Neoliberal utopia awaits.

By

`If you want a lower standard of living," conservative policy
experts Grace-Marie Turner and Robert Moffit wrote in an op-ed last
week, "the Europeans have the right prescription." The topic of
discussion was universal health care, but it just as easily might
have been government-sponsored child care or generous unemployment
benefits. The failure of the European welfare state is, after all,
an article of faith among conservatives, from Robert Samuelson
("Europe is history's has-been") to Jonah Goldberg ("Europe has an
asthmatic economy") to David Brooks ("[T]he European model is
flat-out unsustainable").The argument generally goes like this. Nowadays, every nation faces
a stark but straightforward choice: It can admit that globalization
demands a fluid economy--in which people will lose jobs frequently
and incomes are bound to be more volatile--and adapt by slashing
taxes, government benefit programs, and trade barriers. Or it can
try to hold on to old-fashioned notions of lifetime job security
and guaranteed incomes by blocking out trading partners, closely
regulating business activity, and maintaining a generous welfare
state--a formula sure to produce sluggish growth, chronic
unemployment, and crippling government debt.

Given their political agenda, it's easy to see why conservatives
would be attracted to this analysis. But, even as the pundits wring
their hands at Europe's economic decline, a growing number of
American economists have begun looking across the pond for
inspiration--to Scandinavia and, especially, to Denmark. Over the
last decade, the Danes have turned the conventional wisdom on its
head by boasting not only one of the world's most expansive welfare
states, but also one of its most robust economies. Given the way
average American workers' wages continue to stagnate even as their
burden of risk--of losing a job, of losing medical
insurance--continues to rise, it looks increasingly as though the
conservative triumphalism has been misplaced: It may be that Europe
has something to teach us after all. And Democrats, who have come
back into power promising to address economic insecurity, should be
sure to listen.

As in most of the developed world, Denmark's welfare state traces
its origins to the Great Depression--specifically, to a dank
January morning in 1933 when Prime Minister Thorvald Stauning
called several of the country's political leaders to his apartment
for a private session to discuss the nation's growing economic
crisis. As Eric Einhorn and John Logue recount in a forthcoming
essay on Danish history, nearly half the population was out of work
and farm foreclosures were widespread. With communism and socialism
gaining popularity among the increasingly distressed population,
Stauning and his colleagues were desperate to take actions that
would not only alleviate the widespread suffering but also save
capitalism itself.

Stauning's apartment was on a small, quiet street named Kanslergade.
And the resulting "Kanslergade compromise," as it came to be known,
would give birth to the contemporary Danish welfare state. Denmark
always had an egalitarian tradition, rooted partly in its strong
ethnic identity. But, prior to the 1930s, fulfilling that guarantee
was largely the responsibility of private associations, organized
around jobs or communities. The Kanslergade compromise changed all
that. Henceforth, the government would take primary responsibility
for making the economy work--and making sure that it worked for
everybody--by, among other things, providing a set of social
insurance programs that protected against illness and
unemployment.

The strategy succeeded. Denmark's political center held, Danes got
back to work, and, on the eve of World War II, the economy was back
on track. The country continued to thrive after the interlude of
Nazi wartime occupation and, from the 1950s through the 1970s, it
generally had steady, strong growth. The more the economy grew, the
more money the government collected through taxes-- allowing it to
provide, in turn, even more generous services. By the '70s, Denmark
had developed a well-earned reputation for providing what was
arguably Europe's most comprehensive and lavish set of welfare
benefits.

But the Danish economic model--like those across Europe and in the
United States--was challenged by "stagflation" in the '70s and
globalization in the 1980s. Denmark's economy, like those in most
of Europe, started lagging behind that of the United States. While
Americans were going back to work--and, in some celebrated cases,
getting fabulously rich--millions of Europeans were joining the
ranks of the chronically unemployed, living off of generous welfare
payments. Meanwhile, businesses, hamstrung in some countries by
rules that made it difficult to hire and fire new workers, weren't
investing or creating new jobs.

But, while most of Europe continued staunchly to resist change, the
Scandinavians began to embrace it--led, once again, by Denmark. In
the early '80s, with unemployment in double digits and the economy
slowing to a crawl, voters threw their support behind the Danish
conservatives, enabling them to oust the Social Democrats who had
run the country for most of the postwar period. Although the
conservatives were not very far to the right by U.S. standards,
they had run on a platform of rescuing the Danish economy, which
they vowed to do by privatizing some government services, modestly
reducing welfare benefits, and bringing down government deficits.
And, for a few years, they made some headway, particularly when it
came to trimming the pension system and bringing the government
budgets back into balance.

By the early '90s, the economy had recovered enough--and the
public's enthusiasm for the conservatives had waned enough--to
swing politics back in the other direction. The Social Democrats
took power once again, this time under the leadership of Poul Nyrup
Rasmussen, a close ally of Denmark's organized labor movement. But,
contrary to the expectations of some supporters, Rasmussen didn't
abandon the conservative reforms. Instead, in a classic Nixon-
to-China move, he undertook some of the very measures that the
conservative coalition had proposed but could not enact on its
own.

One of these was the sale of Denmark's state-owned telephone
company, which, relative to the size of the country's economy,
represented one of the largest efforts at privatization in Europe
for the entire decade. Rasmussen also remained committed to
balanced budgets, making more low-level spending cuts to keep the
budget in line. But perhaps most important were the reforms
Rasmussen's Social Democrats introduced to the Danish unemployment
system. Previously, unemployment benefits had been not only very
generous--equal, in some cases, to 90 percent of lost wages--but
also essentially unlimited. Under a new scheme pushed through by
the Social Democrats, the government began limiting assistance to
four years--and, even then, only on the condition that
beneficiaries worked or enrolled in job training.

Essentially, Rasmussen was triangulating between the two main poles
of the country's political debate, in a manner much like the one
Bill Clinton was employing in the United States at roughly the same
time. But, because politics in Denmark were generally far to the
left of the United States, the resulting compromise actually looked
quite different. Relative to Clinton's welfare reform, Rasmussen's
invested much more money in worker-counseling and training. The
explicit goal was to recognize a social compact: Just as the
unemployed were obligated to find new jobs, so the government was
obligated to make sure the jobs were there (even if it meant
creating them on the public payroll) and that the unemployed
received proper training to succeed. Today, largely as a result of
Rasmussen's reforms, Denmark spends more than 4 percent of its GDP
on its labor market programs--the most of any country in the
Organization for Economic Cooperation and Development (oecd) and
more than 20 times what the United States spends on its
worker-training programs.

In some respects, though, what was most significant about
Rasmussen's agenda was what it did not include: radical changes to
the welfare state. And that explains why, today, the country has
programs that remain among the most generous in the developed
world. There is universal health care and child care. Lengthy
maternity and paternity leaves are available. And, despite the time
limit, unemployment benefits are still worth up to 90 percent of
lost wages. In all, Denmark spends nearly one-third of gross
domestic product on government- run benefits--among the highest in
the developed world and more than twice what the United States
spends. Naturally, Denmark has a tax burden to match: Half of the
country's annual economic output goes through government in the form
of taxes--again, among the highest in the developed world and well
above the U.S. rate of just under 30 percent.

If you believe the conservative rhetoric on economics, this
combination of high taxes, a large public sector, and lavish
welfare benefits ought to be killing the Danish economy. But it's
not. In fact, Denmark's economy has thrived. And nowhere is that
more apparent than in the job market. By the time Rasmussen left
office in 2001, the unemployment rate had fallen from a 1994 peak
of 9.6 percent to 4.3 percent; in 2002, it fell below the U.S. rate,
where it has remained ever since. For the most recent quarter of
2006, Denmark's standardized unemployment rate was 3.6 percent,
compared with 4.7 percent in the United States. Moreover, while
Europe has a reputation for fostering cadres of idle youth (a
reputation that, in countries like France, has at least some basis
in reality), in Denmark, a mere 3 percent of its 15- to 19-year-olds
are neither in school nor working--the second-best rate in the
developed world. (Tiny Luxembourg is first.) In the United States,
by comparison, the figure is about 7 percent.

Another important measure of overall economic health is GDP per
capita, which in effect approximates the wealth generated per
person per year. Here, the United States remains near the top of
the developed world, at

$39,732. Denmark, though also in the top fifth of the oecd, is at
just $31, 932. It's a significant difference, but one that
reflects, in part, the fact that Americans simply work more hours,
don't get as much vacation, and can't take such generous pregnancy
or sick leaves. GDP per capita is also an average, pulled up by the
extraordinary wealth of America's elite. Once you consider the
distribution of income and material goods, it becomes apparent that
typical citizens in Denmark are doing as well as--and quite
possibly better than--their American counterparts.

Nearly 80 percent of Danish households have access to a home
computer, the second-highest proportion in the world; just 62
percent of U.S. households can make the same claim. And, while the
United States scores a bit higher than Denmark on the U.N. "Human
Development Index," which combines financial standard of living
with measures like knowledge and life expectancy, Denmark bests the
United States on the "Quality of Life" index, which the Economist
Intelligence Unit devised to measure a similar combination of
factors. One reason Denmark scores so well is that programs like
universal health care and day care mean middle-class Danes don't
carry around the same sort of anxieties that their American
counterparts do. The existence of such programs also helps explain
the most obvious economic difference between Denmark and the United
States: America's poverty rate of 17.1 percent is the second-worst
in the oecd, behind only Mexico. And Denmark's? It's 4.3 percent,
tied with the Czech Republic for the best on the planet.

To critics, the trouble with large welfare programs isn't so much
what they do today as what they promise to do tomorrow: Since aging
populations will eventually claim more in benefits than younger
generations of workers are projected to generate, the programs
appear unsustainable. In the general sense, this claim has some
truth. The money Denmark owes its future retirees, in the form of
pensions and health benefits, will indeed put a huge claim on its
treasury--one it's not yet fully prepared to meet. But Denmark is in
a far better position to meet those obligations than many other
countries, including, yet again, the United States. As it has for
several years, Denmark is presently running a small budget surplus,
equal to around .65 percent of its GDP. The United States, of
course, is running large deficits, in the neighborhood of 4.5
percent of GDP--which is one reason our long-term financial
liabilities are more severe, too.

So what have the Danes figured out that conservative American
pundits haven't? "High taxes don't hurt [by themselves]," says
Harvard's Richard Freeman, a highly respected labor economist who
has studied Europe extensively. "It depends on what you are getting
for the money." Medical care is the most obvious example of this.
Danes have lower infant-mortality rates than Americans and,
statistically speaking, live just as long. You can't pin that
completely on the medical system (a lot has to do with poverty,
diet, and so on), but it certainly suggests Danish health care is
no worse than the U.S. version. Yet we Americans pay far more for
our system, because it's riddled with inefficiencies as insurance
companies compete with one another to enroll healthy beneficiaries,
rather than finance good care.

Another thing the government does well is spend money on projects
whose benefits are too long-term, or too spread-out, to attract
sufficient private investment. Worker-training is a case in point.
One of the great virtues of Denmark's worker-retraining program is
the way it enables even middle-aged workers to shift gears and pick
up a new profession: If, for example, you're an unemployed textile
worker whose best prospect for a new job in two years lies in
health care, then the Danish government will pay to train you as a
physician's assistant.

Just as a well-educated workforce attracts foreign investment, so
does strong infrastructure--whether it's in the form of good roads
or a speedy information highway. Here, too, Denmark excels. And
here, too, government can take considerable credit, as the
Economist Intelligence Unit noted in its glowing write-up: "High
public spending also translates to an excellent infrastructure....
Denmark has emerged as a global leader in the development of
information and communications technology infrastructure, and a
pioneer for wireless technologies, including Bluetooth, among
others."

Of course, infrastructure is only part of the story--and a modest
one at that. A bigger reason, ironically enough, is the tax code.
The high rates on personal income, which max out at 63 percent,
mask relatively low rates on investment capital and corporate
earnings. That relative balance--with investment taxed less than
wages--is what many economists prefer, since, theoretically, low
taxes on corporations will encourage them to invest more, creating
more jobs, and so on. The reason Danes tolerate such high income
taxes, even while corporate taxes are low, is that they feel like
they're getting something for the money: good public services. In
effect, the generosity of the welfare state creates political room
for economic policies that foster higher growth.

That's also true in the larger sense, when it comes to the rules--or
lack thereof--about hiring and firing. Studies have shown that
Danes change jobs more frequently than their counterparts elsewhere
in Europe and that, on the whole, they have the shortest tenures.
With such a volatile job market, you might expect the Danes to
clamor for the same kinds of protections as, say, the French or
Germans. But they haven't. The main reason, everyone seems to
agree, is that the combination of welfare programs and job-training
means that the newly unemployed needn't fear becoming destitute.
Indeed, in some cases, losing a job is actually a way to get a step
up. Polls show that, despite the high rates of job turnover, Danes
are among the most optimistic about their prospects for finding
work again. As Stein Kuhnle, an expert on Denmark who now teaches
at the Hertie School of Governance in Berlin, explains: "One may
say that the Danish system is one promoting employment security
rather than job security" (my italics).

Earlier this year, an article in The Wall Street Journal on the
closure of a Danish meatpacking plant illustrated how fluid labor
markets and generous welfare supports produce a virtuous cycle. As
soon as the factory was shuttered, the famous Danish job placement
and training system went to work. Counselors met with each of the
newly unemployed workers, drawing up individual plans of action for
each and then monitoring the "clients" to make sure they followed
through on their plans. Then, using both state money and some
contributions from the old employer, they financed classes to
retrain the workforce. The results were impressive: After having
spent ten years slicing up pig carcasses, Suzanne Olsen now had a
position as a golf landscaping apprentice. Finn Larsen was enrolled
in classes to become fully trained as a math and science teacher.
Indeed, of the 500 workers the company had laid off, within ten
months only 60 were still collecting Denmark's generous
unemployment benefits.

Talking up one region's, or one country's, economic model is a
recurring phenomenon in politics--and a tricky one. At various
times in the last 50 years, the opinion elite has swooned over the
Anglo-American countries, the Far East, continental Europe, and
even the communist bloc because their economies were in the middle
of a temporary boom. But even "successful" countries often have
problems that admirers either overlook or willfully ignore. And
Denmark has its share of those. To take one obvious example,
because the generous unemployment benefits and job-training means
nobody wants to work in low-wage jobs, the country's service sector
is lackluster. Positions like housekeepers and nannies tend to be
filled by immigrants operating as part of an underground economy.
"We have a vibrant public sector," says Christoffer Green-Pedersen,
a professor of public policy at the University of Copenhagen. "But
I've never seen a shoe shiner. It'd be too expensive."

A bigger issue for those who might want to import the Danish model--
particularly for a country like the United States--is that Denmark
is a small, ethnically homogenous country with a tradition of
marked cooperation. Labor and management enjoy one of the least
adversarial relationships in the developed world, enabling them to
pursue mutually advantageous arrangements. Many experts think the
strong sense of common enterprise among Danes improves government
services by promoting a strong sense of duty among civil servants.

Still, nobody is suggesting that other countries could--or even
should-- import the Danish model whole. (Among other things, the
strong sense of common purpose has an uglier side: relatively harsh
treatment of foreigners and immigrants.) The idea, rather, is to
take broad lessons from Denmark's experience. And the broadest
lesson would seem to be the most obvious one: that it is entirely
possible to have a large welfare state, with generous benefits,
without choking the economy. Data from the rest of Scandinavia,
which all use variants of the same economic model, support this
argument. In a recent Scientific American column focusing on the
performance of these Nordic countries, Columbia University
economist and best-selling author Jeffrey Sachs blasted the right's
anti-tax, antigovernment conventional wisdom, concluding that "a
generous social-welfare state is not a road to serfdom but rather
to high levels of satisfaction, fairness, economic equality and
international competitiveness."

Nor is Sachs the only prominent economist who has taken notice of
Scandinavia's success. So have Harvard's Richard Freeman and Nobel
Prize-winner Joseph Stiglitz, the former chief economist for the
World Bank. Even some relatively conservative economists--like the
American Enterprise Institute's Kevin Hassett, who has been an
adviser to John McCain--will concede that the Nordic model works,
although they are dubious that the United States could copy it:
"The Scandinavians," Hassett says, "show that you don't have to have
a terrible economy if you have a big welfare state and high
taxes."

Scandinavia's success has particular relevance today, when the
Democratic Party suddenly finds itself with real political power
again--and a mandate to address the rising economic insecurity that
many American workers feel. The problem for the Democrats, as my
colleague Jonathan Chait recently noted ("Freakoutonomics,"
November 6), is that the solutions they've pushed for in the last
decade suddenly seem inadequate. For most of the 1990s, the Clinton
administration pursued a relatively conservative set of economic
policies that focused on efforts to improve overall growth, such as
free trade and balanced budgets. Most economists believe Clinton's
economic policies did, in fact, strengthen the economy as a whole.
But it's also becoming apparent that the poor and middle class
didn't benefit from the subsequent period of growth as much as the
administration had hoped--and that both groups remain surprisingly
vulnerable to economic dislocation today.

Of course, even back in the early '90s, not every member of the
Clinton administration was so sanguine about the policies it was
pursuing at the time. Among those dissenting was then-Secretary of
Labor Robert Reich, who proposed that "if we blended our flexible
labor markets with [Europe's] investments in human capital and put
the safety net somewhere in between ours and theirs, you would have
the best system in the world." Reich's argument famously lost out
to those of Clinton's more conservative advisers--among them former
National Economic Council Chairman Laura Tyson and former Treasury
Secretary Robert Rubin.

And so it was a little ironic that, a few weeks ago, it was Tyson
and Rubin, along with some other former Clinton advisers, who found
themselves discussing Denmark at a panel on economic policy
co-sponsored by The New Republic and the Brookings Institution.
Tyson, who just completed five years as dean of the London Business
School, first raised the possibility that Denmark might be a model
for the United States, noting that "there is nothing in the growth
rates to suggest that Denmark is paying a penalty for having a high
level [of taxes and government spending]. ... This is not to
mention in addition the fact that health care coverage in Denmark
is universal, and it is not to mention the fact that, actually,
Denmark has one of the lowest poverty rates in Europe and has the
lowest poverty rates for children in all of the oecd countries."

Upon hearing that description, Rubin quipped, "I think I would like
to move to Denmark." That, surely, isn't necessary. But a
fact-finding visit might be worthwhile.

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