Must America become more like Scandinavia? A long-read Q&A with Stan Veuger

During the Democratic presidential campaign. Hillary Clinton noted that “we are not Denmark” — a nation the size of Maryland with the population of Atlanta, nearly 90 percent of Danish descent. This was in response to a Bernie Sanders remark: “I think we should look to countries like Denmark, like Sweden and Norway, and learn from what they have accomplished for their working people.”

Indeed, many on the left seem to think that moving toward social democracy is the natural progression of modern advanced economies. They want to expand family leave policies, install universal preschool, dramatically raise taxes to reduce high-end inequality.

For a different perspective, I spoke with my AEI colleague Stan Veuger about all this. Here is an edited and condensed version of our conversation, which you can listen at in full over on my Ricochet podcast.

James Pethokoukis: What I wanted to talk about today is the social safety net in the modern economy. One of the candidates – Hillary Clinton – has a lot of proposals out to expand what government does as far as a safety net for working people. From The Economist:

America is an extraordinary outlier in terms of the safety net it provides for family leave. The average in the OECD family is 54 weeks, and as you know we provide nothing. The percentage of GDP that makes up total spending on benefits at 1.6% is well below the OECD mean, and a third of that comes in the form of tax breaks. Not much support to families who pay middle income tax in the first place. Mrs. Clinton, it would seem, intends to fix this. She has named as chief economist Heather Boushey from the left leaning Washington Center for Equitable Growth; who has made inequality in the labor market her focus of research. Mrs. Boushey  – Hillary Clinton’s economic advisor – wants the American government to step into workplaces and homes that it has hitherto chosen to avoid. In a book, she recommends reinforcing America’s safety net to make it more like those in Europe, grant workers more paid time to care for new babies or ailing relatives, who allow greater flexibility in working time, and provide greater support for the education of preschool children. This all sounds like a boon for hard pressed families and children, but is the government really needed to apply them?

So does the government need to supply all those things to American families?

Stan Veuger: I don’t necessarily think so. There’s a lot of items that families and households and parents use and consume ranging from food to entertainment to clothing. I think that the typical way that households acquire those things is by spending their own money on those things. And it’s not obvious to me why you’d want to have a middle man – like the federal government – to step in and take taxpayer money and recycle it and turn maternity leave.

Now of course some of these programs that Hillary has proposed are not actually meant to be government programs. There’s a reasonable amount of things that she wants to do that mandates employers. Which is in a sense clever, because people don’t see in their tax statements that their paying for these mandates. But the costs of such mandates are passed on to employees, to consumers, and to shareholders. So that’s why I think in a number of cases, these responsibilities – which you for some reason keep referring to as a safety net – are done through the private sector, not through the government directly.

So you’re questioning whether this is a solution in search of a problem. That we don’t have these stressed families who would like to take some paid leave to deal with a new baby. That we need a lot more of this flexibility in our workforce. That not only would it make happier, more contented people, that it actually might draw more women into the workforce, therefore increasing economic growth.

I think that Ms. Boushey and Hillary Clinton wouldn’t just portray this as sort of a hand out for middle class, for working class families. They’ll say you know what this is actually good for everybody, because it will boost the economy. So it shows you what’s at the core of the issue. It’s about redistribution. It’s not about preparing society for a new economy. That’s really the heart of the issue. You can dress it up however you want, but it still comes down to redistribution.

So this is the Democrat’s version of pro-growth policy. Oh, and by the way, they seem to be doing this in all these other countries. So what’s wrong with us?

So obviously if it’s as beneficial for both worker and firm as Democrats seem to argue, then surely you would see many contracts between firms and workers featuring paid leave, paid maternity leave. You do see these in some cases, but it’s certainly not omnipresent. So it seems unlikely that the underlying logic as they portray it.

The second – I think more important issue – is that mandates that benefit certain workers, or require workers to provide certain workers benefits, make those classes of workers less attractive to employers. Typical economic theory and maternity studies actually show women getting paid less and getting hired less than men. Larry Summers has wrote one of the seminal papers on this, that when you mandate certain benefits, the classes of workers that receive those benefits are more expensive, and as consequence they’ll be paid less and hired less frequently.

If this is being passed along to the worker, why would they be hired less? If they’re sort of paying for it wouldn’t there be –

Only part of it is passed onto the worker. Part of it is passed on to the worker, part of it is passed on to consumers, part of it is passed on to other workers, part of it is passed on to the owners of the firm.

Obviously you’re right, if pass through was complete, you would see no employment effect. As long as it is incomplete, you see these employment effects.

Back to my point, so you see these are a range of issues. After the implementation of the Americans with Disabilities Act, you see that employment of people with disabilities goes down. You know, the logic is pretty straightforward; you make certain types of workers more expensive to hire, you hire fewer of them. Supply and demand.

What are the advocates missing?

I think what they struggle to see is that there are alternatives to these federal government mandates. So you could have setup along the lines of health savings accounts, for spells of unemployment, or time spent taking care of family members, for maternity leave, paternity leave. You can set these things up in ways that are more flexible to you. That allow people to control their own resources, to set their own priorities. I’m certainly not sure why the Clinton camp would not like solutions like that. But I’d certainly imagine that what appeals to them – in government programs, and in employer mandates – is that it redistributes resources in ways that are attractive. Of course you can do that directly. But they’ve come to the conclusion that this a politically more palatable way to get their redistribution goals in action.

Much of this could be done through mandates that, as you said, hide the cost. Much like how politicians would rather do something with the minimum wage, which again seems costless to everyone but obviously there is a cost. 

Yeah that’s right.

I’ve been reading  The Nordic Theory of Everything: In Search of A Better Life, and the author comes to America, and she is just appalled at our lack of social insurance. 

For people to support a Nordic or Scandinavian approach is not an act of altruism but of self-promotion. It is also the future. In an age when more and more people are working as entrepreneurs or on short term projects, and when global competition is requiring all citizens to be better prepared to handle economic turbulence, every nation needs to ensure that its peoples have the education, healthcare, and other support structures they need to take risks. So that businesses can build a better future for themselves, and for their country. It’s simply a matter of keeping up with the times.

No one wants to live in a society that doesn’t support individual liberty, entrepreneurship and open markets. But the truth is that free market capitalism and universal social policies go well together. This isn’t about big government, it’s about smart governing.

They say these Nordic countries seem to work. Why not just do that, rather than try and come up with this new scheme that you just outlined?

Well, there’s a range of things that you can say about this. Anu Partanen for some reason decided to move from this Valhalla you are describing to America, where she still lives with her family.

Well, if she was in Valhalla she would be dead, so I’m not sure if that’s where we’re going. More of like an Asgard.

Well I guess that’s where the gods live, I was thinking of more a heaven. I was trying to use a vivid metaphor, after you described moving from using social insurance to safety net because you like vivid metaphors. I will not attempt to do so again.

You are originally from a country much closer to Scandinavia than I am, so I’ll refer to you –

On Nordic mythology. Well, I appreciate that.

There’s a range of things to be said. First of all, Finland, Sweden, Norway, Denmark, the Netherlands – I think are the countries people have in mind when they speak of those Nordic models – have all been prosperous for some time now. I think people are conflating their wealth with their policies, in strategic ways. I don’t think anyone believes that it is programs from the 1970s that have led to the prosperity of Northern Europe.

If not causal, they seem compatible.

They do seem compatible, even though all these programs have been reformed in certain ways. The countries are smaller than you would think. There are scale advantages too, there are disadvantages to scale of certain things. For example, it is easier to run a school system at a sort of local level than at a continental level like in the United States. It is easier to redistribute more, with stronger ties between people. It is easier to produce a relatively flat after tax income distribution when the pre-income tax distribution is flatter, which I think is the case in these countries. So there are a number of important differences here.

I agree with you that in these countries, these programs have seen compatible with prosperity. But in the Netherlands there’s a lot of oil, in Norway there’s gas. This is not a randomly selected group of countries. They are five of the wealthiest countries in the world.  They’re relatively homogeneous, they have stable politics, they do not have a tradition of ethnic groups or racial groups that have long been disadvantaged. So that makes a lot of these programs more feasible and more affordable too.

All these arguments are partial at best. There’s a scale of things you can do. The Netherlands does not have that many government run schools, it’s 70% privately run. Different countries have different disabilities insurance programs, different countries have different unemployment insurance programs, different countries have you know, more productive public sectors.

I think it’s unlikely that the city of Detroit, or the city of Chicago would be able to implement certain training and unemployment as effectively as Helsinki or Amsterdam. You know, I think you have to be realistic about the ambitions you may have at different places and at different scale. I think that people are not always doing this when they talk of Finish, or Danish, or Swedish programs.

Another point Partanen makes is it really should be the goal of policy to get women out of the house, into the workforce. Does that seem logical? 

Well, I don’t think the goal is to get as many workers as possible. The goal is to make people happy. Some people will being willing to say that we’ll have one person in this household work, not the other one.

It’s also not true that these countries all have higher women participation rates. The Netherlands for example is well below the United States. In the end, a lot of these things are downstream from culture, in a way that people who believe in the unassailable power of these programs do not want to recognize.

Well cultures can change.

For sure, and that’s certainly the goal of many of these programs. What does seem true pretty consistently, significantly higher tax rates discincentivize work, more expansive anti-poverty or welfare programs disincentivize   work, and if your goal is to stimulate economic growth, those are not the directions you should go into. It’s clever to point to Sweden, Denmark, Netherlands, but those are not countries that are wealthier than the United States. They may have an income distribution that the Clinton campaign likes better.

Well maybe we’re 25% richer, but they could be 25% happier.

Maybe not, but that was not your argument a few questions ago. Which is fine, but then we’re arriving at a very different set of underlying motivations for pushing these programs. You know, these questions of happiness, do people want more leisure, do people want more redistribution, you vote on that stuff. I don’t think those kinds of changes are those kind of economic growth motivations that you – perhaps unfairly – said were driving these decision making of Democrats on these issues.

The other point she makes is a freedom argument, but different than you would hear on the American conservative right wing. Under the American system with a more minimal social insurance system, we are more dependent on each other. That all limits your freedom. Why should a child have to worry about what his parent thinks about what they should major in in college? When you’re getting a free education, you can make a choice that’s best for you. So it’s a freedom agenda. By just having it be a transfer from the state, that frees you from all those other obligations.

 So it’s really an argument against any of these mediating institutions between family and the state — which a lot of people on the right think is a horrible idea. 

I think that’s a fundamental difference that she has with a lot of American conservatives. Her idea is that if you pay 80% taxes but the government brings you everything you need, then you’re fully free because you live in a world without scarcity. I guess it’s sort of an extreme version of freedom from want.

I am not sure that everyone wants exactly the same thing, I don’t think that’s true even. And I don’t think it’s good to completely free people from any and all responsibilities. To shield people entirely from most of the consequences of their actions, I think it induces bad behavior. I just don’t think it guarantees what I guess she has in mind. That other people do everything for you, and you yourself can hunt in the morning, fish in the afternoon, rear cattle in the evening, and be an art critic after dinner. I don’t think that’s the obvious outcome she has in mind. I don’t know why she thinks that’s the way it is. But perhaps you can tell me more about that.

I think she thinks it works, because she’s seen it work. She sees – I guess in her opinion – how much less harried her friends back in Finland are versus her friends in Manhattan ,and thinks “There’s no reason to have that stress. I have seen the future. It’s Scandinavia. It works.”  And apparently the Democratic Party to a greater degree agrees with that. That I’m more likely to start a business if I don’t have to worry about not having health insurance for the next two years. If we want all that creative destruction, don’t we need a stronger, more expansive social insurance/safety net to join with that competitive capitalism?

Now we’re back to the original question, that somehow this will incentivize growth and entrepreneurship. The evidence for that strikes me as bizarrely weak. I know that you are personally a very satisfied user of Nokia phone, I have moved on from that, most other people have as well. It’s just not the case that Scandinavian countries are necessarily hotbeds of innovation and entrepreneurship.

The comparisons she is drawing between Manhattan and the outskirts of Helsinki, I think, are a little misleading. If you don’t want to have a harried New York City lifestyle, you shouldn’t live in Manhattan. There are place in the US with a different pace of life, and people should be free to choose the option they prefer. If that’s not the option that she prefers, than she should move. I don’t understand the ambition to make everything the same.

Would you force people to save more? What would you do for people who just don’t make very much and are lucky they can save anything? I guess there’s two questions there — would you mandate it, and what would you do with those who just can’t spare the dollars.

Well, so would you mandate it, not necessarily. If you don’t want to save in case of unemployment, than you would take a big income hit if you do end up unemployed. Those are tradeoffs people can make. If you’re less worried about big income fluctuations, then you don’t have to save as much for those tough times.

Are you confident for people to make those decisions?

Well no, but you can nudge them a little bit. You can give them tax preferred savings vehicles, you can do things like 401ks, although I recognize that’s not the case throughout the income distribution. Once you give people obvious ways to do this saving, I think it becomes more attractive and people will do it. But I do think that there is – much like the Finnish ambitions would require – a little bit of a culture shift. In this case I think it’s towards taking responsibility for your own life, and I think that’s a better shift.

A different way in which you could do it is for things like unemployment insurance that produce very big income shifts, where you put money in some sort of account and you draw down the balance if you become unemployed. Maybe if you become poor early on in your career, the government could provide the money and you could pay it back later.

There’s different ways that you could design it. Ideally you would roll this out in a few states and see how it works. Experiment with it a little bit. The good thing is that it would help people build assets outside their own home, which you know is very rare.

But of course there are problems to be solved. As you were saying, there are people who will say “well I don’t have money for these saving vehicles.” Now, of course no matter what system, someone’s going to have to pay for unemployment benefits, or for maternity leaves, or for whatever.

There is no money tree.

Right, there is no money tree. People do it themselves or other people pay for them. So, if you think this is important enough you could transfer money to lower income families, and they could use that money to save.

Whoa, whoa, whoa.

Right, so it shows you what’s at the core of the issue. It’s about redistribution. It’s not about preparing society for a new economy. That’s really the heart of the issue. You can dress it up however you want, but it still comes down to redistribution.

How you would design that system?

You could give them tax credits for doing these things, you could top it off, you could give them 25% bonuses. I’m pretty flexible when it comes to the details of my all encapsulating policy, as long as the big picture gets implemented.

The great people cannot get tied down in minutia. You have charted the course, and now it’s up to us to get there.