Debunking Utopia

by Nima Sanandaji

  If we systematically look at Nordic countries, we can make a number of observations about the direction of the Nordic-style welfare model. The first is that the generosity of the welfare systems has gradually been reduced. The following table shows the economic situation for an average family with one income-earner and two children who go from work to long-term unemployment. How much is the incentive for the family to return to work compared to remaining on benefits? In the United States a system exists where work is certainly more rewarded than welfare support. The average household would more than double their income by working rather than being supported by welfare. As late as 2001, Nordic countries had a quite different model. The incentives to work were small, and almost nonexistent in Denmark, where benefits would amount to 97 percent of the previous work income, leaving only a measly 3 percent as the reward for work. Since then every country in the Nordics has increased the incentives to work substantially, with the exception of Iceland, where work was already rewarded.

  HOW MUCH MORE (PERCENTAGE OF INCOME) WOULD A SINGLE-EARNER FAMILY MAKE BY WORKING COMPARED TO LONG-TERM UNEMPLOYMENT BENEFIT?2

  Source: OECD and author’s calculations. Based on average of net replacement rates over 60 months of unemployment, families qualified for cash household assistance and social assistance “top ups” (for a two-child, one-earner married couple); 2001 is the earliest and 2013 the latest years reported by the OECD.

  Sure, Nordic countries still have more generous welfare systems than the United States, but change has indeed taken place lately. During the last decade or so, their systems have moved much closer to the American one, as taxes for working households have been lowered while the benefit levels have been cut. Of course, one could still debate whether it is the American model – which today strongly rewards work – or the Nordic model – which today moderately rewards work – that is best. But if Nordic countries are the judge, their previous model, where work was barely rewarded, is out of the competition. Again, this makes sense. For some time, the Nordic welfare models could rely on the fact that their citizens had unusually strong norms related to work and responsibility. It was therefore feasible to have extremely generous welfare systems, where those who didn’t work could be given nearly the same standard of living as those who were working. As people norms gradually adapted to the new system, it became obvious that the social democratic model was eroding personal responsibility and leading to high costs for taxpayers. So the system was changed.

  Another recent change is that taxes have been cut. International observers often believe that Nordic people are somehow much more tolerant of high taxes than people who live elsewhere in the world. As noted previously, this is only a half-truth. All Nordic countries have over time moved toward hidden taxation. Around half of the true tax rate is simply hidden from people. If you have a friend in any Nordic country, you can try this for yourself. Ask him how much he pays in taxes, and don’t be surprised if his response sounds similar to the taxes paid in the United States.3 Still, even though taxes are hidden, the Nordic people have been pushing for lower rates.

  Bernie Sanders has called for a “political revolution” against “the billionaire class” in America. Of course, he has argued that the role model is Nordic social democracy: “If we know that in countries in Scandinavia, Denmark, Norway, Sweden, they are very democratic countries – the voter turnout is a lot higher than in the United States – and in those countries healthcare is a right, college education and graduate school is free, retirement benefits and childcare benefits are stronger … and in those countries government works for ordinary people and the middle class rather than, as is the case right now in our country, for the billionaires.”4 Granted, Nordic societies are somewhat more bent toward high taxes compared to America. But the difference in how much taxes the rich pay is not as large as one would imagine. As shown in the following table, the top tax rate in the United States is actually somewhat higher than in Iceland and Norway, and not much lower than in Denmark, Sweden, and Finland.

  While America has moved toward higher taxes, the Nordic countries have moved towards lower rates.

  Also, while America has moved toward higher taxes, the Nordic countries have moved toward lower rates. This is particularly true in Denmark and Norway, where the top income tax rates have been cut by 6.7 and 8.1 percentage points respectively between 2001 and 2014. If an American politician would have suggested this, she or he would likely have been accused of being a pet dog of the billionaire class. In reality, this change has taken place in the Nordics, in two countries which during this period have in part been ruled by social democrat governments. But of course, those who view the Nordic countries through a socialist Shangri-La lens often neglect to note that the very same countries have chosen the path of tax reductions. In Sweden the top rates have been increased somewhat. However, the total taxes have been reduced substantially due to the workfare policies, through which the taxes on low and medium incomes have been substantially cut. Even most of the rich are paying less taxes in total now, since the reductions of the lower rates also apply to them.

  TOP TAX RATE (INCLUDING SOCIAL SECURITY CONTRIBUTIONS)5

  Source: OECD Stat Extract and author’s calculations.

  Lastly, we can see that the days when the Nordic countries could actually be socialist are long gone. The countries in this part of the world certainly did experiment with democratic socialism during the 1970s. But as we saw previously, the socialist policies that were introduced, particularly in Sweden, proved to be such a failure that they were abandoned after some time. Since then a number of market reforms have been introduced. Denmark has, for example, moved toward quite flexible legislation when it comes to how workers are hired and fired. Sweden has since the 1990s opened up its publicly funded schools, publicly funded health care, and publicly funded elderly care for competition from private businesses. Voucher systems allow private firms to compete with the public sector in providing various forms of welfare. In addition, the Swedish pension system has been partially privatized, giving citizens some control over their mandated retirement savings. Arguably, in these regards Sweden is more of a capitalist country than America is.

  The Heritage Foundation each year creates an Index of Economic Freedom in partnership with the Wall Street Journal. The index goes through the economic policies of various countries in great detail and scores them accordingly to how free they are. A high score represents a capitalist, free-market system, while a low score represents a system with much government intervention, high taxes, and high public spending. As the following table shows, America has moved toward less economic liberty during the last few years. The Nordic countries, which had come far in adopting capitalism by the beginning of the twenty-first century, have continued to massively strengthen their economic freedom. The only exception is Iceland, which at the turn of the new millennium was already quite a capitalist country. Today the United States is only very marginally more economically free than Denmark. Let’s think about this a bit. The United States is barely more capitalist than Denmark. And while America has moved toward less capitalism and higher taxes on the rich, Denmark has moved – much faster – in precisely the opposite direction. Huh. I wonder how often this is acknowledged by those who wish to copy Danish policies in the United States.

  Besides having higher taxes and larger public sectors, the Nordic countries are in many other regards more capitalist than America.

  In fact, all Nordic countries have a high rate of economic liberty. They are overall just slightly less market-friendly than the United States. This might sound odd to someone who doesn’t follow Nordic policies, but in reality makes perfect sense. Capitalism works. And as I have demonstrated in this book, the Nordic experience is very much that free markets create wealth while socialism inhibits job creation and greater prosperity. So, over time the pragmatic Nordic people have introduced a wide range of market policies. Free trade; simple-to-follow regulations for businesses; tax codes that, contra
ry to the American one, are not full of weird holes; and other market-friendly policies have been introduced. Besides having higher taxes and larger public sectors, the Nordic countries are in many other regards more capitalist than America.

  REDUCED SIZE OF GOVERNMENT6

  ECONOMIC FREEDOM INDEX (HIGH SCORE = MORE CAPITALIST SYSTEM)

  Source: Index of Economic Freedom and author’s calculations.

  So there you have it. In America policies are moving toward less capitalism and higher taxes. In the Nordics they are moving toward more capitalism, less generous welfare, and lower taxes. I am not going to say that the experience of the Nordic countries is a proof that America should also move toward a smaller government. But it does show us that even in the part of the world most often used as the proof that socialism actually works, policies are moving from socialism to capitalism. And it shows us that those Americans obsessed with Nordic-style social democracy don’t really know much about the policies of the Nordic countries. They are content with viewing the Nordic countries as Utopia. But if we don’t disregard these facts, we can learn much from the real Nordic lesson.

  In short, the Nordic countries teach us that by having a pragmatic approach, successful welfare state institutions can be introduced. Single-payer health care systems, which avoid much of the bureaucracy and high costs of the American model, public provision of child care that allows many women to work, and public funding of higher education certainly have their merits. The Nordic countries also teach us that high tax rates and attempts to introduce Third Way democratic socialism massively reduce economic performance. Labor market regulations and overly generous welfare policies hinder job creation and create long-lasting welfare dependency. Although well intentioned, the welfare states can through welfare dependency create large obstacles for the poor. This is why the Nordic countries, for all their benefits, are offering fewer opportunities for immigrants to climb the social ladder compared to in America.

  And finally, the Nordic countries teach us about the limits of policy. Everything for which the Nordic countries with large welfare states are admired also exists in Iceland, the Nordic cousin with a smaller welfare state. Why? Well, because Iceland has the same culture of success that is the true root of all this success. The same explanation obviously goes for why countries such as Sweden and Denmark achieved high income equality and good social outcomes before introducing large welfare states. And for that matter, why Nordic Americans have much more prosperity and even lower poverty rates than their cousins in the Nordics. To a large extent, the admirers of Nordic society wish to copy Nordic socialism. They fail to realize that what they wish to copy in reality is an extraordinary culture. And they fail to realize that the socialist policies that they so admire have to a large extent been cast aside by the Nordic people themselves.

  I don’t mind people viewing the Nordics as idealistic, Shangri-La societies. But we should know that there is no such thing as Utopia when it comes to policies, no such thing as a perfect system.

  I don’t mind people viewing the Nordics as idealistic, Shangri-La societies. If it amuses them, let them. But we should know that there is no such thing as Utopia when it comes to policies, no such thing as a perfect system. There are good reasons to admire parts of Nordic welfare policies, and certainly good reasons to admire the market reforms, tax cuts, and reduced generosity of welfare programs that have been taking place lately in the same countries. What kind of reforms you introduce is all about what kind of goals you want to reach. In this regard there is no difference between America and the Nordic societies. Neither is Utopia. Both have their advantages and disadvantages. And neither of them can simply copy the other, since societies are not formed simply through political mandates. Rather, they are formed through the complex interaction between culture and policies.

  So, at the end of the day, the true lesson from the Nordics is this: culture, at least as much as politics, matters. If the goal is to create a better society, we should strive to create a society that fosters a better culture. This can be done by setting up a system wherein people are urged to take responsibility for themselves and their families, trust their neighbors and work together. The Nordic countries did evolve such a culture – during a period when the state was small, when self-reliance was favored. For a time these societies prospered while combining strong norms with a limited welfare state, which was focused on providing services such as education rather than generous handouts. Then came the temptation to increase the size of the welfare state. Slowly a culture of welfare dependency grew, eroding the good norms. So, yes, the Nordics did stumble on a recipe for economic and social success. They did so before turning to large welfare states. Intuitively, it all makes sense. A system that over time encourages work, responsibility and strong families endures and grows stronger. A system that encourages individuals and families to instead rely on the state slowly falters. In this regard, the Nordic nations are anything but exceptional.

  Notes

  INTRODUCTION

  1.Bernie Sanders said this during a Democratic presidential debate on CNN held on October 2015. Moderator Anderson Cooper asked him to elaborate on why he viewed himself as a democratic socialist. Sanders used the Nordic countries as examples of successful democratic socialist models. (CNSNews.com staff, “Bernie Sanders: ‘We’re Going to Explain What Democratic Socialism Is,’” CNSNews.com, October 15, 2015, http://cnsnews.com/news/article/cnsnewscom-staff/bernie-sanders-were-going-explain-what-democratic-socialism.) The Nordic countries are commonly used as role models by Bernie Sanders and other politicians on the left, in the United States and abroad.

  2.Heritage Foundation and Wall Street Journal, 2016 Index of Economic Freedom, “Country Rankings,” Heritage.org, accessed April 19, 2016, http://www.heritage.org/index/ranking.

  3.Blue is the color of the Center Right in most countries, while red is the color of the Center Left. Curiously, the United States has opted for the opposite color scheme.

  4.Lisa Hagen, “Rubio: Sanders a Good Candidate for President of Sweden,” Ballot Box (The Hill’s campaign blog), January 28, 2016, http://thehill.com/blogs/ballot-box/presidential-races/267477-rubio-sanders-a-good-candidate-for-president-of-sweden.

  5.“Swedish royalists up in arms over US politician’s blunder,” The Local, January 29, 2016, http://www.thelocal.se/20160129/fury-in-sweden-over-marco-rubios-king-blunder

  6.Aftonbladet (2015). ”Madrasserna slut i hela skåne”, 2015-10-08. http://www.aftonbladet.se/nyheter/paflykt/article21550808.ab

  7.Sydsvenskan (2016). ”Rekordmånga lämnar sina jobb i Malmö stad”, 2016-03-29. http://www.sydsvenskan.se/malmo/rekordmanga-lamnar-sina-jobb-i-malmo-stad/. The sick leave number is reported to have been 50 percent for Malmös social emergency service department in the autumn of 2015.

  8.“Today’s Society Poll of Polls,” Dagens Samhälle (2016, January 28, 2016, http://www.dagenssamhalle.se/dagens-samhaelle-poll-of-polls. Even when adding the support of the Greens, the total support for the Left is below 40 percent.

  9.“Stefan Löfvens Nya Desperata Krisplan” (Stefan Löfvens New Desperate Crisis Plan), Expressen, February 9, 2016, http://www.expressen.se/nyheter/stefan-lofvens-nya-desperata-krisplan/.

  10.The leader of the Swedish Socialists, but not the Social Democrats, has a friendly relationship with Bernie Sanders.

  11.This is particularly evident if we look at a key indicator for success later in life: the school results of children from different backgrounds. A shift from conservative to progressive teaching methods has failed pupils from socioeconomically challenged families, particularly migrants. Certainly there is a lesson to be learned here for American observers.

  12.Nima Sanandaji, Scandinavian Unexceptionalism: Culture, Markets and the Failure of Third-Way Socialism (London: Institute of Economic Affairs, 2015). The book was preceded by the report The Surprising Ingredients of Swedish Success – Free Markets and Social Cohesion (Discussion Paper no. 41), which I also wrote for the Institute of Ec
onomic Affairs and which came out in 2012 (http://www.iea.org.uk/sites/default/files/publications/files/Sweden%20Paper.pdf); and before that the report “The Swedish Model Reassessed: Affluence Despite the Welfare State,” published by Finnish think tank Libera in October 2011, http://www.ncpa.org/sub/dpd/?Article_ID=21268#sthash.HFtMzTp8.dpuf.

  CHAPTER 1: AMERICAN OBSESSION WITH NORDIC SOCIAL DEMOCRACY

  1.See, for example, Gregory Krieg, “Top Swedish Diplomat Is Not Feeling ‘the Bern,’” CNN, February 3, 2016, http://www.cnn.com/2016/02/03/politics/hillary-clinton-bernie-sanders-sweden/.

  2.Bernie Sanders, “What Can We Learn from Denmark?” HuffPost: The Blog, May 26, 2013, http://www.huffingtonpost.com/rep-bernie-sanders/what-can-we-learn-from-de_b_3339736.html.

  3.Ezra Klein, “Bernie Sanders and Hillary Clinton’s Debate over Capitalism, Explained,” ​V​o​x, ​u​p​d​a​t​e​d O​c​t​o​b​er 1​4, 2​0​1​5, h​t​tp://w​w​w.v​o​x.c​o​m/2​0​15/10/14/9528873/bernie-sander-hillary-clinton-socialist-debate.

  4.“The Swedish Connection,” Washington Times, June 3, 2015.

  5.William J. Clinton, “Remarks to the Citizens of Copenhagen,” July 12, 1997, A​​​mer​​ica​n ​​Pr​​es​​id​​en​cy P​r​oject, h​tt​p://w​w​w.p​r​e​sid​en​cy.u​c​s​b.e​d​u/w​s/?pid=54410.

  6.Bill Clinton, Back to Work: Why We Need Smart Government for a Strong Economy (New York: Random House, 2011).

  7.Remarks by President Obama and Prime Minister Reinfeldt of Sweden in Joint Press Conference,” press release, White House, Office of the Press Secretary, September 4, 2013, https://www.w​​hi​t​e​h​ou​se.g​ov​/t​he-p​r​e​ss-o​f​f​ice/20​13/0​9/0​4/r​e​m​ar​ks-president-obama-and-prime-minister-reinfeldt-sweden-joint-press-.