Sweden has a very large and expensive welfare state, but it’s actually becoming a bit of a role model for economic reform. I’ve already commented on the country’s impressive school choice system and noted that the Swedes have partially privatized their Social Security system.
I even wrote a Cato study looking at the good and bad features of economic policy in the Nordic nations, and cited a Swedish parliamentarian who explained that his nation became rich because of small government and free markets and how he is hopeful his country is returning to its libertarian roots.
Notwithstanding the many admirable features of Sweden, I never thought they would be moving in the right direction on fiscal policy while the United States was heading in the opposite direction.
Yet that’s the case. We all know that America has had made many mistakes during the Bush-Obama years, particularly with failed stimulus schemes in 2008 and 2009.
Sweden, by contrast, has put in place pro-growth reforms. Here’s what Fraser Nelson wrote for the UK-based Spectator.
Can we trade Geithner for Borg?
When Europe’s finance ministers meet for a group photo, it’s easy to spot the rebel — Anders Borg has a ponytail and earring. What actually marks him out, though, is how he responded to the crash. While most countries in Europe borrowed massively, Borg did not. Since becoming Sweden’s finance minister, his mission has been to pare back government. His ‘stimulus’ was a permanent tax cut. …Three years on, it’s pretty clear who was right. ‘Look at Spain, Portugal or the UK, whose governments were arguing for large temporary stimulus,’ he says. ‘Well, we can see that very little of the stimulus went to the economy. But they are stuck with the debt.’ Tax-cutting Sweden, by contrast, had the fastest growth in Europe last year, when it also celebrated the abolition of its deficit. …‘Everybody was told “stimulus, stimulus, stimulus”,’ he says — referring to the EU, IMF and the alphabet soup of agencies urging a global, debt-fuelled spending splurge. Borg, an economist, couldn’t work out how this would help. ‘It was surprising that Europe, given what we experienced in the 1970s and 80s with structural unemployment, believed that short-term Keynesianism could solve the problem.’ …He continued to cut taxes and cut welfare-spending to pay for it; he even cut property taxes for the rich to lure entrepreneurs back to Sweden. The last bit was the most unpopular, but for Borg, economic recovery starts with entrepreneurs. If cutting taxes for the rich encouraged risk-taking, then it had to be done.
The article notes that government is still far too large in Sweden, but it’s also clear that moving in the right direction generates immediate benefits.
I posted a video back in 2010, narrated by a Swedish economics student, and asked a rhetorical question of why Obama wants to make America more like Sweden when the Swedes are moving in the other direction.
Unfortunately, there was no good answer then and there’s no good answer now.
Let’s close with some irony. Last year, I cited a study showing how large public sectors undermine economic performance. The study was written by two Swedish economists. In addition to trading Geithner for Borg, perhaps we can ship Krugman to Stockholm and bring those economists to America.
Dan,
You have the facts wrong about Sweden’s school choice system. The local school districts have the last say in whether or not a private school is allowed to open, and their first order of business is to decide whether or not the government’s own schools “need more competition” as the wording goes. Over the past few years there has been strong pushback from school districts around Sweden against more school choice, based on this very certificate-of-need clause. The private schools are also banned from charging tuitions on top of the vouchers. In at least one of the major cities the vouchers for private schools are lower than for public schools, putting private schools at a financial disadvantage.
I would not call that impressive. I prefer the Danish model which actually allows genuine enterpreneurship and freedom of choice.
As for “fiscal reforms”, Sweden has a law that mandates a budget surplus of two percent of GDP over the business cycle. IOW, for every $100 the government spends they must by law take in $102 in taxes. As a result the Swedish government has some of the biggest financial assets in Europe, adjusted for population.
I do not want my money to pile up in government bank accounts anymore than I want them to go toward lavish government employee compensation, wasteful pork-barrel spending programs or a dysfunctional government education or health care system.
After the 2006 election they introduced their version of our Earned Income Tax Credit. And just as with our EITC it has dramatically increased the punitive effect of Sweden’s already discouraging marginal income taxes. Low income earners see the gains from higher incomes vanish even faster under the Swedish EITC, and therefore have even weaker incentives to make more money. As a result, their eligibility for welfare programs is perpetuated.
One of the consequences of the fiscal reforms you applaud – which actually have been in place for a long time in one shape or another – is that they have instituted austerity programs for government services. Instead of privatizing health care they make annual cuts while keeping the high taxes in place. As a result, the Swedish health care system now has some of the most inaccessible services in the industrialized world, with fewer doctors, hospitals beds, MRI machines and you-name-it than any other Western nation (except Albania according to a British study). The right to open a private doctor’s clinic is about as weak as the right to open a private school: you need a government-issued certificate of need, and you still operate under the single-payer system.
I agree that the private accounts reform in the retirement system was good in principle, but if you look at the parameters you’ll see that the entire thing was set up not to benefit retirees but to cut costs for government. They are better at making blondes than sense over there.
Reblogged this on The Conservative New Ager.
I see the WSJ has picked this up, good job being first to the pitch.
> I agree that the private accounts reform in the retirement system was good in
> principle, but if you look at the parameters you’ll see that the entire thing was
> set up not to benefit retirees but to cut costs for government.
The group that really benefits from the Swedish retirement system is the Labour unions and bankers that run it, though. Because they get to invest the money and charge (high, proportional to the deposited amount) annual fees for doing so. And we the people are, of course, not allowed any free or low-fee alternatives.
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I am not sure why we keep blaming Keynes for all of this fiscal policy non-sense that goes on in the world. Keynes actually wrote that deficit spending doesn’t work as a stimulus unless the previous periods of economic activity have produced a surplus. (Deficit Spending when a Deficit already exists previously is not stimulative) He also wrote that Tax Rate reductions are most effective when marginal tax rates are relatively high. Both of these thoughts are just plain common sense, but Democrats seem to want to believe in deficit spending activity when Keynes would argue against it and Republicans likewise would like to have us believe Tax Cuts will be stimulative when Keynes would argue the opposite.
Most of the world, the US included is out of real options other than to bite the bullet and reduce government spending. In the US we have some Oil, Gas and Coal reserves that can be taxed as we reduce the spending to soften the impact, but someone has to have the political courage to make these kind of decisions. It isn’t Keynes fault if we fail, he taught us correctly.
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