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The Bankrupt Finnish Welfare State

Mises Daily: Tuesday, August 31, 2010 by

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Progressives in America are often keen on promoting the European welfare state as an argument for big government, not least in the healthcare debate. They point to European countries, often the social-democratic Nordic countries, as role models, with their universal healthcare, public school system, generous social-safety net, and all the happy people who live there.

This line of argument got a significant boost when Newsweek proclaimed that Finland was the best country in the world to live in, closely followed by Sweden and Switzerland. And of course they are happy. After all, there is no poverty in these great countries, the populace is educated, and people generally don't have a care in the world, because the benevolent government is always there to solve every problem.

Many people have tried to dispel this myth, but it still persists. I don't presume to be able to put this issue to rest, but there are some things that should be known about this mythical utopia, the "best country in the world" — Finland.

Government Education

Like other Scandinavian countries, Finland likes boasting about its public education system. All schools are run by the government, even the universities. There are no tuition fees for Finnish students. On the contrary, students actually get paid over 400 euros per month to get a degree, in addition to heavily subsidized student loans, student lunches, etc. Free higher education is seen as a right, and because it is a right it must be accessible. To this end, Finland has 20 universities and 27 polytechnics. This in a country with about 5.3 million people, of which 1 million live in the capital-city area, and where only five other cities have a population over 100,000.

One might think it great that there are so many places of higher learning in a country with so few inhabitants, a proof that its people are educated and civilized. Few things could be further from the truth.

First of all, the reason for having so many universities is regional politics. Politicians buy votes by creating and maintaining government jobs in depressed areas — the oldest trick in the book.

Second, the multitude of universities and polytechnics brings the overall level of education down, because such a small population can't possibly maintain a high standard of education in so many different places. There simply aren't enough competent people to go around, not to mention that many of the universities and polytechnics are located in less than desirable places. Only very few of the Finnish universities can lay claim to a really high standard of education. Of course, the economics education is subpar across the board.

Third, with higher education so accessible, it lures thousands of people every year to go for a degree, even though they have no business in the world of academia. This produces a great number of bachelors, masters, and PhDs who don't have any value on the job market because they studied literature, art history, religious studies, or something like that. In many cases, they didn't choose their major because they actually thought it would give them a job; they chose it because it seemed fun or interesting, or it was easier to get into than law school or medical school.

Unemployment among educated people has become a chronic problem. The other side of the coin is that Finland has long had an acute shortage of people with trade skills: carpenters, plumbers, mechanics, and so on — people who can actually provide a valuable service. The shortage has, predictably, driven up prices and prolonged delivery.

Universal Healthcare

Like the other Scandinavian countries, Finland has universal healthcare. This is one of the things many like to boast about. However, the healthcare system is bad even by the standards of universal healthcare.

First of all, it is not a single-payer system in the way you'd imagine a government-run and -financed healthcare system to be — i.e., where it is the central state that provides for and runs the system. Instead, the Finnish system is municipal. Every municipality is formally obliged to provide its citizens with healthcare. Of course, not every municipality can afford a hospital or even a health center. That is why Finland is divided into myriad healthcare districts, each served by hospitals and health centers located in some of the municipalities that make up each district. On the face of it, this may seem reasonable and good. After all, what's the difference between national and municipal healthcare systems? A quite significant one, as it turns out.

A major problem with a municipal healthcare system is that it is very restrictive. Only people who are registered in the district are allowed to use the healthcare services there. If you have an emergency, you have the right to get treatment, but as soon as you're out of the ICU, you have to transfer to a hospital in your own district. This has led to numerous cases where people have been shipped around from one place to another, at taxpayer expense, to accommodate these administrative rules.

One of the most bizarre examples of this was when a woman fell ill in the capital city, Helsinki. She was given emergency treatment, but as soon as the emergency was over she had to be transferred back to her own district, which was in Rovaniemi, over five hundred miles to the north. Bear in mind that just because you're out of the emergency room you're not necessarily all well and ready to be released. Because of the way the municipal healthcare system is set up, a sick individual had to be driven more than five hundred miles to a different hospital.

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One of the most basic laws of society is that the more administrative areas there are within one state, the more bureaucracy it breeds. All these healthcare districts must of course have their own administrations, which in turn have to liaise through the healthcare officials in each municipality of the district, and they all have to coordinate with the administrators of each hospital and health center. And then you have to have healthcare officials, a whole department full of them, at the national level to top things off.

As you can well imagine, efficiency is not one of the Finnish healthcare system's main attributes. Studies have shown surpluses of doctors in some places with corresponding shortages in others. Very few of the municipalities can afford to maintain the healthcare services the law mandates. Health centers have been and are being closed all the time, but no administrator is ever laid off. The central government must transfer money to the districts to keep them afloat on a continual basis. In other words, Finland seems to have a central-state-run and -financed healthcare system, but in reality it has a municipal system, which has resulted in even more bureaucracy.

Any country that wants a universal healthcare system should not look to Finland for an example to follow. One of the real tragedies of this fiasco is the fact that Finland has some of the best private hospitals in the world, but because of our universal healthcare, very few Finnish citizens ever get to benefit from them.

With a License to Rob

As a tax consultant, I am frequently engaged in legal battles with the tax authorities, representing my clients and trying to protect their rights. In these fights, I encounter the arrogance, and in some cases the sheer malevolence, of the taxman, completely uncensored. I never cease to be amazed by the ignorance and the callousness of this particular department of the state.

As a rule, the tax authorities don't care about the law, in the rare event they even know it. Not only that, but it is clear from the way they act that they consider every penny to be their money, and may only be retained by the taxpayer at their discretion. It even happens that they make up arguments that are blatantly false and without any legal ground whatsoever in order to levy more taxes and impose various other sanctions. When the taxpayers challenge their outrageous claims, they simply ignore the challenges and press on as if nothing has happened — even though the constitution mandates that all decisions and rulings made by a government agency must be based on law and thoroughly explained.

This doesn't seem to apply to the tax authorities though, and neither do other legal principles. In all other matters, you are innocent until proven guilty, but if the taxman charges you with something, it is you who has to prove your innocence. If you fail, you're guilty, and it is the tax authorities who decide whether you fail.

This type of behavior is certainly familiar to the American public, as the IRS has subjected them to all kinds of violations. However, these violations, taking place no less regularly in Finland than in the United States, fly in the face of the aura of utopia that seems to surround the social-democratic welfare states of Northern Europe.

The statists may be very comfortable with high taxes, but even they tend to become squeamish when they hear of the havoc wrought upon private individuals and their families by the tax authorities. And it is of course the private individuals and small businessmen who suffer the most aggression, because they seldom have the knowledge or the resources to defend themselves. Billionaires and big corporations at least have a fighting chance; the little guys don't. So much for the compassionate society.

In a system such as this — with a very vague tax code; tax officials who are exempt from responsibility for their conduct; and onerous, never-compensated legal expenses arising from litigation against the tax authorities — the rights of the taxpayers are routinely violated. The officials have no interest in making the right decision, so whenever a case is not utterly and totally obvious, they rule in favor of the state.

"The state enacts vague legislation and then makes the taxpayer pay for its interpretation."

After that, the taxpayer can choose between paying the additional and often unlawful tax, or spending time and money challenging the decision. And because the tax officials can and do routinely ignore the taxpayer's arguments, even the most trivial of cases can be appealed through the judicial system all the way to the Supreme Administrative Court, the highest court in the land. If the taxpayer is unlucky, it can take as long as ten years to settle a dispute, costing tens of thousands in legal fees. And if he wins, he is not compensated for the time and money spent defending his rights, nor are the responsible tax officials reprimanded for their conduct. For this reason, most tax disputes are settled mainly by referring to case law, and the case law has to a large extent been paid for by the taxpayers. In other words, the state enacts vague legislation and then makes the taxpayer pay for its interpretation.

Increasing Debts

The reality and future of the Finnish welfare state is not very bright. The crisis in Greece and the other PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain) has given rise to much-needed discussion about the state of the public finances in Europe. For the first time in a long time, politicians are actually talking about the need for cutting government spending. While this is undoubtedly positive, even those politicians who do advocate spending cuts don't seem to comprehend what that actually means.

The increasing deficits and national debts are not the result of a shortage of tax revenues. In Finland, the maximum marginal income-tax rate for individuals is over 50 percent. A value-added tax is levied on all goods and services at every level of production. The tax rate of normal consumer goods and services has recently been raised from 22 to 23 percent. As in the United States, there are a great host of other taxes and duties levied on everything under the sun.

What has brought the Finnish welfare state close to fiscal calamity is its ever-increasing government spending. Even during the 15 years prior to the collapse of 2008, a period referred to as one of continual economic growth, the national debt was not paid off. In 1994, the Finnish national debt was 51.7 billion euros. In 2007, it rose to €56.1 billion. At the end of 2009, the debt shot up to €64.3 billion, and at the end of June 2010, it rose to €69.8 billion. This in spite of the fact that the tax revenues had remained stable and even risen from 2000 to 2009. Figures show that government spending during the same time rose from €33 billion in 2000 to €46.9 billion in 2009. The projected spending in 2010 and 2011 is €52.5 billion and €50.4 billion respectively. It is estimated that the national debt will hit €85 billion at the end of fiscal year 2010.

Conclusion

Finland is, and has long been, a poster child for the utopian European social-democratic welfare state, and has now been named the greatest country in the world, in a bizarre remake of Time's Person of the Year award to Ben Bernanke.

In Finland, the progressives believe, big government works. So do universal healthcare and public, "free" education. And if Finland can do it, so can the United States. The flaw in that argument is that Finland actually can't do it, no more than Obama can keep his promises.

The Finnish welfare state comes at a price we can't afford. The healthcare system is severely inefficient and costly, and stands in the way of normal people's access to the truly great medical care provided by the private sector. The public education is also very costly and constantly short of money. Textbooks are passed on from generation to generation, everybody learning the same fallacies as the ones before them, provided that books are even readable.

The idea of everyone's right to a university degree has resulted in a very high number of university graduates, but their degrees are often of no value on the job market. Due to high taxes and both the legal and financial risks of employing people, an 8 percent unemployment rate is considered normal. And did I mention that the retirement system is every bit as much of a Ponzi scheme as the US Social Security system, and is on the verge of collapse?

The national debt has already reached alarming levels. What's more, there hasn't been an extended period of time when the principal of the debt has been systematically paid off. At best, it has remained fairly stable, only to shoot up by almost 50 percent in the last couple of years, if the projections hold true. Bankruptcy will come unless significant changes are made.

I do, however, want to end on a positive note. In survey after survey, the Finnish people overwhelmingly favor cutting government spending as a means to get the public finances under control. Previously, the Finnish have not minded paying taxes, but now they are waking up to the fact that raising taxes is not a viable option anymore.

Next year, we Finns go to the polling stations to elect a new parliament. I hope the outcome of the election will reflect this important and new-found realization.