Switzerland’s secret sauce – Ecolib

Matt Yglesias There is a new post about Switzerland. i have one A longstanding interest in Switzerland, and thus cannot refrain from commenting.

In the first part of the post, Iglesias established that Switzerland is indeed a very successful country. He also explained that this success was not due to any kind of trickery like secret Swiss bank accounts. The Swiss economy is highly productive, and little of that success has to do with retail banking. He includes a graph showing that since 1880 Switzerland has outperformed its European neighbors by a wide margin:

That part of the post is very effectively presented. When it comes to explaining Switzerland’s success, the post is less impressive. Iglesias concludes thus:

Maybe Swiss institutions can make us better citizens.

But to be unhappy about this, I doubt. Many of the politeness and consensus-based aspects of the Swiss system appear to be emergent features of political culture rather than formal features of institutional arrangements. Swiss prosperity and its reputation as a well-governed small state predates the current form of the referendum system. And many things in Switzerland, not just politics, seem well-organized and well-considered. It could easily be that an unusually industrious and conscientious group could do all sorts of strange things.

This may be correct, but the arguments offered in support fall short of being persuasive. Iglesias discounts a number of (mostly right-wing) explanations such as free markets, low taxes, decentralized government, and widespread use of referendums.

While praising the Swiss system, people talk a lot about decentralization and subsidiarity.

But what exactly is this amount? Switzerland has a national pension system. They adopted a universal health care program in 1996. As they mentioned earlier, there is a national state-owned railway. They have a national decarbonisation programme. I am obviously not denying that municipal governments have real authority in addition to their cantonal autonomy. This level of federalism doesn’t seem particularly different from what you see in Italy or Germany or the US or Canada.

If you look at OECD countries, you notice that (with the exception of Mexico) all countries in the federal system are richer than the average developed economy:

There are not enough federal systems to be statistically significant, but there is no reason to reject the idea that decentralization is beneficial based on the list above.

I would add that in some respects Switzerland is more decentralized than many other federal systems. Switzerland has fewer than 10 million people, less than individual states such as Ohio, Bavaria and Ontario. And that smaller number is further divided into self-governing cantons and then smaller local governments. It’s a extremely Decentralized system. (There are vast differences between a California referendum and a Swiss cantonal referendum.)

Some American right-wingers have told me that Switzerland’s success is due to their love of free markets.

And Switzerland seems market-oriented for a European country. But still, their share of taxes in GDP is higher than ours in the US. They engage in sectoral bargaining with a much larger share of workers covered by collective bargaining agreements than in the United States. There is universal health care. College tuition costs $1,168 per year for citizens. There is a national minimum child benefit of about $2,500 per year, and most cantons offer a bonus above that. So while I’m not saying that Switzerland is a left-wing utopia, they have achieved much of what American progressives emphasize, and they’ve done it in a political system where center-left parties can never achieve or control parliamentary majorities. Instead of the cabinet, moderate and center-right elites have consistently prioritized leftist politics, incorporating intelligent versions of progressive demands in the Swiss airspace.

By Iglesias standards, this is a really weak argument. Here is a more accurate description of taxes in Switzerland:

Taxes in Switzerland are very low compared to other Western European countries. They are slightly higher than in the US, but only because we run massive budget deficits. (Government spending in the US is higher than in Switzerland.) And Switzerland has plenty of features that suppliers like, such as no tax on capital gains from stock sales. More importantly, the US and Switzerland are both outliers, with very low taxes by rich country standards. And these two countries are exotic in another important way. Like Switzerland, the United States Much richer than other developed countries (Apart from a few small European kingdoms and oil-rich Norway) It’s an interesting coincidence!

I’m not an extreme purveyor who thinks taxes explain everything (the Nordic countries are also fairly rich), but I believe low taxes are one reason for the unusual success of Switzerland and the US.

In health care, I suspect that the US system is more of a free market ideal than the Swiss system, even though the Swiss system is more universal. Our government spends on healthcare like most European countries and our regulations and subsidies create strange distortions in the healthcare market. The Swiss system involves unusually large out-of-pocket payments for health care.

The United States and Switzerland also hold a much higher than average number of referendums.

Here is a list of some of the things that unusually rich Switzerland and unusually rich America have in common:

1. Relatively decentralized.

2. Lots of referendums.

3. Traditionally more free markets than most developed economies (although the edge is eroding.)

4. Much lower than average taxes for a rich country.

5. A long period of isolation from war (on their soil), and a refuge for dissidents fleeing persecution. Also a good place for expats who want a business-friendly system.

With this final point I want to return to where Iglesias ended. He suggested that the Swiss were in a sense superior to other peoples. Not genetically superior, but superior in political decision making. More specifically, he notes that they are unusually well-informed voters. Perhaps this is because they have a direct say in policy.

I don’t believe Americans are superior at making political decisions, but I do believe we have another kind of superiority. Our talent distribution has an unusually talented extreme right tail. Our economic system and political freedom make this place relatively attractive to talented immigrants like Elon Musk. Thus while I don’t believe that Americans are more talented than the citizens of places like Canada, on average, I believe the top 10 in the 1% of American talent is very impressive. This may help explain our growing dominance of intellectual capital-intensive industries such as software, biotech, filmmaking, finance, etc. Switzerland also does well in industries that require highly skilled people.

When thinking about cause and effect, it’s hard to deny the influence of human talent and good organization, for a simple reason Talents tend to build better organizations. Compare (less well-educated) Switzerland with mountainous and landlocked countries like Afghanistan, Bolivia and Laos. Where would you prefer to migrate?)

I live near Irvine, California, with very good schools and very expensive homes. Talented people pay extra to move their children to Irvine to get into good schools. Over time, the less talented are gradually valued. It makes Irvine’s schools better. But are they better because the new people are better at running the school, or are their kids more talented?

I don’t think anyone will be happy with my conclusion. When analyzing Switzerland’s success, I believe that progressives are wrong to discount the importance of what might be seen as right-wing (or liberal) political and economic policies. At the same time, I suspect that Iglesias may be right that Switzerland’s success is partly due to its people, not just its institutions. On the other hand, Switzerland’s good institutions have probably helped to attract the people who make Switzerland successful.

Thus it is almost impossible to completely rule out different interpretations. Only if the Swiss were willing to do a controlled experiment. What if the French territories adopted the economic and political system of France? Run the experiment for a few decades and see how it goes. Then the rest of the world can decide whether Swiss institutions are truly superior and we can all adopt their measures. (If the French region adopts high-speed rail and suffers a loss of export competitiveness, we can assume that institutions matter.)

Alas, it is true that Switzerland is hyper-democratic which makes such crazy experiments impossible. But maybe there is a lesson there. Nothing could stop Mao from experimenting with his Great Leap Forward.

Although we can’t do controlled experiments, there are plenty of natural experiments. And what do they show?

1. Institutions really matter (North vs. South Korea)

2. Within the same regime, the difference in talent really matters (Malay vs. Chinese within Malaysia.)

So it is perhaps not a question of which interpretation is correct for Switzerland, but rather a question of how important each factor is.

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