Viking Economics (part 2)

June 26, 2017

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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

 

 


Viking Economics

June 25, 2017

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George Lakey. Viking Economics. Brooklyn: Melville House Publishing, 2016.

This is a book about the economies of four Nordic countries whose peoples have Viking ancestry–Norway, Sweden, Denmark and Iceland. It focuses especially on Norway, where the author, who was born in the US, has spent the most time. Lakey himself is a sociologist, not an economist. Although he draws on the work of economists, the book is not very technical. Lakey supplements his own reading and observations with many interviews and anecdotes.

For people who feel that US economic policy has been moving in the wrong direction, the Nordic countries are a good place to look for alternatives. They have been accomplishing something we have not been lately–a high level of national income without an extreme degree of economic inequality.

According to rankings by international agencies like the IMF and World Bank, the Nordic countries are among the richest in GDP per capita. Norway ranks higher than the US and the others a little lower. According to a Gallup international survey, Norway, Sweden and Denmark are all ahead of the US in median household income. So much of the income from America’s national production is concentrated at the top that households in the middle do not do as well. The Nordic countries have done a better job of maintaining a thriving middle class at a time when the American middle class has been shrinking.

Among 32 developed countries in the OECD, the four Nordic countries studied in this book rank in the top ten for economic equality. The US and the UK rank near the bottom. The OECD has also surveyed the populations of these countries on their life satisfaction. The same Nordic countries are consistently near the top of the rankings, while the United States is only a little better than average. Lakey also draws on research by Richard Wilkinson and Kate Picket on other social indicators that tend to be associated with wide disparities in income: “They find that inequality highly correlates with negative statistics in physical health, mental health, drug abuse, education, imprisonment, obesity, social mobility, violence, teenage pregnancy, and child well-being.”

Equality, productivity and innovation

Lakey acknowledges the widespread belief that differences in economic reward motivate people to do their best, and especially to devise better ways of doing things that the marketplace can reward. “The belief is that inequality motivates, by increasing both the risk and potential reward, attracting talented people who love adventure. The bold ones make the breakthroughs that propel invention and innovation. It sounds reasonable.”

Yes it does. No modern society pays all economic contributors the same. It hardly follows, however, that the extremes of wealth and poverty we see in the United States are optimal for encouraging productivity and innovation. Lakey reports, “Rates of start-up creation in Norway are among the highest in the developed world, and Norway has more entrepreneurs per capita than the United States….” He suggests a couple of ways that economic equality supports potential entrepreneurs: giving them access to education without burdening them with debt, and providing a stronger safety net so they can afford to take risks. People can leave a job to try something new without worrying about losing their health insurance, since coverage is universal. More equal societies do a better job of developing talent across the economic spectrum, and they have higher rates of social mobility.

Lakey also cites research showing a positive association between high productivity and strong unions. This may be counterintuitive, at least for Americans, since “U.S. unions sometimes defend inefficient labor practices and outmoded organization of work, even though undermining productivity–whatever it takes to keep workers in jobs.” However, Lakey argues that this is because the American system leaves workers so insecure. When union membership is higher, high wages are more universal, and the social safety net is stronger, workers have less to fear from productivity-enhancing innovation. In addition, companies may have to boost profits by increasing productivity, since it is harder for them to do it by cutting wages.

Another feature of social organization that contributes to both productivity and equality is the Nordic tradition of cooperatives. They have industrial co-ops, farm co-ops, consumer co-ops, housing co-ops, even parent co-ops providing child care. People are motivated to contribute because they know they will share in the benefits.

Nordic countries are also noted for developing the talents and productivity of women. Their rates of female employment exceed that of the United States, although women are still underrepresented in the highest managerial positions. Rates of employment for men are also higher than they are here. The Nordic countries do more to support employed parents, by subsidizing child care and providing paid family leaves for parents of both sexes. And although more adults are employed, annual work hours per worker are lower, for example 1,418 in Norway vs. 1,791 in the US in 2012. That’s 373 more hours off the job, or about 10 weeks. National production does not seem to suffer, since productivity per hour is higher in Norway.

Keeping poverty low

International comparisons of poverty rates often use a relative definition of poverty. They determine what percentage of a population lives on less than the national median income. That could be misleading if two countries have very different medians; a very poor country could appear to have little poverty if it had little variation around its very low median. For countries that are all pretty affluent, the relative definition makes for pretty fair comparisons. UNICEF calculated child poverty rates for the Nordic countries in the range of 4.7% to 7.3%. The rate for the US was 23.1%, the second worst among OECD countries. We should all think about the damage to human potential that figure represents, and its impact on our national productivity and well-being.

Lakey wants to correct the impression that Nordic states are just generous “welfare states,” since their strategy for fighting poverty involves much more than just handing out cash and other benefits to poor people. It is, first of all, a strategy emphasizing full employment and good wages. Norway has a pretty good record for holding unemployment down, keeping wages up, and preparing people for jobs with educational and training opportunities. “Free post-secondary schooling is available for technical fields like seafaring, business, engineering, and agriculture; for arts fields like performance and visual arts; and for professions like medicine and law.” Adult education is so common that one-sixth of the population is taking courses in any given year.

When jobs are available and wages are fairly high, the government can provide some cash assistance to families with children without worrying that the payments will destroy people’s motivation to work. That’s especially true when such benefits are universal rather than provided only to the very poor and unemployed. You have everything to gain and nothing to lose by taking a job.

Universal services and taxation

Programs designed just for the poor don’t have a very good track record for actually eliminating poverty. They tend to be inefficient because a lot of administrative effort has to go into determining eligibility, and potential recipients may try to cheat. They tend to be under-funded because popular support for them is limited (especially when there is a longstanding racial divide between the affluent and the needy). They tend to be stigmatizing for the people who participate in them. They tend to be too individualistic, helping one person at a time instead of changing social conditions more generally. “The twentieth-century descendants of the Vikings figured out that the individualistic charity model of the nineteenth century simply could not alleviate poverty. In each country, the designers turned against programs for the poor and created universal systems instead.”

Among the publicly-funded services available to Norwegians are tuition-free higher education, paid maternity and paternity leave, affordable child care, subsidized public transportation, subsidies for family farms, vocational counseling and job training, free health care and universal public pensions.

To pay for such benefits, Nordic countries tax their citizens at high rates, both through individual income taxes and corporate taxes. (In contrast, although US rates may look high on paper, the tax code has so many loopholes that revenue as a percentage of GDP is among the lowest for OECD countries.) Lakey describes the general Nordic attitude toward taxes as “To get a lot, we pay a lot.” The “lot” they get includes not only the benefits they receive personally, but the general benefits of living in a more egalitarian and less divided society.

Do high taxes inhibit economic growth, as is so often claimed by economic neoliberals in the United States? Lakey cites the work of economist Jeffrey D. Sachs, who modified his own neoliberal views after examining the evidence. He compared the Nordic countries with the Anglo-Saxon countries of Australia, Canada, Ireland, New Zealand, UK and United States, countries he characterized as “low-tax, high-income countries that share a historical lineage with nineteenth-century Britain and its theories of laissez-faire.” He concluded, “On average, the Nordic countries outperform the Anglo-Saxon ones on most measures of economic performance.”

Relevance to the United States

Maybe the culture and traditions of the Anglo-Saxon countries are so different from those of the Nordic countries that we are unable to learn much from them. On the other hand, maybe the problem isn’t as much culture and traditions as vested interests standing in the way of the public good. Lakey cites research showing that most Americans want more economic equality than they now have. “In one of the studies, participants were shown two different income distributions, in the form of pie charts. Without saying so, one chart reflected the distribution in Sweden and the second chart that of the United States. 92 percent said they preferred the first.”

Lakey also cites research by political scientists showing that in the US, the wealthy get what they want in political decision-making much more often than any other economic segment of society. He believes that politicians are so dependent on powerful financial interests that voting alone will not move a country in a more egalitarian direction. Only broad social movements featuring nonviolent direct action can bring about the desired changes.

Continued