Defending the welfare state

Matthew Yglesias rushes to the ramparts to take the up the defense of Europe (a role, unsurprisingly, the French people appear to have rejected):

We were told that the "no" votes represented the failure of the European social model, which goes to show that American liberalism is bad, and, therefore, we should privatize Social Security or not worry about the massive proportion of our children who live in poverty or our desperately broken health care system. Overlooked in all this is the fact that most Europeans are neither French nor Dutch; significantly more countries approved the constitution than voted it down.

I'll get to the first part soon enough, but Mr. Yglesias conveniently forgets that while more countries have ratified the EU constitution than rejected it, of the three countries that have held referendums -- i.e. the truest measure of popular support -- only one, Spain, has approved it. Meanwhile, prospects for a referendum on the matter appear to be so bleak in the U.K. that it has been abandoned.

Yglesias then goes on to discuss European vs. U.S. health care systems. I won't defend the U.S. healthcare system because I agree that it is in dire need of reform. However, I don't believe that more government is the proper solution. (for an interesting first-hand comparison of the two health-care systems I would recommend this piece which I think explains both of their respective strengths and weaknesses)

He then continues:

When you get the little things right, it's easy enough to make very expansive welfare states compatible with strong economic growth. Iceland spent 45.9 percent of GDP on the public sector in 2004 and got 3.9 percent growth. Sweden got 3.3 percent growth and spent 57.5 percent. A more realistic model for the sort of country American liberals would like to build is the United Kingdom, where, as we saw a few weeks ago, economic growth was strong enough to propel the Labour Party into an unprecedented third term despite the personal unpopularity of Prime Minister Tony Blair, widespread disapproval of his foreign policy, and the British government's spending 44.4 percent of the country's GDP.

I have a few problems with this. First, I don't think that public sector spending is the best measure of how socialist a country's economy is. Rather it is the degree of economic freedom. In this respect both Iceland and Sweden do rather well. If we look at the Heritage Foundation's Index of Economic Freedom for 2005 we find that Iceland is ranked as the 8th freest economy in the world while Sweden comes in at number 14. The U.K. is number 7. The U.S., in contrast, is tied for 12th with Switzerland.

Next let's examine per-capita GDP figures. According to the CIA, Iceland comes in at $31,900. Sweden at $28,400. The U.K. at $29,600. And the U.S? A cool $40,100.

The point isn't that big government is an economic panacea. Clearly, things have gone rather awry in France and Germany; more subtly, it seems unlikely that the Scandinavian social model is compatible with the high levels of immigration that the United States has traditionally, and quite properly, permitted. But neither is it some sort of doomsday device. All sorts of things influence economic growth, and the developed world provides plenty of examples of countries combining economic dynamism with a robust safety net.

So Iceland shows some good economic growth and suddenly welfare states aren't such a bad thing? No, wait, that can't be it, even Yglesias concedes that these small (Iceland's population: 296,737) relatively homogeneous countries aren't a good benchmark for the U.S. Meanwhile, on the European continent job growth has been abysmal. Outside of the U.K. and Ireland (which has engaged in aggressive tax cutting in recent years) the ability to combine a dynamic economy with the welfare state in the EU is mostly lacking. Where they are found they are the exception rather than the rule. And, when one looks deeper -- such as with Scandinavia -- they are in some respects economically freer than the U.S.

Indeed, in a business climate increasingly characterized by uncertainty, such safety nets are arguably conducive to the kind of risk-taking necessary to participate in contemporary capitalism. Just as all those helmets, complicated ropes, and other safety gear let people climb dangerous rocks, the guarantee that you'll be protected from economic turbulence that is beyond your power to control can increase flexibility in the labor market, encourage entrepreneurship, and otherwise facilitate growth.

This is an assertion unsupported by facts.

For the contrary view, one can look at the Mississippi-Alabama social model of non-union, low-wage work; low taxes; little regulations; poor public services; and minimal investments in health care, education, and basic infrastructure. These are not, needless to say, the great American success stories. Nor, I dare say, are the mandarins of American opinion journalism clamoring to leave their comfortable homes in the blue suburbs of Washington to move there.

Ah yes, the Deep South states of Alabama and Mississippi, those paragons of right-wing economic thought. Let's look at how they stack up compared to other states. According to the Pacific Research Institute Alabama was the 25th freest economy in 2004. Mississippi comes in at 28.

The top 5? Kansas, Colorado, Virginia, Idaho and Utah -- all of which are probably nice places to live (well, yeah, Kansas might be a little boring).