Folks on the left sometimes act as if the Nordic nations somehow prove that big government isn’t an impediment to prosperity.
As I’ve pointed out before, they obviously don’t spend much time looking at the data.
So let’s give them a reminder. Here are the rankings from Economic Freedom of the World. I’ve inserted red arrows to draw attention to the Nordic nations. As you can see, every single one of them is in the top quartile, meaning that they aren’t big-government jurisdictions by world standards.
Moreover, Finland ranks above the United States. Denmark is higher than Estonia, which is often cited a free-market success story. And all of them rank ahead of Slovakia, which also is known for pro-growth reforms.
To be sure, this doesn’t mean the Nordic nations are libertarian paradises. Far from it.
Government is far too big in those countries, just as it is far too big in the United States, Switzerland, New Zealand, Canada, and other nations in the top quartile.
Which is tragic since the burden of government spending in North America and Western Europe used to be just a fraction of current levels – even in nations such as Sweden.
The way I’ve described the Nordic nations is that they have bloated and costly welfare states but compensate for that bad policy by being very free market in other policy areas.
But you don’t need to believe me. Nima Sanandaji has just written an excellent new monograph for the Institute of Economic Affairs in London. Entitled Scandinavian Unexceptionalism: Culture, Markets and the Failure of Third-Way Socialism, Nima’s work explains how the Nordic nations became rich during an era of small government and free markets, how they then veered in the wrong direction, but are now trying to restore more economic freedom.
Here are some key excerpts, starting with some much-needed economic history.
Scandinavia’s success story predated the welfare state. …As late as 1960, tax revenues in the Nordic nations ranged between 25 per cent of GDP in Denmark to 32 per cent in Norway – similar to other developed countries. …Scandinavia’s more equal societies also developed well before the welfare states expanded. Income inequality reduced dramatically during the last three decades of the 19th century and during the first half of the 20th century. Indeed, most of the shift towards greater equality happened before the introduction of a large public sector and high taxes. …The phenomenal national income growth in the Nordic nations occurred before the rise of large welfare states. The rise in living standards was made possible when cultures based on social cohesion, high levels of trust and strong work ethics were combined with free markets and low taxes….the Nordic success story reinforces the idea that business-friendly and small-government-oriented policies can promote growth.
Here’s a chart from the book showing remarkable growth for Sweden and Denmark in the pre-welfare state era.
Nima has extra details about his home country of Sweden.
In the hundred years following the market liberalisation of the late 19th century and the onset of industrialisation, Sweden experienced phenomenal economic growth (Maddison 1982). Famous Swedish companies such as IKEA, Volvo, Tetra Pak, H&M, Ericsson and Alfa Laval were all founded during this period, and were aided by business-friendly economic policies and low taxes.
Unfortunately, Nordic nations veered to the left in the late 1960s and early 1970s. And, not surprisingly, that’s when growth began to deteriorate.
The third-way radical social democratic era in Scandinavia, much admired by the left, only lasted from the early 1970s to the early 1990s. The rate of business formation during the third-way era was dreadful.
Sweden’s wealth creation slowed down following the transition to a high tax burden and a large public sector. …As late as 1975 Sweden was ranked as the 4th richest nation in the world according to OECD measures….the policy shift that occurred dramatically slowed down the growth rate. Sweden dropped to 13th place in the mid 1990s. …It is interesting that the left rarely discusses this calamitous Swedish growth performance from 1970 to 2000.
The good news is that Nordic nations have begun to shift back toward market-oriented policies. Some of them have reduced the burden of government spending. All of them have lowered tax rates, particularly on business and investment income. And there have even been some welfare reforms.
…there has been a tentative return to free markets. In education in Sweden, parental choice has been promoted. There has also been reform to pensions systems, sickness benefits and labour market regulations
But there’s no question that the welfare state and its concomitant tax burden are still the biggest problem in the region. Which is why it is critical that Nordic nations maintain pro-market policies on regulation, trade, monetary policy, rule of law and property rights.
Scandinavian countries have compensated for a large public sector by increasing economic liberty in other areas. During recent decades, Nordic nations have implemented major market liberalisations to compensate for the growth-inhibiting effects of taxes and labour market policies.
Let’s close with what I consider to be the strongest evidence from Nima’s publication. He shows that Scandinavians who emigrated to America are considerably richer than their counterparts who stayed put.
Median incomes of Scandinavian descendants are 20 per cent higher than average US incomes. It is true that poverty rates in Scandinavian countries are lower than in the US. However, the poverty rate among descendants of Nordic immigrants in the US today is half the average poverty rate of Americans – this has been a consistent finding for decades. In fact, Scandinavian Americans have lower poverty rates than Scandinavian citizens who have not emigrated. …the median household income in the United States is $51,914. This can be compared with a median household income of $61,920 for Danish Americans, $59,379 for Finnish-Americans, $60,935 for Norwegian Americans and $61,549 for Swedish Americans. There is also a group identifying themselves simply as ‘Scandinavian Americans’ in the US Census. The median household income for this group is even higher at $66,219. …Danish Americans have a contribution to GDP per capita 37 per cent higher than Danes still living in Denmark; Swedish Americans contribute 39 percent more to GDP per capita than Swedes living in Sweden; and Finnish Americans contribute 47 per cent more than Finns living in Finland.
In other words, when you do apples to apples comparisons, either of peoples or nations, you find that smaller government and free markets lead to more prosperity.
That’s the real lesson from the Nordic nations.
P.S. Just in case readers think I’m being too favorable to the Nordic nations, rest assured that I’m very critical of the bad policies in these nations.
Just look at what I’ve written, for instance, about Sweden’s healthcare system or Denmark’s dependency problem.
But I will give praise when any nation, from any part of the world, takes steps in the right direction.
And I do distinguish between the big-government/free-market systems you find in Nordic nations and the big-government/crony-intervention systems you find in countries like France and Greece.
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Reblogged this on Truth Is Power.
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Facts, proof and science don’t matter to pro(re)gressives. It’s the “feel good result” they get out of taxing people to death that matters to them.
You won’t find that theorem in Micro-Economics 101. ©2015
Hans Otto Frøland – a Norwegian historian and professor at the Department of History and Classical Studies at Norwegian University of Science and Technology (NTNU) – concluded that the Norwegian success predated the welfare state, and that Norway became rich during an era of small government and freer markets in an article (in Norwegian only) printed the first time in 2010: http://e24.no/privat/rettigheter/forbruker/hverken-gerhardsen-eller-oljen-gjorde-norge-rikt/10085819
But Norway was by no means a unambiguously optimal free market in the 1950s and 1960s. Some quotes from the article Ragnar Frisch and the Postwar Norwegian Economy by Arild Sæther and Ib E. Eriksen:
«Frisch became increasingly insistent that economic life be strictly regulated. In a 1947 article in the Norwegian journal Samtiden he wrote: “Studies of the modern economic machinery have made me completely convinced that if this machinery is left to itself, it will according to its nature have to go through convulsive spasms and periodically spread sorrow and misery to large groups of the population … The modern capitalistic system will go through the most terrible economic convulsions if it is permitted to develop under extreme freedom. And he, without predicting the exact time, claimed that an economic catastrophe would surely come in the United States. Frisch claimed that we want to have “full democratic control” of this system of a regulated economy. But to achieve full democratic control we need to educate people so they can understand the main features of the economic relations. And as a consequence we need to increase the number of students in economics.”»
«The other major figure was Leif Johansen (1930–1982), who at age 18 entered the University of Oslo and later became an assistant to Frisch. From 1951 Frisch and Johansen worked closely together. Unlike Haavelmo, Johansen shared with Frisch not just the planning spirit but an aggressive, forward-looking ambition. When Frisch retired in 1965, Johansen took over his chair. Johansen’s doctoral dissertation, A Multi-Sectoral Study of Economic Growth (1960) became the foundation for long-term economic planning by the Ministry of Finance. With Johansen, economic planning became a very strong discipline at the Institute. His lectures (collected in Johansen 1977) became the standard work to be used by students as well as economic planners in Norway. Johansen was a member of the Norwegian Communist Party and defended the Party in radio discussions in parliament elections, but he promoted his ideas within the context of a democratic society. Still, he strongly favored a Soviet-type planned economic system and in writing he fought vigorously against free trade.»
«Note the remarkable belief in the ability to govern, regulate, and control markets, and an equally strong will to use the necessary planning instruments. Decisions that had, prior to the Nazi occupation, been left to each individual player in the market would now be decided centrally by the government and its bureaucrats.»
«But the economic planners invented new measures and the detailed
regulation of the economy continued into the 1950s. The low-interest policy, which Frisch had strongly recommended, was formally introduced in the spring of 1952 with the white paper “Directives for the Monetary and Credit Policy,” followed by the Law on Interest Rates from 1953. Also in 1953, after heated debate, the Parliament made the aforementioned 1945 provisional decree, the Law of Prices and Competition Regulation, permanent law. On this occasion the well known British journal The Economist wrote that Norway could not any longer be counted among the countries that had a liberal economic system.»
«In 1945 the socialist Labour Party won a majority in Parliament. Many of its members and supporters wanted to turn Norway into a socialist society with a centrally planned economy. Norway should develop a national plan; competition is a nuisance and would not lead to a social optimum. New inventions and technical improvements within one firm should, for example, immediately be shared with all the other firms within its industrial branch. But such sharing could only be implemented in a planned economy. Such attitudes led to an expansion of the Norwegian wartime regulations. The Lex Thagaard and several other decisions made by the government and the parliament in 1945 and 1946 can, according to Espen Søilen (2002, 29), be seen as “a step on the way to a permanent form of a planned economy.”»
«A year later the conservative newspaper Aftenposten published a Frisch
essay titled “Heretical Opinions on Free Trade” (“Kjetterske meninger om
frihandel”):
“If the western democracies persist in basing their economy on the
free market they will soon be ousted by the eastern countries who
now prepare themselves for an expansion under full utilization using
rational and flexible economic planning.”»
«“The defects in the long-run [of such policies] lead to waste of economic resources.” It suggested that the defects were sufficiently serious to justify re-examination of the methods used for intervening in the financial markets. The study warns in particular against direct fixing of interest rates: “When carried out to the extreme, direct fixing of rates is obviously incompatible with the concept of the market.” It reported that cases where the financial authorities dictate the entire structure of monetary and credit policy are rare: “The systems existing in Spain, Greece and Norway probably come closest to this” (OECD 1967). Norway found itself in the company of two countries that were, at the time, dictatorships.»
«The yearly economic growth in average GDP per capita, in fixed 1985 international prices, was in Norway from 1950 to 1960 2.6 percent. This is lower than the average of 3.3 percent for all OECD countries. It is on par with Sweden, Denmark and Iceland, but lower than Finland, which had an annual growth of 4.0 percent.
From 1960 to 1973 average yearly economic GDP growth per capita for all OECD countries was 4.0 percent. The growth in Norway during this period was at 3.7 percent. This is again lower than Finland’s at 4.3 percent, and on par with Iceland at 3.7 percent, but higher than Denmark at 3.5 percent and Sweden at 3.1 percent.»
«The economic growth in Norway in the 1950s and 1960s cannot therefore … be interpreted as the result of a particularly successful economic policy. Nevertheless, a ‘success’ interpretation has often been maintained by economic historians such as Einar Lie … and Fritz Hodne … and it has also been reflected in socialist and social democratic memoirs, for example that of Gerhardsen….»
«Another economist at the Institute of Economics, Johan Vogt … also asked why, in light of Norway’s high investment ratio, economic growth was so low. He even made a computation showing that if we had the same relation between investment ratios and economic growth as the other countries in Western Europe we should have had 6.2 percent yearly growth in GDP.32 The actual growth rate was only 2.6 percent! Year after year Norwegians sacrificed better living (consumption) to pay extra for only average growth rates.»
Then once you get prosperity you get the bright idea:
“Ok now let’s concentrate on redistributing it a little more evenly”.
Off you peel off into the lower growth club. It is very difficult to reverse this decision.
Because, as a voter, the more you lose your once enviable prosperity, the more you desperately turn to government as the only entity that can immediately redistribute and restore some of your former prosperity.Redistribution gives near immediate gratification. But it is a one time finite effect and now your country is in a perpetually compounding growth deficit. An economic death spiral towards becoming a middle income country.
If you follow the higher growth path, you might have to wait a good five years or so, for growth to compound and see the same level of personal benefit as immediate redistribution yields. But now you have perpetually compounding growth, and hopefully, a social capital virtuous cycle.
Things are very unstable when it comes to these decisions. That is why they seem almost random. Some countries rise, then get mired in the middle income trap. Some never prosper, some prosper and then decline. Most of it depends on whether they can create and then sustain a relatively healthy, unadulterated, steep effort-reward curve. Alas this is not the innate tendency of the voter-lemming. Therefore few, very few get it right. The rest peel off into dead end branches of the prosperity evolutionary tree,.
Reminder: The world on average is growing by 4% annually. Any country that cannot match this trendline rate is, by definition, in deterministic decline.
While the U.S. is #1 in the world in defense spending at almost $600B, the Netherlands is #23 at under $10B, Norway is #29 at $7B, and Sweden comes in at #34 spending just $6.2B. Now, given that those European countries are much more likely to actually be attacked by a foreign power, how can these countries spend so little defending themselves?
Maybe they can spend so little, and thus spend so much on a welfare state, because they know that the U.S. will defend them against the Putins of the world.
Seeing how they are held up as models by the so-called progressives, I say cut them loose and let them defend themsevles.