It is not uncommon for the more liberal elements of American politics to praise the welfare states found by the North Sea or north of our border. It is indeed admirable how effectively such countries ensure the quality of life of their citizens. But it is misleading and unhelpful to think of these countries as offering an alternative social and economic model to that of the United States. It is far better to view Scandinavian countries and Canada as comparable countries with successful practices that we can and ought to emulate.
For proof that we are not so different, look at the Heritage Foundation's 2013 Index of Economic Freedom. Canada is sixth in this ranking, Denmark ninth, the U.S. 10th, Finland 16th and Sweden 18th. All of these countries surpassed the U.S. in business freedom as well, partly due to lower corporate tax rates. Sweden's government commands 51.3 percent of the GDP compared to America's 42 percent and Canada's 42.9 percent, and the U.S. spends an additional 5.3 percent of GDP on tax expenditures. At any rate, America, Sweden and Canada can each be accurately categorized as having mixed market economies and big governments.
In light of Sweden and Canada's substantial welfare states, it is impressive that they have kept balanced budgets and debt-to-GDP ratios below 50 percent. Though much of this can be credited to a steady stream of tax revenue, it is also due to foresighted pension reforms; unlike Social Security, which uses a demographically unsustainable "pay-as-you-go" system, Canada's state pension plan is partially funded, while Sweden's state pensions are partially privatized.
Yet we would do well to recall the early 1990s, when Canada had a chronic deficit of six percent GDP in 1994 with unemployment at 10 percent, and when Sweden's deficit was a whopping 13 percent of GDP with unemployment at 10 percent in 1993. By comparison, America's current unemployment rate stands at 7.8 percent and the deficit is 8 percent of GDP. Despite elevated unemployment rates, Sweden and Canada massively reduced their deficits during the 1990s, primarily through spending cuts. In Canada, seven dollars of spending was slashed for every one dollar in tax increases. Cherished social programs were gutted and tens of thousands of public employees were let go. But by 1998, neither country had a deficit, while unemployment had fallen as well.
In contrast, over the last five years, the U.S. increased spending and reduced taxes in the face of high unemployment and a high deficit. Compared to Canada and Sweden's successes in the 1990s, current results in the U.S. have not been nearly as good. While Canada and Sweden also reduced taxes during the most recent recession, they did so from positions of relative fiscal strength, thus aiding the economic recovery without deepening their fiscal holes. Admittedly, these countries began their cuts during the 1990s with spending and tax levels higher than those in the U.S. Thus, tax cuts will be less effective in the U.S. today than they were in Canada and Sweden and spending cuts will hurt more. However, despite the fact that government spending is no longer a larger share of GDP in Canada than in the U.S., Canada continues to forge ahead with such spending cuts.
Beyond fiscal policy, the North still has much to teach us. School choice programs introduced in the 1990s in Sweden have offered parents with limited means the ability to send their children to private schools. Contrary to American fears that such programs will undermine public schools, Sweden's state institutions improved following the end of the near-monopoly on education, evidenced by the fact that most Swedish pupils still attend public school. Finnish schools while all public have a great deal of autonomy in curriculum development and pedagogy. Both Finnish and Canadian schools rely heavily on professional teacher development programs. All of these countries' schools best American ones on international assessments despite lower per pupil expenditures.
I have not addressed the numerous social programs provided by Scandinavian countries that the U.S. does not offer to its citizens these no doubt account for part of the high living standards enjoyed by Swedes, Finns and others. Unfortunately, developing such programs is not an option for America, where governments at all levels face gaping budget holes. We can, however, set a path for sustainable budgets and growth in the future, and following the Northern model may be the way to go.
