Tyler Cowen and Thomas Piketty on Sonderfall Schweiz

From the Conversations with Tyler podcast:

COWEN: If I visit every major country in Europe, what I observe is the highest living standard is arguably in Switzerland — Norway and Luxembourg aside. Switzerland has one of the smallest governments, and they attempt relatively little redistribution. What is your understanding of Switzerland? What if someone said, “Well, Europe should try to be more like Switzerland. They’re doing great.” Why is that wrong?

PIKETTY: Oh, Switzerland. It’s a very small country, so it’s about the size. . . . Actually, it’s smaller than Île-de-France, which is a Paris region. Now, if you were to make a separate country out of Île-de-France, GDP per capita, I think, would actually be higher than Switzerland. Of course, you can take a wealthy region in your country and say, “Okay, I don’t want to share anything with the rest of the country. I’m going to keep my tax revenue for me. I’m going to be a tax haven based on bank secrecy.” That’s going to make you 10 percent or 20 percent richer. I’m not saying —

COWEN: It’s been a long time since Switzerland relied on bank secrecy, right? Following 9/11, that Swiss advantage largely went away.

PIKETTY: Oh, that’s wrong. Oh, you’re wrong on this.

COWEN: It’s the US that’s the secrecy haven.

PIKETTY: No, it still brings . . . No, no, I can tell you in terms of the banking sector and the status as a tax haven still brings an additional income of at least 10 percent or 20 percent to Switzerland. But I agree with you, Switzerland would still be rich even without this. But they would be a bit poorer, and they will certainly not be richer than if you compare to, say, the Paris region GDP per capita or the London region, if you take the wealthiest region. It’s important to compare countries of comparable size, regions of comparable size….

COWEN: But Switzerland is a real country with a diversified economy.

PIKETTY: Yes, sure.

COWEN: Very little of it is poor.

PIKETTY: The Paris region is a real region.

COWEN: But that’s a clustering effect within France. France is much poorer than Switzerland. Could not France bring Swiss prosperity to —

PIKETTY: This is not comparable in size. I don’t think it makes sense. Again, if you want to compare a region of about 5 million,10 million inhabitants — which is the size of Switzerland — you find many other regions with comparable GDP per capita all across Europe.

There are many good things with Switzerland, by the way. I think the local democratic system has lots of good aspects to it. The education system has . . . I think there’s a lot to learn from each of these experiments.

I feel lame excerpting this part since it’s the same part that Tyler excerpted, but Switzerland is one of my obsessions so here we are.

A couple of observations…

At least as far as I can tell from the internet, Piketty is wrong about GDP per capita. The latest GDP per capita I could find quickly for Île-de-France was $69,423 in 2016 (from Wikipedia). Swiss GDP per capita was $83,073 in 2016 according to the World Bank. The Swiss figure is in 2020 US dollars. I’m not sure what year the Île-de-France figures are in, but if you assume it’s 2016 dollars, then that would put the Île-de-France GDP per capita figure at $74,862 (based on this admittedly less than fully convincing website). Still less.

This doesn’t invalidate Piketty’s point larger point about scale . Before I lived in Switzerland, I had several people who had lived there mention how small of a country it is when comparing it to the US. At the time, I would roll my eyes.

But having lived there, I’ve changed my mind. It is a really small country and this seems to make some problems more tractable. US federalism and Swiss federalism get compared a lot and they are similar in many ways. But Swiss Cantons, which relate to the Federal government the same way that US States do, are closer to US counties in terms of population and land mass. There’s a lot more consensus about how things should work at the US county level than there is at the US state level, which makes choosing a direction easier. (Aside: You could argue that the implication here is that even more US governance should happen locally, but I wonder if at some point that would erode the benefits of scale that the US enjoys.)

Even with the caveat of size, I still think Switzerland is super impressive. The way I describe it to Americans is that the entire country is like the wealthiest US suburbs. Everything just works. The infrastructure is well maintained. It’s clean. The bureaucracy is friendly and easy to navigate. It’s safe enough to leave your door unlocked. There aren’t that many places in the world where 8 million people live that you can say that about.

The last thing I’ll say is that I don’t think the Swiss secret is simply less government and less redistribution, although I do think these are assets for Switzerland. If I had narrow it down, I would say that the political culture of trust and compromise and the high investment in human capital are the driving factors. If anything, I think these are what allows the government to be both small and effective… which I think places me closer to Piketty’s answer than Tyler’s question.