Is Scandinavia Really a Socialist Paradise?

It is taken for granted in countless ill-informed Facebook memes that the Nordic countries are the happiest, healthiest and most prosperous on earth, and that this is thanks to their huge welfare states, generous social services and compassionate regulations that afford workers high minimum wages, lengthy holidays and enviable benefits.

The “Scandinavia-is-rich-because-of-socialism” myth is incredibly persistent, and is thrown out triumphantly by those who believe that every thinking person should support the adoption of Nordic-style socialism, as a manifestly superior alternative to US-style cowboy capitalism.

There are a few important things to consider in response to the claim that these countries are much more prosperous than they should be according to free market ideologues: firstly, the Nordic states are not as perfect as they are cracked up to be; and secondly, they are not, and have not always been historically, as socialist as one might think.

But even if they are, pointing out that these few countries are surprisingly successful is like pointing out that you personally know a few people who have smoked all their lives and have not died of cancer. It is interesting that many cite the examples of Sweden and Denmark as evidence that high government spending does not impede economic prosperity, but never seem to cite France, Italy or Greece, all of which have governments that swallow up a very similar proportion of GDP. All these countries also have generous welfare states and pensions, and spend a huge faction of their income on health and social services.

Moreover, wealth, health and other markers of human prosperity are not dependent exclusively on a nation’s economic system. Culture matters. The Protestant work ethic is probably a very real phenomenon, and probably contributes to Scandinavians’ wealth independent of the size of government or the welfare state. There could also be something about a culture that comes from centuries living in a freezing cold country where there is nothing to do but stay inside and work, and where every grain of wheat must be fastidiously harvested and stored for the long, harsh winter that instils discipline and values of hard work and productivity in people, as opposed to living in a warm, sunny country with nothing to do but sit around eating olives and drinking red wine à la Greece and Italy.

A high life expectancy in Scandinavia relative to the US is also paraded around as a consequence of Nordic socialism by leftists running victory laps. But again, irrespective of economic policy, a culture of eating herring and going for long hikes will yield a higher life expectancy than a culture of eating cheeseburgers and driving everywhere.

That is why, even though Scandinavians are quite wealthy and healthy, Scandinavians in America are even richer and in even better shape. As Nima Sanandaji, president of the European Centre for Entrepreneurship and Policy Reform notes, Nordic Americans, who number around 12 million in total, enjoy around 50% higher income than their cousins back in Scandinavia, and enjoy a longer lifespan. They also enjoy lower unemployment, lower school dropout rates and lower poverty rates. And all of this is true of Danes, Finns, Swedes and Norwegians and even when comparing Scandinavians with similar levels of education.

So a fair amount of the success of Scandinavian nations can be attributed to culture, which immigrants can take with them when they move across continents.

Demography also matters. The Nordic countries are generally far less ethnically diverse than the US or Australia. Countries with higher levels of recent immigrants will likely report higher levels of inequality, despite this not being the result of injustice. For example, Latino Americans have a lower average income than white Americans, and it cannot be simply due to racism, given that Japanese Americans- who have been so discriminated against that they were at one point interned in camps- are far wealthier than whites on average. This has a huge amount to do with cultural differences, such as the amount of importance different communities generally ascribe to education, saving and professional advancement, but also simply the amount of time both groups have had to accumulate capital and wealth in their adopted countries. When more of a society comes from a similar background, as is the case in Scandinavia, as well as countries such as Japan, less inequality is likely to result.

But there is another reason why Scandinavian countries are rich, and it’s surprising: laissez-faire.

For one thing, all these countries impose lower corporate tax rates than the United States or Australia. While the US and Australian governments clobber their countries for 35% and 30% respectively, Norway levies 25%, Denmark 22%, and Sweden, Finland and Iceland all charge a modest 20%.

Perhaps most importantly, while the Nordic countries have higher rates of taxation and spending overall than, say, America or Australia (although government spending as a percentage of GDP is actually higher in America than in Norway), they more or less make up for it with their policies of free trade and minimal government interference into markets.

For one thing, Sweden, Finland, Norway, Denmark and Iceland have no minimum wage, so you can forget about that. True, trade unions often negotiate de facto minimum wages in certain industries, but that is by no means exclusive to Scandinavia. Nordic countries also rank highly on the most authoritative Index of Economic Freedom, compiled by the Heritage Foundation and the Wall Street Journal, in which Denmark ranks one spot behind the USA, and ranks higher in business freedom, investment freedom, trade freedom and property rights, with other Nordic countries close behind. In fact, the Prime Minister of Denmark recently implored an audience at Harvard University to stop calling Denmark ‘socialist’, when it is in fact a ‘market economy’.

Nevertheless, it is true that the Nordic countries tax and spend more than Anglophone countries, so to that extent, they are more ‘socialist’ than we are.

Of course, Scandinavian countries are by no means perfect: Denmark’s real GDP per capita is 5% lower than it was in 2007, and it is not because of ‘neo-liberal’ austerity: government spending has increased substantially since then. Many other Scandinavian countries (with the possible exception of petro-state Norway) are also beset with the problems of ‘Eurosclerosis’- sluggish growth and high unemployment, particularly following the Global Financial Crisis.

So the Nordic countries are a mixed bag both in terms of their economic system and in terms of their economic results. Socialists might say that they are successful because of their generous government spending and unsuccessful because of their lax oversight of trade and commerce, while free-marketeers might argue the opposite.

To resolve this argument, we must look at the precises sources of Scandinavia’s prosperity and its economic woes. Once we do this, it is clear that the pro-socialism narrative falls apart. Scandinavian countries routinely rank very well on measures of labour productivity, business efficiency and transaction costs. By contrast, they have scandalous levels of labour-market non-participation and welfare dependency. In 2009, 59 out of 98 Danish municipalities could boast a majority of residents working, but that number had dropped to three by 2013. And in the near future, with fewer and fewer people working, Denmark will have a simply herculean task paying for the extremely generous pensions of its growing elderly population.

Moreover, out of a population of 5.6 million, a whopping 240,000 people, or 9% of the total workforce, receive lifetime disability pensions from the government.

So you need to approach the issue of the Nordic countries with an antecedent body of economic theory: what is the theory behind the notion that really high taxes and welfare spending make a country prosperous? There really isn’t any. By contrast, it is very easy to see the mechanism behind the hypothesis that high taxes and generous benefits discourage work and encourage dependency. And- surprise, surprise- that is Exactly. What. Happens. And this seems to be behind most of the problems that plague these otherwise generally strong economies.

But most importantly, it is vital not to put the cart before the horse. History shows that Nordic countries like Sweden only adopted generous welfare states after they became fabulously wealthy thanks to limited government and free enterprise.

The easiest way to amass a small fortune is to start with a large fortune and fritter most of it away. And this is essentially what Nordic countries have done in past decades.

It is true that Sweden is about the eleventh richest country in the world (although Australia and the United States both rank higher). However, in 1960 and as late as 1970, it was the fourth richest country in the world. Did it build that wealth on the back of high taxes, stiff regulation of labour markets and a large welfare state? Pffffff. On the contrary, government spending in Sweden during the first few decades of the 20th Century was under 10% of GDP (compared to around 50% today) and in the 1950s, Sweden still lad lower taxes and less government spending than the United States.

Moreover, the fact that Denmark has a higher life expectancy than the US by 1.5 years is often touted as a result of Nordic socialism. But actually, in 1960, Denmark had lower taxes than the United States, and enjoyed a 2.5-year longer life expectancy.

The Nordic countries were not always big welfare states. Most of them became rich through their adherence to the free enterprise system. To return to the case of Sweden, it was not until the 1960s and 1970s, by which time it was already one of the richest countries in the word, that social democrats began hiking taxes and public spending, with ruinous consequences.

By the 1990s, Sweden had fallen down global wealth rankings and had not created a single net private sector job in that time. At the same time, it was gripped by a fiscal crisis and its deepest recession since the 1930s, as well as repeated currency devaluations as investors deserted the krona. In 1992, the Swedish central bank raised interest rates to 500% (yes, 500%) in a desperate attempt to save the value of the currency.

All of this doesn’t exactly scream economic health. So the government had to largely abandon the ‘Swedish model’. Government spending, which had peaked at almost 70% of GDP, was eventually cut to below 50%. Markets were liberalised, trade unions were stripped of some of their privileges and welfare was rolled back- for example, whereas Swedes used to be eligible for four years of unemployment benefits, this was cut to two. Since these free market reforms, Swedish prosperity has bounced back significantly.

So at the most superficial level, and to those who care little about intellectual rigour, it might seem like the Scandinavian countries are a standing reproof to “neoliberal” economic theory. But if you look a little closer ad examine the complexities of the issue- their economic strengths and weaknesses, their history and their actual economic and social policies- it becomes clear that the Nordic countries are not an exception the supposed rule, but strong confirming evidence of the efficacy of limited government and free markets and the destructive nature of socialism, even in its most benign and cuddly form.

John Hajek

John Hajek is the IPA Campus Coordinator at the University of Melbourne.

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