| | He [Robert F. Kennedy, Jr.] said Iceland went "alternative" and is now the richest country in the world (per capita). Teresa replied, "what does Jr. mean by 'richest'? Sweden's producers and workers pay like 70% tax!"
Teresa, RFK, Jr. was referring to Iceland as the richest country, not Sweden. Of course, the citizens of Iceland are heavily taxed as well.
In any case, RFK Jr.'s statement reflects a profound misconception about what constitutes wealth. A country's wealth is not synonymous with its GDP (its gross domestic product), which is strictly a monetary calculation that reflects spending on final goods and services. Wealth depends as well on how those goods and services are allocated, which in turn depends on how much free trade there is within that country. The more free trade, the better the allocation, because in a market transaction, people value what they receive more than what they give up in exchange for it. So they are always wealthier after a trade than they are before the trade.
For example, two countries could have the same GDP, but have it allocated very differently. Suppose the allocation in one country were such that people were not happy with the goods they possessed and preferred to trade them for the goods of others, but were prevented by various laws and regulations from doing so or from doing so efficiently and easily. By contrast, suppose that the other country with the same GDP did not have these impediments to free trade, such that its citizens could easily trade their goods and services for the goods and services of others. If unlike the first country, the trade in the second country took place, no new goods would have been produced, but people would nonetheless be wealthier, because they would now have more of what they wanted.
To make this clear, suppose that I have a baseball glove, and you, a baseball bat, and let's say that I would prefer to have the bat, and you, the glove. So we trade. As a result of the trade, we will each be better off -- we will each be wealthier -- even though no new production has taken place.
Gross domestic product doesn't account for this, because it is strictly a measure of spending on final goods and services. So GDP doesn't include the sale of previously owned goods, like old houses and used cars, which if they change hands in trade increase the wealth of both the buyer and seller, who will now have more of what they want.
Also, because GDP is simply a reflection of how much money is spent on final goods and services, it says nothing about their quality. For example, a slide rule used to cost more than an electronic calculator does today, even though the latter is a far superior tool of calculation.
Moreover, spending on private goods and services cannot be compared to spending on government goods and services, because the government can force people to spend more than they would be willing to spend for a good or service produced by the government, thereby artificially inflating GDP as a measure of a country's wealth. As Economics Professor Carole E. Scott notes,
"Because people don't have to buy a car, and if they do, because there are other car manufacturers, they don't have to buy a Ford, what people pay for Fords doesn't exceed what they are worth to the buyer. The same isn't necessarily true of government-provided services because the public is forced to pay for them through taxes, regardless of the valuation the public places on government-provided services. (The ballot box is the only way the public can do anything about the cost of government-provided services exceeding their value to the public.)
"While what Fords sell for and how many of them are sold determines how much what Ford produces adds to GDP, how much the government spends determines how much what it produces adds to GDP. So, the more money the government wastes, the higher GDP will be." (http://www.westga.edu/~bquest/1996/csgdp.html)
Are you beginning to see how a heavily taxed welfare state like Iceland could be considered "wealthier" than the U.S. when GDP is used as a standard for measuring wealth?
There are many other problems with using GDP as a measure of wealth that I've neglected to mention. They can be found in the excellent article by Professor Scott whose URL I cited.
- Bill
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