The Scandinavian countries economies are based off of the Nordic Model. Features of the Nordic Model include:
Welfare state programs such as:
-Universal healthcare and free education
-High percentage of workers belonging to unions
-High government spending as a percentage of GDP/ high tax burden
They also have free market traits including:
-Strong property rights, contract enforcement, and overall ease of doing business.
-Low barriers to free trade
- Little product market regulation. Nordic countries rank very high in product market freedom according to OECD rankings
- In many aspects of economic freedom, such as business, monetary, and investment freedom, Scandinavian countries are actually more free than the United States
Basic economic theory as well as research and empirical evidence has continuously suggested that high levels of taxation and government debt seriously retard economic growth. As the charts below show, the evolution of prosperity in the Scandinavian countries has stagnated significantly in the last few decades, not coincidently with the development of their welfare states. For example,”according to OECD figures, Denmark was the 5th most prosperous economy in the world in 1970, immediately behind Switzerland and the United States. In 2004, Denmark was 10th.” (1)
Additionally, when we look to the graphs below we can note that job creation and worker productivity has also remained stagnant. This could be as a result of the high levels of unionization, but that is speculation on my part.
It is also worth noting that in recent decades, Ireland has had drastic reductions in tax rates with positive results. “In barely 18 years Ireland jumped from the 22nd to the 4th place in the OECD prosperity ranking. Ireland did not reduce its social welfare benefits. On the contrary. The unprecedented growth led to an increase of fiscal revenue and social expenditure. It was sufficient to improve the productivity of the government.” (1)
Despite all the praise of the Nordic Model, the United States has higher per capita GDP than every Scandinavian country with the exception of Norway (which is rich with oil and natural gas).
However, it is worth noting that Americans have a higher disposable income before and after taxes. Basically, the
Americans cost of living is significantly less. (2)
Dan Mitchell of the Cato Institute conducted a policy anaylsis of the Scandinavian countries economic models. He argues that the prosperity of the Scandinavian nations is not due to the welfare state, but rather its free market policies of the 1960’s and 1970’s. (3)
“Before the 1960s, Nordic nations had modest levels of taxation and spending. They also enjoyed — and still enjoy — laissez-faire policies and open markets in other areas. This expansion of government has slowed growth,” Mitchell writes, “And the United States has maintained a steady advantage over Nordic nations in per capita GDP.”
He then goes on to note that the United States outperforms the Scandinavian countries:
“Whether measured by annual growth rates or levels of output, income, or consumption, Nordic nations have inferior economic performance when compared to the United States”
He also goes on to explain that one aspect of the economy that the Scandinavian nations do get right is their corporate tax policy:
“Corporate income in the United States is taxed at 39.3 percent, while the tax rate in Nordic nations is no higher than 28 percent. American firms face a competitive disadvantage in this key measure.”
In conclusion, the successes of the Scandinavian countries are not exactly due to an ever expanding welfare state, but rather their historical friendliness to free markets. However, probably as a result of recent decades of government expansion, the Scandinavian countries have been lagging behind many other countries they once outperformed in economic prosperity.