How awesome is Denmark?

By Megan McArdle

Pretty awesome, notes Will Wilkinson, although also pretty boring.

This is, for those of you who aren't aware, a hot topic in libertarian economic circles because a largish group of liberals has been touting Denmark as a "nordic" model that other countries should follow. Roughly speaking, the model consists of high income taxes, high social spending, low capital taxation, light business regulation, and what one might call a "teach a man to fish . . . " approach to unemployment.

I'm somewhat skeptical of the Nordic revolution. For one thing, things that work in small homogenous countries don't work in big, heterogenous ones. German unemployment reform caused massive political problems with the east.

But mostly, I'm skeptical of the "next big thing" approach to economic growth. Remember how Japan was going to buy the whole United States and turn us into slaves in their Walkman factories until . . . ooops! Ten year recession. I recall that at around the same time, Germany was going to finally conquer America with its mad engineering skillz. America, you see, couldn't possibly compete against national healthcare and a consensus-based management approach that allowed companies to do real long term planning.

In 1991, German per capita GDP was $19,4651, compared to $23,456 in America--Germans enjoyed about 82% of American income per head.

In 2005, the last year for which figures are available, American GDP was $41,789 per head, while Germany's was $32,039--or 76% of our level.

Yes, yes, I know, this doesn't capture all of the intangibles that make life in a social democracy preferable to the squalor of America's unfettered market capitalism. But the point is, back then, people were arguing that Germany's GDP would smoke ours because of their awesome industrial system. Didn't happen.

I'm also somewhat skeptical of claims about American exceptionalism. I find them more plausible than claims about a Nordic miracle, because America has been pulling away from Europe for a lot longer. And I can tell a plausible story about why it's so. But the consensus based management thing wasn't obviously crazy, and if Germany had posted another ten years of terrific growth, I might even believe it now. So I think one should be cautious about attributing economic growth to any model, no matter how plausible the story behind it. Economies are mysterious things, and if we actually knew how to make them grow, we'd all be rich.

I should also point out that it's particularly dangerous to do this with small countries. The smaller the country, the more its economic growth is likely to depend on a few discrete factors that may be unrelated to policy. A single company, Nokia, accounts for something like 3-5% of Finnish GDP. If they have a boom year, the Finnish government looks like a genius; if they have an off year, the Finnish government looks like a poor economic steward. But the Finnish government has no control over worldwide demand for mobile phones.

1All figures quoted at current prices in PPP.

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