The other Europe

Writing in The American, the underrated Tino Sanandaji points out that the American left almost invariably equates the welfare state and its outcomes with those of the Nordic countries, despite the fact that the countries of Southern Europe have welfare states every bit as robust. While this is no surprise -- the superior social and economic outcomes found in Scandinavia make far better poster children for leftist policy than the seething and economically stagnant Mediterranean states -- the phenomenon deserves remarking upon.

As Sanandaji writes:

...The American Left is far more interested in northern Europe than it is in southern Europe, despite the fact that southern Europe constitutes the majority of the population of the core 15 European Union members. 

The fascination of the American Left with northern Europe can be illustrated using some simple Google searches: Matthew Yglesias mentions countries in northern Europe at twice the rate of southern Europe. In the Krugman archives there are one and a half times as many mentions of northern Europe as of the continent’s southern part. Both authors mention Sweden, with 9 million inhabitants, more often than Italy, with 60 million inhabitants. 

Krugman and Yglesias make roughly as many mentions of the Scandinavian countries as they make of Italy, Spain, Portugal, and Greece combined, though the latter together have a population of 130 million compared to 25 million Scandinavians. The psychology behind this favoritism is understandable. Northern Europe in general and Scandinavia in particular has superior social and economic outcomes compared with southern Europe. If your aim is to make Europe a storefront for social democracy, why not go ahead and showcase the nice part of town?

While Sweden and its Scandinavian brothers may have pioneered the welfare state, Sanandaji highlights evidence that those of Southern Europe have grown to a point that they are no longer any less authentic than their Northern European brethren.

The justification for using northern European countries to showcase the welfare state is the notion that only these countries are “real” welfare states. Certainly some decades ago, focusing on northern Europe made sense. Historically, this region was the first to industrialize, the first to witness the rise of labor movements, and the first to build welfare states. However, during the postwar period the two Europes rapidly converged, both in terms of average income and economic policy. 

Today, the welfare state is roughly the same percentage of the economy in Italy, France, Spain, Portugal, and Greece as it is in northern Europe. Southern Europe is at least as left-wing in their economic policies as the north, leaving American liberals no excuse to sweep their poor economic outcomes under the rug.  

... it is today difficult to find fundamental policy differences between the two Europes, as the welfare state in northern Europe has shrunk a bit while the state has expanded in southern Europe. Government spending as a share of GDP is the most commonly used and most straightforward measure of the size of the welfare state. In the United States prior to the crisis, government spending was around a third of GDP. In northern Europe, the government in 2008 constituted 46 percent of the economy, while it made up 48 percent of the economy of Southern Europe. This is strong evidence against the notion that southern Europe should be excluded when evaluating welfare states. 

Top marginal taxes on higher labor incomes are still somewhat higher in northern Europe, but the gap is now minor: an average of 62 percent in northern Europe versus 60 percent in the south. The highest effective marginal tax is 74 percent in Sweden and 70 percent in Denmark, but next is Portugal at 65 percent followed closely by France at 61 percent. Corporate tax rates are similar in north and south, as are rates of compensation in unemployment insurance and the generosity of public pensions. 

Indeed, on all three measures, southern European policies are slightly more welfare-state oriented than in northern Europe. The share of the workforce covered by union collective bargaining agreements is today higher in southern Europe than northern Europe. According to various OECD and World Bank indices, the regulatory burden of government is again if anything larger in southern than northern Europe, both regarding labor regulation and regulation of businesses. 

Paul Krugman and Ezra Klein have argued that the size of the welfare state is best measured using public “social expenditure.” This definition is narrower than it sounds. It includes healthcare spending and entitlements, but not, for example, education spending, so that it tends to only include around half of total welfare state spending. Leaving aside the problems with this measure, even by the liberals’ own empirical definition southern Europe is as much a welfare state as northern Europe. Public social expenditure prior to the crisis was an identical 25 percent of GDP in southern and northern Europe. Currently, social expenditure is actually a higher share of the economy in the south than north, though this may be a temporary result of the crisis.

Sanandaji's points about regulation and taxation are especially well taken. Despite their onerous tax burdens, Denmark, Sweden and Finland are all ranked in the top 25 countries in the world in the Heritage Foundation's Index of Economic Freedom (Norway is #40) while Spain (#36), Italy (#92), France (#67) and Portugal (#68) are much lower. A new brief issued by the Cato Institute last week, meanwhile, calls attention to Spain's high tax rates, where the 56 percent top income tax rate in the Catalonia region is very comparable to income taxation levels in Denmark. It's also worth noting that the Socialist candidate for the French presidency last week called for the enactment of a 75 percent top tax rate.

All of this begs the question, however, that if Southern Europe has essentially the same welfare state policies as Scandinavia, why the significantly differing outcomes? This brings us to the most intersting part of Sanandaji's piece:

Southern Europe today is no less a welfare state than the north, defined as the involvement of the state in the economy. While we observe sizable differences in social and economic outcomes, there is no evidence that this is due to policy itself being radically different. A more likely explanation is that outcomes from welfare state policies are mediated through the deeper structures of society: culture, norms, social capital, etc. so that similar policies produce different outcomes in different countries. These “soft” factors are hard to measure, but the fact that a concept is hard to measure or to perfectly define does not mean that it is not important. 

Indeed, some such patterns can be discerned in data such as the World Values Survey and in aggregate national accounts. Just as Max Weber would have predicted, the saving rate in northern Europe remains higher than in the south. The political systems in the south are still characterized by corruption, instability, and narrow interest politics rather than broad national responsibility. Weber also believed the work ethic to be stronger in the north. It is interesting that around 60 percent of Scandinavians state that they are proud of their job, compared to 30 percent of Italians and merely 15 percent of the French. 

Trust in strangers, perhaps the easiest way to measure components of social capital, is also far higher in northern Europe than in the south. While 66 percent of Swedes, 63 percent of Finns, and 55 percent of the Dutch state that they trust strangers, those numbers are 34 percent in Italy, 23 percent in France, and 21 percent in Portugal. 

The interaction of policy and culture can be seen in the size of the shadow economy. The difference between Sweden and Greece is not only the tax rates determined by politicians, but the extent to which people actually pay their taxes. The shadow economy share has been estimated at 7 percent in the relatively low tax, rule-compliant United States, around 14 percent in high tax, rule-compliant Scandinavia, and 21 percent and 24 percent, respectively, in high tax, weak-compliance Italy and Greece. 

The share of the population that states that it could be justified to “claim government benefits to which you are not entitled” is 33 percent in northern Europe and 45 percent in southern Europe. These figures are likely to underestimate the historical differences, since long periods of welfare state policy appear to undermine social norms.

These are all excellent points. While a significant determinant of economic outcomes, the role of culture is consistently given short shrift in the broader economic debate -- particularly so when comparing policy differences and outcomes between the US and Scandinavia. It is borderline fantastical, however, to think that Americans and Scandinavians would realize the same outcomes even if operating under the exact same policy conditions. 

This isn't mere idle speculation -- just look at countries featuring more than one culture. In Belgium for example -- a country classified by Sanandaji as part of Southern Europe owing to its shared Catholicism -- the Dutch-speaking Flemish have a per capita GDP nearly $8,000 higher than their fellow countrymen in French-speaking Wallonia (per capita GDP in Brussels, the seat of government, is almost double that of Flanders). Moving over to Spain, the top four richest regions are the Basque Country, Madrid (again, the seat of government), Navarre (where Basque is recognized as an official language) and Catalonia, which -- like the Basque Country -- is linguistically and culturally distinct from the rest of the country.  

Italy, meanwhile, features a pronounced North-South economic divide. The country's richest province is South Tyrol, which was part of Austria until 1919 and where German is still widely spoken. South Tyrol is more than twice as wealthy on a per capita basis as Sicily, despite the fact that the island sits at the crossroads of the Mediterranean. 

Other examples abound. Ethnically Chinese Malaysians are disproportionately wealthy and well-educated  (as are Chinese Americans and Chinese Indonesians). Members of the Lebanese diaspora have done particularly well regardless of the country they emigrate to (Mexican citizen Carlos Slim, the richest man in the world, is of Lebanese descent). Gujaratis have a reputation for entrepreneurship and their home state of Gujarat has a per capita GDP significantly higher than the Indian average. The list goes on. 

Sanandaji's column is one that deserves to be spotlighted in the broader debate over political economy. If the American left is interested in an honest debate over the implications and performance of the welfare state, it must both acknowledge that Southern Europe is more representative of this model than its Nordic cousins and the sizable role played by culture in determining outcomes. Citing the success of small, relatively homogenous countries such as Denmark or Sweden while ignoring the very different outcomes in the Mediterranean states and failing to recognize the very real cultural differences between Scandinavia and the increasingly heterogenous and massively larger United States isn't terribly informative.

Update: Another article worth considering in the Northern Europe-Southern Europe debate.