Social Democratic America (16 page)

For another, since the 1970s the impact of innovation on productivity has been partly masked by rising employment. Productivity is calculated as output per employed person or per hour worked. Since employment is the denominator, a significant increase in employment will reduce the measured amount of productivity growth. In the 1950s and 1960s, the share of American adults with a paying job held steady at about 56 percent. In the 1970s, 1980s, and 1990s that share increased steadily, reaching 64 percent at the end of the 1990s before leveling off in the 2000–2007 business cycle.
⁴⁶
This is part of the reason measured productivity growth has been slower in recent decades.

Finally, as countries shift away from fossil fuels toward renewable sources of energy, the world's existing commercial and residential building space will need to be retrofitted or rebuilt from scratch. This promises to be a source of growth for quite some time.

Rapid economic growth is a relatively recent phenomenon, dating from the beginning of the Industrial Revolution around
1750. There is no reason to assume it will continue forever. But nor are there compelling grounds for thinking it will halt anytime soon. Innovation is a product of innate human creativity, education, and an institutional framework that provides financial reward to successful innovators.
⁴⁷
As long as countries such as the United States ensure ample opportunity for learning and don't allow large firms or government regulations to stifle incentives for innovation, we should expect a relatively robust rate of economic advance.

Working-age Belgians, French, and Germans spend, on average, about 1,000 hours a year in paid employment. In the United States, Switzerland, and New Zealand, by contrast, the average is about 1,300 hours. That's a big difference. Is it due to differences in the size of government?

These averages are determined by the share of people who have a paying job and by the number of hours they work over the course of a year. In the United States, for instance, the employment rate in 2007 was 72 percent, and the employed worked an average of 1,800 hours (.72 x 1,800 ≈ 1,300). In France, the employment rate was 64 percent, and the average number of hours worked was 1,550 (.64 x 1,550 ≈ 1,000).
⁴⁸

Because high taxes reduce the financial reward for paid work, they may reduce employment.
⁴⁹
On the other hand, as I noted earlier, some people might work
more
when taxes are higher, in order to reach their desired after-tax income. And lots of other things affect people's calculations about whether and how much to work, including wage levels, employment and working-time regulations, paid vacation time and holidays, availability and generosity of government income transfers, access to health insurance and retirement benefits, the cost of services such as childcare, and preferences for work versus leisure.
⁵⁰

Figure 4.12
shows the association between government revenues as a share of GDP over the years 1979 to 2007 and employment hours per working-age person in 2007. The pattern looks broadly supportive of the notion that high taxes reduce work hours.

But knowledgeable comparativists will notice a familiar clustering of countries in
figure 4.12
.
⁵¹
One group, in the lower-right corner, includes Belgium, France, Germany, Italy, and the Netherlands. These countries, along with Austria, have several features that might contribute to low employment hours. One is strong unions. Organized labor has been the principal force pushing for a shorter work week, more holiday and vacation time, and earlier retirement. These nations are also characterized by a preference for traditional family roles—breadwinner husband, homemaker wife. This preference, often associated with Catholicism and Christian Democratic political parties, is likely to influence women's employment rates and work hours. It is manifested in lengthy paid maternity leaves, lack of government support for childcare, income tax structures that discourage second earners within households, and practices such as Germany's school day ending at lunch time and France's schools being closed on Wednesday afternoons. These countries also fund their social insurance programs through heavy payroll taxes, the kind most likely to discourage employment growth in low-end services.
⁵²

FIGURE
4.12 Government revenues in 1979–2007 and employment hours in 2007

The line is a linear regression line. Government revenues: Average level of government revenues as a share of GDP, 1979–2007. Includes all levels of government: central, regional, and local.
Data source
: OECD, stats.oecd.org. Employment hours: employment rate (employed persons as a share of the population age 15–64) multiplied by average yearly employment hours per employed person, 2007.
Data source
: OECD, stats.oecd.org. The correlation is –.34. “Asl” is Australia; “Aus” is Austria.

A second group consists of the four Nordic nations: Denmark, Sweden, Finland, and Norway. These countries also have strong unions. But they have had electorally successful social democratic parties that promote high employment.
⁵³
Denmark and Sweden, in particular, have led the way in using active labor market programs to help get young or displaced persons into jobs, public employment to fill gaps in the private labor market, and government support for childcare and preschool to facilitate women's employment.

The third group of countries, in the upper-left corner, includes Australia, Canada, Japan, New Zealand, and the United States. These nations have relatively weak labor movements and limited influence of social democratic parties and Catholic traditional-family orientations.

The other five countries—Ireland, Portugal, Spain, Switzerland, and the United Kingdom—are a hodgepodge.
⁵⁴

Based on their institutional-political makeup, we would expect the weak-labor countries to have comparatively high employment hours, the social-democratic countries to be intermediate, and the traditional-family-roles countries to have low hours. As
figure 4.13
indicates, that's exactly what we see.

If we adjust statistically for institutional-political group membership, the negative association between tax levels and work hours shown in
figure 4.12
disappears. Differences in union strength and in preferences for traditional family roles are the likely source of differences in employment hours across the world's rice nations.
⁵⁵

FIGURE
4.13 Institutional-political group and employment hours, 2007

Institutional-political group: See the text for description. Employment hours: employment rate (employed persons as a share of the population aged 15–64) multiplied by average yearly employment hours per employed person, 2007.
Data source
: OECD, stats.oecd.org. The correlation is –.89. “Asl” is Australia; “Aus” is Austria.

Public provision of social services and transfers is paternalistic. Government takes money from us and spends it to ensure economic security, expand opportunity, and enhance living standards. In doing so, it reduces individual freedom.
⁵⁶

That isn't especially objectionable. Only diehard libertarians believe individual liberty should trump all other considerations. Virtually everyone supports government paternalism in the form of property protection, traffic lights, and food safety regulations, to mention just a few examples. And many people support public social programs. When our basic needs are met, we tend to want greater security, broader opportunity, and confidence that living standards will improve over time. We are willing to allocate some of our present and future income to guarantee these things, and we are willing to allow government to take on that task. That's why public social programs tend to expand in size and scope as nations grow richer.

Does a big safety net imply other limitations on economic liberty? No, it doesn't. In fact, a social democratic approach to government can feature a relatively light regulatory touch. In the best real-world examples of modern social democracy, the Nordic nations, government sets basic standards for employee and consumer protections, but it doesn't tell economic actors how to meet those standards. The aim is to maximize individuals' opportunities and to provide security for those who fail (consistent with the spirit of our limited liability and bankruptcy protections) while impinging as little as possible on competition and flexibility. It's big government in one respect and small government in another.

We can see this in some prominent measures of economic liberty. The Heritage Foundation, a conservative think tank, partners with the
Wall Street Journal
to score countries on ten dimensions of economic freedom: security of property rights, freedom from corruption, business freedom (the right to establish and run an enterprise without interference from the state), labor freedom (absence of hiring and firing restrictions and other limitations on work conditions), monetary freedom (a stable currency and market-determined prices), trade freedom (absence of regulatory barriers to imports and exports), investment freedom (absence of restrictions on the movement of capital), financial freedom (a transparent and unrestricted financial system), low taxes (“fiscal freedom”), and low government spending. The vertical axis in
figure 4.14
shows the average scores for the United States and other rich nations on eight of these ten dimensions, with the taxes and government spending dimensions left out. Three of the four Nordic countries score higher than the United States.

A relatively similar picture emerges from the World Bank's scoring of the ease of doing business. Countries are ranked according to how easy it is to start a business, deal with construction permits, register property, get credit, protect investors, pay taxes, trade across borders, enforce contracts, resolve insolvency, and get electricity. The rankings on these aspects of doing business are then combined to establish an overall ranking. The rich countries' positions in the rank-ordering of all countries is shown on the vertical axis in
figure 4.15
. Here the United States edges out the Nordic nations, but not by much. Two of the Nordic countries are among the top four, and the other two are among the top nine.

FIGURE
4.14 Government spending and economic freedom

Economic freedom is measured as the average score for eight items: business freedom, trade freedom, monetary freedom, investment freedom, financial freedom, property rights freedom, freedom from corruption, labor freedom. Each item is scored from 0 to 100. Data are for 2012.
Data source
: Heritage Foundation,
www.heritage.org/index
. Government spending: total government expenditures as a share of GDP, in 2007.
Data source
: OECD, stats.oecd.org. The correlation is –.14 (with Italy excluded). “Asl” is Australia; “Aus” is Austria.