Editor's Note: Professor Campbell's column is the second installment of ExtraCurricular, an occasional series of commentary by Dartmouth professors. Each column will approach a topic of the author's choice, highlighting issues of faculty interest and opening them up to response from our readers.
Get ready to hear it again in 2008! Conservatives will warn that low taxes and less government spending are the best way for governments to help their economies flourish in today's global economy. The evidence suggests otherwise.
Consider the United States and Denmark. Both have been among the most economically successful western democracies over the last 15 years. But their paths to economic success could not be more different. High taxes and government spending on social programs -- anathema to conservatives -- make Denmark one of the world's most generous welfare states, but contrary to conservative dogma, the result is not stagnation, but a thriving economy with a booming private sector.
In fact, the World Economic Forum's survey of global business leaders ranked Denmark and the United States among the top six most competitive economies in the world last year. This was no surprise, given that during the late 1990s, Denmark and the United States had comparably low unemployment and inflation and similarly healthy increases in labor productivity. Economic growth overall was a bit lower in Denmark, but after the dot-com bubble burst, the nations' economies grew at roughly the same rate.
Quality of life was also very good in these two countries. Both received virtually identical and very high scores on the U.N. human development index, which reflects average life expectancy, literacy, education and per capita income. In all of these ways, the resemblance between Denmark and the United States is striking.
Beyond this, however, the similarities end and conservatives could learn a lot from the Danes. Whereas Washington spent about 20 percent of GDP in the late 1990s, the Danes spent over 37 percent. And Danish expenditures on social programs were more than twice as large as they were in America.
When it comes to taxes, the differences are even more startling. In the United States, federal taxes amounted to about 20 percent of GDP during the 1990s -- some of the lowest among the advanced capitalist countries. In Denmark, they were nearly twice that amount. And the effective tax rate on capital in the U.S. was 37 percent while in Denmark it was a whopping 52 percent. Suffice to say, Danish taxes are among the heaviest in the world.
All of this should shock Americans who fervently believe that high taxes and government spending drive capital away, undermine investment, and jeopardize economic growth, jobs, and national prosperity. By this logic, Denmark's economy should have tanked years ago.
But it has not. And in one important respect the Danes have beaten us hands down. In addition to matching our economic performance, they have done it while minimizing income inequality and poverty. The poverty rate in the United States is about twice as large as in Denmark. The same is true for income inequality. According to the World Economic Forum, the Danish government has been the most effective in the world in reducing income inequality -- a record we should envy.
So how do the Danes do it? By spending tax revenue on things that boost national economic competitiveness and reduce inequality and poverty. For example, Danes receive public education through college and have a publicly financed national apprenticeship program for students not going to college. The result is one of the world's most skilled labor forces. Danes also enjoy a publicly financed healthcare system that is less expensive and more effective than our own. In turn, firms operating in Denmark benefit from smart, innovative workers and are not saddled with the exorbitant costs of health insurance as are U.S. firms.
Not only have these sorts of benefits enhanced the competitiveness of Danish employers, they have also proven attractive to foreign firms. The director of European operations for one of the world's largest software manufacturing companies recently told one of my Danish colleagues these were the sorts of things that caused his firm to put its headquarters in Copenhagen. He added that high taxes were not even a consideration.
The lesson for conservatives is that there is more than one way to succeed in the global economy. Tax and spending cuts are not always necessary. In fact, restoring taxes to levels prior to the White House's 2001 tax cuts would provide revenues that could be used constructively. Raising taxes and providing services could help America reduce inequality and poverty. The lesson of Denmark is that doing so could also help the United States become more, not less, competitive in the global economy.