by Steve Forbes
Sachs writes, “On average, the Nordic countries outperform the Anglo-Saxon ones on most measures of economic performance.”46 Citizens are protected by social welfare programs and labor regulations yet enjoy the benefits of a private sector with competitive, open markets.
Cato Institute senior fellow Dan Mitchell agrees that “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.”47
Denmark, Sweden, and Finland have enjoyed economic growth levels higher than European nations such as Germany and France. Prior to the 2008 recession, Mitchell wrote,
Average annual growth rates over the past 10 years range from 2.1 percent in Denmark to 4.3 percent in Iceland. Unemployment rates are all below 9 percent, with Iceland enjoying a jobless rate of just 2.6 percent. [This was before the country’s economic collapse.] Per capita GDP also is reasonably impressive, especially compared to most parts of the world, ranging from nearly $43,600 in oil-rich Norway to slightly more than $34,400 in Sweden.
What the numbers don’t show, however, is a Scandinavian standard of living far below that in the United States. The average Nordic citizen has about half the disposable income of the average U.S. resident. Mitchell cites a 2003 study by the Organisation for Economic Cooperation and Development (OECD) showing that
the average person in the United States had more than $27,000 of disposable income while the average person in Nordic nations (no data available for Iceland) had disposable income of barely $14,300, less than 53 percent of the U.S. level. Even Norwegians, bolstered by oil wealth, had per capita disposable income of less than $16,800, barely 62 percent of the American level. Danes and Finns are at the bottom, with less than 50 percent of the disposable income of the average American.
Mitchell elaborates:
Americans have twice the household wealth of Swedes, Finns, and Norwegians…. Americans also own more consumer products, particularly durable equipment such as automobiles and household appliances. Americans also enjoy more housing. Indeed, poor people in the United States have as much housing space as the average European.
What does this mean in terms of daily life? Writing in the New York Times, Bruce Bawer, an American freelance journalist living in Oslo, Norway, reports that evidence of a lower living standard is everywhere:
Library collections are woefully outdated, and public swimming pools are in desperate need of maintenance. News reports describe serious shortages of police officers and school supplies. When my mother-in-law went to an emergency room recently, the hospital was out of cough medicine. Drug addicts crowd downtown Oslo streets, as the Los Angeles Times recently reported, but applicants for methadone programs are put on a months-long waiting list….
After I moved here six years ago, I quickly noticed that Norwegians live more frugally than Americans do. They hang on to old appliances and furniture that we would throw out. And they drive around in wrecks. In 2003, when my partner and I took his teenage brother to New York—his first trip outside of Europe—he stared boggle-eyed at the cars in the Newark Airport parking lot, as mesmerized as Robin Williams in a New York grocery store in “Moscow on the Hudson.”48
Writing before the recession, Bawer was amazed at how many Norwegians—”from classroom to boardroom”—brown-bagged their lunches.
It is not simply a matter of tradition, or a preference for a basic, nonmaterialistic life. Dining out is just too pricey in a country where teachers, for example, make about $50,000 a year before taxes. Even the humblest of meals—a large pizza delivered from Oslo’s most popular pizza joint—will run from $34 to $48, including a delivery fee and a 25 percent value added tax.
Bawer says his experiences bear out studies reflecting the glacial economic growth of both Scandinavia and the European Union. According to one study, “Economic growth in the last 25 years has been 3 percent per annum in the U.S., compared to 2.2 percent in the E.U. That means that the American economy has almost doubled, whereas the E.U. economy has grown by slightly more than half.”
Another study from the international accounting and consulting firm KPMG “indicated that when disposable income was adjusted for cost of living, Scandinavians were the poorest people in Western Europe. Danes had the lowest adjusted income, Norwegians the second lowest, Swedes the third.”49
Dan Mitchell of Cato writes, “If Sweden were part of America, it would be the sixth poorest state.”50
The key culprit behind this wealth gap—taxes. Scandinavians have less disposable income because they have to fork over so much to their welfare states. According to the Brussels Journal, “Between 1990 and 2005 the average overall tax burden was 55% in Finland, 58% in Denmark and 61% in Sweden. This is almost one and a half times the OECD average.”51 Dramatically higher personal income taxes are combined with a VAT (value-added tax) on consumer goods of as much as 25 percent, much higher than any U.S. state sales tax. The only bright spot—and one that is helping to sustain economic growth—are corporate tax rates, which are lower than in the United States.
Unemployment has been lower in Scandinavia than in other EU nations such as France and Germany, with their rigid worker-protection laws. But jobless rates have generally been higher than in the United States because of the high cost of hiring workers. And long-term unemployment has been far higher. Even before the recession, Dan Mitchell writes, “more than 18 percent of the unemployed in Nordic nations have been out of work for more than 12 months. In the United States, by contrast, fewer than 12 percent of the unemployed [had] been jobless that long.”52
Per Bylund, a Swedish libertarian writer, reports that concern over joblessness was so great in the the middle of this decade that
the national trade workers’ union demanded the state “redistribute” jobs through offering people in their 60s state pensions if they step down and their employers employ young, unemployed people in their stead. In the labor union’s calculations, such a stunt would “create” 55,000 jobs. What this shows is that the only perceivable way of finding jobs for the young seems to be to “relieve” older people of theirs.53
In fact, Scandinavia generated much of its vaunted wealth in the 1960s, before it instituted its high taxes and massive social-welfare bureaucracy. For example, according to Dan Mitchell, unemployment in Sweden averaged 2 percent twenty years ago. It has since more than tripled. He quotes an analyst at a Brussels-based think tank who observed, “Not a single net job has been created in the private sector in Sweden since 1950.”54
Mitchell and others report that—despite its attractiveness to some Americans—Scandinavia’s high-tax welfare is driving away entrepreneurs and businesses. Mitchell writes, “Many productive people have departed for lower-tax jurisdictions. Others remain, but they move their assets so they are hidden from tax authorities.”55
Sweden has lost much of its pharmaceutical industry, which has moved abroad. Volvo and Saab, its automakers, were taken over by Ford and GM. Even IKEA, the giant furniture retailer that to many is a symbol of Swedish enterprise, relocated to the Netherlands. Company founder Ingvar Kamprad moved to Switzerland. According to one estimate, emigration since 2000 has grown at five to seven times the growth rate of the population as a whole. At least half—or more—of those leaving are college graduates.56 No wonder Sweden’s per capita income has fallen to about 80 percent of that of the United States. When the Swedish Tax Authority recently produced TV commercials to promote paying taxes online, it outsourced them to low-tax Estonia to save on labor costs.
Scandinavia’s own citizens have become increasingly disaffected with the economic stagnation that afflicts their economies. Sweden, as we noted in our introduction, has recently adopted promarket policies. What about Denmark? Fans say that even though the country has a high income-tax rate of 63 percent the economy still prospers. It is true that the country
has lower unemployment because businesses are allowed to shed redundant workers, thus giving its economy greater flexibility. And because of its small economy, government job-retraining programs are more focused and successful than similar programs elsewhere.
What they don’t mention is that there is growing dissatisfaction with the tax burden. Many Danes find ways around high tax rates, such as incorporating themselves so that some of their income is taxed at lower rates. They overlook the fact that, like other Scandinavian countries, Denmark has experienced emigration to lower-tax nations.
Even accounting for Scandinavian countries’ national healthcare programs, their overall economic well-being still isn’t a match for those of many other western European countries, or indeed many parts of the United States.
Ironically, freemarket bashers in the United States are touting the virtues of the “third way” just as its own practitioners are discovering that, when it comes to producing true prosperity, it’s not the best way at all.
REAL WORLD LESSON
Nordic countries’ lower living standard is the little-known price paid for high taxes and social protections.
CHAPTER THREE
“Aren’t the Rich Getting Richer at Other People’s Expense?”
THE RAP The rich are a privileged group that prospers at the expense of everybody else, exploiting employees and customers to stay on top, while getting special treatment and tax breaks. Meanwhile, the poor get poorer and the middle class struggles to keep from falling behind.
THE REALITY Rich people make their fortunes by creating opportunity and wealth for others. They do this by launching businesses that generate jobs, by investing in new ventures, or by spending money on other people’s products and services. The rich are not a fixed aristocracy. Who is rich and who is poor is always changing. You can’t have a prosperous or innovative economy unless people are allowed to become rich.
It’s true: the rich have been getting richer. Recent decades have seen an unprecedented expansion of worldwide prosperity. Until the credit crisis, there was an extraordinary explosion in asset values. Between 1982 and 2007, for example, the stock market went up more than fifteen-fold. The typical price of a house went from $69,000 to $247,000. In 1982 it took a mere $125 million to get you on the Forbes list of richest Americans. In 2008 it took $1.3 billion. Even in the current recession we see breathtaking displays of personal wealth—from ten-thousand-square-foot “McMansions” to privately owned jets to luxury cars that cost more than many single-family homes. The 2008–2009 downturn is most likely an interruption, not the end, of this long boom.
Freemarket opponents—including many who are rich themselves—say the growing number of rich proves that our economy is divided into “two Americas.” One is made up of the wealthy, who keep moving ahead at the expense of everybody else. Barbara Ehrenreich, a vociferous critic of capitalism, summed up this view in the Nation magazine. She called the rich “a bloated overclass” who in certain ways “drag down a society as surely as a swelling underclass….”
Every year, four or five of the people on Forbes magazine’s list of the ten richest Americans carry the surname Walton, meaning they are the children, nieces, and nephews of WalMart’s founder. You think it’s a coincidence that this union-busting low-wage retail empire happens to have generated a $200 billion family fortune?1
She writes scornfully, “A lot of today’s wealth is being made in the financial industry, by means that are occult to the average citizen and do not seem to involve much labor of any kind, we all pay a price, somewhere down the line.”
Those who do not share Ehrenreich’s anger nonetheless have plenty of complaints. Among them: the rich make life miserable for others by driving up the price of everything. A few years ago, New York magazine ran a cover story, “Don’t Hate Them Because They’re Rich.”2 According to the article, Manhattan was a place where, if you weren’t spectacularly wealthy, you were jealous of someone who was: “The more rich people there are, the tougher it is for everyone else to get by, to afford apartments and live the New York life they dreamed of. How wonderful is Central Park if you live an hour away by train?”3
The article observed, “It’s almost as if the superrich have cordoned off much of Manhattan for their own personal use, distancing themselves from the workaday rich and building a social class all their own.”
The financial collapse of 2008 deepened this resentment still further, with many blaming “hedge-fund billionaires” and greedy Wall Street for the nation’s economic woes. The downturn seemed to provide the most powerful proof yet that America is a land where the poor and middle class keep falling further and further behind and are victimized by the selfish rich. Barack Obama seemed to suggest this when he insisted that the 2008 financial crisis was the result of “a philosophy we’ve had for the last eight years—one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else.”
Columnist Daniel Henninger has noted that the president’s tax and spending policies have been shaped by this view of the rich and “everyone else” as being two distinct groups on opposite sides of some imaginary divide, with rigidly disparate economic interests. He cites commentary included in the administration’s budget document that asserted, “There’s nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few…It’s a legacy of irresponsibility, and it is our duty to change it.” An appalled Henninger writes,
The rancorous language used to describe these taxpayers makes it clear that as a matter of public policy they will be made to “pay for” the fact of their wealth—no matter how many of them worked honestly and honorably to produce it.4
Bashing “rich people” may be good for getting votes during political campaigns. But in the Real World, the rich do not get rich at the expense of the poor. The opposite is true: they make their fortunes by meeting the needs and wants of other people—by building or providing capital for innovative, job-creating businesses whose goods and services make life better.
There’s no question that those who contribute innovations in our entrepreneurial economy can reap immense rewards. Bill Gates had virtually no wealth at all when he set up Microsoft in 1976. By the turn of the twenty-first century, he was worth over $60 billion. The boom in high technology, finance, and other sectors over the past thirty years has created numerous newly rich individuals. But this wealth was not made at the expense of the poor. Entrepreneurship and capital investment by rich people are responsible for businesses that created 1.4 million jobs annually over the last decade. Americans couldn’t live without cell phones, laptops, BlackBerrys, high-definition TVs, and new medical procedures—innovations produced from the investments of wealthy individuals that have helped people throughout society get richer.
Take the favorite target of Ehrenreich and other capitalism bashers—WalMart. A drag on the economy? The company employs some 1.4 million people, 1 percent of the U.S. workforce, and two million worldwide. It has generated billions for countless vendors and suppliers, not to mention thousands of stockholders, helping to finance the retirement and college savings of countless families through 401(k)s and college funds. By selling its products—including food, and recently, medicines—at 15 percent to 25 percent less than the average prices, WalMart also helps its customers live better by getting more for their money. Even the most fervent adversaries of the retail giant acknowledge these benefits. In the 2008 recession, customers flocked as never before to WalMart precisely because of its low prices. In that sense, WalMart does more for strained household budgets than any government program.
WalMart is just one of the wealth-creating contributions to our economy from members of the Forbes 400 in 2008. There’s also Facebook, launched by Mark Zuckerberg, the Forbes 400’s youngest member at age twenty-four (net worth $1.5 billion), the Home Depot, cofounded by Arthur Blank, sixty-five (worth, $1.3 billion), and Fidelity Investment
s (Edward and daughter Abigail Johnson, worth $11 billion and $15 billion, respectively). And that’s to name a very few.
History books portray the rich of the nineteenth century as rapacious oligarchs—“robber barons”—who amassed their immense wealth through their ruthless treatment of workers and nearly everyone else. The reality was more complex. Most of the robber barons made their fortunes building railroads or opening mines, oil fields, or retail chains. What is underemphasized, or just plain ignored, is the degree to which these innovations dramatically raised the living standard of what was then a hardscrabble, rural society where backbreaking labor was the rule and the average American faced a level of hardship unknown today. It was this new affluence, some observers believe, that helped to stoke subsequent labor movements by encouraging rising expectations, impatience with the pace of change.
Tom Sowell rightly observes that people who start businesses are actually the last to benefit from the wealth they create. They reap their profits after paying off their workers, creditors, and investors—and that’s when things are going well. If business isn’t thriving, they may never see a dime.
You don’t get rich off the sweat of others in a freemarket economy—unless you’re former college football player Kevin Plank, who founded Under Armour, the perspiration-absorbing athletic-apparel maker that went on to make him a fortune in little more than a decade.
Contrary to the claims of populists, high earners pay the largest share of taxes. According to the Tax Foundation, the top 10 percent of households—with incomes roughly $100,000 or greater—pay roughly 70 percent of all federal income taxes. That share is up from just below 50 percent in 1980.
Critics of capitalism like to give the impression that “rich people” are a fixed aristocracy. Yet only 19 percent of families on today’s Forbes 400 list have inherited their wealth. When the rich list appeared in 1982, it was populated by Rockefellers and du Ponts. Today there is only one Rockefeller—ninety-four-year-old David. As rich families proliferate, wealth is divided and often depleted. It’s hard for families to stay rich for more than a generation or two.