TCS Daily


Social Model Myths

By Hans H.J. Labohm - March 30, 2006 12:00 AM

Earlier I wrote about a report on the Celtic Tiger published by WorkForAll, a young, independent free market think tank, based in Leuven (Belgium), the town which is also home to the Ludwig von Mises Institute. Recently WorkForAll came out with a new report by Martin De Vlieghere, Eric Verhulst, and Paul Vreymans on Europe's ailing social model. The message? Dancing on the Titanic!

The authors argue that the future of Europe's generous welfare state model is at stake. It is not capable of coping with the challenges of globalization. While the world's economy is booming at an average rate of over 4 percent, Europe is stagnating at just 1.5 percent. But even in the absence of those challenges, it is likely to collapse under the combined weight of its massive public debt and its hidden liabilities, as a result of Europe's pay-as-you-go public pension schemes.


Unfunded pension liabilities now average some 285 percent of Europe's GDP, more than 4 times the officially published public debt figures. Total public liabilities are causing runaway debt service. Referring to a study by Richard Disney, the authors point out that if social policies are kept unchanged, tax hikes by as much as 5 to 15 percentage points will be necessary over the next couple of decades, only to avoid the indebtedness from increasing any further. They fear that this will kill economic growth completely.

The experience over the past decades has proved that Keynesian expansionary policies, both budgetary and monetary ones, have failed. The only obvious effects have been asset inflation and speculative bubbles. As an alternative the authors advocate the strengthening of the supply side of the economy and the reduction of taxes. Referring to analyses by the American economist James Gwartney, they emphasize the close relationship between the tax burden and economic growth. The higher the level of taxation, the lower the growth rate, since high taxes have a negative impact on incentives.


Against this background it is no surprise that they regard Ireland as a role model for Europe. The Irish economy has been booming at an annual growth rate of over 5.6 percent for over 20 years now. In barely 18 years Ireland jumped from the 22nd to the 4th ranking position in OECD's pecking order. At 33 percent, the Irish overall tax burden is the most moderate in Europe. Ireland also has a unique fair-flat-tax structure, which evenly spreads the weight of the tax burden over profits, labor and consumption. This unique tax structure is key to the Irish success. Contrary to the rest of Europe's incentive-undermining tax structure, the Irish tax model provides positive stimuli to participation, saving, investment and enterprise.

What about the Scandinavian model(s)? Despite the overwhelming success of the Irish alternative, supporters of a sizeable role of the state in the economy continue to plead in favor of the Scandinavian model. But, as the authors argue, Scandinavian policies have proved to be particularly inefficient. Scandinavia has gone through a long period of steady decline with poor growth and low job creation. In 1970, Sweden's level of prosperity was one quarter above Belgium's. By 2003 Sweden's position in the prosperity index had fallen from number 5 to 14, two places behind Belgium. According to OECD figures, Denmark was the third most prosperous economy in the world in 1970, immediately behind Switzerland and the United States. In 2003, Denmark was seventh. Finland did badly as well. From 1989 to 2003, while Ireland rose from 21st to fourth place, Finland fell from ninth to 15th place. Together with Italy, the Scandinavian countries are the worst performing economies in the entire European Union.

Rather than taking them as an example, Europe's politicians should shun the Scandinavian big-government recipes. If there is anything to be learnt from the Scandinavian experience it is that Scandinavia succeeds in making a more efficient use of public resources, through investment and innovation. Nevertheless even their strict restrictive unemployment policies will never result in higher growth as long as they stick to big spending policies and oversized governments.

All in all, the new WorkForAll report offers a clear and forceful message. Those who have still confidence in big government will undoubtedly retort that not all government expenditure is waste and that besides economic growth, some degree of income equality is also a valuable objective in itself, which can only be achieved by a sizeable amount of government intervention. But then, of course, it raises the question whether the present European welfare state is sustainable. More likely than not, this is not the case. The combined burden of its public debt and (hidden) pension liabilities seems to become its Achilles heel.

Will Europe be able to act in time in order to extricate itself from its quandary? Witnessing the excessive public outcry in France against the proposed tiny little step to liberalize the labor market, the answer is still "no", alas.

The author is a TCS contributing writer.

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8 Comments

A Time for reflection
One would assume that the socialists of Europe aren't blind to the facts and would take steps to correct the polcieis that have reduced the standards of living and places them in a handicapped status compared to their global competitors. But it is doubtful that true believers will takje a fresh view if it means departing the faith so Europe appears content to spiral ever downward economically, politically, and militarily until it achieves the same status as Mexico enjoys on the world stage.

On the other hand Americans can see our future enacted in Europe. If free spending politicans creating immortal social spending blackholes continue their reckless expansion an economic collpse is inevitable just as Weimar Germany eventually collapsed or as Argentina more recently has collapsed.

Social Models of socialist (communist?) Europe
Apparently, Europe has learned the lessons the East-bloc provided with their totalitarian socialist economy.
Because they still are fond of big government and high taxes. Sure the gap between poor and rich is much smaller, but then the incomes for comparison are also very low.
So, in the end, take away from the 'haves' and give it to the 'not haves' and then take away the incentive to produce anything, or even be productive in a job, and you have the formula for disaster.
The governments know that, so they jumped into the EU-boat, hoping the "others" will compensate for what is missing. But as it looks they all are heading for the cliff.
That's why the EU will never materialize, and Europe is heading for dark times, as their standard of living is a hollow bubble, ready to burst any moment. And then what?
With all the socialists staring at each other. Perhaps they will start blaming countries that are more open to open market systems and lower taxes as incentives?

They will certainly attempt to blame someone, and I am afraid this will destabilize Europe to a point that war might be inevitable, - the implicit reason why the EU was formed to avoid.

Gradually, one state after another will jump off the "EU" train, and hopefully only a skeleton of states (la grand nation) will remain and crash completely.

It's so clear, it is actually scary. But the media in Europe are paid off (literally by subsidies) by the states, so the truth will not be known, until it may be too late. Perhaps, satellite TV will bring alternate TV views to the European viewers.

Social Models of socialist (communist?) Europe - correction!
Of course, I meant to say:

Apparently, Europe has NOT learned the lessons the East-bloc provided with their totalitarian socialist economy.

Government is a time machine for wealth and growth
Measured in real money terms, government enables a nation to realise its future wealth and growth today by printing money, borrowing abroad and redistributing wealth from those who are best at creating it to those who are not. Nations who employ government this way portray a remarkable lack of patience. Perhaps this is why Swedes open all their Christmas presents by Christmas Eve.

Government is a time machine for wealth and growth
I didn't know the Swedes still had Christmas.
Isn't Christmas a religious celebration, which, of course, ought not be tolerated?

Cut the irony
Cut the irony.....as a European living in the US, it's one of the few things I really like about Europe; the fact that it's so secular. As a libertarian atheist, I'm all for people's right to wallow in and celebrate their own delusions, but let me tell you, THIS country (the US) is now so filled with religious crackpots, it scares me! Let me remind you that the only person who, in my mind, has ever given captalism a moral justification (yes, I'm talking about Ayn Rand), was a committed atheist.

Cut what?
I'll cut the irony, when you get off your Cool-Aid. :)

What damage have the "religious crackpots" done to the USA?
Secondly, atheism has nothing to do with economics, except in some academic institutions, who feed on their own garbage.

And then, the Swedes and EU will go down the drain, it will never "fly". Two countries most committed to the EU (Holland and France), failed by a wide margin to have their own people vote for it. Now you can imagine how the rest of the countries will be voting - if they ever dare to confront them with a vote-, especially when the goodies they received have to be paid back (taxes).

For you: the 10 commandments have worked much better than your 10,000+ laws will ever do.
So, careful with your anti-religious fanaticism.

Swedish Sex Experiments on Second-Graders
I'm a Christian classical liberal living in Sweden, and this country's lack of Christian values scares the crap out of me.

Just last year, a teacher took her class of second-graders to a government institution where several were singled out and read ******* porn stories. After the reading, the eight-year olds were questioned about how the stories made them feel, sexually. The childrens' parents were not informed of the experiment beforehand, and those who conducted the experiment confessed that they could see no moral problem with it other than failing to get parental permission. Moreover, the experimenters believed that since they were after vital knowledge that they could use in their quest to remake Swedish society in their own feminist image, the violation of the childrens' and parents' personal integrity was a small matter, comparitavely.

See Dorian, this is the kind of thing you get to be free of in a Christian country. In Sweden, moral relativism has won the day, meaning that no one is bound by common moral principles because there simply aren't any. The consequence of this is that the law sets the limits for right and wrong, and there is no law against conducting sex experiments on eight-year olds under the color of state action.

Got any eight-year olds of your own, Dorian? Best keep them out of Swedish schools.

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