Friday, November 21, 2014

Finding the Keys to National Prosperity

NEW YORK – In many of history’s most successful economic reforms, clever countries have learned from the policy successes of others, adapting them to local conditions. In the long history of economic development, eighteenth-century Britain learned from Holland; early nineteenth-century Prussia learned from Britain and France; mid-nineteenth-century Meiji Japan learned from Germany; post-World War II Europe learned from the United States; and Deng Xiaoping’s China learned from Japan.

Through a process of institutional borrowing and creative adaptation, successful economic institutions and cutting-edge technologies spread around the world, and thereby boost global growth. Today, too, there are some great opportunities for this kind of “policy arbitrage,” if more countries would only take the time to learn from other countries’ successes.

For example, while many countries are facing a jobs crisis, one part of the capitalist world is doing just fine: northern Europe, including Germany, the Netherlands, and Scandinavia. Germany’s unemployment rate this past summer was around 5.5%, and its youth unemployment rate was around 8% – remarkably low compared with many other high-income economies.

How do northern Europeans do it? All of them use active labor market policies, including flex time, school-to-work apprenticeships (especially Germany), and extensive job training and matching. 

Likewise, in an age of chronic budget crises, Germany, Sweden, and Switzerland run near-balanced budgets. All three rely on budget rules that call for cyclically adjusted budget balance. And all three take a basic precaution to keep their entitlement spending under control: a retirement age of at least 65. This keeps costs much lower than in France, and Greece, for example, where the retirement age is 60 or below, and where pension outlays are soaring as a result.

In an age of rising health-care costs, most high-income countries – Canada, the European Union’s Western economies, and Japan – manage to keep their total health-care costs below 12% of GDP, with excellent health outcomes, while the US spends nearly 18% of GDP, yet with decidedly mediocre health outcomes. And, America’s is the only for-profit health system of the entire bunch. A new report by the US Institute of Medicine has found that America’s for-profit system squanders around $750 billion, or 5% of GDP, on waste, fraud, duplication, and bureaucracy.     

In an age of soaring oil costs, a few countries have made a real difference in energy efficiency. The OECD countries, on average, use 160 kilograms of oil-equivalent energy for every $1,000 of GDP (measured at purchasing power parity). But, in energy-efficient Switzerland, energy use is just 100 kg per $1,000 of GDP, and in Demark it is just 110 kg, compared with 190 kg in the US.

In an age of climate change, several countries are demonstrating how to move to a low-carbon economy. On average, the rich countries emit 2.3 kg of CO2 for every kg of oil-equivalent unit of energy. But France emits just 1.4 kg, owing to its enormous success in deploying safe, low-cost nuclear energy.

Sweden, with its hydropower, is even lower, at 0.9 kg. And, while Germany is abandoning domestic production of nuclear energy for political reasons, we can bet that it will nonetheless continue to import electricity from France’s nuclear plants.

In an age of intense technological competition, countries that combine public and private research and development (R&D) financing are outpacing the rest. The US continues to excel, with huge recent breakthroughs in Mars exploration and genomics, though it is now imperiling that excellence through budget cuts. Meanwhile, Sweden and South Korea are now excelling economically on the basis of R&D spending of around 3.5% of GDP, while Israel’s R&D outlays stand at a remarkable 4.7% of GDP.

In an age of rising inequality, at least some countries have narrowed their wealth and income gaps. Brazil is the recent pacesetter, markedly expanding public education and systematically attacking remaining pockets of poverty through targeted transfer programs. As a result, income inequality in Brazil is declining.

And, in an age of pervasive anxiety, Bhutan is asking deep questions about the meaning and nature of happiness itself. In search of a more balanced society that combines economic prosperity, social cohesion, and environmental sustainability, Bhutan famously pursues Gross National Happiness rather than Gross National Product. Many other countries – including the United Kingdom – are now following Bhutan’s lead in surveying their citizenry about life satisfaction.

The countries highest on the ladder of life satisfaction are Denmark, Finland, and Norway. Yet there is hope for those at lower latitudes as well. Tropical Costa Rica also ranks near the top of the happiness league. What we can say is that all of the happiest countries emphasize equality, solidarity, democratic accountability, environmental sustainability, and strong public institutions.

So here is one model economy: German labor-market policies, Swedish pensions, French low-carbon energy, Canadian health care, Swiss energy efficiency, American scientific curiosity, Brazilian anti-poverty programs, and Costa Rican tropical happiness.

Of course, back in the real world, most countries will not achieve such bliss anytime soon. But, by opening our eyes to policy successes abroad, we would surely speed the path to national improvement in countries around the world.

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    1. CommentedDallas Weaver, Ph.D.

      He seems to be saying, "we can know what to do, but we don't seem to be able to do it". Doing anything significant means harming a few established politically connected interests, ranging from the sugar farmers and their billions in benefits (tariffs and quotas) to resource-extracting oil companies and government employee unions with their 55 retirement ages at 90%.

      To achieve Prosperity, some existing interests or "stakeholders" must lose power, prestige or money for the greater good of the society. In China, the party hack bureaucrats who used to control all the agricultural planning and production lost power and prestige: the citizens prospered and became well fed. In India, the power and prestige of the "License Raj" bureaucrats was decreased: the country prospered.

      In the US, we are increasing our "License Raj". We are increasing regulations, and these increased regulations interact with existing regulations, resulting in a combinatorial increase in complexity. Consequently, the required times to reach the point where most projects that hire the median worker (a HS graduate with no college) are delayed for years, while educated professionals (with a very low unemployment rate) and bureaucrats live the good life and prosper. They spend years discussing the project, and the median worker remains unemployed.

    2. CommentedGuy Bragge

      Mr Sachs, correctly points out how many countries have learned from others, who achieved economic growth before them. This very different to choosing lessons and to pick their originators, from being told what lessons need to be learnt and to be told who is going to teach them. Maybe there is a lesson to be learnt there?

    3. CommentedLyle Sykora

      Without a study of how oil equivalents are determined I wonder if it is correct to compare Switzerland’s small geography and small high value production with the United States continental sized geography and transportation costs with in many cases its low value high volume output such as wheat and corn.

      Additionally, I wonder if Russia and Japan consider nuclear energy safe and clean. Nuclear energy is anything but clean and safe. It is dirty from mining uranium ore to the disposal of used fuel rods which must be constantly cooled to be safe which is still a problem bedeviling the nuclear industry. Moreover, building and disposing of nuclear plants cannot be done without great costs using more energy.

    4. CommentedJohn Brian Shannon

      Hi Jeffrey,

      Great piece. Common-sense, logical and cogent argument. Expectedly so.

      In any event, I would like to cover a topic somewhat related to your fine post, free minor (as opposed to major) health care for lower-income U.S. workers.

      It has been suggested to me that free health care for lower-income U.S. workers would positively impact the U.S. global competitive index ranking. Possibly as much as 18 points on the GCI.

      Obviously well-paid workers do not need this sort of coverage, I'm talking about lower income workers. Let's just say lower paid workers (possibly supporting a large family) might fall under $50,000 gross income per year.

      Many otherwise productive work days become 'sick days' for lower-income workers -- such levels of illness related time off work are unheard of in the highest 50% of American workers, as they are well and able to afford the best medicine, treatment and preventative maintenance.

      The largest single reason for lower-income absenteeism is health-related. These people require so many more days off per year, (compared to their +$50,000/yr counterparts) because they feel they cannot afford the 2 hours off work to see a doctor to get treatment and pay for a prescription/treatment or advice to avoid a much longer illness or hospital stay.

      So far, everyone has been looking through the wrong end of the telescope, worrying about how much this would cost, when in fact, it always costs much less to prevent illness than to treat it once it is full-blown.

      Similar is true for diagnosing an illness at the beginning, as opposed to diagnosing it at a much later time (such as in the Emergency Ward).

      The sooner illnesses are recognized and diagnosed, the faster, better and cheaper the treatment is, resulting in that many more productive work days, for lower-income workers! It's as simple as that.

      I'm respectfully suggesting that you research this out and write "Found! -- One of the Keys to National Prosperity"

      Both socially-conscious Democrats concerned about the well-being of Americans and GCI-minded Republicans will salute you.

      As always, very best regards, JBS

    5. CommentedTimothy Williamson

      China appears to have also taken the best of the Hamiltonian/American System and incorporated them into their current economic policies. Though, they are regulating the system more stringently than is possible in the US.

    6. CommentedRock Steady

      Interesting and informative article with no pot shots at "simplistic keynesians." Thank you for "moving on."

    7. CommentedJoseph Concordia

      Jeffrey: Are there keys to prosperity powerful and large enough to overcome the impacts of structural changes in the US potential for world economic leadership? While we are currently still strong, the direction of US leadership on many economic fronts is moving to lower levels relative to emerging economies. It is always a struggle to further improve on an already rising trend, it is a horrendous problem to try to reverse a downward move and rise at a higher rate than that which existed before. The conventional wisdom is that the only way to do this is to make bold paradigm shifts, sometimes with terrible consequences and not an improved situation as outcome. Can the American people accept an agenda that carries with it such great risk? I personally do not, and I think most Americans do not want that. Such proposals as the Ryan budget and the general concept of austerity programs embody such an agenda. I would never want such a plan to be put in place. The alternative is a realistic long term strategy that accepts new standards for economic performance and makes new management models for satisfactory economic viability. Models that accommodate such things as: higher levels of unemployment than 4-5% as "full" employment, GDP growth of 2% or less, fiscal and monetary policies that balance and allow various degrees of capitalistic and socialistic elements. I believe it may be possible to achieve a reasonable level of "Gross National Happiness" in such an environment, but it will take a big change in popular ideologies to implement such a program.

    8. CommentedProcyon Mukherjee

      Jeffrey Sachs raises all the right points and indeed there are so many excellent examples in the world where prosperity has already taken shape and in spite of the current problems of growth there is still so much in the resilience that prosperity has created which would make it impossible to wither.

      But I have always found at odds some of the best examples that the Swiss tradition could teach are not easily replicable anywhere else. For example the sense of equity and equanimity within the community (Gemainde) which allows every household to be engaged in a quest for the sharing of gains and pains, do not find takers in the other communities. Instead of creating wide roads leading to the city (Zurich for example) the roads are narrower and parking spaces very limited; the purpose is not to incentivize more cars into the city, but to limit them as public transportation is of the highest quality. There is no concept of a low cost housing, which according to the Swiss could actually harm the environment by destabilizing the process of movement of people. The punishments for traffic violations are the highest when for getting a driver’s license one has to struggle the highest in the world (no wonder the number of traffic violations are the lowest). The prisons are empty and the country has no permanent military, while the police are on the spot at the fastest possible time; the country averages eleven minutes for any accident to happen on the road and the arrival of the ambulance, which includes those that happen in the ski resorts on the top of Alps.

      This is prosperity.

      Procyon Mukherjee

    9. CommentedDave Thomas

      I love the catch-all-phrases that can allow almost any type of action imaginable.

      "....process of institutional borrowing...."
      No attempt to do with "who is liable for repayment.
      ".....creative adaptation.....
      Could a Sophist come up with a more all meaning phrase that sounds good?!
      "......successful economic institution...."
      Don't both to name any to clarify your statement. That would create limits and clarity which of course are unnecessary.

      Northern Europe is doing just fine? When you look at the population of the countries mentioned and the size of the economies discussed this is the same as saying that "the American Southwest, Texas-New Mexico-Arizona-Colorado and Utah are doing well.

      How does the American Southwest do it. With right to work laws.

      How does Germany do it? By manipulating the common currency of an entire continent that allows it to loan money to other European nations to buy its exports. A great set up if you can get it. How does Sweden do it? By confronting the collapse of its own Welfare State in 1993-94 by slashing benefits and cutting taxes to foster economic growth.

      Switzerland makes a surprise appearance as part of Northern Europe in the 4th paragraph. Why?

      In the age of rising health care costs government controlled systems effectively control costs by rationing, denial of care, limited choices of drugs, higher cancer death rates, and medical tourism by their upper classes. 8.000 doctors educated at state expense left Great Britain in the last decade. How long before the state controls passport issuance to doctors?

      The amount of money squandered could as easily be reduced by eliminating the government bureaucracy and its accompanying corruption, waste, and inability to prevent fraud that Dr. Sachs cites as a cause of $750 billion in waste.

      The fact that Dr. Sachs attempts to compare the infrastructure and the energy needed to run the widely disparate transportation systems in the population dense compact European nations and the vast, sprawling United States endangers his considerable credibility.

      Is Dr. Sachs suggesting the U.S. build more dams? He better check with the Salmon fisheries first. The German Interior Ministry just sent an official warning that electric bills will increase by 30%.

      The only reason that oil costs are soaring is because of currency devaluation and the strict limits on drilling. There is no shortage of cheap oil outside of a government imposed shortage.

      Does Dr. Sachs suggest that the West move to much more expensive economies that control carbon while China and India build massive economies based on cheap carbon energy that more than makes up for our reductions with enormous emissions increases?

      In point after point Dr. Sachs supplies a terribly subjective view of the keys to national prosperity that don't seem to stand up to the most basic challenges.

    10. CommentedZsolt Hermann

      I would go one step further.
      If instead of just opening our eyes to other countries success trying to copy them we actually connect together into a mutual system, where each part can contribute its own strength, and get something that can balance their weakness, creating a living, breathing single, unified human, global network, then immediately we could solve all our problems, as such a mutually responsible and considerate system would merge into the similar structure and network of the vast natural system around us, containing us, and then instead of the constant fight, and difficulties, recurring crisis and threatening wars we would find that everything simply becomes easy and pleasant.