Cato Institute says Denmark is more economically free than the US

The Cato Institute and Fraser Institute have published their annual report on Economic Freedom of the World. As always it is interesting stuff. One can of course always debate the methods used to rank different countries in Economic Freedom ranking, but I nonetheless think it gives a pretty fair description of the overall tendencies.

One thing I always like to look at is the relative ranking of the Nordic countries versus the US. Interestingly enough all of the Nordic countries tend to rank as very economically free in both the Cato/Fraser rankings and in the similar ranking from the Heritage Foundation. This is despite the fact that the Nordic countries have very large public sectors and a high level of taxation. However, that is generally more than “compensated” by low levels product and labour market regulation and very open economies with free movement of capital and goods.

This is the 2013-ranking for the US and the Nordic countries:

(7) Finland

(14) Denmark

(17) United States

(29) Sweden

(31) Norway

(41) Iceland

So there you go – both Denmark and Finland are more economically free than the US at least according to Cato/Fraser.

I sure that a lot of Danish libertarians and conservatives would object to Denmark high ranking and they would undoubtedly stress that it is impossible to argue Denmark is more “economically free” than the US due to the fact that the Danish public sector is among the largest public sectors in the world and level of taxation is very high in Denmark. However, looking in all other areas Denmark is indeed a very free economy.

I am looking forward to comments from both Danes and Americans. Is Fraser and Cato right?

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4 Comments

  1. This question probably doesn’t have an answer. Denmark’s economic freedom is weighted toward the ‘efficient/simple government/social capital/property rights’ direction. U.S. economic freedom is more evenly spread, with moderate taxation for a rich country, fairly solid property rights/government efficiency, and for the moment at least, fairly ok social cohesion. I don’t think we can know with much accuracy, how many index points of ‘tax freedom’ offset x points of ‘efficiency freedom’. At some point it becomes obvious, but right now it is a close call. But then I haven’t started a business in either country so what do I know? If someone could settle the issue, I wouldn’t want to bet against Denmark or Finland in beating out the U.S. Sweden trailing America makes sense to me though. Their national rent control policy is in my view quite destructive and leads to huge inefficiencies and head aches for lots of people, if Denmark and the U.S are close, then this should push Sweden below America. I wonder if Denmark/Finland should lose points for lacking monetary sovereignty?

    Reply
  2. Dan S

     /  October 1, 2013

    I would agree that it has to do with efficiency/simplicity. In most developed countries, when you want to provide some government service or benefit, you tax to raise the revenue, and then spend it on whatever the goal is. But people in the US have such an aversion to high taxes and to the idea of big government that you wind up with a very inefficient public-private hybrid carrot-and-stick incentive system, and then Congress will pass some law to try to bandage over the holes, but it usually doesn’t go well.

    For example, the healthcare system in the US uses a tax deduction for employer-provided health insurance to corral people into employer-provided risk pools (this was largely an accident dating back to WW2), but then of course you have the problem that employers would just refuse to hire sick people, so Congress passes a law that says you can’t refuse employment to somebody based on health status. OK but then this still leaves the elderly, the poor/unemployed, and their children without coverage. So you have Medicare, Medicaid, and CHIP as a result. Of course then when people lose their jobs they are suddenly without coverage and might not qualify for Medicaid, so you have COBRA which allows people to continue their coverage for 18 months after losing their job. And so on and so on. Needless to say this has created a complete mess, an overly expensive bureaucratic nightmare. And I haven’t even said anything about regulations regarding the provision of health care itself (certificates of need, etc.).

    Another example is in the area of affordable housing. Instead of simply giving money or housing vouchers to the poor, many major cities in the US require developers to construct a certain number of affordable housing units along with whatever else they were going to build as a condition of being permitted to build. This system works very poorly and simply gives a nice apartment to a few lottery winners while doing little to help the rest.

    I could go on but I think my point is clear. This is what happens when the desire to provide social services collides with a love of “small” government. I would take bigger on paper and simpler in practice any day.

    Reply
  3. Intuitively, it makes sense that high levels of redistribution and little regulation hurt economic efficiency less than low levels of redistribution and lots of regulation. If I had to choose either Nordic social democracy or US “capitalism,” I’d pick the Nordic model any day.

    Reply
  4. Benjamin Cole

     /  October 2, 2013

    Side note: If you go to a Thailand, you will find that anyone can set up a roadside BBQ,or a push-cart food stand, drive a jitney, open a hair salon, sell fruit out of his front yard, fix cars etc as a business with no say-so from the government. There are also “pop-up” markets in which many vendors set up temporary stalls and sell food and goods.

    This is impossible in Los Angeles. Any of those business are licensed, and there are no legal roadside stands or push-cart vendors or pop-up markets.

    It is much the same in the much of the First and Third Worlds.

    So who had economic freedom?

    Reply

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