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Free market in a welfare state

Free market in a welfare state October 19, 2015

In the Democratic debate, Bernie Sanders said that what he meant by Democratic Socialism is a system like Denmark’s.   I had to laugh, having just come from Denmark and learning that the system over there is more complicated than either Bernie Sanders or I had realized.

Despite the stereotype of the melancholy Dane, Denmark has been ranked as the happiest nation on earth.  Its income level, standard of living, and economic prosperity are among the best in the world.

It is true that Denmark has what could be described as a welfare state.  Medical care and university education are free, and the generous safety net takes care of just about everybody.  And yet, Denmark also ranks as one of the world’s freest market economies.  I had assumed that the welfare state and pro-business free market capitalism are irreconcilable opposites.  But the two work together in Denmark.

There is no minimum wage in Denmark.   And yet the free market lets McDonald’s workers earn $20 an hour.

Businesses are free to hire the workers they need, and then, when the business cycle dictates, to lay them off with impunity.  The workers don’t really mind getting laid off, since the government unemployment benefit can be up to 90% of what they had been earning.  Besides, the government will soon find them another job.  But because of those generous unemployment benefits, businesses are free to do what they need to do to be competitive.

Also, since the government covers health care and other benefits that in the United States are covered by employers, companies save money on their labor costs.

There are virtually no obstacles to starting a business in Denmark and strong private property protections.  The labor market is the freest in Europe.  There are no restrictions on overtime, so factories can run around the clock.

In effect, the welfare state serves the free market.  As opposed to the Bernie Sanders Democrats who would like a welfare state to restrict the free market.

Denmark, like the other Scandinavian countries, was savvy enough to stay out of the Eurozone, so each has its own currency.  The country is a manufacturing powerhouse, exporting everything from Legos (a multi-million-dollar industry) to most of those energy-generating windmills that are sprouting up everywhere.  A Danish company makes most of the shipping containers used in the world’s trade, and Danish design is influential in furniture, fashion, the decorative arts, and product design.

And yet, the country has a population of only 5.6 million.  That’s about the population of Minnesota (where lots of Danish immigrants ended up).

Hillary Clinton replied to Bernie Sanders’ Denmark adulation by saying that this isn’t Denmark, this is the United States of America.  In this she spoke truly, and what works in Denmark wouldn’t necessarily work in the United States.

I would submit that the welfare state/free market partnership in Denmark can work with a small population better than it would with a large population like the United States, with 318 million.  A 4% unemployment rate in Denmark would mean paying generous benefits to 224,000 people.  The same rate in the United States would mean paying 12,720,000 people.  It also helps to have a homogeneous culture of industrious citizens with a strong work ethic.  Some Americans might not want to go back to work if they were getting 90% of their salary for not working, but Danes do.

How does the government of Denmark pay for all of their benefits?  With some of the highest taxes in the world.  They have an income tax AND a flat tax AND A Value Added sales tax (of 25%!).  Overall, the tax burden is 46%.

A tax that even Bernie Sanders might draw away from is the tax on automobiles of 180%!  So cars cost nearly three times what they do here!  Nevertheless, we saw 4 Teslas.  (My wife said that she read that Elon Musk offered his electronic supercars at a huge markdown so that Danes could buy them.)

Just because something “works” does not mean that it should be adopted if it violates important philosophical or ideological principles.  Still, the combination of a welfare state with free market capitalism is an intriguing concept, going against the grain of both of our political parties while also suggesting how their two ideologies might be reconciled.

(Information for this post came from Denmark – Wikipedia, the free encyclopedia.  If you want a better source than Wikipedia, follow the footnotes in that article.)


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