Scandinavian Economic Prosperity and Merits of the Welfare State

I was listening to the Michael Medved radio show today (He's really good, by the way.). The topic was Scandinavian family values, or rather the lack thereof. He was referring to a USA Today article that talks about how 82% of Nordic children are born to unwed mothers. Though it is somewhat shocking to think that an entire culture has embraced such a backwards mentality as to consider marriage more deliberately than bearing children, it appears to be so. A couple cited in the article is expecting a baby in May but they've decided to put off marriage until they're sure they're right for each other. Say what? Aside from the differences in religious and social attitudes in Scandinavia, there appears to be an economic explanation for this practice.

According to a caller from Copenhagen (you gotta love internet radio), the Danish system rewards having children before you get married - government benefits are substantially higher for single mothers than they are for married parents. Putting aside that this is obviously stupid, I think it illuminates something more important about the relationship between economic policy and social attitudes. But first, it's time to put to rest the myth that the Nordic system is the pinnacle of compassionate and effective economic policy.

Scandanavia is often held to be an example of a successful welfare state, where taxes are high but benefits are high and much appreciated by a population more happy with the return on their substantial investments. On the surface, given the prosperity of these three countries, this argument seems compelling. It seems to refute the notion that the kind of economic freedom reflected in free-market capitalism (and its necessarily minimalistic welfare model) is a prerequisite for truly elevating the human condition. However, I am inclined to believe that it is the social pressures that exist in such ethnically homogenous populations that explain the success of the massively regulated and redistributive economies in Scandinavia.

The problem for free market fans like myself when considering this area of the world has always been reconciling the notion that there is no free lunch with the fact that Sweden, Norway, and Denmark have in years past enjoyed very low unemployment and a commendable general standard of living. How could such generous benefits be sustained economically? Why wouldn't the freeloaders bankrupt the system? The answers, until the last decade or so, have revolved around the fact that freeloading among Scandinavians was socially unacceptable. The folks who could work did work because the social repercussions of being a deadbeat sponging off the system were more painful than whatever agony was associated with maintaining gainful employment. Social resposibility effectively protected the system. Therefore, the security of comprehensive state-provided benefits could be enjoyed by all without fostering resentment toward a significant portion of the population for taking without contributing. Nowadays, however, the Scandinavian welfare state is in a crisis, and immigration is turning out to be the chief culprit.

I found an article on the Royal Danish Ministry of Foreign Affairs website called "Denmark - Conditions of Life - The Scandinavian Welfare Model." The author, Niels Ploug, describes the situation:

It has never been the intention either with unemployment, sickness benefits or with cash benefits that so many people should receive them or that they should receive them for so long as has been the case in recent years. The financing of the welfare state has thus become a problem, and as it has not been politically possible to increase taxes, which are already very high, the Scandinavian countries have accrued a very large national debt which on the long view could represent a threat to the welfare systems.

The reason so many are receiving benefits is the influx in the last few years of immigrants. The Scandinavian systems were designed to provide benefits to all residents. Prior to the immigration stampede, this was viable because the ratio of people contributing to the system (via high taxes) versus people extracting benefits from the system was high enough to sustain it. However, now that immigrants are moving in and realizing that they can live in relative luxury (compared to life back home) without so much as lifting a finger, the system is descending into deeper and deeper waters. Thus, the free market fan is vindicated.

Whenever income distribution is derided by classical liberals (not to be confused with the modern-day notions of liberalism), the misguidedly compassionate are quick to point to Scandinavia as an example of the realization of their vision. It is the harshness of capitalism, they argue, that creates poverty and crime. If we only adopted the redistributive policies of our Nordic friends, many of our problems would go away. This, as we can now see, is nonsense.

The fact is that there is no ethnic homogeneity in this country to protect us against freeloaders. Our society is so anonymous that it is entirely possible to remain unemployed and receive unemployment and welfare benefits without any "neighbors" ever knowing - especially now that food stamps are giving way to benefit cards that are often indistinguishable from debit and credit cards. So there are no real social incentives to be productive. We can see how a relatively small population of immigrants with no ethnic connection or feeling of social responsibility are bankrupting the Scandinavian system. Imagine implementing that system here. It would make the inane US social security system look like the height of economic acumen. And, beyond simple economics, as in the case of single mothers in Nordic countries, there are significant social ramifications to such systems.

As the caller from Denmark pointed out, there's a definite connection between the terms of the provision of benefits and the behavior of the general public. It simply makes sense economically to have a child before you get married. According the Ploug article, about two-thirds of single mothers in Sweden receive housing allowances, which means that available benefits are being taken advantage of in a big way. And why not? If you and your partner are blissfully in love and want to have a child, you'll recieve significantly more income from the state if you do so while unmarried. Could it be that much of the rationalization for this practice (liberal attitudes about the sanctity of marriage, etc.) is a smoke-screen for the fact that people will often do what makes the most sense economically? This has certainly been the case in the US.

When Welfare Reform was passed in 1996 limiting the amount of time benefits could be received, the US saw a gradual reduction in the number of people on the welfare rolls. When there was no economic incentive to get to work, many welfare recipients were content with limiting their exertions to walking to the mailbox every month to collect a check from Uncle Sam. But when the money ran out, necessity forced them into the workplace. So, when we look at Scandinavia, we should not see a shining example of how things ought to be. We should see the massive impact that economic policies have on the prosperity of nations and on the value systems embraced by the populations therein. It is, quite simply, an axiom that large-scale income redistribution inevitably leads to a decline in fiscal health. What is also becoming more and more clear, however, is that attitudes regarding employment, family life, and the relationship between the rich and poor are disproportionally influenced by economic policies in the welfare state. This is an object lesson in the concept of unintended consequences.

Social attitudes should be shaped by the public's rational pursuit of the good life. But when economic policies place arbitrary hurdles in the way of practical courses of action, impractical and often irrational options become the paths of least resistance. Over time, they become socially acceptable simply by virtue of being well worn. The problem is that, eventually, these paths place the good life entirely out of reach. As far as I'm concerned, it's better to let necessity continue to be the mother of invention. What do you want to bet she's married?