"It is entirely possible to have a large welfare state, with generous benefits, without choking the economy," says Jonathan Cohn of the New Republic in a new series of articles, glorifying the Danish economic model. He enlists the support of several prominent economists from left and right.
Economist Kevin Hassett: "The Scandinavians show that you don't have to have a terrible economy if you have a big welfare state and high taxes."
Columbia University's Jeffrey Sachs: "A generous social-welfare state is not a road to serfdom but rather to high levels of satisfaction, fairness, economic equality and international competitiveness."
Former Treasury Secretary Robert Rubin: "I think I would like to move to Denmark."
Before Mr. Rubin starts packing, perhaps a dose of reality from someone who has actually lived in Denmark is in order.
First, let's compare material living standards in Denmark and the United States, looking at the poorest, the richest and the middle class in each society. The Economic Policy Institute estimates that the poorest 10% of Americans on average earn 39% of the US median income while their Danish counterparts earn 43% of the US median income, as Tim Worstall recently pointed out. Thus, the poorest 10% in America and in Denmark have about the same annual income (accounting for purchasing power parities and all social income transfers).
Not surprisingly, the top 10% of Americans are much better off than their Danish counterparts with an average income of 210% of the US median income compared to 123% in Denmark. "Rich" people in Denmark thus do not make much more than the median income in the United States.
As for the average industrial worker, the Danish Ministry of taxation estimates that American workers earn roughly 33% more than their Danish counterparts when accounting for purchasing power parities and social transfers of income.
Taken together, these numbers indicate that the 10% poorest in the United States have roughly the same standard of living as their Danish counterparts while the remaining 90% of Americans are better off than the Danes.
Anecdotal evidence and hard numbers concerning material goods support this conclusion. If we look at housing, the Heritage Foundation estimates that Danes have an average of 558 square feet per person available compared to a US average of 721.2 - almost 30% more living space. The difference is even more striking if we look at cars: According to Eurostat, America has 759 cars per 1000 people compared to 354 in Denmark -- a difference of more than 100%. In particular, large passenger vehicles such as SUVs are extremely rare in Denmark.
In addition, Danes tend to have fewer household amenities than Americans. A case in point: my wife and I recently hosted a Danish friend at our home in Virginia. During the clean up after dinner, our guest was astonished by our garbage disposal, having never seen one or even heard of one before in her life.
Ironically, the taxation system, which is designed to redistribute income for the benefit of the poor, is one of the main reasons poor and lower middle class Danes are not doing better than their American counterparts. For instance, Denmark has a value-added tax (VAT) of 25% on all goods and services, which increases prices for everyone regardless of their income. Furthermore, certain goods such as cars and gasoline are taxed at even higher rates. The sales tax on cars is 180%, and the price of gasoline is currently 6.50 dollars per gallon due to taxes. Since the poor tend to spend a larger percentage of their income on consumption than the rich, the high VAT and special sales taxes hit the poor relatively hard.
The same goes for what Cohn admits is a "lackluster" service sector in Denmark. Personal income taxes start at 39% in the lowest bracket with a marginal income tax rate of 60%, not counting the 8% tax on gross income (dubbed "labor market support") that everyone pays before any deductions can be made. With such an enormous tax-burden on labor, labor-intensive services naturally tend to be much more expensive in Denmark than in the United States. Since the poor need many services just as much as the rich, the high price of services hurt the poor more - by forcing them to spend a relatively high proportion of their income on basic services or to spend their free time trying to perform these services themselves.
Which brings me to my second point. Cohn points out that "Americans simply work more hours, don't get as much vacation, and can't take such generous pregnancy or sick leaves." True, on paper Danes and Europeans in general have much more free time than Americans. However, as Constantin Gurdgiev points out in this article, recent research from Sweden and Germany suggests that Americans have just as much leisure time as Germans and Swedes when one accounts for the time spent on "do-it-yourself" services such as cooking, grocery shopping and home repair. While Americans spend more time on the job, Swedes and Germans spend more time working at home performing basic services that Americans pay others to do for them.
Anecdotal evidence suggests that the numbers from Germany and Sweden apply to Denmark as well. For instance, Danes rarely go out to eat compared to Americans, and shopping for groceries, clothes and other everyday items requires more time in Denmark due to smaller stores, higher prices, and a lower variety of goods. In addition, Danes tend to spend long hours stuck in public transportation due to the high cost of cars and gasoline. High taxes tend to complicate life and cut into people's free time in more ways than immediately meet the eye.
Finally, there are the "generous" non-cash social benefits of the Danish welfare state to consider, primarily the health care system, which all Danes can use free of charge. "Danish health care is no worse than the US version," Cohn states, "Yet we Americans pay far more for our system, because it's riddled with inefficiencies as insurance companies compete with one another to enroll healthy beneficiaries, rather than finance good care."
In fact, US healthcare is better than the Danish version, exactly because Americans spend more on healthcare than the Danes. As in most government-run healthcare systems, Danish patients face significant waiting times for many types of treatment that Americans can get immediately. The United States is also ahead of Denmark when it comes to employing modern technology. For instance, America has 62.1 DTX scanners (for osteoporosis) per 1 million people compared to 8.0 in Denmark. The ratio for MRI scanners is 27 to 10 in America's favor, and the ratio for CT scanners is 32 to 14.6, again in America's favor.
Furthermore, Americans have better access to many preventive drugs than Danes, who often have difficulties getting prescriptions until they show serious medical complications. Competition between insurance companies is exactly what causes this American superiority in access to drugs. Since the insurance companies work for profit, they have an interest in minimizing expenditures for hospitalizations and expensive treatment by encouraging their beneficiaries to stay healthy through preventive drugs and a healthy lifestyle. By contrast, the Danish health system is governed by narrow-minded bureaucratic interests that jealously guard their individual budgets and slow down the strategic shift from treatment to prevention that has taken place in the United States.
One question now remains: If the Danish economic model is, indeed, vastly inferior to the American model, why do most Danes continue to hold their system in such high regard?
Growing up in the Danish public school system, I experienced firsthand the kind of soft propaganda that keeps Danes loyal to the welfare state. "Denmark is a country where few have too much, and even fewer have too little" is one of the national mottos that many students are taught to take pride in. Moreover, when "learning" about the United States, students are left with a greatly distorted image of widespread poverty, out-of-control crime rates, and a culture of raw selfishness.
In recent years, however, globalization and freer movement of labor within the European Union have given many young Danes opportunities to live and work in countries with lower tax-rates than Denmark. As more and more Danes realize that high taxes are a bad deal, the political elites will either have to lower tax rates and cut social spending or face a massive exodus of the people that suffer the most in the current system: Talented and hard-working citizens with high incomes.
In fact, this mass exodus is already taking place. For instance, estimates of Danes living in London vary between 35,000 and 70,000, which is roughly 1% of the total Danish population of 5.4 million. According to the leading Copenhagen business daily Børsen, the average income of these Danish Londoners is more than $100,000 per year.
To put this number in perspective, imagine the reaction if 3 million high income Americans moved to London in search of greater economic freedom. Perhaps even The New Republic would realize that there's something rotten about high taxes.
Henrik Rasmussen is an immigrant from Denmark, living in Virginia. He is currently working on a book comparing economic, social and cultural conditions in Europe and the United States.