Cato study debunks myth of the “Nordic Model”

High taxes and large government expenditures hold back Nordic economic growth

November 5, 2007 • News Releases

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The wealth of Nordic nations is due to their history of free market policies — not their generous welfare state which, in fact, hinders their continued growth, finds a new study by the Cato Institute. 

In “What Can the United States Learn from the Nordic Model?,” senior fellow Daniel J. Mitchell argues that the U.S. economy outperforms the Nordic nations. “Whether measured by annual growth rates or levels of output, income, or consumption, Nordic nations have inferior economic performance when compared to the United States,” he writes.

The prosperity of Nordic nations derives from a long history of free market policies, but their growth has waned since politicians in the region raised taxes in the 1960s and 1970s. “Before the 1960s, Nordic nations had modest levels of taxation and spending. They also enjoyed — and still enjoy — laissez‐​faire policies and open markets in other areas. This expansion of government has slowed growth,” Mitchell writes, “And the United States has maintained a steady advantage over Nordic nations in per capita GDP.”

However there is one area in which Nordic policies are greatly superior to those in the U.S.: corporate tax rates. As Mitchell notes, “Corporate income in the United States is taxed at 39.3 percent, while the tax rate in Nordic nations is no higher than 28 percent. American firms face a competitive disadvantage in this key measure.”

The successes and failures of the Nordic Model offer lessons for American policy. “Conservative critics correctly condemn the large welfare states, but often overlook the positive results generated by laissez‐​faire policies,” Mitchell concludes. “Liberals, meanwhile, exaggerate the economic performance of Nordic nations in an effort to justify welfare‐​state policies, while failing to acknowledge the role of free‐​market policies in other areas.”