Monday, February 10, 2014
Breakfast Buffet: $50
I traveled with my family the week between Christmas and New Year's to Copenhagen. Because of my interest in economics and the social aspects of diverse cultures, this became the lens through which I experienced the journey.
The Danish people, pretty much universally, are considered liberal. In terms of global neutrality, their reputation is similar to Switzerland. One example of this trait was evident in World War II when the Danes helped their Jewish population evacuate days before the Nazi round -up. This liberalism today is evidenced in their economic and social programs. Free healthcare is just one example. Another example is evidenced by the fact that not only is university free, but additionally all students receive a stipend to cover living expenses, regardless of financial need, in the amount of about $12,000 per year. Another safety net provided by the government is unlimited unemployment benefits provided the recipient provides rudimentary evidence that he or she is actively seeking employment. One Dane with whom I was discussing this policy told me that what satisfies as "actively seeking employment" is a joke. He said that it is quite common for recipients to apply for jobs for which they are clearly not qualified, and therefore have no real shot at being hired. Nonetheless, going through those motions fulfills the obligation and continues the benefits.
Free healthcare, free university education, free income for university students, "unlimited" unemployment benefits, generous social security benefits, a public transportation system that is state of the art that links their subway system with their rail system, and makes the United States look like its infrastructure is still in the Stone Age, how do they do it you ask? Taxes! Tax rates start at 30% and increase from there. In the United States, we have a progressive tax rate where all thresholds of income are taxed at the same rate regardless of total income. So, the first $50,000 of a millionaire's income is taxed at the same rate as a wage earner who makes only a fraction of that income. In Denmark and most of Europe the tax rate is applied to all income on an absolute basis. So a Danish millionaire will pay substantially more taxes than his American counterpart. In addition, a 30% tax rate is a significantly greater portion of income deducted from a low or modest wage earner.
Furthermore, Denmark and Europe impose a hefty 25% sales tax known as the value added tax (VAT) that applies to all purchases. The effect of the VAT is that it inflated the cost of the very simple breakfast buffet at the Crowne Plaza Hotel from an advertised cost of $30 to nearly $40 per person. Adding further hardship to the VAT is the incredible weakness of the shrinking US dollar. Base prices are high in Europe, and adding the VAT and the dollar exchange rate resulted in a self- service breakfast buffet costing $50 per person. This is just one example of many evidencing the effects of European liberalism coupled with US monetary policy. A single can of beer cost $20, and a cocktail would set you back by $35. To raise revenues as well as to legislate social morals such as caring for the environment, certain items such as automobiles have imposed on them an additional tax. In the case of an automobile, the additional tax is equivalent to 120% of the purchase price. This makes owning an automobile out of reach for most citizens, and consequently, bicycles proliferate everywhere.
All of this got me thinking who has the better system, especially in light of the fact that the US is debating these issues today on the domestic front. I was also especially sensitive to the juxtaposition because I personally was a university student in Europe 32 years ago. And, I was a beneficiary of some of the generous social promotions, but at a time when the dollar was king. Notwithstanding the fact that I attended an American college, the Italian government - subsidized cafeteria was available to me and all who had a university ID card. With my college identification, I was welcomed into the cafeteria, and enjoyed a four course meal including wine for about $.75. This coupled with the fact that the dollar was at an all - time high, enabled me to travel throughout Europe on my "lunch money".
Now, as an adult and a financial planner, I am certainly supportive of policies that make life worthwhile and less stressful. As a society, we should look out for our brothers and sisters who are in need and who are in route to becoming independent and successful. The great challenge is balancing these values with policies that do not inhibit innovation, motivation, and incentivization. In striking the right balance, it is important to appreciate the fact that sometimes providing more translates into less. What I mean by this is the law of diminishing returns. When social promises and programs cost so much to support, then there becomes less of an exchange. When breakfast costs $50 per person, or a can of beer costs $20, there are fewer and fewer people who can or are willing to partake. And this becomes a vicious cycle because there is less commerce and therefore less income to support the entire system. If we think of no other industry beyond tourism, at current expenses, it does not take a rocket scientist to realize the effects of diminishing returns. Furthermore, while the Federal Reserve has used unprecedented tools in recent years to suppress interest rates in order to invigorate the US economy, it has also resulted in a dollar that doesn't provide much abroad. A weak dollar makes US exports much more competitive, but it does not help our purchasing power in terms of goods and services that are best rendered outside our borders.
I must say that Danes appear happy with their lifestyle and their government. The policies have been ingrained as a fabric within their society, and they seemed content. My sense was that there is not a large income disparity in Denmark. I felt that there would be relatively few extremes in terms of poverty or wealth. Additionally, I felt that the incomes of the middle class would fall into a fairly narrow range. Their housing and furnishings appeared quite uniform. Along the subway route, the new condominium buildings were all modern, filled with similar looking apartment boxes within. Perhaps due to the fact that there is limited light during the winter, most of the condominium buildings that we passed had limited window coverings. We could see right into the apartments, and literally saw the same furniture down to and including light fixtures in a great number of these units. Even though the Danish design aesthetic is filled with attractive and simple lines with optimum function, the uniformity was so pronounced that, it became monotone. And, with all the talk about income disparity in America, it made me question whether from a purely social rather than economic standpoint, income parity could in fact breed a monotone society.
There are of course no easy or right or wrong answers to these social and economic philosophies. What is clear is the inter-linking of economics and sociology. The monetary and economic policies that we enact are reflective of our values and therefore culture. With every pro, there is a con. At the core of America is individualism coupled with collectivism, the notion of equal opportunity irrespective of how tainted it may be, hard work and sacrifice, and a melting pot that is supposed to celebrate diversity. As our middle is getting marginalized today by the extremes on both the left and the right, I only hope that we continue to debate the social/economic framework that we want for our society in the most respectful manner. As our population ages and our demographics shift, and technology realigns the fabric of our society, these issues will become even more challenging and daunting. We must understand and appreciate both the costs and consequences of moving too far in the European direction, and too far in a direction that results in a large portion of the
populace hurting or becoming disenfranchised. And, what is so interesting and timely in light of this discussion, is the fact that it was just announced that the Danish government has agreed to sell an interest in one of their largest state owned energy companies to Goldman Sachs because like most governments, even the Danes are finding themselves cash-strapped. This reinforces the need to strike the proper balance government largesse and austerity, and the recognition that we will only prevail when that balance is struck.
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