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.
February 22nd, 2008 13:01
Iceland’s economy is fairly unusual to begin with, though. For one thing, prices are astonishingly, brain-crushingly high — just window-shopping in Reykjavik is enough to convince you that you’re hallucinating. Probably largely a result of the whole isolated island thing.
Presumably when cost of living is very high a welfare state looks much more appealing because the baseline of economic subsistence is such a large fraction of income. It may be that in terms of the ratio of per capita welfare spending to cost of living, Iceland isn’t nearly as welfarist as it seems. Worth checking the numbers, anyway.
February 22nd, 2008 13:32
Iceland has (well, had) its own ongoing Marshall Plan throughout the NATO years. The Icelandic economy’s dependence on (mostly U.S.) military personnel spending their money in Reykjavik was all-encompassing and supplemented only by tourism (which, unsurprisingly, Iceland is now pushing heavily as its strategic role wanes).
(A secondary effect of the NATO factor, incidentally, was that English became the de facto second language on the island — EVERYONE in Iceland speaks absolutely fluent English. This too has ripple effects on economic growth, etc.)
Just as it is invalid to compare continental European (or Japanese) economic performance in the mid- to late 20th Century to that of the U.S. without adjusting for who was paying for whose defense for 50 years, so too is it invalid to analyze Iceland without adjusting for its symbiotic relationship with the NATO generally and the U.S. specifically, even if it is now winding down in post-Cold-War world.
February 22nd, 2008 16:20
Of course, there is always the fact that Iceland has about the population of Des Moines.
February 22nd, 2008 19:35
Of course, there is always the fact that Iceland has about the population of Des Moines.
And we have a winner! Its more a matter of scale, I think.
Not to mention Iceland is pretty much a homogenous culture too, which I’m sure has an effect on people’s attitudes.
February 23rd, 2008 01:10
I thought regulations were supposed to have a greater effect than taxation. Do they have things like SarbOx and OSHA?
February 23rd, 2008 13:48
But Will … what about all of those market failures?! How can they possibly survive? Oh, the inefficiency …
February 24th, 2008 16:15
I think key moral draw from this story is not just that free market policies can help welfare states, but that well organized welfare states can be the best enviornments in which to engage in buisness. One of the sources of Denmark’s success has been its truly massive investment in education and worker training, which keeps their economy much more agile than the rest of the world’s. Ditto goes for their tech investments. So the free market knife cuts both ways, methinks.
One other thought: The fact the its so incredibly difficult to get rich in Denmark would seem to throw quite the monkeywrench into libertarian thinking on personal gain. If people shouldn’t work incredibly hard with negligible profit motives, then how can a system premised on high income taxes be remotely as successful as the Nordic tigers? I think some responsibility could be put on cultural cohession, the nordic work ethic, and that people living in these countries think about collective gains in a much more concrete way than say, Americans, might, but all of those would seem to throw water on free marketeer’s assumptions about what really drives people to pursue gain.
February 25th, 2008 00:54
I bet Danish immigrants to the U.S and their children are similarly well educated.
February 25th, 2008 02:37
[...] here he argues with Will Wilkinson and all the the others who think that the economic success of countries like Iceland and Denmark [...]
February 25th, 2008 20:20
It would be interesting to see which is cheaper: having a minimum wage and less government expenditure or having extensive spending and no minimum wage.
March 19th, 2008 18:52
[...] Okay, I’m all for that. So would McArdle be in favor of transforming the United States into a Scandinavian-style social democracy, for instance? That certainly seems to be the best way to provide Americans with some form of [...]