Last week, Denmark was mentioned in a American TV debate between Bernie Sanders and Ted Cruz. Instinctively, as a Dane, I always feel a sense of pride whenever Denmark is mentioned on the big stage. However, in this instance I would like to take a step back and look at the facts because Denmark is far from the utopia politicians and pundits often claim it is.
Bernie Sanders is one of the advocates for implementing a welfare model similar to that of Denmark and for a good reason. In many ways, Denmark looks to be a very attractive country, which it is (except for the weather), but not always for the reasons stated in the public. Especially in this TV debate, Sanders mentions he is ready to raise taxes for every American in order to fund a system similar to that of Denmark. However, as it is mentioned by the moderators, Denmark pays the highest taxes of all developed countries in the world. Now, I don’t believe every country is able to raise their taxes the way Denmark has, unless they share similar values. A combination of strong work ethics and high trust in one another is what have made the welfare state possible. This is not something that has happened concurrently with the creation of the welfare state. Actually, this predates the welfare state and is probably what has been the main factor for upholding it over time as well. Nima Sanadaji finds in his book, Debunking Utopia, that the explanation lies in the Danes and the Scandinavian work ethic, among other things.
Sanadaji also makes the claim that Scandinavians are actually doing better in America than their peers back home. For example, he presents a statistic showing the GDP per capita for the Scandinavian countries and their peers in America. The average GDP per capita for Danish Americans are $70,925 compared to $45,697 for Denmark. That is quite a difference that potentially comes from the fact that the features mentioned above didn’t just disappear when Danes travelled to America between the 1850s and 1910s. Something might therefore suggest that Danes aren’t doing well because of the welfare system. Rather, Danes appear to thrive better in the American economy because of the social institutions instilled in the Danish way of life. Milton Friedman was once confronted on this matter by a Scandinavian economist stating that there is no poverty in the Scandinavian countries. To that Friedman responded with “that's interesting, because in America among Scandinavians, we have no poverty either”.
This leads me onto my next point. Quite often it is argued that Denmark became wealthy because of the welfare system, not in spite of. But this is simply not true. Denmark was wealthy long before the welfare state came about. Combined with its social institutions, Denmark's early adoption of property rights led to a high degree of personal independence among Danes – a solid foundation for creating a wealth society.. Actually, Denmark was for a long period a low tax country and at one point in history its levels of taxation was on a par with the United States - until the middle of the 1960s where the development of the Danish welfare state began. The welfare state merely came about because of the wealth created before.
The above graph is in Danish, BNP translates as GDP and shows combined taxes.
In addition, Denmark has been able to uphold the welfare state, not only because of the social institutions, but because it has a capitalistic economy. Year after year, Denmark is among the most economically free countries in the world. Each year, the Fraser Institute measures the economic freedom of several countries - this year 159 countries are measured. They measure the economic freedom of the countries on a scale from 1 to 10 in five different categories where 10 is completely free: Size of government, legal system and property, sound money, freedom to trade internationally and regulation. This year Denmark ranked 15th overall - just four spots lower than the United States which ranked 11th. However, the one thing that always drags Denmark down the rankings is ‘the size of government’. Therefore, if we are to exclude the other categories and only look at ‘the size of government’, then Denmark suddenly drops down the ranks to a whopping 154th out of 159 countries. If we disregard ‘size of government’ completely and calculate their rankings based on the four remaining categories we come up with a almost completely different ranking:
As the picture shows, Denmark makes a giant leap towards the top landing on an overall 6th place. United States for instance drops two places. Denmark’s large levels of redistribution aside, Denmark has a very free economy, which perhaps is one reason it can afford so much redistribution in the first place.
The Fraser Institute describes what ‘the size of government’ measures in the following way:
Taken together, the four components of Area 1 measure the degree to which a country relies on personal choice and markets rather than government budgets and political decision-making.
Denmark obviously is one of the lowest ranking countries in this regard and a lot of the Danish population relies on the government in order to make a living. Such a large proportion of the population reliant on government for income means high and distortionary taxes, this means a smaller reward for extra economic activity and thus a smaller incentive to take on more work – resulting in a reduction in economic freedom. In addition, it is stated in the freedom index that an economy with a high politicisation of the redistribution of societal goods there typically tends to be a higher level of hostility towards immigration as well.
Just to give you a gist of how things are in Denmark: Overall, 2.1 million of the Danish population in one way or another get their income provided by the government. That means that for every 101 full time worker, there is 100 people who get government benefits. How will they react when a massive influx of immigrants happen? Because of the misperception that immigrants pose a threat by going on welfare, they will consider them as free riders who don’t contribute to the public purse which ultimately leads to welfare chauvinism.
This leads to several consequences of which I will mention a couple. First of all, immigrants have been shown to be beneficial for low-skilled workers and it could therefore lead those people to be worse off than they potentially could have been with immigrants coming to the country. Additionally, welfare chauvinism, among other things, has in Denmark led the anti-immigrant party, the Danish People’s Party, to gain 21.1 percent of the vote and thereby become the second biggest party in Denmark. Because of the way the Danish system works, their massive influence have made it difficult for the current liberal-conservative government to actually get through with some of their liberal reforms trying to cut spending in the public sector as well as lowering the marginal tax and taxes in general.
Denmark is indeed in many ways great, but we should be careful glorifying it, especially if we do it based on false information.