4 Surprising facts about gun violence.

4 Surprising facts about gun violence.

1. The scariest guns kill the least amount of people.

Despite the extensive coverage dedicated to “assault weapons” by the media following mass shootings, it appears as though such coverage excludes a few important details. For one, “assault weapons” are functionally no different from any other firearm. As one study has noted of the 1994-2004 “assault weapons” ban:

"The AW [assault weapon] provision [of the ban] targets a relatively small number of weapons based on features that have little to do with the weapons operation, and removing those features is sufficient to make the weapons legal."

That’s right, the difference between an assault weapon and any other firearm are purely superficial, one is far more disturbing than the other, but they are both the same on the inside.

Despite the media craze about the danger of “assault weapons” like the AR-15, FBI data shows that ALL rifles were only confirmed to have been used in 322 homicides in 2012. And when justifiable homicides committed in self-defense are excluded, the number is a mere 266. This is in comparison to 1,554 unjustifiable homicides committed with knives, 518 committed with blunt objects, and 667 committed with hands or feet. Thus, a US citizen’s chance of being murdered by a person with a rifle was 0.000085% in 2012. 

According to the US Congressional Research Office, there were approximately 110 million rifles in the United States in 2009. Assuming that number stayed the same (it probably grew) in 2012, that implies that 0.00024% of rifles are involved in unjustifiable homicides. In comparison, of the 312 million pairs of hands and feet in the United States, 667 were used in homicides. That implies that 0.00021% of pairs of hands/feet were used in unjustifiable homicides, a percentage insignificantly different from percent of rifles involved in unjustifiable homicides. Ultimately, this means that the rationale that the government should ban rifles like the AR-15 in order to save lives makes about as much sense as cutting off everyone’s hands and feet so we can’t strangle each other to death.

2. Banning high capacity magazines doesn’t work.

Banning magazines over a certain size is a popularly accepted gun control measure. The logic behind it is simple; if criminals have less bullets to fire, than they will kill less people. The problem is that most gun crime doesn’t even involve more than a few bullets being fired. According to a study analyzing the effect of the 1994 “assault weapons” ban on gun violence reported to the Department of Justice in 2004:

“[A]vailable studies on shots fired show that assailants fire less than four shots on average, a number well within [a] 10-round magazine limit”.

However, this information didn’t stop the US government from banning magazines which held over 10 bullets between 1994-2004. Despite this ban the DOJ report noted earlier found that:

“[C]riminal use of [large capacity magazines] was rising or steady through at least the latter 1990s, based on police recovery data… Post-2000 data... suggest that [large capacity magazine] use may be dropping from peak levels of the late 1990s but provide no definitive evidence of a drop below pre-ban levels.”

So the ban on high capacity magazines didn’t stop or even cause a decline in their use, and even if it did, most crimes don’t involve more than 4 shots being fired  and thus wouldn’t be affected by the ban anyway.

3. The majority of gun deaths are voluntary

Gun control advocates cite often cite the statistic that there are 30,000 gun deaths per year. While this is true, it is misleading because the majority of those gun deaths are completely voluntary. In 2010, the latest year for which data is available, the CDC documents 19,392 suicides by firearm. Additionally, the FBI reports that there were 8,874 homicides committed with firearms that same year. That means that 69% of firearm deaths in 2010 were suicides. However, even with the 69% of gun deaths being attributed to suicide, a few hundred more gun deaths are considered justifiable (e.g self-defense). In 2010 there were 617 justifiable homicides using firearms by police and private citizens. This brings the true number of unjustifiable homicides committed with firearms to 8,257.

However, many gun control advocates will argue that restricting gun ownership is a good thing since it could reduce the number of suicides. While it is true that gun ownership is positively correlated with overall suicide rates in individual states in the US, a Harvard study found that there is no correlation between international suicide rates and firearm ownership. For example, Japan has a suicide rate double that of the US despite having near zero gun ownership.

Many things correlate with suicide, that doesn’t mean that they cause it. Take for example a study which found that the amount of country music radio stations play is strongly related to the suicide rate, even when controlling for other variables like gun availability and poverty. Should we believe that country music causes people to off themselves? Maybe, or maybe there is another unrecognized variable driving the relationship.

Regardless, if one believes the government should restrict gun ownership to protect people from their own choices, than stopping people from listening to country music, as well as forcing people to have healthy diets would also seem like legitimate government interventions into a person’s life. Such draconian and authoritative interventions could not possibly be supported by any believer in human free will.

4: Fatal accidents with guns are nearly nonexistent.

A favorite argument for restricting gun ownership is that having a gun in the home increases the risk of accidental death dramatically. However, this is not the case. According to the Center for Disease Control, 606 people died due to accidental discharge of firearms in 2010. This is in comparison to 35,332 accidental deaths due to motor vehicles, 33,041 due to poisoning, 26,009 from accidental falls, 3,782 due to drowning, and 2,782 due to fire.

Cause of accidental death	Number of accidental deaths among children (all ages)
Cut/ Pierce	105
Bicycle accidents	551
Firearm	606
Fire	2845
Suffocation	6,165
Drowning	3,782
Falling	26,009
Poisoning	33,041
Motor Vehicle	33,687

And if we look solely at children (age 14 and below), it is clear from CDC data that accidental death by firearm is not a statistically significant problem (see below).

Cause of accidental death	Number of accidental deaths among children (Age 14 and below)
Cut/ Pierce	4
Bicycle accidents	58
Firearm	62
Falling	62
Poisoning	94
Fire	308
Drowning	726
Motor vehicle	1,418

While the media may scare people into thinking firearm accidents are a major cause of accidental death among children, the data shows that such accidents are extremely rare and comparable in number to fatal bicycle accidents. For the public at large, firearm accidents are the least of our worries. Accidental poisoning, drowning, falling, etc are far more likely to occur.

It’s also worth noting that fatal accidents by firearm have decreased 58% since 1991. It appears that this problem is one that is taking care of itself.

Myth: Women earn less than men for the same work.

During his State of the Union Address, President Obama stated “women make up about half our workforce. But they still make 77 cents for every dollar a man earns. That is wrong, and in 2014, it’s an embarrassment.” Is it true that there is a gender wage gap? A better question is: Do people who work different jobs, with different skills, and different work hours earn different amounts of money? The answer is yes.

That 23% difference between what men get paid and what women get paid is calculated by simply dividing the average earnings of women by the average earnings of men. Thus, the 23%number is an apples to oranges comparison that is so superficial that it is rendered meaningless. The reality of the situation is that there are numerous variables which determine how much a person is paid. Experience, education, where they work, how long they work, if they are married, etc are all important factors yet the 23% number completely ignores them.

There are many reasons why on average, men earn more than women. Here are some:

-Men work more dangerous jobs. Dangerous jobs tend to pay highly in order to attract people to take them. In 2009, the rate of fatal occupational injuries per 100,000 full times workers was 5.5 for men and 0.6 for women [1].

-Men tend to work more in higher paying industries. For example, engineering (any type) is one of the highest paying jobs in the country. Not coincidentally, around 90% of engineers are males. On the other hand, the least well-paying jobs in the US are those of social work, studio arts, early childhood education, drama and theater, etc. And unsurprisingly, women make of the majority of these workers. [2]

-Men tend to work longer hours. “[In 2009] Average hours for men were 41.3 per week, whereas women worked 35.6 hours per week on average.” [3] Additionally, 44% of full time workers are women compared to 56% which are men. [4] 

-Part time workers tend to earn less, even among women. "The hourly pay of women who work part-time has been found to be 20 percent lower than the hourly pay of women who work full time, even when comparing women with the same levels of education and the same family circumstances such as being married, divorced, or with children" [8] Additionally, "Part time workers not only earn less total pay, they are also paid less per hour and are less likely to be promoted. There have, and continue to be, more women than men who are part-time workers" [8]. 

-Many women take years out of the labor force to bear children. This time out of the labor force seriously diminishes the market value of their labor. Mothers tend to have lower wages than childless women.[5]

-Marriage is also a significant factor in determining wages. Studies have found that married men earn more money (around 16% more) than non-married men even when controlling for factors like education, age, number of hours worked, etc. [6] Research generally finds that marriage has a negative or insignificant effect on women’s wages [5].

It is obvious that there are numerous factors which have a hand in determining how much a worker is paid. A true, apples to apples comparison would analyze the wage difference between men and women of the same job with similar education, marriage status, skills, etc. Luckily, researchers have done this. Here are the findings:

- “[A]mong workers who have never been married and never had children, women earn 117% of what men do. (This factors in education, hours worked and age.)” [7]

- “Among college educated, never married individuals with no children who worked full time and were from 40-64 years old- that is, beyond child bearing years-men averaged $40,000 a year in income, while women averaged $47,000” [8]

-"This study leads to the unambiguous conclusion that the differences in the compensation of men and women are the result of a multitude of factors and that the raw wage gap should not be used as the basis to justify corrective action. Indeed, there may be nothing to correct. The differences in raw wages may be almost entirely the result of the individual choices being made by both male and female workers." [9]

The findings are clear, when individuals of similar qualities are compared, the gender wage actually favors women. Thus, the gender wage gap is undoubtedly a result of individual choices, not gender discrimination. Anyone who cites the 23% gender wage number is simply ignoring the fact that there are other determinants of worker’s wages besides gender. And even then, there doesn’t appear to be any evidence that gender even plays a role in how workers are compensated for their labor.

Parting thoughts: Intuitively we should know that paying people less because of their gender is a downright terrible idea. If women were equally as productive as men but paid less by their employers, no one would hire men because it would be a complete waste of money to pay more for the same amount of production. In reality, employers compete for workers and value workers based on said worker’s productivity. If a company can make profits by hiring women at higher wages than companies who discriminate against them, they sure as hell are going to do that regardless of their own prejudices. In a market economy, discrimination based on sex, race, etc is punished. Any employer engaging in discrimination must accept the fact that he will lose productive employees to his competitors or lose valuable customers to competitors who don’t discriminate against people based on superficial attributes like race, sex, etc. Either way, discrimination is a financially unwise decision that most companies refuse to make.

Citations:

[1] http://economix.blogs.nytimes.com/2010/08/20/the-most-dangerous-jobs-in-america/?_php=true&_type=blogs&_r=0

[2] http://www.thedailybeast.com/articles/2014/02/01/no-women-don-t-make-less-money-than-men.html

[3] http://www.statcrunch.com/5.0/viewreport.php?reportid=7996

[4] Authors calculations based on this data: https://www.census.gov/newsroom/pdf/women_workforce_slides.pdf

[5] http://epc2014.princeton.edu/uploads/140782

[6] http://www.nytimes.com/2004/07/29/business/29scene.html

[7] http://www.forbes.com/2006/05/12/women-wage-gap-cx_wf_0512earningmore.html

[8] Sowell, Thomas. “Economic facts and fallacies”

[9] http://www.consad.com/content/reports/Gender%20Wage%20Gap%20Final%20Report.pdf

Myth: WWII brought the United States out of the Great Depression

This is a very popular belief and one which is borne out by most measures of economic growth. And to be completely honest, as the economy is conventionally measured, WWII did result in a rapidly expanding economy. However, the reason why economic growth is important is because it raises the standard of living of the lot of all men and women. This certainly was not the case during the war. Instead of producing capital or consumer goods that improved people's lives, the bulk of the economic growth during the war came from government purchases which funded the manufacturing of tanks, uniforms, bombs, bullets, etc. According to the economic historian Dr. Robert Higgs:

"Yes, national output as conventionally measured did grow hugely during the war... [G]ross domestic product (in constant 1987 prices) increased by 84 percent between 1940 and 1944. What the orthodox account neglects, however, is that this "miracle of production" consisted entirely (and then some) of increased government spending, nearly all of it for war materials and equipment and military personnel. The private component of GDP (consumption plus investment) actually fell after 1941, and while the war lasted, private output never recovered to its pre-Pearl Harbor level. In 1943, real private GDP was 14 percent lower than it had been in 1941. If a nation produces an abundance of guns and ammunition, it does not thereby achieve genuine prosperity .Those who lived through the war ... forget the scarcity of decent housing, the hassles in commuting to work, and the severe rationing or complete absence of basic consumer goods...Because of the many other ways that the well-being of consumers deteriorated during the war, which the official data fail to capture, actual wartime conditions were even worse than [the] figures suggest." [1]

As Dr. Higgs notes, no intellectually honest person would believe that the war was good for the American people, nor the people in countries affected by the war. Indeed, the American people suffered the rationing of basic goods and services as if they lived in a communist command economy. Austrian economist Steve Horwitz and his colleague Michael J. McPhillips published a study in 'The Independent Review' which states: 

"Whatever the war’s effects on seemingly booming conventional macroeconomic aggregates, it entailed a retrogression in the average American’s living standards, and that disconnect should alert us to those aggregates’ limitations...The notion that World War II is responsible for ending the Great Depression has met growing skepticism among economic historians. Although the wartime economy saw increases in conventional measures of macroeconomic performance, the letters, journals, and newspapers of the era indicate years of continued material deprivation and hardship, rather than rising living standards for the average American." [2]

Thus, while Gross Domestic Product is a useful tool in measuring the size of the economy, any sort of production, even if such production is socially harmful (like production of war materials which crowds out private production) is considered a net gain. 

Additionally, Economist Robert Barro has done research on the multiplier effect of government spending during WWII and concluded that the defense spending multiplier was 0.8 and the non-defense spending multiplier was close to zero [3]. This suggests that while government spending on defense stimulated production, it also crowded out private sector investment. His results indicate that the "benefits" of government spending did not outweigh the costs of crowded out private sector investment. Thus, even by conventional measurement of the economy, WWII wasn't exactly a net gain. 

During the war, Keynesian economists warned that an end to the excessive defense spending would lead to an economic downturn. Leading Keynesian Alvin Hansen stated, "the government cannot just disband the Army, close down munitions factories, stop building ships, and remove all economic controls.” [4] Contra Hansen's advice, after the war the government "Government canceled war contracts, and its spending fell from $84 billion in 1945 to under   $30 billion in 1946. By 1947, the government was paying back its massive wartime debts by running a budget surplus of close to 6 percent of GDP"[4]. As a result conventional measurements of the macroeconomy (GDP), suggest that there was a severe depression in 1946, the year after the war. However, this economic downturn is almost never spoken of simply because it was a return to normalcy from the economic sugar high of WWII. In fact, no one living during the post-war years would think that they were living in a depression. There was no evidence of diminished consumption after the war and the unemployment rate was 3.9% in 1946, indicating a strong economy. Of course, this unemployment rate was higher than the 1.2% unemployment rate of 1944 because millions of soldiers who volunteered or were drafted into the military returned home [5]. As historian Thomas Woods has suggested, the miracle of employment during the war could easily be achieved at any time if the government decided to simply kill off the unemployed, but that  is both perverse and insane [6]. Woods' comments are meant to highlight the fact that low unemployment due to mass military conscription is nothing to be proud of. 

After the war, the US economy shrank from decreased production of war materials, however, after the initial "depression" the economy (especially the private sector) expanded rapidly, creating a post war economic boom which continues to be studied today. In the end, we should be wary of the claim that WWII ended the Depression simply because producing an abundance of weaponry for war does nothing to further the standard of living for the lot of all men and women. Socially useful production is determined subjectively by individuals engaging in voluntary exchange en mass, government allocation of resources may grow the economy by conventional macroeconomic measurements, but if no one values what is produced than that production was a waste of scarce resources. And that is exactly what World War II was, a necessary waste of scarce resources and human life, nothing more. Hopefully the world will never have to experience such a "miracle of production" again.
Citations:
[1] http://www.independent.org/newsroom/article.asp?id=2188
[2] http://www.independent.org/publications/tir/article.asp?a=915
[3] http://online.wsj.com/news/articles/SB123258618204604599
[4] http://www.cato.org/policy-report/mayjune-2010/stimulus-spending-cuts-lessons-1946
[5] http://mises.org/journals/rae/pdf/rae5_2_1.pdf
[6] https://www.youtube.com/watch?v=71tPBjrTeJU

Myth: Australia has a $16 minimum wage with no adverse effects.

Myth: Australia has a $16 minimum wage with no adverse effects.

First of all, there is a HUGE difference between nominal and real exchange rates. Nominal exchanges rates are the exchange rates people typically think about (the number of currency units of one country it takes to purchase one currency unit of another country). In contrast, the REAL exchange rate is the ratio between the domestic price level and the price level in a different country. Different countries have different domestic prices. The real exchange rate accounts for this difference while the nominal one does not. Thus, one should be skeptical of any claim that Australia has a minimum wage of $16. In terms of nominal exchange rates, the claim is true. However, real exchange rates are what matters since they take the cost of living into account.

Another thing worth noting about Australia’s minimum wage is that there are different minimum wage rates which apply to different age groups. Using the formula Q = P _d/( ε*P _f) to find the real exchange rate between the US dollar and Australian dollar, I was able to find how much the minimum wage is actually worth in Australia in 2013 (when the minimum wage was raised) for varying age groups:

Real Australian Minimum Wage (2013): [Data from citations 1 and 2]

Age 21+: $10.63

Age 18: $7.27

Age 16: $5.03

Under 16: $3.92

For Comparison:

United States real minimum wage (2013): $7.25

It appears as though while the Australian minimum wage in 2013 was greater than the minimum wage in the United States, it is still almost $6 lower than the figure minimum wage proponents cite. To be fair, since 2014 the real minimum wage for people aged 20+ in Australia has risen to $12.61 due to a rapid fall in the cost of living. Australia’s cost of living has changed randomly from year to year.

The unemployment rate in Australia when the minimum wage was raised (July 2013) was 5.7% and since then has risen to 6.0% [3]. Minimum wage proponents cite this relatively low unemployment rate as proof that raising the minimum wage will not increase unemployment. First, we should already expect Australia’s unemployment rate to be low based off the fact that it was one of the few developed countries not to suffer badly from the 2009 recession (their economy contracted 0.2% in contrast to the US economy which contracted 3.7%) [4]. Additionally, there are many reasons to expect that raising the minimum wage wouldn’t affect the overall unemployment rate. For one, most people earn more than the minimum wage. According to one article, only 2% of the workers in Australia are covered by the minimum wage [5].

Also, a low unemployment rate can be maintained simply because people have dropped out of the labor force and thus stopped looking for work. Indeed, a startling but superficial observation is that the labor force participation rate in Australia dropped steadily from 65.3% in June 2013 (the month before the minimum wage increase) to 64.5% in January 2014 (see below) [6]. Since then labor participation has slightly recovered. Was the minimum wage raise the cause of this decline in labor force participation?

As noted earlier, only a small amount of workers are covered by the minimum wage so it’s hard to say for certain (also other factors could be at play). However, as our friends over at Unbiased America have pointed out, minimum wage increases in the US have coincided with significant drops in labor force participation. The fact that the same thing occurred in Australia is intriguing.

In order to measure the effect of the minimum wage, researchers must examine employment and labor participation among low skilled workers and account for numerous other confounding variables. While there is no research on Australia’s current minimum wage to my knowledge, past research from Harvard University on Australia’s minimum wage has stated: “[F]or each 1 percent increase in the minimum wage we can expect... [to lose] 96,000 jobs" in Australia" [7].  

In conclusion, the minimum wage in Australia is much lower than its proponents state, but it is still much higher than the United States’ minimum wage. The low unemployment rate in Australia relative to other countries is due to the fact that it largely escaped the global recession when most developed countries didn’t. Additionally, we can’t expect to deduce the effects of a minimum wage increase on employment by solely looking at the unemployment rate. While more research on this issue is warranted, past research suggests that raising the minimum wage in the past has not benefitted Australia.

This myth is based off the wrong exchange rate and makes deductions based off superficial data. Thus, it shouldn’t even be considered a valid argument.

Parting notes: It’s worth mentioning that Australia has very admirable economic policies. They have relatively low government spending compared to other rich democracies and rank very highly on the Economic Freedom Indices. Their economy is so free in fact, that they are ranked as the third freest economy in the entire world [8]. Any negative effects that their minimum wage imposes on their economy are most definitely outweighed by the positive effects of economic freedom.

Citations:

[1] Aussie min wage: http://www.fairwork.gov.au/pay/national-minimum-wage/pages/default.aspx

[2] Cost of living data: http://www.numbeo.com/cost-of-living/rankings_by_country.jsp?title=2013

[3] http://www.tradingeconomics.com/australia/unemployment-rate

[4] http://data.worldbank.org/indicator/NY.GDP.PCAP.KD.ZG

[5] http://truth-out.org/opinion/item/5601

[6] http://www.tradingeconomics.com/australia/labor-force-participation-rate

[7] http://andrewleigh.org/pdf/Minimum%20Wages%20(AER).pdf

[8] http://www.heritage.org/index/country/australia

Myth: The Scandinavian countries are proof socialism works.

Myth: The Scandinavian countries are proof socialism works.

This is a myth that is quite pernicious because no one bothers to fact check it. However, to those who have done their research, the Scandinavian countries are definitely not an example of where socialism works, rather they are an example of market economies with large public sectors. Also, it appears as though their large public sectors have been detrimental to economic growth, not conducive to it.

The Scandinavian countries economies are based off of the Nordic Model. Features of the Nordic Model include:

Welfare state programs such as:
-Universal healthcare and "free" education
-High percentage of workers belonging to unions
-High government spending as a percentage of GDP/ high tax burden

They also have strong free market traits including:
-Strong property rights, contract enforcement, and overall ease of doing business.
-Low barriers to free trade
- Little product market regulation. Nordic countries rank very high in product market freedom according to OECD rankings
- In many aspects of economic freedom, such as business, monetary, and investment freedom, Scandinavian countries are actually more free than the United States.

Indeed, the Scandinavian countries on net are some of the most capitalist countries in the world. In fact, the Scandinavian countries score very highly on the Economic Freedom of the World report 2013 report (10 being the highest and 0 being the lowest scores):

Economic freedom ranking:

-Sweden: 7.58 
-Norway:7.56
-Denmark: 7.78. 
-Finland: 7.98 (7th freest in the world)
-Iceland: 7.37


The research on economic freedom is generally supportive of the idea that more economic freedom leads to higher economic growth rates and the prosperity that comes with those growth rates. [2] From an economic perspective, the Scandinavian countries have excellent trade and monetary policies, but have sub-par labor freedom policies and their governments spend way too much. The economic policies of the Scandinavian countries can only be considered to be socialistic insofar as they have large public sectors. 

Government Spending as a % of GDP by country in 2012 [3]:

Scandinavian countries:

-Denmark: 56%

-Sweden: 51.2%

-Norway: 43.9%
-Finland: 55.1%
-Iceland: 47.3%

For comparison:

-United States: 41.6%
-Canada: 41.9%

-Switzerland: 33.8%

-Australia: 35.3%

-Hong Kong: 18.5%
-Singapore: 17.1%

-United Kingdom: 48.5%

Basic economic theory as well as research and empirical evidence has continuously suggested that high levels of taxation and government debt seriously retard economic growth [4]. More importantly, a survey of the empirical literature on government spending on economic growth has stated: “The most recent studies find a significant negative correlation [between government size and economic growth]: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate.” [5] This suggests that the big governments the Scandinavian countries are famous for are most likely detrimental to their economic well-being and not the cause of it as socialists and progressives like to suggest.

Additionally, the same survey also found that countries with large governments can mitigate the negative effects of government spending on economic growth by implementing market friendly policies in other sectors of the economy (i.e trade and labor freedom) and by having high levels of social trust. Luckily, the Scandinavian countries do in fact have high levels of social trust and have instituted market friendly policies throughout their economies with the exception of labor freedom.  

As the charts below show, the evolution of prosperity in the Scandinavian countries has stagnated significantly in the last few decades, not coincidently with the development of their welfare states. For example, “according to OECD figures, Denmark was the 5th most prosperous economy in the world in 1970, immediately behind Switzerland and the United States. In 2004, Denmark was 10th.” [6]

Additionally, when we look to the graphs below we can note that job creation and worker productivity has also remained stagnant. This could be as a result of the high levels of unionization. Research that has been done in the United States tends to show that unionized industries hire less workers and actually shed jobs more than non-unionized industries [7]. This may be the case in the Scandinavian countries as well.

In contrast to the high taxes in Scandinavia, Ireland has had drastic reductions in tax rates with positive results. Additionally, between 1987 and 2005, Ireland’s government spending as a percentage of GDP decreased from over 50% in 1987 to just below 35% in 2005 [6]. It has risen since then unfortunately.  “In barely 18 years Ireland jumped from the 22nd to the 4th place in the OECD prosperity ranking. Ireland did not reduce its social welfare benefits. On the contrary. The unprecedented growth led to an increase of fiscal revenue and social expenditure. It was sufficient to improve the productivity of the government.” [6]

Despite all the praise of "Scandinavian socialism", the only Scandinavian country that makes it into the top ten richest countries (measured by GDP per capita, PPP) is Norway. In contrast, my favorite economies are those of Switzerland, Hong Kong, Singapore, Canada, Australia, and to a lesser extent the United States, which are all within the top ten richest countries. Why do I like them? Because all of these countries have high economic freedom rankings and maintain levels of government spending below 40% of GDP (except Canada and the US). However, even government spending of 40% of GDP is too much. Empirical research suggests that the optimal level of government spending is no greater than 25% of GDP for the average country [8].

Also, when we compare my favorite economies, which are have higher economic freedom scores and lower government spending than the Scandinavian nations, it appears as though the growth rates that the Scandinavian nations have achieved are nothing spectacular or even noteworthy.


Growth rates by country (Real GDP 5- year compound annual economic growth, PPP) [9]:

Scandinavian countries:

-Denmark: -0.9%

-Sweden: 1.0%

-Norway: 0.6%
-Finland: -0.6%
-Iceland: -1.1%

My top picks:

-Australia: 2.5%

-Canada: 1.2%

-United States: 0.6%

-Hong Kong: 2.5%

-Singapore: 4.3%

-Switzerland: 1.2%

The question becomes, why do the Scandinavian countries perform so badly when they have such high economic freedom rankings? I speculate that their large public sectors and lack of labor freedom are the cause. When I extended this hypothesis to James Gwartney, the author of the Economic Freedom Report, he said: "Your speculation makes sense, but I do not know if it is correct.". There could be other factors causing these low growths rates worth exploring. 

In conclusion, the data is clear, the Scandinavian countries are not economic miracles nor are they examples of socialism. Rather they are examples of market economies with large public sectors. Most likely as a result of recent decades of government expansion, the Scandinavian countries have been lagging behind many other countries they once outperformed. Also, they have slower growth rates than countries of similar wealth but have smaller governments. As Dan Mitchell of the Cato Institute has stated:

“Conservative critics correctly condemn the large welfare states, but often overlook the positive results generated by laissez-faire policies in other areas. Liberals, meanwhile, exaggerate the economic performance of Nordic nations in an effort to justify welfare-state policies, while failing to acknowledge the role of free market policies in other areas.” [10]

Citations:

[1] http://www.freetheworld.com/2013/EFW2013-complete.pdf

[2] http://ideas.repec.org/p/dgr/rugccs/199903.html

[3] http://en.wikipedia.org/wiki/Government_spending#As_a_percentage_of_GDP

[4] http://taxfoundation.org/article/what-evidence-taxes-and-growth

[5] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1734206

[6] http://workforall.net/ScandinavianModel.html

[7] http://ime.bg/uploads/335309_OptimalSizeOfGovernment.pdf
[8] http://www.heritage.org/research/reports/2009/05/what-unions-do-how-labor-unions-affect-jobs-and-the-economy

[9] http://www.heritage.org/index/ranking

[10] http://www.cato.org/publications/policy-analysis/what-can-united-states-learn-nordic-model

How much would small government cost?

How much would a small government cost? According to one study, in 2010 funding the following core functions of government would mean that government spending is only 14.33% of GDP [1].

Core functions:
-Police
-Judicial System
-National Defense 
-Education
-Highways
-Sewage sanitation and environmental protection
-Federal Reserve expenses

In 2010, government spending was 40% of GDP and most of that spending is in the form of transfer payments like social security as well as government insurance schemes like medicare and medicaid. We can still have the public goods that the public sector provides without having a big government.

There are also economic reasons for having small government. According to a 2011 survey of the academic literature on the relationship between government spending and economic growth found that, "The most recent studies find a significant negative correlation [between government size and economic growth]: an increase in government size by 10 percentage points is associated with a 0.5% to 1% lower annual growth rate." [2]

Many studies have tried to find the size of government which maximizes economic growth. The findings are almost unanimously within the 15%-25% of GDP range. For example, researchers at the Institute for Market Economics found:

"The evidence indicates that the optimum size of government, e.g. the share of overall government spending that maximizes economic growth, is no greater than 25% of GDP based on data from the OECD countries. In addition, the evidence indicates that the optimum level of government consumption on final goods and services as a share of GDP is 10.4% based on a panel data of 81 countries. However, due to model and data limitations, it is probable that the results are biased upwards, and the “true” optimum government level is even smaller than the existing empirical study indicates." [3]

The evidence appears to suggest that the economy grows faster when government is smaller, thus providing support for the classical liberal viewpoint that government is needed to provide public goods, but is detrimental to growth once it starts crowding out spending and investment in the private sector via borrowing or taxation in order to pay for things like the welfare state.

Citations:

[1] http://www.wheaton.edu/hastertcenter/~/media/Files/Centers-and-Institutes/Hastert-Center/PublicPolicySeries/ScopeofGovernmentFinal08282012.pdf

[2] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1734206

[3] http://ime.bg/uploads/335309_OptimalSizeOfGovernment.pdf