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No. 603

November 5, 2007

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What Can the United States Learn from

the Nordic Model?

by Daniel J. Mitchell

Executive Summary

paring disposable income, private consumption,

Some policymakers in the United States and

and other measures that reflect living standards.

Europe argue that it is possible to enjoy economic

Notwithstanding problems associated with a

growth and also have a large welfare state. These

large welfare state, there is much to applaud in

advocates for bigger government claim that the so-

Nordic nations. They have open markets, low lev-

called Nordic Model offers the best of both worlds.

els of regulation, strong property rights, stable

This claim does not withstand scrutiny. Eco-

currencies, and many other policies associated

nomic performance in Nordic nations is lagging,

with growth and prosperity. Indeed, Nordic

and excessive government is the most likely expla-

nations generally rank among the world's most

nation. The public sector in Sweden, Denmark,

market-oriented nations.

Norway, Finland, and Iceland consumes, on aver-

Nordic nations also have implemented some

age, more than 48 percent of economic output.

pro-market reforms. Every Nordic nation has a

Total government outlays in the United States, by

lower corporate tax rate than the United States,

contrast, are less than 37 percent of gross domes-

for example, and most of them have low-rate flat

tic product. Revenue comparisons are even more

tax systems for capital income. Iceland even has

striking. Tax receipts average more than 45 per-

a flat tax for labor income. And both Iceland and

cent of GDP in Nordic nations, a full 20 percent-

Sweden have partially privatized their social

age points higher than the aggregate tax burden in

security retirement systems.

the United States.

The Nordic nations offer valuable lessons for

This bigger burden of government hurts

policymakers, but they do not fit the traditional

Nordic competitiveness, both because govern-

stereotype. Conservative critics correctly con-

ment spending consumes resources that could be

demn the large welfare states, but often overlook

more efficiently allocated by market forces and

the positive results generated by laissez-faire

because the accompanying high tax rates discour-

policies in other areas. Liberals, meanwhile, exag-

age productive behavior. A smaller state sector is

gerate the economic performance of Nordic

one reason why the United States is more pros-

nations in an effort to justify welfare-state poli-

perous. Per capita GDP in the United States is

cies, while failing to acknowledge the role of free-

more than 15 percent higher than it is in the

market policies in other areas.

Nordic nations. The gap is even larger when com-

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Daniel J. Mitchell is a senior fellow at the Cato Institute.