Michael discusses Democratic Socialism, Nordic countries and the real world.

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MR. MICHAEL CEMBALEST: Good morning and welcome to the Eye On The Market podcast. This one's a travel log. With the first Democratic debates coming up this week, I thought it was a good time to share this analysis.

 

At the Democratic Party Convention in California earlier this month, the former Governor of Colorado was booed for saying that socialism isn't the answer, and the crowd there has company. Recent surveys of college students in the United States are shown as having a more favorable view of socialism than of capitalism. And when they're asked about some of the failed 20th Century socialistic experiments, the respondents say they're talking about Democratic Socialism instead. 

Okay. Fair enough, but let's take a look at where Democratic socialism is used elsewhere before the United States adopts it and, that's where, of course, it gets murkier because such societies are not that easy to find. Some people point to the Nordic countries as Democratic Socialism in action. 

 

And just to give you a refresher, the Nordic countries are, for our purposes, Sweden, Finland, Norway, Denmark, and the Netherlands. They have an average population of just about 9 million and a GDP per country that averages about 5-percent of U.S. levels, and are very ethnically homogenous and more closed to immigration than the United States. 

 

Anyway, while some people point to these Nordic countries as Democratic Socialism in action, the Nordics themselves, many of them disagree with that. The former Prime Minister of Denmark said some people in the United States associate the Nordic model with some kind of socialism. Therefore, I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy.

 

Our models backed him up. While Nordic countries have higher taxes and greater redistribution of wealth than the United States, the Nordics are just as business friendly as the United States, if not more so. And examples include greater business freedoms in the Nordic countries, freer trade, even before the Trump tariffs, more oligopolies where companies have large market share, lower levels of state control over the private sector, and receptivity to foreign direct investment, et cetera, et cetera. 

 

And so--and as for the tax issue, while the Nordic countries may raise more taxes than the U.S., the gap results from regressive VAT and consumption taxes, and Social Security taxes, and payroll taxes, rather than from having much higher progressive income taxes.

 

So the bottom line is you can copy the Nordic model, if you like, but understand that it entails a lot of capitalism, a lot of pro-business policies, a lot of taxation on the middle class with respect to their spending and their wages, minimal reliance on corporate taxation, roughly the same as a percentage of overall taxes as the U.S., and plenty of co-pays and deductibles in its healthcare system. For all of the discussion about Nordic healthcare systems, which are excellent, they are quite different from anything related to Medicare for All proposals in the U.S., which do not have co-pays and deductibles.

 

So with the Nordic countries firmly rooted in capitalism and free markets, if I wanted to find an example of Democratic Socialism in practice, I'd have to look elsewhere. So I broadened my search and I looked for countries that relative to the U.S. are characterized by higher tax rates on corporations and individuals, more government spending, more worker protections restricting the ability of companies to hire and fire both domestic and foreign labor, less flexibility for companies to set wages based on worker productivity, more reliance on regulation, more constraints on real estate development, more antitrust enforcement, more state intervention in product markets, a shift away from a shareholder centric business model, more protections for workers in domestic industries through tariffs, and more constraints on capital inflows and outflows. 

 

I couldn't find any country that ticked off all of these Democratic Socialist boxes, but I did find one that came close. Argentina, which has defaulted seven times since its independence in 1816, which has seen the largest decline in its standard of living in the world over the last century, and which is on the brink of political and economic chaos again in 2019. 

 

So that's where my journey ended, halfway around the world from Scandinavia, where it began, and my conclusion is that a real life proof of concept for a successful Democratic socialist society hasn't been really--has not been found yet. 

 

And again, to reiterate, if you like that Nordic model, understand that it's heavily reliant on middle class taxation, not a lot of corporate taxes, plenty of co-pays and deductibles in healthcare, and a very business friendly private sector.

 

And so this month's Eye On The Market has some charts and tables that substantiate all of those points. 

 

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With the first Democratic debate coming up this week, I thought it was a good time to share the following analysis. At the California Democratic Party Convention earlier this month, the former two-term Governor of Colorado was booed for saying that “socialism is not the answer”. The crowd has company: recent surveys cite US college students having more favorable views of socialism than capitalism. When asked about failed 20th century socialist experiments, respondents insist they’re talking about democratic socialism instead. Fair enough, but before the world’s largest economy adopts democratic socialism, let’s see how it’s working out elsewhere. That’s where it gets murkier: such societies are not easy to find.

Some point to Nordic countries as democratic socialism in action, but some Nordics object to this, such as Danish Prime Minister Rasmussen: "Some in the US associate the Nordic model with some sort of socialism. Therefore, I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy"1Our models back him up: while Nordic countries have higher taxes and greater redistribution of wealth, Nordics are just as business-friendly as the US if not more so. Examples include greater business freedoms, freer trade, more oligopolies and less of an impact on competition from state control over the economy. And as explained in the full article, while Nordics raise more taxes than the US, the gap usually results from regressive VAT/consumption taxes and Social Security taxes rather than from progressive income taxes.

The bottom line: copy the Nordic model if you like, but understand that it entails a lot of capitalism and pro-business policies, a lot of taxation on middle class spending and wages, minimal reliance on corporate taxation and plenty of co-pays and deductibles in its healthcare system.

On many measures, the Nordic approach to the private sector is even more business-friendly than the US

Sources: World Bank, OECD, World Economic Forum, Fraser Institute, KOF Institute of Switzerland and WSJ.
Scatter plot chart: Comparison of the US versus Nordic countries on different measures of business friendly policies (measured by business freedoms, ease of starting a business, free trade policies, receptiveness to foreign direct investment, property right protections, freedom of capital flows, and economic globalization), presence of oligopolies (measured by bank asset concentration, competition among all firms, and competition in services) and state control impact on competition (measured by government’s regulations impact on competition and public ownership). Nordic countries have more business friendly policies and oligopolies than the US, have less non–competitive friendly regulations and less public ownership.

Who pays for Nordic entitlement programs? Everyone, particularly the middle class

Source: OECD, 2018
Table: Consumption, Social Security and Payroll taxes as % of GDP in Nordic countries and the United States. All Nordic countries have higher taxes than the US.

With Nordic countries firmly rooted in capitalism and free markets, if I wanted to find examples of democratic socialism in practice, I’d have to look elsewhere. I broadened my search and looked for countries that, relative to the US, are characterized by2:

  • Higher personal and corporate tax rates, and higher government spending
  • More worker protections restricting the ability of companies to hire and fire, and less flexibility for companies to set wages based on worker productivity and/or to hire foreign labor
  • More reliance on regulation, more constraints on real estate development, more anti-trust enforcement and more state intervention in product markets; and a shift away from a shareholder-centric business model
  • More protections for workers and domestic industries through tariff and non-tariff barriers, and more constraints on capital inflows and outflows

I couldn’t find any country that ticked all these democratic socialist boxes, but I did find one that came close: Argentina, which has defaulted 7 times since its independence in 1816, which has seen the largest relative standard of living decline in the world since 1900, and which is on the brink of political and economic chaos again in 2019. Here my journey ended, halfway around the world from Scandinavia where it began. A real-life proof of concept for a successful democratic socialist society, like the Lost City of Atlantis, has yet to be found.