The Myth
of the Scandinavian Model
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"America's
social model is flawed, but so is
France's," the
Parisian newspaper Le Monde recently wrote. According to Le Monde
Europe should adopt the "Scandinavian model," which is said to combine
the economic efficiency of the Anglo-Saxon social model with the
welfare state benefits of the continental European ones.
The excessive
praise for the Nordic model comes from Bruegel, a new
Brussels-based think tank, "whose aim is to contribute to the
quality
of economic policymaking in Europe." The think tank is a Franco-German
government initiative and is heavily funded by EU governments and
corporations. In October Bruegel published a study "Globalisation
and
the Reform of European Social Models" [pdf] propagating the Nordic
model. |
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A
paper from the economics
department of Ghent University does
the same. This
paper, Fiscal Policy Employment and Growth: Why is the
Euro Area Lagging Behind, was also subsidized by the government. Their
paper compares the performances of Scandinavian policies those of the
other EU economies. To proove their case, the authors arbitrarily
eliminated Ireland, Spain
and Portugal (three of the four best performing EU economies) from
their EU country list and added oil-producing non-EU member Norway tho
their Scandinavian selection. (over 20% of Norway's GDP is based on
income from oil). It is hardly imaginable that professors of one of
Belgium's major universities would not be aware of how this arbitrary
selection must distort the results. Hence one must read their text as
an ideological pamphlet rather than a scientific study... |
The implosion of the
welfare state
However,
despite
Bruegel, distorted academic studies and the
European media's praise, the efficiency of the major Scandinavian
economies is a myth. The Swedish and Finnish welfare states have been
going through a long period of decline. In the early 1990s they were
virtually bankrupt. Between 1990 and 1995 unemployment increased
five-fold. The Scandinavian countries have not been able to recover.
In
1970,
Sweden's level of prosperity was one quarter above
Belgium's. By 2004 Sweden had fallen to 13th place from 4th in the
prosperity index, just behind Belgium.
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According to
OECD figures,
Denmark was the 5th most prosperous economy in the world in 1970,
immediately behind Switzerland and the United States. In 2004, Denmark
was 10h.
Finland did
badly as well. From 1989 to 2004, while Ireland
rose from 21st to 4th place, Finland fell from 8th to 15th place.
Together with
Italy, these three Scandinavian countries are the worst
performing economies in the entire European Union. Rather than taking
them as an example, Europe's politicians should shun the Scandinavian
recipes.
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 Jobs
While
a poorly performing economy such as Belgium's was able to create 8% new
jobs between 1981 and 2003, Sweden and Finland were unable to create
any jobs at all in over two decades. Denmark did a little better
because it "activated" its labour market by making it more "flexible."
It became easier for employers to fire people. For workers in the
construction industry the term of notice was reduced to five days.
Unemployment
benefits were restricted in time, while those who
had been unemployed for a long time, and young people could lose
benefits if they refuse to accept jobs, including low-productivity jobs
below their level of training or education. The result is that
productivity growth in Denmark is lower than in Sweden and Finland.
These
draconian measures reduced the unemployment rate, but did
not eliminate the cause of unemployment, namely the total lack of
motivation on the part of employees and employers resulting from the
extremely high taxation level.
Despite
the painful measures, the growth of Danish productivity
and prosperity has been substandard. Disappointment in Danish
politicians is one of the reasons for the rise of the far right.
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Big government, bad
government
 Why
are the Scandinavian countries doing such a bad job, despite their
Protestant work ethic and devotion to duty? The main cause is the
essence of the nanny state: its very high tax level. Between 1990 and
2005 the average overall tax burden was 55% in Finland, 58% in Denmark
and 61% in Sweden. This is almost one and a half times the OECD average.
In his research into the causes of
growth differences between OECD
economies the American economist James Gwartney showed that there was a
direct correlation between economic growth and tax burden. The higher
the level of taxation, the lower the growth rate.
The explanation for this phenomenon is as
logical as it is simple. The
higher the tax level, the lower the incentive for people to make a
productive contribution to society. The higher the fiscal burden, the
more resources flow from the productive sector to the ever more
inefficient government apparatus.
Ireland:
the efficient alternative
Ireland has
proved that a substantial lowering of the taxation level can become the
motor for launching even the most slackish economy into full gear. A
drastic reduction of the Irish tax rate, from 53% in 1986 to its
current 35% , has led to a continuous boom of wealth creation at an
average rate of 5.6% during the past two decades, while the number of
jobs has grown by over 50%. In barely 18 years Ireland jumped from the
22nd to the 4th place in the OECD prosperity ranking. Ireland did not
reduce its social welfare benefits. On the contrary. The unprecedented
growth led to an increase of fiscal revenue and social expenditure. It
was sufficient to improve the productivity of the government.
One crucial
element of the Irish model is its "fair tax" system, in
which there is less emphasis on taxing labour and profit and slightly
more on taxing consumption. This balance between direct and indirect
taxation motivates labourers and entrepreneurs to make productive
contributions. It stimulates new initiatives and guarantees a high
degree of participation. Such
a fiscal
system does not put the entire burden of financing social
security on domestic production. Indeed, a consumption tax ensures that
foreign production also contributes evenly.
The
Irish model
combines the so-called
"active welfare state" of continental Europe with the Anglo-Saxon
liberal economy in a balanced fashion. The model is efficient. Ireland
surpasses all other EU members in prosperity, job creation, social
expenditure and productivity per working hour.
Investing
in the future
 The difference
between the wealth destructive Scandinavian model and
the booming Irish alternative is obvious for all to see. Strangely
enough, however, the French and German governments do not seem to
notice. Those in Belgium do not, either. The Belgian government
recently proposed a new policy plan inspired by the Danish model. The
tax level is not reduced, the fiscal burden is not being shifted from
production to consumption, but instead from one production factor
(labour) to another (capital) which is already overburdened. Saving is
discouraged, too. After deducting inflation and the
witholding tax, which under the European savings taxation directive
will soon amount to 35%, the real net interest rate will be –2%. This
means that every person in his thirties who is saving 1.00 euro today,
will only have the equivalent of 0.54 euro when he turns 60.
In barely six
years the Belgian savings rate has already dropped by
more than a quarter: from 12.4% in 1998 to 9.1% in 2004. The savings
rate will drop even further, thereby drying up all reserves for
investment. Like work, saving and investing, too, must be profitable if
people are to engage in these activities.
2004
witnessed a
record world economic growth of 5%. China and India
are booming, the US and Japan are recovering. Gwartney's findings
explain why continental West European countries, such as Belgium, did
not see their economies grow. The Belgian tax burden is 9% higher than
the OECD average and 15% higher than the tax level in the US and Japan.
If continental Western Europe does not change its policies, its
relative impoverishment today will soon turn into absolute
pauperization.
Tax
structure
unadapted for globalization.
Its tax
structure is not adapted to the
challenges of globalization. Taxes on production are the opposite of
import taxes. They double Europe's production costs and, in doing so,
halve its productivity. Like protectionism they lead to distortions in
world trade, but they do so in the opposite direction.
Ever more rapidly, continental Western Europe is losing its semi
labour-intensive sectors to countries where productivity is even lower
than in Western Europe. This move from high productivity to low
productivity countries is a waste. It is not only a catastrophe for
Western Europe's employment. It is also bad for the world at large
because the highly productive production apparatus and infrastructure
of Western Europe is not used to its full capacity. This leads to less
than optimal global labour division and wealth creation. Politicians
must realize that
economic growth is not brought about by
fiscally punishing productive citizens, nor by collective
impoverishment and social welfare cuts, but by cutting taxes and
bureaucracy. Ireland has shown that it can be done and how to do it.
|
The
famous TV
Series on free Market Economics
by
Nobel Prize laureate Milton
Friedman
|
 In
this great
series Milton Friedman
explains his inspiring
ideas
on liberty, on free market economics, on limited government,
limited public spending and low taxes. The TV series
is a complement to his masterpiece book of the same name
co-authored with
his economist wife, Rose Friedman. The series
includes debates
with dissenting economists. It’s a fantastic lesson in forensics,
very
instructive, and a lasting source of inspiration. Comments by Arnold
Schwarzenegger, Ronald Reagan, George Schultz, David
Friedman and many others.
The
Power of
Choice
the
full TV
Series free online
here: |
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Abstract:
While the rest of the world is booming,
Europe lags behind. Europe's performance is weak in
spite of high productivity and knowledge, high level of
development and good labour ethics. Growth is also remarkably
dissimular among regions. France, Germany and Italy are stagnating, and
so do Denmark,
Sweden and Finland. All gained less than 44%
prosperity over the last 20 years. The Irish
economy grew 4 times faster, gaining 169%
wealth over the same period. In half a generation Ireland so
metamorphosed into Europe's second
richest country creating jobs for all.
"
Big government " is the main cause of Europe's weak performance. The
oversized Public Sector lacks productivity and is undoing the entire
productivity gains of the Private Sector, eradicating all of its
outstanding performance and productiveness. Europe could improve its
overall performance by copying the Irish success formulas: Scaling down
Public Spending, downsizing bureaucracy, and shifting the tax burden
from income on consumption. This book demonstrates why the Lisbon
Agenda and decades of Keynesian inflationist demand stimulation have
failed. It devellops an alternative and workable supply-side strategy
as well as effective cures for a humane and financially sustainable
development.
This
book reads
as a step-by-step manual for economic recovery.
It is a data-reference for students and politicians interested in
growth, wellfare and in social modelling. It is a
classic for economists concerned about Big
Government, poor public sector productivity and for parents
worrying about their declining standard of living and their
children's future.
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Big
Public Spending
means
poor Growth.
Slow
Growth
results in Poverty.
These are the key findings from our
research
confirming the results of earlier
studies such as this
which compared the growth differentials
of 30 OECD countries over 45 years
(
over 1000 data-pairs !!! )
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Do
You feel more people should know this? Please
link our site http://workforall.net
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