Why the Nordic Model Won’t Work in the United States – by John Gustavsson
It’s a common refrain in progressive American circles: If Europe can have universal health care, pre-K, and all the other benefits of the welfare state, why not America? We could if we just taxed millionaires and billionaires, the argument goes.
As a Swedish citizen, I can tell you that it is not quite it’s simple. While I cherish many of the benefits offered by the welfare state, the fact is that the United States cannot follow the same path, for a number of reasons.
Building a welfare state is a booming business. The Nordic welfare states were built during postwar expansion. In the case of Sweden, we had the best of both worlds: we avoided getting involved in the war, and subsequently the demand for our industries skyrocketed. With that, wages too. This has made it easier to build a welfare state for two reasons: First, as wages explode, tax revenues also increase, even though tax rates remain unchanged. This increase in revenue has allowed the government to add safety nets and additional government programs without increasing rates or having to cut other budgets.
Second, it is politically much easier to raise taxes when wages are rising rapidly. Most people don’t really care about their tax rates, but rather how much they get paid. If taxes are rising, but real wages are rising at an even faster rate, then most people will do well because their paychecks keep getting bigger over time and they are able to buy more stuff. Relative change is king.
Wage growth in America is, to put it mildly, not at the level it was in Scandinavia during the post-war boom. From 1950 to 1975, household income in Sweden increased by 70%. Building a Nordic-style welfare state in America would require raising taxes in a way that would reduce not only real but nominal incomes of Americans, which would undoubtedly negatively affect consumer behavior.
But wait, why the growth in wages of mean Do Americans Matter? Surely building a welfare state is about taxing the rich? Well, that’s the trick …
Sweden doesn’t really tax millionaires and billionaires, it taxes the poor. In Sweden, it is possible to avoid practically all capital gains taxes with an investment savings account, which obviously mainly benefits the rich. What about wealth taxes? The Nordic countries have long passed them: Denmark abolished its wealth tax in 1997, Finland in 2005 and Sweden in 2007. It is not about ideological opposition to tax the rich. It is because the wealth tax has been totally counterproductive and has driven capital from these countries. In the United States, the wealth tax is a new idea. In the Nordic countries, it is the 56k modem of taxation.
Instead, the big difference between the United States and Sweden, from a tax standpoint, is how the poor are taxed. Americans who earn less than $ 12,000 a year pay no federal income tax. Many of those who earn more than that still end up paying zero net tax once the deductions are counted. In Sweden, the equivalent is about $ 2,300. On any money you earn above this threshold, you pay a tax rate of approximately 30 percent, more social charges. And the deductions? In the United States, the average tax refund last year was $ 2,707. In Sweden, it was $ 821. In addition to this, Sweden has a national sales tax of 25 percent on almost anything you buy. As the poor spend more of their income, this tax disproportionately hurts them.
The kind of taxes that the poor are forced to pay in the Nordic countries would be totally unacceptable to the majority of the American public. It doesn’t matter whether the polls say Americans support Nordic welfare programs, it doesn’t make sense unless you too agree to pay them the only way they can be paid: by taxing the average citizen.
Again, the Swedes are certainly not opposed to taxing the rich, and we to do tax them, but mainly those whose wealth comes from labor rather than capital gains. Welfare states simply cannot be built on the backs of the rich alone. We learned it the hard way, and so did you.
But wait, even if you have to tax the average American to fund the welfare state, and even if raising taxes is difficult to impossible when wages aren’t booming, surely this problem will fix itself? After all, the great wage stagnation that began in the 1980s was caused by the neoliberal policies of the Reagan administration, and so some classical Nordic socialism should get wage growth back on track, right? not ? Well, again, things are not that simple …
Wages have also stagnated in Sweden. The 1980s in Sweden were quite different from the 1980s in the United States. Taxes have gone up. Unionization has not declined significantly (in 1990, 81 percent of Swedish workers were unionized, a drop of only 4 percent from five years earlier), as was the case in the United States). There were some capital market liberalizations around the second half of the decade, but overall Sweden was still a country very left-wing country, with marginal income above 80% for most of the decade.
And wages still stagnated. After being largely untouched by World War II, the Swedish economy experienced strong growth for several decades during the post-war boom. Then, during the 1970s, the economy stumbled as high oil prices and new competition from now rebuilt European and Asian powers proved difficult for our industries, especially manufacturing. This was followed by the 1980s when real wages stagnated, and even declined for some years. In fact, it took until 1996 for real wages to reach 1979 levels.
What have we done to reverse the trend? First, we reduced the top marginal tax rates by 30 percentage points over a six-year period starting in 1985. Real wages then started to rise again, almost reaching 1979 levels. before a financial crisis caused by our fixed exchange rate in the early 90s. And how did we handle this? With brutal austerity policies of course (policies supported at all levels). Wages recovered quickly and, since 1993, Sweden has experienced only one year of negative real wage growth (2011). Real wages have grown faster in the last decade than in the 1970s, although unionization has been declining in the long run (today “only” 61% of Swedish workers are unionized).
Moreover, the idea that wages have stagnated in the United States is somewhat exaggerated, to say the least. What I mean is that, whatever happened in the United States that caused wage stagnation (at least on paper), also happened here – without the economy of the offer demonized by the left. In fact, evidence suggests that the economy inspired on the supply side [cite examples! lower tax rates, etc.] helped pull Sweden out of the real wage growth rut.
In other words, don’t rely on the Scandinavian model to give you the salary growth you would need to painlessly raise taxes for the middle and lower classes. This is not how it works. There are several other reasons America may find it difficult to embrace a Nordic-style welfare state. Nonetheless, if the United States is to make an honest attempt to create a welfare state like ours, liberal supporters must be honest about the kind of economic transformation they are in fact selling.