You have probably heard the tale of
the Nordic paradise where benevolent government makes everyone happy, healthy,
prosperous, and wise. The worry-free wonderland that defies economic theory and
refutes any objections to big government policies — where healthcare and college
are “free,” everyone pays their “fair share,” and there is a government program
to meet your every need.
The tale of Sweden has become the
liberal panacea for all challenges to socialistic, big government policies.
If you call out the failures of socialistic policies in Venezuela,
Greece, or essentially anywhere that they have been tried, the inevitable
response is that we don’t mean bad “socialism” like Venezuela, we mean good
“socialism” like Sweden. If you question the practicality or economic impact of
single-payer healthcare, “free” college tuition, high taxes, an expansive
welfare state, government regulation, or a year of paid family leave, you hear
that it works in Sweden so why not here. Even our recent article in
opposition to the $15 minimum wage was met with a repetition of Facebook
comments saying how Sweden’s even higher minimum wage has not caused any of the
harms that we assert will arise here. Given that Sweden has no minimum wage
(much less a minimum wage higher than $15 per hour) we can only conclude that
these numerous commenters simply assumed that Sweden must prove their point —
because Sweden is the answer to all challenges to big government.
Yet, when Bernie Sanders says that
we should look to Sweden to see the results of “democratic socialist” policies,
he will not like what he finds — the liberal fairy tale version is Sweden is
far from the reality of a country made rich by free markets, stymied by
“socialism,” and then revived again by free market reforms. Sanders’ policies
were tried in Sweden — and they failed. The era of Swedish “socialism” was
marked by economic stagnation, zero job growth, falling wages, growing debt,
and ultimately an economic depression. Basically, just what you would expect.
It was only after a drastic cutback in government spending, free market
reforms, and government divestiture of assets that Sweden finally return to
economic growth. Again, just as you would expect.
Sweden is not the remarkable tale of
how one country made “socialism” work. It is just another example of the
failure of socialistic policies and the power of economic liberty.
How
Liberty and Free Markets Made Sweden Wealthy
In the mid-1800s Sweden was one of
the poorest
countries in Europe. While many of its European neighbors were experiencing the
economic benefits of the Industrial Revolution, the Swedish economy was stifled by
a corrupt aristocratic government, high taxes, restrictive guild systems,
occupational licensing, and harsh trade restrictions. The resulting economic
conditions were so bad that over 1.3 million of Sweden’s 3.5 million population immigrated to the United States in the
mid-to-late 1800s, mostly for the promise of low-cost farmland in the Upper
Midwest (hardly a life of riches and leisure).
Then, between 1840 and 1865, there
was a libertarian (then called liberal) revolution: taxes were cut; the guild systems were abolished; economic
regulations were lifted; banks and interest rates were deregulated; freedom of
the press and religion were expanded; trade prohibitions were abolished; and
import tariffs were largely eliminated. Sweden became one of the freest
countries in the world. And, this made it one of the most prosperous.
Free markets unleashed the work
ethic and ingenuity of the Swedish people. From the 1890s through the 1950s,
Sweden’s economic growth was the fastest in
the world. Iconic companies like Ericsson, Volvo, IKEA, SKF, Tetra Pak, H&M,
and Electrolux were formed by Swedish inventors and entrepreneurs. Between
1850 and 1950, Swedish real per capita income increase
eight-fold, even as its population doubled. Infant mortality fell from
15 percent to 2 percent, and life expectancy rose by
28 years. By 1950, Sweden had transformed from one of the poorest countries in
the world to the 7th richest.
And by 1960, the average life expectancy in Sweden was 73.1 years, 2.2 years longer than in the United States.
This period of exceptional growth
was also a time of limited government. At the height of its growth, around
1900, government spending accounted for just 6% of GDP. And, as shown in the
chart below, government expenditures remained below most other developed
nations, including the United States, until they began to rise in the late
1950s and 1960s.
Sweden’s wealth, in other words, was
not created by government. It was not the “third way” socialistic policies of
the 1970s and 1980s that made Swedes healthy and prosperous. Sweden owes
its success to over 100 years of free markets and economic liberty.
The
Failure of Sweden’s Socialistic Experiment
Beginning in the 1950s, Sweden’s
government policies began shifting to the left, eventually moving sharply
to the left in the late 1960s and early 1970s. As seen on the chart below,
Sweden’s tax burden, which was still under 30% of GDP in 1960, grew to well
over 50% of GDP from the mid-1970s to early 1990s.
At the same time, in just 20 years
between 1960 and 1980, public spending almost doubled from
31% of GDP to 60% of GDP, peaking at over 65% of GDP in the early 1990s.
Welfare benefits were expanded, labor markets were harshly regulated, and in
some instances
marginal tax rates exceeded 100%.
The results were predictable.
Government spending and burdensome taxes crowded out private industry and
stifled innovation. Sweden’s most wealthy and successful entrepreneurs — including the
founders of IKEA, Tetra Pak, and H&M — were driven from the country.
Business formation essentially came to a halt. By the year 2004, just two of
Sweden’s 100 largest companies had been founded after 1970. Sweden fell
from the world’s 4th wealthiest country in 1975 to the 14th in 1993. And, as
shown on the chart below, it went from being 20% richer than the average OECD
country to being 10% poorer.
The lack of new business formation
also meant fewer jobs. While Sweden’s population grew by nearly 2 million
between 1950 and 1993, it lost nearly 500,000 private sector jobs.
And, real wages were stagnant
throughout the height of the “socialist” era.
Not surprisingly, until the free
market reforms in the early 1990s, it was the low wage earners who suffered the
most. Even on basic health measures,
Sweden fell behind. The 2.2 year advantage in life expectancy that Sweden had
over the United States in 1960 narrowed to
just 1.6 years in 2005. Plainly, it was not “socialism” or universal healthcare
that made Swedes healthy — if anything it made them less healthy relative to
the rest of the world.
By the early 1990s, two decades of
“socialism” had turned Sweden from one of the strongest economies in the world
to a country in decline and heading into a depression. While free market reforms brought Sweden back from the
brink (i.e. the Swedes recognized that “socialism” was failing and
reformed before the situation became as bad as it has in Greece and
Venezuela), the Swedish experiment with “socialism” will have lasting effects.
If Sweden, whose economic growth outpaced every other OECD nation in the 100
years before 1970, had grown at merely the OECD average from 1970 to 2002, the
economy would have been so much bigger that it would be the equivalent of $32,400 per household per year. Sweden is still a
relatively wealthy nation — but it would have been far wealthier without its
foray into “socialism.”
Sweden’s
Free Market Reforms
An economic depression in the early
1990s brought a wave of free market economic reforms. Taxation and government
spending were cut dramatically. Welfare programs were rolled back. The pension
system was partially privatized and changed from a defined benefits program
(like we have in the United States) to a defined contribution program. A system
of universal school vouchers was implemented to provide students and parents
the option to spend their education dollars at any public or private school of
their choice. Businesses were re-privatized. Burdensome regulations were streamlined.
And a financial transaction tax — the same tax that Bernie wants to impose on
“Wall Street” — was eliminated after having driven down trading volumes so much that the
reduction in capital gains tax revenue more than offset the revenue from the
transaction tax.
Again, the results were striking,
but not surprising. As shown on the charts below, as government spending fell,
economic growth returned.
And, as shown in the charts in the
prior section above, private sector employment and real wages — which had been
flat for the 20 years of “socialism” — increased significantly. With a revived
economy and reduced government spending, Sweden’s government debt began to
retreat.
In many ways, Sweden’s economy today
is freer than the United States. According to the Heritage Foundation, Sweden bests
the United States in almost all measures of economic freedom other than
government spending and fiscal policy. Sweden is ranked as one of the easiest countries in the
world to do business. And Sweden has some of the most pro-free trade policies
in the world. Sweden has come a long way from the “socialist” era that Bernie
and his kind seem to imagine still endures.
Problems
Remain Due to High Taxes and Government Spending. Sweden’s potential is still held back by relatively high
taxes and government spending, along with burdensome labor market and housing
regulations. While Sweden is an easy place to start and grow a business (with a
corporate tax rate of just 22% compared to 35% in the United States),
successful companies like Spotify have
threatened to leave Sweden because high personal taxes and high costs in the
tightly regulated housing markets make it difficult to attract talent.
High taxes also make it difficult to
accumulate personal wealth. While Bernie and other liberals claim that they
will pay for their social programs by taxing the “rich” — the math just does
not add up. In countries like Sweden that provide extensive government
benefits, these benefits are paid for by taxes on the middle class (i.e. there
is no “free” college or “free” healthcare, these services are simply paid for
indirectly through taxes instead of directly by the users). When accounting for
a 25% value-added tax, the average Swedish worker making about $45,000 per year
will pay about 70% of
their income in taxes. With average housing costs ranging between
20-30% of income and a generally high cost of living in Sweden, an average
worker has little left for discretionary spending or savings.
The result is that while Sweden has
more income equality than the United States, Sweden’s wealth inequality is one
of the highest
in the world. The top 1% in Sweden are estimated to own as much as 40% of
the wealth, compared to about 35% in the United States. The top 10% owns 69% of
the wealth. And, due to the difficulty of wealth accumulation, an estimated 2/3
of wealth is inherited in
Sweden, compared to just 1/3 in the United States. This low intergenerational
mobility means that much of Swedish wealth is controlled by multi-generational
aristocratic families and Sweden’s former nobility. It has been estimated that just
one family — the Wallenberg family — may own as much as 40% of
Sweden’s stock market. Sweden is hardly the exemplar for equality — Sweden’s
confiscatory taxes mean that birth matters more than merit, and it is very
difficult for middle or even upper income Swedes to accumulate wealth and move
beyond government dependency. High taxes and an expansive welfare state have
not made Sweden more equal, it has merely made the vast majority of the
population dependent on government.
Sweden’s extensive labor regulations
(intended to “protect” workers) also make it difficult for young and low skill
workers to find the employment necessary to develop skills and gain experience.
For example, Sweden’s youth unemployment rate is 19.3%
(compared to 10.8%
in the United States). Yet, this problem is most evident among Sweden’s
immigrant population. Almost 22% of
foreign born Swedish citizens are unemployed (compared to just 4.9% in
the United States), and Sweden has one of the largest gaps
between foreign born and native unemployment in the world. The situation is
even worse for refugees, who tend to be less skilled and educated than the
overall immigrant population: after 15 years in the country, just 34% of
refugees have full time employment. The result is
large, poor immigrant communities dependent on (and heavily burdening)
government welfare programs. Moreover, Sweden’s great difficulty assimilating
immigrants into its system lends support to the argument that its welfare model
works best within a small, homogeneous country, but would pose problems in a
country like the United States with more diversity.
Sweden’s much vaunted government
benefits also leave much to be desired. While Bernie Sanders extols how Sweden
provides “free” college, the average Swedish student still leaves college
with $19,000
in student loan debt, compared to a modestly higher $24,000 in the United
States. Yet, because Swedish incomes are lower, the average Swedish graduate
has a debt-to-income ratio of about 80% —
the highest in the world — compared to about 60% in the Unites States. The
likely reason is that students in Sweden can take out government loans to pay
for living expenses, while students in the U.S. are more likely to work their
way through college. The end result in that Swedish students leave their “free”
college in even worse debt then their U.S. counterparts, and then pay a
lifetime of high taxes for everyone else’s “free” college.
Problems are also evident in
Sweden’s government managed (or shall we say “rationed”) healthcare system. As
one would expect from a system that provides virtually “free” care while trying
to contain costs, supply is insufficient to meet demand, resulting in Sweden
having some of the worst
wait times in Europe. Patients often wait months for
specialist appointments or needed surgeries. For example, the median wait time
for coronary artery surgery was 55 days,
while a patient in the U.S. would likely receive surgery immediately. And, the
wait time to see a child psychiatrist is 18 months.
Most Americans would not accept this type of rationing for life saving heart
surgery or if their child needed psychiatric care. Neither do the Swedes who
can afford a better option — over 10% of
Swedes now buy private insurance to avoid the government “lines” for care.
Sweden is a wealthy nation with a
high standard of living — but the evidence shows that this is despite
government, not because of it. And, to the extent that we should look to
Sweden, it is to see the benefits achieved by free market reforms — including
pension/social security reform, school vouchers, free trade, and regulatory
reform — that liberals now reject. Sweden is not a “socialist” paradise that
defies economics — it is a country that has discarded many of the same failed
socialistic policies that Bernie and his followers want to impose on the U.S.
that has embraced economic freedom in most non-fiscal realms, and yet continues
to be burdened by high taxes and government spending. Let us not repeat the
same mistakes that Sweden made. Let’s embrace the economic liberty that made
Sweden rich, and reject the “socialism” that made it poorer.
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