How Sweden got its groove back

The soul of political punditry is to cherry-pick facts and weave them together to support a pre-conceived notion of what’s right or wrong about this or that.  Thusly, we have been lied into two wars by presidents of different political parties; religious conservatives have created a mythology called “creationism;” and, social democrats have become convinced that the Scandinavian socialist economy is an example of a superior system.

As it turns out, the fall of Saigon didn’t have a material effect on the global balance of power; Saddam didn’t have weapons of mass destruction; and, of course, we really did evolve from apes.  As for socialism… well, it hasn’t worked anywhere ever.  And, Scandinavian countries are not running on a socialist system.  Indeed, if you’re looking for evidence that the policies of social democrats don’t work, you need look no further than Sweden. 

Kudos to those who governed the country in the 1990’s for having the courage not only to understand that they screwed up by turning to socialism in the 1970’s but also for dramatically restructuring policy to ensure a turnaround in their fortunes. In a 1998 report of the Institute for Economic Studies at Stockholm University, Assar Lindbeck outlines the events leading to the near collapse of the Swedish economy and identifies the policies that led the country out of the darkness.  

“In the early 1970s, Sweden became dominated by large and centralized institutions and highly interventionist policies,” he tells us. “Important manifestations are (i) a drastic rise in government spending (to the interval 60-70 percent of GDP); (ii) a huge increase in marginal tax wedges (to 65-75 percent for most full-time income earners); (iii) an increasingly interventionist macroeconomic policy, in particular, in the labor market…” 

The results? “Policies… seem to have contributed substantially to reducing poverty, as well as to making the overall distribution of disposable income relatively compressed. In this sense, welfare-state policies basically attained established targets.” 

Sounds good, right? Just one little problem though.  Economic growth was much slower than the rest of Europe. Comparing Sweden’s growth to the industrialized countries in the Organization of Economic Cooperation and Development (OECD), Lindbeck goes on to say:

“While per capita GDP increased by altogether 52 percent in the OECD area as a whole during the period 1970-1990 (weighted average), it increased by only 40 percent in Sweden. During the period 1970-1997, the difference is even greater: 62 percent for the OECD and 42 percent for Sweden.” 

By the late 90’s – while the rest of the industrialized world was booming -- Sweden’s government spending was over 70% of GDP.  A tax on capital enacted in 1983 had reduced the amount tax revenue from that source. And, high marginal tax rates had reduced household income.  The results were devastating.  Total GDP declined 5% and unemployment increased to 13%.  

Today, tax reductions along with market-based reforms have placed Sweden among the elite in the global economy.  The government’s website points to its ranking in the Top 10 most competitive economies in the world according the World Economic Forum and the World Bank’s ranking designating Sweden as one of the easiest countries to do business with. 

By enacting a debt limit and reducing both government spending and government intrusion in the economy in the 1990’s, Sweden avoided the calamity of the global economic crisis in 2008.  With the lack of humility common to all governments, they point out:

“While governments with large budget deficits carry out austerity measures by increasing taxes and cutting public spending, Sweden has broadly avoided these difficulties. While Sweden remains a relatively highly taxed economy, the centre–right coalition government of 2006–2014 scrapped inheritance tax in 2005 and a wealth tax in 2007.”

Sweden remains a highly taxed nation and its redistributionist policies have reduced income inequality and created a social safety net that many admire.  Personally, I believe it’s easier to implement such programs in countries whose populations are not diverse.  Sweden has a population smaller than New York and it’s nearly homogeneous.  People whose reciprocal expectations are met are unlikely to resent those who rely on that safety net.  

But that may be changing. Noting Sweden’s historical openness to refugees, CBS News recently reported on the rise of populist political parties espousing anti-immigrant policies.  Using the slogan “Keep Sweden Swedish” the far-right Sweden Democrats increased their share of the vote from 5.7% in 2010 to 17.5% in 2018, according to CBS.  And, the New York Times reported last week that four years after the influx of refugees “growing numbers of native-born Swedes have come to see the refugees as a drain on public finances.”  The Times quotes a local council member from a rural Swedish town as saying, “people don’t want to pay taxes to support people who don’t work.  Ninety percent of the refugees don’t contribute to society.  These people are going to have a lifelong dependence on social welfare.  This is a huge problem.”

Five years ago, I wrote about my father’s journey from welfare to successful entrepreneurship (On social mobility:  confessions of a former yuppie).  It seems that Swedes’ view of the purpose of the social welfare system is much like ours.  Those who pay into a system meant to help people in times of need expect those who benefit to use it as a platform to become contributing citizens – not to rely upon it for life. 

WHO WILL LEAD?