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How good is the Nordic model?
Jeffrey Sachs has written a new paper on the Nordic model, extending his Scientific American article in praise of the welfare state. It is listed as "not for quotation" so I won't. I agree with much of the paper, but I would emphasize a few propositions more:
1. Many ideas and innovations are international public goods. This will make the Nordic model more sustainable over time. Swedish society doesn't have to be that innovative, although of course sometimes it is.
2. Societies differ a great deal in their innate level of cooperativeness. This is a key to making the Nordic model work. I wouldn't try the Swedish model in France, much less in the United States.
3. The Nordic countries generally take a light hand in regulation, capital income taxation, and many of the public welfare programs pay people to work and not to sit at home on their behinds. In fairness to Sachs, he does mention these points. Furthermore given the extensive subsidies to child care, which encourage female labor force participation, the high marginal tax rates do not discourage labor supply as we might at first think.
4. Government policy is often most usefully thought of as endogenous. Higher levels of cooperativeness, and lower levels of corruption, mean that people will choose more government. The government they get will work better than government works elsewhere. The point is not that all choices are efficient, but rather there is a selection bias in the data we observe on government size and performance. Nordic welfare states are large, in part, because they work relatively well.
5. The long-term consequences of a slightly lower growth rate are in any case troubling, no matter how well a society works at any moment in time.
Here is my previous post on the Nordic model. Here is a post on Swedish stagnation. Excerpt: "I've been to Stockholm several times and loved it. That being said, how attractive will this model remain when it offers only half of the per capita income of the United States?"
Posted by Tyler Cowen on October 26, 2006 at 05:54 AM in Economics | Permalink
Comments
Ever increasing productivity suggests to me that we will eventually need to move toward a welfare state.
Even now, I see most of my co-workers as deadweight. Most jobs probably exist due to labor laws preventing discrimination.
If you link about it, most white collar jobs are simply management of the redistirbution of income (sales, regulations, and finance).
Posted by: aaron at Oct 26, 2006 9:06:05 AM
link=think
oops.
Posted by: aaron at Oct 26, 2006 9:07:39 AM
Mr. Cowen,
Back in 2004, you wrote “I'm willing to take the Swedish model seriously. I've been to Stockholm several times and loved it”. What exactly did you love about it? What made Sweden attractive?
Posted by: Peter Schaeffer at Oct 26, 2006 9:44:08 AM
We had a vast expanse of welfare spending in the US in the 60s and 70s. I seem to recall certain adverse affects on family structure.
Maybe it’s a mistake to assume that what works in Sweden will work just as well in the US.
Posted by: Roy at Oct 26, 2006 10:03:32 AM
Are high marginal tax rates defendable as long as tax dollars are used on things such as day care programs? To balance out one's view of the "success" of the Swedish model, one must consider the Howard Center's Allan C. Carlson's writings on the topic. This paper is a good summary, but much more can be found on the web.
Posted by: chris at Oct 26, 2006 10:10:14 AM
The Nordic model does not work!
http://www.johannorberg.net/
Posted by: Niels Andeweg at Oct 26, 2006 10:18:26 AM
Another question would be, does the Nordic taxation system tax
"households" or just individuals.
If they are trying to encourage both marriage partners to work, a high marginal tax rate would hurt dual income "households".
Posted by: Xmas at Oct 26, 2006 11:11:03 AM
Some more criticism from Mises Institute: http://www.mises.org/story/2259
Posted by: dimakor at Oct 26, 2006 11:11:23 AM
Can the Swedish model really be said to work when the birth rate is 1.75? What happens when you have a tenth of the population working to support the other 90%?
- Josh
Posted by: Wild Pegasus at Oct 26, 2006 11:14:04 AM
Which leads to the next obvious question: Will the model continue to work as the Scandinavian counrtries cease to consist of relatively small, homogenous populations and become more pluralistic because of immigration?
Posted by: BC at Oct 26, 2006 11:53:32 AM
Chris,
That's a fascinating essay you cite. I hadn't thought of what the article
explores but once pointed out it's seems obvious. I don't know whether the
solution Allan C. Carlson advocates is practical.
If there's any hope for his path there has to be a radical shift in
attitudes towards the desireability of teenage labor. I do clearly remember,
as I teenager, resenting the more-or-less mandatory uselessness of teenage
life. The opportunities to constructively engage with and be part of
something meaningful in the adult world, or to do very interesting things,
were very limited.
I don't think most people want to become like the Amish. The question is
how to raise modern, technically sophisticated children whose education
and lives spin around their families and the formation of new families
instead of the state.
Maybe a more open and competitive educational system would help a lot. Say for
example we separated teaching from the evaluation of course material so
that instead of degrees being awarded from a college the degree would mean
a nationally standardized proficiency in a certain set of subjects. That in
turn lead to a far more productive and efficient, and probably cheaper,
educational system characterized by a greater diversity of practical pathways.
Which would in turn open up other possibilities including family-centric
as opposed to state-centric lives.
Posted by: Mark Amerman at Oct 26, 2006 11:54:40 AM
Swedish economist Andreas Bergh says that Peter Lindert significantly overlooks the extent to which the Swedish govt does pay people to sit on their behinds. He sheds light on many related issues, such as female labor force participation. See Bergh's exchange with Lindert in Econ Journal Watch, which I edit:
www.econjournalwatch.org
Posted by: Daniel Klein at Oct 26, 2006 12:17:27 PM
You make a point I think is often underdone: that whawt worksfor one culture might not work for another. By comparison to us, the Scandinavian countries are very small, and relatively homoegeneous Their history is different. Is there any reason to think that what works there should work for us? I mean, maybe there are ideas and notions we can steal and learn from that'd work well with our givens. But we should be a little wary of simply running and doing likewise, no?
You write: "how attractive will this model remain when it offers only half of the per capita income of the United States?"
I dunno. But, assuming incomes generally keep rising and Scandinavians aren't too crippled by envy, maybe it'll work fine. After all, they'll be experiencing growth and will be better off than they are now. Given that they're already fairly rich, that ain't so bad, right?
Posted by: Michael Blowhard at Oct 26, 2006 12:17:31 PM
At the bottom of the brief Scientific American article is this footnote:
"For details see background paper (Sachs, 2006)"
Wondering exactly about these details I went to Jeffrey Sachs list
of papers at Columbia University.
First item up is ""Welfare States Beyond Ideology," Scientific American, November 2006."
Except when accessed
http://www.earthinstitute.columbia.edu/about/director/documents/ScientificAmericanNovember2006-WelfareStatesBeyondIdeology.pdf
it's pretty close to the same essay, just a little shorter. At the bottom of it
is this footnote:
"An expanded version of this is available online at www.sciam.com/ontheweb"
which turns out to be precisely what Tyler cited.
I looked further at Jeffrey Sachs website and found no dataset to go with
the essay and no footnotes to tell where precisely he got his data from
and what exactly he was looking at.
Posted by: Mark Amerman at Oct 26, 2006 1:04:46 PM
Ok, I'll say it. Sachs has done a horrible job picking his countries. He is making an apples to oranges comparison, and so far no one is calling him on it.
First off, to not acknowledge that Norway is an extreme case that rightfully ought to be left off of any comparison is just plain wrong. Norway has a huge amount of oil and gas wealth per capita, and is also socking away a lot of money for the day when their oil will run out, and it is running out. The notion that this huge amount of per capita GDP is somehow due to the high tax model is absurd. Same goes for their surplusses, plus the ability to sustainably fund lots of social programs.
Second, comparing small population sies with large population sizes is wrought with conflicts, and ought not be done if there is a reasonable alternative. I'd hope it would be obvious that a small country (population-wise) has huge advantages over large countries when it comes to improving per capita GDP. If Sachs wants to compare small countries instead of the bizarre English speaking sample he picked, then that would make more sense. I nominate Sweden, Denmark, and Finland vs Ireland, Hong Kong, and Singapore.
Another comparison that makes more sense than Sachs' is large population countries. I nominate the US, UK, and Australia vs France, Germany and Italy.
Sachs is correct, the evidence is in and it points in the exact opposite direction he wishes it pointed in.
Posted by: happyjuggler0 at Oct 26, 2006 1:36:19 PM
I assume Sachs's essay is to a large extent statist ideology trying to pass as
analysis. The Economist reported a month or so ago on the "Swedish model" (citing a
McKinsey study) that unemployment in Sweden is 15-17%, not the 5.8% or so the
government reports. Unemployment for young people, especially Muslims (who are
not well integrated into Swedish socieity), is considerably higher, and more than
a third of people who are employed work for the State.
Of the fifty largest Swedish firms (e.g, Ikea, Nokea), not one was started after
WW II. Doesn't sound like a very dymanic place to me.
And there's also a lot of nanny statism. A friend reported that he was on a train
in Sweden once, and the guy next to him was rolling his own cigarette because of the
high taxes on them.
Posted by: Bill Stepp at Oct 26, 2006 1:38:50 PM
According to the "CIA World Factbook," the combined population Sweden,
Denmark, Finland, and Norway is 24 million. The combined population
of the United States, United Kingdom, Canada, Australia, Ireland and
New Zealand is 420 million.
Sweden comprises 38% of the scandanavian population; the United
States 71% of the anglo-american.
So simplifying my calculations and skipping the other countries
to do a quick verification:
Sweden has a purchasing-power parity of $268 billion; the U.S.
$12,360 billion. Sweden has a working age population of 5.9 million;
the U.S. 200.5 million. Thus purchasing-power parity per working-age
swede is $45,400 versus $61,645 for the american.
Yet Mr. Sachs table shows $50,700 for the scandanavians versus $48,500
for the anglo-americans.
I'm not calculating exactly the same thing but still it seems they
should be in the same ballpark. What's going on?
Posted by: Mark Amerman at Oct 26, 2006 1:44:10 PM
I was thinking the same thing as happyjuggler0. Norway, at 19%
of the scandanavian population, should not be included with the
others. Because of it's gas and oil Norway has more money than
it knows what to do with. This unusual situation is going to distort
all these numbers. Certainly there's no counterbalancing similar
free money in 19% of the anglo-american world.
For example, one of the things that Norway does is to guarantee
every person a job. If you can't find a job in the private sector,
the government will give you one. If you don't like that job,
the government will try to invent a job that you do like. Not
surprisingly Norway has the highest employment rate in the world.
It's all very interesting but it seems an inappropriate point of
comparison.
Posted by: Mark Amerman at Oct 26, 2006 1:56:53 PM
The combined population of Wisconsin, Minnesota, North Dakota,
and South Dakota is about 12 million. Scandanavia minus Norway,
which should be excluded for the reasons given above, is
about 19 million. Wisconsin, Minnesota, North Dakota, and
South Dakota have a high percentage of people with scandanavian
ancestry. They are also more culturally homogeneous than
most of the United States.
Have minimized the variables about as much as is practical,
it seems like this would be a good point of comparison.
Posted by: Mark Amerman at Oct 26, 2006 2:08:04 PM
First I would like to commend Tyler for being
willing to confront and provoke lots of his
readers with facts/arguments that go against
their preconceptions. I have been hearing for
decades about how the Nordic model is "doomed"
and about to collapse and on and on.
So, fine, Norway has lots of oil so we can
pretend that its system has nothing to do with
its good performance, even though a lot of oil
exporters have lousy economic performance, Dutch
disease, lots of corruption, and dictatorships,
and so forth, e.g. Russia, Libya, and Venezuela,
to name a few.
Also, while it is the biggest, Sweden has also
arguably been the one of the furthest out there
in its system, someone reformed afte 1991. What
about some of the others?
Let's look at an important set of facts. Just
googled per capita income nations rank and got
a list pulled from the 2005 World Bank Development
Indicators report. Here is the list of the top 11
countries in order after adjusting for PPP.
Luxembourg
Norway (oh, sorry, we should not mention it!!!!)
Switzerland
US
Denmark
Iceland
Japan
Sweden
Ireland
UK
Finland.
Guess what kids, all the Nordic economies are
in the this group. Wanna go on about how they are
all going to be in terrible shape in a few years
or how they do not work or how they are about to
collapse or how they should imitate Hong Kong (# 18)
or Singapore (# 20)? Maybe Ireland is worth
emulating, although only Finland is behind it on
this list. And the Nordics pretty much beat everybody
on education and life expectancy (except Japan on this
last one), and they easily have the lowest poverty
rates in the world by any measure, even if those
rates may be increasing, especially among their
growing immigrant populations (ah, Peter Schaeffer
is right again! Of course you are right, Peter,
Stockholm is awful, unlike what Tyler said, especially
if you have to pay the high taxes and get subsidies
for sitting around doing nothing, poor thing).
Niels,
Went to Norberg site. Maybe he showed how the
Nordic model "does not work" in one of the postings
in Swedish (which I do know a bit of, but not enough
to read all those postings, or maybe this was one of
the other Scandinavian languages), but I did not see
anything in the English postings. Does Norberg actually
know relevant data or is he just bloviating about high
taxes, immigration, and disguised unemployment in
Sweden?
Regarding the issue of population density. Again,
having lots of natural resources can be a curse,
not a blessing. Second, if anything, a bivariate
regression at the global level will show a positive
relation between pop density and per capita real
income, with a lot of outliers of course. There
are good econmic reasons (think endogenous growth
models and issues of transportation costs) for why
densely populated countries might have higher per
capita incomes, although this is a complicated
matter.
Now, the Nordic economies do tend to be among
the high income outliers on that story, along with
Canada and Australia. But, Denmark is one of the
more densely populated countries in the world,
and I remind that it is # 5 in per capita income
rank, the highest of the Nordics except for that
one nobody is supposed to mention... In Europe,
aside from micro states like Monaco (actually # 1
in density in the world), those in Europe that
are denser than Denmark are the following in rank
order
Netherlands
Belgium
UK
Germany
Luxembourg
Switzerland
Czech Republic.
Except for the last of these (just barely ahead
of Denmark), this is not a poverty stricken
group, with Luxembourg and Switzerland in the
top three in the world in real per capita income.
Iceland is the least densely populated country
in Europe, but # 2 is resource rich and not so
high per capita income Russia.
Regarding Sachs, I found his Sci Am piece to be
pretty weak, full of barely supported assertions,
even if much of it is more or less correct. What
is amusing is that just over a decade ago when he
was advising some of the transition economies, he
was urging them to slash their welfare state programs
(in order to balance their budgets without raising
taxes, eeeeek!). I heard him complaining in a major
address at the AEA meetings after Poland voted out
its first reform government precisely because it
wanted to follow Jeffrey's advice, that the Polish
pensioneers were a bunch of spoiled whiners. Of
course Poland has generally done pretty well, as
have the Central European countries that ignored
his advice and mostly kept those programs in place,
in comparison with some others that undid them and
have had major social and political collapses and
upheavals (think Russia).
Oh, a final picky point. People should be careful
not to call Finland "Scandinavian." That is a linguistic
category, a subset of the broader Teutonic category,
which also includes English, sort of. Finnish is not
even an Indo-European (aka "Aryan") language, but is
part of the Finno-Ugric group, which includes Estonian
and Hungarian. The Uralo-Altaic linguistic hypothesis
argues that the Finno-Ugric group is also related to
the Turko-Altaic group, and also includes Japanese.
Thus, Finnish and Japanese may be more closely related
than either is to Swedish or English.
In any case, "Nordic" is the more correct classification
that includes Finland with Scandinavian 4: Norway, Denmak,
Iceland, and Sweden.
Posted by: Barkley Rosser at Oct 26, 2006 3:06:40 PM
aaron at Oct 26, 2006 9:06:05 AM
suggests that rising productivity will
lead to fewer jobs. But rising
productivity has been associated with
rising numbers of jobs -- indeed with
rising labor force participations rates,
that is more jobs per person of
working age.
Posted by: Shakespeare's Fool at Oct 26, 2006 3:10:32 PM
I've been on holiday to Sweden, Norway & Denmark several times over the last 20 years (and like Tyler I dig Scandinavia). I think the 'Nordic model' will evolve, but stay largely intact.
But I would offer one interesting (to me) observation on travelling around Sweden: I was there again recently with friends & stayed in Youth Hostels [very clean, cheap & spacious] but invariably all the other boarders were retired (although often in their 50's). The kids all amuse themselves, as globally, by hanging out in groups at their local town centre for free, but only the oldies can afford to regularly travel for leisure (it seems to me).
They've got a great social structure, so I'm sure they'll adjust well, but my obsevations suggest to me that there is currently an inequality between those lucky few who are retired on great pensions in their 50's now & the prospects for Sweden's youth...
Posted by: Nick at Oct 26, 2006 3:49:32 PM
Tyler,
“Societies differ a great deal in their innate level of cooperativeness”
Do you mean that the rate at which the cooperation gene is expressed in a country’s population varies significantly between countries?
Posted by: Aaron_M at Oct 26, 2006 4:42:02 PM
Cooperativeness is inversely proportional to ethnic diversity. This is a genetic trait shared by all humans. The more closely related a group are to each other, the higher the cooperation within the group.
Posted by: Mallory at Oct 26, 2006 5:18:40 PM
The most similar American state to Scandinavia is Minnesota. Minnesota's neighbors, Wisconsin and Iowa, with their large German populations, also have some Social Democrat tendencies. All three are pretty decent places to live for the majority (if you can take the weather), but something worth noting is that their black communities are among the most dysfunctional in America:
Minnesota has the highest black to white imprisonment ratio at 31 to 1 in 1997.
Iowa has the highest absolute black imprisonment rate at 4.8% of the whole black population (1997).
Wisconsin has the highest black illegitimacy rate at 82% in 2004.
This suggests that the Nordic model works better for more Nordic sort of people and worse for less Nordic people.
http://isteve.blogspot.com/2006/10/nice-north-centrals-not-so-nice-black.html
Posted by: Steve Sailer at Oct 26, 2006 5:35:05 PM
