what do they mean? “My policies most closely resemble what we see in the U.K., in Norway, in Finland, in Sweden,” Rep. Alexandria Ocasio-Cortez told “60 Minutes.” Yet Sweden’s experiment with socialist policies was disastrous, and its economic success in recent decades is a result of market-based reforms.

Until the mid-20th century, Sweden pursued highly competitive market-based policies. By 1970 Sweden achieved the world’s fourth-highest per capita income. Then increasingly radical Social Democratic governments raised taxes, spending and regulation much more than any other Western European country. Economic performance sputtered. By the early 1990s, Sweden’s per capita income ranking had dropped to 14th. Economic growth from 1970 to the early 1990s was roughly 1 percentage point lower than in Europe and 2 points lower than in the U.S.

Before its socialist experiment, Sweden had a smaller government sector than the U.S. By the early 1990s, government spending and transfer payments ballooned to 70% of gross domestic product, and debt had increased to 80% of GDP. Between 1966 and 1974, Sweden lost some 400,000 private jobs—proportionate to 16.7 million in today’s U.S.

In 1991 a market-oriented government came to power and undertook far-reaching reforms. Policy makers have privatized parts of the health-care system, introduced for-profit schools along with school vouchers, and reduced welfare benefits. Since 1997, government ministries that propose new spending plans have been required to find offsetting cuts in their budgets. As a result, public debt has declined from 80% of GDP in the early 1990s to 41%.

To increase incentives to work, Sweden reduced unemployment benefits and introduced an earned-income tax credit in 2007. The electricity and transportation industries were deregulated in the 1990s, and even the Swedish postal system was opened up to competition in 1993. The corporate tax rate was cut from its 2009 level of 28% to 22% today, and is scheduled to decline to 20.4% in 2021.

This policy mix has earned Sweden a Heritage Foundation ranking as the 15th freest economy in the world. The U.S. is 18th. And it’s paid off. Since 1995, Swedish economic growth has exceeded that of its European Union peers by about 1 point a year. Sweden is now richer than all of the major EU countries and is within 15% of U.S. per capita GDP. While Sweden still has a larger government than the U.S., its tax code is flatter. The progressivity of the U.S. tax code distorts incentives. These distortions would become even larger under the tax-increase proposals of democratic socialists like Ms. Ocasio-Cortez.

There is an example for the U.S. here, but the lesson isn’t what Ms. Ocasio-Cortez thinks. Command-and-control economic policies undermined Sweden’s prosperity, and they would do the same to America’s.

Mr. Fernández-Villaverde is a professor of economics at the University of Pennsylvania. Mr. Ohanian is a senior fellow at the Hoover Institution and professor of economics at UCLA.

literature review (We've read most of this already) from Stantcheva (worth noting she's is a frequent Saez collaborator) finds that"....certain segments of the labor market, especially high-income workers and professions with little location-specific human capital, may be quite responsive to taxes in their location decisions...."

"....The key question — and the one with which we are preoccupied in this paper — is if income tax rates distort the location choices of broader segments of workers? And if they do, how large are the responses and what are the implications for policy?.... This body of work has shown that certain segments of the labor market, especially high-income workers and professions with little location-specific human capital, may be quite responsive to taxes in their location decisions....."
Henrik Kleven, Camille Landais, Mathilde Muñoz, Stefanie Stantcheva, "Taxation and Migration: Evidence and Policy Implications," National Bureau of Economic Research, April 2019, https://www.nber.org/papers/w25740

New Miles Corak (of the Great Gatsby Curve) my take is that his paper is actually pretty strong evidence that mobility (or lack therefore of) isn't generated by policy choices given that while US mobility is overall lower then Canada's that's largely due to us getting dragged down by the low levels of mobility in the American South.... ".... But the other reason the national statistics suggest Canada is more mobile has to do with the fact that there is a high concentration of low mobility in the southern United States..."

Marie Connolly, Miles Corak and Catherine Haeck, "Intergenerational Mobility between and within Canada and the United States," National Bureau of Economic Research, April 2019, https://www.nber.org/papers/w25735

"....Intergenerational income mobility is lower in the United States than in Canada, even when Canadians are placed in the American income distribution. This is the case almost without regard to the statistic used to gauge intergenerational dynamics: income mobility, rank mobility, or directional mobility measured by transition matrices.For example, our analysis of rank mobility shows that Canadian children raised by parents in the bottom fifth of the income distribution can on average aspire to rise more than 30 percentiles, approaching the median income in their generation. This is almost 10 percentiles higher than the expected rank of their American counterparts. These differences in rank mobility reflect a combination of differences in absolute mobility, the expected rise in the income distribution of child raised by bottom ranking parents, and differences in relative mobility, the transmission of an additional percentile rank among parents to their children. We document public opinion research that we interpret as suggesting that a comparison between these two countries may be particularly apt. Canadians and Americans share values associated with their personal aspirations, and the aspirations they hold for their children. The “American Dream” has a very similar meaning on both sides of this international border, and citizens seem to have a common perspective on the importance of individual initiative and responsibility, and on the value associated with equality of outcomes versus equality of opportunity as social goals. As such, a pairing of these two countries may offer insights on the drivers of intergenerational mobility. Comparisons of the United States with many other countries might be interpreted as being policy irrelevant because the results may reflect differences in underlying values and social choices. A Canada-US comparison cannot be as easily dismissed. The most important difference between Canadians and Americans has to do with their perspectives on the role of the government in supporting individuals and families in striving to realize their aspirations, Canadians being significantly more inclined to see government as a help rather than a hindrance. Progressive public policies are one factor promoting intergenerational mobility, but there are many others. These have to do with the strength and capacities of families to invest in the human capital of their children and to support them in all of the transitions they must make from infancy to adulthood, and with the structure of labor markets that reflect the economic returns to skills and education. Public policy, families, and labor markets all interact to determine differences in intergenerational mobility across space. Our analysis of administrative data associated with the income tax records of the labor market outcomes of a cohort of Canadian men and women born in the early 1980s, a data set we construct to resemble that used by Chetty et al. (2014) for the United States, allows us to document the level and variation of intergenerational mobility across about 1,000 small areas that completely cover these two countries. This between and within country description shows considerable variation in outcomes within both countries, and we use unsupervised machine learning to cluster regions that are most similar across a battery of five related measures of mobility. The findings support two broad descriptive conclusions that call for more detailed study.The first conclusion is that it is too simplistic to suggest that the international border is the most accurate way to understand the variation across these regions. Many areas in Canada share very high levels of intergenerational mobility with many areas in the United States. At the same time, some of the least mobile Canadian regions have more in common with the least mobile parts of the United States than they do with other parts of Canada. The second conclusion is that the Canada-US landscape can be best summarized as consisting of four broad regions, three of which the countries share, and one that is almost entirely American.These findings in turn raise at least two issues that may help in understanding the underlying drivers of intergenerational mobility. One important reason that there is less intergenerational mobility in the United States has to do with the very low levels of mobility in the American South. While some parts of northern Canada share these challenges, they represent a much smaller fraction of the Canadian population. The US challenge may have to do with the longstanding issue of fully integrating the black population into the economic mainstream of cities and regions that have a long history of exclusion.As such, our findings echo existing research suggesting there is a much lower degree of mobility among the black population in the United States. The Canadian challenges may be just as important, but different in nature, more likely being associated with the Indigenous populations in some geographically more isolated areas of the country. There is no parallel in Canada for the magnitude of the experiences in the American South, which as Alesina and Glaeser (2004) stress is a central factor in understanding US-European differences in the nature and size of the welfare state. We suggest these same issues may be playing out in understanding the relatively low level of intergenerational mobility in the United States, and by implication the greater capacity for the Canadian welfare state to reduce poverty rates and lower inequality in the lower half of the income distribution. Another reason there is more intergenerational mobility in Canada concerns a region of affluence but of low mobility that is distinct to the United States. Many regions along the Great Lakes and Northeastern seaboard of the United States are characterized by a relatively lower degree of mobility. They are not part of the Canadian landscape, with the great bulk of the Canadian population living in adjacent yet relatively more mobile communities. These Canadian communities are on average less affluent, but also characterized by less income inequality. This finding suggests that the search for causal explanations place less emphasis on inequalities in family life and private and public investments in education, and look more carefully at the structure of labor markets, the returns to human capital, and at income support to the least advantaged, an insight offered at one level by the Great Gatsby Curve. For example, Rothstein (2018) carefully mines the Commuting Zone data on relative rank mobility produced by Chetty et al. (2014) to show that parental influences on the educational attainment of their children may be second order in determining the degree of intergenerational mobility. His results emphasize the relatively strong role that variations in the returns to human capital across regions plays in determining the degree to which income is transmitted across the generations. Our findings also lean in this direction, suggesting an important role for labor market institutions, and the inequalities embedded in them, as a potential factor in understanding Canada-US differences...."

"... The share of U.S. population growth attributable to immigrants hit 48% for the fiscal year ended June 30, 2018, up from 35% in fiscal 2011. The result is a country that is becoming increasingly dependent on immigrants to fill jobs and fund programs like Social Security and Medicare, economists said. “We have a situation where U.S. fertility rates are really low and we’re not actively adding to the workforce through natural increase,” said Aparna Mathur, a resident scholar of economic policy at the American Enterprise Institute, a conservative think tank in Washington. “We cannot afford to talk about immigrants as bad for the U.S. economy.” Separate federal statistics released last year suggest that a number of women who put off having babies after the 2007-09 recession are forgoing them altogether. The general fertility rate in 2017 for women age 15 to 44 was 60.2 births per 1,000 women—the lowest since the government began tracking it more than a century ago, according to the National Center for Health Statistics...."

Janet Adamy and Paul Overberg, "Immigrants Propel Population Growth in 10% of U.S. Counties,"Wall Street Journal, April 18, 2019, https://www.wsj.com/articles/immigrants-propel-population-growth-in-10-of-u-s-counties-11555560061