Policy Documents

What Can the United States Learn from the Nordic Model?

Daniel J. Mitchell –
November 5, 2007

In this comparative Policy Analysis, the author writes that some policymakers in the United States and Europe argue that it is possible to enjoy economic growth and also have a large welfare state. These advocates for bigger government claim that the so-called Nordic Model offers the best of both worlds. This claim does not withstand scrutiny. Economic performance in Nordic nations is lagging, and excessive government is the most likely explanation. The public sector in Sweden, Denmark, Norway, Finland, and Iceland consumes, on average, more than 48 percent of economic output. Total government outlays in the United States, by contrast, are less than 37 percent of gross domestic product. Revenue comparisons are even more striking. 

Notwithstanding problems associated with a large welfare state, there is much to applaud in Nordic nations. They have open markets, low levels of regulation, strong property rights, stable currencies, and many other policies associated with growth and prosperity. Indeed, Nordic nations generally rank among the world’s most market-oriented nations. Nordic nations also have implemented some pro-market reforms. Every Nordic nation has a lower corporate tax rate than the United States, for example, and most of them have low-rate flat tax systems for capital income. Iceland even has a flat tax for labor income. And both Iceland and Sweden have partially privatized their social security retirement systems.

Conservative critics correctly condemn the large welfare states, but often overlook the positive results generated by laissez-faire policies in other areas. Liberals, meanwhile, exaggerate the economic performance of Nordic nations in an effort to justify welfare-state policies, while failing to acknowledge the role of free market policies in other areas.