Economic Theory Ethan Lamb World

Nordic Countries are Neither Socialist nor Paradise

While certain achievements of Nordic countries undeniably demonstrate success, a further examination reveals that the prosperity attained in this region is largely attributable to Nordic culture and free market policies, and has very little to do with socialistic initiatives.

By: Ethan Lamb

While certain achievements of Nordic countries undeniably demonstrate success, a further examination reveals that the prosperity attained in this region is largely attributable to Nordic culture and free market policies, and has very little to do with socialistic initiatives.

The broad debate between free markets and socialism has been gaining relevance in American political discourse. A popular talking point is Nordic countries, which are often considered the exemplar of socialist policies being implemented correctly. While certain achievements of Nordic countries undeniably demonstrate success, a further examination reveals that the prosperity attained in this region is largely attributable to Nordic culture and free market policies, and has very little to do with socialistic initiatives.

An honest analysis of Nordic political systems shows that these countries are not socialist, no matter how the term is defined. In fact, after frequently being extolled by Sen. Bernie Sanders as a paradigm for socialism, Danish Prime Minister Lars Lokke Rasmussen responded, “I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy.” Furthermore, the Heritage foundation in partnership with the Wall Street Journal formulates an Index of Economic Freedom, which measures trade freedom, business freedom, investment freedom, and property rights. According to the Index of Economic Freedom, Denmark is the 12th most economically free country in the world, only one spot behind the United States. Contrary to popular belief, the Nordic system can largely be explained as a group of free-market economies with high taxes and expansive welfare states, with certain industries such as healthcare being centralized.

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The impetus for socialism in America is often undergirded by a certain set of circumstances, the most common being health outcomes and income equality. The contention of many self-proclaimed socialists is that if the United States were to become socialist, health outcomes would improve and the distribution of income would be more equal because these outcomes happened in Nordic countries. However, further scrutiny shows that the laudable health outcomes predate the Nordic countries’ move to a more socialist-redistributive political system. In Debunking Utopia, analyst Nima Sanandaji underscores this notion by pointing out that “When Nordic countries had similarly sized public sectors as the United States (1960), Swedes lived 3.2 years longer than Americans, while Norwegians lived 3.8 years longer. Today the difference has shrunk to 2.9 years in Sweden and 2.6 years in Norway.” A similar trend occurred when comparing infant mortality rates. In other words, there is another factor(s) responsible for these impressive statistics. Moreover, according to the OECD Better Life Index, Switzerland, a culturally and economically conservative country, has a higher living standard than all of the Nordic countries.

It should also be noted that the Czech Republic and Slovenia are rated more income-equal than all of the Nordic countries despite having lower and relatively flat taxes. This trend is not necessarily a critique of the political systems in the Nordic countries. It’s merely a suggestion that Nordic policies do not explain the entire story and have a much weaker causal impact than is generally understood. 

To understand the success behind the Nordic countries, it’s important to recognize the unique culture that made such economic growth possible. German sociologist Max Weber noted that “Protestant countries in northern Europe tended to have higher living standards, better academic institutions, and more well-functioning societies than countries in other parts of Europe,” and attributes a large part of that success to a protestant work ethic. Moreover, Swedish Scholar Assar Lindbeck posits the strong work ethic in the Scandinavian culture is due to the “hostile environment of preindustrial Scandinavia,” which required farms to work exceedingly hard to yield a profit. Furthermore, economist Tino Sanandaji explains that “Scandinavia was likely the most egalitarian part of Europe even before the modern era. For example, it was the only major part of Western Europe that never developed full-scale feudalism and never reduced its farmers to serfdom.” Contrary to the prevailing narrative, Scandinavian societies were some of the first societies to embrace free-market principles such as property rights. In fact, even before Adam Smith, a Finnish priest and member of Sweden’s Parliament named Anders Chydenius articulated the necessity of free trade and free markets in fostering economic prosperity.

Such values, including personal responsibility, work ethic, and social trust are uniquely present in the Nordic culture. For example, Nordic countries are at the top of the charts for coffee consumption per person. Finland (12.3 kg), Norway (9.7 kg), Denmark (8.7 kg), and Sweden (7.3%) noticeably surpass the average American’s coffee consumption of 4.2 kg. Perhaps more telling, Nordic countries account for three out of the top four spots in Europe in terms of share of workers “totally committed to their employer.” Sweden (65%), Norway (63%), and Denmark (53%) significantly outrank their southern European counterparts in France (41%), Italy (39%), and Portugal (28%). Moreover, the aforementioned income-equality rankings heavily correspond with high levels of homogeneity. What these can partially display is  that public trust in institutions, social cohesion, and unity are integral characteristics in forming a functional society. The importance of such oft-overlooked metrics and cultural components explains at least some of the disparity in performance levels between Nordic countries and countries that implement Nordic policies. The latter tend to achieve underwhelming results.

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Some of the previously discussed cultural traits become much more apparent when juxtaposing the performance of Nordic Americans with average Americans as well as Nordics in Europe. For instance, the GDP per capita of all Americans ($52,592) is lower than that of Norway ($65,685), and marginally higher than those of Denmark ($45,597), Sweden ($45,067), and Finland ($40,832). However, when looking at the GDP per capita for Danish Americans ($70,925), Swedish Americans ($68,897), Norwegian Americans (67,385), and Finish Americans ($64,774), Nordic Americans conspicuously outperform their relatives in their home country. Further adhering to this phenomenon, the high school graduation rate of Swedish Americans (96.6%), Danish Americans (96.5%), Finnish Americans (96.4%), and Norwegian Americans (96.3%) is markedly higher than those of all Americans (86.3%), and their relatives in Norway (81.7%), Sweden (79.6%), Finland (78%), and (75.1%). Economists Geranda Notten and Chris de Neubourg provide further evidence by pointing out that, while the absolute poverty level is higher in America (11%), the poverty rates in Denmark (6.7%) and Sweden (9.3%) are higher than the poverty rates of Danish Americans (4.1%) and Swedish Americans (5.1%). This like-for-like comparison more closely resembles a fixed-effects modeling econometric analysis and indicates that the success of these Nordic countries could very well be in spite of the policies implemented in these countries.

Historical Outlook

Nordic countries are indisputably some of the most prosperous countries in the world. However, it is important to understand the policies responsible for generating their robust economic growth. As Nima Sanandaji notes in Debunking Utopia, Sweden averaged 2% growth per year from 1870-1936, the highest of any western nation, while pursuing pro-market policies. While the Swedish Social Democratic Party was able to gradually expand the welfare state and raise taxes from 1936-1970, their average growth rate was 2.9%, around the western European average. However, between 1970-1991, Sweden, unlike any other Nordic Country, pursued a quasi-Socialist system, manifesting in the enacted policies such as “employer funds,” in which the private ownership of firms would gradually be transferred to labor union. Sanandaji points out that this trial of socialism coincided with a growth rate of 1.4%, the second lowest in western Europe at the time. In fact, The Economist explains that “In a period from 1870 to 1970 the Nordic countries were among the world’s fastest growing countries, thanks to a series of pro-business reforms such as establishment of banks and the privatization of forests. But in the 1970s and 1980s the undisciplined growth of government caused the reforms to run into the sands.”

After this underwhelming period, Sweden enacted reforms that tightened up their welfare programs and reduced their taxation levels. These reforms increased the growth rate to 1.8%, near the top of western Europe. The strength of the economies in these various time periods are well explained when comparing how Sweden’s employment level responded to the Great Depression with how it responded to the crisis in the 1990s. While both periods brought turmoil, Sweden’s quasi-socialist economy reacted demonstrably worse to the crisis in the 1990s, as the charts below indicate. Moreover, the expansion of the public sector starting in the 1970s significantly stifled growth in the private sector job market. In short, Sweden’s wealth was built from decades of free-market policies, and severely undercut by the growth of the public sector and redistributionism. While the Nordic countries have done much to curtail such pernicious policies, they are still facing the consequences of a rapid expansion of the public sector and increased taxation.

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Taxes

Today, while the Nordic countries have largely worked on reforms including reduced unemployment benefits and lower tax rates, their welfare programs and taxation levels are still significantly larger than that of America. According to Danish researcher Henrik Jacobsen Keven, “The top marginal tax rates are about 60-70 percent in the Scandinavian countries as opposed to only 43% in the United States.” However, these high tax rates are not uniquely imposed on the high-income earners. The Tax Foundation notes, “The top marginal tax rate of 60 percent in Denmark applies to all income over 1.2 times the average income in Denmark. From the American perspective, this means that all income over $60,000 (1.2 times the average income of about $50,000 in the United States) would be taxed at 60 percent.” In fact, American tax rates are demonstrably more progressive than in Nordic countries. Such high tax rates have been shown to discourage investment and output. In an extensive economic study conducted by Mathias Trabandt and Harald Uhlig, motivated in part by the Laffer curve model, higher taxes in both Denmark and Sweden actually decrease the revenues from taxes.

Furthermore, the taxation levels in Nordic countries are often underestimated due to hidden taxes. For example, the “employer fee” is effectively a tax on labor. Nima Sanandaji delineates this clearly in an example of a worker in Sweden. He explains, “somebody receives a wage of 10,000 kronor in Sweden, the employer has to pay additionally around 10,000 kronor to the government. Half of this is a tax on labor and the other half is the employer’s fee. On their pay stubs, people see that their official wage is around 15,000 kronor, out of which 5,000 have been paid in taxes. The other 5,000 kronor, which has been paid to the tax authority, is often not even included on the pay stub. Thus, many ordinary citizens think the tax on labor is a third of their income (5,000 kronor out of 15,000) rather than the actual rate of half their income (10,000 kronor out of 20,000).” Such hidden taxes are replete in the Nordic countries and actively deceive their citizens. On average, Swedes believe their average tax rate is close to 40%, when in actuality the number has been found to be much closer to 60%.

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In conclusion, the Nordic countries have not stumbled upon some magic formula to circumvent basic economic principles. When constructing policy, it is important to identify and evaluable intangible factors such as culture. The Nordic countries do not have socialist economies, and it is even worth noting that their expansive public sector and high taxes have been far from perfect. With all of this in mind, Bernie Sanders and the ever-growing Democratic Socialist movement in America ought to demonstrate how their policy proposals would yield successful results instead of blindly citing the Nordic model, which is highly misleading and obscures a much-needed debate.

Works Cited

Image Source: Nordic economy: The post crisis recovery of Scandinavian economies. (2015, September 25). Retrieved from http://www.newslettereuropean.eu/nordic-economy-post-crisis-recovery-scandinavian-economies/

Image Source: Sanandaji, N. (2016, December 02). Misreading the Nordic Model. Retrieved from https://www.foreignaffairs.com/articles/northern-europe/2016-08-17/misreading-nordic-model

Image Source: Pomerleau, K. (2018, October 16). How Scandinavian Countries Pay for Their Government Spending. Retrieved from https://taxfoundation.org/how-scandinavian-countries-pay-their-government-spending/

Image Source: Sanandaji, N. (2015, August 04). Scandinavian Myths: High Taxes and Big Spending Are Popular | Nima Sanandaji. Retrieved from https://fee.org/articles/scandinavian-myths-high-taxes-and-big-spending-are-popular/

2018 Index of Economic Freedom. (n.d.). Retrieved from https://www.heritage.org/index/

Denmark to Bernie: Stop Dissing Us with That Word. (2017, August 04). Retrieved from https://www.the-american-interest.com/2015/11/02/denmark-to-bernie-stop-dissing-us-with-that-word/

Jackson, K. (-0001, November 30). Denmark Tells Bernie Sanders It’s Had Enough Of His ‘Socialist’ Slurs. Retrieved from https://www.investors.com/politics/commentary/denmark-tells-bernie-sanders-to-stop-calling-it-socialist/

Kleven, H. J. (2014). How Can Scandinavians Tax So Much? Journal of Economic Perspectives,28(4), 77-98. doi:10.1257/jep.28.4.77

Notten, G., & Neubourg, C. D. (2007). Relative or Absolute Poverty in the US and EU? The Battle of the Rates. SSRN Electronic Journal. doi:10.2139/ssrn.1095712

Sanandaji, N. (2015, August 04). Scandinavian Myths: High Taxes and Big Spending Are Popular | Nima Sanandaji. Retrieved from https://fee.org/articles/scandinavian-myths-high-taxes-and-big-spending-are-popular/

Sanandaji, T. (2012). Poverty And Causality. Critical Review,24(1), 51-59. doi:10.1080/08913811.2012.684474

Sawe, B. E. (2018, August 03). The Most Equal Countries in the World. Retrieved from https://www.worldatlas.com/articles/the-most-equal-countries-in-the-world.html

Solving the European Productivity Puzzle. (2018). Intereconomics,53(2), 52-52. doi:10.1007/s10272-018-0720-0

Switzerland. (n.d.). Retrieved from http://www.oecdbetterlifeindex.org/countries/switzerland/

The McKinsey Quarterly: Sweden’s growth paradox. (n.d.). Retrieved from http://courses.wcupa.edu/rbove/eco343/060compecon/Scand/Sweden/060600comeback.htm

The secret of their success. (2013, February 02). Retrieved from https://www.economist.com/special-report/2013/02/02/the-secret-of-their-success

Trabandt, M., & Uhlig, H. (2009). How Far Are We From The Slippery Slope? The Laffer Curve Revisited. doi:10.3386/w15343

What the Left Gets Wrong About Scandinavia. (n.d.). Retrieved from http://fortune.com/2016/01/26/democrat-bernie-sanders-scandinavia-socialism/

Sanandaji, N. (2016). Debunking utopia: Exposing the myth of Nordic socialism. Washington, D.C.: WND Books.

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