The U.S. budget deficit widened by 23% to $747.1 billion in the first nine months of the fiscal year, as rising spending eclipsed a small bump in revenue from the Trump administration’s tariffs. Read more
In 2017, Alexandria Ocasio-Cortez beat Joe Crowley to claim the seat for New York’s 14th district in a momentous political upset. As a self-described Democratic Socialist, Ocasio-Cortez’s election spurred debate across the political spectrum. Her election was hailed simultaneously as a statement of an energized youth, as well as an uprising of a movement to dismantle capitalism. In 2016, Bernie Sanders ran a relatively popular campaign while also self-identifying as a democratic socialist. Meanwhile, Elizabeth Warren has rejected the label and identified as a capitalist. However, with all the excitement (positive and negative) surrounding the term, there is significant confusion about what this means as an ideology and how it plays out in practice. In this article, I clarify the term democratic socialism and then compare various economic and social indicators between the United States and countries with stronger and weaker elements of democratic socialism.
Democratic Socialism
While socialism has various connotations and meanings in the contexts of politics, history, and economics, the term carries a sort of stigma in the United States. Perhaps a relic of the Second World War and the Cold War, socialism (democratic or not) and communism are sometimes used interchangeably. Historical hostilities between the United States and various communist countries, therefore, might explain some of the negativity surrounding the term. Democratic socialists in the United States, however, reject this equivalence. According to the website for the Democratic Socialists of America (or the DSA, of which Ocasio-Cortez is a member), “Democratic socialists believe that both the economy and society should be run democratically—to meet public needs, not to make profits for a few.” The webpage states explicitly that they do not want complete government control, nor do they want complete ownership by large corporations.
So, what exactly does democratic socialism look like and are there any countries that exemplify this ideal? The DSA website cites Northern European countries as examples of states that have embraced various aspects of democratic socialism and have been prosperous. They further note that, “We can learn from the comprehensive welfare state maintained by the Swedes from Canada’s national health care system, France’s nationwide childcare program, and Nicaragua’s literacy programs.”
Pointing to an exact system of what it means to be democratic socialist is challenging because it does not fall at or near either extreme of free-market capitalism, or complete-government-control communism. However, with these examples in mind, it is clear that democratic socialism, according to this perception, contains elements of social safety nets. What all these programs have in common is that they are set up by the government for the benefit of citizens, especially vulnerable populations like children, the ill, people living in poverty, and so on. There is social expenditure from the government directed at all or part of the population.
The idea of government social spending enables a more robust analysis. One can measure the degree of democratic socialism through gradations of social expenditure. For the purpose of this analysis, since the question is being asked through the lens of the United States, the focus here will be on the relatively high-income countries in the Organization of Economic Co-operation and Development (OECD) whose 36 members include many of the richest countries in the world, as well as a number of emerging economies.
Public spending as a percent of GDP for the OECD countries shows that Mexico, Chile, and South Korea are on the lower end of the spectrum while Belgium, France, and Finland are on the higher end. The United States’ share puts it slightly below the OECD average.
Because of the wide variety of categories included in this aggregate measure, I detail some common areas of expenditure and select outcomes associated with countries that have higher levels of public expenditure. To illustrate aspects of democratic socialism as generally understood, I focus on common, accessible and comparable measures of wellbeing as defined by the OECD.
Taxation
Restricting our view to the countries with the highest social spending as a percent of GDP, the table below suggests that they also have the highest tax revenue as a percent of GDP, in the mid-to-high 40% range.
Tax Revenue: Total, % of GDP, 2012-2017
| Country | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 |
| Belgium | 44.17 | 45.11 | 45.07 | 44.81 | 44.08 | 44.60 |
| Chile | 33.19 | 19.86 | 19.61 | 20.38 | 20.16 | 20.16 |
| Finland | 42.68 | 43.62 | 43.81 | 43.93 | 44.02 | 43.34 |
| France | 44.36 | 45.37 | 45.45 | 45.28 | 45.46 | 46.23 |
| Korea | 24.78 | 24.30 | 24.59 | 25.16 | 26.24 | 26.90 |
| Mexico | 12.65 | 13.30 | 13.70 | 15.93 | 16.63 | 16.17 |
| United States | 24.07 | 25.65 | 25.98 | 26.23 | 25.89 | 27.14 |
Countries with the lowest social spending as a percent of GDP have low tax revenue as a percent of GDP. The U.S. falls somewhere in the middle, but closer to the lower end of the distribution.
Per Capita GDP, Income Inequality and Poverty
The GDP per capita is higher for the U.S. at $57,797 as compared to France ($42,030), Finland ($43,730), and Belgium ($47,373).
However, the U.S. has a significantly higher level of income inequality as compared to many advanced and even emerging economies, including Belgium, France, Finland, and Korea (as measured by the Gini coefficient where 0 is perfect equality and 1 is perfect inequality).
The poverty rate (the ratio of people whose income falls below the poverty line) for the United States is substantially higher (.178) as compared to Belgium (.097), France (.083), or Finland (.058). In fact, the U.S. falls towards the higher end of this spectrum in the company of predominantly emerging economies.
Moreover, the ratio by which the mean income of the poor falls short of the poverty line (that is, the how different the mean income of those below the poverty line is as compared to the median income) in the U.S. is also higher at .398 as compared to Belgium (.216), Finland (.225), and France (.239).
Public Spending and Social Safety Nets
Education: In terms of public spending on primary to post-secondary non-tertiary education as a percentage of GDP, the United States lags behind France, Korea, Finland, and Belgium; moreover, the U.S. also spends less on tertiary education as a percentage of GDP as compared to Mexico, Belgium, France, and Finland.
Given that this information may be tempered by how high education costs per student are for various amenities, it is worth noting that in 2015, the U.S. had lower math performance scores as compared to France, Belgium, Finland, and Korea (the closest comparison being France at 493 as compared to the U.S.’s 470. The highest mean score was Singapore’s at 564). Similarly, the U.S. had lower mean reading performance scores than those for Finland, Korea, France, and Belgium. Furthermore, it lagged Finland, Korea, and Belgium in science performance scores, although its mean was one point higher than the mean score for France.
Retirement: Net pension replacement rates, which measure the extent to which pension systems replace income post-retirement (taking income taxes and social security contributions into account), vary across countries. The U.S. falls towards the lower end of this spectrum, with pensions replacing only 49% of pre-retirement income, while France, Belgium and Finland fall in the middle of this distribution, replacing 75%, 66%, and 65% of pre-retirement incomes in post-retirement pensions, respectively.
Disability: The measure of public spending on incapacity as a percentage of GDP is lower in the U.S. as compared France, Belgium, and Finland (0.4% lower than France, the second lowest, and half that of Finland, the highest among the countries in question).
Infant Mortality: Of the countries considered, the U.S. has the highest infant mortality rates after Mexico and Chile; By contrast, France, Belgium, Korea, and Finland have lower deaths per 1000 live births respectively.
It is also worth noting that the U.S. has a lower measles vaccination rate as compared to Korea, Mexico, Belgium, Finland, and Chile, although it is higher than France. Moreover, the diphtheria, tetanus, and pertussis vaccination rates for the U.S. are also lower than those for Korea, Belgium, Mexico, and France, but still higher than those for Chile and Finland.
Conclusion
In summary, democratic socialism is a political and economic system that favors large welfare state spending and the equitable redistribution of wealth. In this article, the data employed from OECD confirms that democratic socialist governments generate higher tax revenues as a share of GDP and spend more in social programs, than the average OECD country. Furthermore, democratic socialism promotes less inequality, less poverty, better health and education outcomes compared to countries with lower social expenditures.
On December 10, 2018, the Graduate Center hosted an attention-grabbing discussion on the causes of the Great Recession and the possibility of a future downturn due to high levels of corporate indebtedness. Janet Yellen, the former Federal Reserve Chair, was interviewed by the Nobel Laureate Professor Paul Krugman.
Professor Krugman initiated the discussion by asking if Chair Yellen had any indication in advance that this particular crisis would become the worst economic crisis since the Great Depression. Yellen responded with an anecdote. When she became the President of the Federal Reserve in San Francisco back in 2004, the first issue raised by the bank supervision unit was the high commercial lending for development and construction, especially in the areas of California and Arizona, due to the booming real estate market. Despite all efforts made by the Federal Bank of San Francisco, banks were leveraging most of their capital in real estate, emboldened by house price increases, and it was almost impossible to convince people, let alone members of the Congress and industry, of the dangers. The authorities found themselves unable to put a stop to this lending and issued mild warnings, while house prices continued to rise. By 2005, Chair Yellen was convinced of the existence of a housing bubble, as large lending institutions, such as Wells Fargo and Countrywide, offered mortgage loans with very lax lending standards. NINJA loans (meaning there was No Income, No Job or Assets) or combined loans provided to one borrower, with a loan value of 125% of the value of the property, were typical examples of bank practice. On this issue, Krugman concurred, adding that Countrywide’s case was indeed a scandal.
Yellen recognized the fragmented financial regulation system that existed in the USA with many different regulators. Countrywide was an example, where the mother company – a gigantic entity exposed heavily to risky mortgages – was converted into a federally chartered thrift company in 2005 in an attempt to avoid the stringent supervision by the Federal Reserve Bank. Thus, it would be regulated by another entity (Office of Thrift Supervision), whereas a subsidiary – a small bank – was supervised by the Federal Reserve Bank.
When Countrywide failed, Yellen became more concerned with the environment of vast financial excess, and overleveraged households, while banks were competing eagerly to finance all possible projects, even the most egregious ones. Yellen gave another example of this idiocy, where a private equity firm tried to take a company private and surprisingly could obtain a loan to buy out the main shareholders without even being evaluated. In addition, the terms of the contract were so favorable that if the economy faltered, the borrowers had the option of not paying interest on the debt until they were able to do so. The process, common in those days, called payment-in-kind (PIK) where the borrower assumes more debt (this is the payment in kind) in times when borrowers could not pay interest.
Easy Loans, Shadow Banking, and Highly Leveraged Large Investment Banks
She mentioned that ample liquidity in the market and the housing bubble were the main issues of discussion in monetary policy meetings. She admitted that, at the time, she had a poor perspective on the impact of the shadow banking system (referring to non-bank financial institutions that were not subject to regulation and engaged in maturity transformation by raising – largely by way of borrowing – short term funds and using them to purchase assets with longer-term maturities).
It was shocking how leveraged investment banks became and how reliant they were on overnight, short-term, wholesale credit, on financing gigantic portfolios of illiquid assets. And how that system could impact the core banking system like the kinds of runs we saw with Lehman and with Bear Stearns. Nor she did ever imagine that there was a company like AIG out there selling enormous amounts of insurance that made investors so comfortable that they weren’t taking on undue risk.
Fed Failure to Understand Magnitude
On this point, Krugman stepped in and said that it was surprising that the Fed’s alarm did not ring enough bells? In response Yellen affirmed that at the Fed hadn’t put all the pieces together at the beginning, despite the series of meetings in 2006 and the extensive debates in the Federal Open Market Committee of a potential housing bust. Nobody expected that this seismic magnitude would create a severe financial crisis and a fall of the housing prices in excess far beyond 20%. They were contemplating that house prices could fall and could have an adverse impact on the economy leading up to a recession, like in 2002, which was caused by a decline in stock prices. The ripple effects through the economy looked manageable, with the Fed probably able to contain it by cutting interest rates.
State of Mind of Policymakers at Fed/Aftermath and Stress Tests/Turning Point
Following Krugman’s question regarding the state of Central Bankers’ minds during the extreme crisis and if they felt confident that they could get through it, Yellen replied that this was indeed a horrifying experience, with this crisis having the potential to make the Great Depression look like a mild downturn. The Fed recognized the need to do everything possible to stabilize the financial system after the collapse of numerous banks. While the financial crisis was transmitted to the real economy, with wide-ranging potential repercussions and the unemployment rate increasing to 10%, the Fed acted quickly with response measures, and by December 2008 short-term interest rates were effectively at zero.
Also, intense pressures on capital markets forced the Fed to move relatively quickly and to conduct stress tests for the major banking organizations in assessing their viability and potential capital shortfall. That act, according to Yellen, was the turning point for the financial system and for curbing people’s panic regarding banks’ undercapitalization. The Fed’s strong commitment to stabilizing the system forced the banks, back in April of 2009, to recapitalize either through the use of private funds or through the injection of government equity. On this issue, Krugman stated that, injecting capital basically meant the government bought stocks, which diluted the existing stock, while banks had more money that could be lost ahead of hitting the debt holders.
Subdued Inflation
Regarding inflation, Krugman initially pointed out that Yellen, in contrast to some other colleagues throughout that period, correctly predicted that 1) inflation would stay low and 2) that the recovery would be sluggish despite enormous monetary expansion.
Regarding her prediction of low inflation, Yellen responded that at the time there was insufficient demand to ignite inflation. In contrast, an immense shortfall in demand and the vast capacity of the economy to supply goods and services resulted in the unemployment rate peaking at 10%. Despite some beliefs – including those of people in the financial markets and Congress – that printing money or creating reserves was bound to create inflation or to verge on hyperinflation, there wasn’t an inflationary environment, and this was indicated by survey measures of inflation expectations.
In regard to a sluggish recovery, Yellen’s pessimism was based on previous historical events where crises such as this one were followed by vastly prolonged downturns with substantial debt overhang, while a long period of time is needed before any revival in consumer spending occurs. Therefore, since short-term interest rates were nearly zero and fiscal policy was not able to help further, the Fed explored alternative policy tools to stimulate the economy. She also pointed out that, in small economies after such a crisis, growth comes from the exchange rate’s depreciation as demand for the country’s exports increases, but she believed that it would not apply in this situation.
Krugman expanded on the issue of lower-bound, short-term interest rates and recalled that some countries essentially achieved even negative rates, although not by a lot. He went further, saying that the Fed was able to decrease short-term interest rates to zero levels, but this constrained the Fed’s ability to do more.
Liquidity Trap and Quantitative Easing
Yellen pointed out that the economy was in a liquidity trap where, at zero-bound, short-term interest rates, conventional conduct of monetary policy – buying short-term debt and paying by printing money – wouldn’t have any effect on the economy. It wouldn’t create inflation, and it might not even increase the money supply.
In Krugman’s remark that this situation brings back memories of the Japanese experience, Yellen argued that, with the benefit of hindsight, in Japan’s case the Central Bank, as a standard monetary policy tool, engaged in purchasing very short-term government treasuries by printing money. But the yields on those treasuries were already close to zero, and therefore the act of creating money by deciding to increase the number of nickels in circulation, buying up dimes and paying for them by issuing two nickels per dime had no impact at all. All in the Fed, however, believed that long-term interest rates are more relevant in driving people’s decisions about buying a house, or a car, or whether to engage in investment in plant and equipment. And with zero short-term interest rates, the Fed enacted quantitative easing – a term pioneered by Japan in 2001 – that placed considerable emphasis on driving long-term interest rates down and stimulating the economy.
The discussion concluded with the two participants answering various questions raised by the audience.
The recovery and expansion of employment in New York City that began following the financial crisis and downturn continued into its ninth year in early 2019. This post examines recent overall job growth in the city and then looks at the variation in growth rates across industries and what this variation implies about the dynamics of the city’s job market. Recently-released employment data show jobs in the city grew 2.0 percent in the first quarter of 2019 over a year ago, modestly higher than in the same period in 2018 and in excess of the 1.7 percent nationwide growth. The last few years of the expansion, as noted in an earlier post, have seen a divergence in job growth among key sectors in the New York City economy, and this past year has continued that pattern.
Employment Trends in New York City, New York State and the Nation
The figure below, also presented here, uses a monthly index of employment to show the robust recovery of employment in the city relative to both New York State and the nation. The level of employment in the city recovered relatively rapidly and is now almost twenty percent above its 2010 low. The recent growth rates, while off the highs of 2015 and 2016, nevertheless continue to run about 2.0 percent. Statewide, job growth has averaged closer to 1.2 percent over the past year, below the city and the national average growth of 1.7 percent. As has been discussed previously, this disparity in growth across areas in New York State has persisted for some time and reflects the relatively slower pace of employment growth in some of the metropolitan areas in upstate and western New York.
Performance of Key Industries in New York City
A look at the last two years of the expansion of employment in New York City shows some divergence in growth across sectors and years, a divergence which suggests the forces driving job growth in the city. Here we examine the variation in employment growth in eight sectors—Health Care and Social Assistance, Construction, Information, Business and Professional Services, Finance and Insurance, Retail Trade, Leisure and Hospitality, and Manufacturing—and highlight some of the features underlying their performance. The percent change in employment in the first quarter of 2019 over a year ago (2019), and the first quarter of 2018 over a year ago (2018) are used to capture recent trends in these industries.
Health care and social assistance had the largest job growth rate over the past year, continuing a pattern of strong annual growth prior to and carrying through the downturn and expansion. Job growth rates in four sub-sectors show that growth is coming from ambulatory care and social assistance, which includes medical offices, outpatient care facilities and home health care providers, and from social assistance providers which include services for the young and elderly and those with disabilities. Hospital employment growth has been relatively slow, a trend also seen nationwide. Demographic trends and changes in the provision of health services underlie these patterns, and the industry will continue to be important for overall city growth.
Employment in construction is relatively cyclically sensitive and declined sharply in the downturn in the city. But since its recovery began in 2011 the industry has been a consistent generator of employment. The level of employment in the major components of the industry are well above their prior cyclical peaks. The information industry includes both traditional publishing outlets as well as establishments in internet publishing, telecommunications, motion pictures, web service portals, and data processing. While employment in non-internet publishers and telecommunications is not expanding, job growth in the other segments in the city has been sufficiently large to continue to yield overall gains for the industry. The professional and business services industry has been a steady force for job growth in the city and with over 750,000 workers, or about 17 percent of city employment, growth here has significant implications for overall city job growth.
A recent pick up in jobs in retail trade has offset the losses seen in 2018. Income growth and spending trends are traditional drives of jobs in the industry, but department and general merchandise stores in both New York City and the nation have been experiencing significant competition as online shopping continues its rapid expansion. This year, however, jobs in these two segments of the industry in the city expanded, a development not seen nationwide. It remains to be seen if the current levels of employment can be sustained.
Employment in the finance and insurance industry expanded, though, at a relatively slow pace in the past two years, with modest gains in jobs in the securities and commodities brokerage (Wall Street) sector. The finance industry is an important part of the city’s economy not so much for its employment numbers but for the fact that, with an average wage in 2017 of roughly $250,000, it generates about 30 percent of annual earnings in the city.
Employment in the city’s leisure and hospitality industry was essentially flat this past year after expanding by about 3 percent in the prior year and being a consistent generator of jobs in this recovery. Gains in several areas were offset by losses in the accommodation and food service component of the industry. Since tourism continues strong and national trends suggest food consumption outside of the home is still growing, the declines could reflect changes in the way in which New Yorkers are consuming food, possibly more consumption of prepared food. These changes in the city warrant a closer look.
Manufacturing firms continue to shed jobs in both New York City and statewide. In a recent article it was pointed out that manufacturing jobs in the nation had declined by almost six million between 2000 and 2010, but employment since then has risen by about one million, much of it in auto and auto-related production locations. The upturn has largely not had an impact either in New York City or New York State, however, with the notable exception of Albany which is successfully developing a nanotechnology cluster.
Outlook
Two reports project that jobs in the city will continue to grow this year and next though likely at a slower pace than in 2018. A variety of factors will combine to influence that growth. One is the national economy where some projected slowing will constrain the ability of a number of industries in the city to expand employment because of their many links to national firms and activity. More locally, as noted here, several developing trends could affect employment, including health care provision, the performance of Wall Street, consumer spending patterns and the competitiveness of the city as a location for internet-related firms and activities. Finally, it remains to be seen how the Tax Cuts and Jobs Act of 2017, which caps the size of the individual federal tax deduction for state and local tax payments, will impact the housing markets in the city in the coming years.
The economic outlook in industrial economies and major emerging markets is deteriorating. The IMF cut its economic forecasts for growth in 2019 to 3.3% from 3.7% in October. Read more
Two years after the death of Sir Anthony Barnes “Tony” Atkinson, characterized as the father of modern inequality research by Paul Krugman, the question of measuring inequality remains more crucial than ever.
The need for improved economic indicators was echoed recently in a David Leonhardt article about the U.S. economic recovery 10 years after the collapse of Lehman Brothers. He claimed that, while accurate, our most prominent economic measures of the recovery, such as the Gross Domestic Product (G.D.P.), the unemployment rate and the Dow Jones Industrial Average are problematic in that due to the inequality in the distribution of income they mislead the public conversation about people’s lives and economy. Leonhardt does not discuss the need for new and improved indices of inequality. When he describes the increase in inequality, instead of reporting the rising Gini coefficient, the most commonly used measure, he points to a gloomier reality by using graphs, such as the one below, that show the large and growing share of economic income that has been going to an elite class of “very rich” people.
Source: New York Times
So, does the Gini coefficient fail to describe the increase in inequality? Definitely not, but maybe it’s time for new measures that “do a better job of capturing the reality” of growing well-being inequality, especially, after the global financial crisis.
Source: World Bank
These new measurements would also inform the public conversation about economic reality and about how policies could improve peoples’ lives. They could also give insight into the rise of populism in the political life of the Western World and especially across Europe. For example, Britain currently realizes that there may be no good terms for Brexit while Labor leader Jeremy Corbyn blames Prime Minister Teresa May for the rising poverty and inequality amid the Brexit chaos. A recently published study shows that individuals from the bottom of well-being distribution in Britain were more willing to vote for Brexit. Will the Britains who voted for leaving the union find themselves worse off in a near future well-being distribution? This question will not be easily answered. Another question is whether and how Brexit will affect inequality in Britain, especially given the fact that the U.K. Gini coefficient has actually been decreasing modestly over the past 15 years.
Source: World Bank
In the early 1970s, the British economist Tony Atkinson proposed an alternative index that helps to make comparisons of income inequality among countries or across different time periods when the Gini coefficient is inconclusive. His idea could be easily described in a risk-taking framework, despite the fact that Atkinson has presented it in a different way. Suppose that it is equally likely for someone to be born in any of the almost 127 million U.S. households. Hence, a child could be born to a wealthy family on the Upper East Side of New York City or to a family in Centreville, Illinois, where 35% of the population is below the poverty line. Indeed, that would be really risky and probably the unborn child would be unhappy facing its first lottery. Atkinson suggested the new measure of inequality using a hypothetical country where all the households have the same income. What would be the minimum income at which the soul would be willing to call off the risky lottery and choose to be born in this hypothetical land without inequality? Probably the minimum accepted equally distributed income would be much lower than $90,000, almost the level of the U.S. mean household income today.
Atkinson’s index shows the share of the mean household income that should be omitted in order to find the minimum accepted income. As the graph indicates, people in the USA and the UK are increasingly willing to accept a smaller and smaller proportion of the current mean household income in order to avoid the observed degree of inequality.
Source: LIS Data Center
In a very interesting paper which accommodates the analysis of globalization’s effects on income distribution, Branko Milanovic and Christoph Lakner study global inequality by using data from almost 600 household surveys from approximately 120 countries. Although between 1988 and 2008, the global Gini and Atkinson index fell by 2.3% and 5.7% respectively, their levels are still very high (Gini: 70.5% and Atkinson (0.5): 41%).
Both the Atkinson index and the Gini coefficient measure income inequality while ignoring other dimensions of well-being, such as health status or education and social reality such as the level of equal opportunities. Maybe the societies in the Western world would not be reluctant to accept a high degree of income inequality if the upward social mobility for hard-working people was not as difficult as observed in recent studies by Miles Corak. His graph below uses a measure of the link between the earnings of fathers and sons to measure social mobility. The relatively high measures for the United States and the United Kingdom indicates that social mobility is more problematic than in Australia, Canada, and Scandinavian countries.
Source: M. Corak, 2016
Note: The horizontal distance displays the intergenerational earnings elasticity between fathers and sons (i.e., the percentage difference between the adult earnings of a son for a one-percentage-point difference in the father’s earnings. The higher the value, the tighter the link between parent and child earnings, and the lower the degree of intergenerational mobility.
Atkinson was one of the first who realized that inequality should be measured beyond G.D.P., and his papers in the early 1980s, along with other scholars, are considered as the beginning of multidimensional inequality literature. Quite remarkably, the literature was in its infancy for more than two decades but in recent years there has been a rising interest from academics and policy-makers (e.g., Stiglitz, et. al.) Hopefully, in the future, this growing literature on multidimensional measures of poverty and inequality will provide policy-makers with better tools to address these critical problems.
The U.S. market’s most reliable recession indicator flashed red on Friday, when the Treasury yield curve inverted for the first time since 2007. Is the next economic downturn here? Read more
