Slides for my presentation on Hayekian Welfare States on the summer course "Libertad económica" (http://www.uimp.es/agenda-link.html?id_actividad=62NL&anyaca=2015-16 )

1. Are there Hayekian Welfare
States? Why Some Countries
with Big Government also Have
High Economic Freedom
Andreas Bergh

2. Dimensions of EF
• Freedom from government
• Property rights
• Sound money
• Trade
• Freedom from regulation

3. Correlation matrix for EF-
dimensions

4. Taxes and economic freedom 1970-2000
5
5.5
6
6.5
7
7.5
8
8.5
9
9.5
20 25 30 35 40 45 50 55 60
USA
France
Sweden
Economic freedom
excl. gov. size
Taxratio
1970
2000
1970
2000
1970
2000

6. Huskinson & Lawson (2014) Clusters of economic freedom

7. Why are “social democratic
market economies” doing so
well?
Persson and Rothstein (2011). "Why Big
Government is Good Government.“APSA
2011 Annual Meeting Paper.
Persson, & Rothstein (2015). "It´s My
Money. Why Big Government May be
Good Government". Comparative Politics
47(2)

8. Taxes and economic freedom 1970-2000
5
5.5
6
6.5
7
7.5
8
8.5
9
9.5
20 25 30 35 40 45 50 55 60
USA
France
Sweden
Economic freedom
excl. gov. size
Taxratio
1970
2000
1970
2000
1970
2000

9. What are (supposedly) the
problems with big government?
• (1) Neo-classical answers: Taxes, distortions &
disincentives. Free riding on welfare benefits.
• (2) Public choice answers: Corruption, rent
seeking.
• (3) Hayekian answers: The knowledge problem.

10. Neo-classical answer

11. However…
• Clever design of taxes and expenditure can
(theoretically) minimize distortions
• Nicholas Barr, Torben M Andersen, Peter Lindert
(and many, many others)

12. The equity-efficiency trade-off
• Okun’s leaky bucket
• -> Countries with bigger government that
redistribute more should have
• higher income equality
• but also be poorer.
• Are they?

13. Figure 1: The efficiency-equity trade-off – OECD countries 2008
AUS
AUT
BEL
CAN
CZE
DEN
FIN
FRA GER
GRE
HUN
IRE
ITA
JPNKOR
LUX
NET
NZL
NOR
POR
SLV
SPA
SWECH
UK
USA
50
70
90
110
130
150
170
190
210
55 60 65 70 75 80
Income,1.000PPPUS$
100-GINI
Torben M Andersen (2015)
Andersen (2015).

14. • Apparently, few countries are clever in this way.
• Have the politicians not taken public economics
and read Barr’s book?

15. Public choice answer
• Why would politicians implement the ”optimal
social planner solution”?
• Myrdal (1968): civil servants will deliberately
introduce extensive public sector regulations to
increase citizen’s willingness to pay bribes
• Mueller (2003) argues that “corruption is almost
an inevitable consequence of the existence of
government and the principal/agent problems
that come with it” (p. 545).

18. The knowledge problem
http://www.safehaven.com/article/1399/generations-and-business-cycles-part-ii
Hayek (1945) The Use of Knowledge in Society,
American Economic Review
Knowledge is decentralized,
discovered through experimentation

19. Example: Stabilization policy
It is impossible for a planner to know where you are in a business cycle!

20. Different types of government size
Knowledge needed
Fundsneeded
more
more
Keynesian
Stabilization
policies
Low basic
income
Means tested
welfare
Public pension
scheme
Encouragement of
entrepreneurs

21. Trust
Growth
Welfare state
size
Income
equality
Algan and Cahuc (2010), Bergh and Bjørnskov
(2011, 2014), Bjørnskov and Svendsen (2012).
Ignoring trust lead
to biased results –
especially for
between country
analysis (RE,
scatter plots), as
opposed to within
country variation
(country FE).
-
+
+
+
+

22. Figure 1: The efficiency-equity trade-off – OECD countries 2008
AUS
AUT
BEL
CAN
CZE
DEN
FIN
FRA GER
GRE
HUN
IRE
ITA
JPNKOR
LUX
NET
NZL
NOR
POR
SLV
SPA
SWECH
UK
USA
50
70
90
110
130
150
170
190
210
55 60 65 70 75 80
Income,1.000PPPUS$
100-GINI 40
66
Social
trust: 40
Torben M Andersen (2015)

23. So far so good
• Some countries with big government have high
economic freedom today
• But that was not the case in the 1970s.
• Can this be explained?
• Idea: Trust, state capacity and de-
industrialization

25. Some economic history
• Sweden and the US similar size of government
until 1960
• Transfers (social insurance, pensions), child
care.
• 1970s: oil crises, stagflation
• Trust and state capacity helps to understand
both low levels of economic freedom in the
1970s
• …and the far-reaching reforms 1980-2000.

26. More on this here…
Only $105 on amazon!

27. Conclusion
• Some seemingly odd countries combine big
government and relatively high growth
• Trust is a background factor that explains the oddity
• Trust also gives a state capacity that enables
countries to experiment and learn from their mistakes
• These countries were half-socialist in the 1970s, but
have since then increased EF more than most
comparable countries
• Hayekian welfare states?

28. • Hayek, Friedrich A. 1945. The Use of Knowledge in Society. American Economic Review 35(4): 519-530.
• Mueller, D.C. (2003). Public Choice III. Cambridge: Cambridge University Press.
• Myrdal, J. (1968). Asian Drama: An Inquiry into the Poverty of Nations. Harmondsworth: Penguin.
• Persson, Anna and Bo Rothstein. 2011. "Why Big Government is Good Government." APSA 2011 Annual
Meeting Paper.
• Persson, Anna & Bo Rothstein (2015). "It´s My Money. Why Big Government May be Good Government".
Comparative Politics 47(2)
• Bergh, A. and C. Bjørnskov. 2014. "Trust, welfare states and income equality: Sorting out the causality."
European Journal of Political Economy 35:183-199.
• Bergh, Andreas and Christian Bjørnskov. 2011. "Historical trust levels predict the current size of the
welfare state." Kyklos 64:1-19.
• Bjørnskov, Christian and GertTinggaard Svendsen. 2012. "Does social trust determine the size of the
welfare state? Evidence using historical identification." Public Choice:1-18.
• Algan, Yann and Pierre Cahuc. 2010. "Inherited Trust and Growth." American Economic Review:2060-
2092.

29. What I will discuss
• Are there Hayekian Welfare States?
• Why do some countries with big government
also have high economic freedom
• Does government size belong in an index of
economic freedom?

30. Example: How steep is the
efficiency – equity frontier?
Andersen (2015) SOU 2015:53

31. the efficiency – equity frontier
revisited
Andersen (2015) SOU 2015:53