If Only We Were Swedenizing

By James Pethokoukis

Monday, February 11, 2013

 

In President Barack Obama’s Election Night and inaugural speeches, he made it clear there would be no centrist pivot in his second term. Forward, 51 percent of my fellow Americans, to a more egalitarian, tolerant, and communal future!

 

The president’s State of the Union speech on Tuesday will likely flesh out that vision as it applies to the federal budget, income inequality, and the environment. The era of Big and Getting Bigger Government is here to stay, he’ll surely admit. Higher taxes on the rich and business will be presented as a small price to pay for an expanded safety net and greater economic security. Don’t worry, middle-class Americans, the “dad of the country” — to use comedian Chris Rock’s recent description — will make it all better.

 

Given all that, it seems like good news that The Economist has just published a paean to Nordic-style, cozy capitalism, calling the Viking on its February 2 cover “The Next Supermodel.” After all, isn’t that what Father Obama is hell bent on accomplishing, the Swedenization of America with a supersized welfare state, confiscatory taxes, and greater income equality? The next thing you know, Michelle will be hiring Ikea to remodel the Oval Office. Out with the stuffy Resolute desk, in with the clean, modern lines of the Vika Gruvan model.

 

We should be so lucky. While America is moving left, Scandinavia is moving right. As The Economist points out, Scandinavia’s socialist image is badly out of date. Sweden is the largest of the Nordics and perhaps the best example of their embrace of market capitalism. Over the past 20 years, Sweden’s public spending has declined from three-quarters of GDP to just over half. Its corporate tax rate is half of America’s, its annual deficit a rounding error of just 0.3 percent of GDP.

 

Late last year, the pro-free-enterprise Legatum Institute published its annual Prosperity Index, ranking major national economies on eight “foundations” of success, including economic fundamentals, entrepreneurship and opportunity, and governance. The top three finishers were Norway, Denmark, and Sweden, with Finland in seventh. And the U.S.? It finished twelfth, outside of the top ten for the first time. Legatum’s damning assessment: “[America’s] biggest fall is in entrepreneurship and opportunity, which has declined eight places in the last four years. Businesses’ start-up costs are rising in the land of pioneers and patents. Fewer Americans believe that working hard will get them ahead.”

 

Scandinavia still taxes and spends too much. But it is able to offset those disadvantages partially with efficient, honest, and transparent government. Both cultural homogeneity and history have created a high level of social trust, The Economist explains, which means “high-quality people join the civil service. Citizens pay their taxes and play by the rules. Government decisions are widely accepted.” In its economic-freedom index, the Heritage Foundation praises the Swedish economy for its “regulatory efficiency [and] open-market policies that sustain flexibility, competitiveness, and large flows of trade and investment.” Of Denmark, Heritage says, “The overall regulatory environment, transparent and efficient, encourages entrepreneurial activity.”

 

The Nordics have had one other big advantage, at least up until now: an America that innovates for the world’s benefit. It doesn’t matter so much whether your own country is innovative, so long as it is open to importing and adopting new ideas, inventions, and processes created elsewhere (as well as the “creative destruction” such innovation brings), which the Nordics are. But someone somewhere needs to push the technological frontier. Economists Daron Acemoğlu, James Robinson, and Thierry Verdier suggest countries “may want to be like the Nordics with a more extensive safety net and a more egalitarian structure . . . [but] it may be precisely the more cut-throat American society, with its extant inequalities, that makes possible the existence of more cuddly Nordic societies.” If America were “to switch to such cuddly capitalism, this would reduce the growth rate of the entire world economy.”

 

This possibility has probably never entered the president’s mind. If it had, he might have, say, not raised investment-tax rates by 60 percent as he did from 2012 to 2013. The worst-case outcome is an America that gets a more Nordic-sized welfare state and tax burden, keeps its current inefficient, dysfunctional government, and loses its innovative edge. That is a recipe for, in turn, stagnation, crisis, and decline. Under Obamanomics, America is more likely on path toward Italy or Greece than Sweden or Denmark.