The Laissez Faire Welfare State

Responding to my colleague Dan Mitchell, Matt Yglesias writes:

“Iceland is known as the Nordic Tiger because of rapid economic growth,” writes Cato's Daniel Mitchell, “much of the nation’s prosperity is the result of free-market policies.” When I visited Iceland it struck me as more a Scandinavian social democracy than a free market paradise. And indeed the OECD stats back me up.

Matt then shows a chart of taxes as a percentage of GDP. Taxes in Iceland are high.

Can't they both be right? Iceland, much like Denmark, is more or less Hong Kong with a huge welfare state. High personal tax rates and redistributive policies certainly do affect incentives to work, save, etc. And certain state-provided services do tend to crowd out private alternatives. That said, it is possible to have high tax rates, lots of redistribution, and no other policies regulating the operation of the market. Neither Iceland nor Denmark leave their markets that unfettered, but it is simply undeniable that they are extremely wealthy, free-market capitalist countries. Indeed, the relative success of countries like Denmark and Iceland is outstanding evidence that the best way to ensure high levels of welfare spending (in tiny, ethnically homogeneous countries) is to let the capitalism rip.

According to Heritage, Iceland ranks 14th in the world in terms of economic freedom. It has no minimum wage. Denmark, which comes in 11th, has one of the world's least regulated labor markets and is one of the world's easiest places to start a business. If you consider that both take a huge penalty in these rankings for their high personal tax rates (but check out the super-low corporate and capital gains tax rates!), you can get a sense of just how unregulated and conducive to business these economies really are.

Perhaps the greatest unheralded discovery of the late 20th/early 21st century is that relatively unfettered capitalism is a much better complement to the comprehensive welfare state than is dirigisme. I for one plan to herald this.