Is Denmark So Bad by Michael Cochrane

Last fall this column published an article on Swedish Socialism.  Here is an article that is not really a followup, but again points to the problems with European style Socialism that our president is so in love with.  This time case in point, Denmark.  So, as written by my colleague, Michael Cochrane . . . . .

The other day I caught a portion of a story on NPR’s “All Things Considered” about tax rates in Denmark. It seems that every year there is a report issued that lists every country in decreasing order of tax rates, and apparently Denmark tops the list year after year as the nation with the highest tax rates.

I didn’t quite catch the percentage of income taxation, but the NPR story did point out that there is a 25% value added tax on all goods and services, and a 200% tax on new automobile purchases! Yes, you heard correctly. To buy a vehicle worth $20,000, a Dane would have to shell out $60,000! I suspect that most of what one earns in Denmark is paid to the government through either income taxes or VAT.

You might expect the Danish government to provide ample benefits and social services for this high rate of taxation, and you’d be right. In addition to free, universal health care, there is a retirement entitlement, and unemployment benefits are paid for up to four years. Most of the people interviewed for the NPR story were actually very happy to pay these high taxes because of all the benefits they received.

A Danish economist and university professor was interviewed who said that, on the whole, the Danish system of social welfare allows employers to be very agile in terms of hiring and firing. Employees can be let go (and rehired) very easily, but with generous unemployment benefits, they usually don’t worry about income. The only downside he suggested was that, “Some people will take the opportunity to stay unemployed because they're paid to stay unemployed”, leading to slower economic growth.

Having lived in Europe on three occasions, I really appreciate the orderliness and security one experiences there. You go to any café in Europe and you can expect a relatively high level of service. Roads and streets are well built and well maintained. Houses are constructed to last hundreds of years. The standard of living seems to be uniformly high.

So, did we get it wrong in the USA? Has Denmark in particular and Europe in general figured out the secret of the ideal utopian lifestyle?

Somehow, though I will be the first to admire all Europe has to offer, I don’t think their economic wonderland can last. In the years immediately following World War II, the Germans, and indeed all of Western Europe, worked feverishly to rebuild their devastated nations. Within only a decade or two, Western European countries had returned to a standard of living nearly on a par with that of the United States. Europeans, particularly the West Germans, worked very hard and productively, building an enviable economy and high living standards for her citizens. When I was first stationed in Germany in 1980, virtually no Germans used credit cards. But in the last three decades, the European worker through the agendas of social democracy, has seen his work week reduced to 35 hours, his vacation increased to more than six weeks per year (in addition to Christmas holiday break) and has acquired numerous other social benefits. Increasingly, Europeans want both the benefits of the welfare state and the income to choose a consumerist lifestyle – buying on credit, having the latest gadgets, better cars, etc.

You can’t have it both ways.

Ultimately, government cannot directly contribute to the growth of an economy. Only business activity can do that. Governments can only redistribute wealth, they cannot create it. To be sure, governmental policies can create an economic environment conducive to the creation of wealth, but they cannot by themselves “grow the pie” larger.

So, should we in the USA emulate the European style of social democracy? It is certainly tempting. However, it’s important to realize that the United States is orders of magnitude larger than Denmark, or even Germany, in terms of population and size of the economy. What might work for delivering services for taxes paid in Denmark would be utterly unworkable in the US. Our Constitution is structured in such a way that it only proscribes limited functions to the Federal government, and reserves the remainder to the States and the people. This suggests that our citizens would be better served if Federal taxation were minimized, with social services primarily provided at the State and local level, where there is more of a direct relationship between the people and the government.

I’m willing to be proved wrong, but I think that the best balance between government and the private sector in providing needed services is to default to minimum essential governmental services, particularly at the Federal level. This gives maximum freedom to individuals to choose their own destiny. It tends to foster a robust and resilient economy where localities are free to choose the degree to which they are taxed and receive local government benefits.

Ultimately, I believe that welfare states tend to stifle the individual initiative and innovation necessary for lasting economic development and the growth of living standards. It may be only a matter of time, but I think that the trend in Europe toward increasing reliance on the benevolence of the state will result in an ultimately unsustainable system in danger of collapse. My hope is that if and when that collapse comes, it will not be catastrophic.

© 2010 by Michael Cochrane. All rights reserved. Used with permission.