California vs. Texas

Paul Krugman is now claiming Texas doesn’t have a well managed economy or something. To be frank, I didn’t read his column, because I have grown tired of the man and his dogmatic and predictable views. He has been caught cheating so many times that I now trust Krugman's figures as much as I trust Glen Beck's.

But at least I have an excuse to write an easy post comparing California and Texas. A lot of people have done this, so here are my two cents.

I use budget data from the Census Annual Survey of State Government Finances and job and per capita income data from the Bureau of Economic Analysis.

Last year, high-tax California had a population about 50% larger than Texas, a deficit 220% higher, and a debt 380% higher. It's safe to say that low-tax Texas is in a better fiscal shape.

Since 1970, Texas has added 60 percentage points more jobs than California. A lot of this is due to faster population growth. But not entirely. In 1970, the employment to population ratio was 1% higher in California, while in 2009 it was 6% higher in Texas.



In 1950 the Golden State had 40% higher per capita income than Texas. In 1970, the advantage was still over 30%. By 2009, the difference had shrunk to only 10%, without taking into account the higher cost of living in California.


(this is how to read the graph: Texas is about twice of what Texas was in 1970, and California 60% higher than California in 1970. The graph shows that Texas has grown faster since 1970, not that it has surpassed California in terms of levels).

It appears that Texas is doing better than California not only fiscally, but also in terms of aggregate job and income growth.

One thing I would warn about is exaggerating California’s debt problem. It’s true that they have mismanaged their finances, and expanded government beyond what they can afford. However California is still extremely wealthy, with a total GDP of about 1900 billion dollars in 2009. This is about the size of the entire Italian economy, and still larger than Brazil, India, or Russia.

So while their tax base may appear narrow, their entire economic base is very wide. The debt to GDP ratio for California alone is still below 10% (or 80%, if you add the national debt).

Also, let's not make too strong policy-inference from the short-term mortgage-bubble that is currently distressing California. Policy should be based on evaluations of long term performance. I argue above that the long term trend also favors Texas.

Who owns Sweden: Nine million Swedish citizens or seven billion citizens of the world?

Adam Cwejman, current chairman of the Liberal Youth of Sweden, responds to my article arguing against open borders in a welfare state (in Swedish).

I don't personally know Adam, but he has a reputation of being a brilliant guy. I thought his response was well argued and intellectually serious, which I appreciated a lot.

1. Adam argues against a fiscal view on immigration. He notes that some studies find that because smoking kills people early and saves on pension costs it is beneficial for the state. Adam argues that we do not consider this sufficient reason to promote smoking, so why should we consider the costs of immigration sufficient reason to limit the free flow of immigrants?

The difference lies in that promoting smoking obviously has massive costs for Swedish society (lost years in life), which outweigh the small benefits for the state. The social cost of smoking is estimated to over $100 billion in the United States. There are no corresponding costs for not having open borders. If anything, unskilled migration has led to large negative social externalities, in the form of crime, reduced trust and cooperation.

Adam is erroneous in saying that smoking is beneficial socioeconomically ("samhällsekonomiskt"), since the social welfare function would include the cost of lost life. It would be better to say smoking may be beneficial fiscally ("statsfinansiellt").

The smoking paradox is about accounting. The central effect of smoking - the cost of the individual dying - is not included in the budget. But no such costs are associated with reducing immigration, so the same paradox does not arise.

2. Adam uses a similar argument as Niclas Berggren, which is that there are groups in our society that have fiscal costs too. Adam believes that I am inconsistent, because I take the cost of immigration into account, but don't want to deport Swedish citizens with "low I.Q".

He also calls me "inskränkt" (paraochial), because in the immigration debate I distinguish between the "nine million" Swedish citizens and the "seven billion" inhabitants of the world.

The difference is ownership rights. Swedish citizens, regardless of gender and race, are collective and equal owners of Sweden. This type of ownership is as legitimate and as absolute as private ownership. It developed in the same way as private property, organically through the formation of spontaneous order.

The rights associated with citizenship are equivalent to ”acquisition of title” associated with private property rights, as discussed by Nozick. They are legitimized by Swedes and their heirs ultimately having created Swedish society, again parallel to how we tend to derive private property rights.

Consequently no citizen has the right to deny another citizen their inalienable rights (i.e deportation) using fiscal costs as an argument. Because citizens are equal, and because citizenship is absolute, there is simply no room for a policy discussion about one citizen denying another citizens voting rights or deporting other citizens, based on I.Q or gender or anything else.

Foreigners by contrast have no ownership right over Sweden, just as Swedes don't have any right to own Albania. It is up to Swedish citizens to decide who gets to come to their club and who doesn't.

Similarly private homeowners decide who gets to enter their home and who doesn't, but they don't have the right to kick out other owners living on the same street if they feel their presence is detrimental. Corporate shareholders get to decide not to bring in a new partner for any reason they like, but they can't kick out a pre-existing owner, barring really extraordinary circumstances.

Swedish citizens therefore have the right to take the fiscal costs of immigration into account when deciding which foreigner to invite, while no Swedish citizen can be denied her rights and deported based on fiscal considerations. There is nothing strange or paradoxical or hypocritical about this.

Modern liberals and libertarians get confused when discussing immigration because they do not acknowledge that Sweden and the United States are associations owned solely by their respective citizens. This is ironic, since libertarians are obsessed with private ownership, which is a (useful) social construction, just as the concept of citizenship is. Without a theory of citizenship and the nation, immigration becomes hard to discuss.

Our unwritten social contract stipulates that we should organize the state around the nation, as the nation is the entity in which the sense of fellowship is the strongest, which makes it the optimal level of collective decision making. This is true for Sweden and virtually every other country.

I am here crudely articulating these principles, which are deeply ingrained in the collective consciousness in Sweden and around the world. Indeed, I have met few immigrants who would deny Sweden the right to make the decision whether to take them in or not! Immigrants of course like to come to Sweden, but almost always acknowledge that this decision is the prerogative of Swedes, just as the decision of Iran to take Afghan immigrants belongs to Iranian citizens. The view that Sweden has no moral right to decide who gets to come to Sweden is something that Swedish libertarians and socialists have invented.

Classical liberal theory is quite clear about the issue of national sovereignty, citizens have the right to make decisions about the nation based on their self-interests. It is modern left-liberalism and left-libertarians, influenced strongly by cultural Marxism, which has deconstructed the nation and citizenship. Adam Smith would not find anything strange in affording Swedish citizens rights of control over Sweden ahead of foreigners, but Adam Cwejman does.

3. More importantly, this view is one of honesty. If Adam and other Swedish intellectuals don't believe that Swedish policies should benefit Sweden, and want to base policies on the welfare of the entire world, they have the responsibility to communicate this very clearly to voters. Intellectuals and politicians have been delegated their power and influence by the public, they have no god-given right to make decision over the collective welfare of Swedish citizens based on their private ideology.

Adam is a bright guy, and will go far. At some point, when he is a member of the government or a member of parliament, he will be faced with decisions where there is a conflict of interest between the "seven billion" foreigners, and the Swedish citizens who elected him. At such a point, I believe Adam has the responsibility to choose based on the welfare of those voters who delegated authority to him, rather than based on personal ideological preferences. Liberals and libertarians in positions of power simply do not have the right to give away the collective assets of Swedish citizens based on their private ideological axioms and their private altruism toward the world.

If Adam wants to give away his own money, no one will stop him. But Sweden is not his to give away to the world, at least not without the explicit approval of the Swedish public.

Politicians who in the interests conflict between the people who elected them and foreigners would choose the welfare of foreigners should at the very least be honest about this during the electoral campaign. Swedish voters still naively believe that the politicians they have elected and the rest of their elites have Sweden's best interests in mind, rather than some private ideological axioms and a personal desire to benefit the world using collective resources.

4. Adam questions my "national perspective", which only takes the welfare of Swedes into account. What about the gains of the immigrants?

My answer is in part the same as above, the national perspective is the correct perspective from the point of view of classical liberalism because of property rights. We accept that a homeowner has the right to make a decision about taking in guests or not based solely on his private welfare. Why should we deny Swedish citizens the same right to act based on self-interest?

The welfare of immigrants does matter for immigration policy, but only to the extent that Swedes are altruistic and care about the rest of the world.

4. He uses the example of remittances. Immigrants send home money and benefit their home country. Shouldn't we take this into account?

Sure we can. But relying on immigration to send remittances back home for economic support is extremely inefficient. According to the world bank, Swedish remittances are 0.15% of Swedish GDP. (Much of this goes to Eastern Europe, rather than the third world).

It is obviously much more expensive to take someone from Bangladesh and house him in Sweden in the hope that he will send back a few percent of what he receives back to Bangladesh. If the aim of immigration is to send aid, why not just cut the middleman and send aid directly ?

Better yet, why don't the people who really care about the third world and believe foreign aid works give away some of their own money, rather than collective assets? Foreign aid is after all a private good, there are very few public good aspects of it, and little reason why aid should be socialized.

5. Adam believes that my views on immigration are not based in principles, but are only consequential. That is incorrect. Using the principle of ownership, Sweden belongs to Swedes, and they get to decide if they want immigration or not based on their own self-interest. I develop my view on this principle more in the debate with Niclas Berggren.

Since it is obvious to me and to the majority of Swedes that Sweden belongs to Swedish citizens, I focused my original article on the consequential effects of open borders. Even if it was not obvious to me, this is what the Swedish public believes, and my responsibility as an amateur pundit is to represent the welfare of the public, not to advance my personal beliefs and self-interest (for libertarian intellectuals to ideologically play around with the welfare of Sweden based on their whims as if it were a toy is indeed a reflection of selfishness, not altruism).

Adam is incorrect in writing that Hayek does not have a "deep" analyses based on principles regarding sovereignty and immigration. Hayek has an rich theory of the state which in my view is quite clear on who owns and has decision rights over society, and more importantly why. Since Hayek already has a well developed theory about rights, it is easy for him to discuss immigration.

Regarding Milton Friedman, Adam provides a link to a libertarian that tries to prove that Friedman "really" believed in open borders.

The truth here is that Milton Friedman's view evolved. Friedman is sometimes portrayed as dogmatic, but this is untrue. He was a fundamentally empirical and pragmatic thinker, in the University of Chicago tradition. American immigration worked quite well historically, but worse and worse after the 1965 reform and as society changed. Late in his life, as Milton and Rose Friedman increasingly observed that modern immigration combined with the welfare state and multiculturalism were having negative effects, their views changed. This is clear in interviews about the topic I have seen, where they contrast today's ill-functioning immigration with their own experience.

After all, as Keynes is reported to have said:

"When the facts change, I change my mind. What do you do, sir?"

Education spending in U.S states and Test-Scores

Some readers wanted me to adjust for the cost of living when comparing education spending and test-scores. To my knowledge no perfect state by state adjustment exists, so I used this one produced by MERIC. The figures seemed plausible (D.C high, Tennessee low).

What I am doing here is comparing education spending per pupil with test scores of 8-graders in different American states, as measured by NAEP (which is considered a reliable comparison of pupil knowledge in different states). I use the average of math and reading.

I repeat that correlation does not equal causality. It may for example be that states who spend the most have the best educated parents. However, establishing statistically significant correlation is a necessary first step in arguing for causality, especially when we don't have controlled experiments.

First, let's start with where the debate between liberals and libertarians is currently: the correlation of state spending and test scores.


At least the correlation is clearly positive, unlike last time when I included other nations as well as U.S states. But the correlation isn't statistically significant, and no self-respecting Libertarians would let liberals get away with using a non-significant relationship in a debate.

Now let us do two simple adjustments. First, I divide the students into three demographic groups. The first group is The Majority, the weighted average of non-Hispanic White and Asians. I add those because the sample size of Asians are too small in many states (Whites alone produce roughly the same results).

Whites and Asians are 60% of the U.S student population. The second sample is Hispanics, 22% of students, followed by African-Americans who constitute 17% of the U.S student population.

First, White and Asians:


Similar results for Hispanics:


Lastly Black pupils:


Notice again the parsimonious power of the crude demographic and cost adjustments: the correlations are about twice as strong, and the relationship is now statistically significant for Whites, Asians and Hispanics.

Admittedly the correlation between spending and test-scores is still weak for African-Americans. I suspect the reason is selection: that the best scoring African-Americans tend to live in rural states with few minorities. (The seven highest are Montana, Vermont, North and South Dakota, New Hampshire, Wyoming and Hawaii). These states spend less than the national average. However the African American parents who move to Hawaii are probably different from the ones who remain in Detroit or the South. Also, states with a large disadvantaged population have their resources spread thin compared to Montana and Wyoming.

So I removed all states where the Black student population is small. This is not strictly kosher, especially since I did it after observing the results. In my defense I did a OLS-regression of the full sample and weighted by state population, and the relationship between spending and test-scores is the same for blacks and whites.

Even though they are passionate about increasing education spending, liberals have not used these simple and effective arguments against anti-education spending libertarians.

P.S

Let me put the top 10 and bottom 10 states for African Americans. The Star* signifies a Red-State (a state that was won by Bush in 2004):

Top:

1* Montana
2 Vermont
3* North Dakota
4 New Hampshire
5* South Dakota
6* Wyoming
7 Hawaii
8 Massachusetts
9* Texas
10 Delaware

Bottom:

42* Nevada
43* Nebraska
44 Rhode Island
45 California
46 Wisconsin
47* Mississippi
48 District of Columbia
49* Alabama
50* Arkansas
51 Michigan

Before I did the comparison, I assumed that since Blue-States are richer and probably more tolerant towards African-Americans, they would have higher scores. But it turns out the opposite is true, the population weighted NAEP score of African-Americans in the 2004-Republican states is 2 points higher than Democrat states.

This is despite the fact that Blue-States spend significantly more than Red-states on education, both before and after controlling for the cost of living. Yes, the Deep South still has low scores, but this is compensated by above average performance in Texas, the Mountain States and the Midwest.

Ironically, the Blue-States are equivalent to the United States in the PISA debate (more resources, worse outcomes) and the Red-States the equivalent of Scandinavia or North-East Asia (less resource, better outcomes). If we were as prone to jumping to conclusions that support our ideological biases as the left or libertarians, the debate would be over. This "proves" once for all that lower-spending on education causes better outcomes for minorities!

However I suspect the reason for this contradiction has to do with insufficient demographic adjustment, just like the PISA-debate. Blue-state are more urban, so that their schools have to deal with more disadvantaged students. The schools are not necessarily worse, or at least this comparison cannot tell us if they are. We need much more careful studies to determine this, controlled experiments or at least a before-and-after methodology that takes into account the background characteristics of the students. Just reporting average scores is not enough.

Liberals are rarely willing to cut the United States slack for having a different population mix than Scandinavia. In the education debate, the are getting a dose of their own causality-ignoring medicine from libertarians.

Ethnic Diversity and the Size of Government

In recent posts I formulated the Sanandaji Principe, which stipulates that due to the left-leaning voting patterns of unskilled immigrants, we can at most have two out of three of Open Borders, Libertarianism and Democracy.

Open Borders and Democracy will inevitably lead to a welfare state, as non-libertarian immigrants sooner or later become the majority of the voters and vote themselves benefits.

One objection that people such as Swedish libertarian Economist Niclas Berggren made is that mass migration causes native voters to turn against redistribution. The reason is that economists believe that solidarity is diminished in ethnically heterogeneous societies. According to this theory voters care more about people with the same race and ethnicity as themselves, and are less willing to help the unfortunate if they have a different skin color. This theory is most prominently suggested by Harvard professors Alesina and Glaeser.

Some libertarians want to rely on this mechanism to tear down the welfare state through open borders and the ethnic tensions they believe that migration will cause.

My first reaction if that is the price of limiting the welfare state, is that I would oppose it. Milton Friedman famously stated that he would oppose reducing the welfare state unless the public was convinced in a democratic fashion that this was in their best interests. I understand that some free-marketers have turned against the very notion of "solidarity", because the left has exploited the term so much. However this should not let us lose sight of the fact that solidarity and national cohesiveness are social goods, not something that we should want to destroy through an immigration shock doctrine.

Leaving my preferences aside, I also believe that Berggren and other libertarians and liberals who rely on the Alesina-Glaeser theory are substantively wrong. Ethnic diversity overall tends to expand the welfare state, not reduce it. While the research only focuses on one effect of unskilled immigration (reduced fellowship), there are at least three effects that go the other way. Here are the main effects of increasing the share of low income minorities:

1. Solidarity is diminished and social ties are wakened, so that the majority population becomes less willing to pay taxes to help "the other". This limits the size of government. The ethnic-diversity-and-redistribution-literature has almost entirely focused on this sole effect.

2. Increasing the share of low income individuals increases the welfare state through a mechanic effect. This means even if you don't vote for any changes to the welfare state, the use of preexisting welfare programs such as unemployment insurance and public health care increases.

For instance, 71% of Hispanic immigrant households in the U.S use at least one form of public welfare, compared to 39% of native households. In Sweden, according to the latest figures around 40% of all unemployed individuals are immigrants.

Even if you don’t make unemployment insurance more generous, having groups with a higher unemployed rate automatically expands the size of government.

3. More disadvantaged citizens increases the need for a welfare state. To the extent that the welfare state reflects a desire to reduce social problems, having more deprived individuals increases the demand for more government to solve problems. The welfare state exists largely because the middle classes and the rich feel sorry for the poor. The left is not stupid or irrational, they rarely demand government intervention where there are few problems.

As immigration increases poverty and social problem, demands for government intervention grow. Note that this is consistent with lower solidarity across ethnic lines, as long as solidarity is not zero (If the new poor immigrants were your co-ethnics, voters would be even more inclined to help them).

To give you a recent example, the majority of the long term uninsured in the United States are ethnic minorities. (Long term uninsurance is a better measure, since many uninsured are just between jobs.)

According to the Medical Expenditure Panel Survey, Hispanics "represented 42.8 percent of the long-term uninsured for the period 2005-2008"

The media does not understand and will not tell you this, but the long-term uninsurance rate of non-Hispanics whites’ above 25 in the United States is merely 3%. This is incidentally one explanation why the white Tea Party activists don’t like President Obama's health care reform, they and their families already have health insurance.

The American uninsurance ”crisis” would likely never had arisen without a high percentage of minorities with extremely high long term uninsurance rates.

Similar, in Sweden the social problem currently most emphasized by the Social Democrats is child poverty. As I explained, 65% of poor children in Sweden are immigrant children (interestingly about two thirds of poor children in the United States are minority children).

Without immigration, there would be no child poverty "crisis" in Sweden for the left to mobilize politically against.

4. Though ignored by proponents of the ethnic-diversity-and-redistribution, minorities also get to vote, and they vote overwhelmingly for the left. This effect is dominant when we are discussing free migration, because with open borders in a world where 700 million people have told Gallup they would like to migrate right now, sooner or later the immigrants will become the majority of voters and make the political preferences of the natives irrelevant.

Pew recently conducted a large survey with lots of questions on economic and social issues. It shows as all other polls that African Americans and Hispanics minorities are far to the left of whites. While 12% of Non-Hispanic whites in America have views that Pew classifies as Libertarian, only 3% of American minorities are libertarian. As America becomes increasingly minority, it will become less libertarian.

The proponents of the Alesina-Glaeser theory tend to focus entirely on point one and ignore points 2, 3 and 4.

It is difficult to test the theory empirically. I will however give you two pieces of suggestive evidence. I am not going to claim that this is definitive proof, just that it is consistent with my view that the net overall effect of diversity is bigger government.

Libertarians like the Alesina-Glaeser theory, because it tells them with more immigration they can reduce willingness to pay for the welfare state. Liberals similarly love the theory because it quite explicitly states that the main reason Americans deny themselves the benefits of a European style Social Democratic system is the racism of Republican voters.

First, I plot the vote share of Obama among non-Hispanic whites with the share of non-hispanic whites in each state. The Alesina-Glaeser theory would predict that whites in states with lots of minorities should vote less Democrat, because of racially motivated lack of support for leftist policies.


In fact, there is no such overall trend. The correlation is not statistically significant, and if anything goes in the opposite direction as their theory would predict.

Sure, there are states with high share of minorities in the South - such as Georgia and Alabama - where whites came out strongly against Obama. Similarly, some very white states in New England went solidly for Obama.

On the other hand, other lily-white states such as Wyoming, Kentucky, West Virginia, Utah and Idaho voted against Obama. Similarly whites in minority states such as Maryland, New York, Nevada, New Mexico and California strongly supported Obama.
A more parsimonious explanation which corresponds better with the observed pattern than the ethnic-diversity-and-redistribution literature is that whites in conservative states voted against Obama, and whites in liberal states voted for him, with little connection to the racial makeup of the state.

A second graph plots per capita spending State and Local spending in 2007, from U.S Census State and Local Government Finances, with the share of state population that are non-Hispanic whites.


Contrary to the prediction of Alesina-Glaser, the overall effect appears to be that states with more minorities spend more per capita.

Thus minority states such as D.C, California, Maryland, New York, Illinois, New Jersey and even Louisiana and Mississippi stand out as spenders, whereas white states such as New Hampshire, South Dakota and Idaho spend the least.

While this is not definitive evidence, I believe points 2-4 tend to dominate point 1, so that the net effect of more diversity is bigger government and less solidarity. At the very least, points 2-4 should be taken into account in the ethnic-diversity-and-redistribution-literature.

P.S

A reader suggested I include my RSS-Feed. I belive it is:

http://super-economy.blogspot.com/feeds/posts/default?alt=rss

Does the United States have a Revenue problem or a Spending Problem?

There is a debate about the causes of the record deficits in the United States. Republicans argue that we have a "spending problem", by which they mean spending is increasing too fast, while the left argues that we mainly have a "revenue problem", by which they mean taxes are too low.

The outcome of this debate will determine whether the most reasonable solution to the structural deficit will be tax increases or slowing the growth of spending. President Obama and liberals such as Paul Krugman like to give the public the impression that the deficit is entirely or to a large extent caused by Bush tax cuts for the wealthy (which is false, since Obama's proposed tax increase on the rich would only collect 0.3% of GDP). If that were the case, the most fair solution to the deficit would be - as the President put it - to raise "a little bit more" revenue from the rich.

It is easier to motivate tax hikes if you convince the public that the deficit was caused by tax cuts, rather than by an unparalleled expansion in spending.

When Republicans such as Paul Ryan say that the deficit is caused by a spending problem, they mean that once the recession is over, a federal tax revenue target of 19% of GDP (the historical average for the U.S) is sufficient to finance federal spending if spending is also kept at historical levels. Throughout, keep in mind that we are talking about Federal revenue and expenditure, the U.S public sector spends about 40% of national income if states and municipalities are included.

Slate columnist David Weigel attacks the Paul Ryan argument. His evidence is that revenue in 1981 was higher than later years of the Reagan presidency, which according to him proves that the Reagan tax cuts reduced revenue. Weigel is wrong. Revenue is highly volatile, because a lot of it depends on corporate profits, capital gains and other variables determined by the business cycle. Weigel is simply cherry-picking the year, 1981 was one of the highest revenue years in post-war history.

Similarly liberals like to pick the peak of the IT-boom at 2000 as the norm, where 20.6% of GDP was collected as revenue, even though it was the highest year in post-war history, and the second highest in American history overall. The highest year was 1944 during World War II, when Federal revenue briefly reached 20.9% of GDP.

In order to give a better picture, I have plotted the average revenue, deficit and spending as a share of GDP for all presidential terms in the post-war period.


First, this exercise shows us that Weigel is mistaken. Tax revenue during both Reagan terms was virtually identical with the Carter years, even though Reagan cut tax rates dramatically.

Second, revenues during the second Clinton term, the highest of the post-war periods, was 19.9%, only a little higher than the 19.0% level Paul Ryan has suggested (which liberals claim is far too little).

Lastly, President Obama has increased spending to levels never witnessed in American post-war history.

Let's move to President Obama's budget, as calculated by the esteemed Congressional Budget Office.

The President likes to give the impression that the deficit debate is about repealing the tax increases for the wealthy. But let us imagine what would happen if revenue during the coming years would be what is was during President Clinton's second term, long before the Bush tax cuts. During those years revenue was 19.9% of GDP.


The overwhelming majority of Presidents Obama's budgeted deficit would remain even if he collected Clinton-era record revenue. By the end of his term, when the recession is projected to be long over, 80% of the deficit caused by President Obama spending plan would remain even if we assume Clinton-era record revenue.

This is not strange, since during the second Clinton term, federal spending as a share of GDP was 18.8%. President Obama has already increased spending to levels unheard on in peacetime. Federal spending with Obama's budget will be 23.4% in 2016, when the recession is projected to be completely over. These numbers show us that President Obama and his defenders cannot use the recession as an excuse for their expansion of government and the immense deficits it is causing.

Clinton-era record revenue would be nowhere near enough to fund Obama-era record spending.

I want to illustrate a final point. Let's ignore the Obama years, and focus on the long run deficit. The figures for spending are from the Long Term Budget Outlook, again calculated by the Congressional Budget Office. These figures take into account the projected increase of Medicare, Medicaid and Social Security spending. This is primary spending, which means that interests on the debt is not included in spending, the numbers would look even worse if we included these.

Let us also be more generous to the left. Instead of assuming revenue for the highest presidential term, let's assume revenue for the record year. As pointed out previously this was the boom year 2000, where revenue was 20.6% thanks to unusually high capital gains and corporate profits.

This picture illustrates what would happen if Federal revenue as a share of GDP increased to the record high of the post-war period and remained there forever, and we continued at the currently projected levels of Federal expenditure.


Because of ever expanding government, the deficit would explode even when assuming record levels of revenue, with the debt growing to several hundred percent of GDP. Jon Stewart was therefore misleading his trusting and economically unsophisticated viewers when he showed them a graph where the deficit appears to vanish if only the Bush-tax cuts were repealed.

The only reasonable conclusion that the United States primarily has a spending problem, not a revenue problem. It is the expansion of the government - some already carried out by Obama, some projected to occur - that is causing the long term structural deficit to grow beyond control, not a reduction of revenue caused by lowering the taxes on the rich.

If liberals want to argue that government spending is too low, and that we should increase it for reasons of social policy and raise taxes to pay for it, they should feel free to do so. But please do not claim that the long term deficit is primarily caused by taxes being too low relative to historical levels, because that is simply not true.

The rich in Europe are poor.

Most of the focus of the policy discussion is the income of the poor and working class. As I have written previously, the American working and middle class is economically better off than their European counterpart. The poorest five percent have it better in Sweden compared to Swedish-Americans, whereas all other income groups earn more in the United States.

It is reasonable to focus on the well being of poor as a central measure of fairness and overall well being in a country. However, this focus can go to far, the poor are not the only group in society.

Today I want to discuss a different social group, the currently much maligned top ten percent of income earners. The group includes managers, successful business owners, professionals such as lawyers, doctors, consultants, civil engineers and also workers without a college degrees who are very good at what they do.

There are several reasons why we should care about the rich and upper middle classes.

The top percent of income is a non-negligible share of the population whose well being shouldn't be ignored just because they score low on the victimhood scale. Keep in mind that the share of the population who will be in the top ten percent at some point in their life-cycle is much higher than ten percent. The right over-exploits this argument (obviously not everyone has an equal chance of becoming rich, and many in society have close to zero opportunity). However the completely static view of the left is also an exaggeration.

More importantly, creating an environment where the most productive in society have incentives to acquire a lot of human capital, work hard, put their carrier ahead of leisure, work intensively and if necessary with unrewarding tasks, take risks and aim for the top is good also for everybody else.

* The more the high-skilled earn, the more we can tax them and fund welfare for the poor. According to the OECD, the top ten percent of American income earners pay 45% of taxes (this includes payroll taxes). In Sweden, the corresponding figure is only 27%, and in France 28% . Wouldn't ordinary Swedes be better off if our most talented worked more and paid more taxes?

* When you put a lot of skilled people together in knowledge industries and entice them to work hard, productivity appears to go up exponentially. This is what we observe in cities such as New York, and in elite organizations such as Mckinsey, Google or Harvard. These high-skilled individuals and organizations create a great deal of so-called innovation spillovers. The people who developed the microprocessor thus only captured a small fraction of the societal value created as private wealth. This is one reason I believe the standard estimates underestimate the negative effects of taxes on the economy, since they neither include innovation and knowledge spillovers or the effect skilled people have on the productivity of other skilled people.

* The high-skilled likely not only raise the productivity of each other, but also of the rest of society. When someone created a new venture he or she raises the productivity of the people hired. Similarly good managers are needed for companies to be productive.

* Lastly the high-income raise the wages of the poor by bidding up demand for their labor. Thus busboys in the U.S earn much more than busboys in El-Salvador, even if they perform the exact same task. The left tends to become angry whenever you point this out, although I have never seem them offer any arguments why this simple implication of economics doesn't hold.

Needless to say, raising the labor supply of the high-skilled generally does not imply theft from the poor. If a doctor or civil engineer postpones retirement for one year and earns more, that reflects more value created, not exploitation. There are examples when the high-skilled earn "rents" rather than create value (such as many lobbyist) or engage in zero-sum activity (some but far from all people in finance), but this is a minority of overall economic output of the professional classes.

We should be honest and admit that skilled professionals contribute more to society than the bottom ten percent. However I also believe that those at the top tend to have had a more privileged life and hence should feel a stronger social obligation.

In would guess that the behavior of the top ten percent is one of the most important reasons for the success of the U.S economy compared to that of Europe. Highly skilled Americans work crazy hours, are professional and motivated, and tend to be quite good at what they do. Probably mainly due to lower taxes and a better business climate, the top ten percent earn far more in the United States than in Europe.

An exciting new database by economists Facundo Alvaredo, Tony Atkinson, Thomas Piketty and Emmanuel Saez amongst others has data on the income level of the tenth percentile for several countries. This measure, P90, is the level of income that would make someone richer than exactly 90% of the population.

I have adjusted the figures for inflation and PPP based on OECD data. For a couple of countries the data was a few years prior to 2005, so I assumed their income share remained constant and their income increased with GDP.

These are not perfect estimates, because the data comes from different sources, have different units and different standards, you should just view them as illustrative. These are pre-tax income. Payroll taxes are not included, nor is employer funded benefits such as health insurance and pensions. These are mainly based on the statistics gathered by the tax-agency, so unreported income will not be included.


In 2005 the P90 threshold in the United States was $105.000, which means that ten percent of Americans had income at or above that level.

The same year the P90 threshold in Sweden was $43.000 (37700 kr), so if you earned this paltry sum you were among the top ten percent highest earners. In fact, less than 1 percent of Swedes earn more than $100.000 per year, about 880.000 kronor per year purchasing power adjusted.

This is confirmed by the Swedish Statistical Agency, which reports that in 2005 there were 61.000 Swedes who earned more than 800.000 kronor per year, or merely 0.8% of the adult population. 10.2% earned more than 360.000 kr, which again indicates that the figures are almost identical to the Top Income Database.

No doubt, those at the bottom are better off in Sweden than in the United States. However the middle class in Sweden is still somewhat poorer than the middle class in the United States, while high-skilled Swedes are far poorer than high-skilled Americans.

I don't think having few poor people requires us to keep the rich down. The left considers the relative poverty of the top earners in Sweden a good thing for Sweden, while I believe it is a problem. The comparative poverty of the rich is problematic both from the perspective of those hired by entrepreneurs, those who benefit from new technologies and products developed by skilled workers, those who sell their goods and services to the rich and not the least from the perspective of tax collection and the welfare state.

Open borders and the Welfare State

Today I write an article about classical liberal theory and compleatly free immigration in Svensk Tidskrift, a journal tied closely to the center-right Swedish Moderate Party. The text is in Swedish. It is pushing the boundaries of what is permitted to say in Sweden and may get me into trouble, but I made the choice to take the hit, hoping for intellectual honesty from those who disagree with me.

My hope is that as someone who grew up for ten years on welfare, who lived close to two years in refuge camps and the rest of his childhood in so called "Millionprogram" housing, in foster-care and "ungdomshem", who in school was physically assaulted several times by skinheads and Neo-Nazis, who had Neo-Nazis come to his home and yell "sieg heil" in the buzzer, who lived in 99% immigrant Ronna while he commuted an hour and a half each way to Handelshögskolan, I can get away with a tiny bit more on this contentious topic than a blond bourgeoisie Swede would.

I argue against open borders in a modern welfare state based on classical liberal principles.

First I demonstrate that unskilled immigration to current welfare states has led to sizable transfers of wealth from and reduction of freedom of the current owners of the state. These owners are of course citizens, needless to say regardless of race or ethnic origin.

Libertarian theory which is used to derive the principle of completely free immigration tends to make the unrealistic assumption that the welfare state and voting rights over the properties of others do not exist. Libertarians sometimes acknowledge the problem of combining a welfare state and open borders, but proceed to declare that they support open borders and no welfare state.

I argue that this is a logically flawed proposal.

Immigrants from third world countries tend to earn less than for example native Swedes or Americans, and furthermore tend to come from countries with no tradition of classical liberalism.

Hence 77% of non-European immigrants voted for the left in the 2010 election, a year when only 43% of native born Swedes voted for the combined left. In the United States whereas only 35% of whites prefer raising taxes and expanding government, the figure is 65% for Hispanic immigrants and 66% for second-generation Hispanics.

These patterns are completely rational, immigrants earn less and unlike Anglo-Saxons have no traditional preference for limited government.

The way immigrants vote and their political preferences cannot simply be assumed away in any serious ideological discussion.

Open borders in a affluent welfare state leads to unskilled immigrants soon becoming the majority of the voters. Since unskilled immigrants in the reality we live in generally do not support libertarian style limited government, the Sanandaji Principe states that you can only pick 2 out of 3 of:

1. Limited Government
2. Open Borders
3. Democracy

Even if Swedes and Americans abolished the welfare state tomorrow (something which I would oppose), with open borders the welfare state would reemerge as soon as the immigrants became the majority of voters. Ignoring the voting patterns of immigrants when you propose abolishing the welfare state and fully opening borders is subsequently a violation of the Lucas Critique. Open borders and an abolished welfare state can only be combined in a nightmare society where immigrants and their children are never allowed to vote.

For me the choice is simple, I prefer Democracy to Open Borders. If a country decides to take immigrants, they have to be included 100% with full rights, and not permanent second-class citizens.

The three most important Libertarian intellectuals of the last century who thought deeply about the subject all concluded that open borders in our societies with welfare states was a bad idea.

Friedrich Hayek thus wrote ”a recognition of collective ownership of the resources of the country which is not compatible with the idea of an open society”. The minimum standard of living that Hayek believed the state should guarantee even its poorest citizens ”necessitates certain limitations on the free movement across frontiers”.

Milton Friedman also recognized this, and stated ”You cannot simultaneously have free immigration and a welfare state”.

Late in his life, Robert Nozick become skeptical about open borders, saying (in an interview with a libertarian Swedish journal no less!): ”Why do we not have completely free immigration everywhere? One reason is the welfare state".

Swedish Libertarians such as Johan Norberg, Mattias Svenssson and Henrik Alexandersson by contrast support open borders combined with keeping or if need be expanding the welfare state. Thus Norberg, Svensson, Alexandersson and others in the "Frihetsfronten" who for decades fought to abolish tax financed health care and schools for Swedish citizens supported the recent decision to grant the same services to illegal immigrants. Mattias Svensson's comment on this historic expansion of the Swedish welfare state in scope to potentially the entire planet was "This is what solidarity is about". Johan Norberg similarly gave the decision a thumbs up in his column.

Remember, a simple libertarian solution would have been to allow illegal immigrants to pay for health care and education services out of their own pockets, just as Frihetsfronten wants Swedes to do. But being pro-immigration has become so important for Swedish libertarian identity that they are cheering expanded welfare state services for illegal immigrants. If you wanted to be unkind, a suitable name for this novel ideology would be Libertarian-Socialism.

Limits on free migration is not just an arbitrary state construct, it is necessary to uphold ownership rights imposed by owners (citizens), just as a fence is necessary to uphold private property. Organizations such as condo-associations who produce social externalities for their members and make decisions about collective matters always limit membership. Since we have chosen to organize ourselves in a nation-state and grant some rights over our lives to fellow citizens, we need to restrict who has coercive power over us. Borders are limits on expanding the necessary-evil which coercion through voting represents.

Voting rights of citizens over common decisions and collective assets should therefore best be viewed in this context as form of property. If you accept this premise, abolishing borders in a modern welfare state is a form of socialism, just as abolishing fences would be. Note that both private property and citizenship rights evolved gradually through the spontaneous order and were not "created", that both serve to increase societal efficiency, and that both are common to all modern societies. Libertarians should remember that that private property also limits free mobility. This theoretical view confirms with reality, where the consequence of unskilled immigration to the welfare states such as Sweden have been an expansion of government and a reduction of the freedom of the existing citizens.

Classical Liberals should take after Hayek, Friedman and Nozick and think deeply about these issues. The discussion should take real world empirical patterns into account and use a richer model than the simple neoclassical model with assumes away voting, the public sector and social externalities. We have to first have a theory of what a nation-state is, what citizenship is and what voting rights are, before we propose to abolishing these rights through open borders.

P.S

I had to cut parts of my article [In Swedish] due to space limitations, so I will put it here:

"Ett något tyngre vägande argument än det ekonomiska är att invandring gjort Sverige kulturellt rikare. Men även det påståendet brister. Visst har Sverige berikats enormt mycket av globaliseringen. Men dessa extremt viktiga influenser utifrån har till överväldigande del inte kommit genom invandring, utan genom utbyte av information (och i mindre utsträckning genom handel). Steve Jobs och Jerry Seinfeld var inte tvungna att flytta till Sverige för att vi skulle kunna påverkas av dem.

Det land som Sverige utan jämförelse har tagit mest kulturella influenser ifrån under efterkrigstiden är USA, ett land som vi har få invandrare från i Sverige. I jämförelse är de kulturella influenserna på vanliga svenskar från t.ex. Afghanistan, Irak, och Somalia i det närmaste noll. Sverige har visserligen fått matinfluenser från Mellanöstern, men vi har också fått ännu större matinfluenser från Frankrike, Japan, Thailand och Indien, utan att ha någon omfattande invandring från dessa länder.

Med tanke på att matkultur består av information och råvaror är detta egentligen självklart, på grund av frihandel och informationsrevolutionen behövs det ytterst få individer för att sprida matkultur. Italiensk och fransk matkultur har i och med globaliseringen erövrat hela världen, utan någon storskalig utvandring. Johan Norberg påstod nyligen att Sverige inte skulle ha haft olivolja eller espresso i affärerna utan invandringen. Detta är fel – trots allt finns olivolja i t.ex. finska mataffärer, trots att Finland haft avsevärt lägre invandring än Sverige.

Om invandring inte stärker Sveriges ekonomi, är det åtminstone inte det bästa sättet att hjälpa andra till ett bättre liv? Svaret är tyvärr troligtvis nej. För det första är tredje världens problem för stora för att lösas av invandring, invandringen till väst är en droppe i havet satt i relation till totalbefolkningen i dessa länder. Inget land har i modern tid blivit rikt på att dess invånare flyttat utomlands. Kina och Indien började i slutändan inte utvecklas genom extern utvandring, utan genom interna liberala reformer (precis som i Sverige på 1800-talet, all romantik kring utvandringen till trots). Inte heller är invandring effektiv biståndspolitik. Sverige skulle kunna rädda miljoner liv med mat och medicin för de stora summor invandringen kostar.

Det går inte att täcka in alla aspekter av ett så brett fenomen som invandring i en artikel. Jag är kanske något mer ensidigt pessimistisk än jag borde vara. Å andra sidan är det ytterst sällan sakliga negativa argument lyfts fram på ett samlat sätt. Invandringspolitikens inverkan på samhället börjar nu bli så pass påtaglig att det inte längre räcker med att konstatera att ”som liberal är jag givetvis för en generös invandrings- och flyktingpolitik”."

Doing the math: President Obama's plan to tax the rich will hardly make a dent in the deficit

The President will give a speech tonight on how he plans to solve America's deficit problem by taxing the rich.

From a distributional point of view, I have nothing against taxing the rich. Further, while it true fact that taxes tend to shrink the tax base (the only question is how much), let's ignore the Laffer-curve controversy. Let us instead accept the left's own calculations about tax revenue.

The centerpiece of President Obama's plan is to raise taxes on the rich (households making $250.000 or more). There is no doubt that the rich have become richer over the last few decades, and hence could afford this tax increase. If taxing them would solve the deficit crisis, I would support it in a heartbeat.

The only problem with this "solution" is that it is dishonest. President Obama likes to give the impression that his plan to tax the rich can significantly reduce the deficit, a claim which is false and which Obama knows is false.

Everybody knows that the rich have a lot of money, so it may appear reasonable to non-economists that taking some this wealth can fill the hole in the budget. What the public doesn't know, and what President Obama will not tell them, is that there are just too few rich people in America for this plan to work.

According to the Congressional Budget Office, over the next 10 years the Obama budget will produce a deficit of $10.900 billion, or 5.3% of GDP on average.

According to the left's own calculations and as reported by the New York Times, Obama's plan to raise taxes on the rich will generate $700 billion in additional revenue over the next decade, or just a pathetic 0.3% of GDP.

In other words, the plan to raise taxes on the rich will only cover one out of fifteen dollars of deficit spending. Where is President Obama going to get the other fourteen out of fifteen?

To the $10.9 trillion in deficits we need to add the unfunded liabilities of Medicare and Social Security. According to the Trustees of these programs, the unfounded liabilities are a staggering $52 trillion.

Again, any honest economist who knows the facts can tell you that a measly 70 billion in revenue per year from the rich will not come close to cover Americas fiscal hole of at least 63000 billion dollars.

Sometimes you hear from the left that repealing the Bush tax cuts will raise 3.7 trillion over the next 10 years. That certainly sounds better! What is the difference between this figure and the 0.7 trillion figure I reported for the rich?

The answer is that the 3.7 trillion figure includes the Bush tax cuts for the middle class, which amount to 3 trillion over the next decade. The key to remember is that the Bush tax cuts mainly went to households making less than $250.000. Obama has no plan to repeal that part of the Bush tax cuts. The Democrats and their allies in the media who cite the 3.7 trillion figure are playing bait and switch and trying to confuse the public. I saw this trick used recently by John Stewart to deceive his economically unsophisticated audience.

A graph with the next ten years of deficits with and without the tax hike for the rich:


But what if we taxed the rich even more? Didn't Warren Buffett promise taxing the wealth of billionaire's like him could solve the problem or something?

Forbes Magazine lists all American billionaires. Going by their 2010 numbers, American billionaires have around 800 billion in net worth.

Even if we could take confiscate all their assets without any risk to the economy, this one-time solution would just pay for around six months of the 2011 deficit Obama is running.

By opposing the tax increase for the rich based on the argument that it would hurt growth instead of pointing out how little revenue it generates, the Republican party has given President Obama a gift. The Democrats give voters the impression that the only obstacle in the way of fiscal balance are the Republican's, their rich friends and their supply-side ideology. This strategy works, because the public is as economists say "fiscally ignorant". Ordinary people simply don't know the relative magnitudes of the deficit, they only know the rich have lots of money.

The media meanwhile has only a selective interests in educating the American public. When miss-perceptions help the left the media suddenly loses interest in their duty to inform the policy debate.

Red State Rising

Richard Florida is a urban theorist, famous for his book "The Rise of the Creative Class". The book argues that since liberal cities with a large concentration of high-tech industries such as San Francisco and Boston have plenty of street musicians and gay bars, street musicians and gay bars must be causing the high-tech sector.

Because of its politically correct message, the book is popular among politicians and in the media. But due to the unsubstantiated claims of causality and shaky statistical evidence, it is not very well respected among economists. Harvard professor Edward Glaser reviewed Florida's statistical analysis, and found that Florida's correlations vanish or even reverse signs once you simply take the level of education in a city into account.

Richard Florida is back with an attack on conservative America in The Atlantic. He writes:

"Conservatism, more and more, is the ideology of the economically left behind. The current economic crisis only appears to have deepened conservatism’s hold on America’s states."..." American politics is increasingly disconnected from its economic engine [liberal states]. And this deepening political divide has become perhaps the biggest bottleneck on the road to long-run prosperity."

Is conservatism the ideology of losers? Is the Republican Party the party of those who cannot make it on their own in the marketplace, and are hence bitter? Are liberal states the "economic engine" of America?

Well, let us start with the fact that a "state" doesn't take an ideological position, individuals do. Although rich states tend to vote Democrat, within states the richer you the more likely you are to vote Republican. So while Mississippi is poor, the poorest groups in Mississippi are Democrats. This is true for whites as well as minorities. This paradox been established by Columbia University's Andrew Gelman (whom Florida cites, so he can't be unaware of it).

Overall, the within state tendency of the economically successful to vote Republican is far stronger than the between state tendency of rich states to vote Democrat. In the United States, it is still true that the economically successful are more likely to vote for free-enterprise Republican and the unsuccessful to vote for welfare-state Democrats.

In 2008 in Georgia 70% of the voters who earned less than $30.000 voted for Obama, whereas only 40% of Georgia voters who earn more than $100.000 voted for Obama. The affluent in Georgia are Republican, whilst Democrat voters are those who are dragging down the state average. In Mississippi 66% voters who earned less than $30.000 voted for Obama, compared to only 23% of high income voters.

In poor white West Virginia, Obama got 62% of those making less than $30.000 but just 39% of those making more than $100.000. In other words, those WV Appalachian "Rednecks" that the media loves to demonize and portray as Republicans on closer observation turn out to vote Democrat. I could go on, the pattern is the same across all Red Stats.

This paradox that poor states vote Republican while poor Americans vote Democrat may be too subtle to understand for journalists, foreigners and causal observers of politics. We should however expect a professor writing in the Atlantic to make the effort. But of course we know why he didn't. The liberal audience of the Atlantic likes to be told that they belong to the party of wealth and success, while Republican voters are losers. Why spoil a good story with facts?

Let's go from states to the national averages. This is how individuals voted in 2010.

Of American voters who earn less than $30.000 per year 40% voted Republican, and the rest for Democrats.

Of Americans voters who earn more than $200.000 per year 64% voted Republican!

Does the Atlantic seriously want to claim that people who makes more than 200k per year are "economically left behind"?


None of this is really new, although Professor Florida apparently needs the reminder. Let's more forward to Florida's claim that liberal areas are the "economic engine" of America.

Red States, by which are mean states that voted for Bush in 2004, are on average poorer than Blue states, mainly due to having more poor Democrats.

However, during the last few decades the less regulated and taxed Red States have had faster growth than Blue states. According to the Bureau of Economic Analyses Regional Economic Accounts Between 1970 and 2010, real output increased by an average of 3.4% per year in Red States compared to 2.6% per year in Blue States. The real per capita growth rate of personal income in the Red States was 2.0% per year, compared to 1.8% per year in Blue States.


The graph below shows the convergence of per capita income. Note that this does not adjust for the cost of living, which is lower in Red States. One reason Red States have been growing faster is that they started at lower levels and are converging. Another likely explanation is pro-growth economic policies.


Job numbers in Republican states are even more impressive. Red States have been creating far more new jobs than Blue States. Part of this is that Red States have had enjoyed a better economic climate and consequently have been attracting more people over this period. Americans are voting with their feat, leaving Blue States for Red States.

The most striking number is that between 1990 and 2009 the Red half of America created 24 million new jobs, compared to only 12 million new jobs in Blue States. This means that Red States created two thirds of all new jobs in the United States between 1990 and 2009. These are the very states which Richard Florida claimed were increasingly falling behind. The Blue States, which Florida calls the "economic engine" of the United States, not only had lower income growth, but only added half as many new jobs as Red States.


Richard Florida's claims in the Atlantic may confirm liberal stereotypes, but have little support in economic data.

David Brooks and Malcolm Gadwall wrong about I.Q, Income and Wealth

In his book "The Social Animal", reviewed here, David brooks writes:

"Once you get past some pretty obvious correlations (smart people make better mathematicians), there is a very loose relationship between IQ and life outcomes."

Brooks further cites a study claiming that there is "no correlation between accumulating large wealth and high IQ."

Both claims are wrong. The result Brooks cites is after "controlling" for education and income. But education and income are themselves functions of I.Q, so you shouldn't control for them if the question you want to answer is how I.Q effects life outcomes.

I have not seen this graphed online, so let's visualize the relationship between an estimate of I.Q and income and wealth so you can see for yourself. The source is NLYS79, a dataset which tracks a representative sample of the U.S population. Intelligence is approximated by the military when the individuals in the sample were mostly teenagers, while income and wealth data is for the same guys in their 40s. The sample is restricted to non-Hispanic white men.

For this group the lowest decile is people with I.Q below 84, and the highest decile above 116, which is not a very high cutoff. So keep in mind that we are not talking about only super-geniuses, in which case the results would be even stronger. Also remember that the middle of the distribution have very similar I.Q scores, the 5th decile is around 101-104, and the 6th decile around 104-108.

As you can see Americans men lucky enough to be born either with genes or a home environment that facilitates high I.Q earn more and accumulate more wealth.




The strong link between I.Q and earnings is well known by labor economists, but perhaps not by the affluent and high-I.Q readers of the New York Times. Obviously most of it goes through education. As technological development makes I.Q more valuable and unskilled labor less valuable, this disparity is increasing.

Another common claim of Brooks and of Malcolm Gladwell is that I.Q may matter, but only until around 130, after which it becomes meaningless. This is also wrong. Many previous samples have had too few observations to make reliable inference about the effect of I.Q above 130. Of course not having sufficient data hardly justifies Gladwell confidently claiming that I.Q above 130 is irrelevant even for scientists in technical fields (which I and others who are not smart enough to handle advanced mathematics could have told you from personal experience was a bizarre theory). After all, 130 is not that high, around the mean for a Harvard or SSE student.

This recent paper by Heckman, Gensowski and Savelyev studies the life outcomes of the Terman sample, which entirely consists of American men and women with I.Q above 135 (in some cases far above 135). They find that I.Q has a significant effects on earnings and educational outcomes, also for those above the 135 I.Q threshold. Another Malcolm Gladwell myth busted.


There are some policy implications from this realization. One is that smart and successful people shouldn't congratulate themselves so much. They didn't so much "earn" their talent than were lucky in the gene/environment lottery. If you are born healthy, with high I.Q genes and with educated parents and a good home environment you are expected to earn more than a more disadvantaged child who exerts the exact amount of effort through life.

Unlike libertarians, Conservatives believe that those who were the recipients of good fortunate have a moral obligations towards the rest of society, in particular to the people who do their best but just have less marketable skills.

Another is that the left is wrong about the market allocating income mainly based on chance, connections or "power". In fact, earnings are strongly linked to intelligence, which indicates that they are linked to productivity, just as economic theory predicts. Poor people are on average less productive than rich people, a claim which may sound obvious (almost tautological) to an economist but which outrages a lot of people on the left.

Denying the link between productivity and earnings is very important for the modern left, as their entire source of outrage is based on the view that the capitalist system "exploits" the poor. More likely, because of the modern welfare state and because of the growing importance of human capital, more resources are transferred from the productive rich to the poor than vice-versa. There is so little demand in the labor market for unskilled people that the poor in industrialized countries increasingly don't even work full time.

The fact that the rich don't exploit the poor doesn't mean the rich shouldn't help the poor. But it's one thing to claim you are rich because you are stealing from poor people, and another to believe you have an obligation to help all members of society due to randomly having being granted more valued skills. Fairness perceptions are not only a function of the type of distribution we desire, but to an even greater extent a function of the process we believe creates inequality.

I suppose David Brooks and Gladwell give an inaccurate impression about I.Q and income/wealth in order to make their readers feel warm and fuzzy. But that is not an accurate depiction of the world we live in, we live in a much harsher and more unfair reality.

The "Mystery" of Child Poverty in Sweden.

Yesterday Håkan Juholt, the new leaders of the Social Democratic party, gave his opening speech to the party congress where he outlined the future direction of policies.

Juholts chief identified social problem and number one priority was child poverty. He stated:

"We will not be a country where several hundred thousand children live in child-poverty. It is a shame for Sweden...It only belongs in [conservative leader] Reinfeldt's Sweden, not in Social Democratic Sweden".

Child poverty is measured by non-profit group "Rädda Barnen", and is defined as either children in families who receive welfare ("socialbidrag") because they are below the poverty norm defined by the state, or children in families who live below the poverty norm but for various reasons do not receive welfare. I would therefore have been counted among the sample of poor children between 1989-1999 when we lived on welfare.

It is therefore a reasonable measure that approximates absolute child poverty (although welfare payments and these minimum norms increase slightly over time in real terms).

The standard critique of the right is that these measures are relative poverty which can give misleading results. For example with relative poverty the poverty rate could bizarrely rise even if when the real income of the poor increases, just as long as the real income of the rich increases even faster. However this critique is not valid here, since the measure is closer to absolute poverty. This is incidentally also true of the American poverty rate, which contrary to perception among many libertarians measures absolute poverty, not relative poverty.

First, let's note that child poverty has declined. In 1997 there were 432.000 poor children in Sweden, and in 2008 the number was 220.000 (so Juholt was technically wrong when he said "several" hundred thousand, but let's not be picky). In percentage terms child poverty went from 22.3% to 11.5%.

But Sweden has experienced rapid income growth in the last decade and a half. So why isn't child poverty declining more? Surely it must be due to the heartless neo-liberal policies of the right!

I think this graph can give us some a hint of what's going on.


In 2008 the child poverty rate of Native Swedish children was only one third of what is was in 1997, a massive reduction from 243.000 to 78.000. The only reason Sweden's' total child poverty rate has not declined more is that during these years politicians to the right and the left brought several hundred thousand poor immigrants to Sweden to swell the ranks of the impoverished. While first and second generation immigrants constituted 44% of the poor children in 1997, they were 65% of all poor children in Sweden in 2008.

Only 5% of native Swedish children live in poverty. For immigrant children with both parents born outside of the Sweden, the child poverty rate is 39%, a miserable number which may shock and should dishearten liberal Americans. The Swedish model appeared to produce amazing results as long as the country was completely homogeneous and full of Swedes. But the much admired welfare state was unable to deal with even moderate levels of ethic diversity (still far below the levels of the United States) without a collapse in social outcomes.

Demographic change, not economic policy, is what is preventing child poverty from declining (if it were the fault of economic policy the child poverty rate of ordinary Swedes would not have declined so much).

The leader of the Social Democrats said "Child poverty shall be combated every day and with all available means!"

One fool-proof method would be slowing the importation of tens of thousands of more poor people every year until he has solved child poverty among Swedes and immigrants already here. I am guessing however that this is not among theoretically possible "available means" in Mr. Juholt's universe.

On the Swedish voucher system

Swedish test-scores are deteriorating, both among native Swedes and immigrants.

The left is blaming this on Sweden's popular system of vouchers. The Swedish private schools ("friskolor") are funded by public vouchers but privately owned and managed, which the left dislikes. In this article for example "ideological...market-experiments" are accused of having caused a decline in the "level of knowledge in schools".

However if we look at PISA-test-scores 2000-2009, it is apparent that 8th-grade test scores are dropping like a rock in public schools, but actually increasing in private schools.


Between 2006-2009 the results fall declined in private schools, but even during this period they fell more in public schools. It is sometimes argued that the higher test-scores of private schools in Sweden is due to grade inflation. However the PISA scores are internationally standardized, so they are a fair metric.

Keep in mind that there may be composition changes going on here, which the averages don't tell us about. It is also theoretically possible that the decline in public schools is caused by private schools. One claim of the left is that if the smart and motivated kids leave, the other children become worse students. The Swedish left also accuses private schools of draining public schools from resources, which go towards detested profits. However it is unlikely for several reasons that pubic school failure is the fault of private schools.

First, the private school sector remains small, with less than 10% of 8th graders tested by PISA in 2009.

Second, in Sweden private schools cost taxpayers 8 percent less per public on average than public schools, so they are not draining financial resources. The average profit margin of all Swedish private schools is only 5% (and much of this is the return of injections of capital into the schools).

Third, studies seem to indicate that there is little sorting in Swedish private schools, that is to say it is not mainly the richest or brightest kids who go to private schools. (e.g Böhlmark and Lindahl, 2007, 2009).

Lastly international research has generally failed to detect a negative effect of school choice on those who stay behind. (having more girls in your class may help, but that's another issue).

Studies of school choice suffer from methodological problems, because children who choice private schools may be different in ways we cannot control for. Therefore probably the best study are those like this one, which uses lotteries. There is no comparable study for Sweden. They generally find that school choice does not lower outcomes, contrary to the claims of the Swedish left. While they also don't detect major increases in test scores, they detect improvement in outcome variables such as arrest rates.

Voucher funded schools have more satisfied teachers and parents and students. They cost less for taxpayers. They don't appear to hurt public schools. In addition, they have been improving their test-scores in a period where public schools scores are declining.

Despite all of this, the Social Democrats blame the crisis of Swedish education on private schools, even though it is the 90% or so of children in public schools who are doing particularly poorly, and even though they present no evidence whatsoever that this long term decline is caused by private schools. If anyone is being blindly "ideological" on this issue, it is the left. This is especially clear with regards to their emotional aversion to and overestimation of profits.

Having written all this, let me criticize the right.

This will pain them to learn, but they are putting too much faith in private schools, and too much weight on test scores in evaluating private schools. The sad truth is that test-scores are mostly determined by I.Q and home environment, not by which school you attend.

Let me show you this depressing graph from a recent paper by James Heckman for white children in the U.S:


You will notice that gaps in child test scores emerge early (age 3) and persist through age 18. Schools contribute little to closing these gaps.

The Swedish right has accepted the quasi-Marxist view of the left and liberals, which is that people are blank slates, that ability is equally distributed and that schools consequently can easily raise cognitive skills.

The left deludes itself into believing society can do this just as soon as we give schools a little more money (meanwhile real spending per pupil has more than doubled in a period where test-scores have declined). The right instead deludes itself into believing in this Utopian vision just as soon as we make schools capitalist (meanwhile decades of private choice in Sweden and Chile have only moderate improvements in outcomes).

It would be one thing if private schools were able to dramatically change the curriculum and drill students like military schools or (horror horror) Swedish schools in 1965. American catholic schools successfully improve the life outcomes of minority students where public schools fail.

While raising everyone's I.Q dramatically through capitalist schools is a fantasy, there is in principle no reason Sweden cannot return to historical test score levels.

But this would require going back to historical curriculum and historical norms. The power vacuum that has emerged in Swedish schools and leads to mini Lord-of-the-flies classrooms has to be filled by adults. Repetition and memorization (both of which do not require the child to have above average I.Q to work) should again become the foundation of learning. The post-modern pedagogic theories taught to teachers in the universities must be discarded into the trashcan of history.

There is a lot of rhetoric from the Swedish right on education reform, but no sign of any of this happening. Making schools private in form without allowing them to depart from the current curriculum is not going to magically fix the problems. This faux-capitalism would not truly utilize the advantages of free-enterprise, and making promises you cannot deliver on will only discredit capitalism among the public.

If the right keeps promising better education outcomes without fixing the core problems voters will sooner or later wise up and punish them. Education minister Jan Björklund should close the rhetoric to reform gap, either by shutting up or by actually doing something about the situation.