TheMillerCircle.org

Our mainstream media are always reminding us that European countries are on a road to fiscal disaster and bankruptcy because their governments are too socialized.  We hear that their form of taxation and social spending cannot be sustained for very much longer and that the American model reigns supreme and must be viewed as the model to which other nations should aspire.  According to our own view, the United States is the greatest country in history. But today things look a little different. America was the first to arrive on the precipice of financial disaster, pulling the entire global economy onto a new playing field which makes words like “free market economy” and “globalization” seem more like a visit to Hell. To recover from this collapse, we are now in the process of determining the kind of economy we will have for the next fifty years and the new one will probably be set within a matter of 6 months to a year. If we are going to restore our economy to a more equitable system and eliminate the risks that produced our present collapse, major changes will have to take place and some of those changes will make us look a little more European in the sense that a more planned economy will be required for many reasons, not the least of which is the requirement for dealing with global climate change. Indeed, it appears that we might have come so close to triggering a disaster that could generate a very long-term depression of the entire global economy, that the world may push for changes in how we conduct our financial affairs so that America never again becomes a country promoting “fools gold,” or in this iteration, sub-prime mortgages.  But, when this country is badly in need to another model for its economy,  the propaganda against the economic systems of other countries won’t go away. So  the Danes for example must be in a state of misery and destitution because their tax rate is at 50% of the country’s GDP. But is Denmark headed for a state of imminent collapse and permanent decline? Economist and writer  Robert Kuttner spent time in Copenhagen in 2007 and wrote an article that appeared last year in Foreign Affairs entitled “The Copenhagen Consensus: Reading Adam Smith in Denmark.” In that highly readable article, Kuttner tries to establish how the Danes have created one of the most innovative and successful economies in the world and the dangers that lie ahead of them if they hope to keep it that way.

The income tax rate in Denmark is at 50% and for that reason alone, it might be hard to implement a high rate of taxation in the present U.S. climate where the “free marketeers” still hold sway. At one time however, back in the 1950s, our top tax rate was 91%, so it’s not as though we haven’t been there (though for slightly different reasons). Indeed back in the late 1950s business leaders assumed that a single payer, universal health plan was right around the corner. But here is what the Danes get for their high tax rate: they get universal health insurance, with the option of choosing among several different health plans and a choice of doctors. They have generous child-care and family-leave benefits, with unemployment compensation at 95% of lost wages; free higher education including graduate school; secure pensions in old age and a very creative and effective system of worker retraining. These attributes of “socialism” seem to hide the fact that the Danish economy is a highly open “free trade” system. The World Economic Forum of Competitiveness Index, which ranks country’s by their “free market” orientation, has Denmark ranked as number 3, right after the United States and Switzerland. The open nature of Denmark’s markets imposes minimal barriers to imports and its labor markets are among the most flexible in Europe. Denmark’s unemployment level of 2.8% (as of last spring) was the second lowest in the OECD (Organization for Economic Cooperation and Development).

Denmark has carved out a unique social contract that is both protective to the interests of its citizens, yet open to progress and economic development. As Kuttner points out, the Denmark social contract took a century of conflict and controversy before Danes  settled in on their present system. The heart of their system is a job security system known as flexicurity. This concept strives to provide job flexibility with job security. Although Denmark has worker’s protection through heavy unionization, workers can be laid off. What is more interesting however is that Denmark has Europe’s highest rate of labor turnover. Over 70% of Danes believe that changing jobs is a good thing, while in neighboring Germany,  the fraction of the population who favor that point of view is 30%. A third of the Danish population changes jobs each year. With a high benefit level when workers are laid off, there is no  “temp” worker industry, something that is a large sector of our work force in America.  Furthermore, labor rates are fairly equitable among the different economic sectors, so switching radically from one job to another does not typically result in a financial decline or a big boost in salary. For that reason, the number of long-term unemployed in Denmark is a very small fraction of the worker population and is much smaller than almost any other European country. With high benefits, the unions often work cooperatively with management to weed out unproductive workers to keep the work environment optimized. In contrast, the U.S. economy does have job flexibility, but very little job security and when you couple that problem with the reality that our health insurance goes with the job, you can appreciate that job loss in the U.S. can be a devastating experience. But, it is not that way in Denmark. Oddly enough, Denmark likes to see outsourcing of its routine manufacturing activities, so that only the higher end kinds of jobs are stimulated to develop and emerge within the Danish economy. They view the export of manufacturing jobs to China as a good move, not a job displacing issue. And, as automation in manufacturing has contributed to a  reduction in those kinds of jobs, Denmark has responded by creating a new class of professionalized service-sector jobs. Someone working in a nursing home in Denmark has much better pay and social status than does a similar worker in the United States. These people also get training to help improve their status as care-givers. And, these kinds of jobs cannot be exported. Wages in the remarkable economic system of Denmark are about 70% above the OECD average. The fact that the Danish system is financed through income taxes and not payroll taxes, means that the cost burden to employers is reduced and the high wages are more readily met.

Kuttner’s article is well worth reading if you want to see how a far more advanced socialized system than the one we have in the U.S. can provide better pay equity and job security, two things that are in short supply in America. Let’s face it, here in America we have a system of labor and management that results in a grotesque level of pay inequity and virtually no job security. But the modern Danish system did not sprout up overnight. The current system can be traced back to a labor agreement in 1899, when labor unions established legal standing. There have been many ups and downs to the Danish model and even as recently as 1993, the unemployment rate in Denmark was stuck at about 12%. But refinement along the lines of a more socialized and equitable system has resulted in the agreeable and highly successful economy that Denmark enjoys today. It is not as though Denmark has no problems ahead in its future. Rising numbers of foreign-born residents now represent about 6% of the population and about half of these are Muslim. This issue has put pressure on the ability of the Danes to assimilate non-Danes into their culture. In this case, the United States does a much better job of immigrant  assimilation.

But perhaps the biggest threat to Denmark is the impact of globalization. Denmark has been hurt by the influx of what Paul Krugman calls “hot money.” As Kuttner says, “Private equity companies and hedge funds, the sharp edge of Anglo-Saxon financial capitalism, reject Danish-style social bargaining. Their business model calls for buying and selling corporate entitites, slashing costs and sometimes appropriating assets from operating companies. This trend of short-term financial engineering, importated from abroad as part of the trading system can be a severe threat to a nation with harmonious labor-management relations rooted in social partnership and long-term company horizons.” For the Danes a disastrous outcome visited the country when they decided to privatize TDC, the national telephone company. In December 2005, TDC was acquired by a consortium of five private equity firms, including the Blackstone Group. It was Denmark’s worst nightmare to have a telephone company that needs to continuously invest in its improved infrastructure, suddenly owned by a group whose main objective is to extract those resources from the company to pay for extravagant executive salaries and bonus compensation. The leveraged buyout required about 80% of the phone company’s value to be borrowed, weakening TDC’s balance sheet. This was followed by the new executives giving themselves a cash dividend of 5.6 billion euros. This ugly “hot money” buyout threatens the entire Danish economy and the special labor-management relations that have been established over a century of development. Right now, the former Danish Prime Minister, Poul Nyrup Rasmussen, heads the Social Democratic bloc in the European Parliament and has emerged as Europe’s leading crusader for tighter regulation of hedge funds and private equity firms, both of which are the current bane of our own economy. Private equity organizations have only one behavioral motif: they only know how to tear companies up for fun and profit and we need to make sure their future follows along the same path as that of the Dodo bird. If the laws were changed to discourage highly leveraged buyouts, that alone would apply some much needed braking power to the toxic behavior of Hedge funds and private equity groups. If Denmark can solve that problem, along with the other members of the European Union, then they will have broken the back of the most toxic byproduct of the current “free market” system, better known as the “greatest wealth transfer system” to ever visit our economy. I encourage you all to read Kuttner’s article on the Danish economy and then ask yourself which country would you rather live in. I can’t advise you on acquiring Danish citizenship.

We can’t adopt the Danish economic system as an explant into America. We have to grow and evolve into it, if indeed we can ever approach their successful system. But, help is on the way. Polls show that the Millennial generation, the generation born in 1978 or thereafter, is more progressive in their attitudes about the value of government and the benefits of more socialized institutions. Perhaps therein lies the intelligent growth we will need to generate a more equitable and balanced economy, where more Americans not only get to share in the “wealthiest nation on earth,” but also help to begin generating sensible policies to face the ecological disaster that lies in our future if we don’t sober up and more clearly visualize the obstacles in our pathway, the ones that are no longer just beyond the horizon.

RFM