Free Market Iceland

"Iceland is known as the Nordic Tiger because of rapid economic growth," writes Cato's Daniel Mitchell, "much of the nation’s prosperity is the result of free-market policies." When I visited Iceland it struck me as more a Scandinavian social democracy than a free market paradise. And indeed the OECD stats back me up. Here's a few countries compared by how big a share of their economy is taken in as tax revenue:

Iceland features somewhat lower levels of social spending than do the other Scandinavian countries, but it's still a really high level especially when you consider that pretty much none of that tax revenue is going to the country's non-existent military. I would love to see the US become more like Iceland -- flexible labor market, high taxes, and generous public services sounds good to me. But I'm pretty sure Cato would freak out if I proposed a 50 percent increase in the tax share of the American economy. Meanwhile, in the vein of promoting free market policies for Iceland, let me observe that their agricultural policies are absolutely insane -- trying to create a viable agricultural sector on a sub-arctic island with no soil and high wages is ridiculous.

Comments

trying to create a viable agricultural sector on a sub-arctic island with no soil and high wages is ridiculous.

Depends on if you count fish farms (aquaculture) as agriculture.

Posted by MikeJ | February 22, 2008 9:10 AM

Can someone recommend an entry level economics book to help me understand the issues since I've read Sowell's Basic Economics, and now need to read one that is not so incredibly right wing?

Posted by TML | February 22, 2008 9:15 AM

Hey, and we have socialized medicine too!

American libertarians have some sort of weird fetish for Iceland. Sometimes it's the medieval first republic, which some of them fancy was an anarcho-capitalist utopia. Sometimes it's the modern country. Cato's fantasy version of Iceland even has a flat tax, as we can see in the article Matt linked to.

Posted by Haukur | February 22, 2008 9:16 AM

I believe that is what you call "intellectual dishonestly".

Posted by freddiemac | February 22, 2008 9:27 AM

Iceland rocks. Speaking the same language as the Vikings rocks. Having endless free geothermal energy rocks. Scads of blonds rocks. Everybody being everybody else's cousin rocks.

Posted by Adam | February 22, 2008 9:34 AM

Nope, just your standard example of Cato work.

Posted by Rob | February 22, 2008 9:35 AM

Plus Reykjavik has the world's most promiscuous women, trumping even Rio de Jeneiro.

Not that, uh, I checked.

Posted by Freddie | February 22, 2008 9:38 AM

Oh great--another paean by the worshipful Matt to the greatness and charisma of Barack Obama! This blog has gotten so blatantly partisan it makes me sick!

Oh wait, this post is about Iceland. Never mind. ;)

Posted by James Gary | February 22, 2008 9:39 AM

Matt's never more of a hack than when he uses pretty charts to make lame points.

The overall size of the tax burden notwithstanding, the actual principle here is that Iceland has very high consumption taxes through a VAT (25%), a high flat income tax (36%), and very low taxes on capital gains (10%), corporations (18%), and estates (5%). It's basically a supply-sider's wet dream.

The result is a very effective tax system, generating very high revenues, but extremely regressive. If Matt really wants to propose we adopt Iceland's tax system, I bet Republicans would accept it in a second.

Posted by right | February 22, 2008 9:50 AM

But none of this answers why Iceland is notorious for having such a severe zombie problem

Posted by Walker | February 22, 2008 9:51 AM

To understand Iceland's free market it is necessary to read Nobel Prize winner Haldor Laxness's great novel Independent People. There is a story of free markets in there that will make you run from the Cato Institute forever. Plus you will learn a lot about sheep.

Posted by Peter Driscoll | February 22, 2008 9:52 AM

My understanding was that Iceland considered a 'viable agricultural sector' to be important as a matter of identity and self-determination, i.e. 'greenhouses everywhere reduce our dependence on foreign vegetables.' It may be ridiculous in strictly economic terms, but, as is often the case, those aren't the only factors in play.

Posted by untravel | February 22, 2008 9:52 AM

Scads of blonds rocks.

Plus a good number of redheads. Best of both worlds.

Posted by Minivet | February 22, 2008 9:53 AM

My understanding was that Iceland considered a 'viable agricultural sector' to be important as a matter of identity and self-determination, i.e. 'greenhouses everywhere reduce our dependence on foreign vegetables.' It may be ridiculous in strictly economic terms, but, as is often the case, those aren't the only factors in play.

Posted by untravel | February 22, 2008 9:54 AM

Yeah, Icelandic agricultural policy doesn't make much sense on from an economics viewpoint. It’s essentially a nationalistic undertaking. For almost all of Icelandic history there were no towns in Iceland, only farms. Farms therefore have an outsized significance in the national psyche. Therefore it would extremely risky for a political party to propose a change in the system.

Lot of quirks in Icelandic policy start to make sense when viewed through the particulars of Icelandic history. For instance, because the most important artistic achievement of pre-modern Iceland are the sagas Icelandic national identity is tied up in literature. This leads to a system where authors are subsidized to write. Every year a bunch of authors are given pay by the Icelandic government to write. This has been expanded to other artists, but writers get more. Needless to say, libertarians rail against this system.

Posted by Kári Tulinius | February 22, 2008 9:55 AM

"the world's most promiscuous women, trumping even Rio de Jeneiro."

I've lived in Rio, and though I didn't try to test the virtue of women there, I can vouch for their normalcy in terms of promiscuity. I have no idea about Iceland, but I imagine climate conditions are such that you see somewhat more of the women in Rio.

Posted by Colatina | February 22, 2008 10:02 AM

> It may be ridiculous in strictly economic
> terms, but, as is often the case, those
> aren't the only factors in play.

Unless you are thinking about the long term, when oil-powered ships full of oil-grown American and Argentinian food may no longer dock regularly on your island. In that case an indigenous, geothermal- and wind-powered food supply might be a good thing to have.

Cranky

Posted by Cranky Observer | February 22, 2008 10:05 AM

Freddie, do you have some type of numbered list? I need it, ummmm, for academic purposes. Not as a travel itinerary.

"Can someone recommend an entry level economics book to help me understand the issues since I've read Sowell's Basic Economics, and now need to read one that is not so incredibly right wing?

Posted by TML | February 22, 2008 9:15 AM"

I thought Krugman's was pretty readable, but that might also be because I had been reading his columns and papers for years before reading his textbook. Mankiw's was disappointingly poorly written in terms of language, especially compared to some of his other work, but that was also the first econ text I ever read, so that might just be my early confusion talking.

Posted by Reality Man | February 22, 2008 10:12 AM

> a high flat income tax (36%)

This is quite misleading. There are really two brackets, a 0% bracket for the first $1400 you earn each month and a 36% bracket for all income after that.

Posted by Haukur | February 22, 2008 10:12 AM

""much of the nation’s prosperity is the result of free-market policies." When I visited Iceland it struck me as more a Scandinavian social democracy than a free market paradise."

Right, Iceland is not a free-market paradise. But it does seem possible that a high-tax, large welfare state country could achieve efficiency gains and greater economic growth by adopting *more* free-market policies, even without dropping below the European averages in various indicators of socialism. By the same token it does seem possible that the U.S. could weaken their economic growth by raising taxes a lot, even if the taxes don't rise to the proportion of GDP we see in Iceland.

I think that's what CATO is arguing.

Posted by Colatina | February 22, 2008 10:16 AM

This is quite misleading. There are really two brackets, a 0% bracket for the first $1400 you earn each month and a 36% bracket for all income after that.

You are right on the facts, but I don't think it's misleading. Every "flat tax" system or proposal I'm aware of is structured more or less like that: a 0% tier for the first x dollars of income, and then a single flat tax rate on everything earned above x.

Are there proposals (or actual tax codes) out there that tax every dollar the same? I'd be interested to know.

Posted by right | February 22, 2008 10:19 AM

But none of this answers why Iceland is notorious for having such a severe zombie problem

Especially when zombies become inactive when the weather drops below freezing. Yet Cuba, where it is always warm, controlled the zombie problem better than anywhere in the world. Does that really make sense?

Posted by vanya | February 22, 2008 10:25 AM

Taxes in post-Thatcherite neoliberal Britain are higher than in stagnating socialist hellhole Germany? Who knew?

Posted by ajay | February 22, 2008 10:32 AM

I think too, greenhouses become more efficient when the heating is powered by geothermal/hydro energy as opposed to natural gas.

I see Iceland as another in the example of a northern country realising that in their particular situation (marginal land, small population harsh climate) thing will not get done unless everybody pulls together to do them. I have spent some time in Iceland and always admire the community spirit that prevails there.

Posted by Chris B | February 22, 2008 10:32 AM

> Are there proposals (or actual tax codes) out there that tax every dollar the same? I'd be interested to know.

Right-wingers in Iceland sometimes argue that we should switch to a flat tax system with a tax rate of, say, 18%. So they certainly don't think we already have a flat tax system.

But you're right that supposed flat tax systems differ wildly in practice and often include 0% brackets.

I guess the relative "flatness" depends on the size of the 0% bracket - and the Icelandic one is quite large. A person with a low salary may pay 10% of their income in taxes while a person with a high salary may pay 30% of their income in taxes. I just don't see the flatness in that.

Posted by Haukur | February 22, 2008 10:36 AM

their agricultural policies are absolutely insane -- trying to create a viable agricultural sector on a sub-arctic island with no soil and high wages is ridiculous

Global warming may help its agricultural prospects.

Seriously, of course it's nationalism. A country that can't feed itself can find itself well and truly fucked under any of a number of unlikely-but-not-unprecedented scenarios. They've got to feel particularly vulnerable being an island. Fostering a domestic agricultural sector is simply responsible governance. It's no more insane than a country striving for energy independence or for the capacity to defend itself.

Posted by Ryan | February 22, 2008 10:37 AM

And of course there are lots of people who pay 0% of their income in taxes. The typical student who works only during her summer vacation or part time during the winter doesn't pay any income tax. I just don't see "flat tax" as an intuitive metaphor for a system like that.

Posted by Haukur | February 22, 2008 10:42 AM

Yes, every time a country does really well for a while, even with high taxes, it's attributed to Friedmanism. Ireland (32% tax rate, top marginal, 41%) being case #1.

Among developed countries, there's no correlation between government size and growth. This simply is no longer an open question among economists.

More:

http://trueconservative.typepad.com/trueconservative/2007/12/government-ba-2.html

OTOH, even some top economists still want to believe it is:

http://trueconservative.typepad.com/trueconservative/2008/02/mankiw-post-fri.html

Posted by Steve Roth | February 22, 2008 10:45 AM

"The overall size of the tax burden notwithstanding, the actual principle here is that Iceland has very high consumption taxes through a VAT (25%), a high flat income tax (36%), and very low taxes on capital gains (10%), corporations (18%), and estates (5%). It's basically a supply-sider's wet dream."

Right makes a great point. Tax revenue as a share of GDP isn't the only consideration; the sort of taxes is apposite. Iceland's taxes seemed designed to insure a broad tax base, moderate consumption, and encourage savings and investment. In contrast, most of the tax policies favored by the American left are designed to narrow the tax base, punish high earners, and discourage investment

"This is quite misleading. There are really two brackets, a 0% bracket for the first $1400 you earn each month and a 36% bracket for all income after that."

Haukur, here we would call that 0% bracket a deduction. This suggests that Right wasn't correct in saying Iceland's taxes are "extremely regressive". A flat tax with such a large deduction is actually progressive.

"Scads of blonds rocks."

Wouldn't you miss the vibrancy that comes from racial diversity?

"I've lived in Rio, and though I didn't try to test the virtue of women there, I can vouch for their normalcy in terms of promiscuity."

He may be confusing Copacabana prostitutes with typical carioca women.

Posted by Fred | February 22, 2008 10:50 AM

I suspect that in Iceland they have also a benefit of rather homogeneous population. First, if you have generous support for the poor but few poor people it is not expensive. Second, you have rather few very rich people, so why worry about special high tax rate for them?

Second, Iceland has some decent export industries, and not just fish, and it can engage in the wildest protectionism to boost employment in, say, gardening and crafts. Then people without any aptitude for high tech jobs get good jobs even so, and they are supported implicitely rather then explicitely by taxes.

Third, Iceland does not need to spend money on a highway system, railroad system, etc. nothing on the military, of course, and perhaps they can keep healthcare expenses in check too.

Posted by piotr | February 22, 2008 10:51 AM

"Yes, every time a country does really well for a while, even with high taxes, it's attributed to Friedmanism. Ireland (32% tax rate, top marginal, 41%) being case #1."

And what's Ireland's corporate income tax rate? The issue isn't entirely the tax burden as a percentage of GDP per se, but the mix of taxes a country has. If you want to encourage economic growth and private sector job creation, it makes sense to have tax levels on corporate income and investment that are attractive compared to other first world countries. That may require higher taxes on personal income and consumption.

Posted by Fred | February 22, 2008 11:01 AM

Small island nations are hard to analyze quickly.

A quick look at the economic data makes no sense. To wit, export is 50% fish, 29% metals (aluminum etc made with hydro-thermal power). So far so good, but how changing the tax rates unleashes gushers of fish and aluminum, I do not know.

Second, in the recent few years Iceland has enormous trade deficit. Not in the absolute numbers, but 14% of GNP is a lot. And how do they do it? Very large foreign direct investments. And why?

My suspicion is that other Scandinavian countries have some (a) measures making it difficult to shift corporate profits to, say, Caymans or Bermuda, and (b) some loopholes created in the name of Nordic solidarity. If so, Iceland became a tax heaven, and thus attracts a lot of economic activity, big part of it illusory.

Now, if 10% of GNP is smoke and mirrors, then 36% share of taxes is actually 40% share of the true GNP.

Posted by piotr | February 22, 2008 11:06 AM

Iceland was one of the countries featured in Jared Diamond's Collapse. As I recall it made a pretty good case for stopping the soil erosion that has decimated their farming. It's both national identity and national interest, even if its not purely economic in the short term.

Posted by TJ | February 22, 2008 11:28 AM

I would love to see the US become more like Iceland -- flexible labor market, high taxes, and generous public services sounds good to me.

Iceland dramatically lowered its tax rates on labor, investment and wealth. It now has a 36% flat tax on labor income, a 10% flat tax on capital income, an 18% corporate tax, a 5% estate tax, and a 6% payroll tax. It abolished its wealth tax altogether. It has privatized numerous formerly state-owned industries, and implemented personal retirement accounts. It maintains its relatively high total tax burden with a high consumption tax: a 24.5% VAT. May we assume Matthew supports a similar tax regime for the United States?

Posted by Mixner | February 22, 2008 11:38 AM

One of the advantages of Economics is that, in its capacity to explain everything, economic arguments get to use Everything - 1 as excuses. So, even though Iceland doesn't even vaguely resemble the society that right winger economists would build from scratch, Everything - 1 comes to the rescue and, voila, It'll Do 'Till the Real Thing Comes Along.

Posted by Jeffrey Davis | February 22, 2008 11:50 AM

I would love to see the US become more like Iceland -- flexible labor market, high taxes, and generous public services sounds good to me.

Iceland has a population less than that of Raleigh, NC, and almost all of that is concentrated in one city. And the population is extremely culturally and genetically homogenous. Taking it as a model for a country like the US is pretty far-fetched.

Posted by well | February 22, 2008 11:51 AM

The fantasy about Saga-Age Iceland as utopia (see link posted by Haukur at 9:14) is possibly the looniest thing I have ever seen emanating from any libertarian. Which is saying something.

What I get from my reading of the sagas is that there were laws, but no mechanism of enforcement, criminal or civil, other than self-help. If somebody killed one of your relatives, you were entitled under the law to kill him, if you could. This right could be traded in for financial compensation (on a scale based on the deceased wealth and importance), which was supposed to end the cycle of retaliation. Sometimes it did, sometimes it didn't. This may appeal to some, but I myself prefer to be able to call 9-1-1.

(Of course, the system may in practice have produced less bloodshed than the sagas would lead you to suppose. They are not history but historical fiction, written two centuries after the fact -- though based on what the authors believed to be reliable oral transmission.)

I have never been to Iceland, but I believe that any discussion of the country's economy has to recognize that it will collapse if the fisheries ever stop producing. To prevent which from happening, the government has a comprehensive, intelligent, and rigorously enforced quota system, based on total exclusion of other countries from a large swath of ocean. (Over which it went to war with Britain a while back.) As far as I know the Icelandic fisheries are the only ones in the world not being depleted by laissez-faire overfishing, so the country's economic position seems likely to improve in the future.

Posted by roac | February 22, 2008 12:13 PM

> What I get from my reading of the sagas is that
> there were laws, but no mechanism of enforcement,
> criminal or civil, other than self-help. If
> somebody killed one of your relatives,

Well, you could also summon the perp to court, and if enough of your neighbors agreed he either had to show up or be shunned, burned out, and driven into exile. Then the two of you argued your case in front of the court (meeting as a moot) and your neighbors voted on the winner.

Problem was if the loser didn't like the outcome he had the option of gathering his friends and "appealing" the verdict via a trial by combat against you and your friends.

Cranky

Posted by Cranky Observer | February 22, 2008 1:37 PM

Fred: "The issue isn't entirely the tax burden as a percentage of GDP per se, but the mix of taxes a country has."

Absolutely correct. Except: The issue isn't the [total] tax burden *at all.*

Within the 23-49%-of-GDP range in developed countries, higher numbers have no correlation with slower growth.

Tax *allocation* policies do have statistically significant correlations.

Posted by Steve Roth | February 22, 2008 1:45 PM

piotr: "Small island nations are hard to analyze quickly"

Spot on. And of questionable value.

Iceland's total population is under 500K--a small city. Trying to draw policy conclusions for, let's say...the U.S.?...based on Iceland's performance is...how shall we say...imprudent?

Posted by Steve Roth | February 22, 2008 1:51 PM

Within the 23-49%-of-GDP range in developed countries, higher numbers have no correlation with slower growth.

Unless you control for all the other variables that plausibly have a significant effect on growth, you can't draw any conclusions about the effect of total tax burden on growth from your international comparisons.

Posted by Mixner | February 22, 2008 1:53 PM

Mixner: "Unless you control for all the other variables that plausibly have a significant effect on growth, you can't draw any conclusions about the effect of total tax burden on growth from your international comparisons."

*All the other variables* is quite the high bar.

Let's just say that the economists have been attempting exactly that for decades. And the conclusions are consistent (including Nijkamp and Poot's 2003 meta-analysis of 93 growth studies): for developed countries, little to no correlation.

Among economists, this is not an open question.

Posted by Steve Roth | February 22, 2008 2:04 PM

This all ignores the libertarian argument as to whether taxation is extortion or theft and whether the state has a "right" to your money.

Posted by Mark | February 22, 2008 2:13 PM

Steve Roth,

*All the other variables* is quite the high bar.

I said "all the other variables that plausibly have a significant effect on growth." As it stands, your comparison is close to meaningless with respect to any implications about the relationship between tax burden and growth.

Let's just say that the economists have been attempting exactly that for decades. And the conclusions are consistent (including Nijkamp and Poot's 2003 meta-analysis of 93 growth studies): for developed countries, little to no correlation.

Do you have a link?

Posted by Mixner | February 22, 2008 2:33 PM

Mark: "This all ignores the libertarian argument as to whether taxation is extortion or theft and whether the state has a "right" to your money."

It ignores an infinitely large set of arguments.

And--agreeing to follow that tangent--that particular argument ignores the fact that one is not "giving" money to the government so it can keep it hoarded away. One is giving money to the government so it can do things that benefit one (and all)--like promoting economic growth.

Posted by Steve Roth | February 22, 2008 2:47 PM

Steve Roth,

Never mind. I found it. I'm not surprised you didn't provide a link, because the findings of that meta-analysis are not consistent with your "no correlation" claim:

Among our sample of studies, 29 percent of the 41 studies concluded that “big government” appeared to be detrimental to growth, as compared with 17 percent of studies that concluded that an increase in government size had a positive impact on growth. Consequently, more than one half of the studies were inconclusive.

So, half the studies were inconclusive, but of those that found a relationship, almost twice as many found that larger government has a negative impact on growth as found the opposite.

Posted by Mixner | February 22, 2008 3:21 PM

"Scads of blonds rocks."

I prefer blondes.

Posted by Ross | February 22, 2008 6:06 PM

Mixner: That's a superficially attractive yardstick. It does suggest, very tentatively, that bigger government might have a small negative effect on growth. I'd stipulate to that statement. (Or its obverse.)

Rather than cherry-picking my own quotations from Nijkamp and Poot (there are plenty--notably hinging on whether the studies sampled developed, developing, or both), I'll just quote their conclusion:

"On balance, the evidence for a positive impact of conventional fiscal policy on growth is rather weak, but the commonly identified importance of education and infrastructure is confirmed."

The reason they don't mention government size/tax levels along with education and infrastructure is that 1. the correlation signs in the studies (and often within studies) point both directions, and 2. the correlations that do emerge are almost uniformly not statistically significant. (Read: "rather weak.")

Since we're comparing countries whose tax levels range from 23 to 49% of GDP, and we're seeing contradictory and non-statistically-significant correlations with growth (at least among developed countries), the most reasonable conclusion is that in developed countries, there is little or no correlation between tax levels and growth (within these tax ranges), and if the correlation's real rather than noise, we don't really know which direction that correlation points.

Posted by Steve Roth | February 22, 2008 6:39 PM

Steve Roth,

My quote was "cherry-picked" only in the sense that it is relevant to the issue in dispute here. Most of the paper concerns the effects of other components of "fiscal policy," and fiscal policy in general, not the effect of the size of government specifically. This is also why your own cherry-picked quote is not relevant to what we are discussing. That quote concerns fiscal policy overall, not the size of government specifically. You're trying to move the goalposts.

Posted by Mixner | February 22, 2008 6:50 PM

Mixner:

"your own cherry-picked quote"

Well, I guess you could call it cherry-picked. But do I get credit for cherry-picking the authors' conclusion?

"That quote concerns fiscal policy overall, not the size of government specifically."

Fiscal policy is the subject of their paper (five aspects, including government size). My point: in two aspects they found significant correlation. In three others (including government size), not.

Would you agree that the paper(s) show(s) no statistically significant correlation?

Or, would you agree that the paper shows very little correlation?

Would you agree that while its ideological underpinnings are compelling to many, the big-government-destroys-growth worldview is based on "rather weak" empirical evidence?

Would you agree that big governmment--in and of itself--might have some effect on growth but from what we can tell, probably not much?

Any of the above? An alternative that you'll stipulate to?

Posted by Steve Roth | February 22, 2008 7:12 PM

Steve Roth

Well, I guess you could call it cherry-picked. But do I get credit for cherry-picking the authors' conclusion?

For the reasons I already explained to you, no. The conclusion you quoted is about the effects of "fiscal policy" in general on growth. We're not discussing that. We're discussing the effects of the size of government on growth. And the authors' findings on that issue are summarized in the quote I provided. To repeat: Almost twice as many of the studies the authors examined found that larger government has a detrimental effect on growth as found the opposite.

Posted by Mixner | February 22, 2008 7:32 PM

Mixner, your quote is 'cherry-picked' because at the end of the very paragraph you quoted, their actual conclusion is:

It is then easily calculated that the 95 percent confidence interval for the proportion of studies that support the null hypothesis is (0.15, 0.43). This interval lies far away from unity. Consequently, we conclude by means of our sample that the relative distribution of economic activity between the private and public sectors across countries and regions appears to have no clear impact on long-run growth at the macro level. [Em. added]

Or to translate from economics-ese, 'Mixner is full of shit.'

Posted by Bo | February 22, 2008 7:36 PM

Thanks, Bo! (though not for the FOS bit...)

Mixner, I'm really hoping that you have the decency to be blushing right now.

After learning about all this research (I understand if you didn't know about it before; nobody seems know it *exists*), is there a statement about tax levels and growth in developed countries that you'd be willing to stipulate to?

Posted by Steve Roth | February 22, 2008 8:37 PM

Bo,

You're up to your eyeballs in shit. The stated conclusion is simply the authors' subjective "interpretation," using their own assumptions, of the implications of the studies in their sample. It doesn't alter the fact that twice as many of those studies found that larger government causes slower growth than found the opposite.

Posted by Mixner | February 22, 2008 8:47 PM

Steve Roth,

A 2001 OECD study by Bassanini and Scarfetta of 18 OECD nations also found a negative relationship between size of government and economic growth. Money quote:

Taxes and government expenditures affect growth both directly and indirectly through investment. An increase of about one percentage point in the tax pressure – e.g. two-thirds of what was observed over the past decade in the OECD sample – could be associated with a direct reduction of about 0.3 per cent in output per capita. If the investment effect is taken into account, the overall reduction would be about 0.6-0.7 per cent.

Posted by Mixner | February 22, 2008 9:08 PM

Mixner:

We just looked at a meta-analysis covering 93 such studies. You found one of them that says what you want it say. You go girl.

I'll stop now. All the best to you.

Steve

Posted by Steve Roth | February 23, 2008 2:27 AM

Steve Roth,

There's also a relevant qualitative factor to consider here: how good is a country's government sector workforce? If it's a well-run meritocracy, than, conceivably, it wouldn't be as bad if government took a relatively larger percentage of GDP. The EU columnist for the FT noted recently that Italy spends as much on its public sector as some Northern European countries do, but it gets less in return, since its public sector is corrupt and inefficient.

This is something we should consider. Even if we increased our public sector spending to Scandinavian levels, we wouldn't get a Scandinavian level of government services. That's because our government agencies, are, for the most part, not meritocracies, and instead are used partly as jobs programs for under-achieving groups. So, since our private sector is more meritocratic in its hiring, and our public sector workforce is of a lower quality than those of some other first world nations, we are probably better off spending less of our national income on government than those countries.

Posted by Fred | February 23, 2008 3:29 AM

Here's an example of a country with highly progressive income tax, 70-91% in the top bracket, which had a thriving private economy and did very well overall: the US from WW II to 1970.

Proponents of tax reduction ignore any history which is not consistent with their ideas, and cherry-pick current data as we see in the case of Iceland. Their basic theoretical justification, the "common sense" idea that high tax rates discourage entrepreneurship and hard work is simply false; motivation in the real world is just much more complex.

Posted by skeptonomist | February 23, 2008 11:14 AM

Skeptonomist,

Good point. If we can instigate another world war, and make sure that all the factories in the industrial world except for ours are bombed into rubble, then we can generate a similar economic boom here, even with high marginal tax rates. Once the car factories in Germany and Japan are destroyed, Detroit will have another golden age.

Posted by Fred | February 23, 2008 2:28 PM

The south of Italy is closer to anarchy than to social democracy. Large black markets, little income is reported to the government.

Posted by Zxcvbnm | February 24, 2008 12:08 AM

The south of Italy is closer to anarchy than to social democracy. Large black markets, little income is reported to the government.

Posted by Zxcvbnm | February 24, 2008 12:08 AM

Peter Driscoll-

Independent People is good reading, but it's a bit biased. Readers may be surprised to find that in addition to disliking capitalism, Laxness didn't like cooperatives, either. He doesn't launch into calling for socialism (by which he does not mean social democracy) until the last 50 or so pages, and then it is rather muted...unlike some of his later novels. (Atom Station comes to mind.)

Even though I think it's a poor guide to social policy (as are Ayn Rand's works, in my opinion, and the works of most authors who aspire to remake society), it's an excellent novel. Bjartur and Asta Sollilja are very memorable characters.

Posted by Marty Busse | February 25, 2008 11:00 AM