Friday, October 16, 2015

The Bad and Good Features About Denmark Bernie Sanders Doesn't Want You to Know

In the Democratic presidential debate on Tuesday night, presidential candidate Bernie Sanders said that he's not a capitalist, and that he's a democratic socialist. In his explanation of what a democratic socialist is, he included that "we should look to countries like Denmark...and learn from what they have accomplished from their working people." Leaving aside for a moment that what Sanders is describing is technically social democracy, it's not the first time he has sung Denmark's praises, and it probably won't be the last. However, let's take Sanders up on his offer and actually take a look at Denmark.

Much like with Sweden, Denmark is not the socialist paradise that Sanders and other social democrats like to depict. Before delving in, I should point out that Denmark, much like any other nation-state, is fallible because it is run by fallible human beings. There are going to be facets about nation-states that we like, and others that we don't. Sanders brings up certain facets he likes, such a paid family leave, subsidized health care, and free college tuition. What I find interesting is what this anti-capitalist presidential hopeful omits, such as Denmark having a higher ecological footprint per capita than the United States, from his diatribes. Rather than write a narrative on Denmark, I'm going to divide this into two sections: the bad and the good. The bad will entail those inconvenient truths that democratic socialists don't want you to hear. The good will entail the extent to which Denmark has pro-growth, pro-market policies.

The Bad About Denmark
  1. Housing market and household debt. The price-to-income ratio measures the affordability of a house. According to the OECD, Denmark's price-to-income ratio is above OECD average, which is to say that housing is more unaffordable in Denmark than it is in the United States. The OECD, as well as the International Monetary Fund (IMF), also points out that Denmark also has the highest level of household debt within OECD countries (IMF, p. 8).
  2. High overall tax rate. The OECD points out that Denmark exceeds the average amongst developed countries for tax burden. Even the Danish government admits it has one of the highest tax rates in the world! The Danish levy their income tax not just on billionaires, but on those who make over 41,000 DKK ($6,251 USD). The Danish tax middle-class Danes quite heavily, which is contrary to what we are hearing from Sanders. Something tells me that Sanders wouldn't want to levy a tax burden of 37.48 percent tax on those with a $6,251 income. Another thing you won't hear Sanders mention is that an overly burdensome tax rate translates into stagnant economic growth, like this European Central Bank paper shows (also see Kreiner et al., 2014; Bergh and Henrekson, 2011). 
  3. High levels of government spending and economic growth. The Danish government spends 57.1 percent of its GDP on government spending, which is about 20 percent points higher than the US. As the World Bank points out, large amounts of government spending have a drag on economic growth, which is to say that Denmark is doing well not because, but in spite of a largesse in government spending. Denmark also experiences spillover effects not only from the Marshall Plan or NATO (the latter of which has kept Danish military spending down), but also from technological process from more capitalist societies like America. 
  4. Low fertility rate. Denmark's fertility rate is about 1.73. The good news is that it has increased from its low of 1.4 from the 1980s, but still could be higher to reach the replacement rate of 2.1 (same could be said about other developed nations). It's getting to the point where Danes are encouraged to have more sex [and children] in order to bring the fertility rate back up. 
  5. Potential financial sector instability. Denmark's financial sector is 650 percent of its GDP (IMF, p. 15). This should be unsettling for someone like Sanders who has problems with the clout of finance. Danske Bank, which is Denmark's largest bank, holds assets that exceeds the size of Denmark's GDP. I guess the issue of Big Banks isn't an issue for Sanders when it comes to his Danish paradise, but on a less chiding note, Denmark has to be all the more careful with monetary policy with its exchange rate peg and fully-open capital account (ibid.). 

The Good About Denmark
  1. More economic freedom. In spite of socialist rhetoric, Denmark actually is a place of economic freedom, even more so than the United States. On the Heritage Foundation Economic Freedom Index, Denmark is placed slightly higher on the ranking. Denmark has great respect for property rights and is open to foreign direct investment. The Fraser Institute gives similar high ratings for Danish economic freedom. You can also check out the Danish-based Center for Political Studies (CEPOS) for more information.
  2. Comparable levels of well-being. Looking at the United Nation's Human Development Index, Denmark and United States have ranked roughly the same over the past couple decades. That means when looking at such factors as years of schooling, life expectancy, and gross national income, they're quite close. The countries are also neck and neck in the OECD's Better Life Index. This certainly helps in taking on Sanders' myth that the United States is a hellhole in comparison to Denmark. If anything, the U.S. is doing relatively well for itself. 
  3. Lower corporate tax rate. The United States has the highest effective corporate tax rate in the developed world. A Danish corporate tax rate of 23 percent is not great (I personally would prefer that it's 0 percent), but it's better than 35 percent. And as a side note, the United States has a much more progressive tax system than Denmark.
  4. Less burdensome business regulations. According to the World Bank's Ease of Doing Business Index, Denmark actually ranks higher on the list than the United States. As of date, Denmark ranks 4th on the list, which is three places above the United States. What does this mean? The regulatory environment is more conducive for businesses to start a firm. 
Overall, Denmark is doing pretty well for itself, which is why it wasn't easy to find some of the more negative aspects about the Danish macroeconomy. There are other points of context that shape the Danish experience, which are further elucidated upon in this report from the Institute of Economic Affairs. Denmark's success in average life span and overall wellbeing actually predated the growth of Denmark's welfare state in the 1970s. Nordic Americans also rate comparably in terms of poverty rates and lifespan (Sanandaji, 2012, p. 51-59).  There are also cultural differences of Scandinavians in terms of trust in strangers, which allowed for a welfare state of such size to even exist in the first place.

Denmark is also a smaller, more ethnically homogenous country. Economies of scale work better in smaller nations than they do in larger, which is why it would be interesting to compare Denmark to more analogous nations like Switzerland, Singapore, or Hong Kong. Yes, the Danish government has a largesse in government spending and tax rates. Yes, there are some policies in Denmark that are a democratic socialist's wet dream (or social democrat, whichever). Even with the largesse in government spending and welfare, Denmark, much like its Scandinavian counterparts, has trended in the opposite direction Sanders envisions, and has taken on more pro-market tendencies. Denmark maintains open trade, overall high economic freedom, a minimal amount of business regulations, and huge respect for property rights, and I can tell you that Sanders is not a fan of open trade (you can read more in economist Scott Sumners' paper on the neoliberal reforms of Denmark). What we should glean from this is that although there are some Sanders-approved policies that are implemented in Danish governance, there are quite a bit of pro-market, capitalist trends that Sanders simply does not want to discuss.

1-19-2016 Addendum: Otto Brøns-Petersen at the Cato Institute released an economic bulletin outlining why Denmark is not a model that the United States should be emulating.

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