A lot of people love what Bernie Sanders is saying: Free healthcare, free college tuition, and a “living wage.” Many have said that, in reality, these are all the result of what’s called “Feel good economics.” I, too, personally believe that while it sounds nice, it’s difficult to do without dealing a lot of damage to the economy. With the way the American economy works, it’s nearly impossible to make healthcare and college tuition free as well as raise the minimum wage to $15 per hour.
What is Feel Good Economics?
I realize that maybe some of you may not understand that feel good economics is. Also known as voodoo economics, feel good economics is a thought or policy that ignores the laws of economics. Having a high minimum wage is considered feel good economics because of how the law supply and demand works. It also usually ignores the fact that people and small businesses have a limited income. Why are people rushing to a presidential candidate that advocates something this economically dangerous?
I feel like part of it has to do with the simple fact that many states do not require any economics courses in high school anymore. Many people say that Denmark, Sweden, and Norway have policies like this and are not only doing just fine, they’re the happiest places in the world. But is it really all so happy when you really take a deeper look into things?
Prices Linked to Inflation Linked to Policies and Minimum Wages
Believe it or not, many prices are actually linked to inflation. However, one factor of inflation are policies and, sometimes, minimum wages. If you pass some policies to make healthcare and college tuition free, you have to pay the price. Luckily, in Scandinavia, you just pay a little more in taxes. How much do you pay? It all depends, of course. Denmark is a great example of how these kinds of policies work.
In order to understand how these policies work, we have to look at a few things. First, we need to look at tax rates. Obviously, if the government funds something, you have to pay more in taxes. Next, we must look at the price of common goods in Denmark. Easy comparisons include technology, automobiles, and, dare I say, Big Macs. Lastly, it’s important to understand the population and demographics of Denmark. The more people you have, the less you would have to pay in taxes. The fewer people you have, the more you have to pay in taxes. It’s simple, but would it actually work out like that in Denmark?
Taxes in Denmark
NOTE: All tax rates are for 2015 unless otherwise specified.
In Denmark, the bottom tax bracket is 8.08 percent. Another tax, known as Labor Market, is a tax that everybody who is working would have to pay. This is 8 percent. We are now at 16.08 percent for the lowest tax rate. There is a health contribution that everybody who is required to pay anything in taxes is required to pay. This is 4 percent. We are now at 20.08 percent for the lowest tax rate. While I don’t really understand much, it’s been said that the minimum (bottom) tax rate in Denmark is 37.68 percent.
If you made more than $69,551.54, you are required to pay a top tax rate of 15 percent. However, the maximum that anybody is allowed to pay in taxes is 51.95 percent. In America, the tax ceiling is 39.6 percent. The American bottom tax rate is 10 percent. It seems like it would be easy to just raise the top tax rates in America by 12.35 percent and tell the rich to just deal with it. But the problem is that if we raise taxes to copy Denmark, it would only be fair to raise the bottom tax rate by 27.68 percent.
American Economy: Taxes, Healthcare, and College
The reason why raising taxes to copy Denmark would become a problem is because the top earners, better known as the top 1 percent, in America can afford a 12.35 percent increase on their taxes. Those who earn much less wouldn’t be able to afford a 27.68 percent tax increase. That means that those earning $9,225 would wind up paying $3,475.98 instead of $922.50. Part of what makes it unfair is that there are many who don’t even use those services for a long time, if at all.
While 4 percent doesn’t seem like much for healthcare, those who make $50,000 per year that are would probably disagree that $2,000 isn’t “a small price.” There is also that 8 percent labor market tax. There is an allowance of 8 percent given to everybody who works. But it’s only up to a certain amount. If you didn’t make up to the certain amount, you wouldn’t really get that 8 percent deduction.
The one thing that just isn’t very clear is how much the Danish people pay for everybody to attend college. However, you have to understand that Denmark has a population of 5,678,348. America’s population is well over 300 million. Sounds like it would be easy, right? Not so much. According to the National Center for Educational Statistics, “In fall 2015, some 20.2 million students are expected to attend American colleges and universities.” If we assume that this was only public school enrollment, and the average tuition is $9,139 per year, we’re looking at $184.67 billion per year. For all four years, that would cost $738.43 billion. I’m not sure what the cost of college is in Denmark, but it’s certainly not that much for all of their students.
America vs Denmark: The Price of a New Vehicle
In America, the price of a 2016 Honda Accord Sedan starts at $22,105. 1 Danish Krone is 15¢. Which means that a 2016 Honda Accord Sedan in America starts at 147,626.01 Danish Kroner (kr). In Denmark, a new Honda Accord Sedan would set you back 350,000 kr. For this very base model vehicle, that’s $52,407.77! Do you know what you can get for that in America?
In America, you can get a brand spanking new 2016 Ford Mustang GT for just $32,395. Of course, this is just the base model and wouldn’t be viewed as a luxurious car. What about Denmark? Over there, a new Ford Mustang GT would run you 719,000 kr. That’s $107,660.54! It’s hard to believe, isn’t it? Do you know what you could get in America for that price? You could get a brand new Shelby GT350R with a starting MSRP of $61,295. God bless America indeed.
I decided to configure this car a little bit. There was only so much that was able to be added to it. So I added a fancy racing stripe and an electronics package. It came fully loaded. The price? $65,670. I could go out and use that $42,000 on something else.
Why is it so expensive in Denmark? There are a few big reasons as to why. Higher tax rates are but one factor of these ridiculous prices for base model cars. However, the free market is another driver of high prices. When you look at minimum wages in Denmark, you find that the country doesn’t have one. That’s right. Denmark doesn’t have one single minimum wage that is required to be paid. According to Forbes, it’s more around $11.70. Of course, this is most likely after Purchasing Power Parity (PPP) is taken into account.
The real wage that most people earn as a minimum in Denmark, as negotiated by unions and whatnot, is around 110 kr. Currently, this converts to $16.47, which is pretty nice compared to the US. So what’s wrong with a $15 minimum wage, you ask? Well, the problem is that this isn’t a national minimum wage. It’s a negotiated wage that unions have created. If you divide the converted $16.47 by 1.4, a correction calculated by Forbes using PPP, you now get the updated wage of $11.76.
How does supply and demand fit into any of this? You have to think about the fact that small increases in minimum wages and taxes eventually create higher prices due to the simple fact that businesses will charge a little extra here and there. Why? Because they know that you will pay it. It’s exactly why we can’t have a $15 minimum wage. Businesses in America will do the exact same thing. The funniest part is that it’s completely legal.