Tag: Scandinavia

The High Cost of Scandinavian “Socialism”

A lifelong socialist, Bernie Sanders decided to do some rebranding during his 2016 presidential campaign. No longer was he a socialist, he’s now a “democratic-socialist” (which I suppose sounds better).  “When I talk about democratic socialism, I’m not looking at Venezuela. I’m not looking at Cuba. I’m looking at countries like Denmark and Sweden.” Bernie declared during the presidential primaries.

I’ll ignore the fact that Bernie has consistently praised Cuba in the past, and in 2011 wrote that “These days, the American dream is more apt to be realized in South America, in places such as Ecuador, Venezuela and Argentina,” and turn my attention towards his new model for socialism: Scandinavia.

Scandinavian “Socialism”: The Offerings

It must first be clarified that Scandinavian countries (Sweden, Denmark, and Norway) are not socialist. They are capitalist countries that impose excessive levels of taxation on their citizens to fund a wide array of social programs. Those programs include:

  • “Free” government funded healthcare through single-payer healthcare systems
  • Generous government funded maternal and paternal leave
  • Heavily subsidized higher education, free of tuition to all students (and in Norway, to international students as well)
  • Generous paid sick leave

And all these programs are extremely popular when you poll American voters on them – but that’s meaningless. Anything that appears “free” polls extremely well – until the public realizes that they have to pony up for “free.”

Scandinavian “Socialism”: The Cost

The large welfare states of Scandinavia are not without their cost.  In 2017, all three countries had levels of taxation exceeding half of every dollar earned. Taxes as a percent of GDP are:

  • 50.7%  in Sweden
  • 53.5%  in Denmark
  • 54.7% in Norway

For reference, in the U.S. taxes at all levels of government averaged 26% of GDP in 2016 (and have since been cut).  

Listen to Bernie’s rhetoric and you’d get the impression that it’s “millionaires and billionaires” ponying up most of those funds – but they aren’t in Scandinavia. While the Tax Foundation found that in 2017 the top 10% of American households paid 70.6% of the taxes, there is no Robin Hood in Scandinavia.

In America, an earner isn’t subject to the top tax bracket of 37% until they earn over $500,000. While an American would need to earn eight times the average income to be subject to our top tax bracket, the figures are only 1.5 times average income in Sweden, 1.6 in Norway, and 1.3 in Denmark (source: pages 30-31).

So, how would America’s tax system look if it were more like Scandinavia’s?

  • If the U.S. tax code was as flat as Denmark’s, someone earning roughly $70,000 would face a top marginal tax rate of 46.3% (source: page 30). That’s simply the first layer of taxation, as all Scandinavian countries have a 25% value-added tax on purchases (the equivalent of a sales tax).
  • Even after accounting for the dollar value of transfer payments and other government benefits, a single-income couple earning the average wage with two children will pay an average personal income tax rate of 22% in the Nordic countries (counting government transfers as a negative tax), as compared to a rate of 14.2% in the United States. Across all family types, the average American family earning the average wage would pay $2,000-$5,000 more in taxes each year (net of the value of any transfer payments) than a Nordic family. Note that this comparison is of Nordic countries (Scandinavia plus Finland and Iceland). (Source: page 31).

And despite all the “freebies” in Scandinavia, Americans consume much more. According to an analysis of OECD consumption data by the White House (source: page 36), average consumption per person is:

  • 31% lower in Denmark than in the United States
  • 32% lower in Sweden than in the United States
  • 18% lower in Norway than in the United States

And on that note, it should come to little surprise that….

Scandinavians Perform Better in America Than in Scandinavia

The success of Scandinavian economies is despite their generous tax-and-spend policies, not because of them. You can thank the Scandinavian work ethic for their success – not the laws of economics being suspended.

There are over 10 million Americans with Scandinavian ancestry (most of which are the descendants of immigrants), and they far economically outperform their counterparts across the Atlantic.

There is, unfortunately, a lack of global household income data, and thus, the most recent information available is from a 2013 Gallup study of global household incomes. They found the median household incomes, purchasing power adjusted to be the following in 2012:

  • Norway: $51,489
  • Sweden: $50,514
  • Denmark: $44,360

The figures are the following median incomes for households of Americans with Scandinavian ancestry in 2012 are as follows:

  • Norwegian American $62,155 (21% higher)
  • Swedish American $62,295 (23% higher)
  • Danish American $63,630 (43% higher)

Additionally, the Census listed a group identifying themselves as “Scandinavian Americans,” who earned a median household income of $67,421 in 2012. The median household income of all Americans in 2012 was $51,371.

And the real kicker? These figures are not adjusted for differences in taxation. Not only do Scandinavian Americans far outperform Scandinavians economically, but they also get to keep a larger chunk of a larger pie.

 

Does Socialism Work in Scandinavia? (Part 3)

Authored by: Matt Palumbo

In parts one and two, I answered the question of whether or not the Scandinavian countries are examples of successful socialism. Part 1 disputed that those countries (Sweden, Denmark, Norway) truly are socialist, and instead argued that they’re capitalist countries with high taxes and large governments. Part 2 analyzed the follies in various government freebies those nations have become known for, including “free” college and socialized medicine.

The question of whether or not Scandinavian countries are examples of socialism done right is a resounding “no,” and despite their large governments, there are some capitalist lessons to be learned from them. Sweden in particular is ideal for this analysis. In the case of some Swedish economic reforms, conservatives will find evidence that smaller government yields benefits, that school vouchers work, and even that Social Security can be partially privatized.

Smaller Government is Better – And Balanced Budget Amendments Work 

In part one I alluded to the fact that Sweden’s economic growth spurt came during a time they had low taxes and small government, and that the brakes began to halt once they created the welfare state they’re known for in the mid 1970s. While their government is still massive, Sweden did also implement reforms relatively recently in the mid 1990s, that have scaled back the size and scope of their government. And as it turns out, when it comes to government, smaller is better.

Consider the following.

From 1975-95, Sweden’s GDP growth was half that of all other OECD countries, and a full percentage point lower than the EU-15 countries. After 1996, Sweden has outperformed both groups of nations. Note: all charts are from the Swedish think tank “Reform Institute.”

A similar pattern can be seen when it comes to Sweden’s productivity growth relative to other nations (with the only exceptions being during the 2008-09 financial crisis, when Sweden’s manufacturing sector saw a severe downturn):

The culprit for the rise in GDP growth and productivity? Simple – a shrinking public sector. In the 1990s, more than one out of every five government employees lost their job. It’s no secret that government workers are (on average) less efficient than private sector workers due to different incentive structures in the public and private sector, and the reallocation of workers from public to private sector gave the economy a much needed jolt.

Swedish workers personally saw the benefits that a reduced government had on the economy. From 1976-95, Swedish incomes rose only 0.7%-0.8% per year. From 1996-2011, the rate of growth nearly quadrupled.

And speaking of the government’s finances, in 1994, Sweden’s national debt totaled 80% of GDP, which has since been cut in half. The catalyst? A 1997 fiscal rule requiring a budget surplus of 2 percent (which was since lowered to one percent).

The national debt in America currently stands at 105%. There is significant evidence that debt exceeding 90% of GDP begins to have noticeable negative effects on the economy. While that may not be noticeable to us currently in the Trump economy, it still remains a lingering problem that will not resolve itself.

School Vouchers Work 

In the 1950s, the late Milton Friedman created the concept of school vouchers. Explained briefly, rather than maintain the status quo in which a student attends a school based on his zip code, Friedman wanted every student to be given a “voucher” with a certain dollar value, which could be used to attend another school (or towards a private school). In theory, this would ensure that only the best schools survive (as students would leave under-performing schools, thus depriving them of funding).

Sweden put such a system in effect in 1992, and it’s yielded the expected positive effects. Prior to vouchers, fewer than 1% of Swedish students attended private schools. Since then, that figure has increased to 10-15% (depending on which study you look at), Just like in America, Swedish students at private schools outperform their public school counterparts.

A study commissioned and published by Sweden’s government controlled Institute for Evaluation of Labour Market and Education Policy concluded that the implementation of vouchers had a positive effect on test scores, grades, probability of attending college, among other factors. Most important was the mechanism by which student performance increased: that competition among schools for vouchers has increased the quality of schools across the board.

I’ll only note that it did take 10 years before those positive effects started becoming realized, so vouchers aren’t an “overnight” fix, but they do work.

(Partially) Privatizing Social Security Works 

Sweden was the first country to implement a universal government-funded retirement system, and among the first to partially privatize the system. Workers in Sweden pay 18.5 percent of their income towards the nation’s retirement program, with their employer footing roughly two-thirds of the bill. After reforming and partially privatizing their retirement system in 1998, workers can now invest 2.5 percentage points of the 18.5 percent into hundreds of private pension funds of their choosing.

The other 16 percentage points fund a restructured pay-as-you-go government program called an “income pension,” similar to our Social Security system. According to Sweden’s Pensions Agency in 2017, income pensions have earned an average investment rate of 3%, compared to 6.7% for private pensions. Obviously there are different risk profiles in the types of assets being invested in, but one can certainly tolerate plenty of volatility when the private system yields twice as much.

Someone investing $4,000 annually over a 45 year career at 3% will have $386,000, while the same person earning 6.7% would have $1.1 million.

Conclusion

While there’s no question that Sweden’s government is far larger than our own, and taxes their citizens to a confiscatory extent, things used to be worse. As they moved towards the direction of freedom, their economic fortunes finally began to sweeten. There’s no reason to think that such trends wouldn’t only continue further if Sweden were to continue to cut their government down to a more reasonable size.

Does Socialism Work in Scandinavia? (Part 2)

Authored by: Matt Palumbo

In part 1, I examined parts of the popular claim that the Scandinavian nations (Sweden, Norway, Denmark) are successful examples of socialism. I pointed out, among other things, that:

  • By definition, the Scandinavian nations aren’t socialist. They’re capitalist countries with high taxes and big welfare states.
  • Scandinavian Americans, who are mainly the descendants of immigrants from 200+ years ago, are wealthier and have lower poverty rates than Native Scandinavians.
  • Scandinavian countries got rich while their taxes were low, and government small. Growth has slowed since changing course.

But there’s still no denying that the Scandinavian nations have generous welfare states, so rather than argue over the definition of socialism, let’s examine some of the alleged benefits of the Scandinavian welfare states.

Inequality

One of the main advertised benefits of the large welfare states of Scandinavia are levels of income inequality among the lowest rates in the world. But, just like their general prosperity, the relative income equality of Scandinavia predates the welfare state.

According to one study of income inequality in Sweden in particular, during the period between 1903 and 2004: “We find that, starting from levels of inequality approximately equal to those in other Western countries at the time, the income share of the Swedish top decile drops sharply over the first eighty years of the twentieth century. Most of the decrease takes place before the expansion of the welfare state and by 1950 Swedish top income shares were already lower than in other countries” (Source: Page 56).

And income inequality isn’t the only kind of inequality. The Scandinavian nations have plenty of wealth inequality. In the United States, the top 1% owns roughly 35% of all the wealth. In Sweden, the top 1% controls roughly 25-40% of total wealth. High taxes have proven unsuccessful at alleviating that “problem.” According to one study, the share of the richest Swedes who inherited their wealth is around, 2/3, with only a third being entrepreneurs. In America, the majority of wealth is self-made, while in Sweden, it’s generational.

Ironic, isn’t it, that the high-tax country is the one with more unearned wealth?

Free College

American readers will undoubtedly see a lack of crushing student debt as the main benefit of “free” college. And in Scandinavia, you can get a college education free of charge…. and still graduate tens of thousands of dollars in debt. Since I’ve written an entire article on this subject, I’ll simply hyperlink to the full version to save space, while summarizing the main problems with free college, that:

  • In 2013, average college debt among graduating students was $19,000 in Sweden, compared to $24,800 in America. It’s presumably room and board responsible for debt in Sweden. After all, why commute when tuition is covered?
  • When everyone has a college degree, nobody does. An American college graduate earns 65% more than a high school graduate, while in Sweden, college graduates earn only 25% more.
  • As a result of the lack of ROI described above, Swedish graduates have the highest debt-to-income ratios of any group of students in the developed world.

In Denmark, there’s a phenomenon known as “eternity students,” which are those who goof around and sometimes never graduate, simply enjoying free classes (and a monthly government stipend to keep themselves afloat). Students are also much more likely to pursue “fulfilling” (translation: liberal arts) degrees when the government is footing the bill. Denmark has only one-third the engineers as the OECD average.

Socialized Medicine

While the Scandinavian nations have a system of universal healthcare/socialized medicine, don’t call the U.S. cheap, as the U.S. government spends more on healthcare than the Scandinavian nations on a per-capita basis.

The difference is that healthcare is a simply a heck of a lot more expensive in America. For all our governments spends, that money is just funding Medicare and Medicaid (which have drastically worse healthcare outcomes than private insurance).

Of note though, while America is the only developed nation without universal coverage, we still boast the highest cancer survival rates in the world.

Just consider the implications of the table below; that for every million people that are diagnosed with the following four cancers in America, 738,000 will have survived after five years. In Denmark, only 510,000 will have survived.

For a more full case against socialized medicine, see the second chapter in my book The Conscience of a Young Conservative (free PDF).

The Welfare State

Few disagree that there should be a safety net for when hard times come unexpectedly – but there’s a difference between a safety net, and a hammock.

In Scandinavia, it’s clear which they are.

Despite being one of the healthiest nations in the world, in the early 2000s, 10% of Sweden’s entire workforce was on paid sick leave at any given time. And why wouldn’t they, when the government would pay 80% of their salary? The average number of sick leaves taken per Swede per year more than doubled when the government increased the percentage of salary they’d pay from 75% to 80%. The paid sick leave system has since been reformed and tightened.

In Denmark, roughly 9 percent of the workforce (in 2012) was on disability, 33,500 of them under the age of 40, and in Norway last year, while the unemployment was below 3%, 20% of the working age population was on either unemployment or sick leave benefits. All of these countries lack the sick populations to justify such figures.

As I pointed out in part 1, Scandinavians are wealthier in America than they are in Scandinavia, and is it any surprise, when there isn’t the temptation of excessive benefits? In America we saw massive reductions in poverty when Clinton-era welfare reform added a work requirement to receive benefits, and it looks like Scandinavia could use the same.

In some regards, Scandinavia is moving in the right direction.  Since the early 1990s, when a financial crisis put their budgets in crisis, Sweden deregulated a number of key industries (airlines, telecommunications, and electricity), lowered taxes, partially privatized their pension system, sold off a number of state-owned enterprises, and began cutting public spending. In 2015, Denmark announced caps to the amount one can receive in both welfare and unemployment benefits. Denmark also began working on welfare reform plans in 2013, and has already implemented caps on certain benefits.

There’s much to be learned from the benefits of privatization and a move towards freedom as seen in the Scandinavian nations.

Socialism doesn’t work there, but capitalism does.

And for more on that, stay tuned for part 3….