David R. Henderson  

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Megan McArdle is back blogging regularly. I happened to come across this one: "America Really is Exceptional." It's very good. Some highlights:

I actually don't think that the latter point is true; if you plucked an average American (mean, median, or modal) out of Kansas City or Aurora, and plopped them down in the middle of Gothenburg, the average American would be very unhappy. Yes, they'd have generous social benefits and lots of vacation, but they'd also be crammed into a small apartment in a very small country. They wouldn't be able to afford services that average Americans take for granted, like lots of restaurant foods and extremely high levels of customer service, which means they'd spend a lot more time doing basic housework, childcare, and so forth. They would find it very expensive to fuel their car, and the insular, almost formal culture would make them crazy.

This is also true the other way, by the way; the average Swede would not be happy living in America. Sure, they'd have a huge house, filled with cheap consumer goods, and they could drive their car everywhere, particularly to their incredible array of dining options. But they'd miss their vacation and find America's looser safety net both terrifying and inconvenient. They would hate the inefficiency of our government services, and miss their cozy circle of friends and family. Part of the reason that we have different systems from the Swedes and the Germans is that we place different emphasis on various possible sets of amenities, and of course, the availability of various amenities changes what we think of as the basic package for a decent life. In most of America it includes a house, preferably detached, and a car. In Sweden it includes a year of mandated maternity leave and a well-run streetcar system. Losing any of those amenities is usually more painful for people than getting whatever the other folks have--which is why most expats are some combination of young, unhappy in their home country, or wealthy enough to buy the stuff they miss.


And:
Ultimately, it doesn't matter whether much whether Sweden changes its economy in ways that reduce the return to innovation, because Sweden is never going to be doing most of the innovation that drives its economic results. This is no slam on Sweden, mind you; it's just that, numerically, the overwhelming majority of new ideas are going to come from somewhere else. Germany is in the middle, but it's still a fraction of the size of the United States. Small countries are like little islands floating on an ocean of trade and capital, while the US is more like the jet stream, moving all the water around.

And so what happens to US growth matters a lot, to us and to others; we're almost a quarter of the world's GDP. If we slow down innovation, we will feel it; so will other countries, as the global economy slows. This will perhaps not always be the case; India and China are huge, and if they get rich, their economies (and presumably, their rate of innovation) will dwarf ours. But right now it simply matters a great deal that we get growth right, in a way that it does not matter for smaller welfare states.


And an implication about how a self-interested rest of the world should have thought about the Affordable Care Act, which, if it does what it is meant to, will dampen the incentive for technological improvement in pharmaceuticals:
Or as I argued during health care reform, given how heavily we subsidize pharmaceutical development, Europeans were stupid to crow about the perceived inadequacies of US style health care. If they'd been smart, they'd have been running ads on television saying, "No, really, it's dreadful--America wouldn't ever want to try anything like it!"



COMMENTS (8 to date)
Graham Asher writes:

"They wouldn't be able to afford services that average Americans take for granted, like lots of restaurant foods and extremely high levels of customer service, which means they'd spend a lot more time doing basic housework, childcare, and so forth. They would find it very expensive to fuel their car, and the insular, almost formal culture would make them crazy. "

Looks like somebody hasn't been to Sweden recently. Or more probably hasn't ever been. About the only accurate comment is about the cost of fuel. On the subject of restaurant food and levels of service, I recently spent a few days in Malmo on business, and found a large variety of restaurants serving food of all types at all prices, with great service.

And it's absurd, is it not, to refer to Sweden as a 'very small country'. The USA is much, much, bigger, but there is no feeling of smallness in Sweden, which is about twice the size of the UK, with a population of 9 million - plenty of space for everybody.

Mike W writes:

I found her credible enough until this:

Since that panel, I've been thinking a lot about the differences between small countries and large, and the policy constraints that imposes.

One thing it made me realize is that I was (I think) wrong to support full social security privatization.

The unfunded liability of [U.S.] social security, by contrast [to smaller countries like Sweden], is in the tens of trillions (net present value). Where would we put enough investment to cover that kind of liability? Our investments would swamp markets, including our own, in a way that Sweden's just don't.

Really, she supported privatization and hadn't considered that?

David R. Henderson writes:

@Graham Asher,
Re food, I can't comment from experience, having never been there. Re size, clearly from context, she's discussing GDP, not physical area.
@Mike W,
Touche. I wasn't highlighting that part of her piece, though.

vlad writes:

Why would you compare US with Sweden, rather than with the EU?! This analysis makes about as much sense as wondering why the US has more innovation than Michigan (about same population as Sweden). If you're going to wonder about innovation, the question is why the EU, with about 60% more people than US and slightly higher GDP, is so much less innovative than the US.

Jeff writes:

That was a good post. My only quibble is that the Acemoglu & Co. paper she cites, while interesting, strikes me as an exercise in just so storytelling.

kebko writes:

The social security point seems poorly thought out to me too (i know you didn't highlight that part). The capital markets would react to it. One of the advantages would be a more reasonable deployment to capital, and innovations would develop as a result of the newly rational savings pool. To imagine privatization while assuming ceterus peribus seems naive and simple.

MikeDC writes:

This seems profoundly wrong:

Ultimately, it doesn't matter whether much whether Sweden changes its economy in ways that reduce the return to innovation, because Sweden is never going to be doing most of the innovation that drives its economic results. This is no slam on Sweden, mind you; it's just that, numerically, the overwhelming majority of new ideas are going to come from somewhere else.

All innovation is not equal and we live in a world of highly interconnected economic activity.

Assuming a fairly random distribution of uncommon geniuses who might help the world make radical advances, of course it matters whether a small country is reducing the return to innovation.

I always used to point out that it'd be a tremendous loss of humanity if someone with the potential to be the next Einstein were born into a North Korean rice field.

It's still a tremendous loss for humanity if the next Einstein is born into a society where he decides to stay a patent clerk.

To put it another way, given that major innovations should spread quickly through the economy, how come so few happen anywhere else? Why couldn't Nokia do what Apple did? At some point, we should see the occasional innovative market leader from a small country. Actually, Ikea probably fits that mold... not sure I can think of too many others off the top of my head.

James Strong writes:

@MikeDC:

That's a pretty good point, but I think that you are wrong in assuming is that all that's needed for innovation is a genius.

There's a lot that goes into the process of creating new products, and Megan McCardle's point is that you need the right economic infrastructure and climate for innovation to occur.

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