This is the second of two posts comparing the US and Europe, in response to Big Government advocates wishing that America was more like Europe. In the first post, I discussed why the desire for a European-style welfare state is misguided.
In this post, I will discuss the Nordic countries (defined here as Denmark, Finland, Norway, and Sweden). Some Americans, Bernie Sanders for example, would like the US to emulate Nordic government.
More than a welfare state
One mistake people make is thinking that the Nordic countries are successful because of their welfare states. Not true, as Nima Sanandaji points out in his book, Debunking Utopia: Exposing the Myth of Nordic Socialism.
Nordic culture is a significant contributor to economic success. For example, the Nordic people value a strong work ethic and individual responsibility.
This culture existed long before the welfare state, so Nordic culture deserves more credit than the welfare state.
Riches before Big Government
In fact, the Nordic countries became rich prior to the existence of Big Government, when free-market capitalism and low taxes were the norm. In 1970, when the welfare state was still in its infancy, Denmark, Norway, and Sweden were already among the ten richest countries in the world, and Finland was in the top twenty.
The graph below shows the history of Nordic government spending back to 1880. As you can see, excluding the WWII years, government spending was quite low prior to the 1960s. Spending increased somewhat in the 1960s, then shot up dramatically in the 1970s as the welfare state really geared up.
The point is, prosperity arrived before Big Government. Big Government did not enable prosperity; prosperity enabled Big Government.
There is another point to make about culture. Nordic culture makes the welfare state more appropriate for the Nordic countries than for the US.
The Nordic countries have homogeneous populations, with high levels of trust and social cohesion. When members of a group are similar, there tends to more widespread agreement on what ‘the group’ should do. Therefore, collective action through government is more likely to be aligned with the desires of most citizens.
The US is quite different, with a much larger population and a much wider range of ethnicities, subcultures, weather, occupations, etc.
This diversity is lovely for many reasons, but not for reaching group consensus. A more diverse and much larger population will naturally find it more difficult to reach widespread agreement on what ‘the group’ should do. Therefore, collective action through government is likely to please a smaller swath of citizens. In this setting, it makes sense to leave more power in the hands of individuals rather than collectivizing through government.
More free-market than you think
The Nordic countries may be less socialist than you think, as these quotes suggest (CNN):
“I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy.”
— Danish Prime Minister Lars Lokke Rasmussen
“When I hear Bernie Sanders talk about himself as a democratic socialist, it’s a little bit 1970s. The major political parties [of Denmark] on the center-left and the center-right would oppose many of the proposals of Bernie Sanders on the regulatory side as being too leftist.”
— Danish economist Lars Christensen
By 1990 or so, the Nordic countries noticed that Big Government was not working as well as expected. So they proceeded to reduce the size and influence of government.
As the graph above shows, government spending peaked in the early 1990s and then dropped.
Unemployment and disability benefit programs were reduced and reformed. The Nordic welfare systems are now more pro-work than in the US.
Various pro-market reforms were implemented, and taxes were cut.
Sweden shook up government monopolies by allowing school vouchers, private competition in healthcare, and partially privatizing the pension system.
Here are some other indicators:
- From 1975 to 2015, the average Nordic country increased its Fraser Institute economic freedom score by one third. Nordic economic freedom improved from 73% of the US level in 1975 to 97% of the US level in 20
- OECD analysis shows that all four Nordic countries impose fewer regulations on their product markets than the US.
- World Bank “ease of doing business” analysis shows Denmark as 3rd best in the world, followed by Norway (8th), Sweden (10th), and Finland (13th). The US is 6th best.
- None of the Nordic countries have government-mandated minimum wages.
The Nordic countries have pulled back on the socialism part of ‘democratic socialism.’
According to the Fraser data, the Nordics are actually more pro-free-market than the US in areas like the legal system, property rights, and international trade. They rank in the top 10% of all countries for economic freedom.
However, it is true that the welfare state side of Big Government is still quite alive in the Nordic countries, even after cutting back. Nordic governments rank among the highest spenders in the world. The average Nordic government spends 53% of GDP, compared to 38% in the US.
No free lunch
But there is no free lunch. The welfare state costs money, and Nordic citizens pay much higher taxes. According to OECD data, the average one-earner Nordic family with two kids that earns the average income will pay an effective income tax rate of 29%. That’s more than double the 14% paid by the equivalent US family.
That’s not all. The Nordic countries also impose an average 25% VAT tax on purchases (VAT is roughly like sales tax). That’s more than triple the average US state and local sales tax of 7-8%.
In short, the Nordic middle class pays twice as much income tax and three times as much sales tax as the US middle class.
I’m sure some Americans like the idea of a welfare state because they assume government can provide free stuff without it really costing them much. Perhaps they think someone else will pay for it, because they believe the politicians who say that bigger government can be funded by taxing ‘the rich.’
In reality, a Nordic-style welfare state costs too much to get all the funding from ‘the rich.’ Indeed, that’s exactly why the Nordic middle class is taxed so much.
It’s just math. The top 1%, or even top 10%, of income-earners simply don’t have enough total income, because they are a small sliver of the population. A Nordic-style welfare state must obtain significant funding from the largest pool of income, and that means the middle class and upper middle class. The number of people earning between $50,000 and $200,000 far exceeds the number of people in the top 1% or 10%.
The question is, does the American middle class want a Nordic-style welfare state if it costs them twice as much income tax and three times as much sales tax? If so, we can have that debate. But let’s be honest about the price tag.
Scandinavians in the US
Dr. Sanandaji points out in his book that the US has about 11 million citizens of Nordic ancestry; a larger population than any of the actual Nordic countries. He notes that Nordic-Americans have higher living standards than their Nordic cousins as follows:
- Finnish-Americans 59% higher than Finns
- Danish-Americans 55% higher than Danes
- Swedish-Americans 53% higher than Swedes
- Norwegian-Americans 3% higher than Norwegians (a smaller advantage because Norway has tremendous oil wealth)
Sanandaji says that “Nordic Americans have around 50 percent higher living standard, half the unemployment rate, lower poverty, and higher high school graduation rates than their cousins in the Nordics.”
The American economic system has allowed Nordic-Americans to do better than their cousins in the ‘old country.’ Why, then, should Americans yearn for the Nordic system?
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