Does Socialism Work in Scandinavia? (Part 1)
Authored by: Matt Palumbo
Does anyone even know what socialism is anymore? It’s not uncommon to see liberals today defend socialism by pointing to roads, firefighters, police, and other government services nobody disagrees with, which truly illustrates how little they know about the economic system they’re defending. Can someone find me the conservative arguing that Venezuela is crumbling because of an abundance of firetrucks?
The same kind of misunderstanding is present when liberals showcase the Scandinavian nations (Denmark, Sweden, and Norway) as Exhibit A when it comes to examples of successful socialism. “I think we should look to countries like Denmark, like Sweden, and Norway and learn from what they have accomplished for their working people” said former socialist Presidential candidate Bernie Sanders. And those countries offer much of what Bernie wants for America – free college, socialized medicine, paid maternity leave, among other generous welfare state benefits.
In response to Sanders, Denmark’s Prime Minister asked him to stop using the slur of calling his country “socialist.” And he is right. The definition of socialism is government ownership of the means of production – which isn’t the case in his country.
But while not explicitly socialist, the Scandinavian countries certainly lean in that direction, combining free market capitalism with high taxes and big government.
So, does it work?
Scandinavia’s Economic Success Predates The Era of High Taxes and Big Government
Scandinavia is rich today – but in spite of their generous government policies, not because of them. As economist Nima Sanandaji, who wrote a book on the myth of Scandinavian socialism, noted in the case of Sweden:
From 1870 through 1936, Sweden was the fastest growing economy in the world. But after 1975—when the Swedish state began to expand in earnest—Sweden’s economy noticeably slowed, falling from the 4th richest in the world to the 13th by the mid 1990s.
Charted below is GDP growth in Sweden (and Denmark), and per-capita income in Sweden relative to other advanced countries.
It’s not hard to imagine why big government and high taxes have slowed growth. The top tax rate in Denmark is 60.4%, while Sweden’s is 56.4 percent. But unlike America where it’s only top earners subjected to the top marginal tax rate, the top rate applies to a sizable chunk of workers in Scandinavia.
If America had Denmark’s tax brackets, someone earning $60,000 a year would be subject to the top 60% tax rate. And there’s a national sales tax of 25% in Denmark, Sweden, and Norway on most goods. I bring this up as a reminder that if we were to adopt Scandinavia’s welfare policies, it wouldn’t be just “millionaires and billionaires” footing the bill.
Scandinavians Are Wealthier in Low Tax America
There is something to be said about the Scandinavian work ethic, and it brings to mind an anecdote. A Scandinavian economist once said to the late Milton Friedman, “In Scandinavia, we have no poverty.” Milton Friedman replied, “That’s interesting, because in America, among Scandinavians, we have no poverty, either.”
Sanandaji, noted elsewhere that:
It is equally interesting to look at Nordic Americans, a group that combines the Nordic success culture with U.S.-style capitalism. It was mainly the impoverished people in the Nordic countries who sailed across the Atlantic to found new lives. Danish Americans today have fully 55 percent higher living standard than Danes. Similarly, Swedish Americans have a 53 percent higher living standard than Swedes. Even though Norwegian Americans lack the oil wealth of Norway, they have a 3 percent higher living standard than their cousins overseas.
When it comes to those on the bottom of the income distribution, the poverty rate among Swedish Americans is lower than Native Swedes.
Not only are Danish and Swedish Americans earning 50% more than their counterparts back at home, the gap is actually much larger, as they aren’t taxed to death on that income either.
Despite High Personal Taxes, Scandinavia is Incredibly Business Friendly
According to the Fraser Institute’s Economic Freedom of the World Index, there are plenty of areas where Scandinavia is more business friendly than the U.S.. Despite the noted extreme taxes on the citizens of Scandinavia, for most of their history, they’ve had a lower corporate tax rate than the U.S.. Denmark taxes corporations at 24.5%, Norway 27%, and Sweden at 22%. Prior to the Trump tax cuts, America taxed corporations at 39.1%.
According to The World Bank’s rankings, Denmark is the third easiest country to do business in globally, beaten only by capitalist haven Singapore, and New Zealand. This at least allows the Scandinavian nations to offset some of the distortionary effects of big government on the economy elsewhere.
And it certainly is interesting that the Left’s “go-to” countries for socialist success are among the most business friendly on the planet.
- Scandinavia is not socialist, but it does combine capitalism with high taxes and big government.
- As evidenced by Scandinavians who live in America, their standard of living is higher in absence of the Scandinavian welfare model.
- Scandinavia is extremely capitalist when it comes to business freedom.
In part 2 I’ll be going more in depth when it comes to particular government programs in Scandinavia. For instance; how effective are their healthcare systems? Is “free college” really “free” there? What are the unintended consequences of their generous welfare state?
As you’ll soon learn, the laws of economics have hardly been suspended in Scandinavia, and they’re actively moving towards shrinking the welfare states that they’ve become known for.