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Should America be more like Sweden or should Sweden be more like America?

Ruminations April 6, 2014

The Swedish Model
*** For many years now, leftists have been touting the economic and social benefits of the welfare state as exemplified by Sweden. Is Sweden really paradise on earth? Is Sweden really socially superior to the United States? Well, maybe they are and maybe they aren’t. Let’s examine the picture.

Who are the Swedes? As all peoples of any nation, the Swedes are “compounds of ethnic loyalties, cultural traditions, social hopes, envies and fears” (Reinhold Niebuhr, see below). It is this compound that is largely responsible for high employment and low poverty, shaped to some degree by the Lutheran church (which played a considerable role in forming the ethos of Sweden) and a high standard of living.

When we consider that the Swedes have been living under a Social Democratic state for almost 80 years, we may attribute that character of the Swedes to the state although it was the state that was formed by the character.

In the late 19th and early 20th century, over one million Swedes migrated to the United States – much to the concern of Sweden. To stem the population loss, Sweden launched a commission to borrow social patterns that evolved in the United States and to bring them to Sweden.

The descendants of those Swedes who migrated to the United States are characterized by communities with low poverty, high employment rates and a high standard of living in spite of the fact that they are not members of a welfare state. (Reportedly, a Scandinavian economist once said to Milton Friedman: “In Scandinavia, we have no poverty.” Friedman replied: “That’s interesting, because in America, among Scandinavians, we have no poverty, either.”)

The Swedish tax program. Taxes in Sweden are high. According to Nima Sanandaji, writing in the Finnish Libera, “The Swedish economist Magnus Henrekson has shown that the effective marginal tax rate (marginal tax plus the effect of inflation) levied on Swedish businesses could be more than 100 percent of the profits. For example, in 1980 a private person who owned a business could pay an effective marginal tax of 137 percent.

“However, if the business was financed by debt, the tax rate dropped to 58 percent, since the effect of inflation was reversed, and the business could make deductions from the high taxes. The situation was very much different for government owners such as public pension funds, which did not pay taxes, but could make deductions. A public pension fund that invested borrowed money faced an effective marginal tax rate that was minus 83 percent.”

Wow. No wonder that from 1970 to 2004, only 2 new entrepreneurial firms were founded. When Reagan tax cuts in the United Sates began to show results (a growing economy, higher employment and shrinking inflation), Sweden cut its top rate, too – from 83 percent to 75 percent.

One of the reasons that Swedes pay such a high tax is that they don’t actually realize how much they pay. In a 2003 survey, Swedes estimated that they spent 30 to 35 percent of their income on taxes when the actual rate – including hidden taxes (the value added tax, or VAT) – was 63 percent.

Jobs. But is the creation of new entrepreneurial firms really a problem? Granted, new firms create jobs, but how many new jobs does a country need? Plenty. While many people associate high employment with Sweden that is actually not the case. Between 1950 and 2005, Sweden’s population grew almost 30 percent and the number of new jobs in the private sector grew zero. On the other hand, public sector jobs grew rapidly until 1970 and then stopped. (This brings to mind Margaret Thatcher’s old admonition, “'The trouble with socialism is that eventually you run out of other people's money.”)

The UN tells us that over 24 percent of Sweden’s youth are unemployed (as compared with 16 percent in the U.S. and 23 percent across Europe). How should Sweden fix this problem? “The Employer’s Union [an employer’s union?] demand more flexibility and lower mininum wages. The trade unions, on the other hand, want more subsidies to create jobs for the young and long time unemployed.” This sounds familiar.

Swedes change. In keeping with the old axiom that as one becomes more dependent on the welfare state, one becomes more addicted, a survey was taken among Swedes asking them if one is ever justified in claiming more government benefits than justified. In 1981, 81 percent said no – never. By 2008, that figure has moved to 61 percent.

But the deterioration of the economy has also led to changes in economics.

New economics. While the Swedish left still pushed Keynesian economics, the European Central Bank reported that Sweden was on the tip of the Laffer curve vis-à-vis taxes and income. This means that an increase in taxes will reduce tax revenue.

Seeing the slowdown in economic progress, the looming deficit in the economy and high unemployment, Sweden elected a center-right government in 2006 to replace the Social Democrats. In 2010, this government was re-elected.

Prime Minister Fredrik Reinfeldt began a program of cutting welfare spending, cutting taxes and deregulating the economy. The result? Sweden’s GDP has gown an average of 5 percent per year for the last three years. Unemployment still remains stubbornly high at 8 percent – but that is better than the euro zone average of 12 percent.

Ironically, although it is American Democrats who often speak glowingly of Sweden, the Swedes seem to be taking pages from the Republican playbook. They have successfully introduced school vouchers and have partially privatized pensions, healthcare and elder care.

Conclusion. Sweden will never abandon its welfare state entirely. It has too much invested both physically and psychologically. Sweden is different from the United States but they are not so different that they refuse to learn from the United States. And, just maybe, we can learn from what they learn.

Quote without comment
Theologian Reinhold Niebuhr (1892-1971) writing in his 1952 book, The Irony of American History: “It is therefore a weakness of our foreign policy … that [the United States moves] inconsistently from policies which would overcome animosities toward us by the offer of economic assistance to policies which would destroy resistance by the use of pure military might. We can understand the neat logic of either economic reciprocity or the show of pure power. But we are mystified by the endless complexities of human motives and the varied compounds of ethnic loyalties, cultural traditions, social hopes, envies and fears which enter into the policies of nations, and which lie at the foundation of their political cohesion.”

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