This year’s model

Garrett MacDonald sent me a very good article from the Economist:

Since then the Nordics have changed course—mainly to the right. Government’s share of GDP in Sweden, which has dropped by around 18 percentage points, is lower than France’s and could soon be lower than Britain’s. Taxes have been cut: the corporate rate is 22%, far lower than America’s. The Nordics have focused on balancing the books. While Mr Obama and Congress dither over entitlement reform, Sweden has reformed its pension system (see Free exchange). Its budget deficit is 0.3% of GDP; America’s is 7%.

On public services the Nordics have been similarly pragmatic. So long as public services work, they do not mind who provides them. Denmark and Norway allow private firms to run public hospitals. Sweden has a universal system of school vouchers, with private for-profit schools competing with public schools. Denmark also has vouchers—but ones that you can top up. When it comes to choice, Milton Friedman would be more at home in Stockholm than in Washington, DC.

All Western politicians claim to promote transparency and technology. The Nordics can do so with more justification than most. The performance of all schools and hospitals is measured. Governments are forced to operate in the harsh light of day: Sweden gives everyone access to official records. Politicians are vilified if they get off their bicycles and into official limousines. The home of Skype and Spotify is also a leader in e-government: you can pay your taxes with an SMS message.

This may sound like enhanced Thatcherism, but the Nordics also offer something for the progressive left by proving that it is possible to combine competitive capitalism with a large state: they employ 30% of their workforce in the public sector, compared with an OECD average of 15%. They are stout free-traders who resist the temptation to intervene even to protect iconic companies: Sweden let Saab go bankrupt and Volvo is now owned by China’s Geeley. But they also focus on the long term—most obviously through Norway’s $600 billion sovereign-wealth fund—and they look for ways to temper capitalism’s harsher effects. Denmark, for instance, has a system of “flexicurity” that makes it easier for employers to sack people but provides support and training for the unemployed, and Finland organises venture-capital networks.

The sour part of the smorgasbord

The new Nordic model is not perfect. Public spending as a proportion of GDP in these countries is still higher than this newspaper would like, or indeed than will be sustainable. Their levels of taxation still encourage entrepreneurs to move abroad: London is full of clever young Swedes. Too many people—especially immigrants—live off benefits. The pressures that have forced their governments to cut spending, such as growing global competition, will force more change. The Nordics are bloated compared with Singapore, and they have not focused enough on means-testing benefits.

All the same, ever more countries should look to the Nordics. Western countries will hit the limits of big government, as Sweden did. When Angela Merkel worries that the European Union has 7% of the world’s population but half of its social spending, the Nordics are part of the answer. They also show that EU countries can be genuine economic successes. And as the Asians introduce welfare states they too will look to the Nordics: Norway is a particular focus of the Chinese.

The main lesson to learn from the Nordics is not ideological but practical.

Other than “means-testing,” I entirely agree.


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16 Responses to “This year’s model”

  1. Gravatar of happyjuggler0 happyjuggler0
    4. February 2013 at 10:20

    Scott Sumner said Other than “means-testing,” I entirely agree

    I guess it depends on what they mean by “means-testing”. I strongly suspect that you favor the EITC, or at least a cousin of that system, which is clearly means-tested.

    But I agree; when means testing results in perverse incentives as a result of effectively high marginal rates of the combo of tax/benefits, then it strongly discourages able-bodied people from working and instead makes the so-called “social safety net” into a quasi-permanent way of life for too many people.

  2. Gravatar of ssumner ssumner
    4. February 2013 at 10:24

    happyjuggler0, Yes, that’s a better way of putting it.

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    4. February 2013 at 12:16

    This related to the VOX post by Gill and Sugawara I linked to a few days ago;

    http://www.voxeu.org/article/central-european-reforms-beacon

    ‘Since the early 1990s, the gap between the EU15’s northern and southern conutries has been growing. At the same time, the productivity gap between the east and the south has been shrinking, and quickly. The timing is not coincidental, starting at a time when the first association agreements were signed in central Europe. But this has happened so quickly that most people are surprised to be presented with this picture. And this is the reason that central and eastern Europe are now almost the economic equals of southern Europe.’

  4. Gravatar of errorr errorr
    4. February 2013 at 12:52

    Sign me up for a swedish or danish model with added immigration. Norway should be ignored as a petro-state and Singapore is the worst nanny-state of all that it confuses me when it is held up as an ideal by conservatives.

  5. Gravatar of Donald Pretari Donald Pretari
    4. February 2013 at 12:55

    Very Good Post.

  6. Gravatar of Josh Josh
    4. February 2013 at 13:20

    “The main lesson to learn from the Nordics is not ideological but practical” – that pretty much subsumes all the rest.

  7. Gravatar of Lars Christensen Lars Christensen
    4. February 2013 at 13:40

    Scott, there is certainly some truth in this. The Nordic countries – particularly Denmark, Sweden and Iceland – are economically a lot more free than the general perception particularly in the US. That said, particularly Denmark faces problems due to very high levels of taxation and excessive income redistribution. That will sooner or later weigh on long-term growth prospects.

  8. Gravatar of bill bill
    4. February 2013 at 13:57

    Due to the phrasing of the sentence in the article about means-testing, it’s not clear whether you are for or against means-testing. I’d be interested to know.

  9. Gravatar of Floccina Floccina
    4. February 2013 at 14:01

    I think that they are the best hope to replace most of the remaining welfare with a wage subsidy or a guaranteed minimum income. I would love to see how that would work out.

    Also it would be interesting to see one country try providing only very high deductible health insurance (at least for the non-poor), kick starting a real healthcare market. Something like this.

  10. Gravatar of ssumner ssumner
    4. February 2013 at 15:26

    Patrick, I’ve noticed that too.

    errorr, I very much doubt whether any conservative ever held up Singapore as an ideal.

    Lars, Yes, the taxes are too high. But at least in Sweden they are gradually falling.

    bill, I’m mostly against means testing. I see it as a disguised tax. I do favor a modest amount of income redistribution via wage subsidies, but not other forms of means testing.

  11. Gravatar of dtoh dtoh
    4. February 2013 at 16:47

    Scott,
    If you were to assume that differences in income were solely a result of conscious choices about how hard to work, how much to work, how much effort to put into training and educating oneself, etc., would you still favor income redistribution.

  12. Gravatar of OhMy OhMy
    4. February 2013 at 19:48

    Lol, all of this is hogwash.

    “Balancing the books”? Government cannot balance the books without stripping the private sector from the ability to net save financial assets. This is accounting. So maybe Sweden can do that but only if it becomes a net exporter. Or goes into a depression.
    http://www.nakedcapitalism.com/2010/02/wray-the-federal-budget-is-not-like-a-household-budget-%E2%80%93-here%E2%80%99s-why.html

    But calling sending a country into a depression or permanently sending output abroad “pragmatic”? Please.

    High government share of the GDP is always sustainable. It is a matter of political choice whether it is desirable.

  13. Gravatar of ssumner ssumner
    5. February 2013 at 07:28

    dtoh, Probably not.

    OhMy, Macro moved past the paradox of thrift—about 40 years ago.

  14. Gravatar of Geoff Geoff
    5. February 2013 at 16:58

    “OhMy, Macro moved past the paradox of thrift—about 40 years ago.”

    100 years too late it seems.

  15. Gravatar of OhMy OhMy
    5. February 2013 at 18:54

    Ssumner,

    Yes, macro has, but apparently not the Economist.

  16. Gravatar of Eric G Eric G
    7. February 2013 at 21:05

    How much do you love the 78% corporate tax rate on “Companies engaged in production and pipeline transportation”?
    http://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/Tax/Taxation%20and%20Investment%20Guides/matrices/dttl_corporate_tax_rates_2012.pdf

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