Table 1. Economic Freedom in Denmark,
Ratings and Rankings (maximum rating 10.0)
Source: James Gwartney, Robert Lawson and Joshua Hall,
Economic Freedom of the World: 2015 Annual Report
(Vancouver: Fraser Institute, 2015)
Table 1 shows the Danish scores on the five sub-indices of the
EFW index. High tax revenues, marginal tax rates, and government
spending related to the welfare state earn Denmark a very low rank
on those “size-of-government” measures. On the other indicators,
however, Denmark scores quite high, in some cases in the top ten.
Its ratings on the protection of property rights and the integrity
of the legal system are very high by international standards, as is
the soundness of its monetary system (with the Krone having been
pegged to the Euro or the Deutsch Mark for more than 30 years).
Being a small country very dependent on the international division
of labor and comparative advantage, Denmark has a long tradition of
free trade with the outside world (nowadays the trade regime is to
a high degree determined by the European Union). With respect to
regulation, Denmark scores quite well. Credit markets are among the
less regulated internationally. During the recent financial crisis,
tax payers did not have to subsidize banks, and some banks were
allowed to fail. The Danish labor market is very flexible: there is
no legislated minimum wage, and there are few restrictions on
hiring and firing. The overall labor market score on the EFW is,
however, dragged down by the existence of conscription. Finally,
Denmark is the least corrupt country in the world according to
Second, Denmark did not become a rich country recently. As
Figure 1 shows, Danish per capita GDP relative to other countries
reached a maximum 40 to 60 years ago (ignoring the “noise” from the
Great Depression and World War II). Denmark caught up to and
overtook “old Europe” in the fifties, while it narrowed the gap
with the United States and other Western offshoots until the early
1970s, when the process of catching up came to a halt. Danes are
still not as rich as Americans.
Figure 1. Danish Per Capita GDP Relative
to Other Countries
Source: Angus Maddison, Historical Statistics of the World
Economy: 1-2008 AD, 2008, available at:
At the time Denmark became rich relative to the rest of the
world, it was not a welfare state. In fact, Denmark has
historically been a low tax country by international standards (see
Figure 2). Until the 1960s the ratio of Danish tax revenue to GDP
was the same as in the United States and lower than in Great
Britain. The sharp divergence in the Danish tax level really
occurred in the second half of the 1960s, when first a left-wing
coalition government and then a right-wing one increased the
tax-to-GDP ratio by some ten percentage points. Interestingly,
government spending was to a large extent driven by increases in
tax revenue stemming from the introduction of a value-added tax and
withholding taxes on wage income.
Figure 2. Historical Tax
Note: The Danish series has data break in 1947 and 1965, the
American in 1948 and 1965.
Source: OECD Tax Databse, “Fiora consolidated govt revenue,”
Whitehouse.gov, taxfoundation.org, “Økonomisk vækst i
Danmark” - Svend Aage Hansen, “Beskatning i Danmark” - DST 1987,
and own calculations.
The 1970s saw a strong tax revolt, as Mogens Glistrup’s newly
formed Progress Party became the second largest in the 1973
“landslide” election. Nevertheless, spending kept growing as the
welfare state attracted new clients and new programs were added,
the economic crisis lead to increasing unemployment, and attempts
were made to combat the crisis by increasing fiscal expenditures.
By the early 1980s the economy was in very bad shape, with high
unemployment, a huge and widening government deficit, and serious
concerns over the large external deficit. All governments since the
right-wing government, which came to power in 1982, have
implemented structural reforms of the welfare state and tax system,
reducing welfare state “generosity” and cutting marginal tax rates,
as well as consolidating public finances.
So, Denmark first became rich, and then introduced the
government programs that make up the welfare state. The huge
increase in government spending has been accompanied by deep
structural problems, which has made it necessary to reform the
Danish economy and welfare state. It can hardly be claimed that
introducing the welfare state made Denmark rich; rather it was the
other way around. Denmark first became rich, and then the
authorities began to redistribute some of the wealth.
But what about Denmark’s apparent happiness? Maybe material
wealth doesn’t matter that much if you are satisfied with your
life. In fact, life satisfaction and income are highly correlated
both across country averages and across individuals within a
country, as pointed out in a comprehensive study of the literature
by Betsey Stevenson and Justin Wolfers.4 (The 2015 Nobel laureate in economics, Angus
Deaton, has made the same point.)5
They reject the so-called Easterlin Paradox, which posits that in
the long run increased income doesn’t correlate with increased
happiness (and that saw only a between- and not a within-country
correlation), and thus could be interpreted as a case for
redistribution. If redistributing from the rich to the poor didn’t
make the rich less happy, redistribution could increase “gross
national happiness.” And in that case, welfare state redistribution
could be the reason for the Danish world record in self-reported
Alas, Denmark is no longer the happiest country in the world,
having been overtaken by the low-taxed Swiss in the latest
survey.6 More important, as
already mentioned, the Easterlin Paradox is not supported by the
literature. The Danes’ high happiness level is probably due to
their high income level. Furthermore, as pointed out by Christian Bjørnskov, a high level of trust
also seems to increase life satisfaction, and, as Danes are quite
trustful, that might play a role here too.7 Again, the high level of trust preceded the
welfare state in Denmark rather than being caused by it.
In many respects, Denmark could serve as a model for the world.
But if you fail to learn the right lessons, it could be dangerous
to try to imitate our model, especially the idea that you can
become rich by redistributing wealth or that there is a gentler,
more successful way to socialism than the one experienced by
typical socialist countries.
And it would certainly be ironic if the Danish case were to
become an excuse for politicians in the United States, Greece, or
other countries to avoid fiscal consolidation and economic reform,
since we Danes have been reforming and consolidating for decades to
deal with the problems created by the introduction of our welfare
1. James Gwartney, Robert Lawson and Joshua Hall,
Economic Freedom of the World: 2015 Annual Report
(Vancouver: Fraser Institute, 2015), co-published in the United
States by the Cato Institute.
2. World Bank, Doing Business 2015: Going Beyond
Efficiency (Washington: World Bank, 2014).
3. Transparency International, 2014 Corruption
Perception Index (Berlin: Transparency International,
4. Betsey Stevenson and Justin Wolfers, “Subjective
Well – Being and Income: Is There Any Evidence of Satiation?
American Economic Review: Papers & Proceedings 2013,
vol. 103, no. 3, pp. 598-604.
5. Angus Deaton, The Great Escape: Health,
Wealth, and the Origins of Inequality (Princeton University
Press, 2013), pp. 18, 21.
6. John F. Helliwell, Richard Layard, and Jeffrey
Sachs, eds, World Happiness Report 2015 (New York:
Sustainable Development Solutions Network, 2015).
7. Andreas Bergh and Christian Bjørnskov,
“Historical Trust Levels Predict the Current Size of the Welfare
State,” Kyklos International Review for Social
Sciences, vol. 64, issue 1 (February 2011): 1-19.