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Wednesday, January 9, 2008

The Scandinavian Economies vs. the US Economy: 3rd in a Series


In the forum-thread at Marginal Revolution where prof bug recently had several exchanges with some Scandinavian posters, all well informed and very courteous, mind you, the buggy article that follows --- a revised version of the bugged out post at Marginal Revolution --- was praised by one of them, almost certainly a Swedish citizen or of Swedish origins. 

Why the Praise?f

Well, that brings us to a few personal comments.  As it happens, the Marginal Revolution --- run by Professor Tyler Cowan, himself a moderate libertarian (note the emphasis) --- posts mainly libertarian commentary by Tyler and lots of replies in the discussion forums by libertarians as well; and one and all, Cowan and his often zealous laissez-faire enthusiasts agreed that more free market reforms were needed if Sweden and the other Scandinavian countries --- Denmark and Finland, each about 4 million in population, plus Norway (also 4 million and not in the EU) --- were to revitalize themselves.  Enter prof bug's first post in reply. 

It isn't that the buggy doesn't share any of these free-market recommendations, for not just Scandinavia, but the rest of the EU countries.  He does, at any rate some of that advice.  Still, only up to a point.

The buggy prof, you see, is hardly a libertarian . . . rather, a political independent who believes that a moderate social security safety net is essential to modern capitalism and freer trade, and believes additionally that, at times, government regulations and taxes can be used effectively to offset certain market failures, such as environmental pollution, insufficient information for consumers to make intelligent choices (think of medicines), and public goods like infrastructrual investments.  Libertarians, by contrast, can seldom or even find any regulatory measure that improves the workings of the free market.  

Nor is that all. 

On the flip side, the buggy out professor doesn't think that the EU Continental countries in West Europe fit this model of limited government socfial spending and regulation --- far from it.  And to put it plainly, he wouldn't like to live in their sort of over-regulated, over-structured countries with their excessive taxes, nanny welfare states, and over-zealous regulations.  Enter the US as a foil and comparative slant.  True, Americans hardly live in a perfect country, economically or otherwise . . . a point, when you get down to it, that's little more than a truism.  Even so, prof bug --- who has studied and taught in four West European countries --- believes that the US has established a fairly successful mid-point between laissez-faire capitalism of the libertarian sort and the state-dominated economic life of the EU Continental sort, what with its profligate bureaucratic controls of the everyday life of business firms, workers, consumers, educational systems, and even  --- note carefully --- way too many aspects of social life, all of which combine to discourage technological innovation, entrepreneurial dynamism, and social and economic flexibility, not to overlook the ensuing dampers on cultural creativity. 

What? Cultural Creativity Too 

Yes, alas.  Since WWII, the record of most, if not all, West European countries is noticeably discouraging in such creativity.  For the time being, consider only the big four countries there.  A great admirer of French, German, Italian, and British cultural and scientific creativity in the 18th, 19th, and early 20th centuries, he finds --- along with lots of Frenchmen, Germans, and Italians, it's worth emphasizing  --- that only Britain, among those large West European countries, has sustained its great literary, artistic, and scholarly virtuosity, adding, for decades now, lots of inspired inventiveness in movies, television, and even surprisingly music of all sorts.  Is it accidental that Britain has never had the statist traditions found on the Continent of Europe?  Or that the extravagant welfare spending and excessive regulatory apparatus that emerged in that country after WWII was an aberration, lasting only about 35 years and offset in fairly large measure by the free-market reforms of the Margaret Thatcher era (and only slightly revived in ten years of Tony Blair's Labour governments.)?

No, not an accident --- or so the bugged out brain of the prof calculates.  Just the opposite.

Back to the Tyler Cowan and The Marginal Revolution's Libertarian Slant on the Scandinavian Countries

There's another reason for prof bug's disagreement with libertarian enthusiasm. 

Simply said, whatever his own preferences just outlined, he thinks it's his scholarly duty to note the recent and yes, impressive achievements of the Scandinavian countries in seeking to revitalize their economic dynamism even as they adhere, for good or bad, to an advanced welfare and regulatory state.  Consider their economic record since the end of the 1990s.  Essentially, in the whole of West Europe, including not just the 15 EU members, but Switzerland and Norway outside it, only Sweden, Finland, and Denmark --- along with Ireland, a relatively free-market, pro-business country by European standards --- have been able to raise their labor productivity growth by tapping the new cutting-edge technologies in communications and information . . . pioneered overwhelmingly, note quickly, by the US, which alone, among rich industrial countries, has reaped the full benefits to date of those technological breakthroughs and the huge boost to labor productivity and what is called multifactor productivity. 

The latter meaning what? Meaning, in curt shorthand terms, advances in productivity and economic dynamism that reflect big breakthroughs in overall knowledge, whether embodied in new and better machines (or energy sources) or found in better marketing, better management of big firms, and various new incentives like venture capital that encourage entrepreneurial dynamism that, thanks to the start-up firms in the American economy since 1975, have brought a whole slew of new risky technologies to our country's market-place. 

One More Introductory Point, Slightly Technical   

For old and new visitors to this recent buggy series on Scandinavian economies compared to the US's, it will likely be useful if, right now, we a very good diagram that charts per capita income on the vertical axis and social spending as a percentage of overall GDP for several countries, including Japan and Australia in the eastern Pacific.  Keep in mind that for comparative purposes, all GDP data and per capita income are adjusted for purchasing power parity across countries. 

This point about PPP adjustments deserves for the umpteenth time at the buggy web site to be clarified briefly. 

In particular, the existing or nominal exchange rate, by way of illustration, of the euro in dollar terms is roughly $1.50 at the start of 2008.  The nominal rate when the euro was introduced in 1999 was about $1.18; over the next three years the euro declined by almost 30% in dollar terms, to bottom out at $0.84; since 2002, it has now soared about 25-30% above its initial exchange rate with the dollar to reach $1.50.  In these eight years of sharply swerving euro-dollar exchange rates, the average GDP of the eurozone 12 West European countries --- Britain, along with Sweden and Denmark don't use the euro --- didn't fall 30% below the initial rate; it actually rose some in real terms, just as it did not rise 30% in five years or so above the real level of the US GDP.  Instead, economic growth and per capita income growth --- adjusted for purchasing power --- rose faster since 2001, and by far, than they did on the average for the EU-12 countries that use the euro.  Overall, if it helps, the US has a real per capita income of around $44,000 at the start of 2008, and the average for the EU-15 countries is somewhat less than a third lower, around $32,000.  Ireland, a tiny economic superpower now, is the richest in the EU in per capita income, a touch higher than the US's!  Denmark comes in around $37,000 and Sweden and Finland each have about $34,000. 

The big three in the EU --- Britain and France (60 million people each), along with Germany with 80 million --- come in just about the EU average, with Italy and its 60 million people lagging around $30,000, or about 8% below the EU average.  Norway, by the way --- with its 4 million people --- is the richest country in Europe, with a per capita income of over $46,000 . . . not least owing to its huge exports of oil and gas from its North Sea reserves.  (Believe it or not, Norway is the third largest oil exporter in the world after Saudi Arabia and Russia.)


Sweden's Achievements of Late And One Huge Deficit

Yes, Barkley, on the whole, I agree: the last few years, the Swedish economy has done a good job of revitalizing itself except --- notoriously --- in one crucial sense: job creation or really, to be blunt, the lack of it.  Its official unemployment rate --- 5.6% in 2006 --- is widely regarded even by Swedish and foreign specialists as drastically under-reported. 

Consider, on this score, some recent studies.  The first is Swedish: in 2005, the chief economist for the Trade Union Confederation, LO, found after a careful analysis that the actual unemployment rate wasn't 6.0%, as government statistics showed, but rather 22% ---- a figure that would put it at US Great Depression levels!  How was that possible? 

Well, with central government complicity, what happened was this: the local Social Democratic governments in Sweden would simply move large Fnumbers of workers onto the early retirement rolls or put them in long-term sick-leave or keep the unemployed formally off the job-market by in extensive job-retraining programs that led nowhere at their end, certainly no career-path  . . . not to mention, to top it all, endless university studies for up to a decade with no jobs once a degree was rewarded, but with these diverse manipulations,  one and all, funded by taxes.   The programs supported by these taxes, often very costly and for decades on end (like early retirement), helped the dominant Social Democratic government --- virtually in power permanently except for one or two brief periods since 1933 --- look like a better success in managing the economy than was at all justified by real job creation. 

What happened to the LO economist's study?  Simply said, the LO balked at publishing the economist's results, and he subsequently resigned and went public with the study, setting off, to the Swedish people's credit, a public outcry. 

Enter a well-known American consulting firm, the McKinsey Global Institute --- which carries out outstanding comparative studies of economic performance of various countries.  Using American and Swedish economists, its careful study of 2005 put the real unemployment level lower, but roughly at 17% . . . still Great Depression levels for the most part. Nor was that all. There were other studies, all showing a very large statistical subterfuge surrounding official Swedish unemployment data.  The electoral fall-out was graphic, again to the Swedes' credit.  Whatever the real unemployment rate happened to be, the electorate --- less and less fooled by the government figures  --- voted the Swedish Social Democrats in the 2006 election.  A major reason: everyone in the country seemed to know at least one person who was unemployed.

The Causes of the Swedish Failure in Job-Creation?

The problems that beset the Swedish labor market --- despite the high quality of Swedish education by international standards --- run deeper still other than just plain rigidities that inhibit labor mobility and the ability of firms to hire and lay off workers to make their firms more flexible and efficient.  They also extend beyond the labor market as well.

Most strikingly here has been the erosion after nearly 8 decades of expanding taxes, regulations, and welfare spending of certain social norms that Swedish life once embraced and much to its benefit.  Among these bad trends --- according to some very good studies carried out by Sweden's most prominent economist, Assar Lindbeck, along with Swedish and British colleagues --- has been the decline in the once legendary Swedish work ethos.  The same is no less true of the impact of high taxes on Swedish civil discipline and honesty: in particular, the Swedes --- like their counterparts in the rest of Scandinavia --- have been found in an impressive Austrian study (using a variety of cross-checking techniques) to have fostered a growing underground economy of tax evasion that added up to about 15-16% of total GDP.  The US underground economy was reckoned to be the lowest of the industrial countries, roughly at 7.0% of GDP.   Britain's underground economy was about Scandinavian size.  France, Germany, Spain, Italy, and some smaller countries averaged around 20%.

What Can We Conclude, Even From This Fast-Top Skimming Survey about Sweden?

Essentially this: for all these negative trends, the Swedes have nonetheless done well in GDP growth the last several years by tapping the impressive technical and scientific skills of their small population (9 million). 

But note: however impressive the Swedish growth performance has been, both in terms of its sluggish growth rate in the 1980s and 1990s and compared to most of the EU-15 countries, a clear comparative fact stands out: Sweden, and for that matter Denmark and Finland, still lag markedly behind the US and Ireland, both relatively free-market economies, in the growth rates of productivity, GDP, and per capita income.  Consider here a Swedish study published in 2005 by the Timbro Institute.  Its puts the gap in stark terms.  If Germany, France, Britain, or Italy suddenly joined the US federal system, they would rank with the four poorest states in the Union: along with Arkansas, West Virginia, Mississippi, and West Virginia . . . all sparsely populated rural states.  Sweden would be ranked 7th from the bottom and Denmark 14th, with Finland in between.  For the buggy take on this Timbro study, click here.

The Other Scandinavian Countries

Denmark's job creation is much better than Sweden's, and unemployment is probably close to US figures, using standardized international measures.  That's impressive.  But then Denmark has only 4 million people, which means it's smaller in population than Los Angeles, and has undergone several efforts by centrist and conservative party coalitions to streamline its bureaucracy and privatize lots of state assets.  The same coalitions have also reduced the extravagantly high tax burdens on the Danes that prevailed down to 2004.  Consider the table that you'll find at the very bottom of this buggy article, which showed direct and indirect taxes across several industrial countries, and totaled them in the third column for 2002. Thanks to such cuts and other effective programs, the center-right coalition in power since the early part of this decade has clearly revitalized the Danish economy and reduced unemployment to its lowest level in a long time.

Note that, like the other Scandinavian countries, Denmark has historically been a remarkably homogeneous country in ethnicity, but more recently --- since the 1980s --- it has become more diverse, exactly like Norway and Sweden.  The chief reasons?  A very low birth rate among Danes, Swedes, and Norwegians, and simultaneously a high birth-rate among the Muslim immigrants in those countries and, for that matter, in the rest of West Europe. 

As it turns out, though, there's a marked difference in how Denmark has dealt with the problems caused by largely alienated and often antagonistic Muslim communities whose values and educational levels and economic achievements are at odds with their equivalents among the native European populations.  Unlike its Nordic neighbors, the Danish government --- led by centrist-right coalitions for several years now --- has not stood by idly, in appeasement-mode, while Muslim political and cultural demands, growing criminality, and growing violence have multiplied in its country.  Its center-right coalitions have insisted emphatically that these Muslim immigrants must adopt to Danish customs; must not insist on special privileges; must not build gaudy mosques as some Muslim groups in Copenhagen insisted; and, additionally, must accept Denmark's historical freedom of speech and expression even if Danish and foreign Muslims by the hundreds of thousands ran amok world-wide as they did two years ago, rioting and rampaging in berserker ways, to protest a few cartoons published in a Danish newspaper that they objected to. 

Finland, the third Nordic country in the EU, falls in between its Scandinavian neighbors in economic performance.  Unemployment is reckoned to be officially 7.0 - 8.0%, a rate that the US hasn't experienced since 1941, except for a few months, in the deep but short-lived recession of 1980-81.  Still, no one has accused the Finns of finagling the unemployment figures.  And though the Finns are, like the Swedes, impressively adept at borrowing and improving on advanced cutting-edge technologies, they come in at the very bottom of the West Europeans --- Sweden not far behind, and Germany not doing much better --- in creating new start-up entrepreneurial firms. 

Nokia remains a great Finnish success.  Can it emulate that success with other giant multinationals at the technological frontier?

Ireland as a EU Foil to the Small Scandinavian Countries with Their Huge Welfare-State Systems 

Note that the real economic miracle in the EU is Ireland, also 4 million like Finland, Denmark, and Norway (outside the EU), and historically one of the three poorest West European countries in the EU, along with Portugal and Greece, when it joined the EU in 1972 . . . so poor, compared to the far wealthier Scandinavian countries, that a large minority of young Irishmen would simply take it for granted when they left school that they would have to seek jobs in Britain or further afield. 

That all changed in the mid-1980s. To escape the country's historical poverty, the Irish government revitalized its economy with low business taxes and other pro- free market policies of sorts that have made Ireland by far the richest country in the EU except for tiny Luxembourg (200,000).  Note also that it kept welfare spending ever since to roughly US levels as a percentage of GDP. (See the figure just below)

The result? 

Ireland's per capita income in purchasing power parity terms is actually about US levels today: $43,000!  Germany, France, and Britain come in around $33,000 each, and Italy slightly behind.  Britain, by the way, has outgrown its three major Continental competitors since the pro-market reforms of the Margaret Thatcher era of the 1980s: it was about 15% in PPP terms in the mid-1980s below Germany and France, and is a tad richer today in per capita income.  More to the point, its unemployment level is half that of Germany, France, and Italy, and hundreds of thousands of Continental young people work in London, Dublin, and elsewhere in the British Isles, escaping permanently high structural unemployment in their countries . . . above all for young people under 30 years.

Other Free-Market Reforms in the English-Speaking World: Australia, New Zealand, and Britain.

Observe finally that like Ireland and Britain and the US, Australia and New Zealand --- foundering with oppressive regulations and high taxes in their economies since 1945 --- scrapped most of their welfare state, pruned their taxes and regulations, and have revitalized themselves impressively since then too.  Meanwhile, the gap between the US and virtually all of West Europe (and Japan) continues to widen yearly in productivity growth, per capita income, and GDP growth.


A Graphic Description

A useful springboard into some systematic comparisons is the following figure, which plots per capita income adjusted for purchasing parity on the vertical axis and, on the horizontal axis, social spending. Those who read the previous (2nd) buggy article of exchanges with Scandinavians about their countries' economies will recall that the same graph appeared there.  Source



Note that Norway is an outlier, slightly richer than the US in per capita income but with about 70% higher social spending as a percentage of its total GDP. There's another reason it's an outlier: it has huge oil and gas reserves in the North Sea that is largely responsible for its uncommonly high per capita income, and though it's certainly a credit to Norway's government for intelligently managing these oil resources and hence avoiding a runaway boom-and-bust oil-dominated economy, its relatively non-industrialized ecFonomy --- dependent heavily on other natural resources and the fishing industry --- would look probably look more like Finland's GDP and per capita income without these lavish oil exports. 

As things stand, with oil priced at around $90-100 a barrel, petroleum exports --- Norway's the third largest exporter in the world, behind Saudi Arabia and Russia --- account for well over 50% of all its exports and, by extension, somewhere between 35-40% of Norway's total GDP of $260 billion (ppp adjusted in 2006). 

The US and Ireland and Japan

Look again at the figure above.  Note how the two richest countries --- the USA and Ireland (in the EU, with a population of 4 million) --- spend relatively little as a percentage of GDP compared to France, Germany, Denmark, Sweden, Italy, Austria, and Belgium in the EU. Note finally how Canada, Australia, Ireland, and to an extent the UK (60 million, like France and Italy, with Germany at 80 million in population) have tended to limit social spending as a group compared to the EU Continental countries.  

These limit on social spending, as it happens, reflect a long industrializing history of Anglo-American traditions to constrain the size of the state, a preference historically for free markets --- which changed only in Britain, Australia, and New Zealand after 1945 and lasted about three or four decades --- and the use of common law as opposed to continental Roman law, and strong entrepreneurial traditions.

The US, of course, has gone further in these directions, what with its federal system, divided central government, judicial review, and a strong heritage of cultural individualism and individual responsibility for a person's life. (With the Labour Party in office for the last 10 years, total government spending in Britain, it needs to be mentioned, climbed about 15% of GDP: more specifically, from around 35% of GDP when Labour entered power in 1997 to around 40% today.)

Enter Japan.  Ddespite a much stronger statist tradition than the Anglo-American countries --- at any rate after the Meiji modernizing revolution of the 1870s and 1880s that culminated in a powerful militarist, fascist-like state in the 1930s and down to the end of WWII --- Japan has also limited social spending and isn't much different on that score than the US and most of the countries following an Anglo-American form of free-market economics . . . always understood, of course, in comparative terms. Laissez-faire never really existed anywhere except in much of the 19th century in Britain --- and certainly not in the US, where government from the outset did play a large role in fostering infra-structure development and protected much of our industry until the start of the 20th century.

US and Scandinavian Prosperity

Keeping in mind the huge differences in geographical size, population (the US 75 times larger than either Norway, Denmark, or Finalnd), and the historical diversity along ethnic and racial lines of the American population vs. Scandinavian ethnic homgeneity until recently --- what with the rapid growth of alienated, angry, and increasingly crime-ridden Muslim minority areas --- it still surprises many West Europeans how much more prosperous the US is than even the rich welfare-state countries of Scandinavia.  Click here for a very recent Cato Institute study, full of data, that brings out the differences in economic dynamism, per capita income, and disposable income, and --- surprisingly --- the extent to which the bottom 10% of the American poor, most of whom don't stay that way for many years, have about as much a percentage of average (median) US income as do Danes, Swedes, and Finns --- roughly 37% for the Finns and Swedes and Americans, with the Danish poorer 10% logging in slightly higher at 6%.  Only the oil-rich Norwegians do much better in boosting the percentage for their poorest 10%

To find these figures at the Cato Study, "What Can the US Learn from the Nordic Model", click on p. 3 in the left-hand column of your browser, and note the faster US growth rate of GDP since 1981 in various time-periods.  Page 4 shows that US per capita income and US disposable income --- the latter taking into account what people pay in taxes and receive in cash benefits ---- are noticeably higher than in Scandinavia . . . with the accent on noticeably.

In the meantime, here is the first figure from the Cato Institute's study by Daniel J. Mitchell:

US vs Nordic Economic Growth

A Surprising Comparison Too 

What about poverty, though --- or at any rate, the lowest 10% of income households --- in Scandinavia as opposed to the US?  Needless to say, there's a more egalitarian distribution of income in Scandinavian countries; but if you look at the income received by the lowest 10% of households in abolute US dollar figures, adjusted for purchasing power in Sweden, Norway, Finland, and Denmark to make such comparisons possible with the US's bottom 10% of households, you will find that there is very little difference in absolute purchasing power available to such low-income households between the Nordic countries and the US except for Norway.  And remember, Norway is exceptional even in Scandinavia because of its very high per capita income, swollen by its daily export of over 3 million barrels of oil, with oil priced even in 2000 by over $50/barrel and in 2008 by about $100.  (Note that the source from which prof bug took this chart is from the Cato Institute study by Daniel Mitchell, and all references to it should be to Dr. Mitchell's study.)

 Share US Median Income Lowest Decile US Scand

One More Comparison: Taxes 

The following table, taken from the OECD, shows additionally what the average West Europeans in the EU are taxed compared to average Americans, taking into account both direct and indirect taxes . . . but leaving out transfer benefits paid to the citizens by governments in the US and West Europe.

The average direct, the average indirect and the average total taxation of
an average production worker in different countries (2002). Per cent.


Direct tax1

Indirect tax2

Total tax

on labour income





























































United Kingdom




United States




1: Percent of gross earnings.  2. Percent of gross consumption.  Source: Danish Ministry of Taxation

Tax Burden 2000-2006

Source: Click Here

Here's a nifty chart, taken from the OECD site, of per capita income in its member states for the year 2005.

OECD per capita income 2005



One final point, this time formulated as a question: can free-market economists, found mainly in Anglo-American countries, suggest economic reforms for the Scaninavian countries and expect those reforms to be implemented?  The answer: maybe so . . . but only if those economists take into account the very different institutional and cultural heritages that separate the EU Continental countries, not just Scandinavian ones, from those have prevailed in the 19th and 20th centuries in English-speaking countries.

Consider this clear difference, if nothing else.  Plainly, as one survey after another shows, the Scandinavian peoples overwhelmingly prefer living in the sort of state-regulated, state-dispensed welfare system they have to the kind of dynamic, less state--dominated market economy that the US has developed for generations, what with its limited regulatory controls and welfare-state . . . not to forget the more rough-and-tumble competitive economic and social systems we also have institutionalized here.  The same point would apply no less to the other West European members of the EU. What follows?

Well, simply this: in effect, to offer free-market advice without taking into account the powerfully rooted preferences of Scandinavians and other Continental Europeans that recoil from such policies as distasteful and unacceptable --- at odds with their age-old social and cultural heritages --- will invariably seem like empty, largely feckless or arrogant sermonizing, little else.   They just won't accept them.  It isn't that certain changes in the relationshp between states and economic markets might not be desirable reforms in West Europe . . . especially in making labor markets more flexible and product markets for goods and services more competitive.  Even so, any practical reforms to those ends will, plain and simply, have to work within the clear limits set by these European political and cultural constraints of long-standing.  And note . . .

. . . It's Ditto for the US

The same sort of logic, no less plainly and simply, applies to any major reforms of the American economy proposed by certain American and European economists. 

In particular, left-wing economists who would like to see the US economy adopt certain social and regulatory measures used in West Europe will have to consider the no less entrenched cultural beliefs and political constraints that make most Americans favor at best limited or incremental changes if they're to have any chance of being implemented, whether in Washington D.C. or on state and local levels.  To forget these cultural and political limits that hem in radical change here is to engage in futile academic advice, little else.  Consider reforms in our health system.  What the Clinton administration sought to do in the first year of its life in 1993 was doomed from the outset.  The entire American political system is structured to inhibit radical changes from the status quo (except in an emergency like the Great Depression of the 1930s or in WWII) and encourage, oppositely, at most limited change. 

Senator Hillary Clinton and Senator Barak Obama have both learned, each in their own way, the lessons of the Clinton debacle i health reform.  What they both propose, with limits, is building on the unique system of mixed private and public health care insurance.  Needless to say, the same is true among the leading candidates for the Republican nomination in this presidential election year.