The Swedish Model

The Center for Freedom and Prosperity has put together a nice little video about how Sweeden, long hailed by the Left as an example of how well the welfare state works, nearly had its economy destroyed by socialist policies, and is now shifting back to a freer market system.

Executive Summary: Sweden is a powerful example of the importance of public policy. The Nordic nation became rich between 1870 and 1970 when government was very small, but then began to stagnate as welfare state policies were implemented in the 1970s and 1980s. The CF&P Foundation video explains that Sweden is now shifting back to economic freedom in hopes of undoing the damage caused by an excessive welfare state. . (March 8, 2010) 5:17 minutes

The video references this editorial from Richard Rahn at the Washington Times:

Sweden began its movement toward a welfare state in the 1960s, when its government sector was about equal to that in the United States. However, by the late 1980s, government spending grew from 30 percent of gross domestic product to more than 60 percent of GDP.

Most full-time employees faced marginal tax rates of 65 percent to 75 percent, as contrasted with 40 percent in 1960. Labor-market regulations were introduced to make it very difficult to fire workers. Business profits were taxed heavily, and financial markets were regulated heavily. By 1993, the government budget deficit was 13 percent of GDP and total government debt was about 71 percent of GDP, which led to a rapid fall in the value of the currency and a rise in inflation.

These policies and outcomes greatly diminished the incentives to work, save and invest. Economic growth slowed to a crawl. Other countries that avoided the excess spending, taxing and regulation of Sweden grew more rapidly, leaving Sweden in the dust. Sweden is still a prosperous country, but far from the top, and its per capita income has fallen to just about 80 percent of that in the United States.

In the late 1980s and 1990s, Sweden began an economic course correction that continues today. Marginal tax rates were reduced for most of the population, and this trend is expected to continue.

The wealth tax and inheritance tax were abolished. Financial markets, telecommunications, electricity, road transport, taxis and other activities were deregulated. Privatization of industry was begun, and the current government is continuing the process. The generosity of some welfare and other benefits has been reduced, with the goal of making work more economically rewarding relative to government benefits. Also, trade liberalization has been expanded greatly. The result has been a pickup in economic growth, and Sweden is no longer falling further behind other developed countries.

Michael C. Moynihan at Reason Magazine, who has some history of studying Sweden and its economy, comments on the video:

When some American pundit, with expertise is everything, explains why some European welfare state “works,” or how everything you know is wrong about taxing income at 75 percent, do a little digging, make use of Google Translate, and don’t trust that, because Swedes and Danes tell researchers that they are happy, the United States should introduce “daddy leave” and provide subsidies to syndicalist newspapers.

The best English-language explication of the Swedish model comes from my pal Johan Norberg, who wrote this brilliant piece for The National Interest a few years back. And watch my interview with Norberg on Swedish welfare politics here and on Naomi Klein here.

The article by Johan Norberg that Moynihan recommends is here, and I recommend it as well.

In the early 1990s a deep recession forced Sweden to abandon a lot of the excesses from the 1970s and 1980s. Marginal tax rates were cut, the central bank was made independent, public pensions were cut and partially privatized, school vouchers were introduced, and private providers were welcomed in health care. Several markets were deregulated, like energy, the post office, transportation, television and, most importantly, telecom, which opened the way for the success of companies like Ericsson.

But Sweden retained the world’s highest taxes, generous social security systems and a heavily regulated labor market, which split the economy: Sweden is very good at producing goods, but not at producing jobs. According to a recent study of 35 developed countries, only two had jobless growth: Sweden and Finland. Economic growth in Sweden in the last 25 years has had no correlation at all with labor-market participation. (In contrast, 1 percent of growth increases the number of jobs by 0.25 percent in Denmark, 0.5 percent in the United States and 0.6 percent in Spain.) Amazingly, not a single net job has been created in the private sector in Sweden since 1950.

For completeness, here are the video interviews that Moynihan mentions as well:

Donald Douglas at American Power also features the CF&P Foundation video.

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