What can be learned from the Nordic model?

Some policymakers in the United States and Europe argue that it is possible to enjoy economic growth and also have a large welfare state. These advocates for bigger government claim that the so-called Nordic Model offers the best of both worlds. This claim does not withstand scrutiny, says the Cato Institute.

Economic performance in Nordic nations is lagging, and excessive government is the most likely explanation, says Cato:

On average, the public sector in Sweden, Denmark, Norway, Finland and Iceland consumes more than 48 per cent of economic output.

By contrast, total government outlays in the United States are less than 37 per cent of gross domestic product (GDP).

Revenue comparisons are even more striking – tax receipts average more than 45 per cent of GDP in Nordic nations, a full 20 percentage points higher than the aggregate tax burden in the United States.

This bigger burden of government hurts Nordic competitiveness, both because government spending consumes resources that could be more efficiently allocated by market forces and because the accompanying high tax rates discourage productive behaviour. A smaller state sector is one reason why the United States is more prosperous, says Cato:

Per capita GDP in the United States is more than 15 per cent higher than it is in the Nordic nations.

The gap is even larger when comparing disposable income, private consumption and other measures that reflect living standards.

Notwithstanding problems associated with a large welfare state, there is much to applaud in Nordic nations, says Cato:

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 labour income.

And both Iceland and Sweden have partially privatised their social security retirement systems.

Source: Daniel J. Mitchell, What Can the United States Learn from the Nordic Model? Cato Institute, Policy Analysis No. 603, November 5, 2007.

For text: http://www.cato.org/pub_display.php?pub_id=8765

For more on International Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=26

FMF Policy Bulletin/ 20 November 2007