Not so long ago, Sweden could claim world leadership in unmitigated
Keynesian economics, with a 90 percent marginal tax rate and a welfare state
second to none.
Now Swedes look at the
conflict between the U.S. and German examples over whether more spending or
more austerity is the key to financial salvation, and for them the choice is
easy: Germany was right. Northern Europe harbors no sympathy for the
spendthrifts of Southern Europe.
Americans still think of
Sweden as a tightly regulated social-welfare state, but in the last two decades
the country has been reformed. Public spending has fallen by no less than
one-fifth of gross domestic product, taxes have dropped and markets have opened
up.
The situation is similar in the other Scandinavian countries, the Baltic nations and Poland. But no turnabout has been as dramatic as Sweden’s.
From 1970 until 1989, taxes
rose exorbitantly, killing private initiative, while entitlements became
excessive. Laws were often altered and became unpredictable. As a consequence,
Sweden endured two decades of low growth. In 1991-93, the country
suffered a severe crash in real estate and banking that reduced GDP by 6
percent. Public spending had surged to 71.7 percent of GDP
in 1993, and the budget deficit reached 11 percent of GDP.
Turning Point
The combination of the crisis
and the non-socialist government under Carl Bildt from 1991 to 1994 broke the
trend and turned the country around. In 1994, the Social Democrats returned to
power and stayed until 2006. Instead of revoking the changes, they completed
the fiscal tightening. In 2006, a non- socialist government returned, and
Finance Minister Anders Borg, with his trademark ponytail
and earring, has led further reforms. Sweden successfully weathered the global
financial crisis that started in 2008, and the Financial Times named Borg
Europe’s best finance minister last year.
Before 2009, Sweden had a budget surplus, and it has one again. For
the past
two years, economic growth
has been 4 percent on average, and the current-account surplus was 6.7 percent
in 2011. The only concerns are the depressed demand for exports caused by the
current euro crisis and an unemployment rate that is about 7.5
percent.
Sweden’s traditional scourge
is taxes, which used to be the highest
in the world. The current government has cut them every year and abolished
wealth taxes. Inheritance and gift taxes are also gone. Until 1990, the maximum
marginal income tax rate was 90 percent. Today, it is 56.5 percent. That is
still one of
the world’s highest, after Belgium’s 59.4 and there is strong public support for a cut
to 50 percent.
The 26 percent tax on
corporate profits may seem reasonable from an American perspective, but Swedish
business leaders want to reduce
it to 20 percent. Tax
competition is fierce in some parts of Europe. Most East European countries,
for example, have slashed corporate taxes to 15-19 percent.
In the bad old days, the
annual centralized-wage bargaining between the Trade
Union Confederation and the
Swedish Employers’ Confederation was a prized custom. But in the 1970s, this
system led to both inflation and strikes. Today, it is long gone. Wage
bargaining is still collective, but it is decentralized. Wage inflation is no
longer a concern and strikes are extremely rare. The employers have won, but
real wages are rising with productivity, so the workers are benefiting, as
well. As everywhere, trade unions are losing members, money and power.
Debt Averse
Sweden has belonged to the
European Union since 1995, but it isn’t a member of the euro area, and the
exchange rate of its krona floats freely. Finance Minister Borg argues against a more
expansionary policy in Sweden in case Europe faces a real meltdown. After the
Keynesian financial and monetary stimulus in the 1970s and ’80s, which led to
inflation, repeated devaluations and low growth, Swedes believe in fiscal
discipline. They are scared of huge national debt and budget deficits --
especially at the levels they are in the U.S.
Where are the left-wing
intellectuals to challenge this new order? They have disappeared. The old
socialist research organizations have closed down. The Center for Labor Market
Studies was a state institution that generated propaganda, not research, and
the government closed it. The Trade Union Confederation had a sophisticated
research institute, which it eliminated for not being sufficiently political.
The union economists, who
dominated Swedish economic debate in the 1970s and ’80s, have been replaced by
bank economists. The free-market right has influential research centers in Stockholm.
After many years of absence
from the debate, I attended a conference on the Swedish economy in the southern
city of Malmo last month. Swedbank, a large bank, was the organizer, and the
180 speakers represented the full range of Swedish views. I was amazed to hear
how far the consensus had moved to the free- market right, even among Social
Democrats and trade-union leaders. The values are competition, openness and
efficiency, while social and environmental values remain -- a social-welfare
society without the social-welfare state. The idea is to make it more efficient
through competition among private providers.
The name of the conference
said it all: “Growth Days.” Wanja Lundby-Wedin, the president of the Trade
Union Confederation, declared without hesitation: “We want flexibility in the
labor market.” She complained that the media no longer pay attention to the labor
market. The reason is that it functions so well.
During the global financial
crisis, the metalworkers’ union quietly agreed to major wage cuts to safeguard
their real incomes in the long run. The leader of that union, Stefan Lofven, has just been elected
chairman of the Social Democratic Workers’ Party.
Moving Right
The Social Democrats haven’t
only joined the free-market consensus, but seem to attack the current
government from the right, pushing for a better business environment. Gone are
demands for the restoration of social benefits. Opinion polls have rewarded the
Social Democrats for their right turn with sharply improved ratings.
Sweden is still offering good
social welfare, but more efficiently and sensibly and increasingly through the
private sector. This model of falling taxes and public spending is rapidly
proliferating from the north of Europe toward the south, and the northern
Europeans have little tolerance for the statist conservatism and fiscal
negligence of Southern Europe. Nor do the Swedes understand the fiscal
irresponsibility of the U.S., while they still admire American research and
innovation
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