Booming Sweden's free-market solution

The nation now offers good safety nets through the private sector, and its model of falling taxes and public spending is proliferating quickly.

By MSNMoney partner Jun 7, 2012 3:00PM

By Anders Aslund


Not so long ago, Sweden could claim world leadership in unmitigated Keynesian economics, with a 90 percent marginal tax rate and a welfare state second to none.


Now Swedes look at the conflict between the U.S. and German examples over whether more spending or more austerity is the key to financial salvation, and for them the choice is easy: Germany was right. Northern Europe harbors no sympathy for the spendthrifts of Southern Europe.


Americans still think of Sweden as a tightly regulated social-welfare state, but in the past two decades the country has been reformed. Public spending has fallen by no less than one-fifth of gross domestic product, taxes have dropped and markets have opened up.


The situation is similar in the other Scandinavian countries, the Baltic nations and Poland. But no turnabout has been as dramatic as Sweden's.


From 1970 until 1989, taxes rose exorbitantly, killing private initiative, while entitlements became excessive. Laws were often altered and became unpredictable. As a consequence, Sweden endured two decades of low growth. In 1991-93, the country suffered a severe crash in real estate and banking that reduced GDP by 6 percent. Public spending had surged to 71.7 percent of GDP in 1993, and the budget deficit reached 11 percent of GDP.


The combination of the crisis and the non-socialist government under Carl Bildt from 1991 to 1994 broke the trend and turned the country around. In 1994, the Social Democrats returned to power and stayed until 2006. Instead of revoking the changes, they completed the fiscal tightening. In 2006, a non- socialist government returned, and Finance Minister Anders Borg, with his trademark ponytail and earring, has led further reforms. Sweden successfully weathered the global financial crisis that started in 2008, and the Financial Times named Borg Europe's best finance minister last year.


Before 2009, Sweden had a budget surplus, and it has one again. For the past two years, economic growth has been 4 percent on average, and the current-account surplus was 6.7 percent in 2011. The only concerns are the depressed demand for exports caused by the current euro crisis and an unemployment rate that is about 7.5 percent.


Sweden's traditional scourge is taxes, which used to be the highest in the world. The current government has cut them every year and abolished wealth taxes. Inheritance and gift taxes are also gone. Until 1990, the maximum marginal income tax rate was 90 percent. Today, it is 56.5 percent. That is still one of the world's highest, after Belgium's 59.4 and there is strong public support for a cut to 50 percent.


The 26 percent tax on corporate profits may seem reasonable from an American perspective, but Swedish business leaders want to reduce it to 20 percent. Tax competition is fierce in some parts of Europe. Most East European countries, for example, have slashed corporate taxes to 15-19 percent.


In the bad old days, the annual centralized-wage bargaining between the Trade Union Confederation and the Swedish Employers' Confederation was a prized custom. But in the 1970s, this system led to both inflation and strikes. Today, it is long gone. Wage bargaining is still collective, but it is decentralized. Wage inflation is no longer a concern and strikes are extremely rare. The employers have won, but real wages are rising with productivity, so the workers are benefiting, as well. As everywhere, trade unions are losing members, money and power.


Sweden has belonged to the European Union since 1995, but it isn't a member of the euro area, and the exchange rate of its krona floats freely. Finance Minister Borg argues against a more expansionary policy in Sweden in case Europe faces a real meltdown. After the Keynesian financial and monetary stimulus in the 1970s and '80s, which led to inflation, repeated devaluations and low growth, Swedes believe in fiscal discipline. They are scared of huge national debt and budget deficits -- especially at the levels they are in the U.S.


Where are the left-wing intellectuals to challenge this new order? They have disappeared. The old socialist research organizations have closed down. The Center for Labor Market Studies was a state institution that generated propaganda, not research, and the government closed it. The Trade Union Confederation had a sophisticated research institute, which it eliminated for not being sufficiently political.


The union economists, who dominated Swedish economic debate in the 1970s and '80s, have been replaced by bank economists. The free-market right has influential research centers in Stockholm.


After many years of absence from the debate, I attended a conference on the Swedish economy in the southern city of Malmo last month. Swedbank, a large bank, was the organizer, and the 180 speakers represented the full range of Swedish views. I was amazed to hear how far the consensus had moved to the free- market right, even among Social Democrats and trade-union leaders. The values are competition, openness and efficiency, while social and environmental values remain -- a social-welfare society without the social-welfare state. The idea is to make it more efficient through competition among private providers.


The name of the conference said it all: "Growth Days." Wanja Lundby-Wedin, the president of the Trade Union Confederation, declared without hesitation: "We want flexibility in the labor market." She complained that the media no longer pay attention to the labor market. The reason is that it functions so well.


During the global financial crisis, the metalworkers' union quietly agreed to major wage cuts to safeguard their real incomes in the long run. The leader of that union, Stefan Lofven, has just been elected chairman of the Social Democratic Workers' Party.


The Social Democrats haven't only joined the free-market consensus, but seem to attack the current government from the right, pushing for a better business environment. Gone are demands for the restoration of social benefits. Opinion polls have rewarded the Social Democrats for their right turn with sharply improved ratings.


Sweden is still offering good social welfare, but more efficiently and sensibly and increasingly through the private sector. This model of falling taxes and public spending is rapidly proliferating from the north of Europe toward the south, and the northern Europeans have little tolerance for the statist conservatism and fiscal negligence of Southern Europe. Nor do the Swedes understand the fiscal irresponsibility of the U.S., while they still admire American research and innovation.

More from Bloomberg

Jun 9, 2012 11:50AM
Sweden has just over 9 million people. It should have better control than most countries. You can't compare it to China, that's for sure.
Jun 7, 2012 7:20PM

My, my - let's move to Sweden!  Or, maybe not...


I wonder why nothing was said about the impact of these 'wonderful' reforms upon Swedish society, or the 40% increase in popularity the far-right had in polls last month.  Needless to say, I also am curious that -- with the great, private social 'safety nets' -- Eurostat says Sweden now has more people at risk of poverty than any nation but Bulgaria ( Reuters: Swedish equality fades away as rich get richer ).


On the brighter side, if the author was of foreign origins and living in Sweden, he might be having an 'exciting time' due to the reported explosion in anti-foreigner sentiment, xenophobia.  Unfortunately, this kind of 'excitement' does have implications for those considering business in Sweden, particularly as it seems discrimination against foreigners has even been documented by Sweden's government as extending to the nation's authorities and courts ( CounterPunch: Living in Sweden, Thinking of the Holocaust ). 

It does seem a bit has been omitted from this article.  There is a difference between an icon and an illusion. 

Jun 16, 2012 11:42AM
"Sweden is still offering good social welfare, but more efficiently and sensibly and increasingly through the private sector."  But it requires private insurers to spend 94% of premiums on healthcare instead of the 67-71% private insurers got away with in the USA before Obama's reforms and the 80-85% in those reforms.
When Electrolux closed a plant in Greenville, Michigan, people lost their homes, their health insurance, hospital emergencies tripled, etc.  When Electrolux closed a plant in Sweden, there was hardly a ripple.  People got health insurance, they got unemployment at 80% their old salary, and they got retrained by the government for new jobs.  Electrolux had to create a fund to help former employees start new businesses.
So Sweden is still a PRO STIMULUS nation compared to the USA.
Jun 9, 2012 9:14AM
So cutting taxes isn't stimulus, it's austerity?
"Sweden is still offering good social welfare, but more efficiently and sensibly and increasingly through the private sector...nor do the Swedes understand the fiscal irresponsibility of the U.S."

Please note that health insurance in the USA is MORE costly through the private sector: private insurers complained to Congress they couldn't compete with government run Medicare B and so their puppets awarded them 14% more per person to offer the alternative Medicare Advantage.

EVERY other story I've read about Sweden trumpets how their stimulus attitude has made their economy strong.  They also went to stimulus when their banks were failing in the 1990s and didn't see that again in 2008 because, like Canada, they REGULATE their banks.

Jun 15, 2012 8:11AM

Until 1990, the maximum marginal income tax rate was 90 percent. Today, it is 56.5 percent.


56.5%? he calls that falling taxes and less public spending? they have free healthcare, education, earlychildhood education, longer vacations, shorter hours, longer maternity leave etc....and he is making the case that this is austerity? This makes the case for higher taxes, universal healthcare and better education. Shows where would be if we had not cut taxes so low under bush when we too had a surplus. Tighten up your society first, take away worries about healthcare, childcare, safety and provide a quality education and then minds can flourish in free society.

Jun 20, 2012 11:57AM
I think one of the points here is balance.  Sweden has come back to a more balanced approach and it is working.  We need to be more balanced but have gotten very far to the extreme capitalist side of governing, to the point that we appear to be a democracy in name only.  The extreme polarity of the political situation is no help to the matter.  We need to become more open to ideas and work toward reasonable concensus.
Jun 13, 2012 8:53AM
Difficult to compare Sweden to bigger countries.  Also, most large organizations will have some blend of socialist and capitalist aspects, whether you call it by those names or not... the key is balance and to not get too far extended in either direction.  We have gone too far to the capitalist side and it has hurt our economy, particularly the middle class, whose spending is the key to growth and vibrancy of the economy.  Read Reich.  France, Sweden and others have gone too far to the socialist side and are moving back toward the center out of necessity.  We have far more socialist enterprises than most people realize, not just SS, welfare, etc... it is also the military-capitalist structure which in effect is socialist... just hidden and not called that, also some aspects of tax system and many others.
Jun 12, 2012 8:49PM
Thank you Eugene Bersing.  The way out of our current mess is not to give the billionaires even more than they already have.  The middle class here, educated or not, has taken a royal screwing at the hands of these scum and crooks.  The Republicants are their hunchbacked cronies, wanting to ride the coattails of the Scrooge McDucks of America (except the few enlightened ones who know where this is all headed).
Jun 14, 2012 2:08PM

Terrible comparison.


It's easy to go from 90% tax rates and huge amounts of welfare and cut them down and get good results. The US is already at low tax rates and social safety has been cut for 4 decades from the state thru the federal level. Plus small countries are easier to manage these kinds of results in, extrapolating it to big countries is not very accurate.


This isn't the 70s. The US was in a similar position to Sweden then.


What should be obvious is the US went down the wrong path *too far* - countries like Sweden are just really starting to go down it. 90% tax rate until 1990. So, effectively, 30 years behind the US. And what do we have for low tax rates and cutting social benefits? Ah yes, growth that doesn't include about 99% of people. But growth non the less, so sure, embrace it. Come back in 20 years.


Especially with Swedens population problem. They have reached a population decline point. Let me know how they are managing it 20 years from now when they don't have any tax rates to cut anymore to stimulate anything.



Jun 7, 2012 9:25PM
how does big money do do they convince people that that sell their labor that its a good idea for them to make less and the money bags make more.are we becoming universally dumber.i keep thinking even the biggist idiot is going to eventually realize hes being screwed
Jun 9, 2012 10:24AM

What is worth noting here is that just this week, the Sweden Democrats (a far-right party with neo-Nazi roots) became Sweden's third largest - 'Sweden Democrats third largest party' in The Local.  I'll add that perhaps the reasons for this are not only the exploding xenophobia (which includes discrimination by Sweden's authorities and courts), but poverty and the shambles Sweden's formerly great social service network is in - 'Living in Sweden, thinking of the Holocaust', CounterPunch. 


If one wants the far-right to rise in America, then copying Sweden is indeed a great idea.


Jun 11, 2012 6:02PM
 This is perhaps the most imbecilic article I have ever read. In the booming 1920's, in uber- Capitalist America, there was also a lot of psycho- babble about "welfare capitalism". However, after the Crash, le grande bourgeoisie rapidly changed their tune, whereupon the utter intellectual and moral bankruptcy of the system became manifest. Keynes proved to be far more intelligent than the system's leading apologists. Morons like the author of this purportedly pro- capitalist screed seem to not understand that sometimes, due to sheer serendipity, everything (or nearly everything, judging by his allusion to Sweden's current 7.5% unemployment rate) works, until the moment that it doesn't. So, I ask you: what do you suppose these neo- free- market Swedes going to do in the next great Crash? We may soon find out, but one thing is absolutely certain: Keynes, Minsky, Kalecki, et, al., will be vindicated once again.
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