Scale, Scope and the Question of the Fiscal Dimension (and of the Extent of our Morals)

Tyler Cowen discusses the question of whether or not we can just scale up Denmark.  Denmark's social welfare state seems to work reasonably well, the argument goes, so why cannot we just adopt that  social welfare system on a larger scale to work here in the US.

This is not a new question and the answers that Cowen's provides  have their roots in earlier discussions (at least I would say they do).  When I am asked similar questions (usually about Sweden) I usually respond with three answers: (1) ethnic homogeneity which enables the span of moral sympathy to be wider; (2) long history of relatively free trade that produces an accumulated surplus that helps sustain the wealth of a nations against inefficiencies for a longer time; and (3) large degree of tax evasion which means that the full burden on the social welfare system is avoided to some extent.

These arguments emerge from shifting empirical information on the history of social welfare states through a theoretical perspective that emerges largely from reading Adam Smith, Ludwig von Mises, F. A. Hayek, and James Buchanan.  For example, didn't Smith tell us both in The Theory of Moral Sentiments and The Wealth of Nations?

James Buchanan asked his students the following question: "If a fly grew 9 times its current size, could it still fly?"  The engineering of this question turns out to provide a negative answer.  The fly could not get off the ground.  But that was not the point. The point was to think of the analogy.  If a state's fiscal system was currently working and we allowed it to double in size, tripple in size, etc., could the state still function?  This is the question of the fiscal dimension.  Can a state function at 9 times its current size?  Buchanan's question seemed to imply an answer similar to the one about the fly.  Do the social welfare states challenge that answer?  I don't think so.

First, we have to recognize the scale issue -- what works at one level does not necessarily work at another level.

Second, we have to remember history --- the Scandavian states did run into fiscal problems in the 1990s that required changes. Also, we have to remember that historically rhetoric often outpaced reality in "socialistic" policy and that relatively free trade and private property rights did dominate economic life.

Third, we have  remember the point about the limits to our moral sympathy. We simply cannot sustain an emphatic sense beyond a certain level and function.  Buchanan's essay "Markets, States, and the Extent of Our Morals," makes this epistemic point, while his essay "The Samaritan's Dilemma" makes the incentive point.

Comments

[Fundamentalist]

Interesting thought. I would suppose that if Denmark could be scaled up, the rest of Europe would have done so. Also, I wonder about immigration. The Nordic countries seem isolated from immigration, partly by location and partly by climate (Most poor immigrants come from warm climates and may not want to go to a cold one.) Ten years ago the US Census Bureau said that single mothers and immigrants contributed most to our poor. Does Denmark have a similar problem with legal and illegal immigration of poor folk? I would suspect that if they did, they would suffer similar problems as the US, Spain and France.

[David Andersson]

Some misunderstandings need to be cleared up here.

Ethnic homogeneity: While it is true that the Scandinavian countries were initially ethnically homogeneous, this is no longer the case, with the exception of Finland. In Sweden, more than 12% of the population was born outside the country, and 20% of the population are either first or second generation immigrants (Only Australia and Canada have higher rates of immigration among OECD countries). In Norway and Denmark, the percentages of foreign-born residents are in the 7-8% range, which is close to the European average. Important source countries (in Sweden) have recently been Bosnia, Turkey (Kurdistan),Iraq, Iran, Somalia, and Poland. Earlier waves included immigrants from Finland, Yugoslavia, Greece, Turkey, Vietnam, and Chile.

2: While Denmark and Sweden have the world's highest tax rates, other indicators of government point in a different direction. According to the Economic Freedom Index, Iceland is one of the 10 freest economies, Denmark and Finland two of the twenty freest, and Sweden is ranked as the 23d freest (same rank as Taiwan).

3 While the Scandinavian governments redistribute a lot of money, the governments are less corrupt and less bureaucratic than in many other countries (e.g. it takes less than 5 minutes to fill out a typical annual income tax assessment form in Sweden)

D

[Rafe Champion]

A fourth positive factor that Pete did not mention was the dominant religion that underpinned (or used to underpin) a strong work ethic. If that is slipping then the Scandanavian nations may be approaching a tipping point with the dilution of racial and religious homogeneity. The use of tax evasion to mitigate the impact of taxation suggests that their moral capital may be running down.