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In my new The Week column, I look at the Bernie Sanders charge — one also leveled by Elizabeth Warren — that the US economy is an immoral, rigged game. (A funny thing to say, I think, about an economy that produces more billionaire entrepreneurs than any other large, advanced economy.) Another stellar effort by me, of course. Yet on second thought, I sort of wish I had focused on this bit of odd economic analysis by socialist Sanders:
You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers when children are hungry in this country. I don’t think the media appreciates the kind of stress that ordinary Americans are working on.
The WaPo’s Jim Tankersley writes that the “literal implication of that last sentence is that there some kind of a national trade-off between antiperspirant/Air Jordan variety and food for children.” Which of course is silly. Demos’ Matt Bruenig thinks there is a deeper point that Tankersley misses: “Whenever someone argues that we should distribute the national income more evenly so as to reduce poverty and inequality (as Sanders does), the very first thing someone says in response is that doing so will reduce growth and innovation. Sanders is mocking this argument, saying he’d gladly cut poverty and inequality even if it meant a reduction in superficial product innovation.”
Again, I am not sure why you would have to micromanage product innovation to reduce child poverty. You could just fatten the Earned Income Tax Credit, for instance, and pay for it by limiting high-end tax expenditures like mortgage interest and health exclusion. But, of course, what this is really about is Scandinavia. Isn’t it always? Bruenig:
It’s harder to know exactly who is the “most innovative,” but to the extent that people try to create such measures, these countries always do quite well. In the most recent iteration of the Global Innovation Index, Sweden (3rd) and Finland (4th) rank ahead of the US (6th) while Denmark (8th) and Norway (14th) are nearby. If entrepreneurship is what gets you excited, then note that, in the years for which there is comparable data, Finland, Sweden, and Denmark have higher enterprise birth rates (percent of companies in a year that are start ups) than the US, though Norway has a lower rate. So, despite a tax level double ours and very generous welfare benefits, these egalitarian countries do not suffer for growth, innovation or entrepreneurship. Although Bernie is amusingly (and reasonably) skeptical of the value of the innovation that high poverty and inequality is supposed to bring us, it’s also true that you can have high levels of innovation and egalitarianism at the same time.
For a different view, here are economists Daron Acemoglu, James Robinson, and Thierry Verdier from their paper “Can’t We All Be More Like Scandinavians?”:
We cannot all be like the Scandinavians, because Scandinavian capitalism depends in part on the knowledge spillovers created by the more cutthroat American capitalism. … Some countries will opt for a type of cutthroat capitalism that generates greater inequality and more innovation and will become the technology leaders, while others will free-ride on the cutthroat incentives of the leaders and choose a more cuddly form of capitalism.
And the 90% top tax rate that doesn’t seem to both Sanders is a lot higher than what they have in Scandinavia these days. More on the Scandinavia issue in my post, “On the left’s dream of turning America into Scandinavia.” It’s also worth noting that some economists see innovation as driving consumer demand, not the other way around. From economist Rick Szostak ( via Ashwin Parameswaran):
While in the short run government spending and investment have a role to play, in the long run it is per capita consumption that must rise in order for increases in per capita output to be sustained…..the reason that we consume many times more than our great-grandparents is not to be found for the most part in our consumption of greater quantities of the same items which they purchased…The bulk of the increase in consumption expenditures, however, has gone towards goods and services those not-too-distant forebears had never heard of, or could not dream of affording….Would we as a society of consumers/workers have striven as hard to achieve our present incomes if our consumption bundle had only deepened rather than widened? Hardly. It should be clear to all that the tremendous increase in per capita consumption in the past century would not have been possible if not for the introduction of a wide range of different products. Consumers do not consume a composite good X. Rather, they consume a variety of goods, and at some point run into a steeply declining marginal utility from each. As writers as diverse as Galbraith and Marshall have noted, if declining marginal utility exists with respect to each good it holds over the whole basket of goods as well…..The simple fact is that, in the absence of the creation of new goods, aggregate demand can be highly inelastic, and thus falling prices will have little effect on output.