Tuesday, April 19, 2016

What Bernie Gets Right (and Wrong) About Scandinavia

A new article at Reason this week makes an obvious but necessary correction to the standard understanding of how the Scandinavian economies are actually structured. Presidential Candidate Bernie Sanders and his supporters are prone to citing Scandinavia, especially Sweden and Denmark, as examples of the benefits socialist economic policies can bring.

And to be sure, there is a Social Democrat party in Sweden. But according to Johan Norberg's new piece, Bernie and the Social Democrats wouldn't find a whole lot to agree on. As Norberg puts it:
Sanders is right: America would benefit hugely from modeling her economic and social policies after her Scandinavian sisters. But Sanders should be careful what he wishes for. When he asks for "trade policies that work for the working families of our nation and not just the CEOs of large, multi-national corporations," Social Democrats in Sweden would take this to mean trade liberalization—which would have the benefit of exposing monopolist fat cats to competition—not the protectionism that Sanders favors....

This reality will not endear my home country to American socialists, but it's better to be hated for the right reasons than to be loved for the wrong ones, as the saying goes. Being more like modern Sweden actually means deregulation, free trade, a national school voucher system, partially privatized pensions, no property tax, no inheritance tax, and much lower corporate taxes. Sorry to burst your bubble, Bernie.
The whole article is worth reading, but the short version goes like this. Sweden was a very a open, market economy that grew rapidly up until about the 1970s. During the 70s and up through the 90s or so, it embarked on a series more socialistic policies in the direction that Sanders wants the US to move. The result was a rapid decline in growth and in real wages for average Swedes. Fortunately, the policies were such obvious failures that Sweden was able to adjust course, and return to be one of the freest economies in the world--freer by most metrics than the United States. This has in turn coincided with improved economic performance.

Of course, there are two key ways in which Sweden (and Denmark) are still less free than the US. One lies in their personal income tax schemes. Although it has relatively low corporate tax rates, Sweden has high personal income tax rates that fall significantly on the middle class and poor and are actually far less progressive than the US system. (Sweden still ranks very highly in measures of economic freedom because the personal income tax burden is but one of many factors.) The other way in which it diverges from the archetypal free market economy is that it does have a large welfare system, including paying for education and healthcare. The aggressive personal taxation system makes this system possible.

In addition to offering some interesting history on the Swedish economy, the article also shows the importance of having a coherent economic theory to make sense of the world around us. Correlation is not causation, as the axiom goes, and this is especially true for economics. Too often, we are wont to look at a snapshot of a particular point in time and draw the conclusions that usually conform to our own preconceptions. Thus, Bernie Sanders supporters can look at the fact that Sweden and Denmark are doing relatively well economically and also have a large welfare state, and presume a causal relationship. Or at the very worst, they might presume the welfare state does not hinder the economy. Similarly, an uninformed free market supporter could look at Sweden, see its free trade policies and automatically, and assume this is the cause of its success. In the absent of a theory to make sense of it, neither of those positions is any more credible than the other. It's just people making the facts of the world follow the pattern they would prefer them to. We are all predisposed to this way of thinking.

That's why it's important to have a theory that can stand up to scrutiny. Data can be helpful, but it rarely tells a story on its own in the field of economics. The story of Sweden is no exception to this rule. However, the general understanding of free market economists helps us make sense of Sweden's experience. Broadly speaking, free market economists would anticipate that low taxes and low regulation will bring about ideal conditions for economic growth by creating strong incentives for people to earn and limited barriers to get in their way. Meanwhile, when government expands, it will tend to have the inverse effect. According to Norberg's telling of it, Sweden's results have followed this free market narrative closely.

One case study is not proof of anything. But understanding Sweden's past and present is critical given the distorted image it often takes on in an American setting. If one wants to advocate for Scandinavian-style policies, the first step is to understand precisely what those policies are. Bernie would do well to take that under advisement.

Here's the link:

Bernie's Right—America Should Be More Like Sweden

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