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What Can the United States Learn from the Nordic Model?, Cato Policy Analysis No. 603

What Can the United States Learn from the Nordic Model?, Cato Policy Analysis No. 603

Ratings: (0)|Views: 4,036 |Likes:
Published by Cato Institute
Executive Summary

Some policymakers in the United States and
Europe argue that it is possible to enjoy economic
growth and also have a large welfare state. These
advocates for bigger government claim that the socalled
Nordic Model offers the best of both worlds.

This claim does not withstand scrutiny. Economic
performance in Nordic nations is lagging,
and excessive government is the most likely explanation.
The public sector in Sweden, Denmark,
Norway, Finland, and Iceland consumes, on average,
more than 48 percent of economic output.
Total government outlays in the United States, by
contrast, are less than 37 percent of gross domestic
product. Revenue comparisons are even more
striking. Tax receipts average more than 45 percent
of GDP in Nordic nations, a full 20 percentage
points higher than the aggregate tax burden in
the United States.

This bigger burden of government hurts
Nordic competitiveness, both because government
spending consumes resources that could be
more efficiently allocated by market forces and
because the accompanying high tax rates discourage
productive behavior. A smaller state sector is
one reason why the United States is more prosperous.
Per capita GDP in the United States is
more than 15 percent higher than it is in the
Nordic nations. The gap is even larger when comparing
disposable income, private consumption,
and other measures that reflect living standards.

Notwithstanding problems associated with a
large welfare state, there is much to applaud in
Nordic nations. They have open markets, low levels
of regulation, strong property rights, stable
currencies, and many other policies associated
with growth and prosperity. Indeed, Nordic
nations generally rank among the world's most
market-oriented nations.

Nordic nations also have implemented some
pro-market reforms. Every Nordic nation has a
lower corporate tax rate than the United States,
for example, and most of them have low-rate flat
tax systems for capital income. Iceland even has
a flat tax for labor income. And both Iceland and
Sweden have partially privatized their social
security retirement systems.

The Nordic nations offer valuable lessons for
policymakers, but they do not fit the traditional
stereotype. Conservative critics correctly condemn
the large welfare states, but often overlook
the positive results generated by laissez-faire
policies in other areas. Liberals, meanwhile, exaggerate
the economic performance of Nordic
nations in an effort to justify welfare-state policies,
while failing to acknowledge the role of freemarket
policies in other areas.
Executive Summary

Some policymakers in the United States and
Europe argue that it is possible to enjoy economic
growth and also have a large welfare state. These
advocates for bigger government claim that the socalled
Nordic Model offers the best of both worlds.

This claim does not withstand scrutiny. Economic
performance in Nordic nations is lagging,
and excessive government is the most likely explanation.
The public sector in Sweden, Denmark,
Norway, Finland, and Iceland consumes, on average,
more than 48 percent of economic output.
Total government outlays in the United States, by
contrast, are less than 37 percent of gross domestic
product. Revenue comparisons are even more
striking. Tax receipts average more than 45 percent
of GDP in Nordic nations, a full 20 percentage
points higher than the aggregate tax burden in
the United States.

This bigger burden of government hurts
Nordic competitiveness, both because government
spending consumes resources that could be
more efficiently allocated by market forces and
because the accompanying high tax rates discourage
productive behavior. A smaller state sector is
one reason why the United States is more prosperous.
Per capita GDP in the United States is
more than 15 percent higher than it is in the
Nordic nations. The gap is even larger when comparing
disposable income, private consumption,
and other measures that reflect living standards.

Notwithstanding problems associated with a
large welfare state, there is much to applaud in
Nordic nations. They have open markets, low levels
of regulation, strong property rights, stable
currencies, and many other policies associated
with growth and prosperity. Indeed, Nordic
nations generally rank among the world's most
market-oriented nations.

Nordic nations also have implemented some
pro-market reforms. Every Nordic nation has a
lower corporate tax rate than the United States,
for example, and most of them have low-rate flat
tax systems for capital income. Iceland even has
a flat tax for labor income. And both Iceland and
Sweden have partially privatized their social
security retirement systems.

The Nordic nations offer valuable lessons for
policymakers, but they do not fit the traditional
stereotype. Conservative critics correctly condemn
the large welfare states, but often overlook
the positive results generated by laissez-faire
policies in other areas. Liberals, meanwhile, exaggerate
the economic performance of Nordic
nations in an effort to justify welfare-state policies,
while failing to acknowledge the role of freemarket
policies in other areas.

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Some policymakers in the United States andEurope argue that it is possible to enjoy economicgrowth and also have a large welfare state. Theseadvocates for bigger government claim that the so-called Nordic Model offers the best of both worlds.This claim does not withstand scrutiny. Eco-nomic performance in Nordic nations is lagging,and excessive government is the most likely expla-nation. The public sector in Sweden, Denmark,Norway, Finland, and Iceland consumes, on aver-age, more than 48 percent of economic output.Total government outlays in the United States, by contrast, are less than 37 percent of gross domes-tic product. Revenue comparisons are even morestriking. Tax receipts average more than 45 per-cent of GDP in Nordic nations, a full 20 percent-age points higher than the aggregate tax burden inthe United States.This bigger burden of government hurtsNordic competitiveness, both because govern-ment spending consumes resources that could bemore efficiently allocated by market forces andbecause the accompanying high tax rates discour-age productive behavior. A smaller state sector isone reason why the United States is more pros-perous. Per capita GDP in the United States ismore than 15 percent higher than it is in theNordic nations. The gap is even larger when com-paring disposable income, private consumption,and other measures that reflect living standards.Notwithstanding problems associated with a large welfare state, there is much to applaud inNordic nations. They have open markets, low lev-els of regulation, strong property rights, stablecurrencies, and many other policies associatedwith growth and prosperity. Indeed, Nordicnations generally rank among the world’s mostmarket-oriented nations.Nordic nations also have implemented somepro-market reforms. Every Nordic nation has a lower corporate tax rate than the United States,for example, and most of them have low-rate flattax systems for capital income. Iceland even hasa flat tax for labor income. And both Iceland andSweden have partially privatized their socialsecurity retirement systems.The Nordic nations offer valuable lessons forpolicymakers, but they do not fit the traditionalstereotype. Conservative critics correctly con-demn the large welfare states, but often overlookthe positive results generated by laissez-fairepolicies in other areas. Liberals, meanwhile, exag-gerate the economic performance of Nordicnations in an effort to justify welfare-state poli-cies, while failing to acknowledge the role of free-market policies in other areas.
What Can the United States Learn fromthe Nordic Model? 
by Daniel J. Mitchell
_____________________________________________________________________________________________________
 Daniel J. Mitchell is a senior fellow at the Cato Institute.
Executive Summary 
No. 603November 5, 2007
� 
 
Introduction
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.”
1
Foreign-aid advocate Jeffrey Sachs claims,“The Nordic countries outperform the Anglo-Saxon ones on most measures of economic performance.”
2
 An article in the
 International HeraldTribune
states, “European leaders want toknow how Sweden and its Nordic neigh-bors, so heavily laden with cradle-to-grave welfare systems, float high.”
3
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.
4
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.
5
Unemployment ratesare all below 9 percent, with Iceland enjoying a  jobless rate of just 2.6 percent.
6
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.
7
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
2
America has amedium-sizewelfare state andthe Nordicnations havelarge welfarestates. Thatexplains, at leastin part, why theU.S. economy generally outperforms theNordic Model.
 
higher in America, unemployment is lower,and long-term growth is more impressive.High levels of government spending in Nordicnations have hindered economic performance.Excessive spending invariably creates a cultureof dependency and misallocates a nation’s eco-nomic resources. A heavy burden of govern-ment also requires an onerous tax burden, evenif a government seeks to raise revenue in a rela-tively nondestructive manner.
Comparing the United Statesand the Nordic Nations
The two main ways of comparing eco-nomic performance are rate of growth andlevel of output. One measures how fast grossdomestic product (or some similar measureof economic output) is expanding. The othercompares the absolute level of economic out-put (or some similar measure of prosperity).By both measures, the Nordic nations gener-ally do not fare well when compared to theUnited States.The OECD and the International Monetary Fund publish comprehensive economic data that can be used to compare growth rates in America and the five Nordic countries.
8
 As seenin Figure 1, this data shows that the UnitedStates has enjoyed a faster rate of growth. According to the OECD, the U.S. grew by anaverage of 3 percent between 1981 and 1991and 3.3 percent between 1992 and 2006 (mean-ing average growth of 3.2 percent for 1981 to2006). The Nordic nations, by contrast, grew by an average of 2.2 percent between 1981 and1991 and 2.7 percent from 1992 to 2006(meaning average growth of 2.5 percent overthe entire period). The IMF, meanwhile,reports that U.S. growth averaged 3.1 percentfrom 1981–2006 compared to an average of 2.6percent for Nordic nations in the same period.
9
Some might argue that the faster rate of economic growth in the United States is theresult of more rapid population growth. Butthat explains only a fraction of the difference.Moreover, differences in population growthare irrelevant when examining per capita eco-nomic output, and America clearly enjoys a 
3
Measures of percapita GDP fromthe World Bank,the OECD, theIMF, and the CIAall show thatAmericans haveabout $6,000of additionaleconomic outputper person.
United StatesUnited StatesUnited StatesNordicNationsNordicNationsNordicNations1.0%1.5%2.0%2.5%3.0%3.5%OECD (19811991)OECD (19922006)IMF (19812006)
Figure 1FasterGrowth in the United States
Sources: Organization for Economic Cooperation and Development, International Monetary Fund.
   A  n  n  u  a   l   E  c  o  n  o  m   i  c   G  r  o  w   t   h

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