Can we just scale up Denmark?

The ever-inquisitive Matt Yglesias asks why the successful social welfare policies of smaller countries cannot be scaled up to a larger level.  I don’t know of serious work on this question (there are papers on whether smallness is an advantage for economic growth, but that is not the same issue), so we should not jump to hasty conclusions.  Nonetheless I can think of a few factors:

1. Perhaps homogeneity is the advantage, not smallness per se.  So a Denmark of 150 million people might work quite well, if only there were 150 million Danes.  There aren’t, and if we imagine the Danish population growing they might not stay so homogeneous in nature.  Peer effects dissipate or perhaps turn negative at some scale.

2. Perhaps the ability to dispense with federalism helps government efficiency in small countries.  I favor federalism for larger units, such as the United States, but I think of it as a necessary evil.  Singapore and New Zealand don’t have much federalism, nor should they.

3. Concentration of power in a major city may account for some of the special properties of small countries.  It is often striking how many of the small-country elites went to the same high school, and they can strike efficient political bargains relatively easily; postwar Austria has been cited as an example.  Larger size makes these Coasian bargains impossible.  Note that Stockholm, Copenhagen, Helsinki, and Oslo are all far more important than the second cities in those countries. 

4. Feelings of social solidarity are limited across space and across numbers, and this simply won’t change.

5. Orderly countries aren’t very interested in larger political units.  The Nordic countries have in the past existed in larger political confederations, but somebody always was persnickety enough to break away.  Many of the Nordic countries, even today, are relatively skeptical about the EU.

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I'd be interested in hearing Professor Cowen discuss highly decentralized Switzerland in the context of why federalism is unhelpful and inefficient for small countries, and discuss Japan dominated by Tokyo and France dominated by Paris as relates to the "Nordic countries dominated by their capitals can strike efficient bargains" hypothesis. It is well-known that in France the leaders of all the parties and indeed most elites go to the same handful of grandes écoles; has this led to "efficient political bargains," do you think?

The UK is now 60 million, mostly in England - but England is in many ways less federal, more centralized than ever; and like these Scandinavian countries we are dominated by one city (and have been for many centuries). Indeed, London is by far the most economically successful region of the UK and so is continually pulling-away from the rest of the country.

The current Labour administration intended to introduce gradual federalism (regionalism) to England, but when this was tested in a referendum in the North East (where I live) the proposal for devolution was so massively defeated that the idea has been dropped. And there are no alternative ideas.

So... with the UK population currently growing rapidly (due to unprecedented levels of immigration and migration); the UK is testing the limits of how big a single, integrated but diverse, heterogeneous but stable modern country can grow without federalism.

Since essentially every French CEO and leading politician goes to Sciences Po and most then to the Ecole nationale d'administration, one would think that it would at least bring something to bear on hypothesis 3.

Even in the United States, with 5x France's population and a far greater number of colleges and universities, a surprisingly high percentage of the movers and shakers attended a surprisingly small number of universities.

Perhaps it is true that federated organizational structures ultimately fall into sizes that lie along some Zipf distribution at some level of efficiency and stability. And depending on the shared values and norms and purposes of the population, at the higher and lower ends of the distribution, the unit size will become irrelevant or impractical. So in some areas, Danish policies may in fact be extensible and scalable into a global but federated structure (e.g. climate change) but not in others (e.g. social policy).

To various degrees and in all sorts of areas, it is easier for small countries to be free riders.

Milton Friedman believed that immigration and the welfare state are incompatible.

I'm inclined to agree with him, which is yet another reason I favor immigration.

It is worth noting by the way that the Nordic countries have low corporate tax rates compared to most of the rest of "Old Europe". Most of "New" Europe, i.e. the former communist countries, at least those in the EU, have low corporate tax rates too, as does Ireland, their "hero".

Perhaps the key to the Nordic countries being viable welfare states is due to their lower corporate tax rates more than anything else.

Investment taxes of various ilks are likely the most damaging to economic growth. Therefore in order to get both "acceptable" economic growth, unemployment rates, as well as government welfare in large amounts, having low investment tax rates may well be a necessary precondition.

Perhaps the key to the Nordic countries being viable welfare states is due to their lower corporate tax rates more than anything else.

Certainly a point that's been argued. The typical formulation I've heard ascribes to the Nordic countries a combination of low taxes on capital and corporations with relatively light regulation. Government which stays out of the running of business, but highly redistributes income is often called the Nordic model. According to this hypothesis, Sweden ran into trouble when it started regulating more, but the early 90s non-socialist government restored some flexibility (and introduced other things like school choice which remain today.)

The Nordic model is frequently pointed to both by redistribution-friendly economics-aware neolibs and by reformist-minded people in France as ways to try to achieve the best of both worlds.

Denmark's policies work pretty well because Denmark is full of Danes, who trust each other because they tend to behave in trustworthy manner, such as not cheating the government. (See the study of NYC parking tickets given to UN diplomats with immunity -- Nordic diplomats followed NYC laws even though they didn't have to.)

The same policies don't work as well in, say, Sicily, which is similarly sized and similarly homogenous, because Sicily is full of Sicilians. They don't trust each other because they don't behave in a trustworthy manner those not in the family. As Luigi Barzini wrote in "The Italians," only a fool would be a minority shareholder in Sicily, so nobody is.

Who says the welfare policies are successful? There's more crime than before the welfare state came to Denmark. A lot of people are dependent on income from the government instead of providing for themselves. And a lot of things are very expensive.

What is good about Denmark vs. a lot of other countries? Here are a few points:
* It's easy to hire people and fire them again (making it safer for employers to hire)
* Not a lot of corruption
* Relatively few regulations on capital
* Predictable property rights. Your company won't be nationalized tomorrow. Some taxes are high, but you know that in advance.

A few bad things:
* High taxes. 25% VAT. 180% tax on cars (in addition to the VAT). 62% marginal income tax in the top bracket. Around 40% in the lowest bracket.
* Public health care system. Hope you don't get cancer and have to wait for months and months before you get treatment. (private hospitals are available though, but not everyone can afford that, especially with the high taxes)
* A big welfare state

Do be inspired by the good points. But don't think that the employment rate is low because of high taxes (hint: look at the relatively relaxed labour laws).

Good to hear that you lost a lot of teeth to the (private) Swedish dental care system, kierkegaard - we don't have universal dental care in Sweden for adults. Our new right-wing government have loose plans to change that, or so I've heard. Misinformation is, as always, widespread at MR when the topic is Nordic models - yes, Sweden is fairly diverse (15 % of the population is first or second generation immigrants); no, ambulances in Malmö don't need police escort (unfunniest joke I've read in a long while, if so intended). To be on-topic: since the Nordic models basically are Social Security on steriods, there is no reason to believe that it can't scale. After all, as pointed out by Ezra Klein and Matt Yglesias, there is amazing institutional homogeneity in the US today. Just add some well-designed social programs (universal health care and parental leave springs to mind) and it will just work. Since the American dream is such a powerful myth in the US, there is no reason to believe that decent social insurance would disincentivize people from working hard. If anything, it would rather provide means for second and third chances.

“Denmark's policies work pretty well because Denmark is full of Danes†

Danmark’s policies do not work well at all. There are 1.4 million with Danish ancestory in the US. This is a good comparison group with the 5 million Danes in Denmark:

(klick Danes)

Danes in America GDP per capita*: 53500$, (poverty rate 4.98%)
Danes in the welfare state GDP per capita: 34500$

Life expectancy white (and Hispanic) Americans: 78 years (2003)
Life expectancy in Denmark: 77 years (2003)

(I don’t have figures for Americans of Danish ancestry, but we can note that the age-adjusted mortality rate is markedly lower in Scandinavian heavy states such as Minnesote, the Dakotas than the US average table 28

3. US has 37% with territory level of education or higher, Denmark 27%. The Danes in the US of course do much better than the average; they are 46% more likely to have a bachelor degree than average Americans.

So Danes with the welfare state are much poorer, live slightly shorter lives, pay more taxes, and are have less education than Danes with the American system. How exactly is the Danish model successful? Why are intellectual standards so low when it comes to accepting the superiority of the welfare state?

Denmark only does well when compared either to other poor and unemployed European welfare states, such as France or Sweden, or when compared to ethnic minorities in the US (in which case they have less poverty and crime, but not much higher average income).

*GDP per capita equivalent calculated by taking per capita income level from Census, 28% above US average, and comparing with US and Danish GDP per capita level in 2005, where the US was 21% above Denmark).

Note: Self selection is not likey to be a factor, since a large percentage of the population moved. The only real bias I see is if more successful people “remember† that they are Danes when the Census conducts interviews. However as someone noted the whites who live in states to which Danes move will give you similar figures of superiority of outcome in the US system that the Danish one.

Dan Karrerman,

I don’t live in Malmo†¦ So my information is by necessity, second hand. However, other folks have some personal experience with Malmo. Check out The Color of Swedish Grass for a debate on this subject. A useful quote from NoDhimmitude:

“ok anders, since you seem to be so conecerned about the comments being made by fellow scandinavians not living in malmoe, allow me to assist then.

I spent my childhood in malmo, and an additional 6 years in my twenties. I moved out of sweden 19th of december 1997, and return 2-3 times every year, my father, 2 brothers and a sister still lives there, and I have almost daily contact with many friends still living there. Does this qualify me for speaking of the situation?

fjordman is 100% correct in his assessments, and if you really are a journalist, then you know this to be true as well. if you have not "no actions against society from any Muslim group", then you sure as hell cant be reading the news a lot either, a bit strange since you calim to be a journalist. sydsvenskan has published numerous articles about bus lines to rosengard, police escort for firefighters and ambulance services, police fearing to leave the police cars unsupervised(!), not to mention the 3 robberies in daylight average per day(!) in triangelen (i lived 5-600m from there by the way). You have obviously also missed the "exodus" of young couples out of the city when they get children..†

NoDhimmitude provides quite a bit more information about the situation in Malmo along with his assessment of journalists (and others) who are in denial about what is going on.

"Just add some well-designed social programs (universal health care and parental leave springs to mind) and it will just work."

Very slowy, like Canada.

"there is no reason to believe that decent social insurance would disincentivize people from working hard."

Afterall, look at the success of public housing.

Accourding to the OECD hours worked in Denmark per working age per declined by 20%& between 1970-2004, wheras they increased slightly in the US. Wheras Denmark was 19% above the US in working hours per working age adult in 1970 they are not 8% below.

(they do beat Sweden, but only marginally, and they do have marginally lower taxes).

Taxes are not everything, but they are a big part of the story. Unless you have another convincing one. What was it the left belives, prefrences for being unemployed through wonderfull social multipliers?

In the early 1960s, liberal northern states in America imported from Scandinavia two ideas: pay a livable level of welfare and stop stigmatizing unwed mothers. In Scandinavia, these policies have yet to completely ruin the place. In contrast, in American inner cities in the 1960s, the crime rate began to shoot upwards within a year or two of adoption of Nordic norms. On the other hand, in places like suburban Minnesota, increasing welfare had little negative effect.

In other words, Scandinavians don't respond to incentives the same way (non-Scandinavian) Americans do.

Sweden has had a welfare state for 72 years now without the complete collapse that has been recurrently predicted by American free marketeers as far back as I can remember (about 1972). I suspect Swedes would be far better off living under Minnesota-style policies, but that they've been able to resist utter moral ruin for three generations and counting is quite a tribute to the moral capital that Swedes started out with in 1935.

In contrast, the British had a full-blown welfare state for only 34 years (1945-1979) before the disaster of the Winter of 1979 led to a substantial policy shift with the election of Mrs. Thatcher.

In further contrast, the welfare state was such an immediate catastrophe in American inner cities (e.g., crime, illegitimacy, welfare dependency etc.) that the Democratic share of the Presidential vote fell from 61% in 1964 to 38% by just 1968, and welfare for single mothers was substantially cut back by 1996.

The Swedish welfarestate is very adaptive, and surprisingly enough the Swedish economy i one of the most free in Europe. That is why the swedish welafare state isn't collapsing like the French or German.

Milton's exact quote, for the record:

“You cannot simultaneously have free immigration and a welfare state.†

However, if the U.S. keeps at it, we might soon have Latin-American-style class and ethnic demagoguery in place of whatever welfare state exists now.

Here is an article on immigration and the welfare state from Norway. Apparently those immigrants from the 1970's were quite an economic bargain: half of them are now on the dole.

If Denmark or any other nation wants to preserve their welfare system and their standard of living, they would do well to keep their population relatively homogeneous.

Wouldn't you end up with Lego blocks the size of a steamer trunk?

So to sum it up:

1) Good labor and corporate tax policies can make up for a lot of bad income tax and redistributionist policies

2) But not enough to keep GDP per capita ahead of the Anglo-Saxon model in the long term

3) And may not be resilient with immigration

4) Because culture matters

Regarding US immigration, as no one but North Korea seems to have secure borders, it is going to happen, and it is stupid for conservatives to oppose it because it will only drive immigrants into the political/cultural camp of non-conservatives.

Conservatives should instead embrace immigrants and help them become well acquainted with the value of economic freedom rather than pushing them away.

Mr. Econotarian,

Secure borders are easy. Just ask the Israelis. Better yet have them build us (the United States) a fence. If fences can stop suicide bombers, they can assuredly keep illegal aliens out. See Israel’s Security Fence for some details. Apparently, not one single bomber has managed to penetrate the Gaza fence.

Eisenhower showed that immigration enforcement is easy†¦ If the government wants to. With roughly 1000 agents, Eisenhower removed (or induced to leave) 1-3 million illegal aliens. See How Eisenhower solved illegal border crossings from Mexico for an article on the subject.

Being “nice† to immigrants doesn’t facilitate assimilation. Tough policies yield better results and produce higher levels of identification with the host society. See Broken Borders: Teddy Roosevelt's words to live by. A quote from Teddy Roosevelt
"In the first place we should insist that if the immigrant who comes here in good faith becomes an American and assimilates himself to us, he shall be treated on an exact equality with everyone else, for it is an outrage to discriminate against any such man because of creed, or birthplace, or origin. But this is predicated upon the man's becoming in very fact an American, and nothing but an American...
There can be no divided allegiance here. Any man who says he is an American, but something else also, isn't an American at all. We have room for but one flag, the American flag, and this excludes the red flag, which symbolizes all wars against liberty and civilization, just as much as it excludes any foreign flag of a nation to which we are hostile...We have room for but one language here, and that is the English language...and we have room for but one sole loyalty and that is a loyalty to the American people."

Umm, forgive me if I misunderstand, but wouldn't this mean that the market would prevent corporations from getting too large and exercising too much power, were this statement true? After all, if "GM-like problems" are inevitable to companies that grow too large, then corporations will remain smaller.

If the problem was merely that they become too inefficient, that might be true--though not inarguably true. Larger corporations seem better at insulating themselves from competition.

But the real problem is deeper than that--as the corporation grows larger, the government becomes dependent on it and subservient to it, bending the laws in its favor. Any free-market purist minarchist state would quickly be converted into a plutocratic patronage system.

"Larger corporations seem better at insulating themselves from competition."

Not enough better to counter inefficiency problems. They have economies of scale and market power from their size, but inefficiency means that smaller companies can nose in (think of the recent airline trends). The only thing that keeps so many around is your second point: government (again, think of the airlines).

But this is an argument for a more pure free market. Not a less pure one.

At least in Sweden the political class is extreamly inbred. This is from the present govermetn

(in Swedish, but self-explanatory picture).

The previous goverment had the wife of the pri-minsiter as the head of the large alcohol monopoly firm, amongst others.

However I am not sure it is nepotism per se, maybe it is just a small country and people naturally follow the footsteps/have relationships with other politicians.

I saw an article on MSNBC regarding the apparent widespread inumeracy (that's mathematical illiteracy) of Americans. It goes a long way toward explaining how we can't seem to grasp the serious nature of the environmental and the financial disasters which our way of life are causing. We live in a state of denial, and fear. Rather than taking positive steps, we cower in a corner declaring any action as already-doomed and too costly, while failing to understand that no action will exact the most costly toll on our lives.

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