Switzerland's Secret Sauce

Matt Yglesias has a new post discussing Switzerland. I have a longstanding interest in Switzerland, and thus cannot refrain from commenting.


In the first part of the post, Yglesias establishes that Switzerland is indeed a highly successful country. He also explains that this success is not due to some sort of gimmick, like secret Swiss bank accounts. The Swiss economy is extremely productive, and very little of that success relates to retail banking.  He includes a graph showing how since 1880 Switzerland has outpaced its European neighbors by a wide margin:

That section of the post is very effectively presented.  When it comes to explaining Switzerland’s success, however, the post is less impressive.  Yglesias concludes as follows:

Maybe Swiss institutions could make us better citizens.

But to be unsatisfying about this, I’m skeptical. A lot of the politeness and consensus-oriented aspects of the Swiss system seem to clearly be emergent properties of the political culture rather than formal properties of the institutional arrangements. Swiss prosperity and its reputation as a well-governed little state predate the current form of the referendum system. And lots of things in Switzerland, not just the politics, seem well-organized and well-considered. It could easily just be that an unusually diligent and conscientious group of people can make all kinds of weird stuff work.

This may be correct, but the arguments that are offered in support fall well short of being persuasive.  Yglesias discounts a bunch of (mostly right wing) explanations such as free markets, low taxes, decentralized government and widespread use of referenda.

When praising the Swiss system, people tend to talk a lot about decentralization and subsidiarity.

But what does this really amount to? Switzerland has a national pension system. They adopted a universal health care program in 1996. They have, as previously noted, a national state-owned railroad. They have a national decarbonization program. I’m obviously not denying that they have a good deal of cantonal autonomy, as well as municipal governments wielding real authority. This level of federalism doesn’t seem particularly different from what you see in Italy or Germany or the United States or Canada.

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

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

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

Some American rightists told me Switzerland’s success is due to their love of free markets.

And Switzerland does seem market-oriented for a European country. But still, their tax share of GDP is higher than ours in the U.S. They have sectoral bargaining with a much higher share of workers covered by collective bargaining agreements than the United States. There’s universal health care. College tuition for citizens costs $1,168 per year. There is a national minimum child allowance of about $2,500 per year and most cantons offer a bonus above that. So while I’m not saying that Switzerland is a leftist utopia, they have achieved a lot of the things that American progressives push for, and they did it in a political system where the center-left parties never secure a parliamentary majority or control the cabinet. Instead, centrist and center-right elites have consistently preempted left politics by incorporating sensible versions of progressive demands into the Swiss firmament. 

By Yglesias standards, this is a really weak argument.  Here’s a more accurate description of Switzerland’s taxes:

Switzerland has very low taxes 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 lots of features that supply-siders like, such as no tax on capital gains from stock sales.  More importantly, both the US and Switzerland are outliers, with very low taxes by rich country standards.  And these two countries are also outliers in one other important way.  Like Switzerland, the US is much richer than other developed countries (excluding a few tiny European principalities and oil rich Norway.)  That’s an interesting coincidence!

I am not an extreme supply sider who thinks taxes explain everything (the Nordic countries are also fairly affluent), but I do believe low taxes to be one factor in the unusual success of Switzerland and the USA.  

As for health care, I suspect that the US system is actually further from the free market ideal than the Swiss system, despite the fact that the Swiss system is more universal.  Our government spends as much as most European countries on health care, and our regulations and subsidies produce grotesque distortions in the health care market.  The Swiss system involves unusually large out of pocket payments for health care.

The US and Switzerland also hold a much larger than average number of referenda.

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

1. Relatively decentralized.

2.  Lots of referenda.

3.  Traditionally more free market 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 warfare (on their soil), and a haven for dissidents fleeing persecution.  Also a good place for migrants who want a business-friendly system.

With this final point I’d like to circle back to where Yglesias ended up.  He suggested that the Swiss were in one sense superior to other people.  Not genetically superior, but superior at making political decisions.  More specifically, he points out that they are unusually well informed voters.  Perhaps that’s because they have a direct say in policy.

I do not believe that Americans are superior at making political decisions, but I do believe we have one other type of superiority.  We have an unusually talented extreme right tail of the talent distribution.  Our economic system and political freedom make this place relatively appealing to talented migrants like Elon Musk.  Thus while I don’t believe that Americans are more talented than citizens of places like Canada, on average, I do believe the top tenth of 1% of American talent is extremely impressive.  This might help to explain our increasing dominance of intellectual capital-intensive industries such as software, biotech, filmmaking, finance, etc.  Switzerland also does well in industries that require highly skilled individuals. 

When thinking about cause and effect, it’s very hard to disentangle the impact of human talent and good institutions, for the simple reason that talented people tend to produce better institutions.  Compare Switzerland to (less well-educated) mountainous and landlocked nations such as Afghanistan, Bolivia and Laos.  Where would you prefer to migrate to?)

I live near Irvine, California, which has very good schools and very expensive homes.  Talented people pay extra to move to Irvine, in order to get their kids into the good schools.  Over time, less talented people are gradually priced out.  That makes Irvine’s schools even better.  But are they better because the new people are better at running schools, or because their kids are more talented?

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

Thus it’s almost impossible to completely disentangle the various explanations.  If only the Swiss were willing to do a controlled experiment.  How about if the French region adopts France’s economic and political system?  Run the test for a few decades and see how it goes.  Then the rest of the world could determine if the Swiss institutions really are superior, and we could all adopt their system.  (If the French region adopts high-speed rail and suffers a loss of export competitiveness, then we can infer that institutions do matter.) 

Alas, it’s the very fact that Switzerland is hyper-democratic that makes such a crazy experiment impossible.  But maybe there’s a lesson there.  Nothing stopped Mao from his Great Leap Forward experiment.

Although we cannot do controlled experiments, there are lots of natural experiments out there.  And what do they show?

1. Institutions are really important (North vs. South Korea)

2. Within the same regime, talent differences are really important (Malays vs. Chinese within Malaysia.)

So it’s probably not a question of which explanation is right for Switzerland, rather it is a question of how important is each factor.

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