In the fall of 2011, Zuccotti Park, a small open space in Manhattan’s financial district, was taken over by protestors, part of a movement known as “Occupy Wall Street.” The protestors had a number of grievances, but the most pressing were their complaints about Wall Street and its perceived contribution to growing inequality in the United States. “We are the 99 percent!” became the movement’s favored slogan, a reference to the large increase in share of income going to the top 1% of the American population. Wall Street, they charged, contributed to growing inequality by paying its bankers huge salaries and bonuses, while engaging in overly risky behavior that led to the housing boom and bust of 2007-2009 that decimated the economy. Was this a reasonable charge?

Those who found it unreasonable pointed to the contributions that Wall Street, and the American finance industry in general, have made to the U.S. economy. Compared to other countries, the United States is a leader in financial services and innovation, generating billions annually in revenues, and attracting trillions of dollars of investment from abroad. High salaries on Wall Street, they contend, are simply the rewards for skill and hard work in the competitive market for talent on Wall Street.

What is incontrovertible, however, are the data that show that incomes in the finance industry have contributed to growing inequality in the United States. This is especially clear when you look not at the top percentile of the income distribution, but at an even smaller group, the top 0.1%—those with a median annual income of $5.6 million.

Although financial industry people are a minority (18%) within this income elite—consisting also of executives, managers, lawyers, and others—they are greatly overrepresented since only about 6% of American workers are employed in finance. So, the protesters were making a valid point: Wall Street salaries are indeed one of the sources of the rapid rise in incomes at the top.

The United States has the smallest welfare state of any major advanced economy. France has one of the largest. As we’ve already described, France has much higher social spending than America as a percentage of total national income, and French citizens face much higher tax rates than Americans. One argument against a large welfare state is that it has negative effects on efficiency. Does French experience support this argument?

On the face of it, the answer would seem to be a clear yes. French GDP per capita—the total value of the economy’s output, divided by the total population—is only about 75% of the U.S. level. This reflects the fact that the French work less: French workers and U.S. workers have almost exactly the same productivity per hour, but a smaller fraction of the French population is employed, and the average French employee works substantially fewer hours over the course of a year than his or her American counterpart. Some economists have argued that high tax rates in France explain this difference: the incentives to work are weaker in France than in the United States because the government takes away so much of what you earn from an additional hour of work.

A closer examination, however, reveals that the story is more complicated than that. The low level of employment in France is entirely the result of low rates of employment among the young and the old; about 80% of French residents of prime working age, 25–54, are employed, exactly the same percentage as in the United States. So high tax rates don’t seem to discourage the French from working in the prime of their lives. But only about 30% of 15-to 24-year-olds are employed in France, compared with more than half of 15- to 24-year-olds in the United States. And young people in France don’t work in part because they don’t have to: college education is generally free, and students receive financial support, so French students, unlike their American counterparts, rarely work while attending school. The French will tell you that that’s a virtue of their system, not a problem.

Shorter working hours also reflect factors besides tax rates. French law requires employers to offer at least a month of vacation, but most U.S. workers get less than two weeks off. Here, too, the French will tell you that their policy is better than ours because it helps families spend time together.

The aspect of French policy even the French agree is a big problem is that their retirement system allows workers to collect generous pensions even if they retire very early. As a result, only 45% of French residents between the ages of 55 and 64 are employed, compared with more than 60% of Americans. The cost of supporting all those early retirees is a major burden on the French welfare state—and getting worse as the French population ages.

Solutions appear at back of book.

“Wiggo Dalmo is a classic entrepreneurial type: the Working Class Kid Made Good.” So began a profile in the January 2011 issue of Inc. magazine. Dalmo began as an industrial mechanic who worked for a large company, repairing mining equipment. Eventually, however, he decided to strike out on his own and start his own business. Momek, the company he founded, eventually grew into a $44 million, 150-employee operation that does a variety of contract work on oil rigs and in mines.

You can read stories like this all the time in U.S. business publications. What was unusual about this particular article is that Dalmo and his company aren’t American, they’re Norwegian—and Norway, like other Scandinavian countries, has a very generous welfare state, supported by high levels of taxation. So what does Dalmo think of that system? He approves, saying that Norway’s tax system is “good and fair,” and he thinks the system is good for business. In fact, the Inc. article was titled, “In Norway, Start-Ups Say Ja to Socialism.”

Why? After all, the financial rewards for being a successful entrepreneur are more limited in a country like Norway, with its high taxes, than they are in the United States, with its lower taxes. But there are other considerations. For example, at least until the Affordable Care Act kicked in in January 2014, an American thinking of leaving a large company to start a new business needed to worry about whether he or she would be able to get health insurance, whereas a Norwegian in the same position was assured of health care regardless of employment. And the downside of failure is larger in the U.S. system, which offers minimal aid to the unemployed.

Still, is Wiggo Dalmo an exceptional case? Table 18-9 shows the nations with the highest level of entrepreneurial activity, according to a study financed by the U.S. Small Business Administration, which tried to quantify the level of entrepreneurial activity in different nations. The United States is at the top of the list, but so are several Scandinavian countries which have very high levels of taxation and extensive social insurance. (Norway, for example, is number 14.)

The moral is that when comparing how business friendly different welfare state systems really are, you have to think a bit past the obvious question of the level of taxes.

QUESTIONS FOR THOUGHT