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The Nordic Model and the Growth Agenda

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History warns us, however, that it is the customary fate of new truths to begin as heresies and to end as superstitions.

--Thomas Henry Huxley (1880)

 

The February 2nd edition of The Economist carries a 14-page special report on the political and economic reforms underway in the four Nordic countries (Norway, Sweden, Denmark, and Finland).  Just as the U.S. and Minnesota are moving toward more social democracy, it turns out the birthplace of the Scandinavian-style welfare state is moving in the opposite direction.

Here in Minnesota—where more than 32 percent of Minnesotans still trace their ancestry to the Nordic countries (2010 Census data)—our one-party state government struggles with developing any new policy ideas beyond warmed-over 1970’s Scandinavian welfare statism.

I hold out hope that examining the new directions the Nordic states are taking may help us with some clues on how to develop a Minnesota-style growth agenda.

If you can spare the time, I recommend reading all of The Economist special report. In this post, I will highlight some of the content most relevant to our situation in Minnesota and how it would play into a unique growth agenda. 

Perhaps the state’s ancestral homelands still have something to teach us.  The surface similarities are still there—the same ethnic groups, a similar northern climate, and individual populations that range from 5 million to 10 million are comparable to Minnesota’s 5½ million.

As The Economist points out,

“Most of the rich world now faces the same problems that the Nordics faced in the early 1990s—out-of-control public spending and overgenerous entitlement programmes.”

Indeed, in Sweden, the government’s share of the economy peaked in 1993:  for the past twenty years, government has been shrinking, even while the Swedish economy has regained its position as one of the world’s best.

Nobel-prize-winning economist Milton Friedman (who once taught for a year at the University of Minnesota) is mentioned several times in the special report.  Author Joel Kotkin quotes Professor Friedman in this exchange between Friedman and an unnamed Scandinavian economist,

When a local economist told Milton Friedman “In Scandinavia we have no poverty”, he replied: “That’s interesting because in America among Scandinavians, we have no poverty, either.”

What is most instructive about the current Nordic model is that these nations have reached the end of the welfare state and have pulled back.  Nordic nations are cutting spending, cutting taxes, cutting government debt and encouraging entrepreneurs.

Why the sudden turnaround?  The Economist quotes a Danish historian as saying,

“The welfare state we have is excellent in most ways.  We have only this little problem.  We can’t afford it.”

The Economist reports that,

“The new Nordic Model begins with the individual, rather than the state…It begins with choice and competition rather than paternalism and planning…rather than extending the state into the market, the Nordics are extending the market into the state.”

Yes, Nordic governments are still too big.  Personal tax levels are still too high (the founder lives in lower-tax Switzerland and many a bright young Swede can be found in lower-tax London).  But both Sweden and Denmark offer private school vouchers to all students.  Nordic nations are running budget surpluses.

The Governor of Minnesota, Mark Dayton, begins with the state.  In beginning with the individual, we will do well to keep in mind the words of Irish philosopher Edmund Burke, who wrote,

"To be attached to the subdivision, to love the little platoon we belong to in society, is the first principle (the germ, as it were) of public affections".

Life is more than just us as the individual, it is also about our families, our neighbors, our communities.

The 80 Percent Solution

One of the more sobering statistics goes like this,

“For the Nordic countries to be able to afford their welfare states, they need to have 80% of their adults in the workforce.”

In America, the current comparable number?  63.6 percent.  Since the recession started, millions have gone missing from the U.S. labor force: lost to retirements, disability, or simply given up on finding work.  Certainly the American welfare state will not be sustainable if we cannot find a way to put more people to work.

If in Doubt, Innovate

One feature of the Nordic turnaround has been an emphasis on entrepreneurs and innovation,

“Nordic governments recognise that they need to encourage more entrepreneurs if they are to provide their people with high-quality jobs, and that they can no longer rely on large companies to generate business ecosystems on their own.”

Here, we are passing new taxes on medical devices and business-to-business services, which discourage startups, innovation, and entrepreneurs.

The Need for New Cows

The Nordic experience has demonstrated the need to develop new generations of capitalists, rather than relying on the same old corporate stalwarts.  The Economist notes that, “In California 39 of the state’s 100 biggest companies were founded since 1970.  In Denmark the number is just three.”

And adds,

“If the Nordic countries are to generate the high-quality jobs that their citizens regard as their birthright, they need to produce a new generation of successful capitalists.  As Karsten Dybvad, the head of the Confederation of Danish Industry, puts it, “you can’t keep milking the same cow forever.”

In Minnesota, we have been milking the same few cows decade after decade.  I took a look at the founding dates of the Star Tribune top 100 public companies (the list excludes private companies, like Cargill—founded 1865). 

Of the 20 largest Minnesota public companies, most (11) were founded more than a century ago, and of those, six were founded in the 1800s.  Of the top fifty, only one was founded within the past twenty years (Digital River, 1994).  Of the top eighty companies, only Northern Oil and Gas (2006) was founded in this millennium.

Of course, those figures exclude those countless numbers of household names that have decamped for friendlier business climes.  Honeywell (now of Morristown, New Jersey) Norwest Bank (now Wells Fargo, San Francisco) and Northwest Airlines (now Delta, Atlanta) are just three that spring to mind. 

The Growth Agenda for Minnesota

Following the Nordic model, a growth agenda for Minnesota looks something like what the Nordic countries are already doing,

  • Cut government spending as a share of the economy
  • Reduce debt as a share of the economy
  • Cut income tax rates, both personal and corporate
  • Eliminate gift and inheritance taxes
  • Move state pensions from defined-benefit to defined-contribution
  • Implement universal school vouchers
  • Allow private firms to compete with state agencies for delivering public services
  • Encourage entrepreneurs and innovation
  • Restore the AAA credit rating

The Economist argues that the Nordic countries reached the natural end of the welfare state some twenty years ago, a point at which I would argue Minnesota is just arriving.  As the Nordics “have reached the future first,” they have much to teach us on“what to do when you reach the limits of big government.”

 

Bill Glahn, author at the terrific BillGlahn.BlogSpot (“Rebuilding America from the Bottom Up”), is the former Director of the Office of Energy Security under Gov. Tim Pawlenty.  

 

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