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Posts Tagged ‘Sweden’

Given Social Security’s enormous long-run financial problems, the program eventually will need reform.

But what should be done? Some folks on the left, such as Barack Obama and Hillary Clinton, support huge tax increases to prop up the program. Such an approach would have a very negative impact on the economy and, because of built-in demographic changes, would merely delay the program’s bankruptcy.

Others want a combination of tax increases and benefit cuts. This pay-more-get-less approach is somewhat more rational, but it means that today’s workers would get a really bad deal from Social Security.

This is why I frequently point out that personal retirement accounts (i.e., a “funded” system based on real savings) are the best long-run solution. And to help the crowd in Washington understand why this is the best approach, I explain that dozens of nations already have adopted this type of reform. And I’ve written about the good results in some of these jurisdictions.

Now it’s time to add Sweden to the list.

I actually first wrote about the Swedish reform almost 20 years ago, in a study for the Heritage Foundation co-authored with an expert from Sweden. Here’s some of what we said about the nation’s partial privatization.

Swedish policymakers decided that both individual workers and the overall economy would benefit if the old-age system were partially privatized. …Workers can invest 2.5 percentage points of the 18.5 percent of their income that they must set aside for retirement. …the larger part-16 percent of payroll-goes to the government portion of the program. …What makes the government pay-as-you-go portion of the pension program unique, however, is the formula used for calculating an individual’s future retirement benefits. Each worker’s 16 percent payroll tax is credited to an individual account, although the accounts are notional. …the government uses the money in these notional accounts to calculate an annuity (annual retirement benefit) for the worker. …the longer a worker stays in the workforce, the larger the annuity received. This reform is expected to discourage workers from retiring early… There are many benefits to Sweden’s new system, including greater incentives to work, increased national savings, a flexible retirement age, lower taxes and less government spending.

While that study holds up very well, let’s look at more recent research so we can see how the Swedish system has performed.

I’m a big fan of the fully privatized portion of the Swedish system (the “premium pension”) funded by the 2.5 percent of payroll that goes to personal accounts.

But let’s first highlight the very good reform of the government’s portion of the retirement system. It’s still a tax-and-transfer scheme, but there are “notional” accounts, which means that benefits for retirees are now tied to how much they work and how much they pay into the system.

A new study for the American Enterprise Institute, authored by James Capretta, explains the benefits of this approach.

Sweden enacted a reform of its public pension system that combines a defined-contribution approach with a traditional pay-as-you-go financing structure. The new system includes better work incentives and is more transparent to participants. It is also permanently solvent due to provisions that automatically adjust payouts based on shifting demographic and economic factors. …A primary objective…in Sweden was to build a new system that would be solvent permanently within a fixed overall contribution rate. …pension benefits are calculated based on notional accounts, which are credited with 16.0 percent of workers’ creditable wages. …The pensions workers get in retirement are tied directly to the amount of contributions they make to the system. …This design improved incentives for work… To keep the system in balance, this rate of return is subject to adjustment, to correct for shifts in demographic and economic factors that affect what rate of return can be paid within the fixed budget constraint of a 16.0 percent contribution rate.

The final part of the above excerpts is key. The system automatically adjusts, thus presumably averting the danger of future tax hikes.

Now let’s look at some background on the privatized portion of the new system. Here’s a good explanation in a working paper from the Center for Fiscal Studies at Sweden’s Uppsala University.

The Premium Pension was created mainly for three purposes. Firstly, funded individual accounts were believed to increase overall savings in Sweden. …Secondly, the policy makers wanted to allow participants to take account of the higher return in the capital markets as well as to tailor part of their pension to their risk preferences. Finally, an FDC scheme is inherently immune against financial instability, as an individual’s pension benefit is directly financed by her past accumulated contributions. The first investment selections in the Premium Pension plan took place in the fall of 2000, which is known as the “Big Bang” in Sweden’s financial sector. …any fund company licensed to do business in Sweden is allowed to participate in the system, but must first sign a contract with the Swedish Pensions Agency that specifies reporting requirements and the fee structure. Benefits in the Premium Pension Plan are paid out annually and can be withdrawn from age 61.

And here’s a chart from the Swedish Pension Agency’s annual report showing that pension assets are growing rapidly (right axis), in part because “premium pension has provided a 6.7 percent average value increase in people’s pensions per year since its launch.” Moreover, administrative costs (left axis) are continuously falling. Both trends are very good news for workers.

Let’s close by citing another passage from Capretta’s AEI study.

He looks at Sweden’s long-run fiscal outlook to other major European economies.

According to European Union projections, Sweden’s total public pension obligations will equal 7.5 percent of GDP in 2060, which is a substantial reduction from the…8.9 percent of GDP it spent in 2013. …In 2060, EU countries are expected to spend 11.2 percent of GDP on pensions. Germany’s public pension spending is projected to increase…to 12.7 percent of GDP in 2060. …The EU forecast shows France’s pension obligations will be 12.1 percent of GDP in 2060 and Italy’s will be 13.8 percent of GDP.

I think 8.9 percent of GDP is still far too high, but it’s better than diverting 11 percent, 12 percent, or 13 percent of economic output to pensions.

And the fiscal burden of Sweden’s system could fall even more if lawmakers allowed workers to shift a greater share of their payroll taxes to personal accounts.

But any journey begins with a first step. Sweden moved in the right direction. The United States could learn from that successful experience.

P.S. Pension reform is just the tip of the iceberg. As I wrote two years ago, Sweden has implemented a wide range of pro-market reforms over the past few decades, including some very impressive spending restraint in the 1990s. If you’re interested in more information about these changes, check out Lotta Moberg’s video and Johan Norberg’s video.

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In yesterday’s column, I shared a humorous video mocking the everywhere-its-ever-been-tried global failure of socialism.

And I tried to preempt the typical response of my left-wing friends by pointing out that Scandinavian nations are not role models for statism.

In global ranking of economic liberty, Nordic nations score relatively high, with Denmark and Finland in the top 20. Scandinavian nations have large welfare states, but otherwise have very laissez-faire economic policies. Nordic nations got rich when government was small, but growth has slowed since welfare states were imposed.

Based on some of the emails I received, some critics have a hard time understanding this argument.

All of which is very frustrating since I’ve repeatedly tried to make this point. So I pondered the issue for hours, trying to figure out whether there was some way of helping people grasp the issue.

Maybe this chart from Economic Freedom of the World will help. It shows, based on the five major categories of economic liberty, that the once-significant gap between the United States and Scandinavia has almost completely disappeared.

In other words, anyone who claims that Scandinavian nations are socialist must also think that the United States also is socialist.

To be sure, there are differences. If you look at specific categories of economic liberty, America gets a noticeably better score than Nordic nations on fiscal policy.

But we get a significantly worse score for governance issues such as property rights, corruption, and the rule of law.

We also do a bit worse on trade and slightly better on regulation.

The bottom line is that both the United States and Scandinavian nations are market-oriented, but also saddled with plenty of bad government policies. If that makes us socialist, then what’s the right term for nations where government has a much bigger footprint, such as France, Italy, or Greece?

How about Venezuela and Zimbabwe?

Or North Korea and Cuba?

What I’m saying is that there’s a spectrum and we should be cognizant that there are different degrees of statism. And nations closer to one end are much different from countries closer to the other end.

Plenty of other people make similar arguments about the Nordic countries.

Tim Worstall, writing about Finland for CapX, emphasizes the laissez-faire nature of Scandinavian nations, while also pointing out that there’s a degree of decentralization that makes big government somewhat less inefficient.

…high tax rates do indeed reduce economic growth rates by undercutting incentives. So do interfering bureaucracy and state planning. And so if you’re going to go overboard on one of those two then you’ve got to be minimalist on the other point. In other words, you’ve got to kill off bureaucracy in order to leave room for the tax rates and still have a growing economy. …That is more or less how Finland and other Scandinavians do things. …The other important point is quite how decentralised they all are. …A much larger piece of the pay packet goes to the local government… That money raised locally is then spent locally too. …There’s thus an efficiency to the system, something that gets lost when…people send their cash off to the national government to be distributed without that local accountability. …if you want that Scandi life then you’ve got to do it as they do. Very local government and taxation plus a distinctly less economically interventionist government.

Amen. Local government oftentimes is bad, but it’s rarely as bad as a centralized system.

I also found a must-read 2016 article for FEE by Corey Iacono.

Democratic socialism purports to combine majority rule with state control of the means of production. However, the Scandinavian countries are not good examples of democratic socialism in action because they aren’t socialist. In the Scandinavian countries, like all other developed nations, the means of production are primarily owned by private individuals, not the community or the government, and resources are allocated to their respective uses by the market, not government or community planning. …it is true that the Scandinavian countries provide…a generous social safety net and universal healthcare, an extensive welfare state is not the same thing as socialism. …The Scandinavians embrace a brand of free-market capitalism… The Economist magazine describes the Scandinavian countries as “stout free-traders who resist the temptation to intervene even to protect iconic companies.” …These countries all also rank in the top 10 easiest countries to do business.

If you don’t believe Worstall and Iacono, check out this table of data I prepared back in 2015.

I took the Economic Freedom of the World rankings and I removed the variables for fiscal policy.

And what you find is that Denmark, Sweden, and Finland were all in the top 10 for economic liberty. And Norway was #14.

That’s compared to #24 for the United States.

Heck, there were plenty of other European nations that ranked as being more free market than the United States.

So we should be grateful that we only have a medium-sized welfare state. Because our better score on fiscal policy helps to offset our comparatively anemic scores on the other four variables.

Having pointed out that the United States now has only a rather small advantage over Scandinavian nations when looking at all five measures of economic liberty, that’s still better than nothing.

It probably explains, for instance, why Americans of Scandinavian descent earn so much more than their cousins who remained back home.

And why Americans of all backgrounds generally enjoy higher living standards than folks in Europe, even the ones in Nordic nations.

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I’ve written that it’s theoretically possible for Greece to pay its debts and restore prosperity.

After all, it’s simply a matter of obeying fiscal policy’s Golden Rule and reforming a suffocating tax system.

But I’ve always figured none of that will happen because Greek voters would never vote for a government that favors Reagan-style or Thatcher-style economic reforms.

Simply stated, there are too may Greek people living off the state. But that’s just part of the problem. An even bigger obstacle to reform is that the people have decided that it’s morally acceptable to mooch off the government.

As a result, I’ve assumed that Greece has passed a tipping point because the moral foundation of Greek society has been corroded by dependency. And it’s very difficult to put that toothpaste back in the tube.

But maybe I’ve been wrong. Courtesy of the great people at the Atlas Network, here’s some remarkable polling data from Greece.

…the people may finally be fed up with big government, runaway spending, public-sector corruption, and job-killing regulations. A recent in-depth survey, published by the daily Kathimerini newspaper and the new think tank Dianeosis, reveals that Greek society seems to be experiencing an ideological sea change.

On a philosophical level, Greeks seem to be embracing the principles of classical liberalism.

In Greece, the term “liberalism” retains its classical meaning of support for individual liberty, free markets, and social tolerance. The latest finding from the Dianeosis poll shows that 27 percent of respondents identify as either liberal or neoliberal, together making the largest ideological group for the country’s overall population. These ideas have taken even stronger hold among the rising generation, with an astonishing 50 percent of Greek youth identifying as either liberals or neoliberals.

And this translates into greater support for small-government policies.

About 60 percent agree that government is intervening too much in economic matters, and thereby prevents the private sector from creating jobs and wealth.

Here’s some of the relevant polling data.

It’s also encouraging to see that there was movement in the right direction between April 2015 and December 2016.

On a policy level, the Greeks now seem to recognize that the state is too big.

Even more telling is that the majority of Greeks, 55 percent, believe that lower taxation is preferable even if that results in less government welfare. This finding is particularly important because two years ago only 39.2 percent agreed with that statement.

Here are those numbers from the survey.

The last bit of good news from the survey is that Greeks have positive feelings about market-oriented terms.

Greeks today also seem to show overwhelming support for many fundamental concepts of the free-market tradition. About 73 percent agreed that “markets” have a positive connotation…a primary reason for this turn toward free markets is that the government regimes in Greece have clearly failed, thereby tainting their devotion to destructive statism and populism. This has caused many Greeks to consider economic freedom as a viable solution for the country’s devastating problems.

On the other hand, the country they most want to mimic is Sweden.

And it’s not even close (though I wonder if this chart would look different if Switzerland and Hong Kong were options).

You may be wondering (like me) how the Greeks can tell pollsters they want smaller government while simultaneously picking Sweden as a role model?

The pessimistic answer is that Greeks don’t know what they’re talking about. Or maybe they are hypocrites, willing to pay lip service to economic liberty but ultimately yearning for a cradle-to-grave welfare state.

The optimistic answer is that Sweden actually is a pretty good role model.

Check out this comparison of Greece and Sweden, based on data from Economic Freedom of the World. Sweden is ranked #27, which is in the top-20 percent of nations for economic liberty. Greece, by contrast, is way down at #116.

Yes, both countries have terrible fiscal policy, but it turns out that Sweden is very market-oriented in areas like money, trade, regulation, and rule of law. And even though it still has a long way to go, Sweden significantly improved fiscal policy in the 1990s and has even enjoyed some modest improvement in recent years.

That’s definitely not the case in Greece.

In other words, I certainly don’t mind if Swedish policy is the short-run goal for Greek voters. If they ever get to that point, then I’ll try to convince them to go the Full Hong Kong.

P.S. In the real world, are there any examples of countries that have escaped statism and enjoyed something akin to a Greece-to-Sweden jump in economic liberty?

The answer is yes. Chile would be an obvious example, as would certain post-Soviet Bloc nations such as Estonia.

It would be great to add Greece to the collection.

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I know exactly how Ronald Reagan must have felt back in 1980 when he famously said “There you go again” to Jimmy Carter during their debate.

That’s because I endlessly have to deal with critics who try to undercut the Laffer Curve by claiming that it’s based on the notion that all tax cuts “pay for themselves.”

Now it’s time for me to say “There you go again.”

Reuters regurgitated this misleading trope about the Laffer Curve last year, issuing a report about how the head of the Congressional Budget Office supposedly disappointed “devotees” of “Reaganomics” by saying that tax cuts are not self-financing.

The…Republican-appointed director of the Congressional Budget Office delivered some bad news…to the party’s “Reaganomics” devotees: Tax cuts don’t pay for themselves through turbocharged economic growth. Keith Hall, who served as an economic adviser to former President George W. Bush, made the pronouncement… “No, the evidence is that tax cuts do not pay for themselves,” Hall said in response to a reporter’s question. “And our models that we’re doing, our macroeconomic effects, show that.” His comment is at odds with lingering economic theory from the 1980s.

Well, I’m a “devotee of Reaganomics.” So was I disappointed?

Nope. I largely agree with the CBO Director on this topic.

But I think he should have included two caveats.

First, while there are some politicians (both now and also back in the 1980s) who blindly act as if all tax cuts are self-financing, Reaganomics was not based on that notion.

Instead, proponents of the Reagan tax cuts simply argued reforms would lead to more growth – and therefore more taxable income. And, on that basis, it was a slam-dunk victory.

Interestingly, the report from Reuters quasi-admits that Reaganomics wasn’t based on self-financing tax cuts, noting instead that the core belief was that revenue generated by additional growth would result in “less need” (as opposed to “no need”) to find offsetting budget cuts.

Stronger economic growth generated by tax cuts would boost revenues so much that there is less need to find offsetting savings.

The second caveat is that not all tax cuts (or tax increases) are created equal. Some changes in tax policy have big effects on incentives to work, save, and invest. Others don’t have much impact on economic activity because the tax system’s penalty on productive behavior isn’t altered.

In a few cases, it actually is possible for a tax cut to be self-financing. But in the vast majority of cases, the real issue is the degree to which there is some amount of revenue feedback. In other words, the discussion should focus on the extent to which the foregone revenue from lower tax rates is offset by revenue gains from increased taxable income.

Let’s now look at a real-world example from Sweden to see how politicians are blind to this common-sense insight. The left-wing coalition government in that country indirectly increased marginal tax rates (by phasing out a credit) for some high-income taxpayers this year. The experts at Timbro have examined the potential revenue impact. They start with a description of what happened to policy.

To finance their reforms, …the marginal tax rate for some 400,000 people working in Sweden – e g doctors, engineers, accountants/auditors and others in high income brackets – will be increased by three percentage points to 60 per cent. …it is also necessary to take into consideration payroll tax… Under current rules, the effective marginal tax rate is 75 per cent for high earners. After the phase-out it rises to 77 per cent.

Amazingly, the Swedish government assumes that taxpayers won’t change their behavior in reaction to this high marginal tax rate.

Decades of economics research show that if you raise income tax, people will reduce their working time, put in less effort on the job and engage in more tax planning. When the government calculated the expected increase in revenue of SEK 2.7 billion from the earned income tax credit’s phase out, it failed to take changes in behaviour into consideration because revenue and expenses in the budget are calculated statically.

The folks at Timbro explain what likely will happen as upper-income taxpayers respond to the higher marginal tax rate.

The amount of revenue generated from a tax hike depends on how people change their behaviour as a result. … High elasticity means that salary earners are sensitive to changes in taxation, and that they are very likely to alter their behaviour with certain types of reforms. Examples of this are increasing or decreasing hours worked, switching jobs, or starting a company to enable more tax-planning options. …Elasticity of 0.3 is often used in international literature (e g Hendren, 2014) as a reasonable estimate of the mainstream for this area of research. Piketty & Saez (2012) state that most estimates of elasticity are within the range of 0.1 and 0.4. They conclude that 0.25 is “a realistic mid-range estimate” of elasticity.

So what happens when you apply these measures of taxpayer responsiveness to the Swedish tax hike?

With zero elasticity, i e a static assessment, the revenue increase from phase-out of the earned income tax is assessed at SEK 2.6 billion. That is in line with the government’s estimate of SEK 2.7 billion. … all revenue disappears already at a low, 0.1, level of elasticity.

And when you look at the more mainstream measures of taxpayer responsiveness, the net effect of the government’s tax hike is that the Swedish Treasury will have less revenue.

In other words, this is one of those rare examples of taxable income changing by enough to swamp the impact of the change in the marginal tax rate.

And since we’re dealing with turbo-charged examples of the Laffer Curve, let’s look at what my colleague Alan Reynolds shared about the “huge across-the-board increase in marginal tax rates…Herbert Hoover pushed for” in the early 1930s.

Total federal revenues fell dramatically to less than $2 billion in 1932 and 1933 – after all tax rates had been at least doubled and the top rate raised from 25% to 63%.  That was a sharp decline from revenues of $3.1 billion in 1931 and more than $4 billion in 1930, when the top tax was just 25%. …Revenues fell even as a share of falling GDP –  from 4.1% in 1930 and 3.7% in 1931 to 2.8% in 1932 (the first year of the Hoover tax increase) and 3.4% in 1933. That illusory 1932-33 “increase” was entirely due to less GDP, not more revenue.

Roosevelt’s additional tax increases in the mid-1930s didn’t work much better.

The 15 highest tax rates were increased again in 1936, dividends were made fully taxable at those higher rates, and both corporate and capital gains tax rates were also increased…  Yet all of those massive “tax increases”…failed to bring as much revenue in 1936 as was collected with much lower tax rates in 1930.

The point of these examples is not that governments wound up with less money. What matters is that politicians destroyed private-sector output as a consequence of more punitive tax policy.

And that’s why the tax increases that generate more tax revenue are almost as misguided as the ones that lose revenue.

Consider Hillary Clinton’s tax-hike plan. The Tax Foundation crunched the numbers and concluded it would generate more revenue for the federal government. But I argued that shouldn’t matter.

she’s willing to lower our incomes by 0.80 percent to increase the government’s take by 0.46 percent. A good deal for her and her cronies, but bad for America.

At the risk of repeating myself, we shouldn’t try to be at the revenue-maximizing point of the Laffer Curve.

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I’m in Sweden today, where I just spoke before Timbro (a prominent classical liberal think tank) about the US elections and the implications for public policy.

My main message was pessimism since neither Donald Trump nor Hillary Clinton support genuine entitlement reform.

But I’ve addressed that topic many times before. Today, motivated by my trip, I want to augment my analysis about Sweden from 10 days ago.

In that column, I highlighted some research from Professor Olle Kranz showing that Sweden became a rich nation during a free-market era when government was relatively small. And as you can see from his chart (I added the parts in red), this is also when per-capita economic output in Sweden caught up with – and eventually surpassed – per-capita GDP in other advanced countries.

Then Sweden began to lose ground. Some of this was understandable and inevitable. Sweden didn’t participate in World War II, so its comparative prosperity during the war and immediately afterwards was a one-time blip.

But the main focus of my column from last week was to show that Swedish prosperity began a sustained drop during the 1960s, and I argued that the nation lost ground precisely because statist policies were adopted.

In other words, Sweden enjoyed above-average growth when it relied on policies I like and then suffered below-average growth when it imposed the policies (high tax rates, massive redistribution, etc) that get Bernie Sanders excited.

Today, let’s build upon Professor Kranz’s analysis by extending his calculations. He did his research in the early part of last decade, and we now have many years of additional data that can be added to the chart.

But before doing that, it’s worth noting that the years of additional data basically coincide with a period of market-oriented reforms in Sweden. A study from the Reform Institute in Stockholm explains some of what happened, starting with the stagnation caused by the era of big government.

The seventies and eighties saw Sweden’s tax burden rise from an average European level to the world’s highest. The public sector expanded vastly. All facets of the welfare system were made more generous in international comparison. Meanwhile, labour market regulation increased… Throughout these years, Swedes’ individual after-tax real income stagnated, private sector job creation ceased, and public debt spiralled higher. This culminated in a severe economic crisis in the early 1990s. By then, Sweden had fallen to 14th place in the GDP per capita rankings of OECD countries.

That’s the bad news.

The good news is that this economic misery led to market-oriented reforms.

When the onset of the financial crisis coincided with election of a market-oriented centre-right government in 1991, the reform process began in earnest. Most emphasis at the time was placed on reforms that opened significant sectors in the economy to greater competition. Moreover, an important feature of these regulatory reforms was that the crisis spurred local authorities to implement less burdensome regulation. …significant changes were introduced to the tax system, macroeconomic policy framework, and social insurance system. …every aspect of the Swedish economy has changed due to implementation of reforms. …public sector employment has declined.

To be sure, none of the means Sweden became Hong Kong. It is currently ranked only #38 by Economic Freedom of the World, and its score only improved from 6.92 in 1990 to 7.46 today, hardly a huge jump.

But we nonetheless can now check whether this period of modest reform yielded any dividends. And, looking at an updated and extended version of Professor Kranz’s chart, there certainly seems to be a clear relationship between pro-market policy and Swedish prosperity.

Call me crazy, but it seems like there’s a lesson here about the right recipe for growth.

P.S. The 16 countries in the comparison are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Japan, Sweden, Switzerland, the United Kingdom, and the United States.

P.P.S. If you’re so disposed, you can watch my speech in Stockholm on Timbro’s Facebook page. If you prefer YouTube, the folks at CEPOS in Denmark saw the same speech (I only oppose wasteful forms of recycling) and they posted it yesterday.

P.P.P.S. If you’re interested in more information about market-oriented reforms in Sweden, check out Lotta Moberg’s video and Johan Norberg’s video.

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Sweden punches way above its weight in debates about economic policy. Leftists all over the world (most recently, Bernie Sanders) say the Nordic nation is an example that proves a big welfare state can exist in a rich nation. And since various data sources (such as the IMF’s huge database) show that Sweden is relatively prosperous and also that there’s an onerous fiscal burden of government, this argument is somewhat plausible.

A few folks on the left sometimes even imply that Sweden is a relatively prosperous nation because it has a large public sector. Though the people who make this assertion never bother to provide any data or evidence.

I have five responses when confronted with the why-can’t-we-be-more-like-Sweden argument.

  1. Sweden became rich when government was small. Indeed, until about 1960, the burden of the public sector in Sweden was smaller than it was in the United States. And as late as 1970, Sweden still had less redistribution spending than America had in 1980.
  2. Sweden compensates for bad fiscal policy by having a very pro-market approach to other areas, such as trade policy, regulatory policy, monetary policy, and rule of law and property rights. Indeed, it has more economic freedom than the United States when looking an non-fiscal policies. The same is true for Denmark.
  3. Sweden has suffered from slower growth ever since the welfare state led to large increases in the burden of government spending. This has resulted in Sweden losing ground relative to other nations and dropping in the rankings of per-capita GDP.
  4. Sweden is trying to undo the damage of big government with pro-market reforms. Starting in the 1990s, there have been tax-rate reductions, periods of spending restraint, adoption of personal retirement accounts, and implementation of nationwide school choice.
  5. Sweden doesn’t look quite so good when you learn that Americans of Swedish descent produce 39 percent more economic output, on a per-capita basis, than the Swedes that stayed in Sweden. There’s even a lower poverty rate for Americans of Swedish ancestry compared to the rate for native Swedes.

I think the above information is very powerful. But I’ll also admit that these five points sometimes aren’t very effective in changing minds and educating people because there’s simply too much information to digest.

As such, I’ve always thought it would be helpful to have one compelling visual that clearly shows why Sweden’s experience is actually an argument against big government.

And, thanks to the Professor Deepak Lal of UCLA, who wrote a chapter for a superb book on fiscal policy published by a British think tank, my wish may have been granted. In his chapter, he noted that Sweden’s economic performance stuttered once big government was imposed on the economy.

Though the Swedish model is offered to prove that high levels of social security can be paid for from the cradle to the grave without damaging economic performance, the claim is false (see Figure 1). The Swedish economy, between 1870 and 1950, grew faster on average than any other industrialised economy, and the country became technologically one of the most advanced and richest in the world. From the 1950s Swedish economic growth slowed relative to other industrialised countries. This was due to the expansion of the welfare state and the growth of public – at the expense of private – employment.57 After the Second World War the working population increased by about 1 million: public employment accounted for c. 770,000, private accounted for only 155,000. The crowding out by an inefficient public sector of the efficient private sector has characterised Sweden for nearly half a century.58 From being the fourth richest county in the OECD in 1970 it has fallen to 14th place. Only in France and New Zealand has there been a larger fall in relative wealth

And here is Figure 1, which should make clear that what’s good in Sweden (rising relative prosperity) was made possible by the era of free markets and small government, and that what’s bad in Sweden (falling relative prosperity) is associated with the adoption and expansion of the welfare state.

But just to make things obvious for any government officials who may be reading this column, I augment the graph by pointing out (in red) the “free-market era” and the “welfare-state era.”

As you can see, credit for the chart actually belongs to Professor Olle Krantz. The version I found in Professor Lal’s chapter is a reproduction, so unfortunately the two axes are not very clear. But all you need to know is that Sweden’s relative economic position fell significantly between the time the welfare state was adopted and the mid 1990s (which presumably reflects the comparative cross-country data that was available when Krantz did his calculations).

You can also see, for what it’s worth, that Sweden’s economy spiked during World War II. There’s no policy lesson in this observation, other than to perhaps note that it’s never a good idea to have your factories bombed.

But the main lesson, which hopefully is abundantly clear, is that big government is a recipe for comparative decline.

Which perhaps explains why Swedish policymakers have spent the past 25 years or so trying to undo some of those mistakes.

Addendum on November 3, 2016: A Swedish researcher kindly sent me a clear copy of Professor Kranz’s chart, so the axes are now very clear.

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I’m still in China, as part of a week-long teaching assignment about markets, entrepreneurship, economics, and fiscal policy at Northeastern University in Shenyang.

One point that I’ve tried to get across to the students is that China should not copy the United States. Or France, Japan, or Sweden. To be more specific, I warn them that China won’t become rich if it copies the economic policies that those nations have today.

Instead, I tell them that China should copy the economic policies – very small government, trivial or nonexistent income taxes, very modest regulation – that existed in those nations back in the 1800s and early 1900s. That’s when America and other western countries made the transition from agricultural poverty to industrial prosperity.

In other words, pay attention to the polices that actually produced prosperity, not the policies that happen to be in place in 2016. With this in mind, I’m delighted to share a new National Review column about the ostensibly wonderful Nordic Model from Nima Sanandaji. He starts by noting that statists are big fans of nations such as Sweden and Denmark.

Ezra Klein, the editor of the liberal news website Vox, wrote last fall that “Clinton and Sanders both want to make America look a lot more like Denmark — they both want to…strengthen the social safety net.” … Bill Clinton argues that Finland, Sweden, and Norway offer greater opportunities for individuals… Barack Obama recently…explain[ed] that “in a world of growing economic disparities, Nordic countries have some of the least income inequality in the world.”

Sounds nice, but there’s one itsy-bitsy problem with the left’s hypothesis.

Simply stated, everything good about Nordic nations was already in place before the era of big government.

…the social success of Nordic countries pre-dates progressive welfare-state policies. …their economic and social success had already materialized during a period when these countries combined a small public sector with free-market policies. The welfare state was introduced afterward.

Here are some of the key factoids about fiscal policy.

…in 1960, the tax rate in [Denmark] was merely 25 percent of GDP, lower than the 27 percent rate in the U.S. at the time. In Sweden, the rate was 29 percent, only slightly higher than in the U.S. In fact, much of Nordic prosperity evolved between the time that a capitalist model was introduced in this part of the world during the late 19th century and the mid 20th century – during the free-market era.

And here’s the data about equality (though I think it’s far more important to worry about the degree of upward mobility rather than whether everyone has a similar amount of income).

…high levels of income equality evolved during the same period. Swedish economists Jesper Roine and Daniel Waldenström, for example, explain that “most of the decrease [in income inequality in Sweden] takes place before the expansion of the welfare state and by 1950 Swedish top income shares were already lower than in other countries.” A recent paper by economists Anthony Barnes Atkinson and Jakob Egholt Søgaard reaches a similar conclusion for Denmark and Norway.

Our friends on the left think that government-run healthcare deserves the credit for longer lifespans in the Nordic world.

Nima explains that the evidence points in the other direction.

In 1960, well before large welfare states had been created in Nordic countries, Swedes lived 3.2 years longer than Americans, while Norwegians lived 3.8 years longer and Danes 2.4 years longer. Today, after the Nordic countries have introduced universal health care, the difference has shrunk to 2.9 years in Sweden, 2.6 years in Norway, and 1.5 years in Denmark. The differences in life span have actually shrunk as Nordic countries moved from a small public sector to a democratic-socialist model with universal health coverage.

Not to mention that there are some surreal horror stories in those nations about the consequences of putting government in charge of health care.

Here’s the evidence that I find most persuasive (some of which I already shared because of an excellent article Nima wrote for Cayman Financial Review).

Danish Americans today have fully 55 percent higher living standard than Danes. Similarly, Swedish Americans have a 53 percent higher living standard than Swedes. The gap is even greater, 59 percent, between Finnish Americans and Finns. Even though Norwegian Americans lack the oil wealth of Norway, they have a 3 percent higher living standard than their cousins overseas. …Nordic Americans are more socially successful than their cousins in Scandinavia. They have much lower high-school-dropout rates, much lower unemployment rates, and even slightly lower poverty rates.

Nima concludes his article by noting the great irony of Nordic nations trying to reduce their welfare states at the same time American leftists are trying to move in the other direction.

Nordic-style democratic socialism is all the rage among Democrat activists as well as with liberal intellectuals and journalists. But in the Nordic countries themselves, this ideal has gradually lost its appeal. …During the past few decades, the Nordic countries have gradually been reforming their social systems. Taxes have been cut to stimulate work, public benefits have been limited in order to reduce welfare dependency, pension savings have been partially privatized, for-profit forces have been allowed in the welfare sector, and state monopolies have been opened up to the market. In short, the universal-welfare-state model is being liberalized. Even the social-democratic parties themselves realize the need for change.

The net result of these reforms is that the Nordic nations are a strange combination of many policies that are very good (very little regulation, very strong property rights, very open trade, and stable money) and a couple of policies that are very bad (an onerous tax burden and a bloated welfare state).

I’ve previously shared (many times) observations about the good features of the Nordic nations, so let’s take a closer look at the bad fiscal policies.

Sven Larson authored a study about the Swedish tax system for the Center for Freedom and Prosperity. The study is about 10 years old, but it remains the best explanation I’ve seen if you want to understand the ins and outs of taxation in Sweden.

Here’s some of what he wrote, starting with the observation that the fiscal burden used to be considerably smaller than it is in America today.

Sweden was not always a high-tax nation. …the aggregate tax burden after World War II was modest.

But then things began to deteriorate.

…over the next four decades, there was a relentless increase in taxation. The tax burden first reached 50 percent of economic output in 1986 and has generally stayed above that level for the past 20 years.

Though Sven points out that Swedish politicians, if nothing else, at least figured out that it’s not a good idea to be on the wrong side of the Laffer Curve (i.e., they figured out the government was getting less revenue because tax rates were confiscatory).

A major tax reform in 1991 significantly lowered the top marginal tax rate to encourage growth. The top rate had peaked at 87 percent in 1979 and then gradually dropped to 65 percent in 1990 before being cut to 51 percent in 1991. Subsequent tax increases have since pushed the rate to about 57 percent.

In the interest of fairness, let’s acknowledge that there are a few decent features of the Swedish tax system, including the absence of a death tax or wealth tax, along with a modest tax burden on corporations.

But the bottom line is that Sweden’s overall tax system (and the same can be said of Denmark and other Nordic nations) is oppressive. And the system is oppressive because governments spend too much. Indeed, the welfare state in Sweden and Denmark is as large as the infamous French public sector.

To be sure, the Swedes and Danes partially offset the damage of their big welfare states by having hyper-free market policies in other areas. That’s why they rank much higher than France in Economic Freedom of the World even though all three nations get horrible scores for fiscal policy.

Let’s close by circling back to the main premise of this column. Nima explained that good things happened in the Nordic nations before the welfare state exploded in size.

So I decided to see if we could ratify his hypothesis by checking the growth numbers from the impressive Angus Maddison database. Here’s a chart showing the average growth of per-capita GDP in Denmark and Sweden in the 45 years before 1965 (the year used as an unofficial date for when the welfare state began to metastasize) compared to the average growth of per-capita GDP during the 45 years since 1965.

Unsurprisingly, we find that the economy grew faster and generated more prosperity when government was smaller.

Gee, it’s almost as if there’s a negative relationship between the size of government and the health of the economy? What a novel concept!

P.S. All of which means that there’s still no acceptable response for my two-question challenge to the left.

P.P.S. Both Sweden and Denmark have been good examples for my Golden Rule, albeit only for limited periods.

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