Last night, I watched a debate on Danish television in which they discussed something rarely talked about in Denmark - and when it’s discussed, things often get heated. The theme was public sector employment.
In the wake of the recently concluded negotiations on fiscal policies, the liberal government have had to shy away from some of the “historical big tax cuts” they promised at the end of last year. However, that’s not the only area where they’ve had to notch down the expectations. They’ve promised to cut spending and even reduce the size of the public sector. Yet they’ve been unable to gather support in the current coalition or elsewhere in parliament, which has led them to downgrade their goals for public spending.
Under the previous social democratic government the public sector grew with an average of 0.5% a year. The goal for the current liberal government is to reduce this growth to 0.3%. They have failed. So far this parliament average growth has been 0.75% and things aren’t looking to brighten up in 2018 when 1.1% growth is expected.
The incumbent Danish government has made several attempts at reforming key areas in the Danish welfare model but has failed time after time, making negligible progress. Why is it so difficult to reform the public sector? Danish politics is often characterised by consensus but on this specific topic the agreement stops. This is what they discussed, among other things, last night:
Part of the explanation, it is suggested, might date back to the 1970’s and the Danish Marxist (although I’m sure other Marxists would argue not in its purest form – splitter!) Jørgen S. Dich. Dich was an economist, a seldom voice of reason (to some degree) on the left, and author of the book, the Ruling Class (Danish: Den Herskende Klasse), a critical assessment of the Danish welfare state.
As the title suggest, Dich uses Marxist class theory to scrutinise the public sector. In his analysis, he reaches the conclusion that the capitalists aren’t the ones exploiting the workers, the new ruling class of public employees are. Dich argues that, while public employees nurture their own interest on the pretext that they are improving everyone's welfare and at the same time are securing themselves high wages and good labour relations, the workers are kept in the illusion that the only conceivable alternative to the enormous public sector is social uncertainty and sickness. Meanwhile, the public sector grows ever larger. Dich’s book was - and still is today - highly relevant. You’ll hear many critical voices of the welfare state in Denmark who agree with Dich but none of them are from the left.
Another possible explanation is that politicians increase their commitment to sunk costs because they’ve invested a lot of time and money into their projects and don’t want to see their projects fail (as explained in this study). The problem with the public sector in Denmark is the epitome of that exact study.
The public sector is the raison d’être of the Social Democratic Party and the left. With time the public sector has become the 'pride' of the Danish people, much like the NHS has for the British people. The key difference is that a larger number of Danish politicians recognise the problem. However, the political willingness to break the alliance of politicians and the public sector, or even try to raise productivity, is simply non-existent. Understandably perhaps, since there’s an emerging pattern that public sector employees lean more to the left than the rest of the population. Any party on the right suggesting they would cut spending would be accused of treason and any party on the left suggesting the same would be accused of political heresy.
Try pointing out some of the problems in a debate and you’ll instantly be blamed for defaming all public workers even though the Danish Productivity Commission has stated that there are critical problems with the Danish productivity - in the public and private sector alike. The same Productivity Commission states that part of the reason for this are the disruptive taxes imposed on businesses. Given the small size of Denmark, the Danes are reliant on the rest of the global economy doing well, which leaves less room for increased taxation. Businesses, and the taxes they generate, are the foundation of the public sector and they are currently hurting because of increasing demands for more spending due to changes in the demographic and living conditions.
The fact that public employees are voters as well as employed by the state creates a circle of incentives that might help answer the question I asked earlier: Why is it so difficult to reform the public sector? Ludwig von Mises noticed in 1944 in his book Bureaucracy that the public employee is in a peculiar situation. Not only is he an employee, he is also an employer. Mises continues:
And his pecuniary interest as employee towers above his interest as employer, as he gets much more from the public funds than he contributes to them.
This double relationship becomes more important as the people on the government's payroll increase. The bureaucrat as voter is more eager to get a raise than to keep the budget balanced. His main concern is to swell the payroll.
Coincidentally, public sector employees in the lower quartile of earnings earn 10% more than employees in the private sector. Additionally, the public sector grew from 382,000 in 1970 to 835,000 in 2012 - over 40 years the public sector has more than doubled. In the same period the private sector has shrunk by 7%. Overall, ⅓ of the workforce is employed by the state.
This leads to a number of implications. Demand for workers in the private sector is rising, and with lower wages, so the private sector might not be able to compete with the public sector. If Denmark wants to maintain the public sector without raising taxes and hurting businesses, it ought to raise the public sector’s productivity. This seems to be difficult, however, because of the public sector’s centralised collective agreement system. Contrarily, the private sector provides a framework for companies to work under but it is highly decentralised and companies are able to induce productivity by offering things like better salaries and working hours, providing an opportunity for more effective use of resources. The private sector used to have a centralised agreement system but it was changed in the 1970s due to its inefficiency – something the public sector should consider doing as well.
Although I don’t agree with Dich on most areas, it’s remarkable that an economist on that side of the spectrum noticed these problems back in 1973, when the amount of public employees was half of what it is today, and when no politician on the left today is willing to admit to these issues. They’ve been thoroughly explained by the Danish Productivity Commission over several years, yet political stubbornness dominates the debate. The foundation of the public sector is shaking and it will eventually collapse if the Liberal Party doesn’t find the political courage to force change.