Lessons From the North

Fewer debates over economics would be needed if the world spent more time examining what actually works and what does not. Almost everywhere, debate has raged about how to combine market forces and social security. The left calls for an expansion of social protection; the right says that doing so would undermine economic growth and widen fiscal deficits.

But the debate can be moved forward by examining the successful economies of Denmark, Finland, Iceland, the Netherlands, Norway, and Sweden. While no regional experience is directly transferable, the Nordic countries have successfully combined social welfare with high income levels, solid economic growth, and macroeconomic stability. They have also achieved high standards of governance.

To be sure, there are also differences among the Nordic states, with social welfare spending the highest in Denmark, the Netherlands, Norway, and Sweden, and a bit lower in Finland and Iceland. Nevertheless, whereas the taxes at the national level in the United States are equal to around 20% of GNP, in the Nordic countries the ratio is more than 30%.

High taxation supports comprehensive national health care, education, pensions, and other social services, resulting in low levels of poverty and a relatively narrow income gap between the richest and poorest households. In the US, the poorest 20% of households receive just 5% of total income, putting their income at around one-fourth of the national average. In the Nordic countries, by contrast, the poorest 20% of households receive nearly 10% of total income, putting them at roughly one-half of the national average.