November 3rd, 2012

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Mogens Lykketoft, Denmark’s finance minister from 1992 to 2000, once promised regarding his plan to radically increase taxes that: “Even after this tax reform, there will still be capitalists left in Denmark.” His statement is very telling of his rather low view of capitalism – that the Danish society should move towards “more state”, not less, and that capitalists were a minority who should simply be tolerated.

The majority of Danish politicians intuitively believe that capitalists are an unpleasant necessity to generate the revenues to fund the social welfare state. 

Denmark has the highest total tax pressure in the world and is towering far above the European average.  It also has the smallest private sector in Europe – one that supports one of the biggest public sectors. Add to that a generous entitlement system, which allows unemployed and unemployable citizens an income well above that achieved by full-time employees in the private sector in many European countries, and you will observe a need for tax revenues nearly unmatched anywhere else in the world.

This is not surprising, since more than half of the adult population is either working in the public sector or living on some form of social transfer payment.

Out of a total population of 5.6 million, a little more than 2 million are pensioners, unemployed, sick or on social transfer payments for other reasons.

Around 800,000 are employed in the public sector. There are only around 1.8 million that are not directly dependent on state payments in some shape or form. But even among this group, there is high focus on cheap, subsidised childcare, free healthcare, child bonus payments, subsidised housing and an infinite number of other ways to secure some additional income from the state.

The recent rise of socialists who continue to hand out huge public expenditures combined with the broadly supported tax reform is going nowhere in terms of really moving the dial between the public and private sectors. Even more, it highlights the fundamental challenges of a social welfare society and the extreme vulnerability of business and capitalism operating within it.

In order to undertake a friendly business policy, one would need to gain the support of an overwhelming majority that in the short-term would have to accept lower public expenditures and cut back on many of their perceived ‘rights’ and entitlements.  But rather than implement actual changes to the system, both voters and politicians like to create the illusion of reforms and security. The reality is that this is fundamentally an effort to create a feeling of reassurance that the current system can be upheld without any serious cutback, sacrifices or changes.

So is there really any hope for reforms, rationality, courage and capitalism in a welfare society? The answer is no, not under the current leadership. Some neighbouring countries have pursued more responsible policies in recent years – notably Sweden and Finland. In a benchmarking of best practices, both countries have a more efficient use of money in the public sector, better value for money in education and healthcare, fewer people permanently placed on social welfare, and a more friendly rhetoric towards business, growth and job creation. Both of these countries must be considered traditional social welfare states but at least show some degree of moderation in their socialist practices.

So if there is no hope for reforms of the welfare society, the next question must be whether capitalism can exist or co-exist in the long-term in a social welfare state. Essentially, the answer has to be no. A social welfare society that wants to embrace and benefit from some form of real capitalism in the long run will need to: set very stringent parameters for the amount of welfare available to its citizens as a percentage of GDP; set a maximum limit for taxation and government debt levels; secure strong fundamental incentives written into a constitution; and secure basic negative rights for its individual citizens.

In addition, it will need to embrace a different rhetoric and give up on equality of outcome as a key objective. It needs to welcome, encourage and praise large contributors to the economy rather than vilify them and berate them for populist purposes. It needs to demand responsibility from the citizens for their own economic situation and be very firm on abuse or exploitation of public support or services. It needs to stop victimising large groups of the society and stop pricing them out of employment through minimum wages and similar initiatives. It needs to stop its politicians from corrupting the democratic process through bribing particular voter groups to gain power.

According to the 2012 Economic Freedom of the World Report, America’s economic freedom has declined so greatly that it has plummeted to 18th place, even trailing behind Denmark.  Now more than ever, America’s capitalistic society is threatened by burdensome government and a bloated entitlement state.  Increasing amounts of regulations continue to come down the pipeline, making it harder for entrepreneurs and small businesses to create value.

Growing up in Denmark, I’ve seen this picture before. If America doesn’t want socialism, its people must wake up and heed the lessons being played out in counties around the world – like Denmark. If America doesn’t want socialism, it must seek politicians and policies that allow the individual to have more liberty and freedom. If America doesn’t want socialism it must act now. But America must first answer the question … does America want socialism?

Lars Christensen is founder Co-CEO of SAXO Bank. He recently finished a five-day speaking tour of the United States organised by the Leadership Institute.

The above was first published on Forbes.com and is extracted from a speech given to the Mont Pelerin Society.