The Welfare State and Causality

My brother Nima Sanandaji has written a report about Sweden for the Finish think tank Libera Foundation which is getting a lot of attention. Go read it.

It includes themes from this blog, namely the importance of thinking about causality for the political debate. Sweden has a welfare state and is successful. The superficial interpretation is that Sweden’s welfare state must have caused Sweden’s success.

But the welfare state is not the only thing which sets Scandinavia apart. Swedes and other Scandinavians have a homogenous population with one of the world cultures best adapted to success. They have high cooperativeness, trustworthiness, work ethic, civic participation, family values and individual responsibility (Scandinavians are politically liberal but personally conservative). You notice this if you live amongst them and think about the importance of norms and culture for economic outcomes.

What I claim is not just an excuse or speculation, but is supported by historical evidence. The Swedish economy had extraordinarily high growth before the creation of the welfare state, the second highest in the world. Swedish 19th century immigrants to the U.S to this day score above the American average in most metrics, despite obviously having no Scandinavian style welfare state. During the last decades when tax rates have been dramatically lowered, the Swedish economy has done great. Though extreme welfare state policies are largely gone, the quality of life has not deteriorated. These are others indications that it was never the welfare state which made the quality of life in Sweden high.

Likely, the strong norms and high productivity of Scandinavians meant that the cost of experimenting with a welfare state was lower. For a while at least, these policies worked, though they tended to quickly cause disaster in other countries.

It is certainly not a coincidence which countries built welfare states. It is precisely the countries where the welfare state works least bad that tried first and went furthest. It wasn’t Nicaragua, Yemen or Cyprus which built welfare state, it was already very well functioning countries in northwestern Europe (in the long run, even rock-hard Lutheran norms were corrupted by the welfare state, and GDP growth lagged).

Of the countries in the Warsaw Pact, the most economically successful was East Germany. Communism didn’t exactly “work” even in East Germany. But because Germans are so competent, have so high social cohesion and such a strong intrinsic motivation to work, they made communism work less poorly than other socialist countries.

If Sweden and Finland would have gone communist, it would probably have worked as well or even better than East Germany. That is not because communism is a great system, it’s because Sweden and Finland are great countries.

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