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Archive for the ‘Denmark’ Category

When non-libertarian audiences ask my opinion about immigration, I generally point out that it is a very good sign that so many people want to come to the United States.

Almost everyone agrees with that statement, but that doesn’t put them in the pro-immigration camp. Instead, I find that many people have a “what’s in it for us” attitude.

  1. They like the underlying concept of programs such as the EB-5 visa that attract immigrants with money, and they are broadly sympathetic to immigrants with skills and education. At the risk of over-simplifying, they want immigrants who won’t rely on handouts and they like immigrants who presumably will increase the nation’s per-capita GDP (and there certainly is strong evidence that this happens).
  2. They’re skeptical of mass immigration by people with low incomes. This is mostly because they fear such migrants will impose higher costs on taxpayers, though Republican types also seem motivated by concerns about future voting patterns. The notable exception to this pattern is that business audiences are somewhat sympathetic to mass migration because they believe labor costs will fall.

When I deal with people in category #2, I sometimes ask them about Tyler Cowen’s idea of allowing limitless migration from nations with bigger welfare states. After all, I doubt people such as “Lazy Robert” will move from Denmark to the United States.

But what about poor people from poor nations? Would they like to migrate to rich nations to get handouts, rather than for economic opportunity?

Taxpayers in many nations are worried about that possibility and are not very welcoming to immigrants who will collect benefits.

Indeed, that’s motivated the Trump Administration to consider tightening rules for who gets in the country.

The Trump administration announced long-awaited “public charge” immigration regulations this week, and the furor immediately kicked up to derangement level. …But immigration regulation of this sort has been a part of our laws for more than a century…the 1882 act declared that “any convict, lunatic, idiot, or any person unable to take care of himself or herself without becoming a public charge…shall not be permitted to land.” …The 1952 revisions to immigration law maintained the idea that the government may exclude “paupers, professional beggars, or vagrants” and those who are “are likely at any time to become public charges.” …In 1996, Congress strengthened the public charge provisions…why would anyone call the Trump administration’s interpretation “un-American?” …the regulations—which do not apply to refugees, asylum-seekers, and various other groups—propose guidance to determine if an immigrant would be likely to use the welfare system for more than 12 months during a three-year period.

But it’s not just a controversy in the United States.

Taxpayers in the Netherlands, for instance, are becoming less tolerant of immigrants who want handouts rather than work.

Non-Western immigrants and their descendants also depend on welfare to a much greater extent than the native Dutch. They are half of all welfare recipients but only 11% of the total population. Among recent Somali refugees granted asylum, 80% are on welfare. Holland is truly a welfare state, and the Dutch are proud of it. …This type of open and yet highly regulated society can function only if it is carried by a disciplined and well-educated citizenry… That is what the fuss is about. To put it in abstract terms: Can a welfare state become an immigration state? You know the answer: A welfare state with open borders will one day run out of money.

I can’t imagine that stories like this make German taxpayers happy.

As early as 2016, German newspapers have been reporting on migrants with recognized refugee status having holidays in countries that they “fled,” such as Afghanistan, Lebanon, and Syria. Because Hartz IV, the welfare system that certain migrants granted refugee status receive, permits 21 days per year of “local absence,” those who have recognized refugee status and have no income or assets simply leave Germany for vacation and continue to receive money from German taxpayers.

There are also concerns that welfare spending hinders economic integration and independence in Sweden.

…only 20 percent of the Somali immigrants in Sweden have jobs, according to a report released on Monday by the government’s Commission… In an opinion article published in the Expressen newspaper, the author of the report, Benny Carlsson of Lund University, explained that Sweden would be well served to let community-based organizations do more…rather than relying on public agencies… Carlsson explained that…Sweden’s rigid labour market and labour protection laws also create “higher risks” for employees which amount to “higher thresholds” for Somali jobseekers. …Carlsson also cited Sweden’s social safety net which “lets people live at a decent level even if they don’t work, while the same can’t be said of the United States”.

Speaking of Sweden, stories of welfare dependency help to explain this report in the New York Times.

…four years after the influx, growing numbers of native-born Swedes have come to see the refugees as a drain on public finances. …Antipathy for immigrants now threatens to erode support for Sweden’s social welfare state. “People don’t want to pay taxes to support people who don’t work,” says Urban Pettersson, 62, a member of the local council here in Filipstad, a town set in lake country west of Stockholm. “Ninety percent of the refugees don’t contribute to society. These people are going to have a lifelong dependence on social welfare. This is a huge problem.” …Under the Nordic model, governments typically furnish health care, education and pensions to everyone. The state delivers subsidized housing and child care. When people lose jobs, they gain unemployment benefits… But the endurance of the Nordic model has long depended on two crucial elements — the public’s willingness to pay some of the highest taxes on earth, and the understanding that everyone is supposed to work. …Sweden’s sharp influx of immigrants — the largest of any European nation, as a share of the overall population — directly tests this proposition. …The unemployment rate was only 3.8 percent among the Swedish-born populace last year, but 15 percent among foreign-born… Roughly half of all jobless people in Sweden were foreign-born. …these sorts of numbers are cited as evidence that refugees have flocked here to enjoy lives of state-financed sloth. …The average refugee in Sweden receives about 74,000 Swedish kronor (about $7,800) more in government services than they pay into the system, Joakim Ruist, an economist at the University of Gothenburg, concluded in a report released last year and commissioned by the Ministry of Finance. Over all, the cost of social programs for refugees runs about 1 percent of Sweden’s annual national economic output

But is it true that migrants are looking for handouts? Are the afore-cited stories just random anecdotes, or do they suggest some countries are “welfare magnets”?

I’ve already shared some evidence that welfare recipients inside the United States gravitate to places that provide bigger benefits.

And this seems to be the case for migrants that cross national borders. Here are some findings from some new academic research showing that the generosity of Denmark’s welfare state has a significant impact on migration choices.

We study the effects of welfare generosity on international migration using a series of large changes in welfare benefits for immigrants in Denmark. The first change, implemented in 2002,lowered benefits for immigrants from outside the EU by about 50%, with no changes for natives or immigrants from inside the EU. The policy was later repealed and re-introduced. The differential treatment of immigrants from inside and outside the EU, and of different types of non-EU immigrants, allows for a quasi-experimental research design. We find sizeable effects:the benefit reduction reduced the net flow of immigrants by about 5,000 people per year, or 3.7percent of the stock of treated immigrants, and the subsequent repeal of the policy reversed the effect almost exactly. Our study provides some of the first causal evidence on the widely debated “welfare magnet” hypothesis. …our evidence implies that, conditional on moving, the generosity of the welfare system is important for destination choices.

Here’s the relevant graph from the study, based on two different ways of slicing the data.

As you can see from the red lines, migration fell when benefits were reduced, then immediately jumped when benefits were increased, and then immediately fell again when they were again lowered.

For what it’s worth, scholars believe that support for the welfare state in Europe is declining for these reasons. Taxpayers are tolerant of subsidizing their long-time neighbors, but are much less sympathetic when giving away money to newcomers.

From my perspective, the solution is obvious. I generally like immigration and generally don’t like redistribution.

So why not reduce benefits, ideally for everyone, but just to migrants if that’s the only possible outcome. That way nations are more likely to attract people (especially from low-income societies) who are seeking economic opportunity.

P.S. If you want to enjoy some immigration-related humor, we have a video about Americans migrating to Peru and a story about American leftists escaping to Canada.

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Spending caps are the most effective way of fulfilling my Golden Rule for fiscal policy.

And we have good evidence for this approach, as I explain in this FreedomWorks discussion.

I also discuss tax competition in the interview, as well as other topics. You can watch the entire discussion by clicking here.

But I’m sharing the part about spending caps because it fits perfectly with some new research from Veronique de Rugy and Jack Salmon of the Mercatus Center.

They point out that America faces a grim fiscal future, but suggest that fiscal rules may be part of the solution.

…the federal budget process as it exists today has proven inadequate…it is a great way to enable politicians to do what they want to do (cater to interest groups) while avoiding what they don’t want to do (living within their means). …The negative consequence emerging from this chaos and the resulting failure to follow budget rules is an unremitting expansion of the size and scope of government… With countries around the world experiencing growing debt-to-GDP ratios, resultant stagnation in economic growth, and, in extreme cases, default on debts, academics have been paying an increasing amount of attention to the potential of rules toward restraining unsustainable deficit spending. …The good news is that the evidence suggests that these fiscal rules are broadly effective at restraining deficit spending. …The bad news is that not all fiscal rules are effective in restraining government profligacy and curtailing debt growth.

The authors are right. Some fiscal rules don’t work very well.

As I stated in the interview, balanced budget requirements tend to be ineffective.

Spending caps, by contrast, have a decent track record.

The Mercatus study looks at Hong Kong.

Hong Kong…might actually represent the gold standard of good fiscal policy. …Hong Kong’s Financial Secretary, Mr. John Tsang, explained, “Our commitment to small government demands strong fiscal discipline. . . . It is my responsibility to keep expenditure growth commensurate with growth in our GDP.” …in Hong Kong it’s actually a constitutional requirement: Article 107 requires that the government should strive to achieve a fiscal balance, avoid deficit, and more importantly, make sure government spending doesn’t grow faster than the growth of the economy. …Hong Kong’s spending-to-GDP ratio has fluctuated between 14 and 20 percent since the 1990s, its debt as a share of GDP is zero, social welfare spending remains steady at less than 3 percent of GDP.

Amen.

I’ve also praised Hong Kong’s fiscal policy.

Now let’s look at what the authors wrote about Switzerland.

Swiss politicians are not allowed to increase spending faster than average revenue growth over a multiyear period (as calculated by the Swiss Federal Department of Finance), which confines spending growth to a rate no higher than the rate of inflation plus population growth. The Swiss debt brake rule is significant in that it appeals to economists and policymakers on both sides of the aisle. Advocates for fiscal restraint support this rule because it is effectively a spending cap, while social democrats support the rule as it allows for deficit spending during recessionary periods. …There’s no arguing with the results: Annual spending growth fell from an average of 4.3 percent to 2.5 percent since the rule was implemented. Also, in 10 out of the past 14 years, Switzerland has had budget surpluses, while deficits have remained rare and small… At the same time, the Swiss debt-to-GDP ratio has fallen from almost 60 percent in 2003 to around 42 percent in 2017.

Once again, I say amen.

Switzerland’s spending cap is a big success.

Here’s Figure 1 from the study, which shows a big drop in Swiss government debt. I’ve augmented the chart with OECD data to focus on something even more important – which is that the burden of spending (which started very low by European standards) has declined since the debt brake was implemented.

Last but not least, let’s look at the Danish example.

In 2014 Denmark implemented The Budget Act to ensure more efficient management of public expenditures. The act is aimed at ensuring a balance or surplus on the general government balance sheet, as well as appropriate expenditure management at all levels of government. In practice, the rule sets a limit of 0.5 percent of GDP on the structural budget deficit. Policymakers decided that managing fiscal policy on the basis of a balanced structural budget would lead to an appropriate fiscal position in the long term. They also designed the system to take discretion out of their own hands by making the cuts automatic. In addition to structural deficit rules, the Budget Act introduces four-year rolling expenditure ceilings. These ceilings set legally binding limits for spending at all levels of government and for each program. If one program spends under its cap, any money not spent cannot be reallocated to another program.

I guess this is time for a triple-amen.

Here’s Figure 2 from the study, which I’ve also augmented to highlight the most important success of Denmark’s policy of spending restraint.

The economic case for spending caps is ironclad.

The problem is that it’s an uphill climb from a political perspective.

Politicians prefer legislative spending caps. After all (as we saw in 2013, 2015, 2018, and this year), those can be evaded with a simple majority, so long as there’s a profligate president who approves higher spending levels.

And those caps have never applied to entitlements, which are the part of the budget that eventually will bankrupt the nation.

So why would public choice-motivated lawmakers actually allow a serious and comprehensive spending cap to become part of the Constitution?

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I explained yesterday that Denmark is not a good role model for American leftists.

Simply stated, Otto Brøns-Petersen’s video shows that the admirable outcomes in that country are the result of laissez-faire markets and the bad outcomes are the result of the welfare state imposed beginning in the 1960s.

In any event, Denmark is not a socialist country. As I wrote, “There’s plenty of bad policy, but no government ownership, no central planning, and no price controls.”

But to make matters clear, here’s a comparison of Denmark and the United States from Economic Freedom of the World.

The bottom line is that if folks on the left want to claim Denmark is socialist, then America also is socialist. Alternatively, if Denmark is an example of Democratic Socialism, then so is the United States.

And if that’s the case, we’ve already reached Collectivist Nirvana and my leftist friends can shelve some of their crazy ideas such as 70 percent tax rates and the Green New Deal.

Needless to say, I won’t hold my breath.

Today, I want to focus on another aspect of Danish public policy that warms my heart. Back in 2015, I applauded the government for imposing some spending restraint and I expressed hope that plans for future fiscal discipline would be fulfilled.

Well, based on IMF and OECD data, policy makers in Denmark deserve a gold star. They followed my Golden Rule and limited the growth of government spending. As a result, there’s been a meaningful decline in the burden of spending (measured as a share of economic output).

Too bad American politicians weren’t similarly prudent. If federal spending in the U.S. grew at the same rate since 2012, the burden of spending today would be more than $700 billion lower.

And since spending is the problem and red ink is the symptom, it naturally follows that the United States would have a deficit this year of about $370 billion instead of nearly $1.1 trillion.

It’s a shame we can’t go back in time and trade profligate Obama and profligate Trump for Denmark’s leaders.

P.S. Here’s a list of other nations with successful periods of spending restraint, and here’s a video highlighting four of those episodes.

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I’ve repeatedly dealt with the argument over Denmark’s supposed socialism.

My core argument is that Denmark is very bad on fiscal policy, but very laissez-faire on other issues such as regulation. The net effect is that Danes have about the same amount of economic liberty as Americans.

The bottom line is that Denmark isn’t socialist. At least not if we use the technical definition. There’s plenty of bad policy, but no government ownership, no central planning, and no price controls.

Which is basically the message in this Prager University video by Otto Brøns-Petersen from the CEPOS think tank in Denmark.

This is a great video.

Basically everything you need to know about Danish economic policy.

To augment Otto’s video, let’s review a report from some of his CEPOS colleagues.

The entire report is worth reading, but I want to focus on one excerpt and some key visuals.

First, notice that Denmark and the United States have similar levels of economic freedom.

Since I’m a public finance economist, I was very interested in some observations in the report about fiscal policy.

This excerpt notes that Denmark has a much more onerous tax burden, and it points out that the value-added tax is the main reason for the gap.

…the tax burden (taxes to GDP) is the second-highest in the OECD and 70 percent higher than in the US (46 vs. 27 per cent of GDP). …The biggest difference between the Danish and the American tax systems is that consumption taxes are much higher in Denmark. VAT is 25 per cent in Denmark while the average sales tax is 6 per cent in the US. …Including the effect of consumption taxes, the top marginal tax rate on labor income is 67 per cent in Denmark. For low and middle-income workers, it is 55 per cent. This is significantly higher than in the USA. It’s important to include consumption taxes when you calculate the effective marginal tax rate. High consumption taxes means that you can buy fewer goods for one extra working hour.

My first takeaway is that this explains why blocking the VAT is absolutely necessary for advocates of limited government in the United States.

And the second takeaway is that big government means big burdens on lower-income and middle-class taxpayers, which is what we seen in this next chart.

Last but not least, here are two charts comparing taxes and labor supply in the United States and Denmark.

In the tax chart, you can see that the two countries were very similar from the 1930s to the 1960s. But then the tax burden in Denmark got much worse (coinciding with the imposition of the VAT).

Now take a look at hours worked in both nations.

We were very similar back in 1970. But as the Danish tax burden grew, people responded by working less and less.

In other words, more evidence to support the core insight of supply-side economics. The more you tax of something, the less you get of it.

The Philoso-raptor surely would agree.

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In Part I of our series on Socialism in the Modern World, we looked at the tragic story of Venezuela.

Today, we’re going to look at what we can learn from the Nordic nations. And the first thing to understand, as I explain in this interview, is that these nations are only socialist if the definition is watered down.

As I noted in the interview, real socialism is based on government ownership and control of the “means of production.” But Nordic countries don’t have government-owned factories, government-controlled allocation of resources, or government regulation of prices.

In other words, those nations are not socialist (government ownership), they’re not fascist (government control), and they’re not even corporatist (cronyism).

So what are they?

In a column for the Washington Post, Max Boot accurately describes them as free-market welfare states.

…rigging elections and locking up or killing political opponents. This is one model of socialism — the same approach that has been applied in Cuba and the Soviet Union. But there are many other varieties that are far more benign. …the Scandinavian model. …Denmark, Norway and Sweden…show that a “free-market welfare state” isn’t an oxymoron. …By some measures, moreover, they are freer, economically…than the United States.

That last sentence isn’t a typo. The United States has more overall economic freedom than the Nordic nations, but both Denmark and Finland actually rank above America when looking at factors other than fiscal policy.

And Sweden and Norway only trail the United States by 0.03 and 0.06 points, respectively.

That being said, a big lesson to learn is that fiscal policy is a mess in the Scandinavian countries.

…there is nothing sinister about wanting to emulate the Scandinavian example. But that doesn’t necessarily mean it’s practical. The Scandinavians have lower corporate tax rates than the United States but much higher individual taxes. …The Scandinavian countries also charge hefty value-added taxes of 25 percent on consumption. The United States doesn’t have a national sales tax, and the average rate for state sales taxes is only 7 percent. In all, Scandinavians pay $25,488 a head in taxes compared with $14,793 a head in the United States — 72 percent more. This is what it takes to finance a Scandinavian-style social welfare state. It can’t be done simply by raising marginal tax rates on the wealthiest taxpayers to 70 percent, as Ocasio-Cortez suggests, because few taxpayers pay the top rate. It requires a massive tax hike on the middle class.

Amen. This is a point I have frequently made, most recently when writing about Alexandria Ocasio-Cortez’s statist agenda. Ordinary taxpayers will pick up most of the tab if the left’s agenda is adopted.

But I’m digressing. Let’s return to today’s main issue, which is the Nordic nations and socialism.

Technically, there’s no connection. As I said in the interview, those countries have never been socialist. Heck, if those nations are socialist, then so is the United States.

There is a lesson to be learned, however, and that lesson is relevant whether one uses the technical or common definition of socialism.

Simply stated, the relative success of those nations is due to free markets and a history of small government, but the imposition of big welfare states starting in the 1960s has weakened the region’s economic vitality.

This chart tells you everything you need to know.

P.S.  Actually, there is more your should know. Nima Sanandaji’s data on how Americans of Nordic descent are richer than residents of Nordic nations is very illuminating.

P.P.S. And we have specific data from Sweden showing how that nation lost ground after it adopted the big welfare state (and has subsequently gained ground thanks to pro-market reforms such as nationwide school choice and partial pension privatization).

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The most persuasive data, when comparing the United States and Scandinavia, are the numbers showing that Americans of Swedish, Danish, Finnish, and Norwegian descent produce much more prosperity than those who remained in Sweden, Denmark, Finland, and Norway.

This certainly suggests that America’s medium-sized welfare state does less damage than the large-sized welfare state in Scandinavian nations.

But maybe the United States also was fortunate in that it attracted the right kind of migrant from Scandinavia.

Let’s look at some fascinating research from Professor Anne Sofie Beck Knudsen of Lund University in Sweden.

If you’re in a rush and simply want the headline results, here are some excerpts from the abstract.

This paper examines the joint evolution of emigration and individualism in Scandinavia during the Age of Mass Migration (1850-1920). A long-standing hypothesis holds that people of a stronger individualistic mindset are more likely to migrate as they suffer lower costs of abandoning existing social networks. …I propose a theory of cultural change where migrant self-selection generates a relative push away from individualism, and towards collectivism, in migrant-sending locations through a combination of initial distributional effects and channels of intergenerational cultural transmission. …the empirical results suggest that individualists were more likely to migrate than collectivists, and that the Scandinavian countries would have been considerably more individualistic and culturally diverse, had emigration not taken place.

If you’re interested in more detail, here are passages from the study.

We’ll start with the author’s description of why she studied the topic and what she wanted to determine.

People of Western societies are unique in their strong view of themselves… This culture of individualism has roots in the distant past and is believed to have played an important role in the economic and political development of the region… differences in individualism and its counterpart, collectivism, impact processes of innovation, entrepreneurship, cooperation, and public goods provision. Yet, little is known about what has influenced the evolution of individualism over time and across space within the Western world. …I explore the relationship between individualism and a common example of human behavior: migration. I propose a theory, where migration flows generate cultural change towards collectivism and convergence across migrant-sending locations.

Keep in mind, by the way, that societies with a greater preference for individualism generate much more prosperity.

Anyhow, Professor Knudsen had a huge dataset for her research since there was an immense amount of out-migration from Scandinavia.

During the period, millions of people left Europe to settle in New World countries such as the United States. Sweden, Norway, and Denmark experienced some of the highest emigration rates in Europe during this period, involving the departure of approximately 25% of their populations. …Total emigration amounted to around 38% and 26% in Norway and Sweden respectively.

Here are some of her findings.

I find that Scandinavians who grew up in individualistic households were more likely to emigrate… people of individualistic mindsets suffer lower costs of leaving existing social networks behind… the cultural change that took place during the Age of Mass Migration was sufficiently profound to leave a long-run impact on contemporary Scandinavian culture. …If people migrate based, in part, on individualistic cultural values, migration will have implications on the overall evolution of cultures. Emigration must be associated with an immediate reduction in the prevalence of individualists in the migrant-sending population.

Here is her data on the individualism of emigrants compared to those who stayed in Scandinavia.

As an aside, I find it very interesting that Scandinavian emigrants were attracted by the “American dream.”

…historians agree that migrants were motivated by more than hopes of escaping poverty. Stories on the ‘American Dream‘ and the view of the United States as the ‘Land of Opportunities‘ were core to the migration discourse. Private letters, diaries, and newspaper articles of the time reveal that ideas of personal freedom and social equality embodied in the American society were of great value to the migrants. In the United States, people were free to pursue own goals.

And this is why I am quite sympathetic to continued migration to America, with the big caveat that I want severe restrictions on access to government handouts.

Simply stated, I want more people who want that “American dream.”

But I’m digressing. Let’s now look at the key result from Professor Knudsen’s paper.

When the more individualistic Scandinavians with “get up and go” left their home countries, that meant the average level of collectivism increased among those remained behind.

Several observations are worth mentioning in light of the revealed actual and counterfactual patterns of individualism. First, one observes a general trend of rising individualism over the period, which is consistent with accounts for other countries… Second, the level of individualism would have been considerably higher by the end of the Age of Mass Migration in 1920, had emigration not taken place. Taking the numbers at face value, individualism would have been between 19.0% and 20.3% higher on average in Sweden, 17.8% and 27.9% in Norway, and 7.6% and 12.5% in Denmark, depending on the measure considered.

These charts capture the difference.

To wrap this up, here’s a restatement of the key findings from the study’s conclusion.

I find that people of an individualistic mindset were more prone to migrate than their collectivistic neighbors. …Due to self-selection on individualistic traits, mass emigration caused a direct compositional change in the home population. Over the period this amounted to a loss of individualists of approximate 3.7%-points in Denmark, 9.4%-points in Sweden, and 13.6%-points in Norway. …The cultural change that took place during the Age of Mass Migration was sufficiently profound to impact cross-district cultural differences in present day Scandinavia. Contemporary levels of individualism would thus have been significantly higher had emigration not occurred. …The potential societal implications of the emigration-driven cultural change are of great importance. The period of the Age of Mass Migration was characterized by industrialization, urbanization, and democratization in Scandinavia. Individualism was generally on the rise, in part due to these developments, but it seems conceivable that the collectivistic turn caused by emigration played a role in subsequent institutional developments. While economic freedom is high in contemporary Scandinavia, the region is known for its priority of social cohesion and collective insurance. This is particularly clear when contrasting the Scandinavian welfare model with American liberal capitalism.

This is first-rate research.

Professor Knudsen even understands that Scandinavian nations still have lots of economic freedom by world standards.

Imagine, though, how much economic freedom those countries might enjoy if the more individualism-minded people hadn’t left for America? Maybe those nations wouldn’t have dramatically expanded their welfare states starting in the 1960s, thus dampening economic growth.

The obvious takeaway is that migration from Denmark, Sweden, and Norway to the United States was a net plus for America and a net minus for Scandinavia.

P.S. When she referred in her conclusion to “American liberal capitalism,” she was obviously referring to classical liberalism.

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Paul Krugman has butchered numbers when writing about fiscal policy in nations such as France, Estonia, Germany, and the United Kingdom.

Today, we’re going to peruse his writings on Denmark.

Here’s some of what he wrote earlier this month.

Denmark can teach us…about the possibilities of creating a decent society. …Denmark, where tax receipts are 46 percent of GDP compared with 26 percent in the U.S., is arguably the most social-democratic country in the world. According to conservative doctrine, the combination of high taxes and aid to “takers” must really destroy incentives both to create jobs and to take them in any case. …what Denmark shows is that you can run a welfare state far more generous than we do – beyond the wildest dreams of U.S. progressives – and still have a highly successful economy. Indeed, while GDP per capita in Denmark is lower than in the U.S. – basically because of shorter work hours.

And here’s what he wrote a couple of days ago.

American politics has been dominated by a crusade against big government; Denmark has embraced an expansive government role, with public spending more than half of G.D.P. American politicians fear talk about redistribution of income from the rich to the less well-off; Denmark engages in such redistribution on a scale unimaginable here. …Conservative ideology says that Denmark’s policy choices should be disastrous, that grass should be growing in the streets of Copenhagen. …But if Denmark is a hellhole, it’s doing a very good job of hiding that fact: I was just there, and it looks awfully prosperous. …The simple fact is that life is better for most Danes than it is for their U.S. counterparts.

Interestingly, Krugman acknowledges that Denmark isn’t really socialist. Instead, it simply has a big welfare state.

But is Denmark socialist? …Denmark doesn’t at all fit the classic definition of socialism, which involves government ownership of the means of production. It is, instead, social-democratic: a market economy where the downsides of capitalism are mitigated by government action, including a very strong social safety net. …The simple fact is that there is far more misery in America than there needs to be. Every other advanced country has universal health care and a much stronger social safety net than we do.

He thinks that is a good thing, of course, and was making the same argument (using the same headline) in 2015.

…the Danes get a lot of things right, and in so doing refute just about everything U.S. conservatives say about economics. …Denmark maintains a welfare state — a set of government programs designed to provide economic security — that is beyond the wildest dreams of American liberals. …working-age families receive more than three times as much aid, as a share of G.D.P., as their U.S. counterparts. To pay for these programs, Denmark collects a lot of taxes. …Overall, Denmark’s tax take is almost half of national income, compared with 25 percent in the United States. …It’s hard to imagine a better refutation of anti-tax, anti-government economic doctrine, which insists that a system like Denmark’s would be completely unworkable.

As far as I can tell, all his numbers about Denmark are accurate, but his analysis is wrong.

He wants readers to believe that the lesson from Denmark is that there are no adverse economic consequences when nations impose a big welfare state and high taxes.

But that’s not what Danish economic history tells us. As with other Nordic nations, Denmark became a rich nation when government was relatively small and taxes were modest.

And we know from historical data that economic performance significantly weakened after the fiscal burden of government was increased.

Moreover, lawmakers are now trying to restrain government spending.

The first thing to realize is that Denmark, as are the other Nordic countries, quite free markets, apart from their welfare state transfers and high government consumption. They tend to get rather high rankings on measures of the most free economies in the World. …Protection of property rights and the integrity of the legal system are very high by international standards, as is the soundness of the monetary system… Denmark has a long tradition for free trade… Credit markets are among the less regulated internationally. During the recent financial crisis, tax payers did not have to subsidize banks, and some banks were allowed to fail. The Danish labor market is very flexible: There is no legislated minimum wage, and there are few restrictions on hiring and firing.

Here’s the part that is a must-read.

Denmark did not become a rich country recently. …Danish per capita GDP relative to other countries reached a maximum 40-60 years ago… Denmark caught up to and overtook “old Europe” in the fifties, while it narrowed its gap to the US and other Western offsprings until the early 1970s, when the process of catching up came to a hold. …At the time Denmark became rich relative to the rest of the World, it was not a welfare state. In fact, Denmark has historically been a low tax country by international standards. Until the 1960s, the Danish tax revenue to GDP ratio was at the same level as the US, and lower than the British.

Unfortunately, policy veered in the wrong direction in the late 1960s, with very adverse consequences.

The sharp divergence in the Danish tax level really occurred in the second half of the 1960s, when first a left wing coalition government and then a right wing one increased the tax to GDP ratio by some ten percentage points. …government spending was to a large extent driven by increases in tax revenue stemming from the introduction of VAT and withholding taxes on wage income. …the welfare state attracted new clients and new programs were added, the economic crisis lead to increasing unemployment… By the early 1980s the economy was in very bad shape, with high unemployment, an inflationary deflation spiral, a huge and widening government deficit.

I can’t help but call your attention to Otto’s observation about how the VAT enabled a far larger burden of government.

But let’s not get sidetracked.

This chart shows how the tax burden in Denmark diverged from the United States.

So what’s the bottom line?

Denmark first became rich, and then introduced the programs, which make up the welfare state. The huge increase in government spending has been accompanied by deep structural problems, which has made it necessary to reform the Danish economy and welfare state ever since. It can hardly be claimed that introducing the welfare state made Denmark rich; rather it was the other way around. Denmark first became rich, and then authorities began to redistribute some of the wealth.

Amen. I made the same point back in 2011.

Writing for PJ Media, Tyler O’Neil reviews the good and bad in Denmark and also echoes Otto’s analysis.

A deeper look at the history and current affairs of Denmark and the surrounding countries tells a different story, however. These countries’ benefits arguably spring from their free-market pasts, not their brief dalliance with big government. …During the early 1900s and following the Great Depression, Scandinavia’s small government and free markets fostered a culture of hard work that paid huge dividends in terms of prosperity.

Unfortunately, starting about 50 years ago, Denmark (like many other nations in the region) adopted an expensive welfare state. With bad results.

…the 1960s – 1990s expansion of welfare states actually held the Nordic countries back. After their experiment with socialistic welfare states, “Nordic citizens now have unusually high levels of sickness absence (despite being healthy societies), high youth unemployment and a poor record for integrating migrants into the labour force,” Sanandaji explains. Big government has weakened the strong culture which enabled welfare states in the first place… In 2013, roughly 240,000 people — nine percent of the potential work force — were receiving disability checks, and about 33,500 of them were under 40.

I fully agree. Denmark’s welfare state has created a problem. Simply stated, there are too many people who depend on government compared to the number of taxpayers who finance government.

I sometimes use the example of how many people are pulling the wagon compared to the number of people riding in the wagon. The Danish version uses Viking ships.

Fortunately, now there’s an effort to move back in the right direction.

Denmark now outranks even the United States as a good place to do business. …In 2013, it reduced early-retirement plans, and cut the term for unemployment benefits from four years to two. …In recent years, all the Nordic countries have decreased their corporate tax rates — each one is lower than in the United States. They also support free trade, unlike American Socialists.

Let’s look at some specific examples of how Denmark is trying to undo the damage of excessive government.

Bloomberg reported last year about the ongoing effort to reduce the nation’s fiscal burden.

When a European government raises the pension age and makes cuts to welfare programs, it’s usually because of dire finances. In Denmark’s case, it’s because of ideology. …Driving the new government’s push is a desire to finance a major round of income tax cuts. “We want to promote a society in which it is easier to support yourself and your family before you hand over a large share of your income to fund the costs of society,” the government of Prime Minister Lars Lokke Rasmussen wrote in its manifesto. It’s all part of a Danish drift toward the political right… Reforms introduced by successive governments over the years have already ensured that Denmark’s expensive welfare state is sustainable for years to come, says Torben M. Andersen, a professor of economics at the University of Aarhus and a former government adviser. These include raising the retirement age to 67 years from 65 years by 2025.

Denmark is also cutting back on college subsidies.

As one of a handful of countries that offers free tuition to college students, Denmark grants students enormous freedom… But some Danes, especially older citizens already in the labor force, say the extra freedom can eliminate a crucial sense of urgency for 20-somethings to become adults. The country now deals with “eternity students” — people who stick around at college for six years or more without any plans of graduating, solely because they don’t have any financial incentive to leave. …The country has made some headway to counter eternity students. In 2015, the Danish government proposed and passed an amendment to the Study Progress Reform… Jakobsen said the amendment has definitely reduced the trend of eternity students.

Now let’s get to my contribution to this discussion.

A few years ago, I created a “statism spectrum” to show how countries differ when looking at total economic freedom (fiscal policy, trade policy, regulatory policy, monetary policy, and quality of governance).

And I pointed out that nations with onerous fiscal burdens can still rank relatively high if they have a very pro-market approach in other areas.

But I have to confess that my spectrum was a back-of-the-envelope exercise. I simply drew a line and then added six countries.

Time for some rigor. I downloaded the latest scores from the Fraser Institute’s Economic Freedom of the World and created this chart showing the relative ranking of all the countries (divided by category). As you can see, the United States and Denmark are both in the top category and they both have very similar levels of overall economic liberty.

And to put those numbers in context, here’s the same chart, but also showing France, Greece, and Venezuela.

In other words, there’s a lot to admire about Denmark. Yes, taxes are onerous and the burden of spending is still too high, but it’s nonetheless one of the most market-oriented countries in the world because of laissez-faire policies in other areas.

My bottom line is that Paul Krugman is right to praise Denmark.

My only gripe is that he likes the one thing that they’re doing wrong and overlooks all the things that make the country a relative success.

Moreover, he ignores all the recent efforts to reduce the fiscal burden of government, probably because that would require him to acknowledge that large public sectors are bad for growth.

P.S. Denmark is way ahead of the United States in its market-friendly, savings-based approach to retirement.

P.P.S. Denmark also ranks above America in protecting the right of private property.

P.P.P.S. But the United States does rank above Denmark when all policies are part of the equation, which presumably helps to explain why Americans are richer. And that also is probably why Danes in America earn a lot more than Danes in Denmark.

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