Many people commonly assume that Nordic countries (Sweden, Denmark, Norway, Finland) spend a lot of money on extensive welfare-state systems, while the U.S. has a more “market-driven” system that economizes by not “wasting” money on welfare. Like many assumptions, this one fails the fact-test. Turns out the U.S. spends as much Denmark and Sweden, but we don’t get near as much for our money. Why? Because of how we do it. In the U.S., we tend to alter the tax code to give tax breaks to people to help them with social needs. Example: we want housing to be affordable so we provide tax-deductibility (a form of subsidy) for interest on mortgages. Of course only middle-class and upper-class people benefit from it because they’re the ones who own houses – renters don’t benefit.
In the Nordic countries, the policy approach tends toward providing direct subsidies or free goods to all citizens. Of course that’s more expensive, so they count the subsidies/benefits as part of income to be taxed. On net, the government spends the same as the U.S. does per person (actually less), but it most benefits those who need it most.
Mark Thoma directs us to
Lane Kenworthy: Social Spending and Poverty
Recent research suggests that social spending in the US is similar to or exceeds the expenditures in Denmark and Sweden, all things considered. But where does this spending go? Who are the main beneficiaries? The disadvantaged, or other groups?:
Social spending and poverty, by Lane Kenworthy: It’s commonly thought that a market-liberal political economy is best for the rich while a social-democratic one is best for the poor. Some recent research suggests reason to question this. Analyses by Willem Adema of the OECD, by Adema and Maxime Ladaique, and by Price Fishback conclude that the quantity of social expenditures in the United States is similar to or greater than in Denmark and Sweden, two nations long considered large-welfare-state exemplars.*
How so? Government social transfers account for a much larger share of GDP in Sweden and Denmark. But the U.S. government distributes more benefits in the form of tax breaks rather than transfers than do the two Nordic countries; Denmark and Sweden tax back a larger portion of public transfers than the United States does; private social expenditures, such as those on employment-based health insurance and pensions, are greater in the U.S.; and America’s per capita GDP is larger.