Tom Edsall on politics inside and outside of Washington.

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Daron Acemoglu, an eminent economist at M.I.T., has ignited a firestorm by arguing that contemporary forces of globalization bar the United States from adopting the liberal social welfare policies of Scandinavian countries.

“We cannot all be like the Nordics,” Acemoglu declares, in a 2012 paper, “Choosing Your Own Capitalism in a Globalized World,” written with his colleagues James A. Robinson, a professor of government at Harvard, and Thierry Verdier, scientific director of the Paris School of Economics.



If the “cutthroat leader” – the United States — were to switch to “cuddly capitalism, this would reduce the growth rate of the entire world economy,” the authors argue, by slowing the pace of innovation.

Acemoglu, Robinson and Verdier put their argument technically, but there is no mistaking the implications:

We consider a canonical dynamic model of endogenous technological change at the world level with three basic features. First, there is technological interdependence across countries, with technological innovations by the most technologically advanced countries contributing to the world technology frontier, on which in turn other countries can build to innovate and grow. Second, we consider that effort in innovative activities requires incentives which come as a result of differential rewards to this effort. As a consequence, a greater gap in income between successful and unsuccessful entrepreneurs increases entrepreneurial effort and thus a country’s contribution to the world technology frontier. Finally, we assume that in each country the reward structure and the extent of social protection shaping work and innovation incentives are determined by (forward-looking) national social planners.

In a series of e-mail exchanges with the Times, Acemoglu said he believes that safety net programs in the United States are inadequate. But, if the thesis that he has put forth is correct, there is room for only modest expansion:

The fact that the United States is the world technology leader puts constraints and limits on redistribution at the top. The global asymmetric equilibrium is at the root of the United States being the world technology leader, but the mechanism through which this matters for innovation and redistribution is the very fact that the United States is such a leader.

Acemoglu elaborated:

In our model (which is just that, a model), U.S. citizens would actually be worse off if they switched to a cuddly capitalism. Why? Because this would reduce the world’s growth rate, given the U.S.’s oversized contribution to the world technology frontier. In contrast, when Sweden switches from cutthroat to cuddly capitalism (or vice versa), this does not have an impact on the long-run growth rate of the world economy, because the important work is being done by U.S. innovation.

These findings, if substantiated, will disappoint those who long for a Swedish-style mixed economy with universal health care, paid maternal leave, child allowances, guaranteed pensions and other desirable social benefits.

In a more detailed paper, “Can’t We All Be More Like Scandinavians?” Acemoglu, Robinson and Verdier expand on their argument that the world is dependent on American leadership in technology and innovation to sustain global growth. In order to maintain its position at the forefront of global innovation, the authors contend, the United States must maintain an economic system that provides great rewards to successful innovators, which “implies greater inequality and greater poverty (and a weaker safety net) for a society encouraging innovation.”

Asked for examples of America’s leading role in innovative enterprise, Acemoglu listed: “Software (Google and Amazon), hardware and design (Apple), social networking (Facebook and Twitter), biotech, pharmaceuticals, robotics, nanotechnology, entertainment and retail (Wal-Mart).”

Unless the United States is prepared to initiate a world-wide slowdown, according to this line of thinking, it will have to come to terms with making relatively minor and marginal changes in its social welfare system:

The United States does not have the kind of welfare state that many European countries, including Denmark, Finland, Norway and Sweden have developed, and despite recent health care reforms many Americans do not enjoy the type of high-quality health care that their counterparts in these other countries do. They also receive much shorter vacations and more limited maternity leave, and do not have access to a variety of other public services that are more broadly provided in many continental European countries. Perhaps more importantly, poverty and inequality are much higher in the United States and have been increasing over the last three decades, while they have been broadly stable in Denmark, Finland, Norway and Sweden. Inequality at the top of the distribution has also been exploding in the United States, with the top percent of earners capturing almost 25 percent of total national income, while the same number is around 5 percent in Finland and Sweden.

Acemoglu and his colleagues are not right-wing conservatives, but their analysis poses one more challenge to an American left that has struggled to preserve basic progressive institutions – the labor movement, employee pension plans, a safety net for the poor – in the face of a corporate consensus that these programs weaken America’s ability to compete in an international marketplace. The three authors make the case that the interconnected world economy has reached what they call an “asymmetric equilibrium” in which the United States “adopts a ‘cutthroat’ reward structure, with high-powered incentives for success, while other countries free-ride on this frontier economy and choose a more egalitarian, ‘cuddly,’ reward structure.”

Directly challenging what they describe as the consensus view – that a country can substantially expand the welfare state without sacrificing its pioneering role in technological innovation – Acemoglu and his colleagues write that it is “the more ‘cutthroat’ American society that makes possible the more ‘cuddly’ Scandinavian societies based on a comprehensive social safety net, the welfare state and more limited inequality.”

In an e-mail, Acemoglu provided the following analogy:

The U.S. is also the military leader of the world, and it cannot imitate Finland and reduce its military to a trivial size without taking into account the global repercussions of this (and I’m saying this as somebody who is strongly opposed to U.S. military interventions around the world).

There are economists – primarily on the left — who take issue with Acemoglu and his colleagues.

David Soskice, a professor of political science and economics at the London School of Economics, wrote in an e-mail to the Times that the conclusions of Acemoglu, Robinson and Verdier are “very clever, but off-the-wall as a description of Sweden, Germany, etc. Moreover, my work with Peter Hall on “Varieties of Capitalism” said the opposite of what Daron and Jim suggest — we agree with them that the world needs Swedens and USAs but not for the reasons they put forward.”

In an e-mail response to a Times inquiry, Dani Rodrik, an economist at Harvard, suggested that

This is an interesting thought exercise, but I would guess that even the authors themselves would caution against taking the ideas in it too far. Surely, global interdependence plays somehow into different nations’ choices of institutional arrangements. But I find it implausible that Scandinavians stick with their “cuddly” form of capitalism because they have the luxury of free riding on America’s technological leadership. For one thing, Scandinavians and others with extensive welfare states have in fact been moving in the American direction as globalization has advanced; global interdependence has had the effect of undermining cuddly forms of capitalism instead of reinforcing them. Second, the Scandinavian and other models of capitalism have deep roots in the historical evolution of their societies that predate the contemporary era of globalization. Finally, the idea that Scandinavian societies are somehow less innovative than the U.S. one is itself contentious.

Lane Kenworthy of the University of Arizona argues in his blog that the Nordic countries are as innovative as the United States, despite their stronger welfare state. If cutthroat economies prompt more innovation, why, Kenworthy asks, is innovation relatively modest “in other nations with relatively high income inequality and low-to-moderate government spending, such as Australia, Canada, Ireland, New Zealand and the United Kingdom?”

For self-evident reasons, it is difficult for a political columnist to adjudicate these warring claims. Why? Here is Acemoglu, Robinson and Verdier’s first assumption:

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and here is their subsequent thought:

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Whatever the merits of competing economic models, there is no question that in the United States, cutthroat capitalism holds sway. The conventional right-of-center argument that supports this form of capitalism is that social spending, taxes, fringe benefits and unions create market inefficiencies. Conservative economic theory has traditionally been in favor of shifting the rewards of production from labor to capital, and these arguments have had a substantial impact on American economic policy.

Figure 1 from the Bureau of Labor Statistics illustrates the decline in labor income from 1947 to 2012.

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American cutthroat capitalism now faces a major challenge. A growing share of the United States work force is shouldering the costs of a shrinking safety net, of lower wages, and of vanishing middle-class jobs. This cost-shifting is taking place just at the moment when demographic trends are pushing the balance of political power to those who are losing “market share.” The men and women most likely to be trapped at the lower end of a low-wage economy — regardless of innovative successes at the high end — are becoming a powerful force at the ballot box.

This puts America’s regime of cutthroat capitalism on a collision course with the relatively disadvantaged bottom half of the United States population that currently makes up a majority of the Democratic coalition. Restive voters in this large demographic will become increasingly unwilling to suffer on the altar of global innovation while the lion’s share of income and other benefits flow to others.

In our e-mail exchange, Acemoglu raised the possibility of addressing these tensions through the development of a two-track set of economic and welfare policies: “An interesting question is whether you can have a safety net at the bottom, while at the same time providing strong incentives for innovation at the top. I don’t see any reason why not, but it’s an open question.”

This approach would amount to formal government recognition of a two-class society, the innovators living under one set of policies that allows them to practice by cutthroat rules, the rest of America consigned to the relatively meager support of a safety net.

Looked at in this light, the 2012 presidential campaign was a louder version of the same argument. Mitt Romney’s total contempt for the 47 percent – “who are dependent upon government, who believe that they are victims, who believe that government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you name it. That that’s an entitlement. And the government should give it to them” – reflected the conservative vision of this two-tier society.

Conversely, Barack Obama described an America where

the basic bargain that made this country great has eroded. Long before the recession hit, hard work stopped paying off for too many people. Fewer and fewer of the folks who contributed to the success of our economy actually benefited from that success. Those at the very top grew wealthier from their incomes and their investments — wealthier than ever before. But everybody else struggled with costs that were growing and paychecks that weren’t — and too many families found themselves racking up more and more debt just to keep up.

Despite its egalitarian tradition, America may have already become a two-class society, with an elite benefiting from advantages in background, wealth, access to higher education and skill sets passed from generation to generation (whether through inheritance or cultural transmission). If that is the case, and there is some evidence that it is, the question is whether our rhetorical obeisance to egalitarian tradition will prevent us from openly recognizing what we have become – thus sapping our ability to do something about it.