The American Dream Could Use Some European Inspiration
European countries went through — and solved — some of the problems America has.
One can tell two very different stories about the American economy.
In one, growth is robust, unemployment is at its lowest in half a century and the stock market is booming. This is the story President Donald Trump likes to tell.
In the other, two in five Americans would struggle (PDF) to come up with $400 in an emergency. One in three households are classified as “financially fragile“. Annie Lowrey writes in The Atlantic that American families are being “bled dry by landlords, hospital administrators, university bursars and child-care centers.” This is the story Bernie Sanders and the Democrats tell: for millions of Americans on seemingly decent middle incomes, life has become too hard.
Sanders’ solution is to bring “democratic socialism” to America. He cites European countries like Denmark and Sweden as inspiration. They’re not bad places to imitate — but they have actually moved away from socialism and toward a mix of free markets and the welfare state. It is why they rank among the freest and most competitive (PDF) economies in the world.
Americans can learn from the Scandinavian experience, if they get the balance right.
Housing has become unaffordable in most American cities, which is where the jobs are. The median asking price for a single-family home in San Francisco, where many of the country’s highest-valued companies are based, has reached $1.6 million.
The problem is national, driven by a combination of stagnant wages, restrictive building codes and underinvestment in construction. Home prices are rising faster than wages in eight out of ten metro areas.
As a result, young Americans are one-third less likely to own a home at this point in their lives than previous generations, delaying their wealth accumulation and possibly family formation. Among young black Americans, homeownership has fallen to its lowest rate in more than sixty years. Americans of all ages are less likely to move, which has contributed to a decline in social mobility (PDF) and an increase in regional inequality. It might also have something to do with the fall in entrepreneurship (PDF).
The average cost of an employer-sponsored health insurance plan was $20,576 last year, up from $13,375 a decade earlier. The percentage of workers with a deductible of $2,000 or more went up from 7 to 28 percent in the same period.
Even Americans on Medicare, which is supposed to provide free health care to seniors, pay an average $5,460 out of pocket every year. The average American on Medicaid, which was designed to provide free health care to the poor, pays over half that amount. Almost two in three bankruptcies are related to medical issues and nearly 140 million Americans — close to half the population — report “medical financial hardship” each and every year.
Tuition and fees at colleges and universities have risen twice as fast as wages (PDF). Half of students take on loans to try for a higher-education degree. Outstanding debts typically range from $20,000 to $25,000, requiring monthly payments of $200 to $300 — but many graduates of elite universities owe much more.
Total student debt is $1.4 trillion, up 6 percent from last year and 116 percent in a decade. One in three graduates aged 25 to 39 struggle financially. The same percentage says the financial cost of their degree outweighs the benefits.
Spending on child care has risen 2,000 percent in the last forty years. Families commonly spend between $15,000 and $26,000 (PDF) per year to have someone take care of their kids. This is completely unaffordable to low-income families — yet many mothers don’t have a choice. One in four return to work within two weeks of giving birth, because they can’t afford not to.
Understanding the problem
I was optimistic four years ago that both political parties understood the problem when the likes of Jeb Bush and Marco Rubio agreed with Democrats that the American Dream had become unattainable to millions.
Then Trump, an economically illiterate self-declared billionaire (he won’t release his financials to prove it), took over the Republican Party, won the election, and the crisis to American democracy and the rule of law he poses took precedence over the cost-of-living crisis.
Frustratingly, the cost-of-living crisis, Lowrey knows, “is amenable to policy solutions — ones most other rich countries adopted decades ago.”
In other developed economies, child care, early education and higher education are public goods and do not require high-interest-rate debts or endless scrambling by exhausted young parents to procure. Other wealthy countries have public-health systems that cover everybody at far lower cost, whether through socialized or private models. And numerous proposals would transform residential construction in this country…
Before looking at some of those policy solutions, it’s worth considering the tradeoffs.
Americans have for decades accepted weaker social protections and second-rate public services in return for higher incomes and the opportunity to get rich. This arguably gave America higher growth, some of the highest median household incomes in the world and a broad middle class. Unique among developed nations, Americans included skilled (but only white) blue-collar workers in their middle class after the Second World War, which helped them stave off European-style class conflict.
That model, though, was predicated on large — sometimes monopolistic — corporations, strong trade unions, government-backed mortgages and employer-linked health insurance and pensions. It hasn’t adapted to the gig economy. As a result, America now sees the stirrings of class conflict, which, because workers at the bottom of the wage scale tend to be black or brown, is also a racial conflict.
Post-Cold War model
The solution is not to imitate post-World War II Europe, but post-Cold War Europe. Northern and Western European countries reformed their welfare states in the wake of the liberalizations of the 1980s, which weakened trade unions and ended lifetime employment as well as lifetime dependency on welfare.
Amsterdam reduced its public housing stock from a high of 65 percent of 55 percent of the city when it realized middle-income families were being squeezed. Paid too much to qualify for social housing but too little for a mortgage, nurses and teachers could no longer afford to live in the city where they worked.
Amsterdam still struggles to build enough homes to keep up with demand, but other Dutch cities are more affordable. Homeowners can deduct the interest they pay on their mortgages from their taxes. Renters qualify for subsidies, which are tied to income and rent. 1.4 million Dutch households, on a population of 17 million, receive between €24 and €368 per month to help pay the rent, which usually hovers around €1,000 per month.
Around one in five Danes live in social housing, which are administered by self-governing public bodies. But Denmark, as well as Sweden, has deliberately sold off many of its public houses to fight ghettoization — which in some cities has led to problems associated with gentrification. (Which, between the two, I would argue is the better problem to have.)
In terms of health care, the best model is not a centrally-run, single-payer system, like Britain’s, which compares (PDF) poorly to mixed public-private systems, such as Denmark’s and the Netherland’s.
I’ve argued before that Democrats in the United States should campaign for Dutch-style health reforms, which is basically Obamacare for everyone: regulated and mandatory private insurance, half of which is paid from payroll taxes and half by consumers, with subsidies for low incomes, independent doctors and publicly-owned hospitals.
Rather than force all Americans onto a single, government-run insurance scheme, the better — and politically more feasible — policy is to sever the link between employment and insurance, which inhibits choice for consumers and competition between insurance companies, and stops people from switching jobs. Combine that with price controls of premiums, deductibles, co-pays and drugs, and costs should come down.
Rather than dole out more loans to students, or forgive all student debt, the United States should attack the root cause of the problem: the high cost of higher education. In most European countries, universities and trade schools are almost entirely dependent on public funding. If Harvard and Yale received the same amount of money per student as community colleges, they would find ways to cut costs. They could still earn more money from foreign students or perhaps charge extra for their Master’s programs. But there is no justification for Ivy League universities to charge their students ten times the tuition and fees as the average community college.
Reducing the cost of child care starts with expanding parental leave. America is the only rich nation that does not give mothers and fathers paid time off from work. Mothers (not fathers) are allowed twelve weeks off, but unpaid, which means many can’t afford to. Northern and Western European countries provide up to twice as much, for both parents, and employers have to continue paying their salary.
In addition, Denmark pays up to three-quarters of the cost of child care. Sweden caps the cost of child care at 3 percent of the parents’ income or €120 per child per month. The Dutch give parents a no-strings-attached subsidy of €200 to €290 per child per month, depending on their age. Low-income parents can apply for more. Parents of all incomes qualify for child-care benefits, which pay up to 230 hours of child care per month.
Denmark, the Netherlands and Sweden can afford these services, because they tax their middle classes at a higher rate.
Comparing tax regimes is tricky. Denmark has relatively low national taxes, but high local taxes, which, for example, pay child care. The Dutch tax system is so convoluted that the tax agency has for years begged politicians to simplify it. What the three countries have in common are progressive income taxes, high sales taxes — and fairly low business rates.
In all three countries, middle-income residents put up with high taxes, because they feel they get a lot for it.
Middle-class Americans, by contrast, tend to think of welfare as something that’s for other people. Given the chance, they regularly vote against affordable housing. The reason homes are so expensive in San Francisco is that existing homeowners routinely vote against new development, or politicians who argue for development, fearing it will bring in lower-wage and lower-class tenants (of color).
Yet those same homeowners can deduct their mortgage interest from their taxes and the federal government guarantees almost $7 trillion in mortgage-related debt, 33 percent more than before the housing crisis.
Americans are reluctant to give up their private health insurance, even though two-thirds agree health care has “major problems” or is “in crisis”.
This is the mentality Bernie Sanders is trying to change when he argues Medicare-for-all may require higher taxes but the average American family would pay less, because it cuts out the middleman. (Which is why my reservations about eliminating private health insurance are less about cost than quality.)
The same goes for higher education. Sanders takes flak for arguing college should be free even for the sons and daughters of millionaires. But universal welfare programs, like Medicare and Social Security, enjoy the broadest support. Means-test a benefit and the middle class will see it as something they pay for but don’t get. Make it for everyone and the experience in Europe suggests most people will be willing to pay higher taxes for it.