Why the Nordic Model Wouldn’t Work in the U.S.

The welfare states were developed during a post-war economic boom, and they rely on taxing the middle class and the poor.

It’s a common refrain in American progressive circles: If Europe can have universal health care, pre-K, and all the other welfare state goodies, why can’t America? We could if we just taxed the millionaires and billionaires, the argument goes. 

Speaking as a Swedish citizen, I can tell you it is not quite that simple. While I treasure many of the benefits the welfare state provides, the fact of the matter is that the U.S. cannot follow the same path, for a number of reasons.

Building a welfare state is a boom-time endeavor. The Nordic welfare states were built during the postwar expansion. In Sweden’s case, we got the best of both worlds: We avoided becoming involved in the war, and afterward, demand for our industries spiked. With that, so did salaries. This made building a welfare state easy for two reasons: First of all, as salaries boom, so do tax revenues, even if tax rates are unchanged. This revenue boost allowed the government to add additional safety nets and government programs without raising rates or having to cut any other budgets.

Secondly, it is politically much easier to raise taxes when salaries are rising quickly. Most people don’t pay close attention to their tax rates, but rather to how much they get paid. If taxes are increasing, but real wages are increasing at an even faster rate, then most people will be fine with it because their paychecks keep getting bigger over time and they are able to purchase more stuff. Relative change is king. 

Wage growth in America is, to put it nicely, not at the level of what it was in Scandinavia during the postwar boom. From 1950 to 1975, household incomes in Sweden grew by 70 percent.  Building a Nordic-style welfare state in America would require increasing taxes in a way that reduced not just real but nominal incomes of Americans, something that would no doubt affect consumer behavior negatively. 

But wait, why would the wage growth of average Americans matter? Surely building a welfare state is all about taxing the rich? Well, that’s the thing …

Sweden doesn’t really tax the millionaires and billionaires—it taxes the poor. In Sweden, it is possible to avoid virtually all capital gains taxes through an investment savings account, which obviously mostly benefits the rich. What about wealth taxes? The Nordic countries have long since moved past them: Denmark abolished its wealth tax in 1997, Finland in 2005, and Sweden In 2007. It’s not about ideological opposition to taxing the rich.  It’s that the wealth tax was completely counterproductive and caused capital to flee these countries. In the U.S., the wealth tax is a novel idea. In the Nordics, it’s the 56k modem of taxation.

Instead, the big difference between the U.S. and Sweden, taxation-wise, is how the poor are taxed. Americans who make less than $12,000 per year pay no federal income taxes.  Many who make more than that still end up paying a net zero in taxes once deductions are accounted for. In Sweden, the equivalent is about $2,300. On any money you make above that threshold, you pay a tax rate of about 30 percent, plus payroll taxes. What about deductions? In the US, the average tax refund last year was $2,707. In Sweden, it was $821. On top of this, Sweden has a national sales tax of 25 percent on almost everything you buy. As the poor spend a greater share of their income, this tax disproportionally hurts them.

The kind of taxes that the poor are forced to pay in the Nordic countries would be completely unacceptable to the majority of the American public. It does not matter whether polls claim Americans support Nordic welfare programs—it’s utterly meaningless unless you also agree to pay them the only way they can be paid for: By taxing the average citizen. 

Again, Swedes are certainly not opposed to taxing the rich, and we do tax them, though mainly those whose wealth comes through work rather than capital gains. Welfare states simply cannot be built on the backs of only the rich. We learned that the hard way, and you will too.

But wait, even if you do need to tax the average American to fund the welfare state, and even if raising taxes is difficult-to-impossible when wages aren’t booming, surely that problem will take care of itself? After all, the great wage stagnation that began in the 1980’s was caused by the neoliberal policies of the Reagan administration, and so some classic Nordic Socialism ought to put wage growth back on track, right? Well, again, things aren’t quite that simple …

Wages stagnated in Sweden as well. The 1980s in Sweden were quite different from the 1980s in the United States. Taxes went up. Unionization did not decline noticeably (in 1990, 81 percent of Sweden’s workers were unionized, a drop of only 4 percent compared to five years earlier), as it did in the United States). There were some liberalizations of the capital markets toward the latter half of the decade, but by and large, Sweden was still a very left-leaning country, with a top marginal income higher than 80 percent for most of the decade.

And wages stagnated all the same. After being left largely untouched by World War II, the Swedish economy grew strongly for several decades during the postwar boom. Then, during the 1970s,the economy stumbled as high oil prices and new competition from the now-rebuilt European and Asian powers proved a difficult match for our industries, especially manufacturing. This was followed by the 1980s during which real wages flatlined, and even declined during some years. It actually took until 1996 for real wages to reach 1979 levels. 

What did we do to turn the tide? First we slashed top marginal tax rates by 30 percentage points over the course of six years starting in 1985. Real wages began to pick up again after that, almost reaching 1979 levels before a financial crisis caused by our fixed exchange rate hit in the early 1990s. And how did we deal with that? With some brutal austerity policies of course (policies that were supported across the spectrum). Wages soon recovered, and since 1993 Sweden has had only a single year of negative real wage growth (2011). Real wages have increased faster in the past decade than during the 1970s, despite unionization being in a state of long-term decline (today, “only” 61 percent of Swedish workers are members of unions).

Further, the idea that wages stagnated in the U.S. is at the very least somewhat exaggerated. My point is that, whatever happened in the U.S. that caused wages to (at least on paper) stagnate, also happened here—without the supply side economics demonized by the left. In fact, if anything, the evidence would suggest that supply side-inspired economics helped take Sweden out of the real wage growth rut.

In other words, do not count on the Scandinavian model to give you the wage growth you would need to painlessly raise taxes on the middle and lower classes. That’s not how it works. There are several other reasons why America may struggle to adopt a Nordic-style welfare state. Nevertheless, if the U.S. is to make an honest attempt at creating a welfare state like ours, liberal proponents need to be honest about the kind of economic transformation they are, in fact, selling.