As fiscal cliff approaches, don't be fooled by the great Nordic myth

According to the latest Gallup World Poll, Denmark is the happiest country in the world. This is not the first time a member of the prosperous Nordic countries – Denmark, Finland, Iceland, Norway and Sweden – has earned the title. And because the Nordic economies are often viewed as socialist as well as prosperous and happy, some call for the United States to increase government involvement in its economy.

As America’s fiscal cliff approaches, some of these advocates, especially Democrats, protest federal spending cuts. They resist any change to entitlements and even call on President Obama, John Boehner, and other lawmakers to increase federal spending.

A more thorough understanding of the specifics of the Nordic economies, however, actually leads one to reject policies that extend government control of markets and reduce economic freedom.

First, contrary to popular belief, in recent decades, the Nordic economies have moved away from socialism and now enjoy substantial economic freedom in the areas of property rights, regulation, monetary policies, and trade. Second, Nordic countries possess advantages in homogeneity and culture that help explain their relative prosperity during their mildly socialist past as opposed to economic policies alone.

The Nordic trend away from socialism is illustrated by the Fraser Institute’s annual Economic Freedom of the World Index. In 1980, Sweden and Denmark scored 35 percent and 23 percent lower, respectively, than the US in overall economic freedom. But, according to the 2012 report released this fall, Denmark has now surpassed the US in the rankings, and Sweden is only two points behind the US. The closing of the gap is due to the simultaneous declining economic freedom in the US as well as increasing economic freedom in the Nordic countries.

Further, US economic freedom is overstated. The Index does not include government interventions like tax credits, exemptions, and deductions because it does not have data for all countries. If these items were included, the report would show that the US actually had more of a welfare state than Denmark and only slightly less of one than Sweden.

People often tout the relatively high levels of prosperity the Nordic economies experienced from 1960 to 1980 while increasing tax burdens and government spending as validation for socialist policy. But that view lacks context. In the 1980s, economic stagnation began and culminated in a severe debt crisis in the early 1990s. In response, the Nordic democracies started to move in a strong free-market direction. This policy shift led to a long period of high growth and declining debt.

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