European Dawn: After the Social Model by Paul Healy

European Dawn

European Dawn â&#x20AC;&#x201C; after the social model

Johnny Munkhammar

Timbro/The Stockholm Network

The Stockholm Network, The Stockholm Network is a one-stop shop for organizations seeking to work with Europe’s brightest policymakers and thinkers–a network of 130 market-oriented think tanks in Europe and further afield, that aims to foster the preconditions for a reform-minded and well-informed debate on the European welfare state. The group includes the Swedish think-tank, Timbro, Policy Exchange and Reform in London, the Institute Montaigne in Paris, the Istituto Bruno Leoni in Milan and the Centre for the New Europe in Brussels. The network arranges seminars across Europe, inviting independent academics and other experts to exchange information and ideas. It also produces publications on key public policy areas. <www.stockholm-network.org>

Copyright © Johnny Munkhammar and Timbro Publishers, 2005. <www.timbro.com> All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the publisher of this book. Cover design: Herlin Widerberg Reklambyrå AB, Stockholm Printed by Davidsons Tryckeri AB, Växjö, 2005 ISBN: 0-954-7663-5-0

Contents

Preface 7 Introduction 11 Creating resources–how it has been done 21 Western Europe has lagged behind 33 Welfare, welfare society and welfare state 39 Taxes and what they pay for 47 The welfare paradox: high taxes but low welfare 61 The public sector can’t deliver 67 Public organization is the problem, not the solution 71 Handouts instead of employment? 79 Growing welfare demand 89 Progressively fewer must provide for progressively more 93 Taxes will decrease 99 A free labour market 113 A more heterogeneous society 121 The unnecessary gap 127 What doesn’t fill the gap 131 The uprising 137 Private welfare today 141 Private funding–how? 147 More and better 159 On the right track? 165 How to reform: good examples 171 Changes today–or better still, yesterday! 177 References 179

Preface

â&#x20AC;&#x153;I suggest that he ask the French why the heck for so many years they encouraged Poles to build capitalism when as it turns out they are Communists themselves!â&#x20AC;? 1 Lech Walesa, former Polish union leader and revolutionary, advising a Polish model going to Paris to pose for an ad designed to attract the French to go to Poland. An intense debate is raging all over Western Europe. Growth is slowing, employment is falling, the number of people living off the state is increasing, and welfare services are deteriorating. Why? Who is responsible? What should be done? The blame game is in full swing. Greedy companies, neo-liberal thinkers, globalization, hyper-capitalism and a general lack of solidarity and social justice are all held responsible. Evil forces are said to be destroying a supposedly successful and morally superior European Social Model. Thus, politicians compete to support the European Social Model and they propose a plethora of political measures to save and strengthen it. Such policies include stopping the creation of a single European market in services, restrictions for foreign labour, tax harmonisation and limiting global trade. Such measures would worsen our problems. The European Social Model with its big state is not the solution to our problems; it is the problem. The forces undermining it are not a threat; they are the promise of a better future. The threat is the Model itself. It is the cause of most of our serious problems. 1. International Herald Tribune, 2005 (b).

Tony Blair spoke plainly about this in the European Parliament in June when he asked: “what type of social model is it that has 20 million unemployed in Europe, productivity rates falling behind those of USA; that is allowing more science graduates to be produced by India than by Europe; and that, on any relative index of a modern economy–skills, R&D, patents, IT, is going down not up.” 2 Since the Model is the problem, the quicker we can leave it behind, the sooner our future will again be bright. Europe is not doomed to become a museum for rich Indian tourists. We can again be modern and prosperous. But achieving that will take tough and thorough reform, with the main aim being a substantial reduction in the size of the state. The pressure of taxation in proportion to the economy more than doubled between 1950 and 1980. The state grew dramatically as a share of society–the big state was born. The same thing happened in most of the countries of Western Europe, whatever the political colour of their governments. Growth and employment have fallen since. High taxes cripple the productive forces by which all prosperity is generated. Companies move out and the entrepreneurs that could replace them are crushed under the weight of the state. Labour market regulations create dependency on the state instead of job opportunities. The big state also has progressively fewer people working and progressively more people living off the government. A few people are creating the total resources that everyone has to live on–more and more through the medium of public subsidies, benefits, projects and hirings. Healthcare is falling apart; people wait for months to have treatment. More youngsters are leaving school without basic skills. Older people are not getting the help they need to cope with everyday liv2. Blair, 2005.

ing. This is a direct consequence of the Model obstructing and prohibiting the forces of development. Free start-ups, free competition, free pricing, free funding. We chose a command economy for welfare instead of a free one. That way you get a Trabant, not a BMW. A centrally controlled, hierarchic organization can deliver neither goods nor services in the right quantity and of the right quality, resources are destroyed and long waiting lists ensue. The problems have been obvious for a long time. To them are now added powerful forces, which will increase the problems if nothing is done: an ageing population, ever-more-expensive services, international competition, an international labour market and a heterogeneous society. Some reforms are taking place. Taxes are being lowered a bit, public commitments limited, private initiatives admitted, and deregulation measures introduced. But the reforms are far too modest, and the politicians in charge are keeping quiet about the aimsâ&#x20AC;&#x201C;in fact, they often argue the opposite. This is dangerous. Consequently, citizens are not clear as to the purpose of the changes, which leaves plenty of soil for reactionary forces, populists and old-time socialists in which to prosper. Forces intent on compounding what was wrong and harmfulâ&#x20AC;&#x201C; enlarging the big state still furtherâ&#x20AC;&#x201C;can augment their influence. If so, Europe will spiral downwards, into low growth, lower wages, fewer jobs and an utter disintegration of welfare services and social security. It is time to speak up about the causes of the problems, the way out and the European dawn that awaits us after the implementation of thorough reform. This book is intended to inspire reform, to provide a clear analysis, and to stimulate an open debate. Evidence is assembled here of how the Social Model causes the problems and what reforms could take us to a prosperous Europe. 9

My heartfelt thanks to my family, friends and colleagues for interesting input material, discussions and for very useful comments on earlier drafts of my manuscript. Thanks to the Stockholm Network and Timbro for publishing this book and to their staff for professional and positive co-operation. To Linda, the best and most beautiful woman in the world, my unlimited love and gratefulness forever. And, finally, thanks to many opponents in the public debate for all the inspiration. Stockholm in September 2005 Johnny Munkhammar

Introduction

â&#x20AC;&#x153;And a glorious future is ours!â&#x20AC;? Over and over again, with more enthusiasm than accuracy, my fellow-students and I carolled forth the oft-quoted line at our high school matriculation in 1993. Many generations of new high school graduates in Sweden have sung the same words of the happy days to come and, just as we did, toasted their prospects with cheap sparkling wine. For many of them the future has lived up to expectations. But with the optimistic celebrations during those spring evenings among the medieval ruins of Visby, many people were wondering just how bright our future really would be. Several widely publicized analyses at that time had led to the conclusion that our generation would be the first in over a hundred years to be worse off than its parents. Since then, the situation has worsened substantially. Was the road to prosperity and welfare a dead end street? Or even a U-turn? For over a century, many of the countries of Europe moved rapidly towards a better future. Poor agrarian countries became modern industrialized nations with steadily rising living standards. The size of the economy kept on doubling. People were leaving poverty and the countryside behind them in favour of expanding cities. Soon the great majority were well-housed, well-fed, were taking holidays and could obtain care when they needed it. Everyone was able to work less, and production kept growing all the same. Small firms founded by inventors and entrepreneurs turned into big and leading international companies. Better output and more of it meant big earnings for businesses and this laid the foundations of steadily rising wages. Life expectancy increased, more children survived into adulthood, older people 11

received better care. But, starting in the mid-20th century, the countries of Western Europe changed direction somewhat, choosing to restrict free competition, free start-ups, private ownership and profit in a number of welfare sectors and replacing them with tax finance and central control. An increasing number of public social insurance systems led to more people living off the state. Rigid labour market regulations–and trade union privileges to dictate wages–led to fewer jobs and less security in the labour market, not more. The state grew dramatically as a proportion of society. By about 1980 the model of high taxes financing a growing number of public commitments was essentially complete. In all European countries, the pressure of taxation rose dramatically during the postwar era. In 1950, the tax pressure in the countries of Western Europe was 20–25 per cent; in 1980, it was 40–50 per cent. The basic idea was that the higher the taxes, the greater the resources for public commitments–primarily welfare services of different kinds and social security. The state took over an increasing share of society and people’s welfare was to be promoted through public management and funding. Unfortunately this turned out to be a counter-productive model: it became the problem, not the solution. The national economy, the “loaf ” which is produced year by year and can be divided up for different purposes, has been growing more and more slowly. A majority of the people depend on handouts from the state to make ends meet after they have paid their high taxes. Through the system of the big state, more and more people are being supported by fewer and fewer. And the welfare services, which the high taxes and public monopolies were meant to develop and encourage, are steadily deteriorating. Schools are decaying, medical care is inadequate, staff are burnt out and waiting lists are getting longer. A number of tragic occurrences show that things happen which are incompatible with basic human dignity. Public welfare services are insufficient even for fundamental needs. Ulla Berg, aged 61, living in 12

Stockholm, was told she had a form of cancer that is fatal unless treated promptly. But her doctor regretfully informed her: “There is no time. We don’t have the resources. You’ll have to put your name down on a long waiting list. We’ve no idea how long you’ll have to wait.” Ulla Berg describes the medical staff as trapped in a bad system: “The care chain is shot through with cynicism and hopelessness. No coordination . . . Not knowing whether or when you will get treatment is the ultimate torment ... Night and day, all you can think about is getting help to die.” 3 The origin of the model is a broad-based consensus of politicians that were in favour of the command economy solution, in the belief that centralization of all resources would be the most efficient proposition. It was decided that the greater part of welfare and security would be financed out of taxation revenue, but taxation hit the ceiling and there still isn’t enough money. The politicians opted for public ownership, operation and funding of important services, and what they got was an organization with no development potential. Resources are being destroyed. Very high taxes create dependence on taxfunded grants, which means the system is undermining itself. The taxes, which are not sufficient for the welfare desired, burden the productive forces in society and inhibit the growth of the total economy–the base on which everything depends in the end. The command economy collapsed because it was built on impossible premises. We now see the same signs of collapse in the European Social Model. The revolutionary force, which eventually took root among citizens because of the command economy’s bread queues in the Soviet Union, is present in our medical waiting lists. Reforms are taking place in Western Europe. In Germany, there is Agenda 2010, a collection of proposed reforms to reduce public spending and deregulate various markets. The French government 3. Svenska Dagbladet, 2004.

proposed changes to the pensions system, which will mean citizens having to work longer and has withdrawn proposals for shorter working hours. In the UK, Prime Minister Tony Blair won, by 316 votes in favour and 311 against, a crucial vote in the House of Commons to sanction private charges for higher education. And he has not revoked any of the important changes introduced by the Thatcher administrations between 1979 and 1991. In Italy, intensive discussions are underway concerning the pensions of the future, and in Spain the former government of José Maria Aznar introduced a number of tax cuts and other reforms. All the EU countries are working on a number of deregulatory and other measures to strengthen competitiveness under the Lisbon process.4 The basic theme of these incipient changes is the retreat of the big state, leaving civil society and the market more scope for manoeuvre. My home country Sweden went very far in creating the big state; it has the highest tax pressure in Europe. Throughout the decades, Sweden has been used as a textbook example of the welfare state, something which seems to have had an international revival in recent years too. It may be of particular interest to see what effects a, in many ways extreme version of the European Social Model, has had there. Therefore, Sweden is used as a frequent example here. In Sweden, governments of different colours have introduced reforms–reducing marginal taxation, introducing a new pensions system, allowing a certain amount of private competition in the public sector and deregulating a number of markets. The Social Democratic government, which took office in 1994, repealed only marginal aspects of the reforms introduced by the 1991–1994 non-socialist government. The national Long-Term Survey, whose main report was presented in 4. At a meeting in Lisbon in March 2000, the EU heads of government set the target of Europe becoming the world’s most competitive and dynamic knowledge-based economy by 2010, thus heralding a process of successive reforms throughout the Union.

March 2004, ended its press release, headed “Welfare–a challenge for the future”, with the sentence: “The Commission recommends that the relatively favourable period over the next few years be made an opportunity for broad political discussion of the structuring of alternative funding solutions.” 5 In his opening address, on growth, at the Social Democratic Growth Congress, Prime Minister Göran Persson emphasized that “we must be absolutely loyal to the objectives but fickle as regards the means.” 6 Many interpreted that as a sign of major policy change. At present, though, no reforms are taking place and problems are mounting. The choice of a centralized model from the outset is the main reason why the big state is the source of the problems. Some major trends in our society will now rapidly worsen the problems it causes. One of them is the fact that services are growing successively more expensive than goods. This means that we can produce more and more goods with less labour input–thanks not least to technical progress–but services are another matter. Teaching, nursing, haircutting and taxi-driving are not streamlined as much as the production of cars, medicines and mobile phones. Consequently more and more of our work is being devoted to the production of services and less and less to the production of goods, causing production of services to account for a greater proportion of total work input and the national economy. The point is that nursing, schools and care are services, growing all the time in proportion to society. Costs have steadily risen over the past 20 years, but revenue has not–hence the perpetual pressure on politicians and officials to prioritize and streamline, and hence the growth of discontent. Taxes, then, have stopped rising. When they are raised above a cer-

5. Långtidsutredningen, Press release, 2004. 6. Persson, 2004.

tain level, a ceiling is passed and revenue ceases to grow.7 Today all the indications are that the ceiling is descending–taxes will be successively reduced. This is partly because tax bases are getting more mobile, global competition is stiffening, high taxes inhibit growth, and an enlarged EU means fiercer competition. And taxes are indeed decreasing–on capital, companies, labour, etc. At the same time as taxes are insufficient and are actually going to be reduced, needs and desires for welfare are increasing. This is partly because when the rest of the economy grows and we can afford nicer food, a good holiday and smart clothes, we also want better care. But it is also because fewer babies are being born and fewer people are working, at the same time as more people are reaching old age and, under the present-day system, are destined to retire and to obtain tax-financed care. Unless these systems are changed, the western world will be heading for a “fiscal Armageddon”. We will then, according to an analysis from Standard & Poor, be faced with dramatically rising national debts equalling several times GDP. 8 Thus, taxes will decline, at the same time as welfare services are getting more expensive and demand for them is growing. The gap between existing welfare and demand for welfare is growing dramatically. The wider it gets, the greater discontent becomes. Gradually the gap is filled with private solutions, and the revolt will come when many citizens find themselves paying high taxes for inadequate wel-

7. The so-called Laffer curve provides a simplified, schematic illustration of this relationship. Different taxes have different points at which an increase leads to less revenue, the simplest example being that a very high tax on alcohol can lead to less consumption and a growth of imports, smuggling and illegal distilling, coupled with a falling-off of taxation revenue. 8. Standard & Poor, 2004. The figure comes from the analysis, while the comment was made in the Financial Times by one of the world’s leading experts on demographic issues and their effects; Richard Jackson of the Center for Strategic and International Studies in Washington DC, USA.

fare and buying private insurance for the welfare they do have. And in order to once again increase growth, letting companies grow, and raise employment–the state has to decrease in order to create space and profitability. The societies of Western Europe have also become more heterogeneous. In the 1950s, citizens in most Western European countries were more similar to each other. We watched the same TV channels, attended the same schools, did military service, read the same papers, ate the same kind of food, and were born in the country. Now, we watch hundreds of TV channels, eat food from all over the planet, study abroad, read blogs on the Internet, and an increasing share were born in other countries. Our lives, values, dreams and views are not that similar. That implies that the legitimacy of the state taking care of people’s money and lives, offering collective solutions, decreases. The regulated, collectivized and unionized labour market of the big state produces unemployment, oppresses small companies and pushes people into dependency on the state. Job protection seriously endangers job creation. That kind of regulated labour market is being challenged by globalization–companies will simply move to countries with greater labour flexibility. With everyone claiming that Western Europe needs more companies, more jobs and increased growth, deregulation of the labour market will be the way forward. Decreasing the size of the state is the way to a better future. Obstacles to private solutions should be removed and the public sector be pulled down to a basic level. Instead of the state taking charge of everyone’s welfare and security, the public sector would concentrate on those who are unable to assume this responsibility for themselves. With the public sector as a basic supply, taxes will be lower and everyone will have a good deal more money left in their pockets. The great majority of citizens who are able to assume responsibility for their own lives can do so, by financing the greater part of their own welfare services and social security. The impediments now blocking the way 17

to private start-ups, operation and finance in nursing, schools, care and higher education will be removed. A large amount of private insurance policies–signed by agreement with the employer or purchased privately–for better welfare will come into being. Reforms that take us away from the European Social Model may seem frightening, but in fact it is quite the opposite. The cause of cutbacks and problems is the model itself–the longer we cling to it, the greater our misery will be. But if we leave this model, divest ourselves of this straitjacket on both economic development and welfare, we will see an explosion of new prosperity. Insistence on welfare being financed out of taxation becomes a wall, which, on the one hand, creates high taxes, which buckle the foundations of all welfare and, on the other hand, prevent an influx of new resources for better welfare. The average American gets medical care worth more than twice as much what a Swede gets–on practically half the taxation.9 Thanks to free competition and private funding, people get the care they want and as much of it as they wish for. Care–an advanced form of service production–can of course become a dynamic sunrise industry. The present-day situation of only a small elite getting the welfare they want can be replaced by everyone having those same possibilities. Welfare will then become more a matter of individual preference. With the public sector no longer responsible for doing everything for everybody, public resources will of course be more plentiful for those who truly need them and are unable to pay for them out of their own pockets. And so the end of the big state is also the return of prosperity and better welfare. The transition to a new European Model with a smaller state and more welfare can assume various guises. The danger is that politicians will go on scratching at the surface and try to conceal what is hap9. Svenska Kommunförbundet and Landstingsförbundet (The Swedish Association of Local Authorities and Regions, SALAR), 2004

pening until the situation becomes quite untenable.10 If so, great and dramatic changes–shock therapy–may follow. The spending cuts of previous crises would seem like gentle breezes compared to the great and rapid changes, that would then occur. This risk is illustrated by nearly all the political parties of Europe huddling in a furrow of consensus on minor tinkerings with the established pattern of things. They are afraid of all those who are dependent on the big state and all the special interests. Nevertheless, reality is as it is, the need for reform is evident. And so are numerous examples from different parts of the world of successful reform. Not least in Eastern and Central Europe; they decreased even bigger states than those of the West–and did so with great success. If we let go of this sinking log, all will benefit. The road to prosperity and welfare does not have an end station. A glorious future can indeed be ours.

10. The reforms that are being introduced all over Europe are all relatively modest, and the politicians responsible have little or nothing to say about the more long-term objective. This softly, softly approach is clearly instanced by the French minister of health, who has put forward a programme aimed at achieving ”close” financial balance in health insurance by 2007. The programme includes the introduction of a charge of 1 euro for medical consultations. Not exactly a far-reaching, radical change. Financial Times, June 17th, 2004.

Creating resourcesâ&#x20AC;&#x201C;how it has been done

The creation of resources is the foundation of any prosperity and welfare. The existing resources must be used as efficiently as possible so as to give maximum welfare. A fundamental question is how we obtain the resources and what we must do to ensure that they are put to the best possible use. We start off empty-handed: resources have to be created. The proto-human that climbed out of the water onto dry land had no resources whatsoever. Reality consisted of humans and the world around them. Providing for the most basic needs of all was an unequal struggle for survival. Things remained that way, with no relevant changes, for thousands of years. Gradually, however, the situation changed and, step by step, human living conditions improved. Today more people than ever are living in better conditions than ever. Means were created to improve living conditions, more and more resources were created to cater to our needs and desires. Less and less energy needed to be devoted to basic needs and more could be devoted to free choices about shaping our lives. These opportunities for development with growing resources are the foundation of improved living conditions and welfare. Essentially, they liberate manâ&#x20AC;&#x2122;s creative powers. If today we are to be able to discuss both challenges and opportunities concerning our standard of living and our welfare, the preconditions for the creation of resources need to be identified and described, because nothing happens by itself. No individual or state automatically has anything at their disposal. Not one single penny, business enterprise, job or hospital bed comes straight from nature. Money is merely a reflection of total output; if we stopped producing, money would be worthlessâ&#x20AC;&#x201C;and more production means more 21

money. If we want the chance of a better life and welfare, we must know what creates development and what rules of conduct are needed in order for the resources created to be used to the best possible effect.11 Economics means, in fact, conservation of resources, i.e. making the best possible use of the resources available. With resources growing year by year, this means that everyone gradually gets more to use for consumption, investments and savings. At any given moment there is a limit to the amount of resources. This does not mean that resources are small, only that you can’t have everything at once. How resources are to be used is always a matter of balancing different possibilities. Year-on-year growth of society’s resources is a relatively new phenomenon in human history, the greater part of which has been characterized by static conditions, with each new generation being able to count on sitting in the same boat as its predecessors. But, starting in certain places about 500 years ago, a path began to be trodden in the direction of affluence. Growth in the majority of European countries only took off in the mid-19th century. We have now grown accustomed to a situation in which rising living standards are normal. How, then, can total resources increase? Society is a plus sum game, in which, unlike a zero sum game, everybody can be a winner. Instead of a beggar-thy-neighbour situation, everyone can improve their lot simultaneously. Consider two people, one with plenty of food but nothing to drink, the other with plenty of drink but no food. They decide, of their own accord, to conduct an exchange, with the person 11. The descriptions of the elements of economics in this chapter can be pursued in greater depth and detail in most standard works on economics and economic history, such as Klas Eklund’s Vår ekonomi, Michael Parkin’s & David King’s Economics, Steven Husted’s & Michael Melvin’s International Economics, Nathan Rosenberg’s and L.E. Birdzell Jr’s How the West Grew Rich, Mark Skousen’s The Making of Modern Economics, Lars Magnusson’s Sveriges ekonomiska historia, and William J Barber’s A History of Economic Thought.

who has a lot of food giving some of it to the other person in return for drink. Both are better off, they both have food and drink. The greater the number of people participating in exchanges like this, with more goods and services involved, the more chance there is of all of us getting more of what we want. Instead of everyone having to be good at everything and doing everything on their own, this results in our dividing the production of things. Each one does what he or she is best at, offering the results of this labour to their fellow human beings. One person is better at tilling the soil and does so, while another is better at instructing children and a third can nurse the sick. When they offer each other their goods and services, all three get food, education and medical care. Extending this over wider areas by means of trade leads to still greater subdivision of who does what and still greater availability of what is wanted. In other words, we specialise in doing what we do best. Different people, regions, countries and continents have different advantages over each other. Phenomena such as climate, natural resources, skills, traditions and previous choices help to decide where different things are best accomplished. In this exchange between people, choice is always voluntary–no one is forced to participate. Nor is anyone forced to choose a certain producer. Instead everyone can choose freely between those available. There is competition. If the farmer is not the only one of his kind–monopoly–there will be others competing with him. He must then be forever trying to improve his production, so that he can go on inducing people to choose his produce. He can find ways of producing the same thing more efficiently, so that eventually the teacher can get no less than 5 kg potatoes instead of just 3 kg for every hour’s instruction received by the farmer’s children. He can also specialise in a certain cereal, which he thinks he can produce better than his competitors can. He can reorganize the farm or invent a machine that improves his efficiency, or hire someone with special knowledge. Similarly, the teacher and the person offering medical care 23

try to get better at the things they do. And so voluntary exchange and competition lead to continuing advances, and society’s resources are put to rational use. Year by year this brings greater resources and a rising standard of living. The exchange is facilitated by a common currency. Instead of exchanging a home-made stool for a haircut–which may not be worth exactly the same amount–a means of payment can be used, so long as both parties agree on its value. In the course of history, precious stones, shells, metals and even cattle have been used as means of payment. Eventually metals were turned into coins and notes came into being as certificates of a certain quantity of gold having been deposited with a bank. These currencies were local to begin with, but their coverage has been extended to progressively greater areas. Money has no intrinsic value: metal and paper mean nothing. It merely symbolises the goods and services that can be exchanged with the aid of money. Returning to our society of two individuals, one of whom has food while the other has drink, suppose they introduce 100 cowry shells as currency and have 50 each. The one with the food can, for example, buy a small amount of drink for 15 shells, and the two of them can close a deal because they agree on the value of the shells. But if one of them loses all his food and the other all his drink–say everything falls into the sea and gets washed away–they will still have all their shells left, but what good will that do? Money is simply a mirror of total output. If output declines, the value of money will do the same. Printing money to create wealth–inflation–is a form of trickery, which has been at the root of several huge economic crises. A society in which free exchange and free competition decide how resources are used leads both to a growth of resources and to efficient use of the resources created. In order for this kind of society to run smoothly, certain basic factors are needed. Free pricing means that there are no regulations governing the price tag on a product or service. If the farmer offers me 50 kg wheat for 200 dollars but I am only 24

prepared to pay 150, we won’t trade. Perhaps I find a competitor selling wheat more cheaply, and if the farmer can’t find a customer prepared to pay more, he has to shut down. Free pricing has not always been the obvious policy. For centuries, when the secular power of the Catholic Church was at its height, the rule was for the Church to determine a “fair price”. In modern times the state has tried to fix prices by political means. Consequently we no longer have a society in which everybody wins in a plus sum game. Without free pricing, production fails to match demand. Resources are used less efficiently; they are located, not where–as consumer–they ought to be, but where a powerful third party thinks they ought to be, for various reasons. In short, the only fair price is a free price. Private ownership is another factor. It might seem fundamental that my neighbour, the Church or the state should not be entitled to confiscate my property. Protection of private property also has a vital bearing on society’s economic development. Why should I devote my time, ideas and energy to producing a commodity or service if I know I won’t be allowed to keep it? Without private ownership you can’t offer your goods and services to other people for the simple reason that you have nothing to offer them and they have nothing to offer you in return. Many suggest that people put more value on things that belong to them. Houses with beautiful porches, flowerbeds and a new veranda would probably have turned out less nicely if the owners had not been sure of still owning them tomorrow. Most people want to have a personal share of the positive results of their exertions. Historically, economic development has been seriously impeded by ownership being concentrated in the hands of the priest or the prince, with the mass of the people living on insecure, borrowed land. The dissolution of private ownership in the communist countries explains the economic collapse that eventually followed. In many countries, persistent poverty can be put down to poor ownership safeguards and, consequently, lack of motivation for improving one’s own future. 25

The pursuit of profit is a driving force of development. A person producing goods or services doesn’t just want to make ends meet, he or she also wants something left over at the end of the day. Trying to make a profit motivates the producer: “do your very best and you will be rewarded”. And so people try to make production as efficient as possible, to produce as much as possible as well as possible and at the least possible expense. In a society of free exchange and free competition, producers can only achieve profit by satisfying customer demands. If they do not, customers find alternative producers who meet their expectations. Profit can be applied to various ends. When it is used to reward someone who has done well, this inspires a wish to continue, which in turn attracts more people who are willing to invest in the activity concerned. Profit can also be used for investments to improve future output. It is an illusion to suppose that profit means that consumers pay more than they would otherwise have to do. Profit means that production grows more efficient and more money comes in, yielding lower prices. The pursuit of profit has been forbidden or circumscribed by powerful religions and ideologies with large parts of the world in their power, but there is no denying that prosperity is greatest in the places–Europe, North America, Southeast Asia, Australia–where the pursuit of profit has been allowed and encouraged. Freedom of negotiation is another pillar of economic growth in a society. Anyone can make an agreement with anyone else on any subject. If I want to buy a used car from somebody for 3,000 euro, we are free to deal. Anyone who wants to be hired by a farmer and take charge of his wheat production is free to do so, on their own terms. A teacher wishing to sign a contract with a teaching materials supplier is free to do so. The point is that in voluntary agreements the parties–no one else–decide the terms and the agreements have to be respected. Respect for freedom of contract is not as self-evident as might be supposed: both history and the present abound with in26

stances of authorities, politicians, organizations of different kinds, the media and others wanting to make stipulations concerning the content of agreements. Someone thinks the farmer should do his job in a different way, someone else that an employee should opt for a longer holiday instead of higher pay, a third person that the farmer should sell more rye instead of wheat. Often, then, you have a third party trying to influence voluntary agreements. This will probably always be the case, but the decisive thing is to what extent: the more external demands that are made, the less the parties to the agreement are at liberty to decide its substance and the fewer will be the number of agreements concluded. And the agreements, which are concluded, will differ in content from the voluntary ones. The level of activity in society then declines, output diminishes and resources grow less rapidly. For production to be possible, you must, according to the classical distinction, have both labour and capital. Capital is production resources that are not labour, such as land, buildings, machinery, skills, money and ideas. Essentials for production have varied from one period to another. In the Middle Ages the availability of land meant a great deal, the Industrial Revolution needed a large workforce but also large investments, while today we are becoming more and more dependent on human capital. The first stock exchanges in the 17th century did much for the possibilities of realising ideas through the supply of capital. A stock exchange, quite simply, is a place where someone wishing to produce something can go and meet those who are willing to invest in production. This way you stand a good chance of enticing capital into your business. The formation of banks, intermediaries of capital between savers and borrowers, was also a turning point. During the past 500 years these institutions have gradually been put in place and have spread all over the world. Merchants of cities like Venice, Genoa and Pisa were the first to defy the Churchâ&#x20AC;&#x2122;s prohibition and the prevailing order of things by going for trade and com27

merce. The Enlightenment brought the ideas that created a new image of humanity as having inviolable rights and liberties. The real growth of society’s resources began with the Industrial Revolution, which started in Great Britain. Technical innovations, like the steam engine and transport facilities like the railway, powered this development. Europe and America were industrialized, which meant heavy urbanization and rigorous living and working conditions in the rapidly expanding cities. Constant productivity increases–each individual producing more and more within the same length of time–led to a better standard of living. Sweden’s per capita GDP–the value of all goods and services produced in the country per person and year–was lower in 1868 than in present-day Gambia, life expectancy was shorter and infant mortality higher.12 In London there were fund-raising appeals to help poor people in Sweden. In 1970, by contrast, Sweden was the world’s fourth wealthiest country and its per capita GDP had more than quadrupled in a hundred years.13 Most of the European countries developed the same way, with living standards rising as a result of growing resources. For much of the 20th century, however, the command economy was widely prevalent. In large parts of the world entire nations were organized as planned economies–the Soviet Union first and foremost–but the western world was also affected. In Western Europe the principles of the command economy were to a great extent the very foundation of welfare services. The command economy meant organising society like one big factory, with everything decided centrally. Private ownership, the pursuit of profit, free competition and freedom of contract were to a very great extent abolished, the notion being that profit was 12. The Human Mortality Database, 2003. 13. According to Angus Maddison (2001) Sweden’s per capita GDP in 1868 was USD 1,660, in 1990 prices. Today it is USD 27,200 PPP (converted at purchasing power parity).

exploitation, private property created inequality and free exchange and competition did not mean total resources being put to the most rational use. Instead of voluntary exchange, the economy was to be controlled from the centre. A national authority, Gosplan, gathered information and made decisions on the basis of five-year plans for the whole of society. The first target was to transform the Soviet Union from an agrarian to an industrial society, and with the aid of the centrally controlled planned economy huge resources could be marshalled to this end. The country was rapidly industrialized and many people were impressed. The command economy was also practised in Nazi Germany, spreading to Eastern and Central Europe, China, North Korea, Vietnam and a number of African countries. In most of the western countries central planning in society was characterized by high taxes, Keynesian cyclical policy, state controls and a growing number of planning authorities for different parts of society. The dominant thesis in the 1960s and 1970s was that all countries would converge in a hybrid mixed economy.14 But following this apparently impressive basic industrialization–the targets for which could be taken from already industrialized countries- the command economy was never able to keep pace with the market economy. Central planning could never match supply and demand–people 14. Dudley Dillard’s Economic Development of the North Atlantic Community (1967) remained the principal economic history textbook for students at Uppsala University as recently as the 1990s. In it we read, for example: ”In place of classic capitalism there emerged by the last third of the twentieth century a mixed economy in which responsibility for the overall performance of the economic system became a governmental function. The market continued to operate as an allocator of resources, but the maintenance of aggregate demand to clear the market of total goods and services became the province of discretionary fiscal policy . . . The market mechanism, the mainspring of classic capitalism until World War I, has become increasingly subordinated to decisions based on the calculations of representatives of the economy as a whole. In general, this is what is meant by economic planning, an it is this trend away from laissezfaire toward economic planning which has come to prevail in most countries of the world.”

had to queue for hours to get the most basic commodities. Products manufactured in huge quantities by central command were not asked for. Because pricing was not based on citizens’ preferences, prices were either too low (and the product over-exploited) or too high (and the product virtually unobtainable). The vanishing profit motive took with it the motivation for improving goods and services. Without rights of private ownership there were few incentives for improving one’s own lot. Many economists and politicians the world over expected centralization to bring better utilization of resources, but the development proved them wrong. It was free competition, with the rivalry and creativity released by it, which led to a growth of resources. The command economy can never lead to a realization of ideas, to innovations creating a better society, because voluntary exchange and diversity are a sine qua non. In the end the whole system collapsed. The command economy was simply incompatible with reality. It was based on assumptions that were untenable and ruined the prospects of development and growth of resources. The resources created were not in demand and were poorly utilised. Today the classical prerequisites of growing prosperity are largely being reinstated in Russia and in most of the other former Soviet republics. In China, with a population of 1.3 billion, the command economy has steadily yielded ground since 1980 to free exchange, competition, profit and–now constitutionally safeguarded–private ownership. China’s economy today is 650 per cent greater than in 1980.15 The Economist dedicated its first editorial in August 2005 to “How China Runs the World Economy” 16, ranging form house prices in the west and American monetary policy to wages in Europe. Most western countries–whatever the political orientation of their governments–have abandoned Keynesianism, privatized state-owned enterprises, opened up large 15. Growth in China, India, the US and EU 1980–2002. 16. The Economist, 2005 (g).

parts of society to competition, reduced marginal taxation rates to make work more profitable, and deregulated some markets. The market and command economies did not converge. Instead the conditions that led the world away from poverty have slowly begun to be reinstated. The factors liberating the forces of prosperity have begun to be rediscovered. But in the sphere of the big state–taxes, welfare services and security systems–the command economy still prevails. Economic growth is not an abstract entity visible only in statistical tables. It is a measure of how our prospects of a good life develop. In Sweden today we can produce 16 times more than a hundred years ago, in the same number of working hours.17 In fact there are far more people working today, thanks to population growth and the entry of women into the labour market, and the average person’s working hours today are a good deal shorter. The average Swede devotes 8 per cent of life to work, a figure that is expected to go on declining.18 This may seem little, but is of course largely due to education at the start of life and retirement towards the end of it, plus public and annual holidays, working hours reductions and various kinds of absence. More output is being accomplished with less work. If we chose to work more, the output would grow even more. The amount we produce at a market price decides what our wages will be. On the OECD list of countries by per capita GDP, Sweden has fallen from fourth place in 1970 to fourteenth today. But if our growth had remained high enough for us to top the list today, the average Swedish family would now have 550 euro per month to spend–after tax.19

17. Svenska Kommunförbundet (The Swedish Association of Local Authorities, SALA), 2002. 18. Rauhut, & Malmberg, 2003. 19. Upprop för tillväxt, 2002.

The connection between a growing economy and growing welfare can be illustrated by the figure below, which shows the connection between high per capita GDP and low child mortality. The left (y) axis shows how many children per thousand born that live beyond the age of one year, and the bottom (x) axis shows per capita GDP. The figure, produced partly by the UN agency WHO, shows how, for the most recent period (1995â&#x20AC;&#x201C;1999), countries are distributed along a straight line, indicating a strong relation. Developments since 1870 can be studied on their web page. Figure 1: Relation between low child mortality and high per capita GDP 20 996 995 994 992 990

980 970 960 950 940 920 900

800 700 600 200

300

400 500 600

800 1000

2000

3000

20. World Health Chart.

5000

7000

10000

20000

30000

50000

Western Europe has lagged behind

Western Europe continued its journey towards greater prosperity in the 1950s and 1960s, but then growth started to decline. The Economist describes the rise and fall of Western European prosperity: “In the 30 years from 1945 to 1975, west European countries that had been devastated by war rebounded with astonishing speed. From 1950 to 1960, German GDP grew at an average of 7.9 per cent a year. The number of private cars in France and Germany increased 20-fold between 1950 and 1966. The spread of affluence and the rise of the consumer society became a familiar story across the western world, but growth in Western Europe was even faster than in the United States. Average income in Western Europe rose from about 40 per cent of American levels in 1950 to just over 70 per cent by 1973 ... But whereas some peripheral European economies boomed after joining, the core European economies that they sought to emulate began to stagnate . . . Average income levels, having risen to 70 per cent of America’s in the early 1970s, have been stuck there ever since and are now declining in relative terms.”21 For decades now, growth in the US has been far higher than in Europe, and American per capita GDP is now about 40 per cent higher.22 If the states of the US and the 15 countries belonging to the 21. The Economist, 2004 (f). 22. Europe cannot mimic USA and should not try to. Europe has a number of preconditions – historical, cultural and political – that are different. But USA is a leading country when it comes to generating wealth and several comparisons may be relevant and interesting in this respect. International comparisons provide more opportunities for learning from successes and avoiding failures.

EU until May 1st 2004–which are still the ones with the highest GDP per capita–are listed together by per capita GDP, the result is that presented below. In nearly all the states of the US, the average citizen is wealthier than in 14 of these European countries. Only Luxembourg, with special conditions, comes high on the list. And since GDP per capita in the ten new EU countries is lower, the picture would be the same. Compared with Sweden the average American has 3.5 times higher consumption of cars, Americans spend 2,100 dollars a year on eating out while Swedes spend only the equivalent of 960 dollars, and an American pre-school teacher earns 40,000 dollars a year as against 22,000 for the Swedish equivalent. And the Swedes are not poorest in Europe, on the contrary, GDP per capita is over the EU-25 average.23 Behind the GDP figures showing wealth and growth, there are concrete realities. GDP is not a perfect way to measure living standards and well-being, but when one looks at other indicators, they confirm the picture from the GDP statistics. Below is a table showing ownership of domestic appliances–an indicator related to living standards. Of course items are not everything, but it is one way to measure. And if people can afford this, they can probably afford a lot of other things as well. This reflects, again, the results of the different growth rates between the US and Western Europe in recent decades. The point is neither to say that the US is a perfect country or that this living standard is unique to the US, it is just to show what growth means in everyday life–regardless of what country it is in. Theory, facts and history concerning how wealth is created, the prerequisites of resource growth, are crucial to the analysis of presentday Western Europe. Problems and shortcomings today, accentuated by the passage of time, can often be attributed to one of these basic issues. When welfare supply and demand do not meet, when re23. Bergström & Gidehag, 2003.

sources are lacking, when new ideas are not put into production, when there is a shortage in one place and surplus in another, the reason is often to be found in these basic factors. Possible escapes from harmful structures, which frustrate their own aims of better welfare, become more obvious once the foundations of prosperity are clearly envisaged. The command economy solution adopted for welfare explains a great many of the mounting problems and also shows the way out.

Figure 2: per capita GDP in the EU 15 (up to and including April 2004) and the states of the US24

24. Bergstrรถm & Gidehag, 2004.

25. Ibid., 2004. (From Cox & Alm, 1999.)

83 63 12.4 776 57

Phones per 100 people Cell phones per 1,000 TVs per 1,000 Cars per 100

Personal Computer

VCR

Television 82

Radio

Microwave

Vacuum-cleaner

Tumbler-drier

Dishwasher

U.S.

Washing-machine

percent of Households

Product Ownership,

464

23.2

Belgium

536

157.3

Denmark

579

23.8

France

550

42.8

Germany

436

67.4

Italy

495

33.2

Netherlands

490

24.1

Spain

476

229.9

Sweden

461

63.5

Switzerland

Table 1. Percentages in different countries owning various domestic appliances etc 27

612

98.0

U.K.

Welfare, welfare society and welfare state

The Oxford English Dictionary defines “welfare” as: “The state or condition of doing or being well; good fortune, happiness, or wellbeing (of a person, community, or thing); thriving or successful progress in life, prosperity.” Then we have welfare policy, welfare society, welfare state and welfare system. Scant guidance, but the beginnings of a more exhaustive definition. “Welfare,” then, can mean something as vague as happiness–the meaning of which differs widely. But, with certain additions, it can also be made to signify something narrower and more distinct, such as welfare systems. “Welfare” in America can mean just social security handouts, a very narrow definition. One might think everyone knows what welfare is, but there are many different perceptions of it, and before we can analyse ways of improving welfare, we need a reasonable working definition. Opinion polls tell us that most people in Europe regard welfare as something positive. As a term for happiness and prosperity it has a very wide meaning, which covers everything from sunshine and a nice garden to better fitness and the children doing well at school. But it can also mean the absence of war, crime, conflicts and suchlike phenomena–protection from violence. Further definition on the lines of economic and social security in society still amounts to a fairly wide cast of the net. Basically, welfare then stands for the creation of new resources, enabling us constantly to provide for more needs and desires. In USA in 1875 the average citizen spent 75 per cent of his total consumption on food, drink, clothing and housing; in 1995 the figure was 12 per cent.26 And moreover, quality was better in 1995. Resources today are so much greater that only a small part of them 39

goes to the absolute necessities of life–a tremendous growth of general welfare. Economic and social security ought reasonably to include many people working, a wage and availability of the goods and services we want. Many people would probably count as welfare such things as a developmental job, personal savings, family and friends and a healthy environment. In opinion polls today, young people often refer to freedom of choice, self-realization and active leisure as important factors for the future.27 The interpretation of welfare in politics and debate is often a good deal narrower, referring to the different services and systems managed within the public sphere. Medical care, schools, caring services and social security are collectively termed “welfare”. Politicians have their reasons for using these narrow definitions–the systems are part of their direct responsibilities. Often they declare their intention of “developing welfare” through a political decision, “strengthening welfare” through increased tax revenue or charges, or “organising welfare” in accordance with some new administrative model. The services and systems existing in the public sphere are of course very important parts of welfare, but by defining welfare solely in terms of public systems we overlook large parts of welfare where an important role is played, not least, by NGOs. Above all, we create a narrow reality whereby the state alone is seen as capable of delivering welfare–by a European Social Model. Certain parts of welfare is both provided and funded publicly, other parts are not. The boundary between the two is neither clear nor self-evident. Medical care is public, but medicines are not. Pensions are for the most part public, but insurance companies are not. In the west, there were originally plans for far more policy fields than at present to be controlled by the state–housing construction, 26. Fogel, 1999. 27. United Minds, 2004.

international trade, banks and insurance companies were to be owned, run and controlled by the state.28 These fields too, of course, can be taken to impact on citizensâ&#x20AC;&#x2122; welfare, and no one believing the state to be the best supplier has any reason of principle for leaving it at that. For various reasons, however, these fields ended up in private society. Thus, even today there are large parts of our welfare that are neither operated nor financed in the public sector. There will always be welfare if there are resources and people want welfare, whether the state has a role to play or not. The question is: Which mechanism is better at delivering the right kind of welfare to the right peopleâ&#x20AC;&#x201C;through the state or through society? Is welfare promoted or impeded by large parts of it being controlled and funded in the public sector? One important reason why welfare in Western Europe is equated with public systems is that the public sphere has made a significant commitment. Step by step, politicians have decided that more and more services are to be delivered by the public sector, while at the same time various security systems have been expanded. The intention has been for the state, the county council or the municipalities to own, operate and finance these systems. With the passing years the public sphere became a progressively larger part of society. What are the main reasons for this development? It was said to be entirely motivated by enhancing the welfare of the citizen. But the truth is that there were other factors which were probably of tremendous importance: â&#x20AC;˘ Belief in the centrally planned economy. During the period when the public sector took more and more upon itself, it was widely believed that resources would be used to greatest effect if they were co-ordinated centrally.

28. The Swedish Social Democratic Party, 1944.

• A desire to win elections. The public choice theory, whose progenitor, Nobel Laureate James Buchanan, offers a further explanation for the growth of the public sector. For each new field politics addressed and in which it promised to deliver welfare to citizens, politicians acquired an opportunity to demonstrate their usefulness and gain support for their continuation in power. • Growing bureaucracy. All public institutions have an inner dynamic that causes them to look for additional scope for action. Utilities, national authorities and other public agencies are always working to justify their existence, increase their funding allocations and tell people why they, and they alone, are capable of performing a certain activity. • Special interests. The power of various organized interests–trade unions, NGOs, companies–is not to be underestimated. Each of the lobbyists only wants to gain assent to the matter closest to its heart, but taken together these “affairs of the heart” add up to heavy increases in public spending. Private ownership was extensively removed from a number of welfare fields through nationalization, the pursuit of profit was restricted and private funding was prevented. The model chosen for the expansion of the public sector did away with competition: there is only one place to turn to for certain welfare services and various security systems, quite regardless of whether your wants are different from your neighbour’s. Not everyone desiring to do so was allowed to deliver welfare services, it having been decided that they were to be owned, financed and delivered by the public sector. With private funding shut off, a person willing to pay extra for better welfare is not allowed to do so. By definition, welfare services correspond to the wants and needs of the average person, with little possibility of variation. And, unlike all other exchanges, you cannot opt out. Normally you can decline the offer of a jar of Losec, a householder’s insurance or a good 42

dinner, and thus avoid having to pay for it, but you have to pay for public sector systems whether you use them or not. The state thus making the exchange compulsory instead of optional is one of the essential differences between public sector and private society. Inevitably, the public sector expanded heavily. More and more was to be accomplished within the private sphere. Public sector personnel size in Sweden rose from 526,000 in 1964 to 1,301,000 in 2001. During the same period the personnel size of the private sector fell off slightly, from 3,091,000 to 2,938,000.29 Meanwhile Sweden’s population increased from about 7 to 9 million. The entire growth in the number of persons employed in Sweden during this period took place in the public sector, corresponding to great extent with the entry of women into the labour market. 80 per cent of public sector employees today are women. The public sector comprised a growing proportion of society, thus pre-empting more and more of society’s total resources. Public sector growth was similar in many countries, as can be seen from the diagram below. The left axis shows public spending by percentages of GDP and the bottom axis gives a time scale. USA, as can be seen, has the smallest and steadiest increase, though the percentage has still risen from under 10 to 30 per cent over this long period. The most important point to note is that developments have moved in the same direction in these countries, and especially in Europe. All of them expanded their public sector, whatever the political hue of the government. It should be pointed out that the European model has a variety of branches. Continental Europe followed the path indicated by Otto von Bismarck, with social security geared to employment and with private agencies but public funding for welfare services. The prevailing model in the Nordic countries is that inspired by William Bever29. Arbetskraftsundersökningarna; Konjunkturinstitutet ”Statistik”; Facts About Sweden’s Economy, 2004.

Figure 3: Development of public spending, 1870â&#x20AC;&#x201C;1995, by percentages of GDP in Sweden, UK, USA, Japan, Germany and France30

idge, with benefits geared to citizenship, not employment, and with the public sector running welfare services, not just financing them. The UK presents similarities with the Beveridge model, but with some inspiration from the US, which makes for a less comprehensive system. The Nordic branch of the European system goes furthest in terms of high taxes and the big state as a part of society.31 There was a broad consensus in favour of the expansion, contrary

30. Hansson, 2000. 31. Blomqvist (ed.), 2003.

to the impression sometimes given in the course of debate. There was often relatively great unanimity between the political parties for new decisions on new public systems. The big state was constructed during some periods by Christian Democrats in Germany and Social Democrats in Sweden. Today, one of its strongest defenders is the right-wing Gaullist Jacques Chirac, French President. To be fair, by focusing on decisions alone one misses the debate preceding them, which of course may have caused many changes of position, but the fact remains that party political differences were smaller than they might seem today.32 The overall picture is that the growing public sector share of society was resolved on with a relatively good consensus in several countries. The expansion came at a time when most people believed the mixed economy to be the thing of the future and central planning an efficient way of utilising resources. All parties and countries in Western Europe moved, at slightly different speeds, in the same direction. The state was considered best qualified to provide citizens with welfare services and social security systems.

32. Uddhammar, 2000.

Taxes and what they pay for

Public activities and systems are financed through taxation. What are the effects of levying tax? How high are taxes? What is the breakdown of public spending? How have taxes developed in the course of history? The state has always taxed citizens in order to finance various purposes. When people were the subjects of their rulers, taxes were levied in an arbitrary fashion, unpredictably and irrationally, and the proceeds were seldom spent on things that can be said to have benefited anyone but the rulers. War was the main reason for increased taxation. Since people became citizens with rights and the state was democratized, taxation revenue has come to be used for purposes that are considered beneficial to citizens. There still remain a number of differences of principle between taxation and what it finances on the one hand and voluntary payment for a product or service on the other: Paying tax is obligatory, and tax collection is ultimately reinforced by the state’s monopoly of force. Persons who do not pay–no matter whether they use the tax-financed systems or not–can be hauled off by the police and deprived of their liberty. The second difference is that we have control of our own money every minute of the day, whereas the taxation revenue at the state’s disposal can only be influenced by us once every four years, at election time, and then you have only one vote among millions, which means that your personal say in the spending of taxation revenue is limited. A fundamental balance has to be struck concerning the purpose of levying taxation and financing public expenditure. Either the measure taken can be aimed at all members of society having the same possi47

bilities to start with, equal chances in life whatever their background, or else the intention may be to equalise the outcome in life, regardless of contribution and effort. In the first instance there is no cause to impose heavier rates of taxation on higher incomes with a view to income equalization, because everyone has had the same chances anyway. In the second instance, though, this is relevant: regardless of whether it yields any revenue worth mentioning, available income must be equalized so as to make living outcomes more equal. Those believing that initial opportunities must be equal and life thereafter allowed to develop freely are likely to use taxation revenue mainly for things like universal education, to give people a good start in life. If on the other hand you want to equalise outcomes, there are strong reasons for extensive handouts all through a person’s lifetime. The tension between these different objectives has existed in the majority of parties, and policies have oscillated. The social model now prevailing in Europe does a great deal to equalise life’s outcomes. In Sweden there are clear differences in pre-tax income, but after taxes and benefits the average difference between individuals in terms of available income is only 18.9 per cent for annual income and a mere 8.6 per cent for lifetime income.33 The levying of tax has effects on society. If the effect is negative, this has to be balanced against the positive nature of what the tax is intended to pay for. Putting it simply, the effect on society of levying tax can be described as follows: Your neighbour wants his lawn mowed but has broken his leg and is prepared to pay someone up to 30 euro to mow it for him. You are prepared to do the job for 25 euro, and so the two of you agree on a free exchange with a freely determined price of, say, 27 euro and 50 cents. The lawn is mowed, you get paid and both parties are satisfied. But suppose a payroll levy–a tax–of 25 per cent has to be paid by the neighbour, who still only allo33. Långtidsutredningen 2003/04 (The Long-Term Survey), Appendix 9.

cates 30 euro. Deduction for the levy leaves only 22 euro and 50 cents–less than the 25 euro you were prepared to do the job for. The exchange, which could have pleased both parties, fails to materialise. Suppose moreover that you had done the job for 22 euro and 50 cents but then had to pay 30 per cent income tax. You would be left with 15 euro and 75 cents–a good deal less than the 25 euro on which the deal depended, and roughly half of what the neighbour forked out altogether. And the taxation levels in this example are lower than is often the case in reality. When the state as third party wants a cut of the proceeds of labour and enterprise, not as much gets done. The greater the tax, the greater the effect. Of course, the state spends the money too, but it is spent on what the politicians demand, not the consumers. The table below shows how much a person must earn before tax in order to pay somebody else to work and for that person to have 1,000 euro left after tax. The extent to which work and enterprise fail to materialise because of taxes depends on the price sensitivity of the product or service in demand. Taxes on food, for example, can be raised relatively high without consumption declining and adversely affecting production. People have to eat, even if food is expensive. The question is what taxes are imposed on; stable tax bases are needed before we can rely on the effects being limited and, accordingly, revenue being sustained. A number of tax bases are unstable. If the tax on alcohol is increased, purchases from abroad, smuggling and illegal distilling will increase, causing both consumption and tax revenue to decline.34 34. This was clear for all to see in the winter and spring of 2004, not as a consequence of increased taxes in Sweden but due to substantial reductions in Danish and Finnish taxation, causing growing numbers of people, especially in border regions, to buy alcohol from those countries. A further consequence of this situation is the negative impact on Swedish output. The Spendrups brewery company, for example, soon had to lay people off. The outside world makes an important difference to Sweden’s scope for manoeuvre.

Table 2: Income requirement for the purchase of services in different countries 200135

Belgium Denmark Germany Sweden Finland Norway Italy Netherlands Austria France Canada Australia Ireland Great Britain Portugal Spain New Zeeland Switzerland USA Japan weig. OECD aver. weig, EU average

Net Income To Seller

Marginal Tax, Soc. Sec. Benefits, Indirect tax

Net Income Requirement to Buyer

Marginal Tax, Soc. Sec. Benefits

Income Requirement

1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

2,703 1,477 2,241 1,611 1,812 1,790 1,707 1,413 1,579 1,363 856 726 816 894 977 1,165 766 639 650 530

3,703 2,477 3,241 2,611 2,812 2,790 2,707 2,413 2,579 2,363 1,856 1,726 1,816 1,894 1,977 2,165 1,766 1,639 1,650 1,530

6,010 4,162 3,396 3,402 2,966 2,713 2,464 2,614 1,461 1,565 1,536 1,625 1,427 1,263 1,065 855 1,192 902 881 561

9,713 6,639 6,637 6,013 5,778 5,503 5,171 5,027 4,040 3,928 3,392 3,351 3,243 3,157 3,042 3,020 2,958 2,541 2,531 2,091

1,000

1,007

2,007

1,435

3,442

1,000

1,588

2,588

2,323

4,911

Market Price

Comment : The yearly income of the seller and the buyer of the service are assumed to be equal to one respectively two yearly incomes of an average industry worker in the different countries.

35. Karlson, 2004.

When tobacco tax was heavily increased in Sweden in 1997, national taxation revenue from this source declined by 0.6 per cent. The tax base disappeared in the same way as with alcohol. And the opposite is also true: In 1990, corporate tax in Iceland was 48 per cent and the revenues were only 0.97 per cent of GDP. Now, the corporate tax-rate is just 18 per cent and the revenue has risen to 1.25 per cent of GDP. The proposal to reduce taxation of labour but increase the taxation of environmentally dangerous activity entails the same problem: the purpose of the environmental tax is to reduce emissions, but when this happens the taxation revenue also vanishes. The combined effect on society can be considerable: it is not only individual taxes that influence the amount of consumption and production. Numerous studies of the effects of the total pressure of taxation–and government spending–on growth in developed countries show how, why and by how much high taxes put a brake on economic growth.36 Far from being a secret, the impact of taxes on society and the economy is carefully worked out by government officials. How stable is the tax base, how price-sensitive are consumers where these products are concerned, who will have to pay, how much revenue can result? In the end it is the politicians who decide whether it is worthwhile to increase a certain tax–despite the effects it may have on activity in society. In Western European countries, politicians have been relatively unanimous in considering successive tax hikes worth the price. This may partly be due to taxation revenue being palpable whereas the effects on society are harder to describe and explain.

36. Fölster & Henrekson, 1999; Hansson, 2000; Tanzi &. Zee, 1996; Ahmed, 1986; Fu, Taylor &. Yücel, 2003; Miller & Russek, 1997; Barro, 1991; Fölster & Henrekson, 2001; Hansson & Henrekson, 1994; Lee, 1995; Guseh, 1997; Abrams, 1999; Grier & Tullock, 1989;, Bassanini & Scarpetta, 2001; Engen & Skinner, 1992; Alesina et al., 1999; Tanzi & Shuknecht, 1996; Peden, 1991, Karras, 1996; Carlstrom & Gokhale, 1991.

37. Karlson, 2004.

52 18.6 25.1

18.9 23.4 23.1

20.9

16.0 11.0 18.3

30.6

17.5

14.9

20.1 20.1 26.3 23.0 25.2

1933

19.6 21.6 21.1 17.8 22.6

1925

23.9 27.0

21.0

30.3

19.8 27.8 30.2 30.1 33.1

1950

27.5 29.3

28.7

32.0

30.4

27.0

25.3 27.5 33.4 33.9 27.3

1960

Comment : Year 1925 and 1933 as percentage of GDI.

Australia Austria Belgium Chec Rep. Denmark Finland France Germany Great Britain Greece Hungary Irland Iceland Italy Japan Kanada South Korea Luxembourg Mexico Netherlands New Zeeland Norway Poland Portugal Slovakia Spain Sweden Switzerland Turkey USA Average EU 15 OECD 19.8 16.9 39.8 22.5 12.5 27.7 28.9 31.2

15.8 14.7 35 19.6 10.6 25 25.8 27.8

28.9

27.7 37.1 27.4 34.9

29.9 27.0 26.1 19.7 31.2

24.9 26.2 25.5 18.3 25.9

32.8 24.7 29.6

40.4 32.5 35.1 32.9 37 20.9

1970 22.9 34.9 35.7

29.9 30.3 34.5 31.6 30.4 18.2

1965 22.3 33.9 31.1

31.1 34.1

19.5 43.4 27.9 16.0 26.9

21.2

43.0 31.1 39.9

30.2 29.6 26.2 20.9 33.1 15.2 39.7

41.4 37.7 36.9 36.0 35.4 21

1975 26.6 37.7 41.6

35.8 32.1

22.9 47.1 28.9 17.9 27

24.6

31.5 29.2 30.3 25.4 32 17.7 40.8 16.2 43.4 33.0 42.7

43.9 36.2 40.6 33.1 35.3 24

1980 27.4 39.5 43.1

Table 3: Total taxes as percentage of GDP in different countries37

38.6 33.8

27.6 48.3 30.6 15.4 26.1

27.1

35.1 28.4 34.4 27.6 33.1 16.9 45.3 17 42.4 33.6 43.3

47.4 40.0 43.8 32.9 37.7 28.6

1985 29.1 41.6 46.3

39.2 35.0

33.0 53.7 30.6 20 26.7

29.6

33.6 31.4 38.9 30.9 36.1 19.1 40.7 17.3 43.1 38.1 41.8

47.1 44.7 43.0 32.6 36.0 29.4

1990 29.3 40.2 43.1

40.1 36.1

32.8 47.6 33.5 22.6 27,6

1995 29.4 41.6 44.8 40.1 49.4 44.9 44.0 38.2 35.2 31.7 42.4 33.1 32.1 41.2 28.4 35.7 20.5 41.9 16.6 41.9 37.6 41.5 39.8 32.7

41.3 37.0

38.7 32.2 33.6 42.7 28.4 37.4 21.1 41.5 16.0 41.0 35.2 43.6 37.9 34.2 37.1 34.2 52.0 35.1 28.7 28,9

1998 29.9 44.4 45.9 38.3 49.8 46.2 45.2 37.0 37.2

41.6 37.3

1999 30.6 43.9 45.7 40.4 50.4 46.2 45.8 37.7 36.3 37.1 39.2 32.3 36.3 43.3 26.2 38.2 23.6 41.8 16.0 42.1 35.6 41.6 35.2 34.3 35.1 35.1 52.2 34.4 31.3 28.9

The following diagram shows how the pressure of taxation developed in Sweden between 1950 and 2001, which may serve as an illustration of a development, that was largely the same all over Western Europe. It shows the emergence of the big state.38 Figure 4: Development of the pressure of Swedish taxation, 1900–200239

The diagram shows total taxes as a percentage of Sweden’s total output, GDP. The increase really puts on speed about 1950, and the rising trend is inflected about 1980. But GDP, the entire economy, went on growing during the period when tax increases were at their steepest. Between 1960 and 2000 GDP grew by 200 per cent, which 38. Långtidsutredningen 2003/04. 39. Johansson, 2004.

means that if the pressure of taxation had been kept at the same level as in 1960, just over 25 per cent, taxation revenue would also have grown by 200 per cent. More exactly, it would have risen from about 20 to 60 billion euro in current price termsâ&#x20AC;&#x201C;a substantial increment, one might think. But the government and parliament found this insufficient and instead doubled the share of taxation, causing revenue to rise from 20 to about 120 billion euro. The difference is that the 60 billion euro, which would have remained in society if the level of taxation had been kept unaltered is now being used in the public sector.40 The public sphere, in other words, has become a far larger part of society. The taxation system is also constructed in such a way that many taxes are invisible. We do not see tax being deducted from a large number of things. For example, salary statements often show pay after deduction for the payroll levy collected from employers, and retail prices are often shown inclusive of VAT. And so in everyday life it can be hard to tell what taxes we are paying. These visible taxes have grown a good deal less rapidly than the invisible ones, and in Sweden, taxes equalling roughly 30 per cent of GDP are collected without being quite openly stated. Does it make any difference if you see the taxes you pay? From a democratic point of view it is arguable that citizens are entitled to see how much money they pay in tax, otherwise it will be hard for them to size things up and form an opinion on the subject of taxation. Does it make any difference to society whether invisible taxes are levied or not? It makes no difference to society and the economy whether taxes are visible or invisibleâ&#x20AC;&#x201C;either way the same amount of money will remain in society at large, outside the public sphere. The only difference between visible and invisible concerns the ability of citizens to call those responsible to account.

40. Ecowin; OECD.

But income tax alone–visible or not–is just a fraction of what a person pays in tax. According to the Swedish bank Föreningssparbanken, a person earning 2,200 euro a month pays a total of 1,760 euro in tax.41 True, only about 700 euro of this is visible income tax, but before that, 700 euro in payroll tax has been deducted, and when the worker buys goods and services this entails further taxation to the tune of 350 euro. That tax money disappears in the form of VAT, specific taxes, electricity tax, car tax and suchlike. In addition, goods and services naturally cost more because companies have to pay a number of taxes during the production process, taxes which have to be recouped through the selling price. This last mentioned is not included in the calculation, and yet the total tax on income still comes out so high. Thus the tax on labour is substantially higher than society’s average taxation pressure of about 50 per cent. Many of the most controversial taxes, such as real estate tax and national income tax, make less than critical contributions to public revenue. Taxes are to a great extent levied on stable tax bases. Capital gains tax does not yield very much revenue, because capital can easily move elsewhere if taxation grows punitive. Instead the really big taxes today are levied in labour and consumption. Whenever we look at taxes, it is important to remember that, one way or another, they are all levied on production. People work to produce goods or services, income is remuneration for productive labour, consumption is based on payment for what has been produced. The whole system is founded on a society in full swing, on the existence of activity and a host of voluntary exchanges providing enterprise and employment and, accordingly, resources that can be taxed. Today the most stable tax bases, those which cannot easily disappear, include consumption of foodstuffs, real estate and low incomes. Tax on these items, accord-

41. Pahne, 2003.

ingly, is relatively high. The following diagram shows how much tax people in low income brackets have to pay in various European countries.42 Figure 5: Tax on the labour of low income earners in various countries 200243

The level of tax on the labour of low-income earners is not far short of 40 per cent in many European countries. In 2002, income tax on low income was still rather high among several countries in Eastern and Central Europe. High pressure of taxation can mean high taxes on low-income earners, for the simple reason that higher taxes are difficult to levy from others because they can emigrate or invest their 42. ECB Statistics, 2003. 43. Erixon, 2003.

money abroad. How is all this money spent? What does the state do with the tax money? The politicians often talk about the police, schools and health care. But in general, in the Western European countries, these only account for small parts of the total public expenditure. The fact is that the largest share of the public expenses in Western Europe is not such welfare services but income transfers, mostly in various public social insurance systems. When the public sector expanded transfers increased most of all groups. The public sector was to assume greater responsibility, not only for different services like medical care and schools but also for citizens’ economic security. One effect is that less than a third of total public spending is devoted to medical care, caring services and schools. The commonest argument for levying high taxes and allocating them as shown above has been that everyone must have access to welfare services, regardless of personal financial resources. But as a matter of fact, most of the money that people pay into the systems go back to the same persons–but in ways which the politicians decide. In Sweden, with the biggest share of social insurance expenditures, for an average taxpayer roughly one fifth of the tax paid every year is redistributed to others, while four fifths are not. Four fifths goes to services and benefits of which the taxpayer receives an equal share. Two of those four fifths actually return to the same person in the very same year.44 This being an average, the actual figure varies from one individual to another. A low-income earner recovers more, a high-income earner less. But the proportion of everybody’s tax that is not redistributed to others remains considerable. It should be further noted that the taxpayer, of course, is not recompensed with public services to the full value of those four fifths, because some of the money finances the administration and much goes to inefficient public services. 44. Långtidsutredningen 2003/04, Appendix 9.

45. Eurostat.

24.4 24.4 25.1 27.9 24.4 21.5 26.5 17.6 23.7 20.6 29.6 25.7 14.6 24.2 : 21.9

25.2 25.0 25.8 28.9 25.2 20.5 27.0 18.7 24.1 21.2 29.7 25.9 15.5 28.9 : 24.6

1991

26.5 26.0 26.5 29.5 26.6 20.6 27.8 19.4 25.1 21.7 30.3 26.4 16.5 32.6 : 26.7

1992

27.4 27.0 27.6 31.0 27.3 21.2 29.1 19.3 25.2 22.5 30.7 27.3 18.5 33.6 37.7 27.7

1993

27.2 26.7 26.8 31.9 27.2 21.2 28.9 18.9 24.8 22.1 29.8 28.0 19.4 32.8 36.2 27.3

1994

27.0 26.7 26.6 31.3 27.8 21.5 29.0 18.1 23.9 22.9 29.2 28.0 20.1 30.8 34.1 27.0

1995

27.2 27.0 27.0 30.6 28.9 22.1 29.4 17.1 23.9 23.1 28.4 27.9 19.1 30.6 33.4 26.8

1996

26.9 26.7 26.2 29.6 28.4 22.5 29.3 15.9 24.6 22.0 27.6 27.9 18.9 28.5 32.5 26.4

1997

26.4 26.3 26.1 29.4 28.2 23.4 28.9 14.7 24.1 20.9 26.7 27.7 19.3 26.3 31.7 25.8

1998

26.3 26.3 25.9 29.1 28.5 24.7 28.6 14.0 24.3 21.0 26.3 28.1 19.8 26.1 31.3 25.4

1999

26.3p 26.1p 25.3p 28.4 28.6 25.5 28.3 13.6 24.3 19.5 25.7 27.5 20.5 24.7 30.2 26.2

2000

26.4e 26.2e 25.9e 28.6 28.7p 26.3 28.5 14.6 24.5p 20.9 25.8 27.8 21.1 24.9 30.3 26.6

2001

26.9e 26.7e 26.2e 29.1 29.4p 25.9 29.0p 15.4p 25.1p 22.2p 26.7p 28.3 22.9p 25.6p 31.3p 26.6p

2002

Note : e–estimated value, p–preliminary value. In EU-15, the social insurance expenditures, as a share of GDP, is usually around 25 to 30 per cent, with the main exceptions being Ireland–which is a lot lower–and Sweden–which is somewhat higher. Since the total public expenditure is between 40 and 50 per cent of GDP, half or more than half of the public expenditures are social insurance in Western Europe. This implies that everything else which the state engages in–from justice, police and defence to welfare services such as health care, elderly care and education–together amount to half or less than half the total public expenditure. The big state is not a welfare state, it is an income transfer state.

EU15 Belgium Denmark Germany Greece Spain France Ireland Italy Luxemburg Netherlands Austria Portugal Finland Sweden United Kingdom

1990

Table 4. Social insurance expenditures as a share of GDP in EU-1545

Table 5: Annual private consumption in the OECD Countries 2002 (euro)46 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

USA Luxemburg Britain Switzerland Austria Canada Australia Germany Italy Belgium Holland Norway France Iceland Japan Spain Denmark Ireland Sweden New Zeeland Greece Finland Portugal South Korea Czech Republic Hungary Slovakia Poland Mexico Turkey

25,644 22,982 18,159 17,783 15,934 15,638 15,456 15,197 15,102 14,641 14,448 14,367 14,281 13,594 13,516 13,085 13,080 12,827 12,554 12,064 11,844 11,841 10,905 9,032 7,979 7,019 6,852 6,549 5,838 3,980

46. OECD, 2002 Purchasing Power Parities, 2002.

Another consequence of high taxes is that a limited amount of money is left for private consumption. As can be seen above, countries like the US and Britain, which have had high growth for a long time, and have relatively low taxes, allow for people to spend a lot of money on their own, in ways they decide themselves.Conclusion: High taxes and heavy public spending have only a minor redistributive effect. The greater part of the money returns to the same people. So what is the difference between paying the four fifths that the state takes in tax and gives back, and spending the money oneself? The most important answer, of course, is that the taxpayer does not decide how the money is to be spent. He or she does not need to choose or prioritize matters of social and economic security to such a great extent. But in private consumption, all is up to you.

The welfare paradox: high taxes but low welfare

A distinction can be made between operation, ownership and funding of activities. Not everything needs to be public or private: combinations of both are perfectly possible–and common. The big state was expanded with the aim of making public most everything concerning welfare and social security, but in recent years privately owned operations have been admitted to take care of publicly funded activities– private operation but public funding. Some public activities have been privatized, but are still dependent on funding out of taxation revenue. Another common method has been the contracting of private firms to perform a particular activity, such as care of the elderly. High taxes finance a very large part of various welfare services. Figures for medical care are given below. Nearly all Western European countries have chosen to finance a large part of the medical care provided within their borders out of taxation revenue. The private funding that makes up the remainder includes user charges–for medical consultations, medicine and suchlike–certain private nursing institutions and some types of insurance. Thus not all medical care–taken here as an example of the whole sector of welfare services–is publicly funded, but a very large proportion of it is. USA deviates from this picture, with less than half of all medical care funded out of taxation revenue. Switzerland too has a large proportion of private funding. From this one might possibly infer that there is less medical care per capita in the US or Switzerland, but in fact the opposite applies. The US is spending the equivalent of 14 per cent of GDP on medical care as against about 9 per cent in Western Europe. And per capita GDP is higher in the US, whose 61

Table 6: Percentages of medical care funded out of taxation revenue, 199847

Luxembourg Czech Republic Iceland Sweden Norway Denmark UK Hungary Japan New Zealand Finland Ireland France Germany Italy Austria Canada Belgium Spain Netherlands Australia Portugal Poland Switzerland Greece USA

92.4 91.9 83.9 83.8 82.8 81.9 79.9 79.6 77.2 77.0 76.2 76.2 76.0 75.8 72.0 71.4 70.8 70.6 70.5 70.4 69.3 67.5 65.4 54.9 54.4 44.5

medical spend, accordingly, is 14 per cent of a considerably larger total. The individual Swede, where ambitions concerning welfare and health care are supposed to be high, gets medical care equalling 2,270 dollars per annum, while the average American gets 4,887 dollars

47. Purchasing Power Parities, 2002.

worth.48 Expenditure in the other Nordic countries and in Germany and France is a little higher than in Sweden. Taking Sweden again as a prime example of the European Social Model, the total expenditure on welfare services–not only health care, but all welfare services–can be compared to that of the US, with another Model and vastly lower taxes. Figure 6: Proportion of total annual consumption going on medical care, caring services, education and other welfare services; USA in 1995, Sweden in 200149

The above diagram is to be read as follows. The circles indicate the average person’s total annual consumption in the US and Sweden respectively, i.e. private consumption and public consumption via taxes. Per capita GDP in the US is nearly 50 per cent higher, which means that citizens’ incomes are higher and annual consumption is higher as well. The US circle, then, is bigger than the Swedish one. The segment given as a percentage shows the proportion of consumption devoted to welfare services by the average American and 48. Utvecklingen i svensk hälso- och sjukvård, 2004. 49. Långtidsutredningen 2003/04, Appendix 7..

average Swede respectively. In Sweden the figure is roughly one-third, while in the US it is two-thirds. The big difference is that nearly all the 36 per cent of welfare in Sweden is financed out of taxation, while only a minor portion of the 64 per cent in USA is financed out of taxation, the remainder being financed privately. In addition, the American figure is 64 per cent of a larger quantity of total resources per capita.50 In other words, it is not true that heavy public spending on welfare gives all that much welfare in society and to the individual. Another example is the fact that a larger proportion of health care in the UK than in Germany is financed through taxation. Yet health care equals just below 8 per cent of GDP in the UK as against 11 per cent in Germany.51 In Western Europe we have high taxes which, to a great extent, finance welfare services, and yet we get less of those services than the American, who also pays a good deal less in tax. When citizens can choose how to dispose of a larger share of their income, they opt to a great extent to devote more of their consumption to welfare services. One study has shown that Americans are so anxious to improve their medical care that, given a 10 dollar rise in income, they want to spend the entire increase and a little more besidesâ&#x20AC;&#x201C;16 dollars in allâ&#x20AC;&#x201C;on better medical care.52 A similar figure applies concerning other welfare services. One explanation is that, thanks to growing resources, an ever-smaller portion of consumption needs to be devoted to basic needs, more can be devoted to free choices. This is a consequence of keeping the door open to every conceivable private solution. In Western Europe, by contrast, a far smaller portion of consump50. There are practical reasons for taking statistics from different years. No relevant changes occurred during this period which would have affected the percentages more than marginally. 51. The Economist, 2004 (e). 52. Fogel, 1999.

tion is devoted to these welfare services. We have decided that they are to be financed out of taxation, not privately. At the same time, taxes have only been raised to the present level, with the result that welfare services are rationed. Even if our total consumption is smaller and we have to devote more to basic needs, the probability is that Swedish preferences also come closer to the American welfare percentage of consumption. Insistence on tax funding inhibits this demand. Private funding is not prohibited today, but it is in several ways impeded. High taxes curb citizensâ&#x20AC;&#x2122; ability to devote resources to welfare. Public welfare institutions are not allowed to accept private funding. Consequently external beam radiation units for cancer therapy are idle for 22 hours out of 24 due to staff shortages, at the same time as cancer patients are queuing up for treatment. Deaf children are issued with a hearing aid for one ear but their parents are not even allowed to buy a second at their own expense. Old people are not allowed to pay extra out of their own pockets for their favourite yuletide fare. New â&#x20AC;&#x153;stop lawsâ&#x20AC;? are blocking the way to private funding. Naturally, there are problems in American health care too, and this comparison is certainly not implying that Europe should immediately imitate America. But this rather striking picture shows a major difference between systems. High taxes give less welfare, such as health care. And this model is not only American, it can also be found elsewhere. Sometimes it is argued that the vastly more expensive healthcare in America is due to the fact that doctors and hospitals are sued all the time. This may be true and it can be a problem, but it only explains a fraction of the difference. Another common explanation, one that perhaps has more credence, is that of higher wage costs. Staff in American health care command substantially higher salaries than in Western Europe. There should, however, be serious doubts over whether this is really something negative. Some say that the difference just demonstrates that the Americans are inefficient. That is not what productivity figures show. Moreover, when the American share was 65

smaller–which it once was–the same people said that a larger figure showed not inefficiency but generous health care. And that is the truth today as well. A last, very common, argument is that there are at least 40 million people in the US who don’t have health insurance, which is often interpreted to mean that they don’t get any healthcare when in need–and that gives a reason to stick to our model. But this is factually wrong.- everyone in America receives healthcare. For those who don’t have private health insurance, there is public healthcare. There is a difference in quality, but that is true in Europe as well–only here almost everyone has to use public health care. The situation in Western Europe has led to a gap between the welfare in demand and the welfare available. The great majority want better welfare services, more of them, and better security system than the public sector can deliver. Even though high taxes mean less scope for private consumption, more and more people are opting to supplement public arrangements with various kinds of private insurance. In Sweden today, 230,000 people have private medical insurance.53 More than two million people have private pension insurance.54 With the aid of such insurance policies, medical waiting lists can be sidestepped and pension benefits enhanced. The gap between welfare demand and welfare supply is gradually being filled by private solutions. The resources devoted by society to welfare services as a whole are thus increasing, but private funding remains a very small part of it all.

53. If, 6th February 2004. 54. Wetterberg, 2004.

The public sector canâ&#x20AC;&#x2122;t deliver

The problems of the public sector have multiplied in recent decades. Medical waiting lists are getting longer all the time, older people risk receiving inferior care, difficult prioritizations are being made, more and more youngsters are leaving high school without pass marks, classes are growing larger and teaching materials are tattered and dogeared. Given that taxes stopped rising in about 1980, one might well believe that the standard of public services and systems is the same today, but it isnâ&#x20AC;&#x2122;t. Despite the dedicated, often exhausting efforts of many people in the public sector, developments are moving in the wrong direction. There are a number of contributory reasons for this, but one factor means more than any other, namely what is known as Baumolâ&#x20AC;&#x2122;s law.55 Productivity does not grow as fast for services as for commodities. Because of technical progress, we can produce more and more goods with less and less work input. If it once took ten people one month to build a house, today perhaps three people can do it in one week. We can imagine people in the future devoting hardly any time at all to production of goods, because it is all done by machines and computers. Services can also be produced more efficiently, but productivity growth in this respect is nowhere near the same as for goods. Hair-cutting, counselling, nursing, teaching and child care have of course developed, but they require much the same work input today as before. A classic example given by William J. Baumol is that a symphony orchestra cannot play faster with quality intact. So more of our total work input is being devoted to services, and citizens are 55. Baumol, 1967 & 1989.

devoting more and more of their resources to the procurement of services. Today, the individual working hours are shortening. Despite the entry of women in the employment sector during the last 50 years, and population growth, the total number of hours worked in the countries of Western Europe are roughly the same as the past decades. During an average week in 2000/01, a Swedish man worked 30 hours and a Swedish woman 21, whereas the week, it will be recalled, has 168 hours altogether.56 This work produces all the resources that we live off. So the number of people has increased, but total working hours have notâ&#x20AC;&#x201C;and the reason we still have had economic growth is an increase in productivity. We have produced more and more in the same number of hours. But service productivity, as we saw earlier, has not grown with the same pace. And so a progressively larger proportion of these hours have been devoted to producing services and less to producing goods. Imagine a society producing one commodity and one service: telephones and nursing. In 1965 1,000 people were employed on manufacturing telephones and 1,000 on nursing. In 2000, twice as many phones are being manufactured by only 500 people. But we still have 1,000 people producing the same amount of nursing. If nursing is to increase at the same rate as phones, more people will have to be employed on it; after retraining, the 500 people from the phone manufacturing company can do so. We will then have 500 people employed manufacturing telephones and 1,500 employed in nursing, and production will have grown considerably in both sectors. Nursing makes up a bigger share of work input; a larger share of societyâ&#x20AC;&#x2122;s productive resources goes to nursing. In addition, nursing salaries are rising as quickly as rates of pay in the phone manufacturing company, even though the services are not producing more and cannot increase 56. AnsvarskommittĂŠn, 2003.

their earnings per hour. From this we conclude that services are becoming an ever-larger part of production and society. Another example is that in 1880 a concrete worker mixed 3,000 tonnes of cement a year, while today he makes 30,000 tonnes. But a teacher who was then instructing 30 children is not now teaching 300. When more goods are produced with less work, the goods become cheaper compared with the services. Or conversely, the services become more expensive compared to the goods. We can buy more and more goods for the same amount of money, but when we buy more goods we want the amount of services we buy to increase with the same rapidity. After buying a DVD player we don’t want to get another one but rather to be able to obtain better care when we need it. Less of our resources are then devoted to goods and more to services. Everywhere in the western world, services account for a progressively larger share of labour, production and consumption. What does this imply for welfare? It means that welfare services, just like other services, will increase their share of society as time goes on. Labour productivity in the public sector in recent years has increased only one tenth of that in the production of goods in the private sector.57 Baumol’s law is a real fact. The previous picture of consumption in USA also confirms that more and more resources are being devoted to welfare services. But in Western Europe we have said that these services are to be almost entirely financed out of taxation. If services are all the time increasing as a share of society, taxes will have to be increased all the time to finance these activities. More and more of society’s resources will then have to go in tax to the public sector. The Swedish Association of Municipalities–the part of the public sector responsible for delivering the welfare services, calculated how much the tax would have to increase if those services should grow as 58. Långtidsutredningen 2003/04.

much as society in general. Then, they assumed that the current economic growth and different productivity levels would continue. Today’s level of 30 per cent would rise to 40 per cent about 2015, and then continue to 50, 60 and above that in the decades to come. And they did not at all calculate that there would be any rise in demand of welfare services. These are optimistic assumptions: a local tax hike as dramatic as this will adversely affect growth and welfare needs are certain to increase. A more realistic assessment would show a faster rise in local taxation. But this has not been the case over the past 20 years. The pressure of taxation generally has remained relatively static. When resources in the public sector have not grown–and they have to grow if services are to develop like the rest of the economy–deteriorations have occurred instead. This goes a long way towards explaining why services are deteriorating in many ways, in spite of taxes remaining on the same level. But the most important conclusion concerns the future: Nothing today suggests that a 20-year trend of unchanged taxes will be altered and a tax hike inaugurated. The prediction presented above will never come true. So what will happen instead? If taxes remain stationary–and we stick to the European Social Model implying that these services have to be public and tax-financed–the current development will continue. Welfare services will not get the growing share of society which they need in order to keep up, in which case they will get worse and worse.

Public organization is the problem, not the solution

Public welfare services mainly consist of health and medical care, compulsory and high school, child care and elderly care, in roughly equal portions. Municipalities and county councils delivering these services in Sweden have a total annual spend of about 60 billion euro or a quarter of GDP. In most European countries this expenditure is financed out of taxation revenue, but in Continental Europe private agents have been permitted to take over the running of services. All over Europe, attempts are being made to improve efficiency and define priorities. The activities themselves are feeling the pinch of rising demand and dwindling resources. In the French newspaper Le Monde in April 2004, 286 doctors protested against the situation for health care, which in their view is in crisis, is being â&#x20AC;&#x153;destroyedâ&#x20AC;? and is falling apart, with waiting lists, stress and lack of resources, not least in terms of appropriate competence.58 The situation regarding public social spending among OECD countries can be seen below, and Western European countries are in the top. Sweden is, next to Denmark, at the top, and is therefore a suitable place from which to pick several examples of the effects of the public sector as a major part of the big state. Most citizens attach great importance to viable health care for those who need it. We have grown accustomed to recurrent media features about mounting problems and scandals. But of course not everything is bad and getting worse. The number of hip and knee-joint operations in Sweden has tripled in ten years, the number of cataract oper59. Le Monde, 2004.

Figure 7: Total public social expenditure, as a percentage of GDP, 200159

ations rose from 30,000 in 1990 to 82,000 in 2002 and cancer survival has improved. Medical advances, organizational changes and technical progress are improving the possibilities. At the same time medical care has been under pressure from dwindling resources and growing needs. Thus efficiency has grown in certain areas; in-patient length of stay, for example, declined from an average of 11 days in 1970 to 6.1 days in 2002. Medical care as a whole has experienced a radical process of cutbacks and restructuring in recent decades. 59. OECD, 2005. Definition: Public social expenditure comprises cash benefits, direct ”in-kind” provision of goods and services, and tax breaks with social purposes. To be considered ”social”, benefits have to address one or more social goals. Benefits may be targeted at low-income households, but they may also be for the elderly, disabled, sick, unemployed, or young persons. Programmes regulating the provision of social benefits have to involve: a) redistribution of resources across households, or b) compulsory participation. Social benefits are regarded as public when general government (that is central, state, and local governments, including social security funds) controls relevant financial flows.

Sweden at the end of the 1960s had 115 emergency hospitals, of which only 60 now survive intact. The Federation of Swedish County Councils expects that another 20 will have to close down in the future. The total number of hospital beds has fallen by nearly 80 per cent, from 120,000 to 27,000.60 In 1997 the Swedish Parliament resolved that medical care must prioritize–in the sense of deciding which illnesses were to be treated and how rapidly. Västra Götaland County is defining criteria for needs prioritization and treatment prioritization, with reference to the potential benefit of medical treatment.61 Nursing services no longer to be provided include amniotic fluid sampling, treatment of respiratory tract infections, chronic back pains, stomach pains in children and infarction observations where there is little likelihood of cardiac arrest. Waiting lists for treatment of different diseases are often long everywhere in the country; the longest waiting periods for varicose veins, knee-joint problems, inguinal hernia and gallstone vary from three to eight years.62 Those lucky enough to live elsewhere can get off with a month or so. Insistence on almost exclusively tax-based funding, rising costs and unchanged taxes are leading to constant efficiency measures and prioritizations. But medical care also presents a number of facts compelling us to ask how the limited resources available are actually used. Since 1975 the number of doctors employed by county councils has risen from 8,500 to 24,200, the number of nurses from 31,000 to 71,000 and the number of assistant nurses from 9,000 to 34,000. During the same period the number of hospital beds fell from 136,000 to 29,000 and the number of hospital medical consultations has fallen from over 12 million to 9 million per annum. Thus the 60. Svenska Kommunförbundet & Landstingsförbundet, 2004. 62. Västra Götalandsregionen (The Region of Västra Götaland), 2004. 63. Aftonbladet, 2004.

average number of consultations per doctor fell from 9 per day in 1975 to 4 per day in 2001. Swedish doctors have the smallest number of patients per annum for any of the developed OECD countries: 903 as against an average of 2,167. One reason is that Swedish doctors devote between 50 and 80 per cent of their time to information, communication and administration. A comparison between Swedish medical care and the Kaiser Permanente private Medicare organization in the US shows Sweden to have more specialist resources per 100,000 inhabitants, and yet Kaiser’s reception waiting time was under two weeks for 80 per cent of patients and its treatment waiting time under 13 weeks for 90 per cent. In Sweden over 50 per cent of the patients have to wait more than 12 weeks for a visit and then at least another 12 weeks for treatment.63 Medical care can serve as an eloquent illustration of other activities as well. Municipal caring services for children and the elderly are also under pressure due to resources dwindling in proportion to needs. The proportion of the total child population receiving child care rose from about 10 per cent in 1970 to 77 per cent in 2001. Persons aged 65 and over made up 10 per cent of Sweden’s total population in 1950, rising to 18 per cent today. This has led to a heavy expansion of caring services for the elderly.64 The fact of this expansion occurring in the public sector is one reason for the post-war growth of that sector. 70 per cent of elderly care expenditure goes to “special housing” and the remaining 30 per cent on home help services in ordinary housing. The cost of elderly care rises steeply with advancing age: the average cost for the 65–74 age group is about 1,000 euro per annum for women and 900 for men. Expenditure in the 85–89 age group is 15,000 per annum for women and 11,000 for men. The Association

63. Fölster et al., 2003. 64. Westerberg, 2000.

points out that there will be an explosion of needs from the 2020s onwards, when the big 1940s generation passes the 85 mark.65 Schools, the third of the big public services, are also being debated. Prioritization measures and attempted spending cuts are constantly occurring in the school sector, and conditions vary from one school to another. There are some positive examples, but there are a number of problems which are gathering strength in the country as a whole. Sweden comes next to last among the OECD countries in terms of the proportion of students completing high school when they should: just over 70 per cent as against an average of just over 80 per cent.66 In 2000 only 59 per cent of students attained the objectives of Swedish upper secondary school. The number of qualified special teachers fell from 8,600 in 1990 to 4,800 in 2001, while the number of unqualified classroom assistants rose from 6,800 in 1995 to 12,500 in 2001.67 In a variety of respects, achievement and quality has been watered down in school, the place where young people are supposed to get off to a good start in life. Higher education at universities and colleges has also been made a public sector monopoly. In 2002 higher education and research expenditure in Sweden totalled upwards of 4 billion euro–5 billion including state support for student aid. Undergraduate studies are almost exclusively state-funded, while research has a higher level of funding from various private sources. Public sources accounted for 88 per cent of funding altogether. No fewer than 329,000 students– twice as many as 15 years ago–were taking undergraduate programmes.68 The student population has doubled over the past ten years, but

65. Svenska Kommunförbundet, 2002. 65. Education at a Glance, 2003. 68. Universitet & HögskolorX 2003. 69. Högskoleverket (Swedish National Agency for Higher Education), 2003.

with only a marginal increase in funding allocations. According to the European Commission, 35 of the world’s 50 best universities are American. Only two of the 40 best are European, namely Oxford and Cambridge, both in the UK.69 If insistence on tax-based funding is to continue and resources for higher education increased–as they need to be, given the international competition for advanced production–then resources will have to be taken from other parts of the public sector, such as the police, medical care or care of the elderly. The politicians decide what study programmes are to be provided, which does not necessarily mean that those completing them will get jobs. At the same time, other categories of educated people are in short supply. The school population, medical patients and children and elderly people in need of caring services are not the only ones whose welfare services are deteriorating. The people employed in these services are also up against it. Illness rates are rising; sickness absenteeism has grown faster in the public than in the private sector. Wage improvements are slow for many groups. In the old Swedish settlements of Minnesota in the US the median rate of pay for a nurse is 51,000 dollars a year. In Sweden it is 26,500. The corresponding figure for a Minnesota doctor is 124,500 dollars, in Sweden 52,500.70 Unlike their colleagues in the US, Swedish nurses, teachers and caring staff cannot alternate between a number of private and public employers or freely start up on their own in the sector of their choice. The national economy as a whole has a slower growth rate, which means inferior working conditions and pay prospects. The European Central Bank has analysed public sector efficiency in 23 industrialized countries, and reached the conclusion that, the smaller the public sector, the higher the level of efficiency–and the 69. The Economist, 2004 (a). 71. Bergström & Gidehag, 2003.

bigger the pubic sector, the lower the level of efficiency. In other words, the more the public sector is called upon to do, the less efficiently it performs. The table below illustrates the analysis with a selection of the 23 countries. Sweden scores 0.57 for input efficiency, which means that if the Swedish public sector were as efficient as those of Japan and USA, which score 1.0, 57 per cent of present-day expenditure would suffice. In other words, lower efficiency means our having to pay 43 per cent more than we might perhaps need to. A similar situation prevails in many other European countries.71 Table 7: Public sector efficiency Country USA, Japan, Luxemburg Australia Ireland Switzerland Iceland UK New Zealand Spain Portugal Canada Norway, Greece Netherlands, Germany Austria Italy, Belgium France Denmark Finland Sweden

Efficiency (1.00=max) 1.00 0.99 0.96 0.95 0.87 0.84 0.83 0.80 0.79 0.75 0.73 0.72 0.67 0.66 0.64 0.62 0.61 0.57

71. Afonso, Schuknecht & Tanzi, 2003.

Clearly, the staff is wearing itself out, with progressively deteriorating results. Not in all fields, but this can be termed the dominant trend. Prioritization and efficiency measures are taken all the time. The problem is not that patients are too demanding, staff insufficiently active or ambitions non-existent. The explanation is to be found in the organization which has been chosen and which has failed whereever it has been tested, at all times and in all fields: a centrally controlled command economy in which private operation, ownership and funding are prohibited. Bureaucrats high up on a central pedestal have to try to plan and direct things on strength of assumptions concerning millions of needs and preferences. Result: poor adjustment to demand, waiting lists and discontent. Tens of thousands of doctors are being hired while the number of medical consultations is falling. When free start-ups and competition are prohibited, the strongest motive force for new ideas, new techniques and new forms of organization also vanishes. Then again, centrally stationed bureaucrats and politicians can never achieve the creativity of a host of energetic people â&#x20AC;&#x153;at the sharp endâ&#x20AC;? and with responsibilities of their own in enterprises of their own. When tax-based funding is the only funding permissible, this excludes foundations, insurance, the stock exchange and other funding sources, which could improve activities.

Handouts instead of employment?

All the resources we live on are produced by labour. History has shown that we can produce more and more and still work less. But the question is where to strike the balance. If we go on working to the same extent when productivity rises, output and total resources will increase. But if we scale down our work input at the same rate as productivity increases, output will remain constant and the sum total of resources will not increase. If work input declines faster than productivity increases, the sum total will diminish. This is influenced by weekly working hours, by young people entering working life and older ones leaving itâ&#x20AC;&#x201C;but also by welfare systems. The biggest share of public expenditure consists of transfers, which mainly comprise pensions, other social security benefits and handouts. The greater the number of people covered by these systems, the smaller will be the number at workâ&#x20AC;&#x201C;and the greater the number having to be provided for. There are substantial differences in the level of employment in the EU countries. The cause for a low level may not always be the economic model. In some cases, the situation may be attributed to a tradition, which has it that only one person in the household works. In other cases, in Eastern and Central Europe, there is still a catching-up phase after the collapse of the centrally planned economy. But it also has to be noted that the statistics include people on sick-leave, parenthood leave, etc. For a country like Sweden, with the highest figures of sick-leave in the EU, this implies that the actual level of employment, in the sense of people actually working, is about 60 per cent rather than the official 72. The aim of the Lisbon Agenda is to reach an average level of employment in the EU of 67 per cent. Still, 79

Table 8: Total employment in EU countries and the US in per cent, 200472

EU Belgium Czech Republic Denmark Germany Estonia Greece Spain France Ireland Italy Cyprus Latvia Lithuania Luxembourg Hungary Malta Netherlands Austria Poland Portugal Slovenia Slovakia Finland Sweden Untited Kingdom The US

63.3 60.3 64.2 75.7 65.0 63.0 59.4 61.1 63.1 66.3 57.6 69.1 62.3 61.2 61.6 56.8 54.1 73.1 67.8 51.7 67.8 65.3 57.0 67.6 72.1 71.6 75.1

72. Eurostat. The employment rate is calculated by dividing the number of persons aged 15 to 64 in employment by the total population in the same age group. The indicator is based on the EU Labour Force Survey. The survey covers the entire population living in private households and excludes those in collective households such as boarding houses, halls of residence and hospitals. Employed population consists of those persons who during the reference week did any work for pay or profit for at least one hour, or were not working but had jobs from which they were temporarily absent.

even this would be quite far from the American level of 75 per cent. Again, Swedenâ&#x20AC;&#x201C;the role modelâ&#x20AC;&#x201C;is a good example. In Sweden in 1964, when the present statistics began to be compiled, every working person had to provide for themselves and 1.3 others. This includes the young and the elderly, just like today. But since then, women, who to a great extent were provided for instead of going out to work, have entered the labour market, practically doubling their employment participation rate during the period. And yet every working person today has to provide for themselves and 1.6 others, the reason being that all other provided-for categories have heavily increased.73 They comprise pensioners, early retirement pensioners, sickness absentees and the unemployed. Women were provided for outside the public systems, but upkeep of individuals through the public systems has grown so dramatically as to more than offset the entry of women into the job market. The public sector and its wages also have to be financed through work in the private sector. If allowance were to be made for public sector employees being de facto provided for by workers in the private sector, the burden of support could be said to have risen to more than 2 persons per private sector worker. There is cause not to be guided by this calculation, because people working in the public sector, needless to say, are employed and produce services. But they are salaried out of tax from the private sector. The number of persons provided for has increased at the expense of the providers. We have coped with this so far, thanks to the workers being able to produce more and more with the same work input. But this means that the profit from producing more with the same work input has mainly gone, not on increasing the sum total of resources, but on providing for more and more non-workers. Pensioners are more numerous and young people are entering employ73. Rauhut & Malmberg, 2003.

ment later and later. But the fact is that, among the population of employable age, not only are working hours shorter but fewer people are working. In 2001 the Swedish population aged between 20 and 64 totalled 5.2 million. This included 1.4 million in the group termed “not in the labour force” and unemployed, i.e. a quarter. The “not in the labour force” group includes early retirement pensioners, whose numbers have risen from just over 300,000 in the mid-1980s to half a million today.74 100,000 of the disability pensioners are under 50. This is estimated to cost the Swedish treasury some 7 billion euro in 2003 or 2,100 euro per worker annually.75 During an average working week in 2002, 4.1 million people were employed, i.e. had jobs on paper. Of these 700,000 were absent all that week, so that of the officially employed only 3,400,000 were at work. Of these another 950,000 were absent part of the week. Fulltime absence mainly comprises parental leave for younger employees and sickness absence among older ones. Roughly 22 per cent of the employed population are absent from work on a normal working day.76 Sickness absentees account for the biggest increase. Sickness absence has increased in all age groups since 1998. On average 400,000 people are off sick every day and 130,000 of them have been sicklisted for over a year. This costs 4.5 billion euro annually–1,400 euro for every person at work.77 The cost of the lost work is higher still than these public expenses. Unemployment amounts to 400,000 persons, including 170,000 openly unemployed. The remainder in this category are occupied by means of various labour market policy pro-

74. Ibid. 75. Riksförsäkringsverket (Swedish Social Insurance Administration), 2004. 76. Långtidsutredningen 2003/04. 77. Riksförsäkringsverket, 2004, op. cit..

grammes. All of these derive their livelihood from the public systems. Altogether this means more than a million Swedish nationals of employable age not going to work. Out of a population of 9 million, then, 3 million are working. And of those, only slightly more than 2 million work in the private sector. We have a situation where progressively fewer people are providing for more and more. Those working in the public sector earn their salaries; they work, but the money still comes from private production. But those getting their livelihood from transfers are merely provided forâ&#x20AC;&#x201C;they produce nothing that is in demand. Thus the burden on the working population is a heavy one and has grown heavier. One can say that there are no alternatives: pensioners must have their pensions and sick people must have sickness benefit. True, but not everything needs to be done under public auspices and financed through taxation. And there have been numerous studies and reports in the media showing that health has never been better in the country, indicating that many simply choose not to work. Furthermore, it is simply unacceptable that more than a million people of employable age should not be working: there is a great demand in society for goods and, above all, services, and many of those who are not working could in all likelihood do something, even if it is not their old job. But something obstructs the use of their potential, something prevents a voluntary exchange between those with demand and those capable of supplying. There is no single answer to this important, pivotal question, but without a doubt the model of high taxes and big public systems is an impediment in itself. For a person earning 1,500 euro a month, the rate of unemployment compensation is about 23 euro per day, given the current 80 per cent public benefit rate. If that person gets a job, he or she will have 28 euro after tax per working day, a profit of 5 euro. This profit, moreover, is quickly absorbed by certain likely extra expenses connected with work, such as public transport and lunching 83

out. The gain from working a full day instead of doing what one wants is minimal. If on the other hand that person were still to opt in favour of working, the public sector would save 23 euro in non-payment of unemployment insurance compensation, and receive 38 euro a day in additional taxation revenue from that person’s work. The gain to the individual is 5 euro but to the national economy no less than 61 euro! Thus the value to society of employment instead of being provided for by others is great indeed. Even with slightly higher incomes such as 2,000 euro per month, the individual person’s gain of about 7 euro per day through going to work is very small compared with society’s gain. And yet the public sector counteracts this by letting the individual gain so little by working. High taxes eat up nearly the whole benefit–and one reason for the levying of high taxes is the upkeep of non-workers. The system in itself obstructs the path to prosperity, it has created a vicious circle. The Swedish Ministry of Finance has written that the taxation and subsidization systems “can palpably contribute to people not offering their labour to the extent which would have been desirable in a national economic perspective.” 78 There are plenty of concrete examples to choose from. A small entrepreneur described how a good worker–a young woman–one day reluctantly gave notice, the reason being that this was the only way she could afford a bigger flat–by combining a high rate of unemployment insurance compensation with a little casual work in the meantime. A carpenter injured his hand. This made it hard for him to practise his trade, but he was offered work as a bus driver. He was keen on the idea, but from various quarters was strongly urged to go for disability pension instead–which he did. With lower tax making it far more profitable to work, employment would become more attractive, which would mean less expenditure on benefits and handouts, which in turn means 78. Långtidsutredningen 2003/04, Appendix 14.

that taxes can be reduced still further–and so on in a virtuous circle. Economic incentives become still more relevant when norms and values change. According to a questionnaire survey of young Swedish persons (1,184 who would be 18 in 2003 replied) conducted by the TEMO opinion research institute in the spring of 2002, few feel that they are responsible through their work for their own livelihood. 54 per cent of the respondents considered society to be primarily responsible for their living standard, while 34 per cent did not feel this to be the case. 40 per cent of young persons in 1970 approved of people who were hardworking and capable of being better off, as against 33 per cent in this 2002 survey. No less than 51 per cent instead felt that it would be better for everyone to be equally well off, regardless of achievement: “I long for retirement, so that I won’t have to worry about the future,” as one of the respondents put it. “Why have a job which you earn money at and become known instead of doing what you want to and enjoy doing?” another wondered. And a third added: “I just want a lot of money so as to be able to buy lots of things. I don’t have any particular aim in life. Social welfare must look after us youngsters” 79 These attitudes on important issues can doubtless be modified with the passing of time, but they have to be taken as a clear warning sign. Young people today see little difference between earnings and handouts, between providing for themselves and being provided for. They seem to have little insight into where the money comes from–creative activity, enterprise and work. This is not surprising. People are rational–not always, but more often than seems to be widely believed. Wages must be payment for work done, but if you can get pretty much the same amount by doing what you fancy instead of working, this is what many people will do. Values often used to stand in the way of this rational behaviour, the important thing being to pull one’s 79. Karlsson, 2003.

weight even if it didn’t pay. Values of that kind have lost strength. The emergence of the big state may be one of the reasons. It has created new values, where work is not so important, and it is no better to work than to force those who are working to pay for people not working. “Curling parents” is a common expression nowadays, meaning that parents do everything to make their children’s lives happy and painfree–sweeping the track ahead of them. The European Social Model, the big state, is undeniably a curling state constructed by curling politicians. Citizens are not only to be guaranteed good chances to begin with but are to be protected all the way and looked after in every way to the very end: the track is swept ahead of them from the cradle to the grave. When the generations which grew up before the big state, and which assumed a greater measure of personal responsibility of their own lives gradually disappear, this will leave the citizens who grew up in the curling state. To them it is supremely natural for main responsibilities to fall on the public sector and only a limited amount of responsibility on themselves. In the longer term this means the system undermines itself–and undermines everything that created our society, our way of life and the path to prosperity. A majority of adult citizens look to the public sector for their earnings or else for the greater part of their incomes in the form of various handouts or benefits. This means that others decide the lives of a majority of people, not themselves. Politicians and officials decide, through power over their incomes, what their lives are going to be like. Thus, people tend to demonstrate in the streets, or at the front of state buildings, to try to improve their lives. It is of no use to try to do something by yourself; you have to try to persuade those who run your life to do it in another way. Most people act rationally in response to the conditions given, and in the European Social Model, this is tragically the logical thing to do. Since you pay such a lot into the system anyway, you might just as well try to increase your share 86

of the proceeds. But with everyone acting this way, a contest develops between groups for the same resources, instead of the creation of new resources which economic activity amounts to. Often the contest ends with everyone having to be given a little more and the public sphere taking up even more room. Or with vociferous groups taking resources away from the less articulate. Few people wish to lose the benefit of getting money without working for it. In this way the system is self-perpetuating, but only up to a certain point.

Growing welfare demand

When the national economy grows, our incomes do the same. We get more resources to use for things we consider important. The importance of economic growth cannot readily be overstated: with an annual growth rate of 2 per cent, the total economy doubles in 40 years.80 When per capita GDP grows larger and our incomes rise, we can choose to apply them to private consumption or to pay tax for public consumption. When per capita GDP increases we can afford more of both private and public consumption, but if public consumption grows more rapidly, it does so at the expense of private consumption–through higher taxes the public sector takes over an increasing share of society, because services grow more expensive and claim more resources. This is truer still if public systems are expanded and given a bigger remit. With more resources for private consumption we can indulge in things like holiday journeys, DVD players, eating out, new clothes, and perhaps a weekend cottage. When we can afford this, demand for more and better welfare services increase–it has been called “the discontent of rising expectations”. To match the growth of quality and quantity in private consumption of goods and services, then, the publicly provided welfare services also have to increase. For a long time this is what happened, until the taxation threshold was reached. Most observers assume that economic growth in the Western European countries will continue in the decades ahead, albeit less rapidly than before. The Swedish Long-Term Survey assumes that per capita GDP growth in Sweden will average 1.4 per cent annually until 2020. 80. Wetterberg, 2004.

Some of the assumptions underlying this figure may be a little optimistic, such as the assumption of the workforce increasing by 500,000 as a result of immigration. In addition, there is no analysis concerning the impact of fiercer international competition on Europe’s possibilities of attracting businesses to sustain growth. Possibly, then, future growth has been overestimated on the strength of present conditions. At the same time as the Commission optimistically counts on total resources increasing, it assumes that the growth of public consumption will virtually cease. It is assumed that over the next 20 years public consumption will only grow sufficiently for the present level of services to be retained, and that it will not, as hitherto, grow considerably faster than that. So public consumption is now to grow at what would have been a rate of 18 per cent between 1970 and 2002, instead of the 80 per cent which proved to be the case. All through the post-war era, per capita public spending has been increasing, as can be seen in the above chart. This is Sweden, but it follows the lines of increased tax pressure and increased government expenditure in various Western European countries shown previously. The development was the same. And this is what the money was largely used for. When the economy grows we want better welfare services and these become successively more expensive. There were just a few years during the 1990s when public consumption did not increase; at the beginning of the decade it actually fell slightly. These periods have been regarded as times of crisis. The Long-Term Survey (LU) assumes that this “crisis level” will be retained for 20 years–and this at a time when citizens to a great extent are already demanding both more and better welfare than now exists. Despite these optimistic assumptions regarding the plus and minus sides of the public sector economy–high revenue thanks to growth, and limited expenditure thanks to constant public consumption–the Survey leads to the conclusion that a gap will occur between income and expenditure. 90

Not even in this scenario–which, from a system-point of view, is extremely optimistic–will the system as now constructed work! Demand for more and better welfare services will of course go on increasing when the economy grows; 20 years of rationing at the present level is an utterly unrealistic proposition. The governmental Responsibilities Committee, tasked with proposing the organization of society for the future, writes: “It seems clear, however, that the real demands on publicly funded welfare will substantially exceed the needs indicated by a straight demographic projection.” 81 That is, even allowing for demography. Demand according to the line indicating a continued increase, true to post-war developments, is more probable than the dashed line, which is constant. This means that the gap between welfare supply and welfare demand is going to be a very wide one. Figure 8: Public consumption per capita82

81. Långtidsutredningen 2003/04. 82. Ansvarskommittén, 2003.

Progressively fewer must provide for progressively more

Demand for welfare services is increasing, not only because we want more and better services, but also because the population is growing older. Our increasing longevity must be rated as a major success, not–as sometimes described–a problem. But the growth in the number of older persons without any attendant rise in the number of younger ones is undoubtedly creating a new situation. Not only must older persons have pensions and caring services, but the number of people to produce the resources through their work input is diminishing–assuming that the present-day situation regarding duration of studies and retiring age continues to apply. In Germany the population is expected to diminish from today’s 82 million to 72 million in 2050. But the proportion of the population defined in Germany as of employable age, between 15 and 64, will decline even more, from 56 million to 41.5 million. The Italian population is expected to fall from 57.5 million to 41.5 million and the employable population from 39 to 22 million. A similar situation prevails in most of the European countries. In Japan the population is expected to diminish by 17.5 per cent over the next 50 years. These assessments may seem very long-term, but the fact is that everyone who will be entering the workforce over the next 15 or 20 years has already been born, and we know almost exactly how many will be retiring. For a similar pattern of development earlier in Europe during peacetime we have to go back to the Black Death, which reduced the population by a third.83 83. Stein & Reading, 2003.

Figure 9: Population of working age84

The diagram shows that the working-age population is expected to decline. The economy can grow as a result of more people working or the workers doing moreâ&#x20AC;&#x201C;increased productivity. In Germany today the population is already declining by 0.5 per cent annually and productivity is rising by 0.5 per cent annually. The workforce is shrinking by 0.5 per cent, at the same as those remaining are working 0.5 per cent more efficientlyâ&#x20AC;&#x201C;which adds up to zero growth! Unless other measures are taken, productivity will have to be increased to keep the economy from total stagnation. When manpower supply diminishes, wages tend to rise faster, which also increases public sector expenditure. Taxes then have to be increased to finance the same service. Higher wages and higher taxes also mean less return on capital, leading to fewer investments. As a result, growth becomes weaker than ever.85 84. Stein, 2004. 85. Stein & Reading, op.cit.

The demographic situation in Sweden is much the same. The biggest national daily has sounded the alarm in several pages of feature articles and analysis with headings like “The bell tolls for welfare” 86 and “Sweden has five years to solve the problems of its greying population”.87 In Sweden today there are about 200,000 people aged over 85, and in 2050 there are expected to be about 500,000. Assuming that care needs are of the same magnitude for the same age groups in the future, this will double total care demand by 2050. Expenditure will also be doubled–assuming there is absolutely no expansion of present caring services, contrary to what has been the case in past decades; otherwise expenditure will rise even further. At the same time we can be expected to grow healthier in future, which may slightly decelerate the rise in caring service expenditure. But demographic developments alone imply that public consumption–if present standards are maintained throughout–will have to rise. Another 130,000 public sector employees will be needed by 2020, merely to sustain the same standard–for demographic reasons–which, allowing for retirement, will mean 800,000 new staff to be recruited.88 Pensions, of course, are very important. It is said that when Otto von Bismarck introduced the first pension system, retirement age was set at 67 because average life expectancy in Germany at that time was 18 months more, 68.5 years. Sweden’s first pensions were introduced in 1913, with the same retiring age, but average life expectancy was only 55. The cost of these systems, then, was relatively limited. In present-day Sweden average life expectancy is 80 years. At the same time, the actual retiring age has fallen to 58. The number of over-65s per 100 persons aged between 20 and 64 is now 29 and is expected to reach 40 in 2020. Most European countries present a similar picture. 86. Bratt, 2003. 87. Schück, 2004. 88. Långtidsutredningen 2003/04.

But whereas this “elderly quota” is expected to rise to between 50 and 60 in several other Western European countries by 2050, in Sweden it is expected to stop short at 43–a less dramatic change.89 Older people are growing more numerous, young people less numerous. Regular employment in Sweden between the ages of 20 and 34 has fallen by 10 per cent since the beginning of the 1980s.90 In 1976, 50 per cent of all men and 40 per cent of all women aged between 16 and 19 were still working full time, as against 11 and 8 per cent respectively in 2001.91 Young people are becoming less numerous and enter working life at progressively later ages–fewer and fewer have to provide for the majority. The effects of increased average life expectancy and the elderly quota on pensions will be dramatic in the long term. If the present pension system is retained, pension costs in Spain will rise from 50 per cent of public social welfare expenditure at present to 80 per cent in 2030. In Germany they would rise from 42 to 60 per cent and in France from 45 to 62 per cent.92 Other public commitments are edged out. If the same commitments are retained, national debt will increase dramatically, to several hundred per cent of GDP. 93 The OECD has calculated how much you lose in various European countries by continuing to work. They describe it as a tax. In Germany and France, this tax amounts to 50 per cent for 55-year-olds, in Belgium it is 80 per cent and in the Netherlands 90 per cent. This is how we punish those who choose to continue working–is it any wonder that people retire instead of continuing to work? 89. Westerberg, 2000. 90. Schück, 2004. 91. Ansvarskommittén, 2003. 92. Boeri, 2004. 93. Standard & Poor, 2004.

The Center for Strategic and International Studies, together with Watson Wyatt Worldwide, compiled an annual Ageing Vulnerability Index, assessing the vulnerability of different countries in the light of demographic developments and the size and structure of public systems.94 In 2003 Australia, the US and the UK were rated least vulnerable, thanks to good demographic conditions, limited public sector commitments and advanced private alternatives. Both the UK and the US, however, are finding it increasingly difficult to finance an expansion of caring services for the elderly. The moderately vulnerable group includes Canada, Sweden, Japan, Germany, the Netherands and Belgium, all of which are faced with a tougher demographic challenge than the least vulnerable, despite pension reforms in Germany and Sweden. With the present system all will incur a heavy burden of provision for the elderly. The most vulnerable countries are France, Italy and Spain, owing to tough demographic developments, generous public systems, early retiring age and a heavy public burden of provision for the elderly. The analysis from the CSIS report questions the ability of these countries to extricate themselves from the situation without serious economic and social problems.95

94. The index is based on a number of indicators in the fields of public commitments, scope for financial policy, dependence on handouts and elderly ratio. 95. Jackson & Howe, 2003.

Taxes will decrease

A number of factors influence the quantity of production, where production takes place and what kind of production it is. Proximity to the market, reliable institutions, regulatory instruments, the level of competition and the level of costs are some of the more important factors. Since production is the foundation of prosperity and welfare, favourable conditions are important. The level of taxation and what it is levied on is a very important factor influencing costs. The quality and extent required of different welfare services is another factor influencing the attractiveness of Europe to new enterprises and their members. In Europe we have chosen to insist on tax funded welfare services and social security, and our taxes are the highest in the world. Thus, the economy grows progressively slower, fewer people work, more live off the state, welfare services are deterioratingâ&#x20AC;&#x201C;and taxes remain high and harmful. If this development is to be stopped and reversed, taxes will have to be substantially decreased, yet still some talk of tax increases to save the European Social Model. This is not going to happen. The pressure of taxation in Western Europe has not increased since around 1980. There is a ceiling for individual taxes after which revenue diminishes. The ceiling is determined by factors such as the mobility of tax bases and citizensâ&#x20AC;&#x2122; access to other alternatives instead of the taxed ones. This level can be worked out fairly precisely for individual taxes: one can see where the ceiling is, the points where tax becomes so high that the quantity of transactions diminishes to such an extent that tax revenue actually declines as well. Adding the effects of the individual taxes, we obtain a picture of the effects of the total pressure of taxation on the economy as a whole. 99

Working out the exact total effect of all individual taxes on the economy, however, is more difficult, and this is sometimes made a pretext for claiming that the total pressure of taxation has no effect on growth. That is completely wrong and a dangerous myth. There are, as mentioned, an overwhelming amount of studies which provide empirical and theoretical evidence of negative relationship between high tax and economic growth. And if the pressure of taxation does not affect growth, it is hard to understand why politicians all over Western Europe propose spending cuts at all, and not just raise taxes. On the other hand it is true that even countries where the pressure of taxation is high, reasonable economic growth can be achieved. This is because the country concerned, quite simply, is much better in some other category which decides the terms of production, such as a deregulated telecom market, a flexible job market or efficient institutions. Even a wheelchair-bound person can be good at tennis, but that is not to say that the wheelchair makes tennis easier. It is because that person is extremely skilled in every other way. In what ways do taxes hamper work, production and growth? Daniel Mitchell, Senior Fellow in Political Economy at the Heritage Foundation, has compiled the eight main ways in which taxes and thus government spending decrease growth: • Government spending displaces private-sector activity. • Government spending finances harmful intervention. • Government spending requires costly financing choices. • Government spending encourages destructive choices. • Government spending discourages productive choices. • Government spending distorts resource allocation. • Government spending is a less effective way to deliver services. • Government spending inhibits innovation.96 96. Mitchell, 2005.

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An empirical study by Professor Magnus Henrekson and Steven J Davis gives evidence as to how much taxes obstruct productive work. Based on empirical studies in the OECD countries, they find that 12,8 per cent in higher total tax pressure (standard deviation) creates the following effects: a 4,9 per cent drop in the employment ratio, an increase of the black economy by 3,8 per cent of GDP, 122 hours less productive work per person, and 10â&#x20AC;&#x201C;30 per cent smaller business within economic sectors like household services, retail, child and elderly care, cleaning, personal servicesâ&#x20AC;&#x201C;that move into the households.97 Economic history also speaks for itself. The following chart illustrates Swedish growth compared with the average growth of 16 industrialized countries.98 Figure 10: Swedish GDP development compared with the average of 16 industrialized countries99

97. Davis & Henrekson, 2005. 98. The 16 countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, Norway, Switzerland, the UK and USA. 99. Andersson-Skog & Krantz, 2002.

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Between 1890 and 1950, Sweden was the worldâ&#x20AC;&#x2122;s fastest-growing economy. Since 1950, though, its annual growth has fallen below the average of the other countries. Many of them, the European ones especially, also raised taxes, but in important countries like the US and Japan the pressure of taxation did not develop in the same way, with the result that these countries reduce the tax pressure average and elevate growth. The more classical scaleâ&#x20AC;&#x201C;the OECD list of countries by per capita GDP PPP (converted at purchasing power parity), also show Sweden slipping down, from fourth place in 1970 to fourteenth in 2003. This goes to show that the total pressure of taxation impacts on growth, even if the impact is clearer in the case of individual taxes.100 The taxation systems of Western Europe have not remained unaltered since 1980, even if the total pressure of taxation has remained relatively constant. Many changes have been made to individual taxes, in various directions. To a great extent this has taken the form of a hunt for things to tax, which cannot disappear so easily. Taxes on financial assets have had to be reduced because financial markets are deregulated and assets can be moved all over the world in a matter of seconds. Many tax bases are highly mobile. Over-taxation of these assets will cause them to disappear, leaving less money for business venture capital and, ultimately, less taxation revenue. Individual specific taxes, e.g. on alcohol and tobacco, have been reduced because otherwise consumption of these products sold and taxed at home will fall dramatically. Marginal taxes on earnings have been reduced so that work will pay better, so that the person earning an income increase will retain more of it. To offset these reductions and maintain the total level of taxation revenue, other taxes have been increased, 100. Thus in the economic sphere, international organizations and agencies such as the OECD, the IMF and the European Commission are constantly recommending the Western European countries to reduce various taxes in order to boost growth.

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many of them taxes on low income earners, who cannot migrate easily, taxes on food, which everyone must have, and taxes on real estate, because everyone needs a roof over their head. There is, however, often widespread popular opposition to these taxes, which makes it difficult to raise them further or even to keep them at their existing levels. In recent years there has been a growth of international competition regarding good conditions for production. Progressively larger parts of the world are able to offer viable institutions, good competence and growing marketsâ&#x20AC;&#x201C;things which attract enterprise. Companies are becoming more and more internationalized. According to the UN agency UNCTAD, at the beginning of the 1990s there were 37,000 international corporations with 175,000 foreign subsidiaries. In 2002 there were 64,000 with 870,000 subsidiaries. No less than 60 per cent of world trade goes on within these corporations.101 The number of people in Western European countries who are today employed in foreign-owned companies has doubled several times in the last decades. Of course, the volume of production, and with it the number of firms and job opportunities in the world, is not constant but growing; it is not a case of different parts of the world contending for a fixed quantity. This can be instanced with the case of Delta Air, which in 2003 moved 1,000 ticket reservation jobs from the US to India and saved USD 25 million in the process, sufficient to hire 1,200 new workers in the US for more qualified positions.102 What we see today is a process of global specialization resembling that which occurred hundreds of years ago in the villages of Europe, with one man becoming a blacksmith, because that is what he was best at, and another becoming a baker, etc. This is now happening on a global scale, aided by new communications technology. In this way 101. The Economist, 2004 (b). 102. Drezner, 2004.

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productivity can rise and the winners are consumers, who get better products and more of them for less money. The following chart shows growth in China, India, the US and the EU (which at the time had 15 members) between 1980 and 2002. Figure 11: GDP growth 1980-2002, percentages, index 1980=100103

China’s economy today is 650 per cent bigger than it was in 1980, India’s not quite 250 per cent bigger, USA’s nearly 100 per cent bigger and the then European Union’s about 60 per cent bigger. The increases in both China and India start from low levels. One per cent of 1,000 is more than ten per cent of 50, but with the passing years the aggregate grows larger and every percentage unit of growth means more. In 2003, for example, China overtook the French economy in size, and its economic growth shows no signs of decelerating. China 103. Growth in China, India, the US and EU, 2002.

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is expected to be the world’s second largest economy in 2030, close on the heels of the US. The Economist devoted its August 2005 edition to “How China runs the world economy” 104 already; it keeps inflation down, affects wages in Europe and the US, runs American monetary policy, etc. In this heightened global competition, the important issue is what production can occur in what place. Today a growing number of service jobs, and not just basic commodity production, are being relocated to Asian countries. It is estimated that in ten years’ time one-third of all European IT jobs will be in India. China is no longer considered just the workshop of the world; it is also the world’s brain. By the end of 2003, central activities like research and development had already been stationed in China by 400 of the world’s 500 biggest corporations.105 The workforce there is less productive than in Europe, but in return wage costs are lower still, and so there is money to be gained by placing production there. As Chinese productivity rises and manpower supply diminishes, Chinese wages will also rise, but it is likely to be a long time before they catch up with rates of pay in the western world. Where the US is concerned, most studies indicate an unambiguous profit through this global division of labour, as in the case of Delta Air: low-skilled, low-paid work is relocated and more qualified jobs remain and increase. The McKinsey Global Institute estimates that for every dollar transferred from the US to production in countries like China and India, the US earns between USD 1.12 and 1.14, mainly in the form of reduced corporate expenditure and lower consumer prices.106 This cannot be taken for granted, however: it all depends on the conditions created on the home ground. Europe offers a number of 104. The Economist, 2005 (g). 105. Engqvist, 2004. 106. McKinsey Global Institute, 2003.

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good preconditions, but high taxes are a drawback. This can mean low-skilled jobs moving elsewhere, but not necessarily their replacement with new and more qualified ones. Another conceivable scenario is for many of the basic jobs to remain in Europe at the same time as company head offices, key jobs and the prerequisites of advanced production find other places to go to. With a scenario like this, Western Europe will tend to follow the current path in many developing countries towards a larger proportion of low-skilled jobs, rather than the one of a greater preponderance of advanced functions seen in reformed countries. The fact remains that high taxes, and the attendant high costs incurred by companies and private individuals, are a disadvantage in global competition. To alleviate that disadvantage, taxes on businesses have been reduced: the KPMG auditing and accounting company finds the OECD countries to have reduced their corporate taxes by seven percentage units between 1996 and 2003.107 Nothing suggests that these reductions will cease, still less that they will be reversed. In the decades to come, a rise in the pressure of taxation will impair competition prospects. The countries of Western Europe are also facing intensive competition from Central and Eastern Europe. At first those countries had to make tremendous readjustments from the social system of the collapsed command economy. Rapid changes took place in a number of countries, and in many cases reforms were vigorously enacted so as to meet the requirements of democracy and a viable market economy prior to EU accession. Gradually, therefore, business interests began basing production in these countries, and trade exchange with them has grown. Swedenâ&#x20AC;&#x2122;s trade with the ten new countries almost tripled between 1995 and 2002. When the first ten of them joined the EU on 1st May 2004, the single market grew to contain 450 million peo-

107. The Economist, 2004 (b).

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ple. Annual GDP growth was over 4 per cent in the new countries in 2004, more than twice as much as in the 15 old ones. Labour costs among the new countries are highest in Slovenia and Cyprus, at about 50 per cent of the average for the old countries, while in the other new countries they are more like 25 per cent.108 The pressure of taxation is lower in the new EU countries, and income tax is flat in several of them, meaning that the percentage payable does not rise with increasing income,–making it more profitable to work harder. Table 9: Flat tax in European countries109 Estonia Lithuania Latvia Russia Serbia Ukraine Slovenia Georgia Romania

26 33 25 13 14 13 19 12 16

% % % % % % % % %

Other countries are also considering flat tax; the Greek government recently said it was thinking “seriously” about it, and the Dutch Minister of Finance has also spoken positively about a flat tax. Thus new, fast-growing EU countries with competitive conditions are intensifying the competition for favourable business conditions at close quarters in Western Europe. Corporation tax in the new EU member states averages 21 per cent as against 32 per cent in ‘old Europe’. Some Estonian corporate taxes are zero per cent. With this in mind, even before the EU’s enlargement, Austria passed a reduction of its 108. Törnell & Leiler, 2003. 109. O’Dwyer (ed), 2005.

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corporate tax from 34 to 25 per cent.110 The free movement of goods, services, capital and people in the EU single market is helping to spur competition. In an open, transparent market with identical rules, differences are made more obvious and disadvantages more telling.111 Late counter-reactions in the form of restrictions on the free movement of people and criticism of the low taxes in the new Member States have been heard both from Germany’s Chancellor and Sweden’s Prime Minister. Suddenly there was concern at the entry of the new Member States requiring the old ones to raise their game in order to cope with the competition. The fact is that the single market, with its free competition and, consequently, pressure for constant renewal, is strengthening European competitiveness globally. Measures to curb competition and the renewal of systems in this European market will only result in our undermining our own opportunities. There are no methods for curbing global specialization and competition for businesses and well-paid jobs. Mobile tax bases and fiercer international competition have led to successive tax reductions in recent years. The differences in corporate tax levels above will not last. And they will not adjust upwards. In 1996, the average corporate tax level of the EU-15 was 39 per cent; in 2004 it was 31 per cent.112 Another aspect auguring further reduc110. Hellblom, 2004. 111. LO (the Swedish Trade Union Confederation) writes, in a major analysis of longterm trends and conditions for the future: ”The freedom of movement existing between the Member States of the EU makes it difficult in certain situations to have different taxation rates . . . Demands for free movement of services also have a more direct impact on Sweden welfare policy. Swedish patients are entitled to seek care in other EU countries. This limits the possibility of Sweden controlling medical expenditure . . . The increased mobility of labour between countries which can be expected in future will make new demands on the structuring of the welfare system . . . When mobility increases, however, it may become more difficult to successfully maintain a high degree of redistribution in welfare systems.” LO, 2004. 112. Segerfeldt, forthcoming.

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Table 10: Corporate tax rates in EU-25113 Estonia Cyprus Ireland Latvia Lithuania Hungary Poland Slovakia Austria Slovenia Czech Rep Finland Portugal Sweden Great Britain Denmark Luxembourg Belgium Netherlands Greece Malta Spain France Italy Germany

0 10 12.5 15 15 16 19 19 25 25 26 26 27.5 28 30 30 30.38 33.99 34.5 35 35 35 35.43 37.35 38.29

% % % % % % % % % % % % % % % % % % % % % % % % %

tions is that increasing the supply of manpower is the best way of alleviating the demographic challenge. More people at work means greater resources for pensions and elderly care. The total number of hours worked has not increased during the post-war era as a whole, despite population growth and a rise in womenâ&#x20AC;&#x2122;s employment participation. If this development is to change, work will have to be made a good deal more remunerative, so as to be more attractive than hand113. International Herald Tribune, 2005 (a).

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outs or leisure. The difference in income after tax between work and handouts will have to be a lot more than the 5 euros in the example quoted above. Both taxes and benefits have to be reduced. There is strong pressure in favour of income tax reductions for the sake of growth and welfare. But that will not necessarily mean a decrease in public revenue in absolute terms; higher growth following lower taxes can lead to a situation where lower taxes bring higher revenues. Since Estonia introduced their flat-tax at 26 per cent in 1994, revenues have risen every year. And substantially lower corporate tax in Ireland has led to sharply rising revenues.114 Figure 12: Corporate tax revenue in Ireland, 1975â&#x20AC;&#x201C;2000

Higher pressure of taxation is not going to be realised. Individual taxes will be reapportioned, but ultimately they will always be a burden on production. Western Europe already has the worldâ&#x20AC;&#x2122;s highest taxes. The downward pressure on taxes is growing progressively 114. Mitchell, 2004.

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stronger. Consequently, individual taxes are being reduced across the board, but in general by too little and at too slow a pace. The dominating trend is to let the problems continue, speak of measures to strengthen the European Social Model and attempting to carry out some reforms in silence.

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A free labour market

Another part of the big state is its influence on the labour market. The state regulates how people should work, where they should work, their wages, their vacation, and other working conditions. And if the state doesn’t regulate it specifically, the trade unions have often been given vast privileges to decide such terms. There are two basic varieties of the European Social Model in this respect: direct regulations by the state or collective bargaining between employers and trade unions. The expressed aim of these regulations–by the state or by state privileges for the unions–has been to increase job security for workers and improve general conditions. To a large extent, this part of the big state has also been counter-productive. Numerous studies show the negative effects of regulated labour markets. Not least, it leads to a situation where few jobs are created. Unemployment in Germany hasn’t been this high in 75 years. Between 1970 and 2003, employment in the US rose by 58.9 million, which is equivalent to a 75 per cent increase. In France, Germany and Italy together, it rose by 17.6 million people, or 26 per cent.115 In Sweden, 100,000 companies with no employees want to hire, but they don’t. The four main reasons they give for this are the following: difficulty in firing people, high taxes and social contributions, too much regulation and too high costs to pay for people on sickleave.116 115. Gersemann, 2003. 116. Svenskt Näringsliv, 9th August, 2005.

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Diana Furchtgott-Roth, senior fellow and director of the Center for Employment Policy at the Hudson Institute, and chief economist at the US Department of Labour 2003–2005, has described the main differences between the less regulated US labour market and the one of Western Europe: “Over the past decade, European employment has grown by less than 10 per cent, while US employment has grown by 17 per cent, creating more than 2.2m jobs last year (2004) alone. ... The unsung story behind US job creation is the flexibility and turnover in American labour markets, which boost employment. Frequent job changes lead to better job matches and higher productivity. In 2004 there were 54m new hires and 51m job separations in a labour force of 147m. Over half these separations were voluntary–people who left jobs because of better opportunities. Younger baby boomers, born in 1957–1964, held an average of 9.6 jobs from age 18 to 36. ... Countries with high employment-protection legislation and less turnover have more long-term unemployment. Last year in the US only 13 per cent of unemployed workers could not find work within 12 months, compared with 21 per cent for the UK, 42 per cent in France, 52 per cent in Germany and 50 per cent in Italy. In the EU as a whole, the percentage of unemployed out of work for longer than a year was 44 per cent. . . Owing to flexible employment laws, a higher percentage of American older citizens work than in many other industrialized countries. In 2003, 14 per cent of Americans 65 and older remained economically active, a figure exceeded only by Japan in leading industrialized countries. In France, Italy, Germany, Canada and Australia, only 1 to 7 per cent of older citizens were economically active.” 117 Again, the US is not the only example, though there are many statistics from there–in Denmark, the labour market is also little regu117. Furchtgott-Roth, 2005.

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lated, with the same positive effects for the labour market. The most common recommendation from various international organizations, such as the IMF, to Western European countries is thus to de-regulate labour markets. One effect of the current order is that the minimum wage levels are pushed up, which means that low-skilled labourers find it very difficult to get a job. Instead, they live off contributions from the state in various programs, often at levels even lower. Young people find it hard to get a job, since they often start with lower salaries and work their way up. And young people are often the first to go when staff has to be reduced, since they were the last ones to come in–and regulations mainly protect those who have had a job for a long time. It has been called the insider-outsider problem and it has created huge youth unemployment in Western Europe. Entrepreneurs that work 80 hours a week trying to get their ideas into production find it hard to manage to learn thousands of pages of labour market regulations. And they hardly dare to employ people since they may find it hard to get rid of them if it turns out to have been a mistake. A company with three employees doesn’t stand a chance to fight trade unions with tens of thousands of members and hired lawyers if they argue their case. Heavily regulated labour markets are, by definition, less flexible than not so regulated ones. If job security is very high, it is likely that people remain in the same jobs. This means, in turn, that if you do lose your job–because the company moves, for example–it is hard to find a new one. The people who have the current jobs simply don’t move. Thus, in a regulated labour market, there is a strong tendency to try to protect exactly the current production and jobs. This implies that regulated job security paradoxically leads to more insecurity; because it is so hard to find a new job, you are very afraid of losing the one you are in. And this creates an obstacle to the necessary constant change and development in the business sphere, where old companies and jobs disappear only to be replaced by new ones. And that 115

means a political environment where politicians always feel they have to try to propose new measures to “protect the jobs” by means of protectionism, subsidies, etc. But globalization and the new EU challenge the regulated labour markets and the power of trade unions. It is hard for governments to have strictly regulated labour markets in Europe when it is so easy for companies to move their production to Eastern and Central Europe–or India and China–where there are fewer regulations. It is also increasingly hard to keep up regulations, despite the falling employment and rising dependency on the state. They also find it hard to regulate companies and employees from abroad. The power of trade unions is also challenged. They are basically labour market cartels controlling the price, and as every cartel, they have to be able to restrict competition in order to control the price. But in the Europe of today, and in this globalized world, it is hard to stay in control. The number of people who are members of trade unions is also steadily decreasing. Thus, they fight a losing battle. They try to stop companies from the new EU member states from offering their services. In France there is talk of Polish plumbers taking jobs. In Sweden, the most famous example is Latvian construction workers. An interesting case took place in Waxholm, a small community north of Stockholm. The town council put out a tender for the construction of a new school, and a Latvian company won the contract. They started building, but were soon blockaded by the Swedish construction workers union, Byggnads. The Latvian company had not signed a collective deal with Byggnads and consequently their employees were subjected to shouts of “go home” at the workplace. The case is now in the EU Court of Justice because it is a matter of whether a union can demand non-members to sign their deal. It is a sign of battles to come. Many in Western Europe fear that companies and jobs will move out and foreigners move in. They consider it a doomsday scenario. In 116

a recent opinion poll, Swedes listed this as their main fear for the future. They believe that the alternative to lower wages and unemployment is protectionism. But the idea that Europe has reached the end of history can hardly be our most creative vision for the future labour market. Should we freeze everything as it is and forever have the same companies and the same jobs as we have today? About 150 years ago, 80 percent of the Swedish population worked in agriculture. Today, it is less than 3 percent and they actually produce more. But the other 77 per cent did not become unemployed. They actually got better jobs than before, in the expanding industry. Today, the average Swede is more than ten times wealthier than at that time. Would anyone have wanted to stop development then? Back then, they didn’t know what was going to replace agriculture and there was fear–and protectionism. In recent decades, the manufacturing industry has been decreasing its number of employees in Western Europe. What emerges instead is the service sector. About 70 per cent of the workforce in the EU-15 is employed in the service sector. In Ireland, for example, employment in the manufacturing industry has decreased by 10 percent since 2000. But total employment has risen by 10 percent.118 For every job lost, two new ones have been created. And as before, the new jobs are better. Wages are higher. And statistics show that the larger the share of services in the economy, the higher the GDP per capita and the lower the rate of unemployment. If we want the new to come, the old must disappear. If we lock up productive resources in the old, the new will not expand. This is always a painful process in the short run for those who are affected. What is a metal worker going to do when his job either leaves the country or is taken by a foreigner? We still don’t have a society that makes gaining new skills and change profitable enough. People in 118. Svenskt Näringsliv, 15th June, 2005.

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Figure 13: More services–higher GDP per capita119

Western Europe don’t have enough opportunities. If we stopped focusing on how to protect the old, we could think more about that. We already live with one horrific example of where we end up if we try to keep the old: Europe’s Common Agricultural Policy. Enormous sums of the taxpayers’ money go to farmers–close to half the EU budget. Consumer prices are higher, poor countries are kept from exporting and resources are locked up. The plain truth is that if European farmers can’t produce without tax subsidies, there should be no farmers in Europe–consumers would obviously choose the same products from other countries. If we use our resources in subsidies to old jobs, the new ones will not come. If we had subsidized the manufacturing of DVD-players–to have DVD-production and jobs here instead of buying from China–there would be other production, for which we are better suited, which would not take place. Prices of DVD-players would be higher, consumers would lose and people would be stuck in 119. World Development Indicators, 2003.

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old jobs with lower wages. And growth would be declining. Luckily, this kind of policy doesn’t exist in every branch of business. The same goes for traditional manufacturing. Today, about 18 per cent of the Swedish work-force is employed in industry, and if the present trend continues, the share will be some 10–12 per cent in ten years’ time. The figures are roughly the same all over Western Europe. Traditional manufacturing industry is the agriculture of our time. And that is the point; if we lose plumbing and construction jobs, we should lose them. If we are not competitive in that field, we should not do such work. Those jobs should disappear and we must do something else. But of course, in a globalized production, there is often a mix of services and goods in the same companies, and different parts of the companies are in different countries. It is not only a matter of letting the old jobs go and welcoming the new, or a matter of getting people from being totally dependent on the state to being employed and economically productive, it is also an issue concerning demography. Letting people immigrate, thus increasing employment, is one way to let market forces reverse a situation where ever fewer people would work and support ever more. What we have to do is to make the transition to the new jobs and prosperity quick and easy–and that means cutting down big government, not least its interference in the labour market.

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A more heterogeneous society

Citizens were all relatively similar to each other within each country when the European Social Model was developed. True, there are and have always been minority groups in many countries of Western Europe. But the vast majority in each country were very similar, in homogeneous nation-states–with a few exceptions. Most had been born in the country, spoke the same language, watched the same television channels, attended similar schools, did military service, belonged to the same church, went on holiday to the same places, belonged to similar organizations, ate similar food and had the same working hours. In a word, citizens were a homogeneous group, a group with a similar picture of the world, experience, origins, habits and desires in life. So the demos–meaning the “people” in the Greek term democracy, was highly uniform. In all democratic states, public power depends on citizens’ support for politics and the framing of public systems. And in all democratic states, there is a debate about how much the majority should be allowed to rule, and how much each individual should be protected in the Constitution. In homogeneous states, the limits for the majority tend to be weak; the opposition towards the majority’s collective solutions is not so strong. But in heterogeneous societies, with minorities of different kinds, the power of the majority is usually much more restricted. The desires of individuals are simply too different to be solved collectively. The big state, with its many collective solutions, has greater difficulty existing in a heterogeneous society. “The people” today look very different: we are considerably more different from each other than we used to be. The trend is much the same everywhere in 121

Europe. The membership percentages of the traditional organizations, which created a similar world picture, values and meeting points, have declined steeply. During the 1990s alone, membership in Sweden’s parliamentary political parties fell from about 630,000 to 400,000.120 Union membership has fallen substantially in nearly all EU countries. Personnel strength in traditional industry and thus the large companies is steadily declining.121 During the decades after the Second World War, nearly all the young men performed military service, in the course of which they shared common experiences, friendships were forged and opinions moulded. Now the proportion of young men called up has fallen below 30 per cent. These developments will not in all probability continue to zero point, but the reduction is already very substantial; we are becoming less and less included in contexts creating community and equality within the country. At the same time a number of other phenomena have increased. More people are going abroad on holiday, and not to the same places as everybody else but all over the world. More young people are studying abroad, which is steadily increasing–and so is the number of countries in which to study. More people have joined new organizations and movements, such as the animal rights movement, environmentalist organizations and associations fighting world poverty. More informal networks with every imaginable kind of cross-border activity have grown considerably, facilitated by new communications technology. Membership of religious denominations other than the traditional ones is growing; one outward and visible sign of this is the appearance of mosques on the European landscape. The number of television channels has risen from a few–often state-owned–to hundreds, and the same goes for printed media and, of course, media on the Internet. Citizens’ world picture, their values and desires in life are 120. ”Partier utan medlemmar,” 2000. 121. SCB (NR, AKU), 2003.

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no longer shaped into a common objective. To an ever greater extent–above all where younger people are concerned–we are growing more cosmopolitan, with more individual preferences and views. Impressions, thoughts and opinions are being gathered from widely separate sources and shaped in an international environment. As a consequence of growing migration, an increasing proportion of citizens in the European societies have a different geographic and cultural background. Even the traditionally ethnically homogeneous Nordic countries have changed. Thus 21 per cent of Sweden’s population today were either born abroad or have at least one parent who was. There are now 14 million Muslims living in Western European countries. Large numbers of immigrant workers from Greece and former Yugoslavia arrived in Sweden during the 1960s, followed in the 1980s and 1990s by growing numbers of refugees, also from countries outside Europe. Cross-border migration as a percentage of population was greater still in the late 19th and early 20th centuries, until two world wars and the rise of totalitarianism put a stop to it. Now migration is increasingly being resumed. How does this affect the big state? The European Social Model implies that a large proportion of citizens’ money is being collected as tax. Decisions on how to spend the money are made collectively, on a majority basis. These collective decisions mean similar solutions for the people affected. A majority overrules a minority. This can be done in a society where people are similar to each other, but what about a society where there are more differences between us? The power of the state must come from the people, with the citizens delegating certain tasks to the public sector. When we grow more different and have different wishes in life, collective decisions over a large part of society, with similar solutions for all, become less legitimate. The uniform systems of the big state, financed by citizens’ money through taxation, suit fewer and fewer people. Some think it is unnecessary to save very much for their pension, but definitely want to have excellent and 123

prompt medical care here and now. Someone else prefers the opposite. The big state, summarizes columnist Göran Rosenberg, “presupposes a common cultural identity which no longer exists–and which can no longer be reinstated ... The question of how we move from a welfare society based on strong cultural cohesion to a welfare society based on cultural and individual diversity is a question which we should lose no time in trying to find the answer to.” 122 The number of analyses on the subject is growing. A book by Alberto Alesina and Edward Glaeser tries to answer the question why the degree of public commitment differs so greatly between Europe and USA.123 Various explanations are tested, but one after another they appear less and less plausible. Taxes are not higher in Europe in order for poor people to have better chances in life, because mobility from poverty to a better standard of living is at least as good in the US as in Europe. Instead the authors find two other explanations. The first is that the US has a strong constitution with a balance of power, which makes it hard for a political majority to expand the public sphere. The second is diversity. The US is a country of great diversity–religious, ethnic, political, economic–between different states but also within them. The greater a state’s diversity, the less it will have of collective decision-making and redistribution. This, the authors maintain, is due not least to citizens being more willing to submit to collective decisions and to redistribute resources when people are more similar and less willing to do so when there is more diversity. This is a controversial and debatable conclusion, but evidence for it is not lacking and one need not look to the US for examples. The European debate about grants to immigrants is undeniably greater than the debate on allowances for newborns, even though there is far 122. Rosenberg, 2004. 123. Alesina & Glaeser, 2004.

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less money at stake. It is not necessarily peopleâ&#x20AC;&#x2122;s origin that creates this lesser readiness to surrender their own resources to others, even though that aspect has come in for a lot of attention. The cause could lie in another of the many factors making us different. During the past few decades in the European countries we have grown more different in practically every respect. Heterogeneous countries have less redistribution and a smaller state, although the causality has not yet been described in detail. But it is easy to see that the common denominators are becoming fewer in number, and public power is, after all, supposed to frame common systems for everyoneâ&#x20AC;&#x2122;s benefit. Civic support for the substance of collective systems, which the mega-state needs in order to be legitimate and to be able to exist, has eroded. With only a minority fitting into the templates of the systems, new political parties and movements can very well come into being and canvass support from everyone wishing to find other ways and means, and to develop their lives according to their own preferences. When a voter base of this kind does take shape, several of the traditional parties are also likely to change their programmes in favour of greater diversity, thereby inaugurating a transformation of politics and systems.

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The unnecessary gap

The public sector is able to deliver progressively less welfare services and social security. The monopolies can’t deliver, services get more expensive, and the levels of public pensions and other benefits have to be reduced. The big state is crumbling. On the other hand, people keep demanding better education, better health care–and as we live longer, we want to have services that can give us a good life in our old age. This has created a gap between what the public sector of the big state can deliver and what the citizens actually demand. That gap is all the time widening, because taxes cannot be increased but will be further decreased, because needs are growing, because the public organization puts the brake on renewal, because fewer and fewer have to provide for more and more, and because our wishes are getting more heterogeneous. The wider this gap becomes, the more discontent will there be. And in a free society, people will find a way around the state to get what we want–and they do. Private solutions are growing. The straight, rising line illustrates citizens’ demand for welfare and is based on the assumption that welfare increases when GDP increases and that needs, partly for demographic reasons, also continue to increase. The second, curved line illustrates supply of publicly provided welfare services and social systems. During the post-war era, when taxes were rising steeply and the public sector became a larger part of society, that sector could grow as rapidly as demand did. When this development slowed down in the 1980s, the curve levelled out and during the 1990s efficiency measures and prioritization began in earnest. The difference between demand and supply in127

Figure 14: The gap between welfare supply and welfare demand

creased and with it discontent. Today, at the beginning of the 21st century, there is a distinct gap that, behind a schematic illustration like the one presented here, consists of concrete problems like hospital waiting lists, staff burnout and deficiencies of care. As Kjell Asplund, Director-General of the Swedish National Board of Health and Welfare, observed in April 2004, â&#x20AC;&#x153;There is beginning to be quite a large gap between what the public sector can take upon itself and what people want.â&#x20AC;? 124 All the analyses indicate a widening of this gap, because demand will go on increasing and the public sector will be less and less capable of delivering. How is this possible? How can a widening gap persist for decades? When there is demand, supply does not usually take long to respond. If youngsters want to transmit text and images through their mobile phones, companies will spend millions and millions of euro working out the best and cheapest solution. Why doesnâ&#x20AC;&#x2122;t the same thing happen in fields like nursing, caring services and social security, for which 124. Dagens Industri, 2004-04-23.

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most people have a far greater demand? The answer is that the big state, with its insistence on tax-based funding and public operation, blocks the path, interposing itself like a huge wall between people and their desires and needs. When all of society, or parts of it, are centralized behind such a wall of restriction of competition, profit, private ownership and private funding, gaps of this kind always occur. When barriers are thus erected between people’s free exchanges, their possibilities of each producing what the other wants, shortages of the most vital phenomena in life occur. The command economy can limp forward by copying and borrowing ideas and techniques, but it won’t work in the long run. When people’s creativity in free societies has manifestly transformed iron ore into aircraft, the command economy creates starvation in the world’s most fertile regions and thirst where water is most abundant. But people’s demand will find a way around the walls. Various private solutions have begun to seep in to fill the gap. Services, that may not be exchanged openly in the market, are exchanged covertly instead. If caring services cannot be outsourced and the public sector is unable to deliver, family and relatives do more than they would have done otherwise. When care is not promptly available within the country, it may be obtainable elsewhere. People try to find welfare services in other countries. The fact the European Court of Justice have now ruled that any EU citizen can seek care anywhere in the EU, and send the bill to the authorities in his or her country of domicile, is likely to have a great impact. The British National Heath Service sent patients past the Channel to other European countries with slightly less centralized health care systems and they received treatment.125 Waiting lists are being shortened because, instead of acquiescing to 125. Ylva Nilsson describes in a Timbro Briefing Paper reforms in the British National Health Service. Private competition, private financing – and other creative solutions – have, like in Sweden, slowly begun to be tested (Nilsson, 2005).

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them, people are travelling elsewhere for treatment, but costs are rising and putting pressure on the system. Only a few people can dispense with public services and, entirely at their own expense, resort to wholly private providers of welfare services. More and more people are opting for the possibility of supplementing public supply with private insurance. A survey in 2002 showed 47 per cent of Swedes believing that they would not be able to live on their state pension and 49 per cent finding it necessary to top up with private insurance. Furthermore, 18 per cent believed that they needed to top up with private unemployment insurance and 21 per cent with private health insurance. Nearly a quarter, 23 per cent, did not believe they would receive the care they needed if they were taken ill, and 230,000 people in Sweden already have private medical insurance. These include a large proportion of small entrepreneurs whose firms cannot wait for months for them to get treatment. In 2002 there were 2,300,000 Swedes who had opted to supplement their public and contractual pensions with private pension saving.126 But with high taxes and a number of prohibitions surrounding this sector, the proportion remains small. The greater part of the gap is not filled with solutions of this kindâ&#x20AC;&#x201C;yet.

126. AnsvarskommittĂŠn, 2003.

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What doesn’t fill the gap

The gap between supply and demand is nothing new, but now it has become so great and is growing so fast that politicians and observers have no alternative but to deal with it and develop conceivable solutions. Since change is very uncomfortable for all those who have invested their credibility in the present model, solutions are being sought which can preserve it. Some proposals, like raising the world’s highest taxes even more, would be extremely counter-productive and rapidly increase the problems, which have been described. But a number of other serious proposals have been made for reducing the gap while retaining most of the present model. Practically every political party, union organization and member of the business community, as well as innumerable special issue organizations claim they favour strong economic growth. But proceeding from general support for growth to identifying the concrete measures to be taken is less easy. The step from policy measure to action is more difficult still. The growth of aggregate resources and of our incomes is the foundation of our living standard.127 Insofar as one wishes to influence that standard in the longer term, growth is the pivotal issue. But where welfare services are concerned, it is not simply that increased growth gives a bigger pool of resources, which means a bigger 127. Ibid. In its first report the Swedish National Responsibilities Committee notes the following on the subject of taxes, growth and public sector funding: ”In the short term there is always the possibility of changing tax bases and taxation rates, but the more long-term the perspective we adopt, the more the supply of resources depends on growth in the overall economy . . . Economic globalization has palpably circumscribed the scope for an independent national policy, not least in the fiscal domain. This constitutes a constraint on the funding of the public commitment.”.

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share for welfare. When growth increases due to rising productivity, this, according to Baumol’s law, means that no new resources are added to public welfare. Productivity in services does not increase like productivity for goods, but costs rise just as much. The price of hairdressing services, for example, outstripped average price rises in the 1990s by 100 per cent.128 Hairdressers do not cut more per hour, but they get the same hourly pay improvements as people working in sectors where hourly production increases. Thus all increased growth goes to pay for the increased cost of the same amount of welfare. For a number of reasons, growth is positive nonetheless, because the total resources and, not least, our incomes with them, increase–but this does not solve the welfare issue so long as welfare remains publicly organized and funded. Moreover, it has to be emphasized that the European Social Model in itself is the main obstacle to increased growth–which of course makes it impossible to raise growth in order to keep that model. If on the other hand growth is based on more people working more– and not just on increased productivity–resources for welfare services can increase. This is the second of two possible ways of increasing growth: increased labour supply. Unfortunately there is nothing, even in the most optimistic demographic forecasts, to suggest a rise in the proportion of workers. All the indications are to the contrary. Germany would need 100 million immigrants between now and 2040 to maintain even the same provider ratio; Sweden would need 6 million by 2030.129 Even the modest increments, which could come from the new EU Member States, have slowed down. And they need people to work there too. It remains to boost employment among the present citizens. The Swedish National Long-Term Survey report estimates that employment among existing immigrants needs to rise by 128. Kommunala framtider, 2002. 129. Swedish Council for Official Statistics.

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63,000 persons by 2020. And the employment participation ratio among non-Nordic citizens fell from 74 per cent in 1980 to 35 per cent in 1997.130 A distinct rise in their employment under the present system seems more of a pious hope than a realistic assessment. There is unlikely to be any growth of manpower supply as long as the present-day system prevails–with the big state heavily regulating the labour market and thereby hampering employment, especially in these groups–and immigration remains impeded. Thus, with the present-day public systems, the present-day gap between welfare supply and welfare demand cannot be plugged with additional growth. Another proposal for filling the gap is to increase public saving, i.e. to collect more tax than will be spent the same year. This taxation revenue can be used to pay off some of the national debt or can be saved in some other way. Thus in 2004 the Centre for Business and Policy Studies’ Economic Policy Group proposed that the existing target of an annual public financial surplus should be raised.131 The idea is that if we tighten our belts and save today we will at least have more resources tomorrow, when our needs are even greater. This proposal is based on our voluntarily putting up with a widened gap between welfare supply and demand today by not using all taxation revenue, and in this way avoiding a very big gap tomorrow. This is not a solution to the problem but a way of alleviating its future scope. But the main difficulty with this proposal is that even the savings–or the additional scope for borrowing after the national debt has been reduced–will run out. The big problem will come sooner or later anyway. The really big effects of the basic problem have simply been postponed. Why put up with a medium-sized gap for a number of years instead of solving the problem and closing the gap as soon as possible? 130. Ansvarskommittén, 2003. 131. Report from SNS Konjunkturråd (Economic Council of the Society for Business and Policy Studies), 2004.

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In the European debate it is quite often proposed that questions concerning taxes and the public sphere should increasingly be elevated to EU level for decision and management. Individual taxes would then be harmonized with central administration, majority decisions would be introduced on individual taxes and eventually perhaps the EU would acquire its own power of taxation. The same would be done concerning social security and welfare services, the aim being to counteract the competition for businesses and jobs which exists in the single market and is being intensified as more and more countries join the EU. In all probability this will not be feasible to more than a very limited extent. In the first place, a union with 25 members and still more to come is very heterogeneous, with a variety of systems and traditions. New, common EU systems for taxes and social affairs–which have to be decided unanimously–cannot gain support in all these countries. A smaller number of countries will then have to press ahead. Secondly, limits on competition within the EU will impair Europe’s global prospects. The single market, with its mobility and competition–and the attendant pressure on businesses to develop and on countries to become competitive–is making us better and better in a global perspective. Preventing this would be an open invitation to other parts of the world to overtake ours, leaving it in a position where we compete for more basic production. Productivity growth in the welfare services is another idea about how to keep the current system. It has, however, according to the established way of measuring it, been practically non-existent in public services for decades–confirmation of Baumol’s law. The same goes for most privately performed services. It is undeniably difficult to look after elderly people with progressively greater efficiency, but there are also signs of phenomena like innovations and new technology being capable of boosting productivity in services. Taking Losec instead of having to undergo surgery for a gastric ulcer means an expenditure cut from 2,500 dollars to 112.50. This way the same 134

treatment is given at a fraction of the cost and productivity raised by no less than 2,200 per cent. Keyhole surgery dramatically reduces the need for after-care, and in cases of this kind is estimated to raise productivity by 200 per cent.132 These are highly positive examples, beacons of hope, but unfortunately they shine in what is otherwise a relatively bleak darkness. No one has been able to show such productivity improvements to have had any aggregate effect with a significant bearing on the overall situation. And, more importantly, these are typical instances of new products and innovations originating in the private sector and imported by the public sector. The beacons, in other words, are lit more in spite of than because of these services being delivered under public auspices. The examples inspire hopes of new ideas, new modes of organization, new products and innovations improving services such as nursing and care. But as long as the motive forces of such innovations and improvements are kept away from these services by insistence on public management and finance, any such productivity increases are likely to be kept to a low level. Only small hopes, therefore, can be entertained of anything but further minimum productivity increases improving the present systems.

132. Bjรถrnberg & Hjertqvist, 2004.

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The uprising

Already today, as seen earlier, many citizens are digging into their own pockets to purchase better welfare services and social security. People are taking out additional policies with private insurance companies for better care, prompt medical attention and bigger pensions. The large proportion of income paid in tax is not giving the welfare many wish for. Purchase of private insurance, with the taxed money remaining from their incomes, improves the situation for them. Is this a problem? Would it have been better if they had been unable to spend extra money on better welfare? Is it a better situation for everyone to be worse off, so long as things are the same for everyone? Hardly, for each individual is at liberty to spend their money as they see fit. When they do so, extra resources for improving services are channelled into nursing and care through the insurance companies. And so a person bypassing the public waiting list and getting treatment directly in a private clinic is not taking someone elseâ&#x20AC;&#x2122;s place in the queue. That person is removed from the public waiting list and goes to a private activity funded entirely through the insuranceâ&#x20AC;&#x201C; thereby shortening the queue by one person and letting people behind take one step forward. Without private funding this activity would not have existed. Even if this person, instead of going to a private activity, were to go to the top of the public waiting list, she or he would still be paying for their own medical care. In both cases that person pays for himself by adding new resources and does not take resources or a place on the waiting list from anyone else. The problem can be that those who have small margins but would like to buy private solutions cannot afford to. Which begs the ques137

tion: why can’t they afford to? The most important answer is that the big state is blocking the way. Taxation is the biggest item of expenditure in every household, and especially among low-income earners, who pay high taxes. This leaves little to spare for private consumption, such as insurance for better welfare. The other side of the coin is that the high taxes go to an activity operated under conditions that obstruct the motive forces of development and thus give relatively little return. The high taxes go to a public welfare which is supposed to deliver, but cannot. In addition, the services have to be delivered to absolutely everybody, including those who could afford to pay more out of their own pockets. If a majority of the population, who are unquestionably capable of providing for themselves, were to pay for more of their welfare privately, then it would undeniably be easier for public welfare to provide for those most in need of it. More private solutions for those who can afford them–and have already started buying them–would ease the situation. Day by day, the gap widens and citizens look for new solutions. There are still obstacles to greater development than this, obstacles such as high taxes, state prohibitions and restrictions of private alternatives and, to a great extent, a new and immature insurance market. But, step-by-step, the number of citizens with private alternatives is increasing. Desire for private solutions is growing as the gap widens. In time millions of people will find themselves asking: “Why must I pay the world’s highest taxes, which do not give me what I want, and at the same time pay for a private insurance which does give me what I want?” All public power comes from the people. When still more have private insurance, this will add up to an important group of voters. Few parties are likely to resist from formulating the answer to their question: “Of course you are not to pay the world’s highest taxes for something that doesn’t work. On the contrary, you are to retain more and be able to buy more of the welfare and social security that you want.” At that point the present development will accelerate and 138

a massive discontent with the taxes and monopolies of the big state can only lead to support for more reform and a smaller state. Taxes can then be lowered at a faster pace, the public sector can focus on providing a basic supply–above all to those who cannot afford to pay–and private solutions can be implemented. And public expenditures can be decreased, in fact they have started to decrease in most Western European countries during the past decade. Figure 15: Government spending as % of GDP in the OECD countries in 1993 and 2003133

It is essential to point out, again, that a decrease in public welfare and social security expenditure is not a decrease of welfare and social security in society. The public sector will decrease–outside that, such services may in fact increase. One widespread fear is that people who can pay for their own welfare will no longer be prepared to contribute to

133. The Economist, 2004 (c).

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the public sector through taxation. Two-thirds would buy better welfare than today, leaving the impecunious one-third in the lurch, it is said. That fear is unfounded. Why should the majority of citizens rather pay very high taxes, only a minor portion of which goes to the genuinely needy, than pay low ones which do so to a greater extent? The main argument for paying taxes and running public activities is, after all, that public welfare and security are in this way to be given to those who need them. If the majority are allowed to retain more of the money which does not in any case go to others through taxation today, but back to themselves, when taxes are lowered they can both decide more about their own welfare and be assured that their tax money is being put to good use. Above all, low-income earners, if numbered among those paying lower taxes, would have more chance of managing without handouts and of improving their own welfare and security. Today, these people are the ones who are trapped by the big state to the largest extent, and reforms decreasing the size of the state would give them more freedom and better lives.

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Private welfare today

Where the question of private or public welfare is concerned, a distinction should be made between three aspects: firstly, private or public management of activities in the welfare sector, secondly, private or public funding of the same, and thirdly, private or public funding of various social security schemes. Often, there is talk of “privatization”, but what is usually alluded to is that private forces will be allowed on the margin. For example, that the public sector issues a tender to let private companies deliver what they pay for with tax money. And that is only partly private. Often, these are mixed, and this is the way most reforms in Western Europe have looked so far. Public payment but private production has been the model in several continental European countries all the time. Still, the politicians decide what, where and how something should be delivered–and pay with tax money, which means that it is part of the big state. Sweden was a reforming country in this respect in the 1990s.134 As regards private management, about 10 per cent of the welfare services in 2002 were performed by private firms but funded out of taxation revenue.135 13 per cent of employees in caring services for the elderly in 2000 worked for private companies but were publicly funded. The proportion of private care rose during the 1990s from 3 to 10 per cent of total medical care expenditure.136 95 per cent of all compulsory 134. More about Sweden as a good example of a country silently leaving parts of the old model behind and taking small steps of reform towards more market-oriented solutions in the welfare sector can be studied in Rojas, 2005. 135. Erixon, 2003. 136. Ansvarskommittén, 2003.

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school pupils and 94 per cent of high school students in 2001 attended schools managed and funded by the public sector, while the remainder attended schools, that were privately run but nearly all publicly funded.137 Management of activities in the welfare sector, in other words, is subject to a certain measure of competition.138 This has gone further in the County and Municipality of Stockholm than elsewhere. The main purposes given for outsourcing of county health care from private providers were to give patients more freedom of choice, further diversify the production of care, preserve the competence and dedication of staff, and develop opportunities for co-ordination. Research indicates that this has created an organization that is 10 or 15 per cent more efficient. A couple of hundred health care SMEs were started when private services were procured, and there are today 290 health care enterprises affiliated to the service company of the Swedish Association of Health Professionals. A number of health care services became less expensive. Peter Risberg, CEO of M&M Medical AB, a private company, states that M&M on average is 40 per cent cheaper than the services from the public institutions. Ercan Sahlin, who runs a private child and youth psychiatry reception in Kista, a Stockholm suburb with a large immigrant population, reports that productivity has doubled in two years. The budget there is 500,000 euro annually and there is no waiting list: anyone can get an appointment within a week. Meanwhile the county 137. Ibid. 138. It should be added that the state, county councils and municipalities also operate companies, outside the welfare sector. The Swedish state, for example, owns 60 companies, the county councils 116 and the municipalities no fewer than 1,423. These companies are not exposed to the same sort of competition as other enterprises. As a last resort they can always draw on taxpayers’ money to cover deficits. This makes it hard for private firms to compete with them on their own ground. So even if the megastate has admitted private enterprise to the margins of welfare – while still insisting on tax-based funding – government in various guises competes at the same time in other market. ”Staten som kommersiell aktör”, Statskontoret 2000.

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council-run units are getting an extra 100,000 euro every year to shorten their waiting time from four to three weeks.139 A survey commissioned by the Swedish Municipal Workers’ Union in 1998 showed staff to be happier in the activities which were privately owned and operated. 90 percent of the 300 persons interviewed were former municipal employees. Assistant nurses, nursing assistants and nurses in seven health care enterprises feel that they have more responsibility and authority and more varied duties than in the public sector units. They find the health care enterprises superior to public sector ones in the following respects: capacity for innovative thinking, efficient resource utilization, responsibility and participation, scope for influence and personal initiative, shorter chains of command, less administration and managers’ ability to reward. 59 per cent of assistant nurses and nursing assistants believe the private health care companies to be more efficient and, accordingly, cheaper, as do 78 per cent of the nurses. Most of the employees also feel that residents get better service in private elderly care than in municipal housing units.140 Private funding of health care, caring services and education, on the other hand, is a good deal less common, with user charges making up roughly 4 per cent of total revenue. It should be noted that with services of this kind–as with social security–private funding does not mean the individual forking out directly when the need arises. No developed country has a system where welfare services hinge on instant ability or inability to pay for them. Private funding over and above a basic array of publicly provided services mostly takes the form of insurance. Europe today has extensive insurance markets in a number of fields. In Sweden, with a population of 9 million, 4.5 million homes, 582,000 weekend cottages and 266,000 boats are insured, 5.3 139. Hjertqvist, 2003. 140. Upplevelser och erfarenheter från arbete inom äldrevård och omsorg, 1998.

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million cars are covered by compulsory insurance and there are endowment insurance policies. Several of these–such as insurance for losing everything if the house burns down–may seem relevant to welfare, but they are all privately organized and funded. The insurance companies administer a total of 145 billion euro, funds which also help to finance business enterprise. Damage insurance companies pay out 3.5 billion euro annually in compensation and the life and work injury insurance companies nearly 6 billion euro, partly in the form of pensions and death benefit.141 Insurance policies for social security and access to various welfare services in most Western European countries today can be said to be organized like a pyramid. At the bottom we have the public social security schemes–health insurance, work injuries insurance, parental insurance, old age pensions and death benefit schemes. On top of this lie insurance schemes agreed on by employers and employees that supplement the public array. These include collective insurance providing compensation for work-related injuries, sickness benefits and extra pension, which can be transferred to private insurance companies. This can also include direct or indirect group insurance policies with private insurance companies, the content of which is flexible and can be adapted to the preferences of individual employees. Usually these group insurance policies provide compensation for accidents, survivors’ benefits, sickness benefit and medical services of different kinds. Altogether a group insurance policy normally costs the individual about 10–15 euro a month. A large proportion of those who have already taken out medical insurance policies are small-scale entrepreneurs, and they have done so because the small firm has difficulty in coping with long-term absence while employees are waiting for treatment. Private medical insurance gives them a “downtime insurance” guaranteeing that em141. Kort om försäkring I Sverige, 2004.

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ployees promptly receive good care when they need it and can rapidly return to work fully recovered. A policy of this kind at present costs roughly 20 euro a month per person. Over and above these two levels of the pyramid–public and collective–there are also individual private policies. These, because they cannot benefit from the economies of scale associated with collective insurance, are usually more expensive for the individual. The pyramid with a public base, a collective middle and an individual top can have quite different proportions in different countries, which affects the prices of private insurance. Finland, for example, stands out as a country where the public base of the pyramid is very limited and private insurance bulks correspondingly larger.142 Today, then, it is not uncommon that activities in health care, schools and caring services are privately operated. But nearly everything is still publicly funded–the state decides. The proportion of privately operated services will in all probability go on increasing, that has quickly become less controversial. So long as the public sector has to procure services in a free market and is not allowed to give preferential treatment to it’s own units, many private agents will compete successfully and be able to take responsibility for the management of services. During the past ten years, an initial period of rapidly growing procurement of private welfare services, certain problems have also appeared where private sector procurement is concerned. Unfamiliarity, culture shocks, uncertainties and poor organization have led to misunderstandings and abuses in several cases–albeit no worse than in a number of publicly operated units. It is only natural that not everything should be perfect to begin with and that the transition should entail difficulties. There are now lessons to be learned for the future. In this way the public sector will be a better purchaser, capable of 142. PTK, januari 2003, If, 2004-02-06.

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clearly defining what is expected of the contracting enterprises. The growth of privately operated activities has of course augmented options and competition, but the proportion remains small and funding is still centralized within the public sector.143 Tax-based funding is almost exclusively the rule in welfare services, and social insurance schemes of different kinds are extensively based on public sector provision. And that is an important enough reform towards free competition, entrepreneurship and some productivity increase. But it is not even a half step away from the big state and thus it is not even a half improvement compared to what would be possible. Parallel to the reduction of the public sector to more basic levels, private funding is going to be more important.

143. A different situation prevails on Continental Europe, where systems have always been based on private agents being responsible for delivery and a certain measure of competition has thus been permitted, but this still leaves the basic issue of funding, which, there as well, is by way of taxation revenue. The British NHS (National Health Service) is beset with problems and is organized on lines similar to Swedish health care, with public management and funding, though with national instead of regional (county council) control.

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Private fundingâ&#x20AC;&#x201C;how?

The gap between welfare supply and demand is thus already, little by little, starting to be plugged with privately funded solutions. As the gap widens more and more people will be wanting more and more in the way of private solutions. What forms can private funding take? There is only one possible point of departure: free pricing for the firms delivering such services as medical care, teaching or care of the elderly. They name their price for individual services, which those wishing to do so can then purchase. The services may be purchased by the public sector, by insurance companies, by foundations, by trade unions or others. Purchases of a complete service by private individuals directly from companies, without the intermediation of either public sector or private insurance, is unlikely to happen very often. But then, surely, free pricing will mean higher prices? On the contrary. Competing companies fixing prices freely will mean lower prices. As soon as one company gives a price that another can undercut while giving the same quality, the other one will do so. The company charging more will then lose customers and be forced to either lower the price or perform better. And so there will be a continuous struggle between companies for the customers requiring the services, the effect of which will be to depress prices and elevate quality. No one ever believed that private firms charge low prices out of the goodness of their hearts. They do so because they have to. In 1925, it cost the equivalent of 245 dollars to speak for one minute on the phone between London and New York, today the price is not even one per cent of that sum.144 With free competition, their selfinterest benefits the public interest. 147

Free pricing also means that signals of a change in demand quickly lead to a change in supply. Should demand for caring services for the elderly increase, e.g. for demographic reasons, the price will go up if supply does not increase. But as soon as price rises are signalled, there will be more scope for more firms to deliver more elderly care, whereupon the supply will increase and the price will go down again. Only free competition with free pricing is capable of swiftly adapting supply to demand in this way in response to millions of different preferences and actions on the part of consumers. And this is why a centralized, command economy model, with central instead of free pricing, always results in a surplus here and a shortage there. Long waiting lists here and empty rooms there within the welfare sector–so frequent today–are merely a sad memory where free competition and free pricing prevail. Free competition and free pricing create motive forces impelling companies to keep finding new and better solutions. When one firm tries for a contract with the public sector, offering appendectomies at 4,000 euro a time, the others try to undercut. They will engage experts, scour the market for solutions, finance research and start up joint projects to find ways of doing the same thing only cheaper. Or do it better at the same price. Every conceivable skill and idea from employees will be utilised. Insofar as purveyors of welfare services have contacts with insurance companies where citizens have taken out policies to finance part of their welfare, they can collaborate. Before long somebody will find a way–like keyhole surgery–of providing better care less expensively. It may be the case, not least, that some of the insurance company’s customers have policies giving both sickness benefit and better medical care. If so, the insurance company has every interest in finding overarching solutions which will make citizens get better instead of sitting around and cashing compensation for 144. Segerfeldt, forthcoming.

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a very long period. The Skandia insurance company, for example, now offers “Skandia Health”, designed to reduce ill-health and sickness absence. The scheme combines services such as contacts with the policyholder and his or her employer, plus health care counselling, with insurance coverage giving access to rehabilitation, a psychologist and so on.145 In the public sector these things would be handled by different authorities that can never put a whole act together, whereas an insurance company, impelled by considerations of economy, has every reason to come up with a package solution for better health. The “Skandia Health” policy costs about 110 euro a year per person. If there is a market for welfare services with companies of different kinds competing together and with free pricing, demand can be organized. The public basic supply of services is purchased with the aid of procurement routines and the insurance companies conclude their agreements. The likelihood is that both will happen, with the insurance companies taking over where the public sector leaves off. In such cases, though, the private companies have a problem to face: if the politicians decide to alter the structure or scope of the public sector, this can lead to sudden cost escalations which, ultimately, can only be passed on through insurance premiums. If, then, uncertainty prevails concerning the stability of the public sector, this can deter insurance companies from offering good solutions. This underscores the importance of the public basic supply being structured for long-term stability. In recent years this has not been the case, and many changes have been introduced in a variety of directions. If on the other hand the public sector commitment is scaled down to a basic supply, with a clear limit to what is being offered, there should be greater prospects of long-term structural stability and a correspondingly greater assurance of resources also being sufficient in the future. The public sector can therefore be scaled down to a more basic sup145. Skandia, 2004.

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ply of social security arrangements, on appreciably lower levels than the 70 to 90 per cent compensation which the public sector is paying out today in Western European countries. It is probable and necessary indeed that benefits be scaled down with the passing of time and will have an ultimate expiry date. This will reduce the largest part of the public expenditure today and enhance the profitability of working. The level may be cut down to half, it may be replaced by a basic sum equal for all or it might be allowed for people to opt out totally and go to private insurances–there are many techniques for reform. Above a basic public level, agreements can be signed with the employer for a supplementary benefit, contributions for which will be deducted from take-home pay, and secondly, this in turn can be supplemented by an individual insurance policy for those wishing to do so. Several countries will also have to reform their pensions, by far the biggest item of social insurance, and probably the most important requirement will be to abolish retiring age altogether under the public system. Pension benefits can then be stepped up, so that the later a person retires the more pension they will receive from the public sector. Those wishing to retire early can take out private pension policies to finance their early retirement. That reduces the work tax described by the OECD, and we stop forcing people to quit working. There has been talk of tax exemption for earnings beyond regular retiring age–another work incentive. The main thing is for the choice between work and retirement to be a free one, except that anyone opting for earlier retirement will have to save up for it. This would disarm the public pensions bomb, which is now set to blow in many Western European countries. The state promised what it could not keep, the system was wrong from the start. Luckily, it can be corrected. But of course, this says nothing of private pensions insurance. In the context of transfers–allowances, subsidies and social insurance–there is perpetual discussion of needs testing. Are transfers to be selective and made to concentrate on those in need, or is everyone to 150

receive them? Are millionaires to draw child allowance? The main argument for the selective model is that it requires fewer resources and mainly helps those who need help. The main argument for a more general system is that it does not stigmatise anyone and the marginal effects are smaller. A selective system certainly weakens the motivation of many groups for working. If allowances are to be scaled down with rising income, refraining from economic activity may be the cushier option. But at the same time, the big state required for general systems with high benefit rates and widespread payment of allowances cannot be reconciled with reality. If, then, work is to be encouraged and the big state reduced, the reasonable course is to retain general systems–insofar as they are to be retained, child allowance for example can be replaced by tax deductions–but on far lower levels. Direct charges for services can be a means of clarifying the true cost. At present there are many public services for which no user charge is levied at all. Often these are mistakenly termed “free”, but the absence of a user charge simply means that funding is derived from another source, most often entirely out of taxation revenue. Direct charges are unlikely in most cases to make up a large part of total funding. Charges that high would lead to sudden and substantial rises in expenditure for the individual, which would be especially trying for those with limited means. Insurance solutions to spread expenditure over time are therefore critically important. But the existence of private charges serves above all the important purpose of reducing overutilization. When funding comes out of taxation revenue and the cost of using a service is only marginally affected by how much one uses it, this creates problems. Nobody has economic motives for avoiding extensive use of the services. Anyone wishing to do so can eat, drink and smoke as much as they like and let others pay for the consequences. The bill for behaviour leading to a great need of nursing and care is paid for by others. Extensive public funding, in other words, 151

creates a risk of systems being used more than would otherwise have been necessary. Care for different kinds of substance abuse today costs large sums of money. Of course care must be given to the people needing it, but if they had seen that they would be paying for it themselves, through their own insurance or increased user charges, they would have been motivated for avoiding voluntary behaviour creating an unnecessarily high demand for care. Direct charges can possibly play a more important role in the funding of higher education, because students can finance themselves through loans or scholarships. Even modest charges of 1,000 euro per term at public universities and colleges would augment higher education funding by billions. Since it is a personal investment, this is something that students could finance either through scholarships or low interest loans. When Germany recently introduced a charge of about 12 dollars for what had previously been free medical consultations, the number of consultations dropped by a third. Given the modest level of the charge, the reduction cannot reasonably have been due to sick people suddenly being unable to afford it, but rather to people not going to see a doctor unless they really needed to. In this way total expenditure is reduced and more resources are left for people in real need of them. When Tony Blair got his own way about British universities being allowed to charge higher tuition fees, there was a dual purpose involved: people should not occupy university places merely for lack of anything better to do, and the universities should be able to pull in more funding. Students would pay the fees through high loans, meaning that universal higher education opportunities would remain as before. On the other hand, students would have to pay for more of their education themselves, while others, who were not studying, would pay less through the medium of taxation. Germanyâ&#x20AC;&#x2122;s Social Democratic Transport Minister, Manfred Stolpe, has proposed that motorways be funded privately through tolls. Calculations have indicated that if tolls were levied on all German motorways, the proceeds 152

would come to 15 billion euros a year. New motorways would be privately owned, constructed and funded.146 Private funding, however, need not necessarily come from the people using the services. The companies delivering welfare services can obtain funding from elsewhere. Venture capital for starting up a business can be obtained in several ways, e.g. through money markets. The principal venue for financing enterprise is the stock exchange, the meeting point for those needing capital to run businesses and those with capital to invest. In most parts of Europe today, companies in the welfare sector face restrictions when they wish to turn to the stock market for capital. An obstacle of this kind must surely be created by thoseâ&#x20AC;&#x201C;probably a limited groupâ&#x20AC;&#x201C;who do not want these activities to obtain more resources. Now that demands for private funding are likely to increase, due to the widening gap between welfare supply and demand, it is a reasonable expectation that this prohibition will be removed. This can be instanced with the case of Ericsson, Swedenâ&#x20AC;&#x2122;s flagship telecommunications company. The new stock issue they floated at their most critical moment in 2003 raised an additional 3 billion euro. Thanks to that extra capital, Ericsson is still with us, offering its products for sale and paying wages to its tens of thousands of employees. There may be a point in not all enterprises using the same stock exchange. When the barriers to this kind of capital procurement are demolished, there will no doubt be good chances of a Welfare Stock Exchange being started on the lines of the IT and telecom-weighted Nasdaq exchange in the US. The most common argument against welfare companies going public is that the stock exchange expects to see a profit. Public companies not posting a profit are unlikely to hold any attraction for investors. It is true that a profit is expected, perhaps ten per cent annually, but what does this mean? It means that the company has to 146. Frankfurter Allgemeine Zeitung, 2004.

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spend less money than it earns. Where does the profit go? Some of it goes to investments aimed at making the company more competitive, improving what it delivers. Quite a lot can go to pay increases for the employees. Some goes to the owners, who have invested money from the startâ&#x20AC;&#x201C;a return on their capital. This last mentioned is sometimes likened to the owners stripping the business of funds, which could otherwise have been used more sensibly. The truth is that their return is only a fraction of the total resources committed to begin with, resources without which the business would never have existed. Profit, moreover, encourages more people to invest, so that more capital can flow into the business. But the portion of profit going directly to the owners also serves a useful purpose, because almost invariably the money, instead of just being laid aside, goes to finance further new investments. In addition, the constant pursuit of profit means that the available resources are efficiently utilised, that there is responsiveness to consumersâ&#x20AC;&#x2122; wishes and that new ideas are constantly being put into production. Making a profit from the cases of the old and sick might seem repugnant at first, but why should big multinationals make a profit out of manufacturing medicines that are needed to save lives? Or a profit from producing and selling foodstuffs, which are basic essentials for us all? This is an unwarranted demarcation. The ban on profit is merely a ban on an important motive force of development and on the procurement of more capital for the sector concerned. And the more important the sector is considered to be, the more important that profit is allowed. The pursuit of profit can be an important motive force for constantly devising better solutions. But not every conceivable player in the welfare sector need be profit-making, there are other forms of enterprise and organization. Foundations are one category, deriving a yield from their endowment capital. Co-operatives may be anotherâ&#x20AC;&#x201C;a form of enterprise that may conceivably be started, not least, by former employees of publicly run units. The US has still other forms of 154

non-profit enterprise in the welfare sector, resulting in a whole variety of agents with a variety of motives for engaging in the activities concerned. Competition means that everyone, whatever their type of organization, has to compete in offering good solutions to those requiring the services. Neither consumers nor politicians have any reason to devote much thought to the form of enterprise or organization. The main thing is that no form of organization or enterprise should be forbidden. What forms of private funding are conceivable for the individual? Insurance is likely to be the principal form, aside from user charges. When the public sector is reduced to a basic supply and taxes are lowered, scope will be created for a good deal more private insurance than at present. This insurance will in all probability adhere to the pattern we can already see, with insurance linked to employment or wholly individual. As the gap between supply and demand widens and people want more welfare than is available, questions of this kind are likely to play a more prominent part in collective bargaining. Instead of pay hikes, insurance for better medical care, increased pension fund allocations or suchlike will be demanded and offered. With larger groups insured, premiums will fall and insurance companies are likely to vie with each other in offering one advantageous agreement after another. Depending on what the insurance companies offer and how wages are structured, the content of these insurance arrangements can probably be made quite flexible. This way people at the same workplace will be able to get insurance but on their own terms.. Insofar as individual deviations are allowed, the quantity can also be made to vary, so that someone preferring a pay hike to collective insurance can get it. Insurance companies are likely to offer individual policies aside from the collective ones. Wonâ&#x20AC;&#x2122;t people find themselves getting different welfare services? Yes, above all because different people have different needs and preferences. Some want ample security in lifeâ&#x20AC;&#x201C;belt and bracesâ&#x20AC;&#x201C;while others 155

are more willing to take risks. The latter will opt for less insurance. But above all, the content of insurance will vary more than its quantity. One person may be more preoccupied with perfect medical care today than with sickness benefit, another may have the opposite priorities. More people will be satisfied because they will get exactly the solutions they want, which is impossible with a collective monopoly. Is there a danger, then, of private funding creating a situation where the quantity and quality of welfare depend more on length of purse than on preferences? Firstly, we should note that length of purse makes a very big difference as it is: only a small elite who can really afford to pay out of their own pockets have access to the welfare they want. If everyone is allowed to retain more money after tax and a large selection of private insurance has been allowed to emerge, everyone will have a far better chance of getting the welfare they want. Since only a small portion of tax today goes to other people, we are already paying most of our own expenses, but we are paying them to inefficient monopolies that allow us no choice. Secondly, public supply will go much further if it is concentrated on those who cannot pay their way, and not, as at present, aimed at doing everything for everybody. But suppose differences in welfare are due to the fact that some people are more competent than others at choosing policies? There is no denying that some peopleâ&#x20AC;&#x2122;s choices are thought through better than others, but if the state will not allow citizens that liberty, why should we have a free choice of travel, driving, housing, work or child education? The more important the subject, the more important it is that we should decide for ourselves. Who could claim to know better? Or be more entitled to decide? And why should schools, which give us tools for coping in the employment sector, not be able to introduce us to the welfare market? One aspect under discussion is whether private solutions mean that the healthy pay less and the sick, the people in real need, have to pay more. It is true that individual insurance policies can mean higher 156

premiums. A person with bad teeth wishing to take out a dental insurance policy has to pay a higher premium than someone whose teeth are in good shape. This will be far less the case with collective, employment-related insurance schemes, which to a great extent involve groups of people where risks can be spread. To some extent, this gives people an incentive to avoid behaviour they know will cost themâ&#x20AC;&#x201C;which is not the case today. But if this is considered an adverse effect to some extent, then here we have the very purpose of the public sectorâ&#x20AC;&#x201C;ensuring that welfare services are provided to those really in need. If public resources are limited, which they are and which is going to be more and more the case as time goes on, might they not just as well be devoted to things that are not believed to be able to achieve privately? Resources will go further when the aim is, not to do everything for everyone but to give priority to those who have needs, which they themselves cannot provide for.

157

More and better

A comedian once had a sketch in which he went around lugging a brick. Why? Because it was too heavy for him to throw away! For some considerable time now this has also been the situation with the big state that has been built up over a number of decades. It is heavy and getting heavier all the time, but we still hang on to it. But the following powerful forces are now making us let go of it: • services are gradually getting more expensive than goods, • public monopolies are an obstacle to development, • work, the basis of prosperity, is poorly rewarded, • demand for welfare is growing, the young are getting fewer and the ranks of the elderly are multiplying, • taxes will be reduced, because they obstruct growth and employment and impede competition, and tax bases are getting more mobile, • a flexible labour market is needed in order to have more jobs and growth, • society is becoming more heterogeneous and collective solutions are losing legitimacy, • more private insurance schemes mean a revolt against the non-delivering public sector. Public sector productivity will not increase and these factors will not be averted by accelerated growth, by the EU doing more or by a growth of public saving. And they will certainly not be averted with an enlarged state or with increased protectionism. The factors bring159

ing down the mega-state are of various kinds–some are exploding it from within, others attacking from without, some act in the short term, others in the long term. These are all very powerful factors. Given a starting position where we already have a gap between the welfare existing and the welfare in demand, heavy dependence on handouts and high taxes impeding growth, each of them alone might suffice to push the big state over the edge. But, in a way which has no historical precedent, a number of powerful forces have appeared which are acting in this direction. The pressure for Western Europe to reform is great, and out of the ashes of the Old Model can arise a great quantity of new welfare, the first shots of which are already visible in a number of quarters. The interesting thing is that the path is so straightforward: nothing new, no policy measures or programmes, no initiatives, nothing that the state need do. The politicians don’t have to think, innovate and introduce new measures. On the contrary, what the state must do is retreat–abolish monopolies, real restrictions, refrain from trying to do everything, stop running peoples’ lives poorly with their money. In its place there will emerge a voluntary exchange, with the potent forces of demand spurring producers’ creativity to heights hitherto undreamed of–for the benefit of new jobs, higher wages, growth, health care, schools, caring services and social security. In a number of fields, reality will be different and better: • Lower taxes will strengthen the global competitiveness of the European countries. We will attract more well-paid jobs in successful enterprises–growth will accelerate, raising our incomes and prosperity. Lower taxes will mean fewer people dependent on handouts, and will make employment more of a paying proposition, so that more people will go out to work. With more money left in their pay packets, the great majority will be able to afford the welfare service and insurance they want. 160

• Citizens will change from troublesome items of expenditure to potential earnings. “Compare the behaviour in a privately owned medical practice and one that is run by the county council. Just before closing time another patient calls. What happens? In the private surgery they are gladly received–a new item of income. At the health centre the opposite applies: the patient makes no appreciable further contribution but creates extra work which upsets the routines. ... Who takes best care of the patient?” asks Anders Milton, Chairman of the Swedish Medical Association between 1989 and 2002.147 • Losing the job will not be as traumatic an affair; you know that there is another waiting tomorrow, probably a better one. New companies move into Europe, the existing companies are developing and entrepreneurs will see their companies grow into successful businesses. It will become natural to welcome people to come and work in Western Europe and tax-financed subsidies to old industry will be seen as completely unnecessary. Employment can rise, and that creates a more prosperous society as a whole. • Employees will become important resources for welfare companies, not expensive cogs in a public machine. It will be important to have and retain skilled associates, to give them further training and to reward initiative and endeavour. The individual employee can change employers or start up on his or her own. • Greater welfare will result from insurance companies competing to give the best insurance at the lowest cost. Competition of this kind will also create new joint undertakings and structures among producers. Perhaps international agreements and low price air travel can give instant, low-cost treatment in other countries? Or privately funded senior housing in Thailand? Perhaps collaboration between insurance companies and welfare businesses will lead to new research and study programmes at the universities? 147. Hjertqvist, 2003.

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• An enormous sector will be opened up to enterprise and entrepreneurship. New schools with dedicated teachers and a new pedagogy, health care enterprises specialising in a host of different variants, suppliers of higher education outside the public universities and colleges, can all become living realities. When the walls around the welfare sector come tumbling down, thousands of dedicated entrepreneurs for whom there was never any room in the public hierarchies will find an outlet for their talent and willpower in their chosen fields. • With freedom of establishment, private funding and, accordingly, free competition in higher education, new educational establishments will be founded. Companies, foundations and organizations will be able to offer study programmes, which are non-existent today. With a system in which students can take a starting amount with them and then choose between private and public, there will be greater freedom of choice. Extra loans can then be contracted to top up students’ finances. This will mean growing competition between higher education establishments, rising quality, additional funding for higher education. • The EU single market can also become a welfare market. Private welfare enterprises could expand their operations across national boundaries. Welfare too would then experience the benefits of a large market–greater competition, specialization and interchange. This would be simplified if there was a true single European market in services. • An opinion poll in April 2004 indicated that 40 per cent of Swedish women could imagine starting up in business on their own.148 With many women in today’s workforce employed in the public sector, a huge number of women would have the chance of making their ideas come true if only the barriers to private alternatives were to be torn down. 148. TEMO, 2004-04-27.

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â&#x20AC;˘ Companies will have healthy employees. Businesses, small ones especially, suffer a great deal from employees having to put their names on waiting lists, and so will be anxious for their employees to be offered good solutions in the welfare market. With the diversity of new solutions and the motive forces they represent, employees will get better chances to recover. â&#x20AC;˘ Jobseekers will acquire an additional dimension for assessing employers, over and above job content and present conditions of service. What welfare arrangements come with the position? In this way employers will have to compete in offering solutions capable of attracting manpower to their workplaces. Union organizations can vie with each other in offering their members the best insurance arrangements.

163

On the right track?

The problems in Western Europe are obvious. Few deny them, though it is common for governments trying to be re-elected to diminish them and paint reality in brighter colours than is the actual case. There is more debate about the causes of the problems, and the most common thing is to blame everything but the most apparent cause, the European Social Model. The phenomenon of sticking to that, which is the main cause of all the problems, has similarities with the so-called Stockholm Syndrome, where the hostage falls in love with the bank robber. Like a person affected with that Syndrome, who tries to stop the police, the supporters of the Social Modelâ&#x20AC;&#x201C; which has such anti-social effectsâ&#x20AC;&#x201C;also try to prevent the reforms that would solve the situation. Economic history is clear as to the negative effects of more protectionism, higher taxes, more central planning and a bigger state. But a more sophisticated defence of the Model is both possible and common. That is to rely on various international studies and indexes which show that the problems of Western Europe are not that dramatic and to say that there is some need for a little reform, to scratch the surface, but that the main features of the Model are both competitive and desirable. A few such sources are usually mentioned; the UNDP Human Development Index, the World Competitiveness Report, various studies concerning happiness and the Lisbon Agenda scorecard. To some extent, all these comparisons and the reforms that may be the result of them are a discussion of degrees. Nobody believes that there is a country on earth that is perfect and doesnâ&#x20AC;&#x2122;t need any reform. The US also suffers from the effects of too large a state in sev165

eral respects, but not nearly as much as Western Europe. Hence, nobody thinks that everything in Western Europe is bad and that all should be scrapped. But reality should be seen as it is. And the use of various studies and indexes to portray an image of reality that is not correct, and that heavily underestimates the need for thorough reform, is dishonest and risky. A closer look at these shows several flaws. In the UNDP Human Development Index, several Western European countries end up in the best positions, clearly surpassing the US, for example. The Scandinavian countries do particularly well. But the actual score for most of the developed countries, and not just the position, reveals that the difference is minuscule–tenths of percentage points. For example, Norway, which is number one, scores 0.956 and the US, which is number eight, scores 0.939 in 2004. The UNDP have duly pointed out that the Human Development Index was never made for rich countries–the differences are too small to be of any significance–but for developing nations. Furthermore, economic growth as a factor is substantially weighted down for rich countries, which explains why the US is not at the top. The explanation offered has been that this index is not intended to be a description of reality. It is a policy instrument: the UNDP wanted to say that growth has little importance and other factors are of more importance in order to influence policy in various countries. That is what this index should be regarded as, nothing else.149 The Lisbon Agenda was first shaped and decided in 2000, the leaders of EU-15, and has since been evaluated by a group headed by the former Dutch Prime Minister Wim Kok. The current leader of the EU Commission, José Manuel Barroso is trying hard to invigorate it. It is a mixture of various small and medium sized reforms. Some concern de-regulation, but some rather concern an increase in govern149. Human Development Report, 2004.

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ment spending. The smallest common denominator for all the policy proposals in the Lisbon Agenda is that practically none of them concerns changes of any feature of the European Social Model. That is natural, since all the content had to be agreed upon by all 15 EU leaders at the time, and of course somebody had objections to every reform directed towards the real problem. Evaluations are made every now and then, such as by the Centre for European Reform, which show how well the countries have come ahead with the reforms. The evaluations show that several countries in EU-15, especially the Nordic ones, have done well.150 And for those who want reform, that is of course positive. But how positive? Since the Agenda itself is mostly about small things scratching the surface, the most radical result one will get by following that strategy will be a minor victory. It cannot be used to claim that all the necessary reforms have been executed or are under way. In the annual Global Competitiveness Report from the World Economic Forum, several countries in Western Europe score well. In the last report, Finland was number one, followed by the US, Sweden, Taiwan, Denmark, Norway, Singapore, Switzerland, Japan, Iceland, the UK, the Netherlands and Germany. Again, the exact score is very close between the countries at the top. Does this mean, as has been interpreted by numerous politicians, that the big state is competitive? The answer lies in what has actually been analysed. The index is composed of four categories: technology, institutions, business and macroeconomic environment. That is, everything that has to do with the European Social Model lies in the fourth category. That might in itself questioned, since the political sphere is so large and should surely be considered to have a greater impact on competitiveness than the other three. And it is clear that in that category, the countries of Western Europe score badly. Sweden, number three on the total list, 150. Murray & Wanlin, 2005.

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is number seventeen in this category. The Global Competitiveness Report thus shows which countries have good technology use, companies, institutions–and, to some extent, it measures what conditions the politicians have created. And in that category, the results for Western Europe are poorer.151 It is sometimes claimed that the difference in growth–and thereby wealth, consumption, wages and welfare services–between the US and Europe is a deliberate choice. Or indeed the difference in growth between Western Europe and any of all the rapidly growing countries of the world. Mark Leonard writes in his book Why Europe will run the 21st Century: “Europe represents a synthesis of the energy and freedom that come from liberalism with the stability and welfare that come from social democracy”. He specifically points out that the European “social model gives people leisure and time with their families”.152 We work less and our economy grows less because we want it to. The fact that Ireland was a poor country–in Western Europe–that reformed and became much wealthier than the EU average seems to be a counterargument. We in Western Europe want prosperity too. We want to have wage increases, a nice home, vacation trips, good food, great education for our children, health care in time–there are no indications of the opposite. And when it is said that we want more leisure instead of work, it is definitely more productivity growth we need. That means we can produce more with fewer hours worked and afford more leisure time. The simple fact is that it is not in the countries that share the European Social Model that there is a free choice between work and leisure. Since the state pays you so much for not working, close to the same amount as when you do work, the incentives against work are very strong. And because people are rational, 151. Global Competetiveness Report, 2004. 152. Leonard, 2005.

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incentives work. If you can have somebody else to pay for you not to work, that is what many will likely do. Fewer people working and working less is not part of European culture, neither is it a free choice. It is the Model that creates such behaviour, and that is one reason why it is harmful for Europe. Recently, interesting research concerning people’s well-being and happiness has become an argument in the debate on prosperity and welfare. It is sometimes claimed that over a certain GDP level, growth doesn’t make us any happier. When our income is about 10,000 euro a year, wage increases don’t make us happier, in fact, we have not become happier since 1945. The conclusion is that we should not want more growth–or, thereby, the kind of society that brings growth–but focus on other things. It is sometimes claimed that the big state, contrary to growth, increases peoples’ well-being. Richard Layard, a leading scientist and Labour politician, has proposed that we tax away all wage increases, since he believes that due to jealousy, a wage increase for one person decreases the well-being of others.153 But this science has said nothing about how it would affect people’s well-being to go back to the living standards of 1945. It has had difficulties explaining why people want more income after 10,000 euro if it doesn’t make them happier. And, as in the case of Mr Layard and several others, clearly it is an attempt to produce new arguments–scientific ones–for their old ideological positions. And how can it be said that our well-being hasn’t increased due to growth since 1945, but it has increased due to the emergence of the big state during the same period? It’s a paradox. When Harris Interactive, a global research company, conducted a major opinion poll in July 2005, they asked first: “On the whole, are you very satisfied, fairly satisfied, not very satisfied, or not at all satisfied with the life you lead?” In the US, the figure for “very satisfied” was 58 per cent, in the EU-15 it was 31 per 153. Layard, 2005.

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cent. Then they asked: “In the course of the next five years, do you expect your personal situation to improve, to stay about the same or to get worse?” In the US, 65 per cent replied “improve”, in the EU15, 44 per cent did.154 Ruut Veenhoven, leading expert in empirical studies of happiness, has also concluded that happiness is in fact greatest in individualistic societies with a growing economy.155

154. The Harris Poll, 29th July 2005. 155. Veenhoven, 1999.

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How to reform: good examples

The need to leave the European Social Model is clear as day and so are the principles of the way out. But how should it be done in practice? Can it be done? Have any countries done something similar? Are there any principal models to follow? How should the politicians actâ&#x20AC;&#x201C;one step at a time, or shock therapy? Of course there are vast and complex questions to which there are no easy answers, particularly in detail. But one thing is beyond any doubt: there are numerous positive examples to learn from. Many countries have managed to decrease the size of the state, with great success. It can be done in different ways, and some have been more successful than others. The Economic Freedom in the World Index, by the Heritage Foundation and Wall Street Journal, is a thorough annual evaluation of the development in 161 countries. Economic freedom is measured by using 50 different indicators, the main feature being that the larger the share of society which is open for voluntary exchangeâ&#x20AC;&#x201C;and thus not monopolized by the state, taxed away or regulatedâ&#x20AC;&#x201C;the more economic freedom there is in the country. Since it is an annual publication, it is possible to record changes due to reforms. In comparison to 1996, 19 of the current 25 EU member states had increased their economic freedom. The increase was biggest in Estonia, Latvia, Lithuania, Slovakia and Slovenia. It had decreased the most in France, Belgium and Austria. But does economic freedom have any effect? The answer is yes. The countries with the highest economic freedom, namely Estonia, Ireland, Luxemburg, Spain, Latvia, Lithuania, Slovenia, Slovakia, Finland and Britain improved their relative GDP 171

per person score the most. In fact, of the 11 EU countries that increased their economic freedom the most, 8 also increased their GDP per person position relative to the others.156 Many countries in Eastern and Central Europe have, as mentioned, carried out very thorough reform. They left societies where the entire economy–and not just half of society as in the west–was centrally planned. They drastically reduced the role of the state–taxes, spending and regulations were cut. Today, many of these countries enjoy a steady, high growth rate, rising employment and better living standards. In 2004, the ten new member states in the EU received some 11 billion euro in foreign direct investment.157 Some of them reformed step by step and the positive effects lingered, some engaged in shock therapy with radical and swift changes, and the effects came quicker. It is sometimes said that this is just a catching-up effect and that their growth will decrease when they reach the GDP per capita levels of Western Europe. But that claim seems to be disproved by the fact that several countries that started as poorer have simply passed the previously wealthier countries–such as Ireland. And the US, with a GDP per capita some 35 per cent higher than the average of Western Europe, yet has twice the growth. The proposal also seems to be disproved by the fact that there are still poor countries in the world that are not catching up at all. But it is clear that these countries started off with different conditions than the countries of Western Europe today; they were poorer, the problems were greater and the state was even bigger. But there are many other reform countries, that started off with more similar conditions. Ludger Schuknecht of the European Central Bank and Vito Tanzi of the Inter-American Development Bank, have described this: “In Ireland, New Zealand, Canada, the Netherlands, Belgium and 156. 2005 Index of Economic Freedom. 157. Financical Times, 2005.

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Finland, public spending reductions exceeded 10 per cent of GDP. In a few others it declined by between 5 and 10 per cent. The size of bureaucracies was reduced, services were privatized and early retirement and other welfare programmes made more balanced. Innovative ideas, such as public-private partnerships and user fees, were introduced. Control over expenditure was tightened; medium-term budget plans and the stability and growth pact were introduced. Contrary to some popular fears, productive spending on infrastructure and education was not significantly affected by reforms. All the reforming countries enjoyed significant economic benefits. Expenditure savings allowed them to put public finances on a sound footing and reduce the tax burden. Economic growth steadily increased. In Ireland, perhaps the most impressive example, growth revived, chronic deficits disappeared and the public debt ratio declined to a fraction of what it used to be. Belgium, Canada and a few others also reaped significant benefits in this regard. Reforming countries experienced notable increases in employment. Income distribution was not strongly affected and higher growth often more than compensated for any relative income loss. In fact, in the past 20 years, income growth for the poorest fifth of the population was highest in those countries that started early with ambitious reforms.” 158 And today, it is hardly disputed that the economic reforms of the Thatcher and Reagan governments in Britain and the US had a positive impact on growth and employment. Britain was called the “sick man of Europe” and had the lowest GDP per capita in Western Europe by 1975; today it has the highest GDP per capita and the sixth largest economy in the world. In Ireland, which has carried out similar reform and more of the same kind, and Britain, the taxes– especially on low income–are lower and income differences are bigger than in continental Europe. And the economic growth in Britain and 158. Schuknecht & Tanzi, 2005.

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Ireland is higher, unemployment is lower and public expenditures are lower.159 The successors of Thatcher and Reagan have not altered any of the fundamentals in their reforms. And what they did also changed the course of economic history in the West; their actions and determination stopped the ever-growing state and to some extent reversed it. The effects of this spread to other countries in the years to come. Social Democrats eventually gave up on the centrally planned economy and started to reform along market-oriented lines. Figure 16. Growth in employment in EU-15, in per cent 1995â&#x20AC;&#x201C;2003160

159. Segerfeldt, forthcoming. 160. Employment in Europe 2004.

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The growth in employment has thus been very different in the 15 countries that were the EU between 1995 and 2004. It has been very high indeed in Ireland, Spain and The Netherlands and very low in particularly Germany. Naturally, there are many reasons behind the difference in development, but there is a clear connection with the degree of market-oriented reform. The total tax on work in the five countries with the best development was 30.5 per cent and in the countries with the worst development it was 41 per cent. In Ireland, with the best development, the tax on work was 15.5 per cent and in Germany, with the very worst, it was 45.5 per cent. Looking at the degree of regulations in the labour market, the pattern is also quite clear.161 The Economic Freedom of the World Annual Report for 2005 from the Fraser Institute contains a scale between 1 (and with 1 being the most regulated) and 7 (the freest labour market). The average for the five countries with the best development was 5.06 and for the five with the worst development it was 3.64. In Ireland, again, the figure was 5.4 and in Germany, it was 2.8.162 The Nordic countries have been initiating reform in various ways. In Denmark, the labour market is highly non-regulated and unemployment–especially long-term–is low. Sweden, too, has reformed. Several markets–television, finance, electricity, railway, gas, taxi and others–have been de-regulated. And apart from allowing for some private competition in welfare services, Sweden also carried out a substantial pensions reform. With broad political support, the pay-asyou-go system was replaced with a partly funded system where the individual is allowed to invest part of the pension in the stock market. Public pension levels were, on average, cut by some 40 per cent–and above the basic public level, there are pension benefits from

161. Taxing Wages. 162. Gwartney & Lawson, 2005.

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the employer and a private insurer. One quarter of the Swedish population now has personal, private, pension insurance. There are indeed many positive examples in the world to look at and learn from. It is known basically what to do, what principles to follow and the direction of the reforms. There are also lessons to be learned about the political management of reforms. It is important to have a broad political unity behind the reforms, which limits the risks of populism and also the risk that reforms stop or are reversed if there is a change of government. Communication with the people has proven essential; explaining the reasons for the reforms over and over again. After all, the politicians told people for decades that the big state was the best model. Saying the opposite creates confusion and opposition, which has to be addressed. This also underlines the importance to start communicating the right message in time, and not continuing to praise a European Social Model that has failed and yet hope to reform tomorrow. A clear sense of direction, boldness and an implacable resolve are important features of successful political leadership during difficult reforms. They do challenge all those who benefit in the short run from big government; special interests and people living off the state instead of working. They will indeed resist change and that has to be overcome. There is also an inherent fear of fundamental change among many peopleâ&#x20AC;&#x201C;â&#x20AC;&#x153;you know what you have but not what you getâ&#x20AC;?. And this effect, which is further enhanced by the effects of reforms necessarily coming some time after the reforms, and being less precise, whereas the reforms are very current and exact. Some examples, notably from Eastern and Central Europe, also show that reforms should not be too limited, take too long and be too few. That gives an impression that the politicians are unsure and the effects will be small, thus decreasing the support for further reform. Instead, the reforms should be bold and quick.

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Changes today–or better still, yesterday!

The longer we cling to the big state, the worse things are going to get. Trying to rescue the big state through changes such as closing frontiers and increasing taxes would be very harmful. Too small an effort at reform may risk losing the necessary support for fundamental change. The reality is clear, there is knowledge about what to do and there are many countries that have carried out successful reform. The European Social Model simply has extremely anti-social effects. When we leave it behind, there will be a new dawn of prosperity and welfare for the old continent. Of course it is a challenge for the current political system and its parties, since they introduced and defended the Model. They now have to reverse, speak clearly and act boldly. One could always ask whether the politicians have the will to follow a new path in everyone’s best interests, even if it contradicts the old theses. The alternative is frightening. The Western European crises of the 1990s would resemble a gentle springtime breeze compared with the hurricane of deep trouble that would come if nothing were done. That is not worth waiting for. What is now needed is political leadership, not more consensus on the old order. The leaders finding the comfortable and quick routes to the brighter future will be the winners. History doesn’t forget its heroes. And best of all: the way out doesn’t demand any new political systems, inventions or projects– instead, it is all about doing less and just decreasing the size of the state. Europe is where society first started to leave what had been permanent stagnation and poverty. The ideas of freedom, rationality and 177

improvement led the way. Nothing has been of greater importance to improve the social standards for mankind than the ideas that originated in Europe and spread over the world. Private property and voluntary exchange gave those without means a chance. Old power structures were turned over. Free enterprise, free trade and free competition built a prosperity nobody could have imagined. Of course we can retrieve these ideas, the sources of progress. After a night that has lasted too long, we can see a dawn coming for a new Europeâ&#x20AC;&#x201C;after the Social Model.

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