Misreading the Nordic Model

Bernie Sanders, the left-wing populist who for months competed with Hillary Clinton in the Democratic primary, has popularized a simple vision for reform: introduce a Nordic-style welfare state in the United States. In a debate with Clinton, Sanders explained that his aim is to popularize the concept of Scandinavian democratic socialism: “I think we should look to countries like Denmark, like Sweden and Norway, and learn what they have accomplished for their working people.”

Sanders and his supporters are not alone in praising the Nordic model. In 2013, President Barack Obama followed suit by making the first bilateral visit by a U.S. president to Sweden, complimenting his hosts about their country’s economic model. He escalated the praise at a U.S.-Nordic summit in May 2016, where he explained: "In a world of growing economic disparities, Nordic countries have some of the least income inequality in the world—which may explain one of the reasons that they're some of the happiest people in the world, despite not getting much sun. . . . There have been times where I’ve said, why don’t we just put all these small countries in charge for a while? And they could clean things up."

Admiration for the Nordic welfare state runs deep among U.S. academics, journalists, and politicians on the left. It’s easy to understand why—at first glance, the Nordic countries appear prosperous yet enjoy equal distribution of wealth and good social outcomes. A closer look, however, shows that what American liberals like about Nordic societies is not a product of socialism. The success of Nordic countries has more to do with their unique culture—and free markets—than with their welfare state policies.

NORDIC CAPITALISM

A 2015 story by PBS titled “What Can the U.S. Learn from Denmark?” is a good example of how many Americans view Scandinavia. The article heaps praise on the Danish social model, explaining that “Danes get free or heavily subsidized health care” and “compensation when they’re unemployed, out sick from work, or on parental leave.” It notes Denmark’s high taxes, strong labor unions, and heavy state involvement in the economy. It suggests that these policies explain why Danes live, on average, 1.5 years longer than Americans.

All these statements are of course true, but they lack historical perspective. Danes today outlive their American counterparts, but not because Denmark has the highest tax-to-GDP ratio in the developed world. As late as 1960, taxes in Denmark were actually lower than in the United States (25 percent of GDP compared with 27 percent), yet at the time, Danes lived 2.4 years longer than Americans—well before the creation of the Danish welfare state. In Sweden and Norway, too, the gap in life span compared with the United States is smaller today than it was in the mid–twentieth century, when their public sectors were relatively less developed. Child mortality follows a similar trend: when Nordic countries had small welfare states, they were further ahead compared with the rest of the world than they are today.

The positive influence of the welfare state on overall prosperity is similarly exaggerated. In fact, prosperity in the Nordic countries has increased faster in periods of economic freedom than in those of democratic socialism. The example of Sweden is instructive. In the latter half of the nineteenth century, liberal politicians such as Johan August Gripenstedt, minister of finance from 1856 to 1866, introduced reforms designed to secure business freedom, free trade, and strong protections for property rights. From around 1870 to 1936, Sweden pursued pro-market economic policies and was rewarded with an average yearly growth rate of two percent—the highest of any western European nation during the period and twice as high as rates of leading economies such as that of the United Kingdom.

In 1936, the Swedish Social Democratic Party was able to form its first majority government. The Social Democrats went on to dominate Swedish political life until 1970, slowly raising taxes and expanding the welfare state while, for the most part, leaving the market-oriented policies of their predecessors in place. During these years, Sweden’s growth rate rose to 2.9 percent. Although higher in absolute terms than before—a product of technological growth and the postwar boom—this was around the western European average. (Austria, for instance, grew by a yearly average of 3.5 percent over the same period.)

Then, between 1970 and 1991, Sweden—unlike other Nordic countries—experimented with third way socialism. The pinnacle of these policies was the introduction of “employer funds,” a system through which ownership of private firms would slowly be transferred to funds run by the labor unions. Sweden’s average growth rate fell to 1.4 percent, the second lowest in western Europe, and many successful businesses and individuals left the country. The socialist experiment was followed by an era of renewed focus on market reforms, reduced generosity of welfare programs, and significant tax reductions. The reforms paid off: between 1991 and 2014, Sweden’s growth rate rose to 1.8 percent—placing the country only slightly behind the United Kingdom, which had the highest rate in western Europe during this period.

CULTURE SHOCK

In addition to economic growth, American admirers of the Nordic societies often focus on their social attributes, such as high levels of income and wealth equality. Yet as I show in my book, many of these attributes largely predate the welfare state. For instance, in a 2008 study of top incomes in Sweden, the economists Jesper Roine and Daniel Waldenstrom explain that “most of the decrease [in income equality in Sweden] takes place before the expansion of the welfare state and by 1950 Swedish top income shares were already lower than in other countries.” A 2013 study by Anthony Barnes Atkinson and Jakob Egholt Sogaard reached a similar conclusion for Denmark and Norway. As my brother, the economist Tino Sanandaji, explains in another paper from 2012: “American scholars who write about the success of the Scandinavian welfare states in the postwar period tend to be remarkably uninterested in Scandinavia’s history prior to that period. Scandinavia was likely the most egalitarian part of Europe even before the modern era. For example, it was the only major part of Western Europe that never developed full-scale feudalism and never reduced its farmers to serfdom.”

American scholars who write about the success of the Scandinavian welfare states in the postwar period tend to be remarkably uninterested in Scandinavia’s history prior to that period.

Good social outcomes in the Nordic countries predate the welfare state because what makes Nordic societies unique is related not to policy—large welfare states can also be found in countries such as Belgium, France, and Spain—but to culture. Over 100 years ago, German sociologist Max Weber observed that Protestant countries in northern Europe tended to have higher living standards, better academic institutions, and more well-functioning societies than countries in other parts of Europe. He attributed their success to the “Protestant work ethic.” Swedish scholar Assar Lindbeck later built upon this theory by looking at factors other than religion. For instance, he explained that in the hostile environment of preindustrial Scandinavia, it was difficult to survive as a farmer without working exceptionally hard. The population therefore adopted out of necessity a culture with a great emphasis on individual responsibility, honesty, trust, punctuality, and hard work.

These cultural attributes help explain why Nordic nations developed high levels of prosperity and low levels of poverty during the small-government era of the late nineteenth and early twentieth centuries. The welfare states were introduced only once Nordic societies had already become prosperous and equal. Everything that Bernie Sanders, Barack Obama, and other leading Democrats admire about Nordic countries already existed in the middle of the twentieth century, when these societies had small public sectors and low taxes. In fact, these outcomes can be found in the United States, too, among a specific group of people: Americans with Nordic ancestry.

It is instructive to compare citizens of the Nordics with Nordic Americans. Historically, impoverished people in the Nordic countries were more likely than the rich to sail across the Atlantic to start new lives. Yet despite coming from the poorest rungs of Nordic society, Nordic Americans have become much more affluent than their cousins back in Europe. Today, measured by GDP per capita, Danish Americans’ living standards are 55 percent higher than those of Danes; living standards of Swedish Americans are 53 percent higher than those of Swedes; and Finnish Americans’ living standards are 59 percent higher than the Finns’. Even for Norwegian Americans, who lack the oil wealth of Norway, living standards outpace those of the Norwegians by three percent.

Nordic Americans are also more socially successful than their cousins in the Nordic countries. They have much lower high school dropout rates, much lower unemployment rates, and even slightly lower poverty rates. Their success cannot be a result of the Nordic welfare state. Rather, Nordic Americans rely on the same culture of success that has enabled social progress in their countries of origin.  

NO MAGIC FORMULA

The simple truth is that there is nothing magical about the Nordics. Like other countries, they have thrived economically in periods of free market reforms and have stagnated when taxes and government involvement in the economy have increased. Their social success predates the welfare state and is no more or less impressive than the social success of Nordic Americans. And as I show in Debunking Utopia, norms related to hard work and individual responsibility, which developed before the welfare state, have begun to change since it was introduced.

In recent years, a number of Nordic economists have linked the Nordic welfare state to evolving norms around work. The Danish economist Casper Hunnerup Dahl, for instance, has argued that there is a strong correlation between the expansion of Denmark’s welfare programs and a decrease in the Danish work ethic. The Swedish economist Martin Ljunge has found that Sweden’s generous sick leave insurance system has gradually increased the population’s desire to stay home from work, with younger Swedes 20 percent more likely to take sick days than their older counterparts, other circumstances being equal. Ljunge claims that “the higher demand for sick leave pay among the younger generations can be seen as a measure of how rapidly the welfare state affects attitudes toward the use of public benefits.” In the paper “Family Welfare Cultures,” the economists Gordon B. Dahl, Andreas Ravndal Kostol, and Magne Mogstad study the Norwegian disability insurance system, in which the benefits that claimants are granted often depend on the strictness of the judge who hears their case. The authors find that when a parent is granted disability insurance by a lenient judge, his or her adult children are significantly more likely to claim disability benefits in the future, with the effect increasing over time. So the lesson from Nordic countries is not that large welfare systems can be introduced without harming economic growth or creating a culture of welfare dependency—the lesson is that they will do precisely that.

It is easy to understand why so many Americans admire Nordic societies, even if they don’t always understand them. The point is not that Americans should stop admiring Nordic society, but rather that it is time to learn the true lesson from the Nordics—the importance of free markets, strong norms, and policies that encourage citizens to maintain those norms.