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?"

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).

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?

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.

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".

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

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.

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?

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.

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?

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.

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.

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?

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

With all the posts about states and country gdp per capita or rather gsp per capita, you might want to look at this table with real numbers.
http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP_per_capita_(nominal)

Schaeffer:

A Danish organization: The Rockwool-foundation's research-unit, has looked at a lot of the issues about immigration, and they have also economic analyses of this issue:
http://www.rff.dk/

As far as I know they have not published very much in English, so I guess the link is not that valuable. However, I remember reading a few years ago an economic impact study from the foundation by the Swedish economist Eskil Wadensjö claiming that the net effects from immigration was negative. The study was released some years ago, in 2000, and is to be found in the Danish-written not-translated book "Integration i Danmark omkring Ã¥rtusindskiftet" written by Gunnar Viby Mogensen and Poul Chr. Matthiessen.

Another book released in 2001 might be a good place to start for English readers though: "The integration of non-Western immigrants in a Scandinavian labour market: The Danish experience"
http://www.rff.dk/da/publikationer/boeger/2001/
(I have unfortunately not read the book myself, but as Wadensjö is co-auther I would assume that this analysis would not differ much from the one in the Danish book from the year before).

Both books were published before restrictions on immigration was passed by the new government in 2001. I analyzed the survey conducted by Wadensjö in 2000 in a political science project in high school a few years back and thus still have the analysis on my computer. His analysis shoved that the net contribution (to the government - not GDP) were basically found to be positive for immigrants from Scandinavia and "other Western Countries" and were found to be negative for "3.rd world immigrants". The figures back then, about the year 2000, was a negative contribution to the government amounting to appr. 63.000 kroners pr. year (11-12.000$) from 1.generation non-western immigrants from 18-65 years old, and the figure was 24.000 kroners (4.5-5000$) for the 2.generation of this group (same age, and a much smaller sample) - there was thus also a very clear convergence taking place. Labor market participation was also discussed and the results here were that a relatively high fraction of the negative net-effects were caused by very low female labor market participation from the immigrants from 3.rd world countries - especially from Muslim countries such as Somalia.

It is not reasonable to claim that these numbers have not changed during the period, as the Danish immigration policy has been reformed in many ways. However, the study might be applicable as a rough estimate of the Swedish experience, as their immigration policy - as well as a lot of other cultural, political and economic factors - today are comparable to the Danish around 2000.

Peter Schaeffer,

Thanks for digging up that information on Minnesota, Wisconsin, Iowa, South Dakota, and North Dakota.

I found this site:

http://www.demographia.com/db-intlppp-region.htm

which has 1999 data comparing U.S. states with various european regions.

Comparisons of estimated 1999 purchasing-power parity per person

region ppp/p pop. in millions
------ ----- ----------------
Minnesota -------------------- $34,175 4.7
Norway ----------------------- $33,174 4.4
Finland, Uusimaa (Suuralue) -- $30,165 1.4
Wisconsin -------------------- $30,112 5.2
Sweden, Stockholm ------------ $29,027 1.8
Iowa ------------------------- $28,853 2.9
South Dakota ----------------- $28,139 0.7
North Dakota ----------------- $26,522 0.6
Finland, Aland --------------- $26,047 0.0
Denmark ---------------------- $25,347 5.3
Sweden, Smaland Med Oarna ---- $21,426 0.8
Sweden, Ovre Norrland -------- $20,937
Sweden, Mellersta Norrland --- $20,847
Sweden, Norra Mellansverige -- $20,416
Sweden, Ostra Mellansverige -- $19,868
Finland, Etelae-Suomi -------- $19,836
Sweden, Sydsverige ----------- $19,569
Sweden, Vastsverige ---------- $19,294
Finland, Pohjois-Suomi ------- $18,624
Finland, Vaeli-Suomi --------- $17,820
Finland, Itae-Suomi ---------- $16,025

The information about Sweden and Finland gets too detailed, but
the basic pattern is clear. Norway and Denmark are comparable to
this group of american states, while Sweden and Finland (with the
exception of their capital city regions) are definitely a notch below.

As I said before I don't think reveals much to include Norway
because of their special situation with respect to gas and oil.

To improve this data it should be brought up to date and adjusted
for the percentage of the population of working age.

Also in addition to the absolute estimates of real income it might
be even more revealing to look at the trends through time. That
is whose situation is improving or detiorating and how rapidly.

Take away their oil, would it work?

Peter -- I did not look at what Steve Sailor has done.
But you can go to bea.gov and get real gdp data per state
and from census get the population data to calculate
real per capita gdp. Note I am saying real not nominal
so it is adjusted for price differences.

If you do this you find that in 2005 real per capita gdp in
California was 109.4% of the national average and in mississippi
it was 63% of the national average. this calculation has Hawaii
at 98.5% of the national average.

Spencer,

Sorry about the URL omission.

Check the explanatory notes over at http://www.bea.gov/bea/newsrel/GSPNewsRelease.htm

"Real GDP by state is an inflation-adjusted measure based on national prices for the goods and services produced within that state"

Interestingly enough, the US government does not provide state or local COLI (Cost Of Living Index) data that are comparable across states or localities. The BLS web site even says so. Check out http://www.bls.gov/cpi/cpifaq.htm#Question_18

"No, an individual area index measures how much prices have changed over a specific period in that particular area; it does not show whether prices or living costs are higher or lower in that area relative to another."

Steve Sailer used private sector data to produce his table.

This makes sense if you actually live or work in California. California isn't rich anymore. Poor people are moving into garages and are eager to do so. High income professionals live in houses that would be laughed at in other parts of the US. Given high nominal incomes, at least tradable goods are cheap in California. Hawaii combines pricey housing with lower incomes. Not a pretty picture if you have to work for a living.

All,

It is important to note that Minnesota turns in its education numbers with spending at the national average (less than 1% higher). By contrast, NY and NJ spends far more and achieve far less. District of Columbia is almost at the top in spending and remarkably worse than any other state in performance.

All of the spending numbers are NOT COLI adjusted. This would make a big difference for NJ, NY, and DOC, but less for MN.

All,

I found some state level COLI numbers. CA is 134.7 and HA is 161.3 (ouch). NJ is 131.7 and NY is 130.4. By contrast, MN is 97.1. This raises MN per-student outlays a bit versus the national average and reduces those of NY and NJ quite a bit. However, NY and NJ are still spending considerably more than MN and yielding quite a bit less.

Given that California's nominal per-capita income is only 7% greater than the national average in nominal terms, CA is actually quite poor (21% below the national average) . A funny note (from Steve Sailer). KS is about 8.5% below the national average in nominal per-capita GSP. However, it is 9.4% below average in the cost of living.

Thomas Frank famously wrote a book "What is wrong with Kansas?". Apparently, nothing is wrong with Kansas (This observation is also from Steve Sailer). He should have asked "What is wrong with California?" However, that wouldn't have yielded convenient PC answers. The “I† word might have been mentioned. Anyone who wishes to defend immigration needs to explain why America’s leading immigration state is so poor.

Barkley Rosser

As a Dane and therefore also Scandinavian I must correct your earlier classification of Scandinavia and Nordic.

Scandinavia: Denmark, Norway and Sweden (Scandinavian peninsula Norway and Sweden).
Nordic: Denmark, Finland, Faeroe Islands (Denmark), Island, Norway and Sweden.

Greenland can sometimes be considered Nordic do to it being a part of The Kingdom of Denmark but is otherwise considered North Atlantic (along with Faeroe Island and Island) or North American do to being a part of that continent.

Sorry :o) (forgive me)

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