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Denmark: A Case Study in Social Democracy

Tags Media and CultureTaxes and SpendingFiscal Theory

07/22/2003Per Henrik Hansen

In a previous article—"Denmark: Potemkin Village"—I documented the downside to Denmark. Despite its reputation as a showcase of political utopia, 40 percent of its adult population live on government transfer income, full-time, all-year. A little more than a third of these people are pensioners and the rest are working age. About one third of the people who actually hold a job work for the government or government-owned companies. The effective tax level is around 70 percent, not the 50 percent that is usually reported (the lower figure comes about by disregarding the effects of the sales tax and excise taxes).

My article led to many questions and comments from readers. One reader admitted that the Danish welfare state is very expensive but claimed that it is worth the price. If high taxes buy a society where people feel secure, where crime levels are low, and where people are well educated and live long and healthy lives, maybe the high taxes aren't such a terrible thing!

For now, let's ignore the ethical question associated with all coercive redistribution. Instead, let's look at the extent to which safety, security, and quality of life really do characterize Denmark.  

People can feel socially secure in Denmark—at least for now. People don't get rich from welfare but they can live a comfortable life. Practically all people are eligible for one program or another. But the system is unsustainable in the longer run. In the early 1970s only about 300,000 people of working age lived full-time all year on government welfare. Today it is about 900,000. The population size has remained unchanged at around 5 million. In the not too distant future, more people are going to be pensioners and fewer people will be working age. At some point, the trough will be empty.

The welfare state has also nationalized many of the formerly family support functions. In 1960, 91 percent of all women 30 years of age were married. Today, fewer than 50 percent are. Partly this is because people are marrying later in life, and yet a considerable part of the explanation is that many people do not marry at all.

Of the people who do get married, more people get a divorce today. In 1975, 18 per cent of all the marriages from 1950 had ended in a divorce during the preceding 25 years. In 1995, 36 per cent of the marriages from 1970 had ended in a divorce. Of  marriages in 1985, 20 per cent ended in a divorce after only 7 years. As a result of the above, many more people live in single households today than did in 1960. In 2000, one third of all adults in Denmark were living alone.

If we next look at the crime level, the Danish Statistical Yearbook 2002 shows reported crimes from 1935 to 1960 to be stable: about 100,000 crimes per year. But from 1960 until today, the number of crime reports has increased by 500 percent, to more than 500,000 per year. And if we look at violent crime, the picture is even grimmer. The number of violent crimes in 1960 was approximately 2,000; it is approximately 15,000 today. This is an increase of more than 700 percent, and it is still rising steeply.

This is a very surprising development. Welfare state advocates often say that crime is caused by poverty. Well, Denmark has become about twice as rich per citizen during this period of rising crime. Another argument is that poverty is caused by economic inequality. Well, Denmark has engaged in the most comprehensive income redistribution program of any nation. Denmark is the most egalitarian country in the world today.

So, a rising crime level is the last thing the welfare statists might have predicted using their own theory. Maybe there is some other independent factor causing the development? Denmark has taken in a great number of immigrants and refugees from third-world countries. These immigrants unfortunately are greatly overrepresented in the crime statistics—something like 5 to 1—but they only account for less than 10 percent of the population, and hence cannot account for the entire increase in crime.

There are better explanations. Massive redistribution schemes have undercut people's respect for property rights. The rhetoric against wealth producers that has accompanied the redistribution has created social antagonisms. People on government transfer income have a lot of extra time on their hands, and their hands do the "devil's work."

The best explanation may be the change in the views of intellectuals. In the 1960s, the theory emerged that crime should not be blamed on the offender but on society. This led to the conclusion that crime should not be punished—at least not very harshly—but instead socially treated.

This idea is still so widespread that the present Minister of Justice, who is a conservative, proposed that prisoners be released when they have served only half their sentence. This, she said, would solve the problem of long waiting lists for the Danish prisons. But it might also make the lists even longer!

Let's now look at education. Many people believe that if education were not provided by the government, only rich people could afford it. Let us compare Denmark to the U.S., where public funding of especially higher education is not nearly as readily available as it is in Denmark. According to the report "Education at a Glance" from the OECD, 15 percent of people between the ages of 25 and 64 has a bachelor degree or more in Denmark. In the U.S.A., it is 26 percent—nearly twice as many. In Sweden, the number is 13 percent, and Norway 16 percent.

If we look at the other end of the education level, those with only 9 years of education, in Denmark it is 34 percent, whereas in the U.S. it is 14 percent. In Sweden the number is 26 percent and in Norway 18 percent. Again the numbers are much more favorable in the U.S.

The U.S. has, according to this report, the best educated population in the world measured by numbers of years of schooling. No country has as many highly educated people as the USA and no country has as few people with only 9 years of education. This is information, I know, is surprising to most Europeans (conceding of course that this is a quantitative and not a qualitative measure).

In Denmark, many people are prevented from gaining the education they would like. All higher education is publicly run and free. Central planners decide how many doctors, architects, engineers, lawyers, economists, etc., that society needs. Students are rationed according to their grades in high school. If your grades are not high enough, you may not begin a degree program of your preference.

There are no objective tests of the quality levels in Denmark that I know of. However, one indication of the falling quality level in education could be the considerable shift in applicants for higher education away from the sciences and into the humanities. Everything involving mathematics, or other clearly demonstrable skills such as natural science or economics, is disliked by the applicants.

What about health? Denmark is one of the few OECD countries where the average life span has hardly increased since the early 1970s. In the early 1970s, Denmark was at the top in OECD comparisons; today it is closer to the bottom.

According to the politicians, this has nothing to do with poor quality at the Danish hospitals or long waiting lists for examination and surgery. They say it is due to the Danish people's habit of smoking and drinking. And yet, often one can read in the news stories of people who die preventable deaths simply because they were on a waiting list and unable to get care.

Sound economic theory can explain the shortages and continuously falling quality in government-provided health care and education. When suppliers are not driven by the profit motive, nor subjected to market competition, they cease being customer oriented. Quality declines and costs rise. Due to the lack of market prices, and therefore no economic calculation, they can neither plan efficiently nor satisfy consumer demand. They do not have the information or the incentives to make rational decisions. This was the case in the formerly centrally planned economies. It is also the case in Denmark, where central planning also prevails in parts of the economy, most significantly in health care and education.

In conclusion, we can say that neither on crime, education nor health do we see the favorable results we would have expected. Quite to the contrary. The prospects for being able to rely on government or family for social security are also rapidly diminishing. These are not very bright prospects indeed for a country where each working citizen are forced to sacrifice such a large share of his personal earnings to the common good.

One option for young people is to leave. It was recently proposed by one of the three economists from the Danish Economic Council that if young people in Denmark wish to move abroad after they have completed their education, they should first have to pay back the costs of their education. Only when they have paid enough taxes to cover all the expenses of their education, would they be able to move abroad without having to pay the government first.

Thus do we have proposed the social-democratic version of the Berlin Wall, an economic barrier to prevent emigration so that the state can continue to tax people to sustain a system that is unraveling. The mere suggestion is a telling sign that Denmark has nearly reached the end of the road.



Per Henrik Hansen

Per Henrik Hansen works at Danmark's National bank and teaches economics at the Copenhagen Business School.

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