Generations change, policies change, but...

Generations change and policies also change, but traditions and habits can’t change that easily. In almost every corner of the Western hemisphere these days, the new Nordic success story has been being praised. Compared to some of the sick economies of Europe, everything seems fine in Sweden, Denmark, Norway and Finland. The ratio of deficit and debt to gross national product has declined to incredibly low levels, social security systems have begun to regain their healthy financing, unemployment has dropped to reasonable levels, exports are going well and so on.

How this success story emerged when the opposite has been occurring in other parts of Europe is not a surprise. The surprise is to observe how the governments in those countries abandoned the traditional – if it is proper to phrase it so – Nordic-type social and economic policies to cure their unhealthy institutions. They lowered very high tax rates to reasonable levels, cut unnecessary and generous social aid, rearranged public programs and service institutions and, as a result, created these success stories.

However, history teaches us that the traditions and habits of a nation (like some addictions) can sometimes change amid the emergence of some serious difficulties but cannot be totally forgotten, dismissed and left aside. Just a generation ago, politicians in those countries destroyed their economies by implementing just the opposite of what they are doing now: very high tax rates (believe it or not, a tax rate of over 100 percent of income in some cases), irrationally generous social programs, early retirement, exaggerated retirement payments and more. These irrational policies resulted in the collapse of all macroeconomic balances and the increase of debt and deficit ratios to incredible levels. The Western media dubbed the failure at the time as the “bankruptcy of the Nordic model.”

What’s changed now? First of all, contrary to general belief, the political ideology of the governments in those countries did not change much. The state still controls most of the economic activities and continues to look after all needy people. But the mentality has changed. This is a very important point. Are the newly emerged or newly understood European problems the reason for this mentality change, or is it a complete change of the traditional ideology? If the first part of this question is true, then there is no guarantee for the continuation of these new political approaches in the coming years. Because, to repeat again, generations change but traditions and habits can’t change that easily.

The total public expenditure, of both the central and local governments, is still high as percentages of the gross national product. In spite of some recent cuts, tax rates remain higher compared to rival countries in Europe which do not encourage, but rather discourage, domestic investment. Social programs were trimmed a lot, but too many people are still living off social welfare. All these facts raise some doubts about what future governments might do when faced with newly emerged domestic or foreign problems. Will they shift to old policies in haste again? Or more seriously, even if there are no new economic and social problems, will they return to implement traditional policies for ideological reasons alone?

There are some historical examples. Thirty-three years ago, leftist French President François Mitterand unnecessarily changed all economic policies in France and caused a capital flight which seriously crippled the French economy. Recently elected President François Hollande made the same mistake. Abandoning some important principles of Thatcherism resulted in a loss of power for the Conservative Party and big losses for the British economy. In the United States, some important changes in party politics have been realized that cannot only be explained as facts of democracy.

However, the positive results of the new Nordic model cannot be denied. There are many lessons for all governments that are trying hard to save their economies from the destructive effects of the recent crisis. But these lessons must not be temporary. This is, of course, also valid for the Nordic governments. When political ideologies challenge realities, the result of this clash has generally been to the detriment of unrealistic dreams.