Saturday, October 08, 2005

Two generations of welfare

Almost two generations of welfare

In every western nation you find a welfare state today. The basic foundations of these arrangements are very different. Some are organized by principles of insurance, some are financed entirely by taxation. This implies substantial differences in respect to total consumption of welfare, re-distribution and equalization among individuals and over time, and not at least in respect to the vulnerability of the welfare now and in the future, regardless if the degree of preparedness or the willingness to face reality among the decision-makers is taken in to consideration.

Three years of low growth rates or negative growth rates at least in Germany, France and Italy tells us that unemployment or mass-expulsion from the labour force have to originate from more than the traditional and clearly public outspoken or ditto theoretical reasons [1]. Theories may or may not help you to understand some patterns, but experience shows reality. Regardless which type of welfare system was chosen, the welfare state is being threatened by the so-called globalization or by its preparedness for international competition, the low western fertility, therefore the ageing of the populations, the weight of the welfare system compared with GNP, and the still increasing state-debt in all the western countries.

The starting point for all civilized communities has been production, sale, export and import in a suitable mix since the end of the Mercantilism and the Napoleonic Wars with young Industrialism and the start of organization of international trade. Demand for labour and other resources as a prerequisite for production is a starting point for growth of production, earnings, consumption (private and public) and employment. If the decision-makers of a nation seriously take the needs of citizens into account, they must also concentrate on economic stability that includes the dynamics of capital formation, securing the investment process, securing economic growth, research and new technology, competences and high productivity. Those considerations and responsibilities are the plain basic of transforming resources/wealth into welfare.

Welfare includes a variety of payments and services to replace your income and to help you when certain events occurs:
Unemployment, absence, leave, invalidity, expulsion, early retirement, pension, health care, nursing homes, nursing at home and alike.

The way the welfare programmes have been financed implies plenty of differences as mentioned. Often differences between ambitions and reality are caused not simply by the willingness to realize, but also by the decision-maker’s trained way of thinking. Systems entirely financed by taxation have the characteristics and even inclines to grow according to the public budget, often decided by both an explicit and an implicit steady growing-mechanism of the taxation. Systems entirely financed by individual payments to private or public security-funds on the other hand are based on insurance principles, and they often meant to make considerations entirely of individual lifetime-distribution of purchasing-power without any built-in re-distribution or even equalization for example between different levels of incomes or between payers and receivers of transfers and service unlike many taxbased systems.

Taxbased systems were often inspired by promoters far from production and sales. The welfare theorists’ way of thinking at best have recently presented the alarming results to the public and the politicians in Denmark[2]:

”Does it make sense to increase the supply of work? Will there be a need for “all this work”? There is. There is a need for labour in a lot of areas. For example are lot of hands needed to do the jobs of the welfare service in the future, care to a growing number of elderly people. There plenty of opportunities in the international economy, if we remain competitive. As we have seen high employment is fundamentally the prerequisite of a high level of service and transfers in Denmark. It is wrong to believe that the amount of work always remains constant. That we have to divide the existing amount of work.”

The central argument and the starting point all the way through is: ”a larger labour force implies larger employment”. The labour force is the part of the population who supplies their work on the labour market. Pensioners, children and young ones in education are typical not included in the labour force. The whole way of thinking is built on Say’s Law, Keynes and Karl Marx: “Supply creates demand” and traditional welfare theoretical discourses.

Take some results of the Danish system/model described by a few key figures as a training-example and forget that the population in Denmark is just 72 p.c. of that of London’s 7,4 mill:

Gross National Product (GNP):

1960: 384,6 bill. 1995-dkr., 2001: 1.188 bill. 1995-dkr.


1960: 26 p.c. of GNP or 100 bill. 1995-kr., 2001 51,5 p.c. of GNP or 612 mia. 1995-kr.[3]

Employed by the public:

1960: c. 406.000, 2001 c. 850.000.

The total employment increased by:

600.000 in the period 1960-2001, of which 450.000 publicly and 150.000 went to saleable production.

Number of receivers of public/taxbased transfers :

1960: 600.000, 2001 1.822.000, of which 1.100.000 in the working ages, of which 700.000-800.000 unemployed or ”on sideline” (a new official expression), i.e. as receivers of unemployment benefits, social security, early retirement payment or another public transferred income (the numbers are accounted in the year round employment).

Public transfers and service:

20 p.c. of GNP in 1960, 2001 44 p.c. of GNP [4].

Public service:

14 p.c. of GNP in 1960, 2001 28 p.c. of GNP. [5]

Public transfers:

6 p.c. of GNP in 1960, 2001 16 p.c. of GNP. [6]

Danish State-debt:

59,3 bill. 1995-kr. in 1960, 2002 573 bill. 1995-kr.

Changes briefly in the period 1960-2001:

All in all GNP: 3 times more

Tax-payments: 2 times more plus 63,7 p.c. of the GNP-growth

Service-employees: more than 2 times more.

Individuals to support: more than 3 times more

Population: 4,585 mill. in 1960, 1983 5,116 mill. and 2001 5,349 mill.

State-debt: 9,7 times larger

Please, email a corresponding short but documented account dealing with the welfare in your country or inspire some able individual to do so.

The results in Denmark, continued:

63-65 p.c. of the GNP-increase, and more than the doubled part of the wealth in the starting point has been confiscated by the public and transformed to public consume included transferred purchasing-power and public welfare service in the period, and about 28 p.c. of the labour force is not offered work in 2001. Now the income taxes cannot be increased further. In the same period (1960-2001) the state-debt has been multiplied by almost 10. A striking disproportion between the monopolized sector with compulsory payments and the production sector on the other hand. The need is not just more hands to make more service of care and nursing, as it is proposed in the source mentioned in footnote no.1. There is something else.

The purchasing power creator – the production in contrast to public consume and public compulsory monopoly-supply - has simply been reduced relatively to what might be possible in order to simply change the negative unbalance of payments to the opposite with the result that more than one quarter of the labour force has been expelled and put on welfare transfers while the production has been sent on pilot light.

In the areas ‘education’, ‘health care’, and ‘social care’ more than 25 p.c. of the labour force (or 630,000) is employed. It is impossible to find the distribution of labour between or within the three sectors caused by the lacking public statistics. Number of patients, clients, pupils and students to throw light on productivity (product divided with resources) and efficiency (aims divided with resources) are not available either. It is a fact that the number of employees has more than doubled since 1960. The explanation may be a doubling even though you then account on the part of a three times bigger total GNP.

A few examples:

Primo April 2005 DR-Text-tv reports that 30 p.c. of teachers’s working hours are used on teaching the children. April 11th 2005 TV2-News reports: 57 p.c. of the all schoolteachers teaching Danish in the Folkschool have not chosen the Danish, when they qualified via education to teach in Danish, and the same with 97 p.c. of those teaching Natural Science and Technology. A big international approved investigation showed that 9 years old Dutch school children got two times more teaching-hours in 1996 at half the cost. 10 p.c. of the students drop out from the more advanced studies. The yearly intake of students on the MSc in Engineering has fallen by 50 p.c. from 1985 to 1995. The worst is we were not informed before the system broke down.

We have 200,000 more in the labour force than outside the labour force, and this disproportion is getting more and more fateful in the future with an growing part of the population in the ages 65 years or more, and an imported group of immigrants who join the labour force less than half as often as the Danish, and therefore consume 40 p.c. (until now) of the social security transfers. To this must be added that 35 p.c. of the immigrants are 25 years or less and therefore very dependent on public transfers and service.

The Danish model has never been claimed by the voters. On the contrary, our language had to be filled with new words and new concepts to replace the old ones, and some of the old ones had to be emptied for substance and filled new substance. Continuously and obstinately it continued for almost one generation in advance in order to succeed. Perhaps the leading figures then also got an easy start with a large postwar-generation employed in the labour force, and perhaps the weaker followers of the Postmodernists and some politicians had imagined that some kind of equalization of the payments was actual, and perhaps also a imagination of some division of those payments with the welfare over some kind lifetime-consideration. Almost nobody will draw wrong conclusions when the results are shown to them after almost two generations with the Postmodernists’ welfare system financed almost entirely by taxation.

Regardless which so-called model of welfare is chosen or chosen to do without, there are some fateful false arrangements of the Danish society, that certainly cannot remain unchanged, but cannot be removed without a large power-displacements and an information programme of considerable dimensions.

The Danish Welfare Commission finds it difficult to increase the employment more than today:

“The employment is already rather high in Denmark compared with other countries.”

And we have to add this: “…with 700,000-800,000 unemployed and expelled of total 2.7 mill. in the labour force”.

On this background both the Welfare Commission and especially EU proposes an accelerated inrush of immigrants as an obvious possibility. The Welfare Commission asks: “Does increased immigration solve the providing problem?” After this some thoughts of experiment that obvious tries to illustrate if 30,000 extra immigrants from more developed countries were invited to Denmark every year in eternity – besides the inrush from less development countries right now – and provided that they were employed and paid taxes, then the financing problem would have been solve for the Welfare Commission. “And if the moon was made of green cheese”.

According to Hans Kornø Rasmussen
[7] and EU [8]
the immigration to EU must be increased by an even increasing factor 8-14 times compared with 1996, i.e. 8 times more in 2007 and 14 times more in 2024. In 1996 525,000 (net, new) immigrated to EU. The number per year should be 4.5 mio. in 2007 and after this increase gradually to 7 mio. in 2024. At the same background the new appointed EU-Commissioner Vladimir Spidla Marts 18 2005 announced a gradually 12-doubled intake of non-western immigrants towards 2024.

We have to add that Hans Kornø Rasmussen reduced his proposal concerning the inrush of foreigners to Denmark to twice the actual number (the number was about 18,000 in 2000). Perhaps he has had some personal experiences. Nothing else in his former premisses has changed.

One way out of the morass:

The Keynesian way of thinking turns things upside down. The earth is actually turning the other way round of what the Keynesian imagine. You does not start e.g. with the labour force and the employment, you actually start in the market for economic goods. Thereafter you turn to the division of labour, and continues with planning of production and the consumption of resources, and you end with the labour force and the employment.

Businesses do not invest when their expected margins of profit do not condition the production or an altered production. The difference between the costs and the expected revenue (price multiplied by the amount of sales) that these costs demand per produced unit by unit, is too small. If it is possible to make an adequate difference or margin be realized at a lower level of production, it will perhaps be carried through at this lower level, also what concerns employment, if the best of other alternatives is worse. It is not, if you look at Danish relations. That is the reason why the purchasing-power is canalised into private capital outside the production or out of the country: Capitalization

Business investments are not based on price-margins, but entirely on a basis of profit-yielding price/cost-margins. The problem is not one-dimensional but at least two, or more often multi-dimensional. It has been said that Keynesians are not able to think in more than one dimension. If it is true, you may not wonder that the economic reporters abroad are rather one-dimensional. There does not exist any Danish anymore.

The economic reality is the producers who drive the economy forward, savings must be looked upon as the fuel in this process.

What the consumers demand and buy does not start the economy, but it just maintains the production machinery. An increased consumption, e.g. a public initiated increase of consumption neither has and never will kick-start any economy, as it usually and very often has been expressed by the Keynesian for the last 70 years. Sometimes you hear the economic reporters say that the expenditures for private consumption amount to some percent of the total demand. You also hear some nonsense about consumer expectations. To give the reader an expression of the reality that is quite different, rather opposite: In the late 1920s private US-consumption was accounted to about 8.5 p.c. of the producers’ expenditures on factors of production and other producer goods. This means that the consumption of capital goods was about 12 times larger than the private consumption.

The production process consists of a vast number of complex stages. It follows from this that the total combined expenditures on all those stages have to exceed the expenditures on consumption rather considerable. As an illustration you can imagine the total invested capital turned to final consumption. This must take some years; here 12. What is being used on consumption originates certainly from production, while production originates from the capital (included factors of production) that in the first link originates from savings. Therefore, the more savings the more real capital are created and accumulated. The result is that production rises, and the consumption can be risen too.

You could accept the following facts: government expenditures and private consumption do not stimulate, but they drain the economy. This is the truth, even though you find these expenditures just.

In Denmark you find the following needed changes :

Wages have to be reduced by a least 30 p.c. The income taxation must be altered to the kind-of-source-taxation, i.e. wages must be taxed directly, proportional and final at the source, primarily to avoid the taxation control. The yield of the wage-tax has to be reduced by an amount

at least corresponding that the disposable wage actually increases by 2-3 p.c. The company taxation has to be reduced to the Irish level.

The different contributions at the wage pay slip are to be gathered after a reduction of at least 50 p.c. into one single contribution to the education-fund, entirely used for education, directly and individually.

The result is a 2-3 times larger saleable production that will draw the labour force into employment and create the purchasing-power for so-called welfare to quite a reduced number of receivers. By following the way the earth is turning in space that will be the outcome per automatic.

Knowledge and competences in front:

If Denmark should take a chance in these years of outsourcing, we have to invest whole-hearted, relevant and consequent in knowledge and competences that can bring us in front. The labour force to do the jobs of welfare service caused by an increasing part of elderly will never become a problem. The second most dangerous development we have experienced for almost two generations now is the reproduction of the gymnasium-teachers’ own irrelevant competences. Most of these competences are certainly not business-relevant, if we have to survive as a civilized nation. The Folkschool is certainly not better. Here we have to invest in Danish, English, German, Match, Biology, Economics, Data and History, and we have to realize that we cannot replace a great deal of teachers, and at the same time find an exchange that carry the development towards new aims I such a way that it will break the mould. Some known kind management to achieve the new aims have to be established.

The means to correct the course within 2-3 years we have to follow our comparative advantages that should have been followed from the start in 1960 instead of letting young ignorant people decide for themselves with help from the teachers in the gymnasiums, where we all were meant to go on the account of others[9]. We have to import education systems and textbooks (eventually translated) from Ireland, Holland, England, Germany and USA, and eventually get some teacher from those nations to work in key positions in Denmark for some time.

USA started to tackle the globalization-political questions action-oriented already primo the 1980s: Dollar-Fall. England did the same. Ireland produced half the Danish production in 1970, today Ireland produces 10 p.c. more per inhabitant than Denmark.

The universities are a greater matter; they have to handled within the same 2-3 years.

The Muddling through continues to the end:

How a country with 67 p.c. of voters employed by government or sent on transfer payments meet its finale in latest 15 years is difficult to imagine. It shall certainly not be a nice view.

Recommend: Two generation of welfare

Ebbe Vig

M. Sc. (Economics)
Information of Denmark


[1] That taxes e.g. may rise wages, even wages in realterms, and at last stop private initiatives, not entirely based on monopoly in the last link of production-sales-chain.

[2] The Danish government’s Commission of Welfare: The welfare of the future does come from itself. Page 24. And we could add: It is created entirely out of wealth.

[3] Notice, that growing percent is accounted from an even growing basic. In this case it was made possible, because both men and women was drawn into labour market as taxes rose further.

[4] Notice, a growing percent is accounted from an even growing basic. You could explain in this way: 14 p.c. of 384,6 bill. and 44 p.c. of 384,6 bill. plus 65 p.c. of the growth from 384,6 bill. 1995-dkr. to 1.188 bill. 1995-dkr.

[5] Notice, a growing percent is accounted from an even growing basic.

[6] Notice, a growing percent is accounted from an even growing basic.

[7] A member of the one of Danish government’s think tanks.

[8] The period ’Social Forskning’ no. 1 1998 and EUROSTAT no. 6 1996.

[9] Almost all UN-members gave this comment to the ambigitious U-90 (Education 1990) in the 1970s: You must certainly be able to afford it.


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