Free Market Sweden, Social Democratic
America
Two historic countries, moving in
opposite -- and unexpected -- directions.
By Samuel Gregg
"Sweden" isn't the first
word that normally crosses our minds when we hear the expression "free
market." But if President Obama, Paul Krugman, Warren Buffett, and other
progressives want to find ways out of America's seemingly-intractable economic
crisis, they might consider looking to the country once viewed as the very
model of a modern Social Democracy.
They're likely to be surprised --
and probably appalled -- by what they discover. For while America has opted for
more deficit-spending, bailouts, socialized medicine, easy money, failed
state-subsidized Solyndra-like green businesses, "job-plans," and
thus-far unsuccessful efforts to raise taxes, Sweden has been quietly turning
social democracy into a museum-piece.
No one will be surprised to learn
that Sweden was among the first European countries to create a modern welfare
state. Between 1911 and 1914, Karl Staaff's Liberal government introduced some
of Europe's first national pension and insurance schemes. Over time, additional
programs were added.
But two things distinguished
Sweden's welfare state from the very beginning. First, Sweden's progressives
cleverly marketed their ideas as a way of realizing what they called a
folkhemmet (people's home). The emphasis was upon realizing a
once-overwhelmingly peasant society's traditional values in a context of
industrialization. This helped the Social Democrat governments that ruled
Sweden between 1932 and 1976 avoid being labeled as soft-Marxists in a country
deeply wary of an expansionist Soviet Union.
The second distinguishing feature
was Sweden's vision of state-provided social protection as a right. This led to
successive governments insisting upon universal coverage and the costs being
covered by general taxation.
It took several decades, but the
relentless logic of these commitments eventually eroded the Swedish economy's
competitiveness. The situation was worsened by the decision of governments in
the 1970s to hasten Sweden's long march towards the Social Democratic nirvana.
This included expanding welfare programs, nationalizing many industries,
expanding and deepening regulation, and -- of course -- increasing taxation to
punitive levels to pay for it all.
Over the next twenty years, the
Swedish dream turned decidedly nightmarish. The Swedish parliamentarian Johnny
Munkhammar points out that "In 1970, Sweden had the world's fourth-highest
GDP per capita. By 1990, it had fallen 13 positions. In those 20 years, real
wages in Sweden increased by only one percentage point." So much for
helping "the workers."
Facing severe economic stagnation,
Sweden began implementing several rather un-social democratic measures in the
early 1990s. This included curtaining its public sector deficit and reducing
marginal tax-rates and levels of state ownership. Another change involved
allowing private retirement schemes, a development that was accompanied by the
state contributing less to pensions.
These reforms, however, proved
insufficient. In the early 2000s, according to James Bartholomew, author of the
best-selling The Welfare State We're In (2006), more than one in five Swedes of
working-age was receiving some type of benefit. Over 20 percent of the same
demographic of Swedes was effectively working "off-the-books" or less
than they preferred. Sweden's tax structure even made it financially
advantageous for many to stay on the dole instead of getting a job.
But with a non-Social Democrat
coalition government's election in 2006, Sweden's reform agenda resumed. On the
revenue side, property taxes were scaled back. Income-tax credits allowing
larger numbers of middle and lower-income people to keep more of their incomes
were introduced.
To be fair, the path to tax reform
was paved here by the Social Democrats. In 2005, they simply abolished -- yes,
that's right, abolished -- inheritance taxes.
But liberalization wasn't limited to
taxation. Sweden's new government accelerated privatizations of once-state
owned businesses. It also permitted private providers to enter the healthcare
market, thereby introducing competition into what had been one of the world's
most socialized medical systems. Industries such as taxis and trains were
deregulated. State education and electricity monopolies were ended by the
introduction of private competition. Even Swedish agricultural prices are now
determined by the market. Finally, unemployment benefits were reformed so that
the longer most people stayed on benefits, the less they received.
So what were the effects of all
these changes? The story is to be found in the numbers. Unemployment levels
fell dramatically from the 10 percent figure of the mid-1990s. Budget-wise,
Sweden started running surpluses instead of deficits. The country's gross
public debt declined from a 1994 figure of 78 percent to 35 percent in 2010.
Sweden also weathered the Great Recession far better than most other EU states.
Sweden's 2010 growth-rate was 5.5 percent. By comparison, America's was 2.7
percent.
Of course Sweden's story is far from
perfect. Approximately, one-third of working Swedes today are civil servants.
Some of the benefits of tax reform have been blunted by Sweden's embrace of
carbon taxes since the early 1990s. That partly reflects the extent to which
many Swedes are in thrall to contemporary Western Europe's fastest growing
religion -- environmentalism.
High unemployment also persists
among immigrants and young Swedes (25.9 percent amongst 15-25 year olds). This
owes much, Bartholomew observes, to "the high minimum wage imposed on the
various industries by the still-powerful unions. Those who cannot command a
good wage are not allowed to work for a lower one." On the income side,
average Swedish wage-earners in 2009 still took home less than 50 percent of
what they cost their employer. The equivalent figure for Britain was 67
percent.
It hardly need be said that the
differences between Sweden and the United States are enormous. An economy of
310 million people is a very different affair to one with just over 9 million
inhabitants. Moreover, small ships are easier to turn around than ocean-liners.
Nonetheless, it's surely paradoxical -- and tragic -- that a small Nordic
country which remains a byword for its (at times obsessive) commitment to
egalitarianism has proved far more willing than America to give economic
liberty a chance.