NoApparentMotive

(Via NAM reader DH) The latest issue of Newsweek (international edition) has a surprisingly favorable piece on the Danish economic model.

Newsweek notes that Denmark enjoys low unemployment (4.8 percent in the third quarter of 2005, compared to 5.0 percent in the United States, according to the Organization for Economic Cooperation and Development (OECD) [pdf]) and relatively rapid economic growth (a projected increase in real gross domestic product in 2005 of 3.0 percent, compared to 3.6 percent for the United States, according to the OECD [xls]). Denmark also does extremely well on a host of other indicators, including one of the lowest poverty rates in Europe (which Newsweek mentions), and essentially complete health-care coverage and high employment rates (which Newsweek doesn't mention). (For a nice discussion of the Danish model, see the paper [pdf] by Peter Plougmann and Per Kongshøj Madsen available from the New School's Schwartz Center for Economic Policy Analysis.)

The "model" works despite --I would say largely as a result of-- what most economists and politicians in the United States would see as two serious strikes against it. Strike one: Denmark has the second highest share of taxes in GDP among the 30 rich (and some not-so-rich) countries in the OECD. According to OECD data, in 2004, totaled 49.6 percent of Danish GDP, up from 48.3 percent in 2003. By comparison, taxes amounted to only about 25 percent of GDP in the United States in the same two years. Strike two: As Newsweek points out, Denmark also has a remarkably high 82 percent of its workers represented by unions. Union representation in the United States is about 14 percent and falling.

The Newsweek article correctly identifies some of the key reasons for success. Probably most importantly, the Danish model delivers a "delicate Danish balance of flexibility and security". The combination of universal health care, paid sick leave, paid family and medical leave, generous unemployment benefits, and an almost completely public pension system gives workers the kind of security they need to accept the levels of flexibilty that employers think is important. Workers in the United States would certainly be more open to expanded trade, for example, if they thought that they could actually support their families on unemployment benefits while they retrained for new jobs or that they would have good health insurance and a decent pension guaranteed by the government, independent of where they ended up working.

But, Newsweek fails to make the explicit connection back to high taxes and high unionization rates. High taxes support the generous social benefits that make the flexibility politically possible. Almost universal unionization rates make employer-employee cooperation and coordination possible.

To its credit, the piece also repeatedly emphasizes several crucial points not made often enough in journalistic discussions of "economic models". First, economic models come and go. In the 1980s, Japan was the rage. In the early 1990s, pre-unification Germany was very popular. Since then, the United States has been the almost universal reference point (amazing, of course, to almost anyone who has lived here since 2000, but true). Second, economic models tend to be pretty difficult to "export" since they usually reflect idiosyncracies of national history and the outcome of decades of negotiations between employers, workers, and governments. As an academic quoted in the piece says: "We did not produce this model based on a master plan". Or in the words of one Danish CEO: "We don't think [consciously] about the Danish model because there is no alternative". Finally, economic models are hard to pin down because they are almost always in flux, with dynamic tensions causing them to evolve and occasionally even to break down. In the words of that Danish academic: "it might derail quite easily".

What would be really nice would be to see this kind of reasoning introduced into stories in Newsweek and elswhere about the "US model", especially when US-style deregulation is being urged on European economies. Don't rush to copy the United States. By the time you do, we may well be on to the next "it" economy. And copying US-style labor relations might be socially or politically impossible. Imagine the public reaction to eliminating statutory vacation in France or Germany, or to putting something like two percent of working-age men in prison.