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Posts Tagged ‘Finland’

Assuming he was able to impose his policy agenda, I think Bernie Sanders – at best – would turn America into Greece. In more pessimistic moments, I fear he would turn the U.S. into Venezuela.

The Vermont Senator and his supporters say that’s wrong and that the real goal is to make America into a Nordic-style welfare state.

Since those nations mitigate the damage of their large public sectors with very pro-market policies on regulation, trade, and property rights, that wouldn’t be the worst outcome.

Though “Crazy Bernie” is still wrong to view Denmark and Sweden as role models. Why adopt the policies of nations that have less income, lower living standards, and slower growth?

Is Finland a better alternative?

The answer is yes, according to Ishaan Tharoor’s WorldView column in the Washington Post.

Sanders and some of his Democratic competitors are clear about what they want to change in the United States. They call for the building of a robust social democratic state, including programs such as universal healthcare, funded in large part by new taxation on the ultrarich and Wall Street. …Sanders is particularly fond of the “Nordic model” — the social plans that exist in countries such as Denmark, Sweden, Norway and Finland, which deploy higher taxation to provide quality public services and keep inequality at rates lower than the United States. …Across the Atlantic, at least one leading proponent of the Nordic model welcomed its embrace by U.S. politicians. “We feel that the Nordic Model is a success story,” said Finnish Prime Minister Sanna Marin… “I feel that the American Dream can be achieved best in the Nordic countries, where every child no matter their background or the background of their families can become anything, because we have a very good education system,” she said.

I prefer the analysis of a previous Prime Minister, though it’s hard to fault Ms. Marin for extolling the virtues of her nation.

But is Bernie Sanders really talking about turning America into Finland?

Tharoor correctly notes that the Nordic nation tell a very mixed story.

Sanders’s ascent in the past five years has spurred considerable debate over what lessons should be learned from the Nordic countries he celebrates. A cast of centrist and conservative critics note, first, that these Nordic countries are more capitalist than Sanders concedes, with generous pro-business policies and their own crop of billionaires; and, second, that the welfare states in Nordic countries are largely financed by extensive taxes on middle-class wages and consumption.

The last excerpt is key.

The big welfare states in Europe – and specifically in Nordic nations such as Finland – are financed with big burdens on lower-income and middle-class taxpayers.

According to data from the Tax Foundation and OECD, middle-income Finnish taxpayers are forced to surrender about 15 percent more of their income to government.

Why such a big difference?

Because Finland has an onerous value-added tax, punitive payroll taxes, and their income tax imposes high rates on people with modest incomes.

In other words, it’s not the rich who are financing the welfare state. Yet Bernie Sanders never mentions that point.

I’ll close by simply noting that Finland (like other Nordic nations) is not a statist hellhole. As I wrote just two months ago, the nation has some very attractive policies.

Indeed, the country is almost as market-oriented as the United States according to Economic Freedom of the World (and actually ranked above America as recently as 2011).

Bernie Sanders, though, wants to copy the bad features of Finland.

He wants America to have a big welfare state, but doesn’t want Finland’s very strong rule of law or robust property rights for people in the private sector. Nor does he want Finland’s 20 percent corporate tax rate.

And I suspect he doesn’t realize that Finland just learned an important lesson about the downsides of giving people money for nothing.

Most important of all, I’m very confident he doesn’t understand why Americans of Finnish descent generate 47 percent more national income than Finns who stayed home.

P.S.S. Researchers at Finland’s central bank seem to agree with my concern about excessive government spending.

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I’ve written many columns about Sweden and Denmark over the past 10-plus years, and I’ve also written several times about Norway and Iceland.

But I’ve mostly neglected Finland, other than some analysis of the country’s experiment with “basic income” in 2017 and 2018.

Now, thanks to a very interesting column in the New York Times, it’s time to rectify that oversight. According to the authors, Anu Partanen and , Finland is a great place with lots of goodies provided by taxpayers.

Finland, of course, is one of those Nordic countries that we hear some Americans, including President Trump, describe as unsustainable and oppressive — “socialist nanny states.”…We’ve now been living in Finland for more than a year. The difference between our lives here and in the States has been tremendous… What we’ve experienced is an increase in personal freedom. …in Finland, we are automatically covered, no matter what, by taxpayer-funded universal health care… Our child attends a fabulous, highly professional and ethnically diverse public day-care center that amazes us with its enrichment activities and professionalism. The price? About $300 a month — the maximum for public day care, because in Finland day-care fees are subsidized for all families. …if we stay here, …College would also be tuition free. If we have another child, we will automatically get paid parental leave, funded largely through taxes, for nearly a year… Compared with our life in the United States, this is fantastic.

Interestingly, the authors are not clueless Bernie Sanders-style leftists.

They fully understand and appreciate that Finland (like all Nordic nations) is not a socialist country.

…surely, many in the United States will conclude, Finnish citizens and businesses must be paying a steep price in lost freedoms, opportunity and wealth. …In fact, a recent report by the chairman of market and investment strategy for J.P. Morgan Asset Management came to a surprising conclusion: The Nordic region is not only “just as business-friendly as the U.S.” but also better on key free-market indexes, including greater protection of private property, less impact on competition from government controls and more openness to trade and capital flows. …What to make of all this? For starters, politicians in the United States might want to think twice about calling the Nordics “socialist.” …in Finland, you don’t really see the kind of socialist movement…, especially around goals such as curtailing free markets and even nationalizing the means of production. The irony is that if you championed socialism like this in Finland, you’d get few takers. …a 2006 study by the Finnish researchers Markus Jantti, Juho Saari and Juhana Vartiainen demonstrates…throughout the 20th century Finland remained — and remains to this day — a country and an economy committed to markets, private businesses and capitalism.

This is a very accurate assessment. Finland is more market-oriented than the United States in many categories.

Moreover, the country is ranked #21 for economic freedom out of 162 nations in Economic Freedom of the World, with a score of 7.80. That’s just .05 behind Taiwan and .09 behind Chile.

That being said, the burden of taxes and spending is rather onerous.

…after World War II, …Finnish capitalists also realized that it would be in their own long-term interests to accept steep progressive tax hikes. …the nation’s commitment to providing generous and universal public services…buffered and absorbed the risks and dislocations caused by capitalist innovation. …Visit Finland today and it’s obvious that the much-heralded quality of life is taking place within a bustling economy of upscale shopping malls, fancy cars and internationally competitive private companies. …Yes, this requires capitalists and corporations to pay fairer wages and more taxes than their American counterparts currently do.

The column concludes by suggesting that American capitalists follow the same model.

Right now might be an opportune moment for American capitalists to pause and ask themselves what kind of long-term cost-benefit calculation makes the most sense.

So should the United States copy Finland, as the authors suggest?

People would get lots of taxpayer-financed freebies, but there would be a heavy price. Taxes consume nearly 50 percent of an average family’s income (even higher according to some measures).

That’s compared to about 30 percent in the United States.

And there’s a very Orwellian aspect of the Finnish tax system. As the New York Times reported last year, everyone in the country has the right to know how much income you earn.

Pamplona can boast of the running of the bulls, Rio de Janeiro has Carnival, but Helsinki is alone in observing “National Jealousy Day,” when every Finnish citizen’s taxable income is made public at 8 a.m. sharp. The annual Nov. 1 data dump is the starting gun for a countrywide game of who’s up and who’s down. …Finland is unusual, even among the Nordic states, in turning its release of personal tax data — to comply with government transparency laws — into a public ritual of comparison. …A large dosage of Thursday’s reporting concerned the income of minor celebrities… The country’s best-known porn star, Anssi “Mr. Lothar” Viskari, was reported to have earned 23,826 euros (about $27,000).

Given the onerous level of Finnish taxes, it’s probably safe to say that “Mr. Lothar” is getting screwed more than he’s…um….well, you get the point.

So what’s the bottom line? Should America be more like Finland? Is the country reasonably successful because of high taxes, or in spite of high taxes?

The U.S. should not mimic Finland, at least if the goal is higher living standards. Finland has some advantages over the United States (including better business taxation), but the United States has more overall economic liberty.

And that presumably helps to explain why, based on data from the Organization for economic Cooperation and Development, the average American enjoys 40 percent higher living standards than the average Finn.

But the most compelling piece of data, for those who prefer apples-to-apples comparison, is that Americans of Finnish descent produce 47 percent more than Finns in Finland.

Is Finland a relatively rich nation? Yes.

Is Finland a relatively free nation? Definitely.

Is Finland a good example of western civilization? Unquestionably.

The bottom line is that Finland seems like a great country (I’ve never visited). All I’m saying is that Americans would not be as prosperous if we had Finnish-style taxation and Finnish-style spending.

P.S. Researchers at Finland’s central bank seem to agree with my concern.

P.P.S. And Finland’s former Prime Minister understood the downside of an excessive public sector.

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In Part I of our series on Socialism in the Modern World, we looked at the tragic story of Venezuela.

Today, we’re going to look at what we can learn from the Nordic nations. And the first thing to understand, as I explain in this interview, is that these nations are only socialist if the definition is watered down.

As I noted in the interview, real socialism is based on government ownership and control of the “means of production.” But Nordic countries don’t have government-owned factories, government-controlled allocation of resources, or government regulation of prices.

In other words, those nations are not socialist (government ownership), they’re not fascist (government control), and they’re not even corporatist (cronyism).

So what are they?

In a column for the Washington Post, Max Boot accurately describes them as free-market welfare states.

…rigging elections and locking up or killing political opponents. This is one model of socialism — the same approach that has been applied in Cuba and the Soviet Union. But there are many other varieties that are far more benign. …the Scandinavian model. …Denmark, Norway and Sweden…show that a “free-market welfare state” isn’t an oxymoron. …By some measures, moreover, they are freer, economically…than the United States.

That last sentence isn’t a typo. The United States has more overall economic freedom than the Nordic nations, but both Denmark and Finland actually rank above America when looking at factors other than fiscal policy.

And Sweden and Norway only trail the United States by 0.03 and 0.06 points, respectively.

That being said, a big lesson to learn is that fiscal policy is a mess in the Scandinavian countries.

…there is nothing sinister about wanting to emulate the Scandinavian example. But that doesn’t necessarily mean it’s practical. The Scandinavians have lower corporate tax rates than the United States but much higher individual taxes. …The Scandinavian countries also charge hefty value-added taxes of 25 percent on consumption. The United States doesn’t have a national sales tax, and the average rate for state sales taxes is only 7 percent. In all, Scandinavians pay $25,488 a head in taxes compared with $14,793 a head in the United States — 72 percent more. This is what it takes to finance a Scandinavian-style social welfare state. It can’t be done simply by raising marginal tax rates on the wealthiest taxpayers to 70 percent, as Ocasio-Cortez suggests, because few taxpayers pay the top rate. It requires a massive tax hike on the middle class.

Amen. This is a point I have frequently made, most recently when writing about Alexandria Ocasio-Cortez’s statist agenda. Ordinary taxpayers will pick up most of the tab if the left’s agenda is adopted.

But I’m digressing. Let’s return to today’s main issue, which is the Nordic nations and socialism.

Technically, there’s no connection. As I said in the interview, those countries have never been socialist. Heck, if those nations are socialist, then so is the United States.

There is a lesson to be learned, however, and that lesson is relevant whether one uses the technical or common definition of socialism.

Simply stated, the relative success of those nations is due to free markets and a history of small government, but the imposition of big welfare states starting in the 1960s has weakened the region’s economic vitality.

This chart tells you everything you need to know.

P.S.  Actually, there is more your should know. Nima Sanandaji’s data on how Americans of Nordic descent are richer than residents of Nordic nations is very illuminating.

P.P.S. And we have specific data from Sweden showing how that nation lost ground after it adopted the big welfare state (and has subsequently gained ground thanks to pro-market reforms such as nationwide school choice and partial pension privatization).

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I’m conflicted.

I’ve repeatedly expressed skepticism about the idea of governments providing a “basic income” because I fear the work ethic will (further) erode if people automatically receive a substantial chunk of money.

Moreover, I also fear that a basic income will lead to an ever-expanding burden of government spending, particularly once net beneficiaries figure out they can vote themselves more money.

Given these concerns, I should be happy about this report from the New York Times.

For more than a year, Finland has been testing the proposition that the best way to lift economic fortunes may be the simplest: Hand out money without rules or restrictions on how people use it. The experiment with so-called universal basic income has captured global attention… Now, the experiment is ending. The Finnish government has opted not to continue financing it past this year, a reflection of public discomfort with the idea of dispensing government largess free of requirements that its recipients seek work. …the Finnish government’s decision to halt the experiment at the end of 2018 highlights a challenge to basic income’s very conception. Many people in Finland — and in other lands — chafe at the idea of handing out cash without requiring that people work. …Finland’s goals have been modest and pragmatic. The government hoped that basic income would send more people into the job market to revive a weak economy. …The basic income trial, which started at the beginning of 2017 and will continue until the end of this year, has given monthly stipends of 560 euros ($685) to a random sample of 2,000 unemployed people aged 25 to 58. Recipients have been free to do as they wished… The Finnish government was keen to see what people would do under such circumstances. The data is expected to be released next year, giving academics a chance to analyze what has come of the experiment.

The reason I’m conflicted is that the current welfare state – both in the United States and other developed nations – is bad for both taxpayers and poor people.

So I like the idea of experimentation. There has to be a better way of alleviating genuine suffering without trapping poor people in dependency or punishing taxpayers.

Indeed, one of my arguments for radical decentralization in America is that states will try different approaches and we’ll have a much better chance of learning what works and what doesn’t.

And maybe we’ll learn that there are some benefits of providing a basic income. But, as reported by the U.K.-based Guardian, it’s unclear whether the Finnish experiment lasted long enough or was comprehensive enough to teach us anything.

The scheme – aimed primarily at seeing whether a guaranteed income might incentivise people to take up paid work by smoothing out gaps in the welfare system…it was hoped it would shed light on policy issues such as whether an unconditional payment might reduce anxiety among recipients and allow the government to simplify a complex social security system… Olli Kangas, an expert involved in the trial, told the Finnish public broadcaster YLE: “Two years is too short a period to be able to draw extensive conclusions from such a big experiment. We should have had extra time and more money to achieve reliable results.”

I will be interested to see whether researchers generate any conclusions when they look at the two years of data from the Finnish experiment.

That being said, there already has been some research that underscores my concerns.

The OECD is not my favorite international bureaucracy, but its recent survey on Finland included some sobering estimates on the cost of a nationwide basic income.

In a basic income scenario, a lump-sum benefit replaces a number of existing benefits, financed by increasing income taxation by nearly 30% or around 4% of GDP. …the basic income requires significant increases to income taxation. …Financing a basic income at a meaningful level thus would require considerable additional tax revenue, and heavier taxation of income would at least partially undo any improvement in work incentives.

And in a report on basic income last year, the OECD poured more cold water on the idea.

…large tax-revenue changes are needed to finance a BI at meaningful levels, and tax reforms would therefore need to be an integral part of budget-neutral BI proposals. …abolishing tax-free allowances and making BI taxable means that everybody would pay income tax on the BI, and on all their other income. Tax burdens would go up for most people as a result, further increasing tax-to-GDP ratios that are currently already at a record-high in the OECD area. …There are also major concerns about unintended consequences of a BI. An especially prominent one is that unconditional income support would reduce the necessity for paid work.

Indeed, it’s difficult to see how work incentives aren’t adversely affected. Why go through the hassle of being employed when you can sit at home and play computer games all day?

P.S. Given the option of voting on a basic income in 2016, Swiss voters overwhelmingly rejected the notion.

P.P.S. Former Vice President Joe Biden actually agrees with me about one of the downsides of basic income.

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In yesterday’s column, I shared a humorous video mocking the everywhere-its-ever-been-tried global failure of socialism.

And I tried to preempt the typical response of my left-wing friends by pointing out that Scandinavian nations are not role models for statism.

In global ranking of economic liberty, Nordic nations score relatively high, with Denmark and Finland in the top 20. Scandinavian nations have large welfare states, but otherwise have very laissez-faire economic policies. Nordic nations got rich when government was small, but growth has slowed since welfare states were imposed.

Based on some of the emails I received, some critics have a hard time understanding this argument.

All of which is very frustrating since I’ve repeatedly tried to make this point. So I pondered the issue for hours, trying to figure out whether there was some way of helping people grasp the issue.

Maybe this chart from Economic Freedom of the World will help. It shows, based on the five major categories of economic liberty, that the once-significant gap between the United States and Scandinavia has almost completely disappeared.

In other words, anyone who claims that Scandinavian nations are socialist must also think that the United States also is socialist.

To be sure, there are differences. If you look at specific categories of economic liberty, America gets a noticeably better score than Nordic nations on fiscal policy.

But we get a significantly worse score for governance issues such as property rights, corruption, and the rule of law.

We also do a bit worse on trade and slightly better on regulation.

The bottom line is that both the United States and Scandinavian nations are market-oriented, but also saddled with plenty of bad government policies. If that makes us socialist, then what’s the right term for nations where government has a much bigger footprint, such as France, Italy, or Greece?

How about Venezuela and Zimbabwe?

Or North Korea and Cuba?

What I’m saying is that there’s a spectrum and we should be cognizant that there are different degrees of statism. And nations closer to one end are much different from countries closer to the other end.

Plenty of other people make similar arguments about the Nordic countries.

Tim Worstall, writing about Finland for CapX, emphasizes the laissez-faire nature of Scandinavian nations, while also pointing out that there’s a degree of decentralization that makes big government somewhat less inefficient.

…high tax rates do indeed reduce economic growth rates by undercutting incentives. So do interfering bureaucracy and state planning. And so if you’re going to go overboard on one of those two then you’ve got to be minimalist on the other point. In other words, you’ve got to kill off bureaucracy in order to leave room for the tax rates and still have a growing economy. …That is more or less how Finland and other Scandinavians do things. …The other important point is quite how decentralised they all are. …A much larger piece of the pay packet goes to the local government… That money raised locally is then spent locally too. …There’s thus an efficiency to the system, something that gets lost when…people send their cash off to the national government to be distributed without that local accountability. …if you want that Scandi life then you’ve got to do it as they do. Very local government and taxation plus a distinctly less economically interventionist government.

Amen. Local government oftentimes is bad, but it’s rarely as bad as a centralized system.

I also found a must-read 2016 article for FEE by Corey Iacono.

Democratic socialism purports to combine majority rule with state control of the means of production. However, the Scandinavian countries are not good examples of democratic socialism in action because they aren’t socialist. In the Scandinavian countries, like all other developed nations, the means of production are primarily owned by private individuals, not the community or the government, and resources are allocated to their respective uses by the market, not government or community planning. …it is true that the Scandinavian countries provide…a generous social safety net and universal healthcare, an extensive welfare state is not the same thing as socialism. …The Scandinavians embrace a brand of free-market capitalism… The Economist magazine describes the Scandinavian countries as “stout free-traders who resist the temptation to intervene even to protect iconic companies.” …These countries all also rank in the top 10 easiest countries to do business.

If you don’t believe Worstall and Iacono, check out this table of data I prepared back in 2015.

I took the Economic Freedom of the World rankings and I removed the variables for fiscal policy.

And what you find is that Denmark, Sweden, and Finland were all in the top 10 for economic liberty. And Norway was #14.

That’s compared to #24 for the United States.

Heck, there were plenty of other European nations that ranked as being more free market than the United States.

So we should be grateful that we only have a medium-sized welfare state. Because our better score on fiscal policy helps to offset our comparatively anemic scores on the other four variables.

Having pointed out that the United States now has only a rather small advantage over Scandinavian nations when looking at all five measures of economic liberty, that’s still better than nothing.

It probably explains, for instance, why Americans of Scandinavian descent earn so much more than their cousins who remained back home.

And why Americans of all backgrounds generally enjoy higher living standards than folks in Europe, even the ones in Nordic nations.

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In my research and travels, I come across all sorts of strange stories about tax policy.

While I’m quite amused by these oddball examples, I actually prefer writing about overseas tax policies that provide teachable moments about big issues such as the Laffer Curve, taxes and growth, tax competition, and how higher tax burdens “feed the beast” by enabling more government spending.

Let’s look at some new examples and see what we can learn about politicians and fiscal policy.

We’ll start with a Bloomberg story from the Ukraine, where taxpayers go above and beyond to escape extortionary taxes on foreign vehicles.

Take a close look at the cars crawling through Kiev’s traffic-laden streets and you’ll notice something odd: a surprisingly large number of them aren’t registered in Ukraine. The explanation isn’t a sudden inflow of tourists, but rather a work-around by local drivers who crave foreign-made vehicles and refuse to pay restrictively high import duties to buy them. Instead, schemes have popped up where buyers effectively acquire cars from nearby nations and bring them across the border on temporary arrangements. They must then leave and re-enter Ukraine every year, or sometimes more frequently. “It’s amazing,” said Oleksandr Zadnipryaniy, a 30-year old entrepreneur who paid about $3,000 for a second-hand Opel Vectra from Lithuania. “Taxes are exorbitant. Why must poorer Ukrainians pay three times as much as richer Europeans?”

The answer to Mr. Zadnipryaniy’s question is that they don’t pay the tax. At least not if this chart is any indication.

Needless to say, I’m on the side of taxpayers and don’t have sympathy for the politicians, who are motivated by a desire to extract revenue and curry favor with domestic interest groups.

Such cars represent a headache for the government. Dodging import duties trims budget revenue… Cracking down is also tricky. …Drivers blame the government, accusing it of pandering to local car lobbies by setting high import duties.

Now let’s shift to another story about tax avoidance, though this one doesn’t have a happy ending.

The BBC reports that a big tax hike may put an end to “booze cruises” from Finland to Estonia

The Estonian government is set to impose a 70% rise in taxation on alcoholic drinks in July, Finnish broadcaster YLE reports. It’s a blow to drinkers from Finland who, since Estonian independence in 1991, have taken the short 54-mile (87km) ferry trip from Helsinki to Tallinn to enjoy prices which are less than half of those back home. …a 12-euro crate of beer will increase to 18 euros, making the concept of the money-saving “booze cruise” much less inviting.

But fortunately Finns still have an option.

Finnish tourist Erno Sjogren said that the tax rise might make him think again – but not on giving up the concept. Speaking to Helsingin Sanomat as he loaded his car outside an Estonian supermarket, he said he would consider taking his trade to Latvia instead – a 2.5-hour drive cross-country from the ferry port in the Estonian capital. The Latvian town of Ainazi is already benefitting, Helsingen Sanomat says, with the appropriately named SuperAlko store visible from the Estonian border and offering cheaper prices than its Baltic neighbours.

Let’s toast to tax competition!

Last but not least, I’m a giant fan of decentralization and a partial fan of secession (done properly and for good reasons), but you don’t automatically get results.

Consider what’s happening in Scotland, as reported by the U.K.-based Times.

Nicola Sturgeon has given her clearest indication to date that Scots will be in line for substantial income tax rises next year. In an interview due to be published today the first minister dismissed suggestions that a high-tax agenda would deter businesses, arguing instead that paying for good public services could be just as attractive to investors and people as low taxes. Ms Sturgeon’s comments came as the Scottish parliament backed a motion calling for higher taxes to pay for public services.

Ugh. I’m sympathetic to Scottish independence, but stories like this make me pessimistic about what will happen if politicians like Sturgeon are in charge of an independent nation.

Assuming, of course, she’s actually ignorant enough to believe that investors want higher taxes.

And I haven’t written about whether Catalonia should be independent of Spain, but this blurb from the EU Observer leaves a sour taste in my mouth.

Catalonia’s regional government said Monday that increases in staff at the tax office, from 321 to 800, have made the Spanish region ready to collect taxes for an independent Catalonia if citizens vote for independence on 1 October. A law to organise the referendum will be to a vote on Wednesday, but the national government in Madrid has dismissed the bill as a way to “cheat democracy”.

Technically, this won’t be bad news if the 479 new tax bureaucrats replace a similar number (or larger number) of officials that formerly harassed people on behalf of the national government in Madrid.

But I’m automatically suspicious that politicians and bureaucrats will maneuver to be the winners of any change. This isn’t an argument against secession, but it is a warning that independence won’t yield economic benefits if there’s no reduction in the burden of government.

Advocates of an independent Catalonia should first and foremost be making plans to unleash the private sector, to make themselves the Hong Kong or Singapore of Europe.

Assuming, of course, that they would want their new country to be highly ranked by Economic Freedom of the World.

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The world’s best welfare state arguably is Finland.

Yes, the burden of government spending is enormous and the tax system is stifling, but the nation gets extremely high scores for rule of law and human liberty. Moreover, it is one of the world’s most laissez-faire economies when looking at areas other than fiscal policy.

Indeed, depending on who is doing the measuring, Finland ranks either slightly above or slightly below the United States when grading overall policy.

Yet even the best welfare state faces a grim future because of demographic change. Simply stated, redistribution programs only work if there is a sufficiently large supply of new taxpayers to finance promised handouts.

And that supply is running dry in Finland. Bloomberg reports that policymakers in that nation are waking up to the fact that there won’t be enough future taxpayers to finance the country’s extravagant welfare state.

Demographics are a concern across the developed world, of course. But they are particularly problematic for countries with a generous welfare state, since they endanger its long-term survival. …the Aktia Bank chief economist said in a telephone interview in Helsinki. “We have a large public sector and the system needs taxpayers in the future.” …According to the OECD, Finland already has the lowest ratio of youths to the working-age population in the Nordics. …And it also has the highest rate of old-age dependency in the region. …The situation is only likely to get worse, according to OECD projections.

Here are a couple of charts showing dramatic demographic changes in Nordic nations. The first chart shows the ratio of children to working-age adults.

And the second charts shows the population of old people (i.e., those most likely to receive money from the government) compared to the number of working-age adults.

As you can see, the numbers are grim now (green bar) but will get far worse by the middle of the century (the red and black bars) because the small number of children today translates into a small number of working-age adults in the future.

To be blunt, these numbers suggest that it’s just a matter of time before the fiscal crisis in Southern Europe spreads to Scandinavia.

Heck, it’s going to spread everywhere: Western Europe, Eastern Europe, Asia, the developing world, Japan and the United States.

Though it’s important to understand that demographic changes don’t necessarily trigger fiscal and economic problems. Hong Kong and Singapore have extremely low fertility rates, yet they don’t face big problems since they are not burdened by western-style welfare states.

By the way, the article also reveals that Finland’s government isn’t very effective at boosting birthrates, something that we already knew based on the failure of pro-natalist government schemes in nations such as Italy, Spain, Denmark, and Japan.

Though I’m amused that the reporter apparently thinks government handouts are a pro-parent policy and believes that more of the same will somehow have a positive effect.

Finland, a first-rate place in which to be a mother, has registered the lowest number of newborns in nearly 150 years. …the fertility rate should equal two per woman, Schauman says. It was projected at 1.57 in 2016, according to Statistics Finland. That’s a surprisingly low level, given the efforts made by the state to support parenthood. …Finland’s famous baby-boxes. Introduced in 1937, containers full of baby clothes and care products are delivered to expectant mothers, with the cardboard boxes doubling up as a makeshift cot. …Offering generous parental leave…doesn’t seem to be working either. …The government has been working with employers and trade unions to boost gender equality by making parental leave more flexible and the benefits system simpler.

Sigh, a bit of research would have shown that welfare states actually have a negative impact on fertility.

The bottom line is that entitlement reform is the only plausible way for Finland to solve this major economic threat.

P.S. Since the nation’s central bank has published research on the negative impact of excessive government spending, there are some Finns who understand what should be done.

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The notion that government should automatically give everyone money – a policy known as “universal basic income” – is now getting a lot of attention.

From an economic perspective, I acknowledge that the idea should not be summarily rejected. Here’s some of what I wrote earlier this year.

…there actually is a reasonable argument that the current welfare state is so dysfunctional that it would be better to simply give everyone a check instead.

But I’m nonetheless very skeptical. Simply stated, the math doesn’t work, people would have less incentive to work, and there would be “public choice” pressures to expand the size of the checks.

So when the topic came up as part of a recent interview, I criticized the proposal and praised Swiss voters for rejecting – by an overwhelming margin – a referendum that would have created a basic income in that nation.

My reaction was probably even more hostile than normal because I don’t like it when guilt-ridden rich people try to atone for their wealth by giving away my money.

Moreover, it’s silly for Zuckerberg to use Alaska as an example because of its oil wealth and small population.

That being said, if I had more time, I would have been more nuanced and pointed out that we hopefully will learn more from some of the experiments that are happening around the world. Especially what’s happening on the other side of the north pole from Alaska.

The New York Times published an in-depth preview of Finland’s experiment late last year. Here’s a description of the problem that Finnish policymakers want to solve.

…this city has…thousands of skilled engineers in need of work. Many were laid off by Nokia… While entrepreneurs are eager to put these people to work, the rules of Finland’s generous social safety net effectively discourage this. Jobless people generally cannot earn additional income while collecting unemployment benefits or they risk losing that assistance. For laid-off workers from Nokia, simply collecting a guaranteed unemployment check often presents a better financial proposition than taking a leap with a start-up.

For anyone who has studied the impact of redistribution programs on incentives to work, this hardly comes as a surprise.

Indeed, the story has both data and anecdotes to illustrate how the Finnish welfare state is subsidizing idleness.

In the five years after suffering a job loss, a Finnish family of four that is eligible for housing assistance receives average benefits equal to 73 percent of previous wages, according to data from the Organization for Economic Cooperation and Development. That is nearly triple the level in the United States. …the social safety net…appears to be impeding the reinvigoration of the economy by discouraging unemployed people from working part time. …Mr. Saloranta has his eyes on a former Nokia employee who is masterly at developing prototypes. He only needs him part time. He could pay 2,000 euros a month (about $2,090). Yet this potential hire is bringing home more than that via his unemployment benefits. “It’s more profitable for him to just wait at home for some ideal job,” Mr. Saloranta complains.

So the Finnish government wants to see if a basic income can solve this problem.

…the Finnish government is exploring how to change that calculus, initiating an experiment in a form of social welfare: universal basic income. Early next year, the government plans to randomly select roughly 2,000 unemployed people — from white-collar coders to blue-collar construction workers. It will give them benefits automatically, absent bureaucratic hassle and minus penalties for amassing extra income. The government is eager to see what happens next. Will more people pursue jobs or start businesses? How many will stop working and squander their money on vodka? Will those liberated from the time-sucking entanglements of the unemployment system use their freedom to gain education, setting themselves up for promising new careers? …The answers — to be determined over a two-year trial — could shape social welfare policy far beyond Nordic terrain.

The results from this experiment will help answer some big questions.

…basic income confronts fundamental disagreements about human reality. If people are released from fears that — absent work — they risk finding themselves sleeping outdoors, will they devolve into freeloaders? “Some people think basic income will solve every problem under the sun, and some people think it’s from the hand of Satan and will destroy our work ethic,” says Olli Kangas, who oversees research at Kela, a Finnish government agency that administers many social welfare programs. “I’m hoping we can create some knowledge on this issue.” …Finland’s concerns are pragmatic. The government has no interest in freeing wage earners to write poetry. It is eager to generate more jobs.

As I noted above, this New York Times report was from late last year. It was a preview of Finland’s experiment.

People have been getting checks for several months. Are there any preliminary indications of the impact?

Well, the good news is that recipients apparently like getting free money. Here are some excerpts from a report by Business Insider.

…some of the 2,000 recipients are already reporting lower levels of stress. The $600 they receive each month might not be much, but it’s enough to put some people’s anxiety at ease.

But the bad news is that the handouts are giving people the flexibility to reject work.

Marjukka Turunen, head of Kela’s legal benefits unit, told Kera News. “There was this one woman who said: ‘I was afraid every time the phone would ring, that unemployment services are calling to offer me a job,'”… Scott Santens, a basic income advocate and writer…says basic income redistributes power into the middle-class — namely, to turn down unappealing jobs.

The last sentence of the excerpt is particularly worrisome. Some advocates think universal handouts are good precisely because people can work less.

It’s obviously too early to draw sweeping conclusions, especially based on a couple of anecdotes.

However, a recent column in the New York Times by two left-leaning Finns suggests that the data will not be favorable to universal handouts. The authors start with a basic explanation of the issue.

Universal basic income is generating considerable interest these days, from Bernie Sanders, who says he is “absolutely sympathetic” to the idea, to Mark Zuckerberg, Facebook’s chief executive, and other tech billionaires. The basic idea behind it is that handing out unconditional cash to all citizens, employed or not, would help reduce poverty and inequality… As a rich country in the European Union, with one of the highest rates of social spending in the world, Finland seemed like an ideal testing ground for a state-of-the-art social welfare experiment. …Kela, the national social-insurance institute, randomly selected 2,000 Finns between 25 and 58 years of age who were already getting some form of unemployment benefits. The subsidies were offered to people who had been unemployed for about one year or more, or who had less than six months of work experience.

But then they denigrate the study.

…the Finnish trial was poorly designed… The trial size was cut to one-fifth of what had originally been proposed, and is now too small to be scientifically viable. Instead of giving free money to everyone, the experiment is handing out, in effect, a form of unconditional unemployment benefits. In other words, there is nothing universal about this version of universal basic income. …The government has made no secret of the fact that its universal basic income experiment isn’t about liberating the poor or fighting inequality. Instead, the trial’s “primary goal” is “promoting employment,” the government explained in a 2016 document proposing the project to Parliament. Meaning: The project was always meant to incentivize people to accept low-paying and low-productivity jobs.

Maybe I’m reading between the lines, but it sounds like they are worried that the results ultimately will show that a basic income discourages labor supply.

Which reinforces my concerns about the entire concept.

Yes, the current system is bad for both poor people and taxpayers. But why would anyone think that we’ll get better results if we give generous handouts to everyone?

So if we replace all those handouts with one big universal handout, is there any reason to expect that somehow people will be more likely to find jobs and contribute to the economy?

Again, we need to wait another year or two before we have comprehensive data from Finland. But I’m skeptical that we’ll get a favorable outcome.

P.S. The Wizard-of-Id parody shown above contains a lot of insight about labor supply and incentives. As does this Chuck Asay cartoon and this Robert Gorrell cartoon.

P.P.S. Since I rarely write about Finland, I should point out that it is ranked #20 for economic liberty, only four spots behind the United States (and the country is more pro-market than America when looking at non-fiscal policy factors).

P.P.P.S. On the minus side, Finland has decided that broadband access is somehow a human right. On the plus side, the country’s central bank produces good research on the burden of government spending, and its former president understood the essential flaw of Keynesian economics.

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I’m a huge fan of the Fraser Institute’s Economic Freedom of the World.

I always share the annual rankings when they’re released and I routinely cite EFW measures when writing about individual countries.

But even a wonky economist like me realizes that there is more to life than economic liberty. So I was very excited to see that Ian Vásquez of the Cato Institute and Tanja Porčnik of the Visio Institute have put together The Human Freedom Index.

Here’s their description of the Index and some of the key findings.

The Human Freedom Index… presents a broad measure of human freedom, understood as the absence of coercive constraint. It uses 76 distinct indicators of personal and economic freedom… The HFI covers 152 countries for 2012, the most recent year for which sufficient data is available. …The United States is ranked in 20th place. Other countries rank as follows: Germany (12), Chile (18), Japan (28), France (33), Singapore (43), South Africa (70), India (75), Brazil (82), Russia (111), China (132), Nigeria (139), Saudi Arabia (141), Venezuela (144), Zimbabwe (149), and Iran (152).

Hong Kong and Switzerland are the top jurisdictions.

Here’s the Freedom Index‘s top 20, including scores on both personal freedom and economic freedom.

The United States barely cracks the top 20. We rank #12 for economic freedom but only #31 for personal freedom.

It’s worth noting that overall freedom is strongly correlated with prosperity.

Countries in the top quartile of freedom enjoy a significantly higher per capita income ($30,006) than those in other quartiles; the per capita income in the least-free quartile is $2,615. The HFI finds a strong correlation between human freedom and democracy. Hong Kong is an outlier in this regard. The findings in the HFI suggest that freedom plays an important role in human well-being

And here are some notes on methodology.

The authors give equal weighting to both personal freedom and economic freedom.

One of the biggest challenges in constructing any index is the organization and weighting of the variables. Our guiding principle is that the structure should be simple and transparent. …The economic freedom index receives half the weight in the overall index, while safety and security and other personal freedoms that make up our personal freedom index receive the remaining weight.

Speaking of which, here are the top-20 nations based on personal freedom. You can also see how they scored for economic freedom and overall freedom.

To be succinct, Northern European nations dominate these rankings, with some Anglosphere jurisdictions also getting good scores.

It shouldn’t be a surprise to learn that nations with economic freedom also tend to have personal freedom, but there are interesting exceptions.

Consider Singapore, with ranks second for economic freedom. That makes the country economically dynamic, but Singapore only ranks #75 for personal freedom.

Another anomaly is Slovenia, which is in the top 20 for personal freedom, but has a dismal ranking of #105 for economic freedom.

By the way, the only two nations in the top 10 for both economic freedom and personal freedom are Switzerland and Finland.

I’ve already explained why Switzerland is one of the world’s best (and most rational) nations. Given Finland’s high ranking, I may have to augment the nice things I write about that country, even though I’m sure it’s too cold for my reptilian temperature preferences.

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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.
Again, he has additional details about Sweden.
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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Forget the Magna Carta and the Constitution. Finland is now on the cutting edge of protecting, promoting, and guaranteeing fundamental rights. As the BBC story excerpted below reports, Finland has announced that broadband access is now a legal right! Yes, you’re reading it here first. But not just the right to broadband. Apparently one megabit per second is a human right today and 100 megabits per second is a human right by 2015. I gather this is the Finnish version of a “living, breathing” right. My only question, though, is whether older Finns can sue the government for failing to provide this right back in the awful, deprived days before Al Gore invented the Internet?
From 1 July every Finn will have the right to access to a 1Mbps (megabit per second) broadband connection. Finland has vowed to connect everyone to a 100Mbps connection by 2015. In the UK the government has promised a minimum connection of at least 2Mbps to all homes by 2012 but has stopped short of enshrining this as a right in law. The Finnish deal means that from 1 July all telecommunications companies will be obliged to provide all residents with broadband lines that can run at a minimum 1Mbps speed.

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According to the Legatum Institute, Finland is the world’s most prosperous nation, based on material well-being and certain social indicators. Other Nordic nations, as well as Switzerland and the Netherlands also rank above the United States. The variables that determined the ranking leave something to be desired from a libertarian perspective, but a column in the Wall Street Journal Europe, authored by the heads of the Legatum Institute and America Enterprise Institute, makes a valuable point about the the fact that the Nordic nations have very laissez-faire policies with the exception of large welfare states. This commitment to unfettered markets enables them to retain some dynamism, thus offsetting to some degree the negative impact of too much taxes and spending. As the column notes, this has important lessons – especially for the United States, which is moving toward bigger government and more intervention in private markets:

…free enterprise has come under attack with the global economic crisis, the perceived threat of climate change, and a broader concern—most recently promoted by French President Nicolas Sarkozy—that growth alone does not indicate prosperity. …Many people—especially Americans—think of wealth as the basis of health and happiness, too. In other words, market economies with good economic fundamentals drive us to more fulfilling lives. Europeans often counter that a narrow pecuniary viewpoint gives a distorted picture of the human experience. Worse yet, it can lead to the tyranny of materialism. Who is right? …While free enterprise is not the only important factor explaining national differences in well-being, it probably does explain most of it. This means subverting the mechanisms of free enterprise would not just lead to lower economic growth but also lower social scores. The fact that the Nordic countries do so well in the Prosperity Index has largely to do with the fact that apart from their welfare policies, they also encourage entrepreneurship, free trade, and have stable monetary policies—even as they employ strong rhetoric against capitalism. Finland, Sweden and Denmark all score higher than Switzerland and nearly all of their southern European counterparts on their capacity to commercialize innovation, through factors such as business start-up procedures, business registration rates, and royalties on patents. All of this drives dynamic entrepreneurship, and spurs people to innovate and take risks, as they are more reassured that good ideas will pay off. U.S. policy makers would do well to note this fact as they contemplate more “European” policies. And as the West contemplates ever tighter regulations on how and where money can be spent, lent and invested, their leaders should remember that economic and political liberty—while not the whole story—play a key role in prosperity. They are the engine driving much of what makes life worthwhile.

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