Why is it that some ideas capture the popular imagination and others die on the vine? A lot has to do with timing, getting noticed by opinion leaders, having a pithy turn of phrase. Yet I’ve seen articles and books that (at least to me) make fundamentally important observations and go nowhere, and others which seemed by comparison lightweight, get a great deal of attention.
Now the object lesson isn’t in the earthshaking category, yet it’s sufficiently interesting and instructive to warrant more attention than it appears to have gotten.
Robert Kuttner wrote an article for Foreign Affairs (subscription required) on the Danish economic model. The summary:
Denmark has forged a social and economic model that couples the best of the free market with the best of the welfare state, transcending tradeoffs between dynamism and security, efficiency and equality. Other countries may not be able to simply copy the Danish model of social democracy, but it nonetheless offers important lessons for governments confronting the dilemmas of globalization.
Given that we have Larry Summers, Martin Wolf, and plenty of others regularly hand-wringing about the growing backlash against free trade, a country, particularly a little country that of necessity has to trade, has managed to reach not merely workable, but successful and robust mix of safety nets and market mechanisms is noteworthy, precisely because it flies in the face of the popular prejudice that you have to have one or the other. Conventional wisdom holds that you have either lots of social welfare and sclerotic, rigid economies, or you have laissez faire capitalism which (allegedly) produces higher growth rates, although it increasingly appears that the main beneficiaries are those at the top, and the average guy gets left behind, sometimes in a dustheap.
But look at what we get in Denmark. According to Kuttner, trade unions call on industry to do more outsourcing! Mirable dictu! That alone should stir interest.
Yes, the piece was deemed interesting enough to have run in Foreign Affairs, so presumably some serious policy wonks took note. But if the level of comment in blogland is any indicator, it appears to have been largely ignored by the Serious Economist cohort. Dani Rodrick gave it a very nice writeup last week, but a quick search shows that it went nowhere.
And this is an article that appeared in the March/April issue, mind you.
So what’s afoot? I can make a few quick guesses:
1. Kuttner works as a journalist. Those outside the academy are not held in high esteem.
2. That name “flexicurity” stinks.
3. Recall the Swedish miracle? I wonder if the fact that Sweden eventually fizzled makes the experts loath to get on any Scandinavian bandwagons.
4. As discussed below, even if you accept that the Danish model can’t be readily exported, it nevertheless has some uncomfortable implications for the US.
Let’s get to the basics according to Kuttner:
…..the Danes are passionate free traders. They score well in the ratings constructed by pro-market organizations. The World Economic Forum’s Global Competitiveness Index ranks Denmark third, just behind the United States and Switzerland. Denmark’s financial markets are clean and transparent, its barriers to imports minimal, its labor markets the most flexible in Europe, its multinational corporations dynamic and largely unmolested by industrial policies, and its unemployment rate of 2.8 percent the second lowest in the OECD (the Organization for Economic Cooperation and Development).
On the other hand, Denmark spends about 50 percent of its GDP on public outlays and has the world’s second-highest tax rate, after Sweden; strong trade unions; and one of the world’s most equal income distributions. For the half of GDP that they pay in taxes, the Danes get not just universal health insurance but also generous child-care and family-leave arrangements, unemployment compensation that typically covers around 95 percent of lost wages, free higher education, secure pensions in old age, and the world’s most creative system of worker retraining.
Aside: would you mind paying that much in taxes if you got all those bennies, plus clean streets and nice public transportation? (Note I am unaware of what individuals pay in taxes versus corporations, but one has to assume the effective rate is pretty high). And remember, since the income distribution is so even, it’s not like some people are paying disproportionately for public services.
Kuttner gives us his caveats:
Yet Denmark’s social compact is the result of a century of political conflict and accommodation that produced a consensual style of problem solving that is uniquely Danish. It cannot be understood merely as a technical policy fix to be swallowed whole in a different cultural or political context. Those who would learn from Denmark must first appreciate that social models have to grow in their own political soil.
Danish “flexicurity” means no labor rigidity. Like the US, you have employment at will; the only restriction on firing workers is that you give them advance notice. The key elements:
[F]ull employment; strong unions recognized as social partners; fairly equal wages among different sectors, so that a shift from manufacturing to service-sector work does not typically entail a pay cut; a comprehensive income floor; and a set of labor-market programs that spend an astonishing 4.5 percent of Danish GDP on initiatives such as transitional unemployment assistance, wage subsidies, and highly customized retraining.
As Rodrik notes:
In the U.S. by contrast, “spending on all forms of government labor-market subsidies — of which meager and strictly time-limited unemployment compensation makes up the most part — is about 0.3 percent of GDP.
What Kuttner stresses, and this is hard for Americans to swallow, are two elements:
1. The large degree of government intervention, even if it is to promote better functioning labor markets and more economic efficiency
2. The commitment to economic equality
And there are not obvious reinforcements between 1. and 2.
As for 1, the US has (unfortunately) come to associate large scale government programs with wealth transfer (as in the New Deal and Great Society programs) or (occasionally) showcases that are assumed to produce useful side benefits (NASA, the national labs such as Sandia, the national park system). Somehow most people don’t include our massive defense apparatus on this list.
Yet we tend to forget our own government support of business (the official kind, not the pork or regulatory capture variety), such as the federal funding, particularly by the National Institutes of Health, of drug research (estimates range from 40% to 55% of total outlays). Japan in its heyday benefited from the guidance of the Ministry of Trade and Industry. Australia has its Commonwealth Scientific and Industrial Research Organization, a highly government funded applied science think tank focused on industries deemed economically important.
But the Anglo-Saxon countries don’t have much in the way of models for buffering labor market dislocation. We tend to see it as welfare, but that line of thinking is fatally flawed.
Consider: as societies become more advanced, economic roles become more specialized. Everyone is a hunter-gatherer in a primitive society. In a pre-industrial society, you will see specialization (farmers versus tailors versus smiths), but these economies features little or no growth, and everyone’s fate tended to rise and fall together, depending on the vagaries of weather, wars, and pestilence. There wasn’t a scenario under which the smith would make a killing and the rest of the village would go begging.
Industrialization brought growth but also greatly increased uncertainty. As Adam Smith pointed out, even greater labor specialization becomes the norm. And that has increased over time not just in factories but in all walks of life. 100 years ago, a doctor was a doctor was a doctor. No more. You see it even in economics: trade economists versus macroeconomists versus financial markets specialists. Yes, they are often familiar with the work in other areas (teaching will force that on them), but they tend to publish more narrowly.
But if society demands increasingly specialized skills, and these skills in turn require the investment of time (education, considerable on the job training, or both) that creates labor market inefficiencies due to skill imbalances as demand and technologies change. This is a drag I don’t see well recognized in conventional theories. It seems to be assumed that when trade or technological advances lead to certain industries, like buggy whips, to die off, labor and capital will automatically adjust. It isn’t so simple and no where near so frictionless.
We thus have the highly visible problem of individuals suffering job losses, which can lead to long term un and under-employment, and/or not finding work only at considerably lower pay. That tends to be treated as a Darwinian outcome in the US, and we miss the fact that many of the people really could be redeployed in other fields if they had real training, not the half-hearted variety on offer here. Too often, the proposals to retrain workers to soften the blow of globalization sound more like a ruse to placate voters than serious policy.
Now of course, that view, as far as America is concerned, has some big shortcomings. First is the uneven and often substandard public education. It’s hard to retrain people if they lack an adequate foundation. Second is labor mobility. As far as I can tell, you can drive from one end of Denmark to another in just over five hours. Thus if one had to move to find work, it would not be as wrenching as in the US (although changing communities is never easy).
But Denmark’s biggest secret weapon is its even income distribution. That makes no only makes labor highly fungible, but is also facilitates people taking the jobs that suit them best (to the extent they have choices) rather than basing their decisions primarily or significantly on the size of their paychecks.
One thing that has quietly distressed me is how much US talent has been sucked up by Wall Street. I doubt that having a good bit of our top mathematical talent work on making better derivative models is the best use of their skills as far as society as a whole is concerned (and they don’t even appear to have been hugely successful at that). A high proportion of the best and the brightest of Ivy League schools have also gone into finance; in earlier generations, they would have gone into a much broader range of occupations. Would Dean Richardson, the top veterinary surgeon who attempted to save the racehorse Barbaro, ever have gone that route had he graduated from Dartmouth in the 1980s? (Richardson was class of ’74). Highly doubtful. Multiply Richardson by 10,000, maybe even 100,000. And that’s just counting the elite schools. The same pattern holds at middlling to good but less celebrated schools (and of course, the other sad fact is America is due to the vagaries of primary and secondary education, plenty of smart, hardworking people don’t have a shot at the best schools. Even in my very limited personal sample, I’ve seen way too many examples).
Consider further: in societies with more even income distribution, you can have higher caliber public servants (is the problem with government the institutions per se, or the difficulty in getting good people in the rank and file?) and teachers. And within organizations, people may be less resistant to change if the worst possible outcome, job loss, really isn’t so terrible.
Yet economic competitiveness seems to have become inextricably enmeshed with our notions of the American Dream. It once meant that poor immigrants could come here, better themselves, and have a shot at middle class life. And even if they did not attain it, if their children applied themselves, almost certainly would.
But the American Dream seems to have morphed into something different. It no longer seems to stand for “if you work hard and play by the rules, you can have a comfortable and productive life.” It feels as if it has become bound up with ever-increasing consumption, no matter what your economic cohort. Yet that new version of the dream now appears to be accessible only to those in the top echelons. So the fact of stagnant incomes for the bulk of the population has been exacerbated by the gap between the lifestyle aspirations pushed in media and the life most people lead.
And per the Danish example, the hidden costs of income inequality may be far higher than anyone wants to admit. To me, that it the inconvenient truth of Kuttner’s piece which is leading it to be less popular than it deserves to be.