Both the US and Dutch economic models are those of mixed capitalist economies where the means of production are largely in the hands of private parties and where governments also play an important role by regulating markets, providing essential social services, and re-distributing wealth via taxes. Beyond that, these two systems couldn’t be more different. With the American welfare state being one of the most barebones in the Western world, While, despite years of budget cuts, the Dutch economic model still has a reputation for being far more generous with extending benefits and services than the American system.
But, in the end there is only one thing that matters….
Do these systems help or hinder the lives of ordinary citizens?
To answer this question, let me introduce you to two ordinary middle class citizens: Joe and Jolien, two university graduates, working respectable white collar middle class jobs, both patriots, who believe that it’s not luck, not inherited wealth, NO! It’s hard work that will get you ahead in life in these economic systems. In other words they both believe in the American dream.
But, which economic model can actually deliver on that promise? Which will be able to support our hard working protagonists better? To find out. we are going to do something that has never been done before.
American YouTuber Econoboi, and myself, will judge the two system in an epic detailed show-off on the following 8 dimensions:
- Wages & cost of living Preview
- Falling out of the middle class
- Labour market conditions
- Quality of Life
- Starting a family
- Education systems
- Moving up in the world
- Pension systems
So, with further ado…. Let the competition begin.
By the way if you prefer to consume this story in video format, check it out here:
Round 1: Wages & Cost of Living
Working respectable middle class jobs, both Joe and Jolien are provided by their systems the median wage.
The median wage refers to the wage earned by the middle person in the income distributions. This metric is generally considered the most reliable indicator for a middle class income because the average wage is skewed too much by the ultra-rich.
For (Joe 989 (2021) * 52) that median wage is roughly 51k. Using the latest (May 25th 2021) Euro to Dollar exchange rate (1.23), Jolien earns roughly 45k every year. To obtain these earnings, both work 40 hour full-time weeks.
However, as you know, the tax authorities want their cut… So, let’s look at wages minus income taxes next. In economics, this is known as disposable income.
Here I came across something that genuinely surprised me about taxes. Because if we believe the headlines, the Netherlands is a high income tax country while the U.S. is not. For example, the lowest income tax bracket in the Netherlands is 37% while that is the same as the highest tax bracket in the US.
But, because both countries have tax deductions and exemptions … the taxes Joe and Jolien will actually end up paying are going to be far lower than these headline numbers. If deductions are taken into account, Joe was due well over 11k USD a year in taxes. That’s an effective tax rate of 20.93% (fill in Atlanta Georgia and 51k annual income here). On the other hand, in big government Netherlands, Jolien paid only a little over 9k USD in taxes. This means that she paid an effective tax rate of only 20.5%.
So middle class Jolien has a lower tax rate than middle class Joe.
That being said, the American system is still ahead and leaves hard working Joe with a disposable income of roughly 40k versus 36k in the Netherlands for Jolien.
To truly settle this discussion, we need to go one level deeper: to what economists call ‘discretionary income.’
Discretionary income is the income that you are truly able to spend freely after subtracting all of the expenses that are essential for your survival. Think food, shelter, transportation, clothing, healthcare, and paying off your student debts.
So, let’s have a look at food first. Here, eating in America is a bit more expensive, with Joe spending almost 5k on food last year compared to Joliens more modest 3.7k in the Netherlands.
Next up, let’s compare housing expenses. Again, Joe here spends a bit more with 13.2k annual compared to the Jolien who spent 13k USD. Now, this really surprised me since house prices are typically a bit higher in the Netherlands and so is rent.
And while the Netherlands has quite a bit of social housing and rent-subsidies at least compared to the USA, middle class Jolien doesn’t qualify for these.
So, what could explain this difference?
Well, here there are two possible explanations, first Jolien’s mortgage rate was quite a bit lower (2.98% Vs 1.94%) and second, more importantly:, like her peers, she lived in an apartment that was much smaller than Joe since the housing stock in the Netherlands typically consists of much smaller houses and apartments.
So, you might actually be getting more house for your money in the US. But, let’s put a pin in that for now and discuss it in our quality of life section.
And, while the Netherlands seems to be winning in the costs department so far, …. The next category will change that
And that category is clothing… where, in spite of her ridiculous habit of dressing up in traditional costumes, Jolien has spent a bit more more at 1.5k USD vs Joe’s 1.2k in the USA.
Next, up, transportation costs, where I though the US economic model would definitely win because every time I hear about gas prices in the US, I’m like wow these are low.
And sure gas prices in the US are much lower (in May 2021 it was 0.892) than in the Netherlands (in May 2021 it was 2.162), and Joe’s Volkswagen golf was also much less expensive at roughly 23k compared to the same car that would cost 30k in the Netherlands.
However, thanks to dense cities with great public transport and cycling infrastructure, Jolien does not need to own a car and therefore rents it occasionally for trips to her parents in the countryside. For all other trips she can comfortably use either the massive Dutch public transportation system, her bicycle, or … just walk.
This explains why Jolien’s annual transportation costs were roughly 3.4k USD in the Netherlands versus Joe’s 6.3k dollars in the USA (source).
Okay, back to Joe and Jolien and their expensive lives. For the next category of healthcare spending, we need to have a look at the US and Dutch healthcare systems.
You see, in both systems, most healthcare spending is supposed to go through the health care insurance system.
These systems have a fundamentally different structure. In the U.S. there is public healthcare insurance for the poor, and the Elderly, via Medicaid and Medicare respectively and for the rest of the population, there are private health insurance providers. However, the costs difference between these two systems is so massive that there are also plenty of people who simply choose to forego healthcare insurance altogether. And while middle class Joe doesn’t qualify for cheap public insurance, luckily, he can afford private healthcare insurance, at roughly $3.2k per year. On the other hand, in the Netherlands….. there is only private healthcare insurance… Yes, you heard that right, only private healthcare insurance in the Netherlands.
And for her private healthcare insurance plan…. Jolien pays roughly 1.8k USD per year.
So, why is private healthcare insurance so much cheaper in the Netherlands?
Well, the reason for this is that the Dutch healthcare system is heavily regulated with the goal of achieving low costs, full coverage, and transparency for consumers. To increase transparency, and promote competition between insurance companies, the Dutch government, every year, determines the contents of the basic health insurance package. Furthermore, to promote fair competition, insurance companies have to sell the basic health insurance package to whoever wants it. So, for example, an insurance company cannot refuse elderly customers or charge them a higher rate because they are more risky. To keep the market fair, the state has set up a compensation fund for those insurers which have been unlucky enough to get mostly elderly customers.
As a consequence of this smart design, the Dutch health insurance market is highly competitive and prices are therefore relatively low…. Although most Dutchies would argue that they are still way too high.
Indeed, this is reflected by the fact that the USA, which has a younger population, spends roughly 16.8% of GDP on healthcare, whereas the Netherlands spends only 10%. Furthermore, every Dutch citizens has health insurance while 8% of the American populace is not insured.
So, with the healthcare insurance system clearly cheaper in the Netherlands, there is one essential cost that we yet have to discuss: the costs of paying off all your student debt.
Because of their modest background, both Joe and Jolien had to borrow quite a bit to pay for their university education. As a consequence, Joe ended up with a student debt of 33k dollars. And, while the average college is of similar quality in the Netherlands, they are significantly cheaper. Therefore, Jolien’s average student debt in the Netherlands is 17k USD. Furthermore, in the Netherlands, she borrowed from the state at 0.0% interest while U.S. Joe borrowed from the federal government, at the lowest possible rate of 2.75% interest.
Now, since both wanted to repay their student debt in 20 years, on average Joe ended up paying $178 per month = 2146 USD annually. Meanwhile, Jolien pays only (17k / 241) $70 per month, which translates to 846 USD annually. And with that….. we have come to the end of this round..
Even though Joe earns a higher wage and has higher disposable income after taxes, Jolien has quite a bit more discretionary income in the Netherlands at 11k USD per year compared to almost 10k in the USA.
So … who won? I’ll discuss this with American YouTuber Econoboi before moving on to round 2. Jury judgement with Econoboi: Quick intro of Econoboi
2.5 minutes max Ask Econoboi: who won and why…
2.5 minutes max Joeri: who won and why?
- Interesting that effective tax rates are so similar for the Middle class… Still well known U.S. has higher disposable income…
- Netherlands wins because… you should consider how much you pay in expenses. Life here is cheaper
Round 2: falling out of the middle class
Okay, so the American model is down …. But far from out. Next, let’s introduce a little drama into the lives of our middle class heroes by assuming that both the United States and the Netherlands are hit by a global recession.
Due to the uncertainty of the recession, unfortunately, Joe’s employer will have to ‘let him go.’ On the other side of the Atlantic, Jolien’s temporary contract will also not renewed for the same reason.
Having both been raised with the typical middle class attitude of working hard to better their situation, both Joe and Jolien immediately try to pick themselves up by accepting any job, even if it means looking for a minimum wage job at a large fast-food chain and look for better opportunities from there.
As expected, Jolien’s new job pays her considerably less at the minimum wage, which is $12 per hour, and which translates to an income of almost $25k per year. That a bit more than half of what she earned previously. Luckily the Dutch economic system will make her life considerably cheaper. Not only does her effective tax rate drop to 6.4%, she now is qualified for cheaper social housing, rent subsidies and health insurance subsidies.
Let’s compare this to Joe’s situation in America.
There, the minimum wage in the state of Georgia is equal to the Federal minimum wage at $7.25 per hour. This translates to a much lower $15.08k ($7.25 * 40 * 52) annual wage in Joe’s new job as a burger flipper. Sure, this is still above the federal poverty level of $12880 per year.
But, Joe now earns a lot less than Jolien. And sure, Joe’s tax bill will also be greatly reduced. But, in the lower class, his effective tax rate is now much higher than that of Jolien at 11.8%. To offset all of this, the American economic model does now qualify him for the government sponsored healthcare insurance plan called Medicaid. However, social housing is much more scarce than in the Netherlands and that limited social housing that is there has a very bad name. On top of that, Joe has much less scope to cut his transport costs since public transport is much worse in the U.S. So, it’s safe to say that, he is now considerably worse off than Jolien.
But, okay, you could argue well the recession will end, it sucks for Joe, but it’s not the end of his middle class life right? And even if the recession doesn’t end any time soon, he could just learn a different profession…? Perhaps he should just learn how to code?
Well, sadly, Joe has now come across a problem that is not always highlighted in the media and in the economics profession… and that is that falling too far down the economic ladder might make it impossible to climb back out for two very practical reasons:
- The first reason is that Joe won’t have time anymore to ‘learn how to code’ because he needs to work 60 hour work weeks just to feed himself and / or his family. He now belongs to a group known as the working poor and that group has become much larger recently in the United States.
- The second reason is that Joe might not be able to get a job anymore because ….. Joe can no longer can afford to live close to job centres and cannot afford the transportation he needs go to job interviews or remote jobs.
Let’s be clear, these two factors also affect Jolien in the Netherlands. But, they affect her far LESS. Because of her much higher discretionary income, Jolien can choose to work part-time in her minimum wage job and use the rest of her time to re-train. Alternatively, she may choose to work 40 hours a week so that she has more money left to pay for specific training. When it comes to the very real issue of transport, this is where Dutch social housing, which is also present in major, very expensive, cities like Amsterdam, as well as its extensive public transport system and cycling infrastructure come in.
Luckily for Joe, the U.S. is not as bad as this yet. But, one thing is for sure, Jolien is much more mobile than Joe and thus has more chances to pick herself up again.
What’s more, Jolien can more easily to take a risk and perhaps start her own business in the Netherlands because the consequences of dropping out of the lower class are, again, much less severe in the Netherlands.
The main reason for that is that even though Jolien was unfortunate enough to get fired, she then was first entitled to between 70-75% of her last earned wage for a period between 3 months to 2 years, depending on how long she worked. What’s more, even though she had to go through the trouble of proving that she realllyyy couldn’t a job for multiple years, she would eventually enter the basic social benefits program that pays her to the tune of roughly 70% of minimum wage. What’s more, while in this program, the Dutch state first allowed her to postpone her student debt payments and later even completely forgave this debt. While this program was no picknick, it did allow her to spend her time looking for new jobs and re-training.
In comparison, not having had the time to re-train, if Joe eventually gets fired as burger flipper, where can he go? And since, the U.S. economic system only awards unemployment benefits for 5 months maximum and at a lower 66% of his previous minimum wage, he has just found himself below the poverty line. And when these unemployment benefits eventually ran out for Joe…he blamed nobody but himself. Ashamed that his family would find out about his failure, he had nothing left but the streets…..
And so that’s where he ended up, under a bridge with dozens of others.
No wonder that, when it comes to social mobility, the Netherlands ranks the 6th …. And the USA the 27th….
Luckily for Joe, if the American economic system doesn’t care about you… your family still might….. and after a couple of months… when Joe looked up…. He saw a familiar face…. Its was his father…. who told him he shouldn’t feel guilty and that he can live back home with his parents for a while…. Judgement with Econoboi
Who won and why ?
- The Dutch system is undeniably more generous and supportive in the scenario that a person finds themselves without work or unable to work. As welfare doesn’t appear to discourage significantly people from working to the degree the Dutch have it, the point has to go to the dutch. Joeri
- Dutch system hands down… I was really shocked by how bad social safety is in the United States. In all fairness, our system was abused at some point… but they cut it back by a lot,, maybe even a bit too much… So… being in social benefits is nooo fun at all… but at least you can get back on your feet.
- Also, tax rates are wayyy less progressive in the USA … which I found pretty shocking.
<Dutch economic models wins round 2>
Round 3 labour market conditions
Okay, so things are starting to look a bit bleak for the American economic system. Let’s be clear … while it was to be expected that falling out of the Middle class is rougher in the USA, the system can make it up by having a better labour market. After all, if Joe really wants to work and can easily find a new job, then it doesn’t really matter that the unemployment benefits are worse.
So, let’s now assume that an economic recovery has finally set in on both sides of the Atlantic. Jolien is ready to transition back to a high paying job and, with his faith in the American dream is shaken, Joe is particularly eager to climb back from his hardship.
But, with this level of benefits… as Ronald Reagan said surely don’t really want to work at all? Welll I couldn’t find that in the data, despite the extensive social safety net, the number of people who can work and actually do, the labour force participation rate, in the Netherlands is actually… higher at 83% versus 78% in the USA.
Okay, another option might be that employers surely don’t want to work in such a country with this huge benefits system, and so it must be difficult for Jolien to find a job. Well, not if you look at the unemployment statistics. In fact, Jolien’s chances are a bit better in the Netherlands, which has an unemployment rate of 3.5% as of 2021, while Joe in the U.S. competes in a labour market with an unemployment rate of 6.1%. That being said, both countries seem to be doing quite a bit better than the average European Union unemployment rate of 8.1%, and much better than for example Spain with a massive unemployment rate of 15.3% source.
Therefore, eventually, both Joe and Jolien will find a new job and reclaim their old level of income. However, then the question becomes, will they be able to find a high quality job?, meaning that it is stable and has good benefits In my research for this video, I discovered that both the Dutch and American systems there are multiple types of work arrangements of which some are clearly more desirable than others …
For example, in the Dutch labour market there are contracts for:
- fixed-term employees,
- permanent employees,
- temporary staff via employed via an agency,
- and finally… independent contractors
And here you will see what some call the beauty, and what others might call the wickedness, of economics at work. You see, the Dutch model just wanted stability and benefits for Jolien. But, at the same time it wanted to give employers some flexibility to fire Jolien if she was a bad employee or if the business environment really requires it.
But, these two: stability & flexibility are obviously opposites. And that’s how the Dutch ended up with such a fractured labour market. With some contracts really being better than others.
For example, take the first two contracts: they differ in flexibility. Confusingly, the fixed-term contract is the most flexible because … as the name suggests … it is applicable for a fixed term of … for example 6 months. Then, there is the permanent contract which is …. Permanent, unless there is a really good reason to fire Jolien like her breaking the law, or her misbehaving. But in that case the employer can proof with a whole bunch of paperwork.
And so, and this is the economics bit, employers had a very strong incentive to get around this pesky permanent contract by giving employees one fixed term contract, and another, and another, and go on and on indefinitely
But, that’s not where it stopped. At some point, Dutch employers also convinced the other participants in the economic model, unions and the government, to allow the temporary staff via an agency and independent contractor arrangement which not only allow them to be more flexible but also allowed them to give these types of workers less benefits.
But, much to Joliens’ delight, it seems that employers might have overplayed their hands a little with this increased flexibility as a new deal between unions and employers seems to be inevitable.
That being, said what does the current state of the Dutch labour market mean for Jolien?
Obviously, Jolien wants that sweet sweet permanent contract. Not only will this give her peace of mind, this will also give her tangible benefits like helping her get a higher mortgage or stand up to her boss every once in a while.
Luckily for her, given that 61% of people who work do have a permanent contract, Jolien still has quite a good shot at getting that sought after permanent contract to ensure her middle class lifestyle for the foreseeable future. And, to be honest, even for Jolien, some flexibility might not be bad because it allows employers to better separate her from bad employees.
Alright, now, let’s look at Joe’s position in the United States labour market and compare it to that of Jolien.
First of all, Joe has to deal with less complexity since, there isn’t a big distinction between permanent and fixed-term contracts in the States since employer might pretty much just fire Joe on the spot and don’t have to justify that choice in most cases. However, even for employees there is some duality and that is whether or not they work full-time. The reason for this is that if Joe works full-time for his employer he often does qualify for health insurance and other benefits, while if he works part-time, he doesn’t qualify.
You can imagine how this system might be abused But, to be fair, just over 33% (28+23mil) of American workers don’t qualify for these benefits, and of these 51 million unlucky bastards most are actually full-time workers.
Furthermore, in the U.S. there is also a difference between contractors and employees. However this difference is much more important for Joe since, unlike the Dutch system, the U.S. economic system does not provide good health insurance and other benefits to the middle class, and has delegated this responsibility to employers instead. Therefore, a no-benefits contractor life would be much harder for Joe than for Jolien. However, on the bright side, it does appear that the chance of Joe becoming a contractor is slightly less than for Jolien since, according to some of the latest data, contractors only make up about 6.9% (10.6 million out of 153 total) of the U.S. labour force.
Judgement with econoboi
So, who won and why? Econoboi:
- It seems the Netherlands has more job security, and a more flexible labour market from both the employer and employee perspective as a result of the universal health system in the Netherlands, so I’d give the point to the Dutch. All else equal, in terms of obtain a job and the security of that job, on median the point goes to the Dutch.
- I’m a bit conflicted here. While I don’t like how fractured the Dutch labour market is… the American market is simpler. Still, the fact that life for American workers is so uncertain doesn’t seem to lead to better outcomes is a big blow.
Dutch economic models wins round 4
Round 4 quality of life
So, yet another blow to the once admired U.S. system. But, so far we have only looked at money money money… what about what that money gets you… quality of life…. Let’s have a look at how comfortable Joe and Joliens respective lives really are.
both Joe and Jolien are now working hard, earning that sweet sweet money and spending what they need to live comfortably….
Or do they?
How comfortable are their lives really? For this part, I’m going to compare the economic models based on the following non-economic categories:
- Work life balance
- The environment
- Safety The free time needed for a healthy work life balance can be divided into two categories:
how much time Jolien and Joe have to relax during workweeks, and how much time they have to go on vacation. When it comes to work life balance, if he wants to, Joe can work on average 34.4 hours per week. On the other hand, Jolien is much more likely to find a great work life balance and only work 29 hours per week.
But, that is not everything, what about vacation?
Well, in the United States, while Joe’s employer is not required by law to grant him any days off, he is graciously awarded 10 days off every year. Just enough for that vacation to the Netherlands, where he is likely to bump into Jolien strolling around town because her employers, while required to give her a 20 days off, graciously gave her 25 days off.
Alright, next up healthcare quality.
We have already established that healthcare is much more expensive in the United States. But, is it much better? Well, one thing is for sure and that is that some of the best hospitals in the world can be found in the United States. However, the chance of Joe getting treated in one of these is very slim.
So, let’s look at the average quality of healthcare instead.
On the healthcare quality index, the Netherlands ranks 11th and the United States ranks 30th. Also, 3.2 hospital beds per 100k citizens in the Netherlands versus 2.9 in the United States (source). Finally, life expectancy in the Netherlands is a bit higher at 82 years, whereas in the United States it is only 79 years….
So, Joe pays more and, on average, gets less….
What’s more, say that Joe or Jolien get sick without needing to go to the hospital.
Obviously, this will still have economic consequences since then they might not be able to show up for work.
Not a problem in the Netherlands, where you can get up to 2 years of paid sick days.
Obviously though, Jolien will need to prove that with a doctor’s note. But, while on sick leave, an employer is not allowed to fire Jolien.
On the other side of the Atlantic, Joe is again at a disadvantage, while the family and medical leave act specifies that he can take up to 12 weeks of unpaid leave for e.g. a serious health conditions, there have been quite a few reports of people being fearful to call sick to work. Not surprising, since an employer can fire him at will in the U.S.
So, let’s just avoid getting in the hospital then shall we?
Well one thing that might surprise you is that in car centric United States, the air quality is actually better than in the Netherlands, where Jolien breaths in 14 micrograms of malicious particles per cubic meter, whereas Joe only breaths in 10.1.
Now you might say here well America is this massive nation. What if we look at the metropolitan areas, which are perhaps more comparable to the Netherlands. Well, even then this trend holds, surprisingly, and the reason for this is probably that Diesel cars are much more popular in Europe.
On the other hand, Jolien is more likely to be satisfied by the quality of her drinking water, along with 93% of her fellow citizens, compared to 83% of Americans.
That being said, both Joe and Jolien’s house is almost guaranteed to contain all amenities such as running water and electricity. What’s more, while Joe pays a little bit more for his housing expenses, he has a substantially bigger house, which has on average 2.4 rooms per person. On the other hand, Jolien lives smaller in her 1.9 room apartment.
So, she will likely leave the house more often. Luckily, if she does so during the night, she is more likely to feel safe, along with 82% of her fellow citizens. On the other side of the pond, Joe, along with 26% of his fellow citizens feel considerably less safe. And understandably so, despite all their guns, the homicide rate in the United States is considerably higher at 3.7 per 100k, compared to 0.6 in the Netherlands.
But, what does this all mean for happiness?
Well Jolien gives her life a 7.4, while Joe is still relatively happy and gives his quality of life a 6.9.
But, ofcourse you all care much more about what myself and Econoboi think about that right?
Judging who won with Econoboi
Who won? Econoboi:
- This seems a wash to me. It’s probably highly dependent on the person. For instance, we might prefer a more rural, spacious lifestyle in the U.S., but others are probably willing to take a more dense and small-scale living situation in the Netherlands because of the amenities available. Of course there are dense cities in the U.S., but from the median, it seems it’s reasonable to prefer either system. Joeri:
- Better air quality USA, bigger houses… But, for me personally, safety is a big deal, and free time as well… my preferences would be Netherlands… but…
Round 5 starting a family
Okay, the U.S. is back on its feet with this draw. Let’s now give this comparison a bit of a twist. What do you think of the following scenario?
Let’s assume that, using some of those generous generous vacation days, Jolien decides to go on a long vacations to America to meet Joe. Naturally, with their shared love for hard work, family and patriotism, they fall in love and eventually… they decide to start a family. However, the problem is now that they have to decide where to raise that family. The USA, or the Netherlands.
Sure, they could make that decision based on whose relatives are more likeable. But, this is an economics blog. So, they only use economic arguments.
After all, the last weeks of pregnancy, childbirth, and the first few weeks after are hardly easy to do in the office…. For that reason, in the United States, employers are required, by law, to offer the mother 12 weeks of leave to have and take care of that baby.
Sounds pretty great right?….
Ehhh no, this is unpaid leave and an estimated 41% of workers are not even covered by the law in question.
Also, for daddy… nothing, just work.
A bit turned off by this, Joe and Jolien might now turn their gaze towards the Netherlands where every mother will get 6 weeks of leave before and 10 weeks after giving birth. During this time, Jolien will receive 100% pay from her employer, which will in turn be compensated by the government. Furthermore, father Joe can get up to 1 week fully paid leave after the baby is born and, optionally, 5 more with 70% pay.
Let’s be honest, having a young child will impact the career of Jolien and Joe well after these first few weeks. So, what are the possibilities for working less in the United States and in the Netherlands?
First, it is very much possible, and quite acceptable to employers if Jolien, as a young mother desires to work on a part-time basis, it is also, but to a lesser extent possible for Joe to do this as a father in the Netherlands. Where it is now becoming more common to have a daddy day every week. At the same time, in the United States, part-time work is starting to become more accepted as well. But, it’s far from being as common for young parents as it is in the Netherlands.
So, for now it seems logical that Joe and Jolien move to the Netherlands…. However, at that point Joe might ask… well couldn’t we just send our children to day-care?
So, they examine how expensive childcare is and to their surprise, it’s quite expensive in the Netherlands, with it consuming 17% of the average wage. However, in the United States it’s even more expensive at 23% of the average wage.
Still, let’s be honest, in both countries having kids will be a detriment for either Jolien’s or Joe’s career, and in both countries it’s more likely to hit that of Jolien. In the USA 20% of parents stop working and in the Netherlands the number is close to that at 15%.
So, while Joe admits the extra flexibility that the Dutch economic system would be nice, he’s proposes they rely on the verdict of the Jury on where to move to.
Judging with econoboi
-Where should they move to? Econoboi:
- Assuming we can get a decent job in either location, the Netherlands offers a lot more flexibility to parents, so if you’re ok with your child having a funny accent, maybe shoot your resume over to some Dutch companies. They invented the stock market after all, so I’m sure they’ve got some good jobs over there.
- Netherlands … for sure
- Here again, I see the logic of the argument that this all would discourage work or lower productivity… but you can find that in the data.
Netherlands wins round 5!!
Round 6 Education systems
Unsatisfied with the Jury’s answer, Joe might now suggest that they postpone their decision till after they have considered the future of their child and specifically both countries primary and high school systems. Luckily, in both countries education is seen as a basic right and therefore government provided public schools are …. Mostly free.
So, you’d think these are a no-brainer.
And they are, in the Netherlands. But, if Joe and Jolien want to live in the US, they need to seriously consider sending their kid to a private school instead. Why? Well because the quality of public schools in the US can vary a lot depending on where you live.
To understand why that is, let’s have to look at the economics, and specifically the funding model, of education in America and the Netherlands.
In the United States public schools are funded through local property taxes. On the other hand, in the Netherlands public schools are funded by the national government. This difference is very important because in the USA local funding means that schools in wealthy neighbourhoods have much more money than those in poorer neighbourhoods. Therefore, it makes sense that if Joe and Jolien cannot afford a house in a wealthy neighbourhood, they opt for a private schools instead. And these can be much more expensive, at roughly 15k per year.
On the other hand, in the Netherlands, thanks to central funding all teachers, no matter where they live, earn the same. Therefore, the Dutch economic system has the opposite problem. Namely, that in wealthy cities, there are often not enough teachers because it’s more difficult to live there on a teacher’s salary.
So, this means that typically poorer, rural, areas might have access to better quality schools. Although to be honest, the difference is not big enough yet to avoid the wealthy cities altogether.
Given their middle class status, the fact that public schooling is consistently better and cheaper in the Netherland gives Jolien one more argument in favour of moving to her homeland. However, in last ditch attempt by Joe, he suggests that of course higher education should also be considered in this crucial decision.
Here again, we bump into some significant differences between two models.
In the Netherlands, most higher education institutions are owned by the government and are therefore heavily subsidised. What they end up costing you depends on the type of institution, with the vocational education institutes costing up to 1.5k USD per year, while applied and research universities will set you back roughly 2.7k per year, without accounting for the costs of books.
That’s a lot of money and not all parents are able to afford that for their children.
Let’s contrast this with the USA, where the costs of higher education can set you back a whopping 16k USD at public universities. However, as with high schools, public institutions are often considered inferior. So, what will it cost if Joe & Jolien want that extra push for their child?
Well, private for profit institutions will on average cost $23k per year and if they want their kid to a prestigious private ‘non-profit’ institution like Harvard, MIT or Stanford, this will set them back over 50k per year.
Sure, the most prestigious universities in the world are almost all in the United States…. However, let’s be honest Joe & Jolien’s kid is extremely unlikely to end up in one. No, it’s much more likely for their kid to get a spot at great universities like California State or City University of New York, which are typically ranked lower than most public universities that accept all Dutch kids with good enough grades. On top of that, while Dutch institutions vary in international rankings, this variance is so low that students often base their preferred university choice on which city has the best nightlife.
And with that picture of how amazing student life can be if we are not in a pandemic, let’s move on to discuss which education system is the winner.
Judging with econoboi
Where should Joe and Jolien send their kid through the education system? Econoboi:
- In terms of actually raising children, the education in both locations is quality, so quality that we would then reasonably look at equitable access, and in the Netherlands, on median, people have better access to quality and more affordable education.
- This isn’t to mention the Dutch society is more safe and supportive of young parents in the form of day-care affordability and regulatory support for young parents.
- I think Netherlands hands down …
- As an academic, I have to recognize that some U.S. universities are leading. Top notch!!! But, … mostly for the upper class, not middle.
Netherlands wins again
So there it is … the discussion has been settled, with the Dutch economic model providing more flexibility for young parents, a cheaper quality public primary and high school system as well as a much more equitable and a cheaper higher education system of very good quality, Joe and Jolien decide to move to the Netherlands…. Were they will raise their newborn daughter Joelle ……
Round 7 moving up in the world
At this point, you might think that the American model is down and out…. But, it’s really not!
After all, one part of the American dream has always been to make it big…. Not just to be respectable in the middle class, but to break out of it and perhaps to even be a superstar….. a high flyer, a baller, if you will.
So, let’s see how the two systems stack up when it comes to breaking out of the middle class to the upper class and, perhaps even into the global elite.
To make this comparison, let’s look at how many people moved out of the middle class and into the upper class in both countries.
Sadly, the data isn’t perfect here. But, in the Netherlands, the Middle class has been growing with 2% from 76% in 1991 to 78% in 2013. At the same time, the upper class grew by 3% and the lower class shrunk by 5%. Contrast this to America where from 1971 to 2013 the share of people in the middle class decreased from 61% to 51%, while the upper class grew by 6% and the lower class by 4%.
Indeed, it is well known that income inequality in the United States has been rising and is substantially higher than in the Netherlands, where income inequality has actually been falling. While you might argue this is bad for the middle class, it could also point to larger upward mobility in the United States as 6% of people broke out of the middle class and into the upper class.
But, there is more to this story, it’s not only that there seems to be more extreme upward and downward mobility in the States the spoils of moving up are also much larger.
To illustrate this, the top 10% of U.S. earners take home a whopping 30% of all income compared to 23% in the Netherlands.
To see what this means for the middle class, let’s go back to Joe and Jolien. Let’s say that they built a successful company and that they are now earning a very comfortable 200k income annually. In the Netherlands, their effective tax rate would be 44%. However, had they moved back to Atlanta, their tax rate would only have been 31.7% (on 163541 euro) and to make matters even worse, had they moved to Miami Beach, Florida they would only need to pay 26.24% in income taxes.
Another factor is that, if you want to make it big as an entrepreneur…. You also need a big market.
And sure, while Dutch entrepreneurs have access to the massive European market in theory, in practice, barriers such as different languages and regulations mean that American high flyers can expand much quicker.
Indeed, the results of these factors can clearly be seen if we look at the embodiments of the American dream on steroids… the wealthiest entrepreneurs under 40 in both countries.
Two key facts stand out. First, while most Dutch entrepreneurs have a public education, most American entrepreneurs have been educated at elite private universities and were therefore more likely upper class to begin with. Second, the wealthiest Dutchmen would be small time players in the US … only the wealthiest Dutchman under 40: entrepreneur Paul de Jong would make it into the American top 40 and there he would only make it to the 35th place. The others wouldn’t even be close…
This means that in America … not only are you more likely to either move up or down significantly, if you make it big… you really make it big.
So, for Joe and Jolien, it would actually make the most sense to move back to the States just after tasting success in the Netherlands…. That way they could have it both ways….. But, does that square with their middle class sense of honour? Before we find out, let’s judge which system did better with Econoboi
Judge with Econoboi
Who won? Econoboi:
- If you don’t imagine you’ll ever be a millionaire or an entrepreneur in general, it makes the most sense to go with the Netherlands. That said, even in the case of a striving entrepreneur, the more generous social assistance and welfare programs make entrepreneurship a lot less risky, so is the 1 in a million probability of becoming a hundred millionaire or billionaire worth the much more likely chance of an unsubstantial and inadequate support system in the U.S.? I would say no.
- I’d agree that the Dutch experience is more equitable … more fair to those especially from the lower and lower-middle class.
- But, if you really want to make it big… you move to the USA. This is still the case. Also, lower taxation of the wealthy means you are more likely to be able to accelerate your growth if you break out.
Round 8 Pension systems:
So, with the Dutchman voting for the US and the American voting for the Dutch system, we can say that the American dream is still somewhat alive in the States when it comes to the international perception of being able to make it big in the United States… while the Dutch economic systems seems to be better at making sure everyone has the same chance of making it fairly big.
And so, the Jo… family might in their weakest moment … consider moving to the States after making it big in the Netherlands…. But of course, they would never because they understand that the system giveth…. Commerce…. Social safety… labour market protection…. Services…. Childcare…. And education… so paying higher taxes seems only fair to the now wealthy family and is viewed by them as a way of giving back to the system that treated them so well.
Luckily….. the system has one more gift for them as they reach old age…. A pension….
So, once again it’s time for a big decision. Where to retire?
To be honest, purely based on movies and video games, I just have this idealised vision of retiring one day in sunny Miami.
But okay this is an economics channel that takes itself somewhat seriously. So, let’s ask ourselves how much pension money did Joe and Jolien end up accruing?
Well, most of that accruing was done by Jolien in the Netherlands where the pension system works as follows:
The government provides a basic pension for everyone. The height of this pension is simply based on how many years you have lived in the Netherlands. Therefore, Jolien will receive the full state pension of roughly $1,514 per month, or just around 70% of average earnings before retirement. Joe will also receive some state pension from the Dutch system. But only for the years he lived in there.
In comparison, the United States has social security, which acts as a state pension. The difference with the Dutch pension though is that how much you get depends on what you earned in your life rather than the years that you lived in the country. So, the U.S. state pension is higher for the rich than for the poor, and can be zero, if you failed to get employment during your working life. Furthermore, for the average Joe, U.S. social security though is not as generous as the Dutch state pension and provides roughly just under 40% of average earnings before retirement.
But, let’s move on, while Joe did not build up any pension benefits during his time as a burger flipper, he did build up some private benefits while working his middle class job in the States in the form of a 401k plan.
The 401k plan has taken the United States by storm (source) and it works like this.
An employee can, without paying income taxes on it, put a certain part of their income in a 401k savings account every month. This savings account is invested in financial markets. The height of his current monthly benefits therefore depend on how well financial markets have done over the last years. Because the monthly contributions of these plans are known while the benefits are uncertain, this type of plan is also known as a defined contributions plan.
Contrast this to Joliens pension, which like most Dutch schemes was a defined benefits plan.
Which, you guessed it, means that her monthly benefits, which she will receive every month once she has retired, have been defined rather than her contribution when she works.
This means that, if financial markets do poorly, in the Netherlands a big political storm will rage because this means that the pension contributions of all current workers might need to be increased. Another difference with Joe’s 401k is that Jolien’s employer has also contributed to the scheme, although that could be why her wage was on average a bit lower. Also, unlike Joe, Jolien did in fact contribute a bit to her pension plan during her time working her minimum wage job.
So, which has the better pension system? This is the last category I will discuss with Econoboi… and it is the one that will decide whether Joe and Jolien will sail away into the sunset on the Frysian lakes or from Miami beach.
- The flexibility and complexity of the US retirement system is more a detriment than a positive. The poverty statistics are a big sticking point. The goal of a pension system is to ensure the security of the elderly as they become increasingly unable to work due to old age, and the Dutch system does a much better job in that regard. Joeri:
- You don’t get it if you didn’t work…
<round 8 won by NL!> Final discussion So, that was the story of Joe and Jolien and with that the full comparison of these two economic models is done. Next up, I’ll discuss the overall highlights of this competition with Econoboi.
Who won overall?
- In my discussion with Joeri and in the conclusion of my Nordic Model series I make the point that people in the U.S. are not more free than those in countries with more expansive and generous welfare programs, and that’s mostly because an individual’s freedom is often predicated on their economic power and economic leverage. The U.S. system, as Joeri described is somewhat risk adjusted. Yes, you can earn marginally more working in the U.S., but you have a constant and pervasive backdrop of poverty and destitution which eclipses the ambitions and dreams of so many people, and that’s assuming those people are lucky enough, on median, to be born into a system with at least a decent school and access to educational resources, and far too many children in America just aren’t that lucky.
I think the Dutch system is better because it gives more opportunities to more people. But, I do think we need to recognize that the potential payoffs of becoming successful are still bigger in the United States.
- Joeri: you can give basic social security… it doesn’t hurt your economy. It likely makes it better… more dynamic… also happier society.
So, this was the in depth comparison of what a good middle class life looks like under the Dutch and American models. Who won…
well the scores are clear…. The American dream is alive and kicking… in the Netherlands… the superior economic system in almost every way…. And it doesn’t seem to lead to worse outcomes … or people not willing to work … which I think is very important to highlight.
But yeah, that’s my take. What do you think, did we make a fair assessment of the economic models? And which country would you pick to pursue the American dream? Let me know, in the comments.