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Celebrity Professor Proposes Wrong Cure for Poverty

He is one of Time’s 100 most influential people in the world; a special advisor to U.N. Secretary-General Kofi Annan, and an architect of Russia’s transition from communism to modern prosperity.

Columbia Professor Jeffrey Sachs is as close to being an international rock star as an economist can get--heck, he even hangs with U2’s Bono, who penned the introduction to Sachs’ bestselling book The End of Poverty--with a gaol to cure world poverty by 2025 through economic growth.

But the good doctor's prescription for getting there -- heavy doses of high-tax government intervention -- is highly questionable.

So, too, is his latest paper touting the miracle cure of socialism.

In the November 2006 issue of Scientific American, Sachs presents an innovative argument for the superiority of the “Nordic” economic model. Sachs makes the even more surprising claim that European welfare states -- as epitomized by the Nordic nations -- economically outperform free-market economies, epitomized by English-speaking countries.

Using language as a proxy for economic systems is rather problematic. In this case, the original English-speaking country, the United Kingdom, is just as much a European welfare state as any Nordic nation. The World Bank reports central government spending is higher in the U.K. than in any of the four countries that constitute Sachs’ Norsland.

While central government spending hits a hefty 39.9 percent of Gross Domestic Product in the U.K, Denmark pegs in at “only” 35.2 percent. Finland registers at 36.9 percent, Norway at 37.2 percent and Sweden at 37.5 percent. When viewed according to this key measure, the U.K. economic model looks far more “Nordic” than “English-speaking.”

Moreover, one can’t help but wonder why Sachs seizes upon the Nordic club as an exemplum of European socialism. Austria, France, Italy and the Netherlands all boast proportionately higher central government spending than their neighbors to the North. They don’t speak English, so why not take a look at them? It would certainly beef up the sample size for Sachs’ inquiry.

When all is said and done, the Nordic nations constitute a rather small sub-sample of European welfare statism. Why exclude, say, France or Germany from examination? These two nations have six times the population of the Nordic peninsula. France’s GDP is nearly double that of the Nordic Four combined, and Germany’s is bigger still. So what are these countries … chopped lutefisk? Or are they being ignored in the interest of cherry-picking?

Leaving aside the questions about study-group selection and assignment, let’s take a look at the methodology Sachs uses to reach his key finding: that average incomes are slightly higher in Nordic countries than in English-speaking countries.

You’d think that would mean that average per capita income in the Nordic peninsula is higher than in the Anglosphere. If so, you’d be wrong.

For starters, Sachs doesn’t look at average per capita income. Rather, he uses the average income for working-age adults -- a curious measure that ignores retirees and children as economic entities. After arriving at this figure for each country, he then averages the averages -- producing a wholly artificial measure of income.

To understand the methodology here, consider this hypothetical. Country A has a population of 50 million people, with an average annual income of $20,000 per working age person. Country B has a population of only 10,000, but an average annual income of $40,000. Sachs would calculate the average of those two average incomes as $30,000.

A better analytical approach is to use per capita GDP, so that everyone counts. And it would use regional averages based on people, not places, to weight the incomes accordingly.

Curious to see how the 414 million souls in the English-speaking world fare economically when compared to Nordica’s 25 million in Nordica (unlike Sachs, I accorded Iceland its rightful place in the club), I calculated the population-weighted averages of the macroeconomic data to determine how they’re doing. I also ran the numbers for the 394 million people in non-English EU member countries. (See table.)

The results paint a much different picture than that limned by Dr. Sachs. Indeed, the population-weighted analyses shows that the Anglo economies are nearly 20 percent wealthier than the Nordics, enjoy faster growth, and have lower unemployment rates. The only good news for the Norsland: The even less-free economies of the EU are even further behind.

One final note: Sachs concludes his essay with a statistical sleight-of-hand to create the illusion that Nordic people are more innovative than the Anglos. To reach this conclusion, he uses an odd measure: R&D spending as a percentage of GNP.

Not only is R&D spending notoriously difficult to track, it’s largely irrelevant. The proper measure of innovation is output, not input. To accurately assess innovation, Sachs should look at results: things like patents and Nobel prizes. The last time I checked, government-run industrial development hasn't worked out too well with Airbus. No such problems with Google and iTunes.

If the Rock ‘n Roll Doctor really wants to end third-world poverty, he’d do well to drop the gimmicky Nordic nostrum, and prescribe the tried-and-true remedy of free-market capitalism.

Tim Kane, Ph.D., is Director of the Center for International Trade and Economics at The Heritage Foundation.

Tim Kane is a full time Research fellow at the Hoover Institution. Kane is a graduate of the U.S. Air Force Academy and holds a Ph.D. in economics from the University of California, San Diego. He is co-author (with Glenn Hubbard) of "Balance: Why Great Powers Lose It and How America Can Regain It," (Simon & Schuster 2013).

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