Saturday essay: The Swedish model again, and why it won’t work in Latin America

No, not this Swedish model,

the socialist economic model, instead.

Socialists sooner or later bring up the exemplary Nordic economies when one talks about the failures of Communism; in my case, when I post on Latin America.

For instance, just this week,

@USSenBlutarsky duh. There are plenty of successful socialist countries… Why does the right ignore Scandinavia? @BernieSanders @Fausta

— DangerAngel (@Dangerangel) August 7, 2015

That person assumes I have ignored Scandinavia. I don’t know about “the right” in general, but after hearing for decades how the Scandinavian models would work, today I’ll look at three factors:

• Taxes and spending
• Work ethic
• Rule of law

Each of those factors explain why a Scandinavian economic model can’t work in Latin America.

Taxes and spending:

1. Two years ago, C. Fred Bergsten was urging Pres. Obama to learn from Sweden’s economic recovery (emphasis added):

After its crisis, Sweden reduced public expenditures by 20 percent of its gross domestic product, slashing social transfers such as unemployment benefits and sick-leave compensation. It cut its public debt in half (its debt, as a proportion of the economy, is now about half that of the United States). It cut marginal tax rates and simplified its tax code so much thatnearly two-thirds of Swedes simply confirm by phone that the declaration automatically prepared for them by the tax authorities is correct. The banking system was thoroughly reformed and emerged unscathed from the global financial crises.

Structural reforms were also adopted. Successive governments deregulated one market after another and privatized as market conditions permitted. All children receive vouchers so their parents can choose private or public schools at public expense. Swedish social security became a true insurance system, rather than a pay-as-you-go one with huge unfunded liabilities as in the United States.

Sweden remains a social welfare society, and government spending still accounts for half of its economy; it finances all education and health care, as is common throughout Europe. Sweden did not dismantle the social system but, in addition to drastically reducing its costs, adopted macroeconomic and structural reforms to make it sustainable and greatly enhanced its efficiency by privatizing the delivery of many educational and medical services. The country’s guiding principle is that a successful social welfare society must be fiscally conservative and administratively efficient. This is the central Swedish lesson for the crisis countries of the euro zone and elsewhere.

These policies, based on competition and openness, have been implemented and endorsed by most Swedish political parties.

Repeat: Policies based on competition and openness, under the guiding principle that a successful social welfare society must be fiscally conservative and administratively efficient.

2. Tim Worstall (emphasis added):

. . . it’s long been argued, by people as varied as Scott Sumner,Stephen Gordon and, ahem, myself, that exactly the reasons that the Nordics like Denmark and Sweden work so well is precisely and exactly because they don’t do things the way that American liberals think things ought to be done.For example, Sweden has no inheritance tax. None whatsoever: it also doesn’t have a national minimum wage or a wealth tax. It follows the classical liberal, or if you prefer, standard economics of taxation. Taxes on corporate and capital incomes are lower than those on labour income. It is consumption taxes which carry the heavy load of funding the welfare state, not those taxes on income, companies or capital. Read Stephen Gordon’s post for more on this. The Nordics are also more economically free than the US in many ways, read Scott Sumner on that.

Further, there’s the point that I like to make. National tax rates are actually very low in these countries. They’re not washing great chunks of the national income though the capital city: they’re raising and spending the money locally.

For example, the Danish national income tax rate is 3.76%. The top Danish national income tax rate is 15%. The Swedish national income tax rates are 20 and 25%. These are, you will note, markedly lower than the rates which are sent off to DC for the congresscritters to decide what to do with.

The big tax on incomes is imposed by the municipalities in Sweden and by the communes in Denmark, those latter being groupings of as few as 10,000 citizens. These local taxes are high: 25-35% of incomes.

[Unfortunately, here in the U.S., if you own property in, say, NJ, you may get those big taxes, too, once you add the state income tax, property and school taxes together – and the only school choice you have is maybe a local charter school, if you luck out, or paying for private school tuition (another $20,000+/yr) out of your after-tax income. Once you’re dead, if your heirs sell your house they get to pay the real estate transfer tax on the total sale, not on the gain. House or no house, your estate gets to pay an estate tax while your heirs each pay inheritance taxes, so don’t die if you live in NJ. But I digress.]

Incidentally, for the last two years the Dutch have been moving away from a welfare state to individual responsibility and self-reliance, too.

The work ethic:
One can argue about the effectiveness of the current or prior economic models. Let’s also look at work ethic.

Benjamin Katzeff Silberstein, a Swede now in the U.S., posits that It’s time to kill the myth about the superiority of the Nordic welfare state model. (emphasis added)

In the new book Scandinavian Unexceptionalism, Swedish author Nima Sanandaji dispels many of the popular conceptions about the Nordic countries. Scandinavia’s success came before the welfare state, not after it. Between 1936 and 2008, when much of the welfare expansion occurred, Sweden’s growth rate dropped to being the 13^th highest out of 28 industrialized countries.
. . .
If anything, the Scandinavian countries are good examples of how important it is to uphold social values and virtues that work. When Swedes voted a center-right coalition into government in 2006, they did so based on a platform that emphasized hard work and individual responsibility in a society where all too many healthy people of working age were living on welfare. This tradition of individual responsibility goes back all the way to the time when Sweden was largely a rural, farming-based country with individual tillers, Sanandaji points out.

The Swedish government’s website actually spells out the work ethic: focus on doing exactly what’s needed and doing it well, shorter chain of command, “Show up on time, stick to your agenda and finish on time,” work hard.

In the case of Puerto Rico, where I was born and lived for the first nineteen years of my life, you could send three million Swedes to inculcate their work ethic to the three and a half million Puerto Ricans remaining in the island, and things may still not change, due to one more factor: The rule of law.

The rule of law:
An even greater factor why successful economic models won’t work in LatAm countries is the absence of the rule of law in their countries.

Bruce Wydick, in his lengthy essay The Key to Prosperity
It’s not knowledge or work ethic, it turns out, makes a cogent case for trust as the key to prosperity:

social trust has significantly fostered economic prosperity

Wydick has found,

The importance of social trust has been driven home as my family and I live for six months in a small village in Oaxaca, Mexico. The value of social trust is made salient by its absence, like being oblivious to your mother’s savory cooking until you leave home. Mexico is a wonderful country, rich in resources, history, tradition, art, and culture. But it is not a country rich in trust. Trust in government, in politicians and police, even among one’s fellow citizens is as sparse as water in the Sonoran Desert. These are not casual observations. Lamentably, they are how the data speak.

You can not, will not, ever, have any social trust unless and until the institutions, the parties, and the individuals create, support, and constantly foment the rule of law.

As it is, mention the rule of law, el principio de legalidad, in most of Latin America, and you’ll get a blank stare, if not a chuckle.

Until then, the only Scandinavian model working in Latin America will be the guy in the photo.