Economic policy debates frequently revolvearound the experiences of other nations.Conservatives often cite Hong Kong whenthey advocate the flat tax, Ireland as evidencefor lower corporate tax rates, and Australia and Chile to show the benefits of personalretirement accounts. Liberals often invoke theNordic nations as evidence that it is possibleto have a large welfare state without sacrificingtoo much growth.Proponents of this view argue that theUnited States should emulate Sweden, Den-mark, Norway, Finland, and Iceland. The so-called Nordic Model (alternatively known asthe Swedish Model or Scandinavian Model) isoften cited by those who want an alternative tothe supposedly Darwinistic free-market sys-tem of the Anglo-Saxon world. For instance:
A study published by a government-sub-sidized think tank in Brussels asserts,“The ‘Nordic’ and the ‘Anglo-Saxon’models are both efficient, but only theformer manages to combine both equi-ty and efficiency.”
Foreign-aid advocate Jeffrey Sachs claims,“The Nordic countries outperform the Anglo-Saxon ones on most measures of economic performance.”
An article in the
states, “European leaders want toknow how Sweden and its Nordic neigh-bors, so heavily laden with cradle-to-grave welfare systems, float high.”
The head of the Tax Policy Centre for theOrganization for Economic Cooperationand Development recently bragged thattaxes are twice as high in Sweden as they are in the United States, but that eco-nomic growth is twice as fast.
Some praise for the Nordic Model is under-standable. Compared to most other Europeannations, Nordic nations are doing well. Average annual growth rates over the past 10years range from 2.1 percent in Denmark to4.3 percent in Iceland.
Unemployment ratesare all below 9 percent, with Iceland enjoying a jobless rate of just 2.6 percent.
Per capita GDPalso is reasonably impressive, especially com-pared to most parts of the world, rangingfrom nearly $43,600 in oil-rich Norway toslightly more than $34,400 in Sweden.
Before drawing conclusions about thedesirability of the Nordic model, however, itis important to answer three relevant ques-tions:1. Why are Nordic nations relatively rich?2. Has the welfare state has helped or hin-dered these countries’ economic perfor-mance?3. Does the Nordic Model create moreprosperity than the (relatively speaking)limited-government model in the UnitedStates?The answer to all of those questions is thatNordic nations are reasonably successful inspite of the welfare state. Nordic countries ben-efit from institutions—such as property rights,stable currencies, and the rule of law—thatfacilitate economic growth. And although they have large welfare states and concomitantly high levels of taxation, their economic systemsin other respects are very market-oriented.Combined with the fact that before the mid-1960s the burden of government in Nordicnations was modest, these factors help explainwhy those countries today are relatively pros-perous.But relative prosperity does not imply thatthe welfare state is good for growth, and itcertainly does not suggest that the NordicModel should be adopted by nations withsmaller governments. The United States canlearn something from the Nordic Model, butthe main lesson is that a large welfare statereduces economic performance.The main difference between the Americansystem and the Nordic Model is that America has a medium-size welfare state and the Nordicnations have large welfare states. That explains,at least in part, why the U.S. economy general-ly outperforms the Nordic Model. Income is
America has amedium-sizewelfare state andthe Nordicnations havelarge welfarestates. Thatexplains, at leastin part, why theU.S. economy generally outperforms theNordic Model.