Why the Nordic model would not work in the US – by John Gustavsson
It’s a common chorus in American progressive circles: If Europe can have universal health care, pre-K and all the other goodies of the welfare state, why can not America? We could if we only taxed the millionaires and the billionaires, the argument goes.
When I speak as a Swedish citizen, I can say that it is not quite so simple. While I value many of the benefits the welfare state provides, the fact is that the United States cannot follow the same path for several reasons.
Building a welfare state is a thriving endeavor. The Nordic welfare states were built during the post-war expansion. In the case of Sweden, we got the best of both worlds: We avoided getting involved in the war, and afterwards the demand for our industries increased. So did the wages. This made it easy to build a welfare state for two reasons: First, when wages are booming, so is tax revenue even if tax rates remain unchanged. This revenue increase allowed the government to add additional safety nets and government programs without raising interest rates or having to cut other budgets.
Secondly, it is politically much easier to raise taxes when wages rise rapidly. Most people do not pay attention to their tax rates, but rather how much they get paid. If taxes increase, but real wages increase even faster, most people will feel good because wages increase over time and they can buy more things. Relative change is king.
The wage increase in America is, to put it nicely, not at the same level as in Scandinavia during the post-war period. From 1950 to 1975, household income in Sweden increased by 70 percent. Building a Nordic-style welfare state in America would require increased taxes in a way that would not only reduce Americans’ real but nominal incomes, something that would undoubtedly negatively affect consumer behavior.
But wait, why would the pay rise off average Americans matter? Surely building a welfare state is about taxing the rich? Well, that’s the thing …
Sweden does not really tax the millionaires and billionaires – it taxes the poor. In Sweden, it is possible to avoid virtually all capital gains taxes through an investment savings account, which obviously most benefits the rich. What about wealth taxes? The Nordic countries have long since moved past them: Denmark abolished its wealth tax in 1997, Finland in 2005 and Sweden in 2007. This is not about ideological opposition to tax the rich. It is that the wealth tax was completely counterproductive and caused capital to flee from these countries. In the United States, the wealth tax is a new idea. In the Nordic countries, there are 56k modems for taxation.
Instead, the big difference between the US and Sweden, in terms of taxation, is how the poor are taxed. Americans who earn less than $ 12,000 per year pay no federal income taxes. Many who earn more than that still end up paying a net zero in tax when the deductions are reported. In Sweden, the equivalent is approximately $ 2,300. For all the money you earn above that threshold, you pay a tax rate of approx 30 percent, plus payroll tax. What about deductions? In the US, the average tax refund was last year $ 2,707. In Sweden it was $ 821. On top of this, Sweden has a national VAT on 25 percent on almost everything you buy. Since the poor spend a larger share of their income, this hurts them disproportionately.
The kind of taxes that the poor are forced to pay in the Nordic countries would be completely unacceptable to the majority of the American public. It does not matter if surveys claim that Americans support Nordic welfare programs – it is completely pointless if you do not also agree to pay them the only way they can be paid for: By taxing the average citizen.
Again, Swedes are really not against taxing the rich, and we do tax them, but mainly those whose wealth comes through labor rather than capital gains. Welfare states simply cannot be built on the backs of only the rich. We learned it the hard way, and you will.
But wait, even if you have to tax the average American to fund the welfare state, and even if it’s hard to raise taxes when wages are not thriving, will that problem take care of itself? The great wage stagnation that began in the 1980s was, after all, caused by the Reagan administration’s neoliberal policies, and therefore some classical Nordic socialism should put a stop to wage developments, right? Again, things are not quite that simple …
Wages also stagnated in Sweden. The 1980s in Sweden were quite different from the 1980s in the USA. Taxes went up. Unionisation did not decrease significantly (1990) 81 percent of Sweden’s workers were trade unionists, a decrease of only 4 percent compared with five years earlier), as it did in the United States). There were some liberalizations of the capital markets towards the latter half of the decade, but by and large Sweden was still a very left-leaning country, with a maximum marginal income higher than 80 percent for most of the decade.
And wages stagnated all the same. After being left largely untouched by World War II, the Swedish economy grew strongly for several decades during the post-war period. During the 1970s, the economy stumbled when high oil prices and new competition from the now rebuilt European and Asian powers proved to be a difficult match for our industries, especially manufacturing. This was followed by the 1980s during which real wages fell and even fell for a few years. In fact, it took until 1996 for real wages to reach 1979 levels.
What did we do to reverse the upturn? First, we lowered the highest marginal tax rates 30 percentage points for six years from 1985. Real wages began to pick up again after that, almost reaching levels in 1979 before a financial crisis caused by our fixed exchange rate hitting in the early 1990s. And how did we handle it? By some brutal austerity policies is understood (policies that were supported across the spectrum). Wages recovered soon and since 1993, Sweden has only had a single year of negative real wage increases (2011). Real wages have risen faster in the last decade than in the 1970s, despite the fact that trade unions are in a state of long-term decline (today, “only” 61 percent of Swedish workers are members of trade unions).
The idea that wages stagnated in the United States is at least somewhat exaggerated. My point is that whatever happened in the United States that caused wages (at least on paper) to stagnate, happened here as well – without the supply-side economy being demonized by the left. In fact, the evidence suggests that it provides side-inspired economics [cite examples! lower tax rates, etc.] helped to take Sweden out of real wage developments.
In other words, do not expect the Scandinavian model to give you the salary increase you would need to painlessly raise taxes on middle and lower classes. That’s not how it works. There are several other reasons why America can fight to adopt a Nordic-style welfare state. But if the United States is to make an honest attempt to create a welfare state like ours, liberal advocates must be honest about the kind of economic transformation they are actually selling.