Don Arthur and Jason Soon have fired up a discussion about the difference between the American system (free-markets and low tax) and the Nordic system (high tax and a comfortable safety net). Proponents of bigger government often point to the Nordic countries as evidence that big government works well, which is exactly what Jeffrey Sachs did recently. This seems to run counter to libertarian intuition and evidence from the rest of the world, so it is worth exploring in more detail.
First, it is important to note that in the greater scheme of political philosophy there are not huge differences between the two systems. Both groups accept private property and markets as the basis for their economic institutions, both have low corruption and democracy and both have an interventionist government far from a libertarian ideal. Both are social democracy — but the Nords are social-democracy-plus while the Anglos are still social-democracy-light.
One difference is the tax/GDP ratio. The Nordic countries (Finland, Denmark, Iceland, Sweden, Norway) have a tax/GDP ratio of between 42 and 51% while the Anglo countries (US, UK, Australia, Ireland, NZ , Canada) have a ratio between 27 and 37%. I would consider anything between 25-50% to be social democracy.
The first point to note is that, despite the consistantly repeated comments of Sachs & friends, the Anglo countries are generally richer than the Nordic countries. There are five countries that have GDP/capital (adjusted for cost of living) above US$40,000 — Luxemburg, America, Norway, Canada, Ireland. While the Nords do have one country in the top 5, Noway is a stand-out because of their rich oil reserves.
The other Nordic countries fall into the US$30,000 – US$40,000 category and so are certainly rich. But so too do Australia and the UK, as well as several other social-democracy-light countries such as Japan, Germany and Switzerland.
Sachs goes on to say that the Nords have a better budget position and more R&D spending. These are misleading indicators. The budget position is not relevant to decisions about the tax level, and the correct amount of R&D (and who should be doing it) is an open question. And in both cases there is as much difference within groups as between them, so neither variable is helpful in comparing differences between the groups.
Sachs goes on to say that the Anglo countries have double the poverty rate of the Nordic countries. This also is misleading. In developed countries, poverty measures do not measure the objective material wellbeing of people, but rather their relative incomes. To understand why this difference is important — if you double all incomes in a country then relative poverty will actually increase. The relative poverty measure only shows that the Nordic countries are more equal, not that there is less absolute poverty.
But despite these issues, it must be accepted that Nordic countries are relatively rich and this continues to be an anomoly. One reason might be their relatively low corporate tax with the Nordic corporate tax rate (avge = 26.8%) lower than all Anglo countries (avge w/o Ireland = 32.8%) except Ireland (12.5%). I think another part of the answer is immigration.
Anglo countries have traditionally had liberal policies towards immigration. The US famously asked the world to send her their tired, poor and weary and still accept a large number of immigrants. According to 2006 estimates all the Anglo countries continue to accept a relatively high number of migrants, with an average of 3.9 migrants per 1000 population. In contrast, the Nords remain relatively immigrant-free with no significant minority group (except for other Nords) and an average of only 1.7 migrants per 1000 population.
Migrants are likely to be less wealthy than the previous nationals. By including the migrant populations in the Anglo averages this will decrease the average wealth inside Anglo countries and also increase the total inequality. If we adjusted for this difference then Anglo countries would look relatively richer and more equal.
P.S. I should add that while immigration may hurt the average statistics in the Anglosphere, I think it has been a good thing both for the Anglo countries and for the immigrants.