The Nordic economic model and its discontents

[stpioc]

This really is an interesting article, showing that even decent conservatives like Brooks get things wrong on the Nordic countries.

David Brooks Is Incorrect About Northern Europe

Posted by Matt Bruenig on February 19, 2016

Last week, David Brooks had a piece titled "Living Bernie Sanders's Danish Dream." In it he makes a number of claims about pitfalls of the Northern European economic model that are not true. Let's review them here.

1. Entrepreneurialism

Here's Brooks:

American capitalism has always been distinct from continental European capitalism.We’ve had more entrepreneurial creativity but less security.
...
It’s possible that entrepreneurs, company founders and others would pay these [higher tax] rates without changing their behavior, but I wouldn’t count on it.When you make risk-taking less rewarding, you get fewer risk-takers, which is exactly what you see across the Atlantic.

In reality, the Nordic countries are more entrepreneurial than the US. The most common measure of entrepreneurial activity is the birth rate of employer enteprises, which is defined as the percentage of enterprises in a given year that are brand new. Here is the enterprise birth rate of the US and the Nordics in 2007 (Norway didn't have data):

Perhaps because of its high level of enterpreneurialism, the Nordic countries are among the most innovative in the world. They regularly score near the top of (admittedly flawed) innovation indexes. Stockholm is home to the hottest tech sector in the world after Silicon Valley (which is itself located in tax-loving California). 

In recent years, the Nordic countries have given the world Spotify, Skype, Mojang (maker of Minecraft), Rovio (maker of Angry Birds), Supercell (maker of Clash of Clans), and Klarna (cutting-edge fintech firm). The Nordic countries, led by Volvo, are also on the forefront of driverless car research and, led by Finland, on the forefront of mobile phone networking technology. The Nordics are also home, in Sweden, to the most successful pop music industry in the world.

There's nothing sluggish about the Nordic startup and innovation scene. Nothing at all.

2. Individualism

Here's Brooks:

American values have always been biased toward individualism, achievement and flexibility — nurturing disruptive dynamos like Bell Labs, Walmart, Whole Foods, Google and Apple — and less toward dirigisme, order and economic equality.

If you've ever read the speeches and arguments of the social democratic leaders in the Nordic countries, you know that this is not true. The Nordics place a very high value on individualism and individual rights. This is why their welfare systems are aimed at securing the individual well-being of every member of society. Health care for every individualregardless of their family or employment situation. Education for every individual regardless of their family or employment situation. Even child care is described, at least in Finland, as a "subjective right" of the individual child, regardless of their family situation. It is the US—where economic benefits are heavily conditioned on how one is situated in various groups, such as families and firms—that has a very anti-individualist economic slant.

I am not trying to be cute when making this argument. This is legitimately how the Nordics appear to understand their system. They don't reject individualism. They just have a different view on how best to promote it. In the US, people like Brooks describe high taxes as the great threat to individualism. In the Nordics, they describe material insecurity as the great threat to individualism. Personally, I find the Nordic account of what's necessary for genuine individualism far more plausible. When you are unsure how your going to get your next meal, it's not so easy to self-actualize.

3. The Distributive Bargain

Here's Brooks:

Our system has favored higher living standards for consumers while theirs has favored stability for employees and producers.
...
Middle classes across Europe bear a much higher tax load than the American middle class. As Austan Goolsbee, a former economic adviser to President Obama, has noted, you really can’t have a Swedish-style welfare state without a broad high tax burden. That means less spending power for most Americans, and fewer resources to choose one’s own lifestyle.

This is a wildly misleading picture of the actual distributive bargain being struck in the Nordic countries. The higher tax revenue in Nordic countries does not get flushed down the toilet, but is instead shot back out to the populace in transfer income and universal services.
To see what the actual distributive bargain is, this graph of Danish income as a percent of US income across each country's income distribution is helpful:

In Denmark, the lower class has a lot more disposable income and has free/subsidized health care, child care, and education. For them, the Nordic model is a total win.

The Danish middle class has less disposable income but, because it also enjoys free/subsidized health care, child care, and education, it spends much less of its disposable income on those items than the US middle class does. Net of the savings on those items, the gap between US and Danish middle-class disposable incomes is much smaller and may even go away entirely for many families. Also, the Danish middle class has more leisure time than the US middle class. So, for the middle class, the distributive bargain is less disposable income in exchange more free time and free/subsidized health care, child care, and education.

The Danish upper class has much less disposable income than the US upper class. Although it too benefits from the health care, child care, and education, those benefits do not make up for the loss in disposable income. For the Danish upper class, the best you can say is that they get to live in a society that isn't a tire fire of stratification and misery. That's probably worth something, but historically, the rich in Nordic countries have not been very supportive of social democratic parties.

4. Sluggishness

Here's David Brooks:

It’s amazing that so many young people want to mimic a continent that has been sluggish for decades. It’s amazing that so many look to the future and want a country that would be a lot less vibrant.

There's nothing sluggish about the economies of the Nordic countries. Just like any other country, they go through recessions and times of trouble. For example, the Soviet Union's collapse was brutal on the Nordic countries, Sweden and Finland especially. For another example, Finland has been having troubles lately because its paper industry is becoming less relevant, global cell phone giant Nokia has stumbled, and the Russian sanctions are hurting their exports. But overall the Nordic countries have kept their productivity growing very well for decades.
 
In fact, all four Nordic countries have seen their productivity grow faster than the US since 1970:
 

 
This doesn't show up as strikingly in the per capita GDP growth because the Nordic countries are more likely to use productivity growth to buy more leisure time. But even in per capita GDP growth, they've done quite well for themselves:
 

 
Conclusion
 
I could go on but I've probably already gone on too long. The basic point here is David Brooks is simpy wrong. The Nordic model that he says young people are foolishly flocking too performs very well in all the areas he says it doesn't. It has high rates of entrepreneurialism, high rates of innovation, and high rates of growth. It's struck an incredibly good distributive bargain for its lower classes and a very decent distributive bargain for its middle classes. It respects individualism and indeed touts individual flourishing as one of its main animating goals.
 
Part of me feels like David Brooks is simply behind the times when it comes to the hip right-wing talking points about the Nordic countries. In the past, the right-wing line was to say that the countries weren't very successful. These days, the right-wing line is to say that they are very successful but only because they are actually super-duper secret libertarian capitalists. I don't think that line is correct either, but at least it doesn't deny the underlying empirical indicators of Nordic economic success.