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Posts Tagged ‘Sweden’

The most persuasive data, when comparing the United States and Scandinavia, are the numbers showing that Americans of Swedish, Danish, Finnish, and Norwegian descent produce much more prosperity than those who remained in Sweden, Denmark, Finland, and Norway.

This certainly suggests that America’s medium-sized welfare state does less damage than the large-sized welfare state in Scandinavian nations.

But maybe the United States also was fortunate in that it attracted the right kind of migrant from Scandinavia.

Let’s look at some fascinating research from Professor Anne Sofie Beck Knudsen of Lund University in Sweden.

If you’re in a rush and simply want the headline results, here are some excerpts from the abstract.

This paper examines the joint evolution of emigration and individualism in Scandinavia during the Age of Mass Migration (1850-1920). A long-standing hypothesis holds that people of a stronger individualistic mindset are more likely to migrate as they suffer lower costs of abandoning existing social networks. …I propose a theory of cultural change where migrant self-selection generates a relative push away from individualism, and towards collectivism, in migrant-sending locations through a combination of initial distributional effects and channels of intergenerational cultural transmission. …the empirical results suggest that individualists were more likely to migrate than collectivists, and that the Scandinavian countries would have been considerably more individualistic and culturally diverse, had emigration not taken place.

If you’re interested in more detail, here are passages from the study.

We’ll start with the author’s description of why she studied the topic and what she wanted to determine.

People of Western societies are unique in their strong view of themselves… This culture of individualism has roots in the distant past and is believed to have played an important role in the economic and political development of the region… differences in individualism and its counterpart, collectivism, impact processes of innovation, entrepreneurship, cooperation, and public goods provision. Yet, little is known about what has influenced the evolution of individualism over time and across space within the Western world. …I explore the relationship between individualism and a common example of human behavior: migration. I propose a theory, where migration flows generate cultural change towards collectivism and convergence across migrant-sending locations.

Keep in mind, by the way, that societies with a greater preference for individualism generate much more prosperity.

Anyhow, Professor Knudsen had a huge dataset for her research since there was an immense amount of out-migration from Scandinavia.

During the period, millions of people left Europe to settle in New World countries such as the United States. Sweden, Norway, and Denmark experienced some of the highest emigration rates in Europe during this period, involving the departure of approximately 25% of their populations. …Total emigration amounted to around 38% and 26% in Norway and Sweden respectively.

Here are some of her findings.

I find that Scandinavians who grew up in individualistic households were more likely to emigrate… people of individualistic mindsets suffer lower costs of leaving existing social networks behind… the cultural change that took place during the Age of Mass Migration was sufficiently profound to leave a long-run impact on contemporary Scandinavian culture. …If people migrate based, in part, on individualistic cultural values, migration will have implications on the overall evolution of cultures. Emigration must be associated with an immediate reduction in the prevalence of individualists in the migrant-sending population.

Here is her data on the individualism of emigrants compared to those who stayed in Scandinavia.

As an aside, I find it very interesting that Scandinavian emigrants were attracted by the “American dream.”

…historians agree that migrants were motivated by more than hopes of escaping poverty. Stories on the ‘American Dream‘ and the view of the United States as the ‘Land of Opportunities‘ were core to the migration discourse. Private letters, diaries, and newspaper articles of the time reveal that ideas of personal freedom and social equality embodied in the American society were of great value to the migrants. In the United States, people were free to pursue own goals.

And this is why I am quite sympathetic to continued migration to America, with the big caveat that I want severe restrictions on access to government handouts.

Simply stated, I want more people who want that “American dream.”

But I’m digressing. Let’s now look at the key result from Professor Knudsen’s paper.

When the more individualistic Scandinavians with “get up and go” left their home countries, that meant the average level of collectivism increased among those remained behind.

Several observations are worth mentioning in light of the revealed actual and counterfactual patterns of individualism. First, one observes a general trend of rising individualism over the period, which is consistent with accounts for other countries… Second, the level of individualism would have been considerably higher by the end of the Age of Mass Migration in 1920, had emigration not taken place. Taking the numbers at face value, individualism would have been between 19.0% and 20.3% higher on average in Sweden, 17.8% and 27.9% in Norway, and 7.6% and 12.5% in Denmark, depending on the measure considered.

These charts capture the difference.

To wrap this up, here’s a restatement of the key findings from the study’s conclusion.

I find that people of an individualistic mindset were more prone to migrate than their collectivistic neighbors. …Due to self-selection on individualistic traits, mass emigration caused a direct compositional change in the home population. Over the period this amounted to a loss of individualists of approximate 3.7%-points in Denmark, 9.4%-points in Sweden, and 13.6%-points in Norway. …The cultural change that took place during the Age of Mass Migration was sufficiently profound to impact cross-district cultural differences in present day Scandinavia. Contemporary levels of individualism would thus have been significantly higher had emigration not occurred. …The potential societal implications of the emigration-driven cultural change are of great importance. The period of the Age of Mass Migration was characterized by industrialization, urbanization, and democratization in Scandinavia. Individualism was generally on the rise, in part due to these developments, but it seems conceivable that the collectivistic turn caused by emigration played a role in subsequent institutional developments. While economic freedom is high in contemporary Scandinavia, the region is known for its priority of social cohesion and collective insurance. This is particularly clear when contrasting the Scandinavian welfare model with American liberal capitalism.

This is first-rate research.

Professor Knudsen even understands that Scandinavian nations still have lots of economic freedom by world standards.

Imagine, though, how much economic freedom those countries might enjoy if the more individualism-minded people hadn’t left for America? Maybe those nations wouldn’t have dramatically expanded their welfare states starting in the 1960s, thus dampening economic growth.

The obvious takeaway is that migration from Denmark, Sweden, and Norway to the United States was a net plus for America and a net minus for Scandinavia.

P.S. When she referred in her conclusion to “American liberal capitalism,” she was obviously referring to classical liberalism.

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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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Folks on the left sometimes act as if the Nordic nations somehow prove that big government isn’t an impediment to prosperity.

As I’ve pointed out before, they obviously don’t spend much time looking at the data.

So let’s give them a reminder. Here are the rankings from Economic Freedom of the World. I’ve inserted red arrows to draw attention to the Nordic nations. As you can see, every single one of them is in the top quartile, meaning that they aren’t big-government jurisdictions by world standards.

Moreover, Finland ranks above the United States. Denmark is higher than Estonia, which is often cited a free-market success story. And all of them rank ahead of Slovakia, which also is known for pro-growth reforms.

To be sure, this doesn’t mean the Nordic nations are libertarian paradises. Far from it.

Government is far too big in those countries, just as it is far too big in the United States, Switzerland, New Zealand, Canada, and other nations in the top quartile.

Which is tragic since the burden of government spending in North America and Western Europe used to be just a fraction of current levels – even in nations such as Sweden.

The way I’ve described the Nordic nations is that they have bloated and costly welfare states but compensate for that bad policy by being very free market in other policy areas.

But you don’t need to believe me. Nima Sanandaji has just written an excellent new monograph for the Institute of Economic Affairs in London. Entitled Scandinavian Unexceptionalism: Culture, Markets and the Failure of Third-Way Socialism, Nima’s work explains how the Nordic nations became rich during an era of small government and free markets, how they then veered in the wrong direction, but are now trying to restore more economic freedom.

Here are some key excerpts, starting with some much-needed economic history.

Scandinavia’s success story predated the welfare state. …As late as 1960, tax revenues in the Nordic nations ranged between 25 per cent of GDP in Denmark to 32 per cent in Norway – similar to other developed countries. …Scandinavia’s more equal societies also developed well before the welfare states expanded. Income inequality reduced dramatically during the last three decades of the 19th century and during the first half of the 20th century. Indeed, most of the shift towards greater equality happened before the introduction of a large public sector and high taxes. …The phenomenal national income growth in the Nordic nations occurred before the rise of large welfare states. The rise in living standards was made possible when cultures based on social cohesion, high levels of trust and strong work ethics were combined with free markets and low taxes….the Nordic success story reinforces the idea that business-friendly and small-government-oriented policies can promote growth.

Here’s a chart from the book showing remarkable growth for Sweden and Denmark in the pre-welfare state era.

Nima has extra details about his home country of Sweden.

In the hundred years following the market liberalisation of the late 19th century and the onset of industrialisation, Sweden experienced phenomenal economic growth (Maddison 1982). Famous Swedish companies such as IKEA, Volvo, Tetra Pak, H&M, Ericsson and Alfa Laval were all founded during this period, and were aided by business-friendly economic policies and low taxes.

Unfortunately, Nordic nations veered to the left in the late 1960s and early 1970s. And, not surprisingly, that’s when growth began to deteriorate.

The third-way radical social democratic era in Scandinavia, much admired by the left, only lasted from the early 1970s to the early 1990s. The rate of business formation during the third-way era was dreadful.
Again, he has additional details about Sweden.
Sweden’s wealth creation slowed down following the transition to a high tax burden and a large public sector. …As late as 1975 Sweden was ranked as the 4th richest nation in the world according to OECD measures….the policy shift that occurred dramatically slowed down the growth rate. Sweden dropped to 13th place in the mid 1990s. …It is interesting that the left rarely discusses this calamitous Swedish growth performance from 1970 to 2000.

The good news is that Nordic nations have begun to shift back toward market-oriented policies. Some of them have reduced the burden of government spending. All of them have lowered tax rates, particularly on business and investment income. And there have even been some welfare reforms.

…there has been a tentative return to free markets. In education in Sweden, parental choice has been promoted. There has also been reform to pensions systems, sickness benefits and labour market regulations

But there’s no question that the welfare state and its concomitant tax burden are still the biggest problem in the region. Which  is why it is critical that Nordic nations maintain pro-market policies on regulation, trade, monetary policy, rule of law and property rights.

Scandinavian countries have compensated for a large public sector by increasing economic liberty in other areas. During recent decades, Nordic nations have implemented major market liberalisations to compensate for the growth-inhibiting effects of taxes and labour market policies.

Let’s close with what I consider to be the strongest evidence from Nima’s publication. He shows that Scandinavians who emigrated to America are considerably richer than their counterparts who stayed put.

Median incomes of Scandinavian descendants are 20 per cent higher than average US incomes. It is true that poverty rates in Scandinavian countries are lower than in the US. However, the poverty rate among descendants of Nordic immigrants in the US today is half the average poverty rate of Americans – this has been a consistent finding for decades. In fact, Scandinavian Americans have lower poverty rates than Scandinavian citizens who have not emigrated. …the median household income in the United States is $51,914. This can be compared with a median household income of $61,920 for Danish Americans, $59,379 for Finnish-Americans, $60,935 for Norwegian Americans and $61,549 for Swedish Americans. There is also a group identifying themselves simply as ‘Scandinavian Americans’ in the US Census. The median household income for this group is even higher at $66,219. …Danish Americans have a contribution to GDP per capita 37 per cent higher than Danes still living in Denmark; Swedish Americans contribute 39 percent more to GDP per capita than Swedes living in Sweden; and Finnish Americans contribute 47 per cent more than Finns living in Finland.

In other words, when you do apples to apples comparisons, either of peoples or nations, you find that smaller government and free markets lead to more prosperity.

That’s the real lesson from the Nordic nations.

P.S. Just in case readers think I’m being too favorable to the Nordic nations, rest assured that I’m very critical of the bad policies in these nations.

Just look at what I’ve written, for instance, about Sweden’s healthcare system or Denmark’s dependency problem.

But I will give praise when any nation, from any part of the world, takes steps in the right direction.

And I do distinguish between the big-government/free-market systems you find in Nordic nations and the big-government/crony-intervention systems you find in countries like France and Greece.

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Sweden is an odd country, at least from the perspective of public policy.

On the positive side, it has private Social Security accounts. It has an admirable school choice system. And it was a good role model of spending restraint back in the 1990s.

But on the negative side, Sweden has one of the world’s biggest welfare states. Even after the spending restraint of the 1990s, the public sector consumes about 50 percent of economic output. And that necessitates a punitive tax code.

There’s also a truly perverse fixation on equality. And you won’t be surprised to learn that the government-run healthcare system produces some unpleasant outcomes.

Today, let’s build on our understanding of Sweden by looking at how the country’s welfare state interacts with the immigration system.

Writing for CapX, Nima Sanandaji discusses these issues in his adopted country of Sweden.

Sweden has had an unusually open policy towards refugee and family immigrants. The Swedish Migration Agency estimates that around 105,000 individuals will apply for asylum only this year, corresponding to over one percent of Sweden’s entire population.

This openness is admirable, but is it successful? Are immigrants assimilating and contributing to Sweden’s economy?

Unfortunately, the answer in many cases is no.

…the open attitude towards granting immigrants asylum is not matched by good opportunities on the labor market. An in-depth study by the daily paper Dagens Nyheter shows that many migrants struggle to find decent work even ten years after entering the country. …The median income for the refugees in the group was found to be as low as £880 a month. The family immigrants of refugees earned even less. Ten years after arriving in the country, their median income was merely £360 a month. These very low figures suggest that a large segment of the group is still relying on welfare payments. Dagens Nyheter can show that at least four out of ten refugees ten years after arrival are supported by welfare. The paper acknowledges that this is likely an underestimation.

So what’s the problem? Why are immigrants failing to prosper?

Nima suggests that government policies are the problem, creating perverse incentives for long-term dependency.

To be more specific, the country’s extravagant welfare state acts as flypaper, preventing people from climbing in the ladder of opportunity.

The combination of generous benefits, high taxes and rigid labour regulations reduce the incentives and possibilities to find work. Entrapment in welfare dependency is therefore extensive, in particular amongst immigrants. Studies have previously shown that even highly educated groups of foreign descent struggle to become self-dependent in countries such as Norway and Sweden. …The high-spending model is simply not fit to cope with the challenges of integration.

The part about “highly educated groups” is particularly important since it shows that the welfare trap doesn’t just affect low-skilled immigrants (particularly when high tax rates make productive activity relatively unattractive).

So what’s the moral of the story? Well, the one obvious lesson is that a welfare state is harmful to human progress. It hurts taxpayers, of course, but it also has a harmful impact on recipients.

And when the recipients are immigrants, redistribution is especially perverse since it makes it far less likely that newcomers will be net contributors to a nation.

And that then causes native populations to be less sympathetic to immigration, which in unfortunate since new blood – in the absence of bad government policy – can help boost national prosperity.

Though let’s at least give Sweden credit. I’m not aware that its welfare programs are subsidizing terrorism, which can’t be said for the United Kingdom, Australia, France, or the United States.

P.S. Here’s my favorite factoid about Sweden.

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Since part of my job is to persuade skeptics to support a free society, I’m always trying to figure out how best to convince people to favor liberty over statism.

I start with the premise that most statists are misguided rather than evil and I try to understand how they see the world. If I know what makes them tick, after all, then perhaps I can explain to them how freedom is preferable to big government.

In my efforts to win people’s hearts and minds, I run into the same obstacles over and over again.

  • Many people equate Republicans with limited government, so you have to explain that there’s a giant difference between the views of the Cato Institute and the decisions of statists like Richard Nixon or George W. Bush.
  • Some folks think capitalism and cronyism are the same thing. I try to show them that there is no role for corrupt favoritism in a genuine free market, which is why it is doubly counterproductive when Republicans support policies and programs such as TARP, the Export-Import Bank, agriculture subsidies, and Fannie Mae/Freddie Mac handouts.
  • Lots of people mistakenly believe the economy is a fixed pie, so they think if someone such as  Steve Jobs becomes wealthy, then other people necessarily have less money.

I have ways of dealing with all these myths. I don’t pretend to be successful in all or even most cases, but I think I’ve helped lead some people out of the darkness.

One of the other challenges I face is that some people believe in equality of outcomes. It’s hard to reason with these folks. I try to explain to them that this system requires massive redistribution, which cripples incentives for productive behavior by both rich and poor.

I cite the famous Churchill quote about “equal sharing of the misery.” And I ask them to show me evidence of one nation – anywhere in the world or at any point in history – that has ever succeeded with this approach.

But the folks with this ideological outlook seem impervious to logical argument or moral reasoning. Indeed, they sometimes go to absurd lengths. Here are some Orwellian details from a Swedish news service.

Annika Eriksson, a lunch lady at a school in Falun, was told that her cooking is just too good. Pupils at the school have become accustomed to feasting on newly baked bread and an assortment of 15 vegetables at lunchtime, but now the good times are over. The municipality has ordered Eriksson to bring it down a notch since other schools do not receive the same calibre of food – and that is “unfair”. …”A menu has been developed… It is about making a collective effort on quality, to improve school meals overall and to try and ensure everyone does the same,” Katarina Lindberg, head of the unit responsible for the school diet scheme, told the local Falukuriren newspaper. …From now on, the school’s vegetable buffet will be halved in size and Eriksson’s handmade loafs will be replaced with store-bought bread. Her traditional Easter and Christmas smörgåsbords may also be under threat.

I’m almost at a loss for words. What sort of sickness is required to deny something to one group of kids just because the same benefit is not universally available?

Equality of outcomes is catnip to the left, but it doesn’t apply to the ruling class

I’ve written some nice things about Sweden in recent years, noting that the government has sought to minimize the damage of the welfare state with free market reforms in other areas.

Sweden has a good school choice program, for instance, and the country has reformed its pension system so that it has personal retirement accounts and is more fiscally stable.

But this story shows that Sweden still has a long way to go.

P.S. Using Elizabeth “High Cheekbones” Warren as a philosophical punching bag, here’s another example of redistribution and equality of outcomes run amok. But at least this is satire and not reality.

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In my travels through Europe, I often wind up debating whether policy is better in the United States or Europe. I generally try to explain that this is the wrong comparison, both because Europe is not a monolithic bloc and also because most individual nations have both good policies and bad policies.

But sometimes you have to use blunt comparisons, which is why this data on living standards is powerful evidence that Europe is paying a high price for excessive government.

When I cite such data, proponents of statism often respond by arguing that I’m being unfair by lumping together more efficient welfare states in Northern Europe with poorly run welfare states in Southern Europe.

That’s a very good point, and I’ve acknowledged that nations such as Sweden and Denmark are examples of how to do the wrong thing in the best possible fashion. They have large welfare states, but they compensate with very pro-market policies in other areas.

Indeed, Sweden is a good example of a nation that has implemented some good reforms in recent years, such as school choice and partial Social Security privatization.

But I argue that these good reforms don’t fully offset the damage caused by excessive government spending. And now I have a new – and very pointy – arrow in my argumentative quiver. A study from the London-based Institute for Economic Affairs has found that Swedes in America earn significantly more money than Swedes in Sweden.

Here are a couple of excerpts from the IEA study.

The 4.4 million or so Americans with Swedish origins are considerably richer than average Americans, as are other immigrant groups from Scandinavia. If Americans with Swedish ancestry were to form their own country, their per capita GDP would be $56,900, more than $10,000 above the income of the average American. This is also far above Swedish GDP per capita, at $36,600. Swedes living in the USA are thus approximately 53 per cent more wealthy than Swedes (excluding immigrants) in their native country (OECD, 2009; US Census database). It should be noted that those Swedes who migrated to the USA, predominately in the nineteenth century, were anything but the elite. Rather, it was often those escaping poverty and famine. …A Scandinavian economist once said to Milton Friedman, ‘In Scandinavia, we have no poverty’. Milton Friedman replied, ‘That’s interesting, because in America, among Scandinavians, we have no poverty, either’. Indeed, the poverty rate for Americans with Swedish ancestry is only 6.7 per cent: half the US average (US Census).

This is remarkable information, and it reminds me that Thomas Sowell had similar stats for other groups in his great book, Ethnic America.

I’m not familiar with the methodological issues involved in this type of research, but is certainly seems like this is a good way of getting apples-to-apples comparisons of different economic systems.

Like many other people, I’ve argued that the success of the overseas Chinese community (compared to their counterparts stuck in Communist China) is a damning indictment of statism.

Now we see that Swedes do reasonably well when living in a country with a big welfare state, but they do even better when living in a nation with  a medium-sized welfare state.

So you can imagine how prosperous they would be if a bunch of them lived in places such as Hong Kong and Singapore!

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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.

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Even though Paul Krugman has told us that horror stories about government-run healthcare in Britain “are false,” we keep getting reports about substandard care and needless deaths (see here, here, here, here, here, here, here, here, and here).

Well, let’s add another chilling report to the list. Here’s some of what the UK-based Telegraph just reported.

Tens of thousands of patients with terminal illnesses are being placed on a “death pathway”, almost double the number just two years ago, a study published today shows.Health service guidance states that doctors should discuss with relations whether or not their loved one is placed on the scheme which allows medical staff to withdraw fluid and drugs in a patient’s final days. In many cases this is not happening, an audit has found. As many as 2,500 families were not told that their loved ones had been put on the so-called Liverpool Care Pathway, the study disclosed.In one hospital trust, doctors had conversations with fewer than half of families about the care of their loved one. In a quarter of hospital trusts, discussions were not held with one in three families.

Remind me not to get sick on my next trip to London.

But horror stories about government-run healthcare are not limited to the United Kingdom. Here’s part of a remarkable story from an English-language Swedish news agency.

A man from Nyköping in eastern Sweden has been denied a power wheelchair despite having had both of his legs amputated as the local health authority remained “uncertain if the impairment was permanent”. The man had his legs amputated after a long struggle with diabetes, but despite being unable get about, his application for a power wheelchair has been denied.

I realize I’m a typical guy, but the first thing that came to my mind after reading this story were a couple of funny bits from Monty Python and the Search for the Holy Grail – the “I got better” scene and the “just a flesh wound” scene.

In the real world, however, there’s nothing humorous about whether amputated legs are a “permanent” impairment.

Both of these stories show the downside of letting bureaucrats have power over health care.

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Johnny Munkhammar is a member of the Swedish Parliament and a committed supporter of economic liberalization. He has a column in the Wall Street Journal Europe that does a great job of explaining how Sweden became rich when it was a small-government, pro-market nation. He then notes that his country veered off track in the 1970s and 1980s, but is now heading back in the right direction. I’ll have more analysis below these excerpts, but it is especially impressive that Sweden is ahead of America on key reforms such as Social Security personal accounts and school choice.

Sweden is not socialist. According to the World Values Survey and other similar studies, Sweden combines one of the highest degrees of individualism in the world, solid trust in well-functioning institutions, and a high degree of social cohesion. Among the 160 countries studied in the Index of Economic Freedom, Sweden ranks 21st, and is one of the few countries that increased its economic freedoms during the financial crisis. …Sweden wasn’t always so free. But Sweden’s socialism lasted only for a couple of decades, roughly during the 1970s and 1980s. And as it happens, these decades mark the only break in the modern Swedish success story. …The Swedish tax burden was lower than the European average throughout these successful 60 years, and lower even than in the U.S. Only in 1950 did Sweden’s tax burden rise to 20% of GDP, though that remained comparatively low. …The 1970s were a decade of radical government intervention in society and in markets, during which Sweden doubled its overall tax burden, socialized a slew of industries, re-regulated its markets, expanded its public systems, and shuttered its borders. 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. …By the late 1980s, though, Sweden had started de-regulating its markets once again, decreased its marginal tax rates, and opted for a sound-money, low-inflation policy. In the early 1990s, the pace quickened, and most markets except for labor and housing were liberalized. The state sold its shares in a number of companies, granted independence to its central bank, and introduced school vouchers that improved choice and competition in education. Stockholm slashed public pensions and introduced private retirement schemes, keeping the system demographically sustainable. These decisive economic liberalizations, and not socialism, are what laid the foundations for Sweden’s success over the last 15 years. …Today, the state’s total tax take comes to 45% of GDP, from 56% ten years ago. Meanwhile, unemployment benefits, sick leave and early retirement plans have all been streamlined to encourage work. The number of people receiving such welfare—which soared during the socialist decades—has fallen by 150,000 since 2006, a main reason for Sweden’s remarkably sound public finances.

Sweden still has a public sector that is far too big, but the damage caused by bloated government is at least partially offset by very good policy in other areas. Sweden is actually slightly more free market than the United States on non-fiscal measures in the Economic Freedom of the World index. Here’s a chart comparing Sweden and the United States. But I also included a few other nations for purposes of comparison. You can see Switzerland, the U.S., Sweden, and the United Kingdom all have similar scores for economic freedom if the burden of taxation and government spending is removed from the mix. But things change dramatically when taxes and spending are added to the formula. Switzerland is ranked 4th overall because of a decent fiscal system, ahead of the United States (6th) and United Kingdom (10th). while Sweden falls all the way to 37th place.

Denmark gets very high marks for non-fiscal freedom, so it only drops to 14th in the overall rating because of its bloated welfare state. Hong Kong and Singapore, meanwhile, rank 1st and 2nd in the world because of strong ratings on non-fiscal factors and they also manage to limit the fiscal burden of government.

Last but not least, many of Johnny’s points are included in this Center for Freedom and Prosperity video.

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Courtesy of Powerline Blog, we have a story about how Sweden’s bureaucratic health system made a mistake and…well, I’m not sure how to delicately phrase this…so let’s just give you the headline of the story: “Man’s penis amputated following misdiagnosis.”

Here are some of the details from a news report about the incident.

The man, who is in his sixties, first visited a local clinic in Blekinge in southern Sweden in September 2009 for treatment of a urinary tract infection, the local Blekinge Läns Tidning (BLT) reported. When he returned in March 2010 complaining of foreskin irritation, the doctor on duty at the time diagnosed the problem as a simple case of inflammation. After three weeks passed without the prescribed treatment alleviating the man’s condition, he was instructed to seek further treatment at Blekinge Hospital. But it took five months before he was able to schedule an appointment at the hospital. When he finally met with doctors at the hospital, the man was informed he had cancer and his penis would have to be removed.

The fact that doctors amputated the man’s penis is not the point of this post. Bad things happen in any country, including medical mistakes by well-meaning people. But a five-month wait for an appointment is an indictment of Sweden’s government-run system. We don’t know if the man’s equipment could have been saved if he got a timely appointment, but a less-drastic approach surely would have been more likely.

But I doubt Sweden’s political elite are too concerned about this story, just like America’s beltway insiders probably don’t worry about the consequences of Obamacare. Waiting lines, after all, are for mere taxpayers. Folks such as Harry Reid, Joe Biden, and Nancy Pelosi will always rig things so they get to jump to the front of the line.

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I touched a raw nerve with my post about Fidel Castro admitting that the Cuban model is a failure. Matthew Yglesias and Brad DeLong both attacked me. DeLong’s post was nothing more than a link to the Yglesias post with a snarky comment about “why can’t we have better think tanks?” Yglesias, to his credit, tried to explain his objections.

This leads Daniel Mitchell to post the following chart which he deems “a good illustration of the human cost of excessive government.”…this mostly illustrates the difficulty of having a rational conversation with Cato Institute employees about economic policy in the developed world. Cuba is poor, but it’s much richer than Somalia. Is Somalia’s poor performance an illustration of the human costs of inadequate taxation? Or maybe we can act like reasonable people and note that these illustrations of the cost of Communist dictatorship and anarchy have little bearing on the optimal location on the Korea-Sweden axis of mixed economies?

I’m actually not sure what argument Yglesias is making, but I think he assumed I was focusing only on fiscal policy when I commented about Cuba’s failure being “a good illustration of the human cost of excessive government.” At least I think this is what he means, because he then tries to use Somalia as an example of limited government, solely because the government there is so dysfunctional that it is unable to maintain a working tax system.

Regardless of what he’s really trying to say, my post was about the consequences of excessive government, not just the consequences of excessive government spending. I’m not a fan of high taxes and wasteful spending, to be sure, but fiscal policy is only one of many policies that influence economic performance. Indeed, according to both Economic Freedom of the World and Index of Economic Freedom, taxes and spending are only 20 percent of a nation’s grade. So nations such as Sweden and Denmark are ranked very high because the adverse impact of their fiscal policies is more than offset by their very laissez-faire policies in just about all other areas. Likewise, many nations in the developing world have modest fiscal burdens, but their overall scores are low because they get poor grades on variables such as monetary policy, regulation, trade, rule of law, and property rights.

So, yes, Cuba is an example of “the human cost of excessive government.” And so is Somalia.

Sweden and Denmark, meanwhile, are both good and bad examples. Optimists can cite them as great examples of the benefits of laissez-faire markets. Pessimists can cite them as unfortunate examples of bloated public sectors.

P.S. Castro has since tried to recant, claiming he was misquoted. He’s finding out, though, that it’s not easy putting toothpaste back in the tube.

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After being in 1st place in 2007 and 2008, America dropped behind Switzerland in the World Economic Forum’s Global Competitiveness Report in 2009. The 2010 ranking was just released, and the United States has tumbled two more spots to 4th place, behind Switzerland, Sweden, and Singapore. I’m not a complete fan of the World Economic Forum’s methodology (the Economic Freedom of the World rankings are the best measure of sound economic policy), but it’s almost surely a bad sign when a country moves down in the rankings.  The timing of the fall will lead some to blame Barack Obama, and I certainly agree that his policies are making America less competitive, but Bush also deserves blame for increasing the burden of government and compromising America’s economic vitality. Here’s a blurb from the Associated Press.
The U.S. has slipped down the ranks of competitive economies, falling behind Sweden and Singapore due to huge deficits and pessimism about government, a global economic group said Thursday. Switzerland retained the top spot for the second year in the annual ranking by the Geneva-based World Economic Forum. It combines economic data and a survey of more than 13,500 business executives. Sweden moved up to second place while Singapore stayed at No. 3. The United States was in second place last year after falling from No. 1 in 2008.

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Somebody sent me this story from the Drudge Report and can’t resist the temptation to share. What really astounds me is not that a Swedish man sewed up his own leg after waiting for a long time in a hospital. Heck, I wouldn’t be surprised if things like that happened in all nations. The really disturbing part of the story is that the hospital then reported the man to the police. A classic case of “blaming the victim.” The bureaucrats in Sweden’s government-run healthcare system obviously were not pleased that he called attention to their failure.
A 32-year-old took the needle into his hands when he tired of the wait at Sundsvall hospital in northern Sweden and sewed up the cut in his leg himself. The man was later reported to the police for his impromptu handiwork. “It took such a long time,” the man told the local Sundsvall Tidning daily. The man incurred the deep cut when he sliced his leg on the sharp edge of a kitchen stove while he was renovating at home. “I first went to the health clinic, but it was closed. So I rang the medical help line and they told me that it shouldn’t be closed, so I went to emergency and sat there,” the man named only as Jonas told the newspaper. After an hour-long wait in a treatment room, he lost patience and proceeded to sew up his own wound. “They had set out a needle and thread and so I decided to take the matter into my hands,” he said. But hospital staff were not as impressed by his initiative and have reported the man on suspicion of arbitrary conduct for having used hospital equipment without authorization.

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Tyler Cowen’s recent New York Times column explains how nations as diverse as Ireland, Sweden, and Canada have successfully solved fiscal problems by limiting the growth of government spending:

America’s long-run fiscal outlook is bleak, mostly because of an aging population and rising health care costs. To close the gap between expenditures and revenue, …we’ll need to focus especially on reducing spending, largely because that taxes on the wealthy can be raised only so high. …Higher income tax rates would discourage hard work and encourage tax avoidance, thereby defeating the purpose of the tax increases. …Higher levels of government spending and taxation would also soak up resources that might otherwise foster innovation and new businesses. And sentiment would most likely turn ever stronger against those immigrants who consume public services and make the deficit higher in the short run. …The macroeconomic evidence also suggests the wisdom of emphasizing spending cuts. In a recent paper, Alberto Alesina and Silvia Ardagna, economics professors at Harvard, found that in developed countries, spending cuts were the key to successful fiscal adjustments — and were generally better for the economy than tax increases. …The received wisdom in the United States is that deep spending cuts are politically impossible. But a number of economically advanced countries, including Sweden, Finland, Canada and, most recently, Ireland, have cut their government budgets when needed. Most relevant, perhaps, is Canada, which cut federal government spending by about 20 percent from 1992 to 1997.

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No, not these kind. Instead, I’m in Stockholm for a meeting of the Mont Pelerin Society, and this gathering of classical liberals (i.e., the Adam Smith types that believe in freedom, not the modern liberals that favor collectivism) has featured some discussion of the Scandinavian social welfare state – often referred to as the Swedish Model.

What is particularly interesting is that Sweden is not the left-wing paradise that some imagine. Yes, government is far too big, consuming about 50 percent of economic output. But Sweden also has an extensive system of school choice. Equally remarkable, Sweden has a system of personal retirement accounts. Indeed, if one removed fiscal policy variables from the ratings, Sweden would be more free market than the United States in the Economic Freedom of the World rankings.

But even in the area of fiscal policy, Sweden is making progress. In recent years, policy makers have abolished both the death tax and the wealth tax. And the corporate tax rate has been reduced significantly below the U.S. level.

Sweden often is cited as an example of a nation that proves a big welfare state is not an obstacle to being a rich society. But as I wrote in my study comparing the United States and the Nordic nations:

Many prosperous nations in Western Europe have large welfare states. This leads unsophisticated observers to sometimes assume that high tax rates and high levels of government spending do not hinder growth. Indeed, they sometimes even conclude that bigger government somehow facilitates growth. …This analysis puts the cart before the horse. It is possible for a nation to become rich and then adopt a welfare state. …A poor nation that adopts the welfare state, however, is unlikely to ever become rich. Before the 1960s, Nordic nations had modest levels of taxation and spending. They also enjoyed—and still enjoy—laissez-faire policies and open markets in other areas. These are the policies that enabled Nordic nations to prosper for much of the 20th century. Once their countries became rich, politicians in Nordic nations focused on how to redistribute the wealth that was generated by private-sector activity. This sequence is important. Nordic nations became rich, and then government expanded. This expansion of government has slowed growth, but slow growth for a rich nation is much less of a burden than slow growth in a poor nation.

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