Selling Welfare-State Snake Oil

In a time when it is becoming glaringly obvious that the European welfare state is on critical life support, there seems to be a bit of an existential debate emerging in the West. Europe has been so invested in the welfare state over the past 75 years that no one alive can remember what life was like without it. In America, the liberal elite envies Europeans who have the privilege of paying a lot more in taxes without getting anything more back. As the welfare state crisis unfolds, the political and self-appointed intellectual leaders of the West are forced to re-examine the very premises of their own existence in the public arena.

So far, this has not led to any major mea-culpa confessions of economic and social mistakes. The European Union, led by an unelected class of Eurocrats, has almost wiped Greece of the macroeconomic map in order to protect the welfare state (and the common currency). They have practically stamped Spain into a wet spot between fiscal annihilation and political humiliation. Italy, Portugal, even larger countries like France, are waiting for their turn.

On the American side of the Atlantic, Canada has thus far preserved its welfare state by shaving off “inefficiencies” and leveling out its taxes. But their high dependency on welfare has created plenty of drug and crime problems, and they still cannot afford to give their citizens decent health care under their socialized system. Canadians with money still come in droves to the United States to get treatment – and then they go home and vote for politicians who want to keep that socialized system alive.

There is a fair amount of debate over the welfare state in Canada. It remains to be seen if the country that has always tried to strike a “prudent” balance between Europe and the United States can come to grips with what foot they want to stand on.

In the United States, the battle between the European welfare-state ideology and liberty rages on. The former camp is represented by president Obama and his entourage of arrogant statists; the latter has the support of the majority of the American people. In 2012 the president and his leftist cohorts lost two big states, North Carolina and Indiana, and almost ten million voters who had previously backed Obama decided to stay home. What kept Romney from winning was a similar decision by three million Conservative and Libertarian voters, some of whom chose to vote for Gary Johnson out of principle.

In that same election, friends of freedom reinforced their positions in state legislatures and gubernatorial mansions. The Tea Party movement is now producing a new generation of electable candidates.

The resiliency of the Tea Party movement despite resistance even from Republican leaders is a strong indication that support for the European welfare-state ideology may have reached its peak in American politics. It will take time for liberty to regain the upper hand, and the outcome of that battle is far from certain. But there is also a new sense of determination emerging among Republicans in Congress, and rising support for traditional Conservatism across America. A recent study by Gallup reveals a notable slant in the Conservative direction among Americans in general: the most conservative states are more conservative than the most liberal states are liberal. This means, in short, that liberalism is diluted even where on its own home territory.

It is also encouraging to see the strong popularity of Republican governors such as John Kasich in Ohio, Scott Walker in Wisconsin and Chris Christie in New Jersey. They are all more or less fiscally conservative and represent a defense line against the invasion of the European welfare state. (And don’t forget the Republican takeover of Michigan, quite an accomplishment.)

There are, in other words, many reasons to be optimistic about the future of America. Once the European welfare-state ideology has been driven off our shores we can focus on rebuilding an economy based on free enterprise and a society based on faith, charity, individual responsibility and self determination.

Before we get there, though, we have to keep up the fight in every corner of the public policy arena. Many disillusioned supporters of the welfare state are still scrambling to market their warped vision of a benevolent government as palatable, even desirable, for America. The latest example comes out of The Economist, in the form of a panegyric Festschrift to the Nordic welfare state:

Smallish countries are often in the vanguard when it comes to reforming government. In the 1980s Britain was out in the lead, thanks to Thatcherism and privatisation. Tiny Singapore has long been a role model for many reformers. Now the Nordic countries are likely to assume a similar role.

They forgot to mention Switzerland and Luxembourg, both of whom have kept their welfare states to an absolute minimum by European standards.

That is partly because the four main Nordics—Sweden, Denmark, Norway and Finland—are doing rather well.

A stretch of facts to the point of breaking. Sweden has one of the highest rates of youth unemployment in Europe. The Norwegian economy is as big as the Swedish, with half the population. Sweden has a violent crime rate per capita that is higher than its three neighbors – combined.

Denmark has a personal income tax rate that begins above 40 percent. Finland’s employment numbers are trending negatively, as its economy has become frightfully dependent on exports; the flip side of spending all your political capital on boosting exports is that you have to suppress domestic demand. When exports go bust, there is no domestic spending to make up for it.

More on these mechanisms in a moment. For now, back to The Economist.

If you had to be reborn anywhere in the world as a person with average talents and income, you would want to be a Viking. The Nordics cluster at the top of league tables of everything from economic competitiveness to social health to happiness. They have avoided both southern Europe’s economic sclerosis and America’s extreme inequality.

Of course. Denmark went through a devastating period of austerity in the 1980s, while Sweden was hurled into its own depression in 1991. In 18 months, unemployment went from two percent to 15 percent. Government cut spending and raised taxes in an austerity package equivalent to nine percent of GDP.

Denmark fell back into austerity in the early 2000s. They closed a number of hospitals under the single-payer system, forcing Danes to accept health care rationing as part of their daily lives. In Sweden, austerity continued and the single-payer health care system laid off one fifth of its medical staff in a matter of a few years.

The Swedish disaster has continued. Today, the employment level among working-age Swedes is eight percentage points lower than it was before the crisis in the early ’90s. This is reflected in massive youth unemployment, and a widespread system of temporary jobs for those who can get a foot in the door of the labor market.

The Economist again.

To politicians around the world—especially in the debt-ridden West—they [the Nordic countries] offer a blueprint of how to reform the public sector, making the state far more efficient and responsive. The idea of lean Nordic government will come as a shock both to French leftists who dream of socialist Scandinavia and to American conservatives who fear that Barack Obama is bent on “Swedenisation”.

What lean government? This classic research paper by three economists at the European Central Bank shows that the Nordic welfare states are far less efficient than the American. Output efficiency – which measures what you actually get for your tax dollars – is half, half, as high in Sweden as it is in the United States.

But of course, if you take in the world’s highest taxes and give less and less back, you don’t need a whole lot of bureaucrats to administer the spending programs. All you have to do is rake in the cash from taxpayers and then leave them to fend for themselves.

Sweden, incidentally, happens to have the longest waiting lists for health care in Europe, with the exception of Albania.. For more on the “efficiency” of the Swedish single-payer system – the crown jewel of the Swedish welfare state – check out this well-written paper.

The Economist, however, does not bother with such facts. They are out to sell the Nordic model as the Second Coming of the Welfare State:

Government’s share of GDP in Sweden, which has dropped by around 18 percentage points, is lower than France’s and could soon be lower than Britain’s.

Yes, it topped 60 percent in the ’90s. But keep in mind that financial transfers do not count here. Welfare checks, unemployment benefits, income security payments are financial transactions that don’t show up in GDP. A very large part of the Swedish welfare state is all about paying people not to work.

Taxes have been cut: the corporate rate is 22%, far lower than America’s.

Technically, that has not yet taken effect. But the big stumbling block for Swedish businesses is the conglomerate of labor security laws. Those laws have driven the exorbitant costs of labor – payroll taxes are more than twice as high as in America – to even higher levels and are part of the reason why the Chinese owner of Volvo Cars is slowly transitioning Volvo production out of Sweden. Labor laws also got in the way of saving SAAB and contribute to the decision by Volvo Heavy Trucks to move its mass transit bus manufacturing to Poland.

Back in the ’80s and ’90s Sweden lost almost all of its once-sprawling pharmaceutical industry. Ericsson, the world’s pioneering telephone company, is limping along today only because of its alliance with Sony.

Back to The Economist, who manages to get yet another welfare-state selling point wrong:

While Mr Obama and Congress dither over entitlement reform, Sweden has reformed its pension system.

And retirees are losing heavily, as the system automatically cuts benefit checks but continues to take money to the same degree from taxpayers. Right now there are mounting demands in Sweden for yet another reform to fix the gaping flaws in the reform from the ’90s. “Retired and poor” is becoming a national sport in Sweden (and sadly my mother is among those having to take a beating).

Its budget deficit is 0.3% of GDP; America’s is 7%.

It is very easy to balance the budget. North Korea has a balanced budget. Romania under Ceaucescu had a balanced budget. All you have to do is, to quote Obama, “tax the heck out of people”. It means nothing when it comes to how people actually live their lives.

The average Swede, by the way, has a standard of living that would qualify him for welfare in most states here in America.

And then, of course, The Economist brings up the shiny coin that Swedes always hold up when they want to sell their welfare state:

Sweden has a universal system of school vouchers, with private for-profit schools competing with public schools. Denmark also has vouchers—but ones that you can top up. When it comes to choice, Milton Friedman would be more at home in Stockholm than in Washington, DC.

Except for the tiny little factoid that if you want to start a private school you have to apply to the local public school district. If the district issues a certificate of need, you can go ahead and open your school. If the public school district thinks that there is no need for competition with their schools, they say no and you have nowhere else to go.

Also, The Economist forgot to mention that home schooling is illegal in Sweden, as are schools with a religious affiliation (except for islamic schools which are violating the law but allowed to continue to exist out of misguided political tolerance).

The rest of the Economist article follows the same line of snake-oil salesmanship. Their attempt at selling a used car wrapped in shiny coating is so full of questionable, superficial and sometimes outright false statements that it would take a thesis to account for all of them. This article is already 2,000 words long…

But fear not. I have finally gotten the material together for my new book, and will be submitting the manuscript this spring:

Sweden – Indictment of a Welfare State.