Democracy in Chains (part 2)

July 12, 2017

Previous | Next

Nancy MacLean argues that James M. Buchanan’s theory of political economy has provided the primary intellectual foundation for a right-wing movement that now threatens American democracy. I’ll describe that foundation here, and then in the next post go on to discuss how big donors liked Charles Koch helped translate it into political action.

The myth of the public good

In 1962, Buchanan published The Calculus of Consent: Logical Foundations of Constitutional Democracy, with co-author Gordon Tullock.

Buchanan refused to take at face value concepts like the “public good” or the “general welfare.” He wanted to know how government decisions are actually made. Who makes them? Who influences the decision-makers? Who wins; who loses? How do public decisions affect people with different economic interests? Do they really advance the cause of freedom?

These are all legitimate questions, and Buchanan’s work on “public choice” theory would eventually earn him the Nobel Prize in Economic Sciences in 1986. However, underlying his theoretical interests was a strong ideological hostility to the public sector and a deep-seated conviction that government was becoming an increasing threat to the free-market economy.

Buchanan noticed that popular support for increased government spending remained high not only in bad times, when a stronger economic case could be made for it, but in good times as well. As MacLean summarizes his concern, “simple majority voting thus ‘tend[ed] to result in overinvestment in the public sector….There are no effective limits’ in the current rules to the resources that might be steered to public coffers, even when those monies would be ‘more productive if left in the private sector of the economy.'”

Buchanan believed that the political system failed to place adequate constitutional limits on the majority’s ability to claim more and more benefits for themselves at the expense of economic liberty and economic growth. He looked back with some appreciation to the “Lochner era” of constitutional law, the forty-year period from 1897 to 1937. Then the Supreme Court had interpreted the Constitution as precluding the federal government from doing things like regulating wages and work hours.

The coercive state

In 1975, Buchanan published The Limits of Liberty: Between Anarchy and Leviathan. The main premise was reasonable enough, that human liberty depended on finding some middle ground between completely unbridled self-interest and government-imposed order. Without any government rules and protections, people could just take what they wanted instead of earning it by their labor. Too much government, and people wouldn’t be free to achieve and to enjoy the fruits of their success.

A strong anti-government bias may have prevented Buchanan from reaching a happy medium. He was most intent on limiting the power of government, since he viewed state power as inherently coercive. The economy, on the other hand, was the realm of voluntary exchange, which for the sake of liberty needed to be left alone as much as possible.

I think MacLean puts her finger on the essential problem with this reasoning when she says that “libertarians steadfastly refused to acknowledge wealth as a form of power.” As a sociologist, I would argue that power exists in some form in every social institution. It can take the form of legitimate authority if it is used on behalf of others, as when parents exert power for the good of their children; but it can take the form of domination if it is used against others. Often it is both: authority over an in-group for the purpose of more effectively dominating an out-group, as in wartime.

From that perspective, to regard public power as inherently coercive while regarding private economic power as benign is arbitrary and one-sided. Concentrating political power through voting can lead to domination, but so can concentrating economic power through corporate organization. If a business pollutes the air or water, doesn’t that force people to breathe dirty air or drink dirty water? If it discriminates against a class of workers, doesn’t that force those workers into a restricted labor market with fewer economic opportunities. If it pays subsistence wages, doesn’t that force families to go without health insurance? The economically powerful have always wanted to claim that what is good for them is good for all. By treating the power of the slave-owner as benign (since it was blessed by Providence), Calhoun could conclude that “slavery is…favorable to personal and national liberty.” Libertarians like Buchanan want to treat the power of corporations as benign (since it is blessed by the free market), and thus conclude that corporate power is favorable to personal and national liberty, no matter how concentrated and unregulated that power may be. Nowadays some multinational corporations command more resources than some national governments, but in Buchanan’s view only government is the Leviathan to be feared.

Buchanan singled out the Great Depression as the turning point when government began to infringe on liberty by over-managing the economy and allocating too much of the wealth. While many economists praise the post-New Deal era as a “golden age” when the middle-class expanded and equality increased, Buchanan praises the pre-Depression period of greater inequality as the peak of economic liberty. MacLean notes that Buchanan ignores the possibility that the extreme inequality and lack of economic regulation of those pre-Depression years might have had something to do with the severity of the Depression itself.

The threat of majority rule

One of the worst crimes of the coercive state, in Buchanan’s view, is taxing the wealthy at a higher rate than the middle class or the poor. As far as he was concerned, that is just the majority using its collective power to take something from a wealthy person who prefers not to pay for whatever the state wants to spend money on. He could see no difference between that and “the thug who takes his wallet in Central Park.”

I would say that this argument too is reminiscent of Calhoun in its portrayal of the wealthy as the real victims of social conflict. Their power is a benign expression of freedom, but the state’s attempt to curb that power in order to enhance some larger group’s freedom is coercive and unjust.

Buchanan also wrote an essay called “The Samaritan’s Dilemma,” in which he questioned any transfer from the haves to the have-nots, even for charitable purposes. The danger was that the recipients would take advantage of the givers’ good intentions by doing less for themselves than they otherwise would. “By this logic, what seemed to be the ethical thing to do–help someone in need–was not, after all, the correct thing to do, because the assistance would encourage the recipient to ‘exploit’ the giver rather than to solve his own problems.”

We have probably all heard some conservatives attributing this country’s high rate of poverty to overly generous welfare programs that encourage “welfare dependency.” If that were true, we would expect countries that provide more public assistance than we do to have even more persistent poverty. Instead, they usually have greater equality and less poverty. In my recent discussion of Viking Economics, I discussed how Nordic countries make benefits such as health insurance universal, and thus avoid giving people incentives to remain poor or unemployed. They achieve better results than we do with more generous government, not less.

Buchanan worried that the American political order had already moved so far in the direction of majority power that the changes were irreversible. Why would the majority now give up all the benefits they have voted for themselves? “How can the rich man (or the libertarian philosopher) expect the poor man to accept any new constitutional order that severely restricts the scope for fiscal transfers among groups?” he asked. He concluded his book on a pessimistic note: “Despotism may be the only organizational alternative to the political structure that we observe.” So the critic of government coercion ends up hinting that coercion may be the only way to save the democratic state from itself.

By 1975, when Buchanan published that, he was already working with Charles Koch and other wealthy donors for political changes that would curb the power of the democratic state. They would soon be achieving at least some of the results they craved.

Continued

 


Democracy in Chains

July 11, 2017

Previous | Next

Nancy MacLean. Democracy in Chains: The Deep History of the Radical Right’s Stealth Plan for America. New York: Penguin Random House, 2017

Nancy MacLean is Professor of History and Public Policy at Duke University. She describes her book as “the true origin story of today’s well-heeled right.” It is the story of how a particular political philosophy joined with a particular source of funding to propel the right-wing movement that has come to dominate the Republican Party.

The political philosophy in this story is the Virginia School of Political Economy, whose founder was James McGill Buchanan. The source of funding was Charles Koch and other conservative millionaires with a rather hostile attitude toward the federal government.

MacLean’s principal source of information is the archive of James Buchanan’s papers at George Mason University. What she found there enabled her to trace the connections between the centers of study Buchanan established at the University of Virginia and later at George Mason, and the think tanks and foundations financed by the Koch brothers and other wealthy donors (such as the Cato Institute, Heritage Foundation, Americans for Prosperity, Club for Growth and State Policy Network). What began as a academic program to advance libertarian ideas expanded into a massive national project to train political operatives and legal experts to transform American government.

MacLean sees something rather sinister about this nexus of ideas, money and political action. The movement’s criticism of government goes beyond critiquing particular policies to question the very foundations of democracy, especially majority rule. It places a higher value on capitalism than democracy and is more receptive to rule by the wealthy few than rule by the majority. (Its advocates might contest that oligarchic characterization and argue that they only want a constitutional democracy with protections against the tyranny of the majority.) Another troubling element is the movement’s reliance on stealth to achieve its objectives. Since many of its proposals–such as Social Security and Medicare privatization–lack majority support, its operatives have to gain power without being entirely candid about their true agenda.

Racial origins

MacLean says that “attacks on federal power pitched to nonelites have almost always tapped white racial anxiety, whether overtly or with coded language.” The underlying message is that the government is coming to take what is yours and give it to those people. Hopefully such appeals play a smaller role in right-wing thought and action than they used to. Nevertheless, the movement MacLean is describing has inherited some of its core ideas from southern defenders of slavery and segregation, notably John C. Calhoun.

Calhoun spoke for the wealthiest men in the wealthiest state (South Carolina) at a time when the South’s prosperity built on slave labor made it the wealthiest region in the nation. Slaves were property, he believed, and the acquisition and free use of property was a matter of liberty and unalienable right. (The liberty of the slave was not an issue, since slavery was “ordained by Providence, honored by time, sanctioned by the Gospel….”) The government’s proper role was to protect property rights, not abrogate them. In addition, state’s rights took precedence over federal rights. MacLean notes that Calhoun preferred to concentrate power at the state level, “the level that men like him could most easily control,” going so far as to take powers away from the local level in order to do so.

From this perspective, any attempt by the federal government to restrict or abolish slavery was an infringement upon liberty. In Calhoun’s view, it was the government that created the battle over slavery, and it was the Southern states and their slaveholders who were the victims, not the slaves themselves.

MacLean sees a common oligarchic theme that connects libertarian thought from Calhoun to Buchanan and Koch: “Now, as then, the leaders seek Calhoun-style liberty for the few–the liberty to concentrate vast wealth, so as to deny elementary fairness and freedom to the many.”

1950s Virginia: Oligarchy resists desegregation

James Buchanan came to the University of Virginia in 1956, almost 100 years after the end of slavery. But it was only two years after Brown v. Board of Education, when privileged Southerners were employing arguments reminiscent of Calhoun to resist school desegregation.

Virginia was characterized by one student of southern politics as the state most thoroughly controlled by an oligarchy. MacLean describes it as the “veritable fiefdom of Senator Harry F. Byrd Sr., the archnemesis of Franklin Delano Roosevelt and the New Deal.” The Byrd Organization ran the state primarily for the benefit of a powerful minority, but remained in power by limiting the voting strength of the majority through measures like poll taxes and malapportionment to underrepresent city and suburban voters. Both practices would later be ruled unconstitutional by the Supreme Court, but not until the 1960s.

The Byrd Organization and its supporters, especially the editor of the Richmond News Leader, James J. Kilpatrick, portrayed the federal desegregation mandate as an unconstitutional violation of states rights and personal liberty.

The Virginia General Assembly responded to the challenge of Brown by ordering the governor to withhold funding from any school that obeyed a federal court order to desegregate. Because representation was so disproportionate, the senators who voted for this action represented fewer citizens than those who voted against it. The majority of Virginians probably wanted to keep their schools open.

Buchanan’s mission

That was the situation in the state when James M. Buchanan proposed creating a new center of study at the University of Virginia. The Thomas Jefferson Center for Political Economy and Social Philosophy would focus academic attention on the proper relationship between the government and the economy. Although trained in economics at the University of Chicago, Buchanan did not share Milton Friedman’s enthusiasm for scientific models and testable hypotheses. He was more interested in broad philosophical issues, especially the threat to liberty created by government’s tendency to over-tax, over-spend, and over-regulate. He theorized at length about such issues without always providing much empirical support for his ideas.

In his proposal for the new center, he avowed that it would not be home to any scholar who valued security over liberty, or wanted to “replace the role of the individual and of voluntary association by the coercive powers of the collective order.” “Collective order” was his term for all those who relied on government for their advancement, which made the democratic process itself sound rather socialistic and sinister.

In 1959, Federal and state courts struck down the decision by the Virginia General Assembly to withhold funding from integrating schools. While that would seem to settle the matter, Buchanan had a proposal for a new, less obviously racist, form of resistance. He proposed that the state close all the public schools, using the economic argument that a private market in education would create more competition and better education. Families would receive vouchers to send their children to whatever school they “chose,” [without, of course, worrying about whether the voucher would be enough to get a poor black child into a good school]. A resolution to end the state constitutional guarantee of free public education failed to pass, but one county, Prince Edward, did close its schools to resist integration. A federal court ordered them reopened five years later.

After Buchanan’s Thomas Jefferson Center came under criticism from the university for being too doctrinaire and authoritarian, Buchanan left for UCLA, arriving in the tumultuous year of 1968-69. Apparently shocked by the protest movements he saw there, he published Academia in Anarchy in 1970, with co-author Nicos E. Devletoglou. He did not advocate the complete privatization of higher education, but he did argue for running universities more like businesses. Students should have to pay the entire cost of their education; otherwise they were “parasites” on society. Faculty should stick to providing the product they’ve been hired to provide. Governing boards representing taxpayers and donors should exercise strict control. In this more businesslike atmosphere, students and faculty would then have less reason to waste time protesting, but those who did create disruptions should be punished or thrown out.

Later, when he taught at Virginia Tech, Buchanan recommended to the president a new “reward-punishment structure for faculty” to reduce funding for departments like sociology, literature and history that seemed to produce more dissent. He acknowledged that this would violate “sacrosanct precepts for ‘academic freedom’,” but hey, “this is a rough world.”

If there was one thing that was sacrosanct for Buchanan, it was economic freedom–the right of those who pay the piper to call the tune. Other forms of freedom, like academic freedom or freedom from discrimination, often took a back seat. As we’ll see, this bias would mar his work throughout his career, but at the same time make his ideas all the more attractive to the economically powerful. I’ll delve deeper into Buchanan’s thought in the next post.

Continued

 

 


Viking Economics (part 3)

June 28, 2017

Previous | Next

Even the wealthiest, most economically developed countries in the world face serious challenges in the years ahead. An important question for the future is whether a more egalitarian social system is an advantage in dealing with these challenges. If so, that makes the Nordic model even more relevant to current policy discussions.

Globalization

In much of the developed world, globalization has benefited capital more than labor, as global corporations profit by offshoring work to cheaper sources of labor. Nordic countries have a long history of global trade. Countries like Norway “lacked the extensive land, abundant resources, and large population that enabled countries like the United States and Germany to generate robust, internally driven economies.” But Nordic countries also have a strong commitment to high employment and good wages. Can they sustain that in the global economy?

One way of reconciling an openness to foreign trade with a desire to protect domestic workers is a policy of “flexicurity,” a Dutch concept that has become central to economic policy in Denmark. “The Danes changed the social contract between the state and the workforce. Instead of guaranteeing workers their existing jobs, the government would guarantee workers ongoing support and retraining so they could get new jobs.” By providing the universal services of education, training and a strong social safety net, Nordic countries help their workers cope with a world of enhanced foreign competition.

Although immigration is a controversial issue almost everywhere, Nordic countries have also had the confidence to extend economic assistance to newcomers. Both Norway and Sweden have about a 14 percent foreign-born population, even a little higher than the US’s 13 percent. Norway will support immigrants for a year while they learn the language and culture and receive job training. “Norway is ranked number one among the twenty-seven richest countries for its policies on migration: acceptance of asylum-seekers and refugees, open borders to immigrants and students from developing countries, and friendly integration practices.”

That is not to say that conflict between immigrants and natives is nonexistent. Sweden has experienced youth riots in immigrant neighborhoods, especially during the period after the mid-1980s, when it was cutting public spending and allowing inequality to grow. In general, however, Lakey believes the Nordic model goes a long way to reduce social conflict. While American-style inequality “institutionalizes scarcity,” making people of different races and ethnicities compete for too few opportunities, the Nordic model:

generously funds agencies and programs that assist people who otherwise might lack opportunity. It seeks out barriers to advancement, such as burdens of childcare and dependent elders, and tries to alleviate those to free everyone to move ahead. By universalizing such programs, as well as health care, vacations, access to public transportation, and other enhancements that otherwise can become racialized for disadvantaged populations, the model carefully avoids setting categories of people against each other.

Of course, doing all these things is costly. But who can calculate the social and personal costs of our failure to do them?

Climate change

As I have argued elsewhere, environmental issues highlight the tension between private gain and public cost. Fossil fuels provide profits for producers and cheap energy for consumers, but their market success depends on not factoring in the social and environmental costs of climate change and other environmental damage. Renewable energy will become cheaper and more profitable over time, but the government may need to put a big thumb on the scale to discourage what is publicly dangerous and encourage what is publicly good as quickly as possible.

Because Nordic countries are more receptive to market interventions for the public good, they have generally been leaders in national and international action on climate change. Sweden, Denmark and Norway were among the first to impose taxes on carbon emissions, back in 1991. Denmark has been a world leader in wind power, because of national policies like incentives to form local wind energy co-ops. In 2013, Sweden was already getting over half of its energy from renewable sources, compared to an average of 15% in the European Union and even less in the U.S.

Norway is in an awkward position on climate change, because oil accounts for almost half of its exports. How much of the Arctic oil reserves it can actually develop without unacceptable environmental damage is a vital but unresolved question. On the other hand, Norway’s large public pension fund has divested from coal, as well as from Canadian tar sands oil. Norway also doubled its carbon tax in 2012 because the government wasn’t satisfied with the country’s rate of emission reductions.

Automation

Lakey does not discuss the potential impact of automation on employment, but it is a challenge that is receiving more and more attention. I recently reviewed Martin Ford’s Rise of the Robots, which warns of a “jobless future” for millions of workers whose jobs are vulnerable to automation. Ford and others envision an expansion of public welfare programs to support the jobless multitudes.

Lakey has described Nordic countries not as welfare states, but as “universal service states.” They place a strong emphasis on helping people to become productive citizens with good jobs. Does that make them more or less prepared to cope with a more automated economy?

In Parts 2 and 3 of my discussion of Ford’s book, I described my somewhat different vision of the future, emphasizing the transformation of work rather than just the elimination of jobs. I have no doubt that robots will take over many tasks that they can do more efficiently than humans. But as in the transition from farming to manufacturing in an earlier time, I would hope to see human labor shifted to new frontiers of economic activity, especially in the area of skilled personalized services. I would also like to see the extension of the twentieth-century trend of shortening the typical work week, which would have the effect of spreading the available work to more people. As the twentieth-century experience showed, fewer hours is compatible with high pay as long as workers have the skills and the technological support to achieve high productivity. That in turn depends on the development of human capital, which requires broad access to education, health care and other human services, industries that both create jobs and equip people to get jobs. Since the development of human potential is a public good that not every family is able to pay for, a strong public role in such areas as health insurance is called for. There is also a role for non-market work–labors of love if you like–which can flourish when people have the leisure to balance their work and family responsibilities and participate in volunteer work.

Although I hadn’t read Viking Economics when I developed these ideas, the Nordic model seems relevant to everything on my list. The same “flexicurity” policies that reduce fears of globalization can also reduce fears of automation. If you lose a job, you can expect help in finding and qualifying for a new one. The Nordic work week is already shorter than ours. The universal services model is more conducive to the development of human capital, and citizens are already accustomed to paying high taxes to support it. Finally, “Thanks to an economic model that fosters work/life balance, people have abundant time to volunteer in the community.” It’s a way of life that compares favorably to the American system, where workers cling to technologically and environmentally obsolete jobs like coal mining because they expect little help to become something new. We can do better.

 

 


Health Insurance Losses Remain High in Senate Bill

June 27, 2017

Previous | Next

Today I will interrupt my discussion of Viking Economics in order to report on the Congressional Budget Office’s analysis of the “Better Care Reconciliation Act” proposed by Senate Republicans. Although the bill differs from the House Republican bill in many of its details, its effect on health care spending and insurance coverage is projected to be similar.

According to the CBO, the Senate proposal would reduce the number of people with health insurance by 22 million over ten years, compared to 23 million for the House bill. It would reduce Medicaid spending by $772 billion, compared to $834 billion for the House bill. It would reduce tax credits and subsidies for purchasing health insurance on the individual market by $408 billion, vs. $276 billion for the House bill. It would eliminate most of the Affordable Care Act’s taxes, which were aimed primarily at medical corporations and the wealthiest taxpayers.

At first, fewer people would have health insurance primarily because penalties for not having it would be eliminated. Some individuals would choose not to carry insurance, and some large employers would choose not to offer group plans. Although young and healthy individuals would be less inclined to obtain coverage, CBO expects that enough of them would do so to keep most insurance markets stable and generate the revenue insurers need to cover the sick. In a few sparsely populated areas, insurers would not have enough customers to keep them in the market.

As other provisions of the Senate bill took effect, more of the uninsured would be people who found insurance less available or affordable than it was under Obamacare.  That could be for a number of reasons.

Reversing the Medicaid expansion and spending less on Medicaid in general would result in an expected drop of 15 million in enrollment over ten years. (That would be an especially big blow to nursing home residents, the majority of whom rely on Medicaid because they have exhausted their savings.)

Many people who are not on Medicaid would be priced out of the market because of higher premiums. Insurers might have to raise rates in order to compensate for the loss of premiums from healthy people who elect to go without insurance. Older buyers would also face higher premiums because insurers would be allowed to charge them up to five times as much as younger buyers; that limit was three times as much under Obamacare.

For many people, the problem would not be higher premiums but less government help in paying for them. Tax credits would offset a smaller percentage of the premiums than under Obamacare, and they would phase out at a somewhat lower income level, 350% of the poverty level instead of 400%.

The CBO analysis talks about premium declines as well as premium increases. In the short run, insurers might have to raise premiums on the sick because fewer healthy people were signing up. But in the long run, the premium on a “benchmark policy” could drop 20-30%. The “benchmark policy” is a standard policy that is the basis for calculating your tax credit. You are expected to pay a certain percentage of the premium, and the government reimburses the rest. The main reason why the benchmark policy would be cheaper is that the bill allows it to cover less of expected health care costs. It only has to cover 58% of the cost instead of Obamacare’s 70%. So the premium is lower, but that is offset in two ways: your share of the premium is a little higher, and your deductible will be higher when you need care. The drop in premiums is a somewhat illusory benefit, since your out-of-pocket cost is higher. Obamacare has some additional subsidies to help with out-of-pocket costs, but the Senate bill eliminates them.

Inexpensive policies would also be available because states can obtain waivers from Obamacare’s strict rules on benefits (requiring “essential benefits” and prohibiting annual or lifetime caps on payouts). That might work for someone who wants a policy without maternity benefits. For people who need a comprehensive policy with no caps, the cheaper policy is very risky.

Low-income people not covered by Medicaid would often face a choice between having to pay too high a premium for a good plan, or having to pay too much out-of-pocket because their cheaper plan doesn’t cover very much. As a result, the CBO predicts that “few low-income people would purchase any plan.” For the 43% of the population with incomes below 200% of the poverty threshold, CBO predicts that the percentage who lack insurance would rise from 17.6% to 34.8% in the 19-29 age group, from 19.8% to 36.7% in the 30-49 age group, and from 11.2% to 25.6% in the 50-64 age group. For the entire population under 65 (all income levels), the percentage uninsured would rise from 10% to 18%. The CBO is too non-partisan to say so, but that sounds like regress, not progress.

Although President Trump initially endorsed the House Republican bill, he later acknowledged that it was too “mean”.  Now he is endorsing the Senate bill, which is about equally mean. One wonders whether the President even understands what he is supporting, since it is so far from what he originally promised. Most Republicans do not seem to care very much what’s in the bill either, as long as it pleases the Republican base by repealing Obamacare and cutting taxes for the wealthy.


Viking Economics (part 2)

June 26, 2017

Previous | Next

How did the Nordic countries, which are in many ways similar to other developed countries, arrive at their unusual blend of economic equality and prosperity? Lakey tries to answer that question with a narrative featuring some of the key events and personalities, but he does not attempt any serious comparative analysis of countries to sort out causes and effects.

One thing that is clear is that the Great Depression of the 1930s was a significant turning point, as it was in the United States. Strong pro-labor parties succeeded in moving politics to the left and gradually building mass support for egalitarian policies. For some reason, those policies went further in the Nordic countries, perhaps because those countries were economically weaker to begin with and more vulnerable to economic downturns. Once a distinctive Nordic model became established, it was able to weather some counterattacks from more conservative elements, as well as financial crises that forced governments to make tough political choices.

From conflict to consensus in Norway and Sweden

Lakey emphasizes that the more egalitarian Nordic model did not emerge without a struggle. He describes the countries a century ago as having huge wealth gaps and politically dominant elites.

In Norway, the early twentieth century was a period of trade union organization, formation of cooperatives, and rising nationalism. Norway dissolved its union with Sweden in 1905. The Norwegian Labor Party flirted with radicalism, joining the Communist International in 1918. Five years later, however, the movement split over the communist issue. Some workers left to form the Communist Party of Norway, but the Norwegian Labor Party became more dominant by attracting many farmworkers, small farmers and students as well as politically moderate workers.

During the Depression, some business owners and right-wing politicians supported violent measures to suppress the labor movement, but the movement proved too popular for them. In 1935, owners and labor leaders forged the “Basic Agreement” recognizing the rights of both capital and labor. “Labor leaders agreed that the owners could continue to own and guide their firms. Labor expected that their political instrument, the Labor Party, would restrict owners through government regulation and control the overall direction of the economy.”

For the next three decades, labor dominated politics. By the time the Conservatives got a change to govern, the basic elements of the Nordic model were established, with policies to promote full employment, regulate markets, and provide universal benefits paid for by taxpayers.

Similarly in Sweden, a violent government crackdown on striking workers in 1931 led to the fall of the government and the election of the labor-based Social Democrats. “Swedish voters reelected the Social Democrats to lead their society almost without a break until 1976, by which time the Nordic model was firmly established.”

Counter-movements and financial crises

In the 1980s, around the same time that Ronald Reagan and Margaret Thatcher were promoting tax cuts, reductions in government spending, and financial deregulation, similar policies were tried in Nordic countries. The failure of the Labor government to curb “stagflation,” a period of high unemployment and inflation, helped the Norwegian Conservative Party take control. In Sweden, the Social Democrats continued to govern, but also adopted some conservative measures to limit the power of government.

Lakey sees a direct link between financial deregulation in the 1980s and financial crisis in the 1990s. Banks had more freedom to make riskier and more speculative investments, often resulting in asset bubbles with prices reaching unsustainable levels. When the bubbles burst and banks experienced massive losses, Nordic governments moved to re-regulate banks and protect depositors, but not to bail out the banks and their shareholders. Both Norway and Sweden nationalized some of the largest banks, at least temporarily. By the time of the 2008 financial crisis, both countries were in a relatively strong position to handle it. “By 2011, the Washington Post was calling Sweden ‘the rock star of the recovery,’ with a growth rate twice that of the United States, much less unemployment, and a strong currency.”

The story in Iceland is different because it was less an exemplar of the egalitarian Nordic model than Norway or Sweden. Its labor-based political party, the Social Democratic Alliance, had always been a minority party, and the government spent less on health and education. Iceland did have collective ownership of major banks, through government and cooperatives, but they moved toward financial deregulation and privatization in the late 1990s. “The now-private banks leveraged their capital base [that is, used it to borrow and speculate] to buy up assets worth several times Iceland’s gross national product.” When the crash came in 2008, the entire banking sector collapsed, taking the country’s currency with it. The political result was Iceland’s first left-wing government, a coalition of the Social Democratic Alliance and the Left Green Movement. Although Iceland needed assistance from the International Monetary Fund and other countries, the new government resisted IMF demands for austerity, insisting on a deal that protected workers, homeowners and depositors while letting banks fail. Lakey describes the Icelandic recovery as an economic success, getting unemployment down to 3.2% by 2015.

Having come through a time of political and financial upheaval with their social democratic principles largely intact, Nordic countries may now be in a good position to tackle the challenges of the global, high-tech economy.

Continued