Wednesday, August 3, 2011

I Love Sweden

About seven days, two hours, and forty minutes ago, I wrote a post about Norway.  Entitled "What is Wrong With Norway?," I quoted a description of Norway's economic model, called the Nordic Model, from Wikipedia:
This particular adaptation of the mixed market economy is characterised by more generous welfare states (relative to other developed countries), which are aimed specifically at enhancing individual autonomy, ensuring the universal provision of basic human rights and stabilizing the economy. It is distinguished from other welfare states with similar goals by its emphasis on maximising labour force participation, promoting gender equality, egalitarian and extensive benefit levels, large magnitude of redistribution, and liberal use of expansionary fiscal policy.
When I wrote that post, I said this:
I must say that I am disappointed in some of the information I am learning, as I have always been quite fond of Scandinavia...
Since then, I have learned a bit more about Scandinavia (and other Nordic nations).  And this time, I am not disappointed in the least.  Watch the following video.  Not only does it explain my new-found love for Sweden, but it also explains the benefit of a free-market economy. 

(h/t to GayPatriot reader ILoveCapitalism)

That video contains the URL of a CATO Institute policy analysis.  How can you not love a country whose economic model is praised (loosely speaking) by the CATO Institute?
Notwithstanding problems associated with a large welfare state, 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. 
Nordic nations also have implemented some pro-market reforms. Every Nordic nation has a lower corporate tax rate than the United States, for example, and most of them have low-rate flat tax systems for capital income. Iceland even has a flat tax for labor income. And both Iceland and Sweden have partially privatized their social security retirement systems. 
The Nordic nations offer valuable lessons for policymakers, but they do not fit the traditional stereotype. Conservative critics correctly condemn the large welfare states, but often overlook the positive results generated by laissez-faire policies in other areas. Liberals, meanwhile, exaggerate the economic performance of Nordic nations in an effort to justify welfare-state policies, while failing to acknowledge the role of free market policies in other areas.
Here is a link to the CATO Institute's policy analysis.  What follows are some excerpts from that analysis:
Before drawing conclusions about the desirability of the Nordic model, however, it is important to answer three relevant questions: 
1. Why are Nordic nations relatively rich?
2. Has the welfare state has helped or hindered these countries’ economic performance?
3. Does the Nordic Model create more prosperity than the (relatively speaking) limited-government model in the United States?

The answer to all of those questions is that Nordic nations are reasonably successful in spite of the welfare state. Nordic countries benefit from institutions—such as property rights, stable currencies, and the rule of law—that facilitate economic growth. And although they have large welfare states and concomitantly high levels of taxation, their economic systems in other respects are very market-oriented. Combined with the fact that before the mid-1960s the burden of government in Nordic nations was modest, these factors help explain why those countries today are relatively prosperous.
The two main ways of comparing economic performance are rate of growth and level of output. One measures how fast gross domestic product (or some similar measure of economic output) is expanding. The other compares the absolute level of economic output (or some similar measure of prosperity). By both measures, the Nordic nations generally do not fare well when compared to the United States. ... According to the OECD, the U.S. grew by an average of 3 percent between 1981 and 1991and 3.3 percent between 1992 and 2006 (mean-ing average growth of 3.2 percent for 1981 to2006). The Nordic nations, by contrast, grew by an average of 2.2 percent between 1981 and 1991 and 2.7 percent from 1992 to 2006 (meaning average growth of 2.5 percent over the entire period). The IMF, meanwhile,reports that U.S. growth averaged 3.1 percentfrom 1981–2006 compared to an average of 2.6percent for Nordic nations in the same period.
...the tax burden in Nordic nations and America was remarkably similar until 1960. Not coincidentally, it was during this pre-1960 era that Nordic nations grew rapidly and became rich.  
Beginning in the mid-1960s, and accelerating through the 1970s and into the 1980s, however, the Nordic nations created large welfare states. Indeed, this is the key difference between America and the Nordic nations. The United States has a medium-sized welfare state and the Nordic nations have large welfare states. Otherwise, America and the Nordic nations have many features in common. Both the Nordic nations and America have sound institutions, including stable currencies, rule of law, and property rights. Both the Nordic nations and America have relatively open markets. Indeed, if the “size of government” factor is removed from the Economic Freedom of the World indicators, Nordic nations score an average of 8.35, ranking above the 8.25 score for the United States.
The Nordic nations also have excellent reputations for honest government. According to Transparency International, the five Nordic nations rank among the eight least corrupt nations in the world, with Finland and Iceland tied for first place. The United States also does well, with a ranking of 20 out of 163 nations, but the higher scores for the squeaky-clean Nordic nations presumably help offset the larger burden of government.

The Nordic nations also deserve attention for important reforms. Iceland, for instance, has a flat tax (albeit with a 36 percent rate), personal retirement accounts, and quasi-privatized fisheries. Sweden, meanwhile, has an extensive school choice system and personal retirement accounts.
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. These are the policies that enabled Nordic nations to prosper for much of the 20th century. Once their countries became rich, politicians in Nordic nations focused on how to redistribute the wealth that was generated by private-sector activity. This sequence is important. Nordic nations became rich, and then government expanded. This expansion of government has slowed growth, but slow growth for a rich nation is much less of a burden than slow growth in a poor nation.
What I take from this is that the Nordic nations can learn from the United States.  Based on that video, it seems Sweden is slowly returning to its pre-1960 model.  Because I have ancestors from Sweden, I feel a closeness to it.  This is very welcome information indeed.  

It is important to note that that CATO Institute analysis is from 2007, before the worldwide economic crisis.  The Nordic nation of Iceland has since undergone a major financial crisis, and so any reference to Iceland may not be reliable.  I think an analysis of Iceland's current economic situation is required to ascertain exactly how Iceland fits into all of this.  To my knowledge, the other Nordic countries (Denmark, Norway, Sweden, and Finland) were relatively unaffected by that worldwide crisis.

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