Why Scott Sumner is Wrong

by Mike Kimel

Why Scott Sumner is Wrong

A number of the big libertarian & rightwing blogs are putting up links to this post by Scott Sumner. I’m kind of surprised because the argument seems to have more than a few weaknesses.

What Sumner is doing is trying to show that the policies pursued by Thatcher and Reagan were a success. He does this by taking the ratio of the GDP per capita of thirteen different countries and compares them to the ratio of GDP per capita of the US. He takes this ratio for each country for 1980, 1994, and 2008. The idea here is that if a country engaged in the kinds of policies Thatcher and Reagan would have approved of, they’d grow faster. So far so good.

Sumner ends concluding that:

So there you are, all these countries support my hypothesis that neoliberal reforms lead to faster growth in real income, relative to the unreformed alternative.

There are two kinds of economists. Those who read the Economist (or FT) every week, and have a pretty good sense of what is going on in the world, and who know why some countries are doing better than others. And those who are lost in their ivory tower doing arcane research. The latter group is often much more highly skilled than I am, and come up with more important new ideas than I ever will. But when talking to this group I often find they are totally oblivious to the neoliberal revolution of the past 30 years.

I have exactly twenty minutes left to write so keep in mind, I’m going to hit the low hanging fruit only.

Update: Rdan here…also see Brad DeLong

1. Without looking at the countries, its obvious to me, a non-ivory tower guy, that the data on Sweden on wrong. He shows Sweden’s GDP per capita as a % of US’ GDP per capita dropping from 1980 to 2008 from .868 to .794. Now, I don’t know offhand what the ratio really is, but it seems kind of funny, I waste two precious minutes pulling up the World Bank data to which he alludes and another finding the figures on the sheet. The numbers I get, going for the GDP per capita, constant 2000 US $ (obviously we want to adjust for inflation, right?) are .865 and .852. In other words, about the same. Sweden no longer works for his argument. I’m not going to look for the data on the rest of the countries.

2. The next question I have is why, when the World Bank has so many countries listed, he picked 13. Why 13? Why those 13? He doesn’t say, and its not exactly a choice that makes any sense. There are some rich European countries, some rich Asian countries, and then there’s Argentina. There’s a conspicuous absence of countries that not long ago folks on the right were calling raving successes and which would probably work according to Sumner’s ratio. I’m guessing Portugal, Hungary, Ireland, Spain, Russia and Latvia, off the top of my head, would fit the bill. But we all know they wouldn’t pass the giggle test these days.

3. I’d include Argentina among the conspicuous absences, except that Sumner has mentioned Argentina, but oddly, as an example that he thinks makes his point. See, his numbers show Argentina lost ground relative to the U.S., and he seems to believe Argentina is one of those countries that did nothing that Reagan or Thatcher would approve of. But that’s odd. Argentina was the success story for folks on the right in the early to mid-90s. (I know the Economist (or FT) covered Domingo Cavallo a number of times.) There’s no way to argue that the US went through anywhere close to the same level of privatization as Argentina did during the 1980 to 2008 period. Scratch Argentina from his argument.

4. Another country on his list is Germany. Now, Sumner acknowledges the whole East German West German thing, but seems to feel that since they lost ground relative to the US since 1994, its a sign that they mostly increased regulation relative to the US. Ignore the fact that East Germany went from a prison state to a piece of West Germany and pretend they somehow became more regulated and all the events on the ground happened with the flip of a switch.

5. I’m not sure exactly how much the Singaporean economy liberalized. Wikipedia tells me the government controls companies that account for 60% of the economy. If that’s Margaret Thatcher’s paradise, I cannot imagine what isn’t.

OK. Time’s up. Gotta go. Have at it.