Why trade wars are ultimately damaging for everyone

The restriction of industries, higher prices and a cost to growth – often for the sake of political point scoring. Trade wars, with their reactionary escalations of tariffs, are ultimately damaging. Not just for those on one side of the tensions, but for all countries involved. At most, a claimed triumph is tantamount to a Pyrrhic victory, incurring heavy losses along the way. Short-term gains for native industries do not necessarily provide solutions to their competitiveness.

The prevailing mercantilist ideas of the 18th century sought to use excise duties as a means of restricting imports and promoting exports. The belief was that imports constituted a loss of wealth, which was fixed, to other countries. Mercantilism was defended by concerns that liberalising trade would reduce Britain’s power and wealth. 

That, however, was a false concern predicated on the supposition that trade was a zero sum game. Adam Smith discredited mercantilist ideas, arguing that free trade benefited both sides of the transaction, allowing global wealth to increase through specialisation and the production of goods and services.

Trade wars are often, at heart, a return to the discredited principles of mercantilist protectionism. 

Whilst the heightened protectionism of trade wars can protect native industries from foreign competition, they result in excessive escalations of tariffs and the protection of firms provides no long-term solution to their inefficiencies. Governments should focus on tackling the problems these industries face, whilst also looking towards more efficient ones. And in trade wars, other industries get dragged in as tariffs become more expansive, posing a threat to firms and trade on both sides of the tensions.

Indeed, history has not looked fondly on the excessive protectionism and retaliation of trade wars. The US Smoot-Hawley Tariff Act is regarded by many as contributing to the decline in world trade in the 1930s, with 25 countries retaliating with their own tariffs. When the newly unified Italy ended its trade agreement with France in 1886 and raised tariffs to about 60%, “both countries experienced dislocation in their export markets and sources of supply.”

Trade wars frequently become embroiled in a political contest, neglecting the benefits of free trade to producers, consumers and aggregate growth. During the escalation of political tensions, disputes become a contest of who has lost out the least.

As former Prime Minister Neville Chamberlain said, “In war, whichever side may call itself the victor, there are no winners, but all are losers.”

Kaamil Kaba is the winner of our Wilson’s School essay competition, held following an Adam Smith Institute economics conference held at the school earlier this month.

Dawn of the Atomic Age

At 5.29 am on July 16th, 1945, in a test codenamed 'Trinity,' an atomic bomb was detonated at Alamogordo in New Mexico, ushering in the atomic age. The test was of a plutonium bomb, one of two types of nuclear device the Manhattan Project had pursued simultaneously. They knew that a U-235 bomb would work, but it took a long time to enrich enough uranium, so they worked on a more complex plutonium bomb as well. It was a higher tech design in which two different high explosives would surround a plutonium core, producing different speed shock waves that would compress it for long enough to produce sufficient fission in a smaller critical mass. They needed to test it, and on July 16th, the 'gadget' was successfully detonated. Weeks later the US ended World War II with a uranium "Little Boy" atomic bomb on Hiroshima, and then a plutonium "Fat Man" on Nagasaki.

There were about 80,000 dead at Hiroshima, and 40,000 at Nagasaki, and counting those who died subsequently from radiation poisoning, the total might have approached 200,000. On the other hand, a study by William Shockley for the War Secretary estimated that invading Japan would cost 1.7–4.0 million American casualties, including 400,000–800,000 fatalities, and five to ten million Japanese fatalities. Their fanatical defence of Iwo Jima and Okinawa had persuaded Truman that his primary duty was to save American lives, so he authorized the use of the atomic bombs to make an invasion unnecessary.

When the Soviets acquired the bomb in 1949, using information their spies had delivered from the American project, the prospect of war became costly to both sides, resulting in the "nuclear peace" that deterred a European or World War until the Soviet Union collapsed from internal and economic contradictions, and the desire of their captive peoples to be free. The Campaign for Nuclear Disarmament, if successful, would have made war more, not less, likely by reducing the cost to themselves of a Soviet attack. Even today, those who oppose the UK's nuclear deterrent would, if they succeeded, reduce the UK's ability to prevent lunatics in North Korea or Tehran from attacking British interests. The Labour leader, Jeremy Corbyn, is on record with his opposition to both NATO and nuclear arms by Britain and the West.

The Atomic Age never delivered the plentiful and cheap energy it promised. The United States Atomic Energy Commission predicted in 1973 that, by the turn of the 21st century, one thousand reactors would be producing electricity for homes and businesses across the US. It never happened, largely because of public concerns over safety and the costs of decommissioning. Lessons have been learned, though, and it is unlikely that more reactors will be built in areas susceptible to earthquakes and tsunamis, or that poorly trained technicans will be allowed to conduct high risk tests on badly-designed nuclear facilities.

France embraced nuclear technology, and produces 75 percent of its power from nuclear stations. It is also true that Green opposition to nuclear is diminishing. Their scare stories are being replaced by an acceptance that nuclear has a role to play in non-fossil-fuel power production, as part of a non-carbon programme that includes renewables.

The tantalising prospect of non-polluting nuclear fusion still remains only a prospect, despite decades of research. It might happen, just as there might be some new and totally unexpected source of energy developed by research facilities. Meanwhile, over two generations of humankind have learned to live, if somewhat uneasily, with nuclear weapons and nuclear power. It is unlikely that the genie which came out of the bottle in July 1945, can ever be put back, but the world has learned how to achieve some degree of nuclear disarmament, and is still learning how to make nuclear power safer.

Inheritance is mostly overrated as a reason for wealth

Perhaps more than ever before, people claim that almost the only way to join the ranks of the rich is through inheritance. Apparently, in the good old days, it was still possible build a fortune from the ground up—but not anymore. Such claims discourage people who have set themselves the goal of becoming wealthy as entrepreneurs or investors. The message, whether explicit or unspoken, is as clear as it is sad: “Don’t even bother trying—those days are long gone.” There are even so-called classism researchers who criticise the media for reporting on people who have ascended from humble beginnings to become rich. Such articles, the researchers claim, only perpetuate a false illusion that capitalism, in reality, can never live up to.

67% of The Forbes 400 Are Self-Made

Forbes has proved that this is simply not the case. In fact, the opposite is true: In 1984, less than half the people on The Forbes 400 list of richest Americans were self-made. By 2018, in stark contrast, this same figure had risen to 67%! Forbes’ analysis is based on a scoring system in which each member of The Forbes 400 is given a score on a scale from 1 to 10. A 1 is awarded to people who have inherited their entire fortune and have done nothing to increase their wealth. A 10 means that someone has pulled themselves up by their bootstraps to build their incredible wealth in the face of substantial obstacles. Anyone on The Forbes 400 who merits a score of between 6 and 10 is rated as having truly made it on their own.

The Buddenbrooks: An Exemplary Tale

The importance of inheritance is overestimated because, in reality, most heirs are unable to preserve let alone expand their assets. In 1901, the German writer Thomas Mann published one of his most celebrated novels, Buddenbrooks: The Decline of a Family, which tells the story of how a rich merchant family, the Buddenbrooks, slowly but surely squandered its fortune over the course of four generations. As is so often the case, fact mirrors fiction, as demonstrated by the scientists Robert Arnott, William Bernstein and Lillian Wu in their research paper “The Myth of Dynastic Wealth: The Rich Get Poorer.” Their key findings include the following: “The average wealth erosion for the 10 wealthiest families of 1930, 1957, and 1968… was 6.6 percent, 5.3 percent, and 8.7 percent, respectively. These figures correspond to a half-life of wealth—the length of time it takes for half of the family fortune to be redistributed within society through taxation, spending, and charitable giving—of 10 years, 13 years, and (remarkably) 8 years, respectively.”

Great Ideas And Personality Traits Are Not Necessarily Passed On To The Next Generation

One glance at the list of the richest people in the world is enough to see that the vast majority—insofar as they have not inherited their wealth—have earned their fortunes as entrepreneurs. And according to the findings of entrepreneurship research, successful entrepreneurs become rich because they have a very specific combination of personality traits. However, these personality traits cannot simply be passed on to the next generation. The super-rich became rich because they had incredibly good ideas. Why is it that Jeff Bezos, Bill Gates, Mark Zuckerberg, Sergej Brin and Larry Page are among the richest people in the world? Because they had great ideas, founded Amazon, Microsoft, Facebook and Google and knew how to turn them into extremely profitable companies. It’s very unlikely that their children will have the same personality traits or such brilliant ideas.

The Secret Weapons Of The Super-rich?

Left-wing economists, such as the Frenchman Thomas Piketty, believe that the rich have access to particularly profitable investments—some would even call them a license to print money—which allow them to automatically increase their wealth even without their own entrepreneurial ideas. Just like left-wing anti-capitalists, family offices that earn their money by promising to increase the wealth of rich families have a vested interest in maintaining the myth that there are secret, extremely lucrative investment opportunities that are reserved only for the super-rich. This is, after all, the basis of their entire business model. But there are very good reasons to doubt that this is the case. It is more likely that most of these exclusive asset managers deliver even worse results for their super-rich clients than an average investor would achieve by investing in an index fund. For example, hedge funds have enjoyed an almost legendary reputation as the super-secret weapons of the rich for many years. And yes, some hedge funds have achieved extremely high returns, for which they have received a great deal of celebratory media attention. On average, however, they have performed worse than an index fund that absolutely anyone can buy on the internet.

In 2007, Warren Buffett entered a million-dollar bet with fund manager Protége Partners that the S&P 500 Index would outperform a portfolio of hedge funds over the next ten years. Buffett was right and donated his winnings to Girls Incorporated of Omaha. The S&P 500 Index fund in which he invested delivered a compound annual return of 7.1%, outperforming the return on the funds selected by Protégé Partners (2.2%). The extent of the difference is really put into perspective when you compare the actual monetary returns: Anyone who invested a million dollars in hedge funds before 2008 would have made a profit of $220,000 by 2017. S&P 500 investors, on the other hand, would have collected $854,000. So much for the supposed license to print money and “secret weapons” of the super-rich.

How People Inherit Money And Lose It Again

Many rich heirs could actually live very well off their inheritances if only they followed the advice Warren Buffett has already given his wife for when she inherits (a minor part) of his fortune: Simply invest the money in an index tracker fund. But most people think they are smarter and believe they can make particularly canny investments—which all too often turn out to be flops. Or they inherit a company but do not have the entrepreneurial talent of their predecessors. Others overestimate themselves, start new companies and lose money. Still others go through expensive divorces or simply spend far more each year than their inheritances would sensibly allow. There are countless examples that show just how difficult it is to manage an inheritance. Many heirs have more in common with lottery winners who, by a stroke of luck, win massive fortunes, but lose them again because they lack the requisite skills to handle money.

Welcome To The Self-Made Billionaires’ Club, Jay Z

In reality, the chances of getting rich, even at a young age or as someone who comes from a humble background, have never been so good. Recent headlines have trumpeted the fact that Jay Z, who was raised by a single working mother, has become the world’s first hip-hop billionaire and the latest member of the Self-Made Billionaires’ Club. Of course, very few people will ever make it quite so far. But what helps more? Telling someone “You have no chance anyway. If you don’t inherit money, you’ll never get rich,” or, “Forget it! Capitalism only makes the rich even richer.” Or saying, “You probably won't become a billionaire, but look at the people who started out at the very bottom and made it to the top. Seize your opportunities!”

Dr. Rainer Zitelmann is a German historian and sociologist. His is the author of 21 books including The Wealth Elite (http://the-wealth-elite.com) and The Power of Capitalism (http://the-power-of-capitalism.com/). 

Just why are the left so angry these days?

It’s said that academic feuds are so bitter simply because there’s no actual there to the feud. Whatever stakes are entirely trivial if they even exist at all therefore everyone can be as bitter and angry as they like. Which leads us to this interesting question, why is the modern left so angry all the time?

It’s the defining characteristic of today’s progressive left: Anger. And it’s not just the rioters like Antifa, or the unspeakably rude people who confront administration figures in restaurants and gratuitously yell at them. Take a look at any of the new icons of the Democratic Party when they are speaking — for example Alexandria Ocasio-Cortez, or Ilhan Omar — and you see them seething with barely controllable anger, if not outright fury. Same with essentially every left-wing commenter on CNN or MSNBC.

That is, of course, about the Americans but there’s nothing Owen Jones does that makes him any different, is there? At which point we’ll try and essay an answer.

They’re finding out how wrong and irrelevant they and their beliefs are. No, obviously not that desire, say, for greater equality, or a better education system or whatever. Rather, their proposed solutions, even methods of getting to one, have been shown to be entirely and wholly wrong.

Us free market and capitalist types used to be the left. And the policies we recommended, that free market capitalism, free trade and so on, made all richer and also, handily, collapsed inequality at the same time. Life got better for all. Further, we got poverty pretty much entirely licked. There is no one at all in any of the rich countries living in that $1.90 a day absolute poverty that was the modal experience of mankind. We were left and we were right.

Today’s left doesn’t like either those markets nor that capitalism. And yet these things still work to solve today’s problems:

I also should not have to teach these sorts of factoids to college-level students, but given the priorities of others I have to:

All humans used to be desperately poor.

The only sustained period of improvement in that condition is the current one (ongoing for about 350 years, or 7% of human history).

This enrichment is associated with regions that practice market tested betterment.

The improvement in China and India over the last 40 years are unprecedented improvements in the condition of humanity

Those changes are associated with a shift in political, social, and legal culture away from other systems and towards one market tested betterment.

Imagine that you’re absolutely certain that the presiding system is wrong. That we must overturn that entire system in order to kill poverty and make the world a better place. Then reality decides to disagree with you. In fact, those policies you recommend, when tried out in places like Zimbabwe, Venezuela, merely impoverish. And the people doing that free market capitalism stuff raise billions - no, really, billions - up out of that historic destitution.

Well, wouldn’t you be angry if it was proven to you, again and again, that absolutely everything you agree was true was, in fact, wrong? Of course, when facts change it’s always possible to change your mind but anger is so much more comforting, isn’t it?

The Royal Society's charter

Leading British scientists met at an "invisible college" in the 1660s to promote and explore scientific ideas. King Charles II approved of the venture, and on July 15th, 1662, he signed a royal charter that brought the Royal Society of London in existence. It still exists, and has enjoyed the support of every subsequent monarch. Charles II used to attend and enjoy its meetings, making intelligent contributions to the papers and experiments presented there.

It is the world's oldest scientific institution, and exists to promote science, to support it, to recognize excellence in the field, and to offer scientific advice bearing on policy matters. It still does all of these things. Historically the Society has been associated with great scientific achievements. It published Newton's "Principia Mathematica," Benjamin Franklin's experiments with electricity and lightning, published the first report in English on inoculation, backed Charles Babbage's differential engine, and published Chadwick's detection of the neutron.

The Society's motto, Nullius in verba, means "Take nobody's word for it." It expresses a determination to establish facts via observation and experiment rather than by taking them on authority.

The Royal Society provides a good example of how important patronage and status can spur scientists on to discovery and success, and the same principle works in other fields. It does not always take floods of public money, disbursed through grant-giving committees, to oil the wheels of scientific advance. Academic scientists like to receive grants, and many spend a great deal of time bidding for them. But some critics have pointed out that grants tend to go to proposals within the mainstream of current received opinion, rather than to the off-the-wall initiatives that might upset settled thinking. Private money from businesses and philanthropists tends to be more adventurous.

Today's science might well translate into tomorrow's business, so in 2008, the Society opened the Royal Society Enterprise Fund, with which to back new scientific companies, and to fund itself in future from the returns on its early investments. The Society's awards, prize lectures and medals all come with cash to finance future research.

There is a charming story told to illustrate the Society's emphasis on hard science as opposed to popular myth and superstition. It is reported that King Charles II once asked the members why it was that if he had two identical pails of water and placed a four-pound fish into one of them, it would not weigh more than the other. The scientists cane up with a variety of convoluted explanations until one finally said, "My Lord, I deny the fact." The King laughed and admitted it was a joke, but its lesson was to base theories on established facts.

It's an effective antidote today to conspiracy theories, in that the 'facts' behind them are usually false. Very often we are presented with alleged facts, whether about Bermuda triangles, moon landings, UFOs or bending spoons, that appear to leave no explanations other than supernatural or conspiratorial ones. The best response is to echo the scientist who stood up King Charles II, and to deny the 'facts' that are presented as real.

Facebook's $5 billion fine shows us that the Efficient Markets Hypothesis is right

It must be difficult trying to struggle through a discussion of a story without having the basic intellectual tools to understand how the story works. Which is the pickle that John Naughton finds himself in here in The Observer. Facebook gets fined $5 billion over data breaches and the share price goes up? Clearly, something is wrong with something, somewhere!

If you want a measure of the problem society will have in controlling the tech giants, then ponder this: as it has become clear that the US Federal Trade Commission is about to impose a fine of $5bn (£4bn) on Facebook for violating a decree governing privacy breaches, the company’s share price went up!

This is a landmark moment. It’s the biggest ever fine imposed by the FTC, the body set up to police American capitalism. And $5bn is a lot of money in anybody’s language. Anybody’s but Facebook’s. It represents just a month of revenues and the stock market knew it. Facebook’s capitalisation went up $6bn with the news. This was a fine that actually increased Mark Zuckerberg’s personal wealth.

The bit that’s gone wrong is Naughton - and to be fair, many others - not grasping that the Efficient Markets Hypothesis is actually correct. At least that semi-strong version, which says that all publicly available information will already be in market prices.

So, what has happened here? We’ve long known that Facebook is going to get fined over the Cambridge Analytica stuff. Facebook even told us that it had $3 billion stashed away in its accounts to pay such a fine. Market participants knew all of this. It was all already in the share price.

So, what happens when the fine is actually announced? That there’s going to be a fine of billions is something already in the price. That the fine isn’t the maximum that it could be removes some uncertainty. Thus the price moves up.

For, recall what the basic message of that EMH is. Only new information moves markets. Old information is already included in those prices. We think it’s fairly important that if you want to write about how markets work then you have a grasp of how markets work. Sadly, not all agree with what we regard as an entirely uncontentious insistence.

Storming the Bastille

It was on the famous quatorze juillet in 1789, 230 years ago today, that the mob stormed the Bastille fortress prison in Paris, an event taken to mark the beginning of the French Revolution, and celebrated every subsequent July 14th. It was more symbolic than real, although there was some purpose to it. France's Third Estate (the people) first stormed the Hôtel des Invalides seeking the 30,000 muskets held there. Unfortunately for the mob, the Hôtel's commandant had moved their 250 barrels of gunpowder to the Bastille a few days earlier.

The mob turned its attention to the Bastille, with nearly a thousand of them gathering outside to demand its surrender and the release of its gunpowder. The Bastille had a few defending troops of its own, plus 32 Swiss regular guards of the Salis-Samade Regiment as reinforcements. It also had 18 eight-pound guns and 12 smaller pieces mounted on its walls. Its governor, Bernard-René de Launay, refused to surrender.

After a lengthy fight during which 98 attackers and one defender were killed, the mob seized control. The governor was dragged to the Hôtel de Ville, and after much abuse, was stabbed many times to his death, and his head paraded on a spike. The three officers of the permanent Bastille garrison were also killed by the crowd, and two of the invalides of the garrison were lynched, plus two of the Swiss regulars. The mob then went and killed the prévôt dès marchands (mayor).

The Bastille's prisoners were released – all seven of them. They were four forgers, a madman imprisoned at his family's request, someone who'd tried to kill Louis XV thirty years previously, and a Count imprisoned by his father. The mob missed a much bigger catch, the Marquis de Sade, who'd left 10 days earlier. It was not a great haul, but the act was symbolic and fuelled the Revolution.

The sad record of that Revolution is written in blood and terror, as ever more extremist and radical groups practised ever more atrocities. It devoured its own, as revolutions do, with the majority of those guillotined being ordinary French men and women rather than aristocrats. The Reign of Terror came and went, as Robespierre and Saint Just were swept away in its carnage. The mob regularly rampaged the streets, getting its own way until one day a young army officer called Napoleon gave them "a whiff of grapeshot" at point blank range. Then they stopped.

The French Revolution ended in a dictatorship and a career of European conquest that only ended at Waterloo. It contrasted starkly with the English "Glorious Revolution" that made constitutional government the norm, and the American War of Independence that secured the rights of Englishmen for the American colonists, and embedded them in a constitution.

The Bolshevik Revolution in Russia followed more the French style than the English or American ones. It outdid the French one in blood, terror and oppression, and was no more successful at attaining a decent life for its citizenry afterwards. One lesson is that revolutions which sweep away society to put in its place one derived from abstract principles, are less successful than ones which build up and improve what the past has done, and try to erase such of its failings as they can.

An invalid argument - people won't therefore they must

Everything has its costs, everything has its benefits. The mark of a liberal society being that we get to decide the correct balance for ourselves, of an illiberal that we’re told what to do by someone else’s estimations of that balance.

A corollary of this is that if the people who have to bear those costs, and also to enjoy those benefits, don’t think it’s worth it then we shouldn’t impose them upon them. So it is with emissions in cities. It is urban dwellers who gain the transport from cars, it is urban dwellers who suffer the resultant pollution. Which is what invalidates this insistence here:

Among other weaknesses, the measures cities must employ when left to tackle dirty air on their own are politically contentious, and therefore vulnerable. That’s because they inevitably put the costs of cleaning the air on to individual drivers – who must pay fees or buy better vehicles – rather than on to the car manufacturers whose cheating is the real cause of our toxic pollution.

It’s not hard to imagine a similar reversal happening in London. The new ultra-low emission zone (Ulez) is likely to be a big issue in next year’s mayoral election. And if Sadiq Khan wins and extends it to the North and South Circular roads in 2021 as he intends, it is sure to spark intense opposition from the far larger number of motorists who will then be affected.

It’s those in that area who enjoy those benefits and suffer those costs. If they think that a ban, or limit, isn’t worth it, who are we who are subject to neither cost nor benefit, to force upon them the very policy they are rejecting?

Not what we’re not suggesting, that pollution’s just fine, that nothing should be done etc. Rather, we’re jabbing at the hole in the logic of this particular argument being used. The people who will suffer the policy might not vote for it therefore it must be forced upon them. Our point being that if they don’t want it then that’s the reason it shouldn’t be forced, isn’t it?

Caesar, Kaiser, Tsar, Shah

July 13th, 100BC, saw the birth of Gaius Julius Caesar, a man who would change the world. One of his lasting changes was the introduction of the modern calendar. He replaced the Roman moon-related calendar by one based on the sun, and gave us our year of 365.25 days with an extra day every fourth year. He added three extra months and has July named after him.

It was, of course, his military conquests and political changes that earned him fame. He was at the watershed as the Roman Republic broke down and was transformed into the Roman Empire. Although its apologists spoke grandly of ‘Republican virtues,’ the fact was that the old system that worked for a city could not cope adequately with the vast territory Rome now controlled. In practice, well-born senators appointed each other to the governorships of provinces that they then looted.

The territory under Rome was hugely enlarged by Caesar’s conquests in Gaul and Germany, and he needed land for his veterans. Although well born himself, Caesar backed the popular cause against most of the aristocracy. He was, perhaps, an early populist. Had he left his army at Italy’s frontier, as the rules required, he would have been defenceless against trial and probable execution in Rome. In crossing the Rubicon with his army, he set in motion the events that changed Rome into an empire governed by all-powerful rulers.

When he took control, Caesar set about implementing reforms that would transform Rome. He extended Roman citizenship far beyond Italy’s borders, creating a unified state of its disparate provinces. He centralized its bureaucracy into a single government, and put into effect the land reforms that supported his veterans. He was proclaimed ‘dictator’ for life, and carried out populist reforms that made the common people regard him as their champion. He undermined the wealth and power of Rome’s élite senators, which is why they killed him.

The model of a strong leader with authoritarian powers, backed by a loyal army, is one that has been followed many times since in many places. Napoleon Bonaparte is probably the most famous example. Populists in modern times have to pay lip service, at least, to democratic mandates, although in Venezuela Chavez and Maduro have shown how readily the democratic process can be subverted.

T H White, who authored many of “The Making of a President” books in the 1960s and early 1970s, also wrote a play called, "Caesar at the Rubicon" (1968). At its end, Caesar finally crosses the river to head for Rome with his army. His closing line as he does so is, "If men cannot agree on how to rule themselves, someone else must rule them." When societies descend into conflict and chaos, they should know that the eternal Caesar waits at the eternal Rubicon, sitting astride his white horse with his army behind him, and with that old, old sword at his side…

The real Nordic model: higher taxes on low-income workers

Britons have a thing for the Nordic countries – especially so if you’re on the left. In their quest for well-functioning and more socially equitable societies, the Nordics have long played a utopian role for Britain’s left-leaning forces.

This ranges from envy of Sweden’s work-life balance and child care system, to reflections on Norwegian experiences, and grand plans by think-tanks to “win the Nordic model for the UK”, to discussion of Finland’s egalitarian and successful schooling and Denmark’s futurism.

British people often only look at what Nordic governments do on the spending side: expansive social welfare spending, generous benefits and impressive social equity. They hardly ever take a look at the accompanying revenue side.

Comparing Swedish and British governments unveils some interesting differences.

Yes, measures of country-wide income inequality put Sweden among the middle or lower end of its peers, with UK standing out; the Gini-coefficient after taxes and transfers has Sweden at 0.28 while the UK almost tops the EU-chart at 0.35. Similarly, incomes of the highest-paid 10% of British earners clock some 34% of all pre-tax income (progressive taxes put the post-tax figure at 28%), whereas their Swedish equivalents earn only 28% of pre-tax (24% post-tax) income. The much-despised top-1% of British earners receive around 12% of pre-tax income, whereas Sweden’s top-1% earners only get 8%.

Britain also taxes its population less than does Sweden (35% of GDP as opposed to 44%), but comparing the reliance of various kinds of taxes as government revenues makes this even more clear. In the figure below I have mapped out tax revenues as share of GDP in four categories of income; the first two bars from the left are taxes on labour (direct income taxes as well as indirect ones like payroll/national contribution levies) the third taxes on capital and the fourth various consumption taxes.

This shows the taxation differences between Sweden and UK. As we would expect from income tax rates, labour incomes are much more heavily taxed in Sweden than in Britain. They don’t, however, exclusively or even predominantly apply to high-income earners. Sweden holds the European record for the lowest level where incomes are subject to direct taxation, at one-seventh of Britain’s remarkably high Personal Allowance (£12,500). Moreover, the elevated indirect taxes (payroll taxes) apply on even the lowest incomes, greatly contributing to why Sweden has among Europe’s highest cost of labour, while UK is below average on this – something that may explain the 2.5 percentage point lower unemployment rate in Britain.

The UK relies more on capital taxation than Sweden – and this difference is not driven by corporation tax, which in both countries generate revenues of 3% of GDP. Rather, the big difference is that the UK taxes property a lot heavier than does Sweden, whereas Sweden relies on taxes on investment and savings more than does the UK.

Admittedly, comparing tax systems is tricky and relying on revenues as I have here does not show the full picture. For instance, a small open economy like Sweden may not have the ability to heavily taxing certain tax bases since the burden for relocating elsewhere might be small and corporations or individuals would simply up and leave if they deemed taxes to be too extractive; similarly, British tax authorities may have larger leeway in taxing high-value properties in London with no or little behaviour response, and thereby rely more heavily on properties for tax revenue.

Bursting the Nordic utopian bubble, Kristian Niemietz at IEA describes the Nordic economies as

relatively liberal, relatively lightly-regulated market economies, with relatively low levels of state intervention – but they are also, at the same time, economies characterised by high taxes, generous welfare states, and generously funded public services.

A few decades before writing The Wealth of Nations, Adam Smith concluded that all that was necessary for a successful country were “peace, easy taxes, and a tolerable administration of justice”. Whatever he thought of as ‘easy’ probably differs from what we would think of today. Nevertheless, a quick look into the tax revenues of Sweden and the UK should awaken the dreaming leftie. Spending like Sweden means taxing like Sweden – reduced property taxes, abolish wealth and inheritance taxes, hike taxes on productive investments and, most importantly: almost double tax revenue on even low-income labourers. Much less tempting, I imagine.

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British tax data is taken from Office for Budget Responsibility’s databank; Swedish tax data comes from ESV, The Swedish National Financial Management Authority, and can be easily accessible here.