A Lesson for Ed Balls (And Noah Smith)

David Levey sent me a fascinating essay by Anders Aslund:

To Brits, Sweden with its tightly regulated social welfare state is often a byword for socialism. But in the last two decades the country has been transformed. today it offers a flexible and dynamic European model with ever falling public expenditure, lower taxes, economic growth and budget surpluses.

After many years of absence from the Swedish debate, I attended a conference on the Swedish economy in the southern city of Malmö in May, organized by Swedbank. The 180 speakers represented the full range of Swedish views, which have moved amazingly far to the free-market right, not least social democrats and trade union leaders. Key values are competition, openness and efficiency, while social and environmental values remain. The idea is not to abolish social welfare but to make it more efficient through competition among private providers. A new consensus has emerged on having a social welfare society rather than a social welfare state.

The changes have been dramatic. While Sweden’s public expenditure has fallen by one-fifth of gross domestic product since 1993, between 2000 and 2009 Britain’s public expenditure skyrocketed by 15 per cent. This has brought Swedish and British public spending to a similar level, but Sweden’s is still steadily falling. Swedish taxes have been cut and her markets have opened up. The Social Democratic Party was in power from 1932 until 1976, and again from 1994 until 2006, but Sweden was actually quite a liberal market economy until 1968. After a century of superior growth, its GDP per capita was the third highest in the world.

But in 1968 left-wing madness took over. Our economic success had been too great, making the government take high economic growth as a given, and the left-wing wind that blew through the world in the late 1960s was particularly strong in Sweden. But the decisive reason was the election of the extreme socialist Olof Palme as prime minister in 1969. He dominated Swedish politics until he was murdered on the street in Stockholm in 1986. His murder remains unsolved, but it became a turning point for Swedish politics. Palme ruled with great force. From 1970 until 1989, he raised taxes, including wealth tax, to more than 100 per cent of income for the wealthy, while social security exploded. Palme undermined the rule of law through retroactive legislation and arbitrary state intervention. A major scheme for gradual nationalisation of Swedish corporations through a punitive tax on their profits, using the money to buy their shares, was adopted.

Arguably, Sweden is the only old nation that has never gone through a revolution, and the people stayed obedient and peaceful in the face of this onslaught. Private initiative was the victim. Since everybody was paid full wages when taking sick leave, Swedes recorded more sick days than any other nation. The truly wealthy emigrated en masse whereas others worked less. Two decades of low growth ensued, and by 1990 GDP per capita had fallen to 18th in the world.  . . .  In 1992, like Britain, Sweden was forced into an uncontrolled devaluation of its currency. Unemployment surged and so did public expenditure that peaked at 71 per cent of GDP in 1993, when the budget deficit reached 11 per cent of GDP.

Finally, in September 1991, the social democrats lost an election and a real non-socialist government under Carl Bildt came into office from 1991 to 1994. Although it was a four-party minority government, it took many radical decisions and broke the trend. It turned the country around. Sweden had been influenced by the free market ideology of Ronald Reagan and Margaret Thatcher in the 1980s.  . . .

The government trimmed all kinds of social security payments to reasonable levels. Sickness leave has fallen by half since employees are no longer paid from the first day or in full. Today, Sweden has regular budget surpluses, although tax revenues have been reduced by 9 per cent of GDP from 1994 until 2011. Sweden’s main scourge was tax. In 1990, the social democratic government actually cut sky-high marginal income tax from 90 per cent to 50 per cent. The current government has decreased taxes every year and abolished the wealth tax. Inheritance tax and gift tax are also gone. A corporate profit tax of 26 per cent may seem reasonable, but tax competition is fierce in this part of Europe, as most East European countries have slashed corporate taxes to 15-19 per cent. Business wants to reduce the corporate profit tax to 20 per cent.

One of the greatest reliefs is the simplification of tax administration. Since the tax reforms of 1990 abolished almost all deductions, while cutting rates, tax declarations have become extremely simple. Ninety per cent of taxpayers simply confirm with a phone message that the declaration automatically prepared by the tax authorities for them is correct. Pensions have been subject to a major reform, giving everybody a pension in accordance with their contributions plus a minimum pension for all. As a consequence, the Swedish pension system is actuarially correct without any pay-as-you-go system or implicit pension debt. It is also transparent so that all can see how large a retirement capital they have saved, and to a considerable extent they can choose when and how to invest it and access it.

The Swedish school system, Palme’s original bailiwick, was badly ravaged by left-wing reforms of the 1960s and 1970s. Today, all pupils are entitled to school vouchers of equal value for each child of a certain age. Their parents can allocate this school voucher to any school the child is qualified to enter. As a result, while in the 1970s Sweden had only four private schools, one-fifth of Swedish secondary schools are now private, some for profit, others cooperatives or non-profit foundations. Yet, in international school comparisons, Sweden lags behind Finland that never carried out any foolish left-wing reforms.

. . .  The Riksbank used to be little more than a subdepartment of the ministry of finance, but now it is independent. Today Sweden has persistently one of the lowest inflation rates in Europe. In 2003, a referendum dismissed euro adoption.

One of the first decisions of the Bildt government was to abolish the wage-earners’ funds (sharing company profits with employees) and stop all nationalisation.  . . .  Swedish governments have quietly deregulated one market after another, contributing to greater economic dynamism.The annual centralised wage bargaining between the Trade Union Confederation (LO) and SAF was the pride of the old Swedish model. But in the 1970s it led to inflation and strikes, and today this system is long gone. Wage bargaining is still collective, but it is becoming increasingly decentralised. Wage inflation is no longer a concern and strikes are extremely rare. The employers have won, but real wages are rising with productivity. As everywhere, trade unions are losing members, money, and power. The Trade Union Confederation has adjusted, its chair declaring recently: ‘We want flexibility on the labour market.’

As the Thatcher revolution exemplified, real ideological victory is when your opponents steal your clothes. In 1994, the social democrats under Göran Persson returned to power and stayed until 2006. Although they complained about all the cuts the non-socialist government had undertaken and carried out few reforms, they did not revoke the reforms but completed fiscal tightening. It was actually Persson who abolished the inheritance and gift taxes.

.  .  .

Keynesianism remains disliked in Sweden. Before the global financial crisis Sweden had a budget surplus on average of 2.5 per cent of GDP in the years 2004‑7. After a minimal budget deficit in 2009, it has once again a budget surplus. .  .  .

Swedes shake their heads when they see the economic policy in euro crisis countries. They take their cue from their own crisis in the early 1990s and call for far more expenditure cuts and structural reforms. Finance Minister Borg argues against more expansionary policy in Sweden in case the euro crisis should lead to a real meltdown. The right-wing drift of the much reduced Social Democratic Party continues, making it reminiscent of New Labour. Its brand-new leader, Stefan Löfven, came to prominence during the global financial crisis, when he and the metalworkers’ union agreed to major wage cuts to safeguard their real incomes in the long run. The social democrats have not only joined the free market consensus, but seem to attack the current government from the right, demanding 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. The left-wing intellectuals are also gone. The old socialist think tanks have closed down. The Centre for Labour Market Studies was a state institution, and the non-socialist government closed it, since it did not generate research but left-wing propaganda. The Trade Union Organisation had a sophisticated research institute, which it eliminated for not being sufficiently political. The trade union economists, who dominated the Swedish economic debate in the 1970s and 1980s, have been replaced by bank economists. The free-market right has won the debate and maintains substantial think tanks in Stockholm. Their main problem is a lack of resistance.

Sweden is not alone. Developments are similar in the other Scandinavian countries, the Baltic countries, and Poland. The Swedish about turn is the most dramatic. While its direction is clear, much remains to be done. The Baltic states look very attractive with public expenditures around 35 per cent of GDP and low, flat income taxes. They are a source of inspiration for their Scandinavian neighbours. In the last two years, five incumbent EU governments have been re-elected, namely centre-right governments in Sweden, Finland, Estonia, Latvia and Poland, showing that the new North European conservatism enjoys popular support.

Aslund neglects to mention things like Stockholm’s congestion pricing scheme.  Sweden might as well change its name to “Neoliberalia,” or perhaps “Mattyglesiasland.”


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30 Responses to “A Lesson for Ed Balls (And Noah Smith)”

  1. Gravatar of Morgan Warstler Morgan Warstler
    7. October 2012 at 18:42

    Its actually very simple.

    Sweden decided to admit that the highest social / economic status had to flow to the private sector winners over all else. The best and brightest do not become econ bloggers.

    Matty hasn’t come to terms with that, but he IS on that path. Noah, I’m not sure can be saved.

    Last qualifier: US Swedes vs. Swedes = Me vs. Noah = Higher vs. Lesser

    Willingness to work and trade with those not like you defines free market, defines likelihood of success.

  2. Gravatar of ChargerCarl ChargerCarl
    7. October 2012 at 20:14

    “Swedes shake their heads when they see the economic policy in euro crisis countries. They take their cue from their own crisis in the early 1990s and call for far more expenditure cuts and structural reforms.”

    So they think the euro crisis is primarily a structural problem and not a monetary policy problem?

    No ones perfect I suppose…

  3. Gravatar of Jim Crow Jim Crow
    7. October 2012 at 20:23

    Yeah, I think it’s safe to say that Sweeden’s opinions on the EU don’t necessarily reflect Optimum Currency Area theory. This essay reads like a center-right Economist’s fantasy. Without the pony. So, naturally, I love it. Although since it was written by a monkey brain for other monkey brains, it really cries out for fact checking. I’m especially curious about the quote, “The employers have won, but real wages are rising with productivity.” Does anyone anywhere have any idea how true this is? I’d been assuming for years that capital holders (the finance industry in particular) had been sucking up most of the gains from productivity in the western world for the last few decades.

  4. Gravatar of economist1 economist1
    7. October 2012 at 20:51

    “The best and brightest do not become econ bloggers.” They definitely don’t become internet trolls either though.

  5. Gravatar of Greg Ransom Greg Ransom
    7. October 2012 at 20:51

    Hayek always aimed at achieving a fundamental paradigm shift in outlook among the Social Democrats in Europe — target hit, transformation achieved — a few more states to go. Then on to America.

  6. Gravatar of Saturos Saturos
    7. October 2012 at 21:57

    Krugman once said that his ideal society was early 80′s Sweden. I guess for you it’s Sweden today?

    Too bad the rest of the world will never have that, unless we can absorb Scandinavian culture

  7. Gravatar of Saturos Saturos
    7. October 2012 at 22:19

    Glenn Stevens doesn’t seem to believe in the Sumner Critique: http://www.dailytelegraph.com.au/news/is-he-australias-most-useless/story-e6frezt9-1111115977362

  8. Gravatar of Felipe Felipe
    8. October 2012 at 06:36

    A cursory look at historic Gini index for Sweden implies that a big reduction in inequality happened around the sixties and seventies (when “left-wing madness” took over), and then basically oscillated in the 20-30 range. It will be interesting to see if inequality and growth rise as the effects of liberalization start to kick in. Currently neither Gini nor gdp per capita seem to have responded much to the reforms (GINI from WIID, gdp from FRED http://research.stlouisfed.org/fred2/graph/?g=bzX)

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    8. October 2012 at 07:40

    Is Barack Obama the Olaf Palme of the USA? And, does Romney know about this;

    ‘One of the greatest reliefs is the simplification of tax administration. Since the tax reforms of 1990 abolished almost all deductions, while cutting rates, tax declarations have become extremely simple. Ninety per cent of taxpayers simply confirm with a phone message that the declaration automatically prepared by the tax authorities for them is correct. Pensions have been subject to a major reform, giving everybody a pension in accordance with their contributions plus a minimum pension for all. As a consequence, the Swedish pension system is actuarially correct without any pay-as-you-go system or implicit pension debt. It is also transparent so that all can see how large a retirement capital they have saved, and to a considerable extent they can choose when and how to invest it and access it.’

    Based on his performance on ABC’s This Week, Krugman doesn’t.

  10. Gravatar of sherparick sherparick
    8. October 2012 at 07:53

    I also note the pseudo-Keynesian strawman about deficits. Keynesian economics states that you devalue your currency and runs deficits in a slump, and then run surpluses when at full employment. It says nothing about the size of government.

    Sweden survived the crisis in 2008-2009 in comparatively good shape because it could let the Krona fall against the Euro, and, unlike Greece, Ireland, Spain, Italy, and Portugal, find itself on a De Facto Gold standard.

    “The exchange rate of the Swedish krona against other currencies has historically been dependent on the monetary policy pursued by Sweden at the time. Since November 1992, a managed float regimen has been upheld.[21] The exchange rate has been relatively stable against the euro since its introduction 2002 (about 9–9.5 SEK per EUR), but from the second half 2008, the value of the krona has declined by around 20%, and had been oscillating between 10.4–11 SEK per EUR into the first half of 2009….” http://en.wikipedia.org/wiki/Swedish_krona

    The jab at the imaginiary Krugman (who is free market advocate, just not a fan of American Crony Capitialism) is another right wing meme selling strawman. Sweden, as its export markets shrink, is finding it is having to practice some Keynesian deficit spending as the storm hits it.

    http://www.swedishwire.com/economy/11303-sweden-announces-2012-crisis-budget

    The fact is, facing an n

  11. Gravatar of ssumner ssumner
    8. October 2012 at 08:13

    Everyone, I am more sympathetic to his microeconomic arguments, but I left it all in so Greg wouldn’t accuse me of cherry picking.

  12. Gravatar of Doug M Doug M
    8. October 2012 at 08:40

    When I was a student in the ’80s we used to wonder how the Swedes seem to have the only successful socialist economy in the world.

    Were the Swedes in a unique economic position because of their system or is it because they are Swedes?

    Touching on some of the other recent blog posts, there does seem to be something in the Scandinavian mindset. It is both industrious and egalitarian.

  13. Gravatar of mpowell mpowell
    8. October 2012 at 09:00

    Like Sherparick, I noticed the howler about Keynesianism. Keynes has no problem with budget surpluses while the economy is growing. But they ran a deficit in 2009 and the relevant figure is that they reduced their surplus by over 2.5%. That’s a pretty strong fiscal stimulus program during an economic contraction.

    Another highly questionable point is the one regarding the pension program. It’s still a defined-benefits program with a social minimum. Allegedly it’s actuarially correct, though I don’t see how this is really any different than the US program prior to 2008 (and will require catch up contributions at some time in the future now).

    Finally, he claims that the unions have been neutered but simultaneously lauds the growth in real incomes. If we could get real income growth matching GDP/capita growth in the US without unions, a lot of liberals would have a lot less to complain about! The right wing economic program does nothing to insure that economic growth will actually be shared and there is plenty of evidence to believe that it hasn’t been recently.

  14. Gravatar of ssumner ssumner
    8. October 2012 at 12:19

    mpowell, I wondered about the pension comment as well. Is there a well defined fund that people can point to and say “that’s mine” and the government can’t touch it? Obviously we don’t have that here, do the Swedes?

    And I seem to recall their national debt is pretty low, does that include or exclude government debt that is held by the state as a pension obligation?

  15. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. October 2012 at 12:56

    Aslund wrote a book called “How Latvia Came Through the Financial Crisis.”

    http://www.amazon.com/Financial-Peterson-Institute-International-Economics/dp/088132602X/ref=la_B001H9R650_1_4?ie=UTF8&qid=1348881964&sr=1-4

    Aslund is a banking industry-funded travelling economic policy consultant. The Global Great Recession hit the Baltic States particularly hard and Latvia provided Aslund the opportunity to find “doctors,” such Central Bank Governor Ilmars Rimsevics and Prime Minister Valdis Dombrovskis, to administer his antidevaluation austerity medicine to address the economic crisis.

    Consequently Latvians are paying their private debts (largely to the Swedes, Aslund’s home country, helping to ensure that Sweden has faced no economic crisis). The cost of course came at a 25% GDP contraction and a 30% reduction in public-sector salaries, with unemployment from public spending cutbacks driving down private sector salaries.

    Meanwhile, the Latvian public will have to bear the cost of this program through the future debt payments required on the more than 4.4 billion euro borrowed from the EU and IMF for its implementation.

    Aslund’s book serves as a manual of style of sorts, on how to successfully implement a program of antidevaluation and austerity through a combined one-two punch fear campaign of central bank economic talking points and government fueled ethnic hatred.

    Needless to say the book is extremely popular with internet Austrians. So, this ranks as one of least favorite Scott Sumner posts ever.

  16. Gravatar of RebelEconomist RebelEconomist
    8. October 2012 at 14:55

    I think a problem with such comparisons is that they are not dynamic. I suspect that one reason for the convergence between public spending in the UK and Sweden is that we in the UK have failed to spend enough to stop the sinking of an underclass. For example, it is estimated that 12,000 “problem” families cost £9bn in public expenditure of various kinds, ranging from social services to medical care to ultimately prison. The return on extra spending on that group must be huge – you could send all of their kids to Eton for that kind of money. Unfortunately, UK politics seems to be too polarised to tackle the problem efficiently – the conservatives want to cut welfare spending while socialists reject the kind of restrictions on such people that might stop them wasting the help they are given, like giving benefits in kind instead of money.

  17. Gravatar of Britmouse Britmouse
    9. October 2012 at 02:17

    The “problem families costing £9bn” figure is so implausible it can only come from a politician pulling numbers out of his rear end, RebelEcon.

    That many transfers in the UK welfare system are in cash not in kind is surely a feature, not a bug. That wise politicians can improve the welfare of poor people by preventing them from “wasting” their transfer payments on stuff they “don’t really need” is an idea I find rather abhorrent.

  18. Gravatar of Mattias Mattias
    9. October 2012 at 03:08

    Scott,

    Of the 18,5% fee/tax on wages that employers pay, 2,5% is put into an account that every tax payer can control himself, choosing among a collection of funds.

    See http://pensionsmyndigheten.se/Welcome_en.html

  19. Gravatar of ssumner ssumner
    9. October 2012 at 07:36

    Mattias, That’s pretty small, so I presume most pensions are paid out of general funds. Then the question is whether the government has saved the money, or whether it’s pay as you go.

  20. Gravatar of Mattias Mattias
    9. October 2012 at 10:35

    Scott,

    It’s not funded (invested) except a small part that is used as a buffer for bad times. That “small” part is invested in stocks, bonds and real estate (including the biggest real estate company in Sweden).

    But there’s also a “brake” in the system which was used in the Great Recession. It means pensions are automatically cut when the (N)GDP grows slower than expected. So it’s solvent from a Government perspective, but there’s no axact level guaranteed to the individual. Not everyone likes it.

  21. Gravatar of Major_Freedom Major_Freedom
    9. October 2012 at 10:50

    Mattias, That’s pretty small, so I presume most pensions are paid out of general funds. Then the question is whether the government has saved the money, or whether it’s pay as you go.

    Everyone knows the market is too risky to keep people’s savings for retirement. Depending on people’s voluntary valuations is not as safe as depending on the state’s guns.

    It’s better for the state to collect pension contributions, and spend the money in the present, so that no money has to be exposed to any risk. Then, when money is needed for paying out benefits, we can use guns, so as to avoid depending on voluntary valuations of investments.

    This is a costless action. Nobody’s livelihoods are reduced. Everyone gets the pieces of paper they are owed.

    Don’t anyone dare use the word Ponzi. Social Security is far more respectable and classy. It has the words “social” and “security” in it. Who else is offering those words to people? Nobody!

  22. Gravatar of To To
    9. October 2012 at 11:48

    Well, I don’t know the details of the economic history of Sweden, but the first thing I check when hearing about marvellous and wonderfully successful free-market reforms is the poverty rate. And yup, it’s been creeping up (pdf) since the 90′s. I wonder about the long-term trend.

  23. Gravatar of RebelEconomist RebelEconomist
    9. October 2012 at 12:25

    Sorry, I got my comma in the wrong place. The claim – made by the minister for local government on the BBC radio Today programme – was that 120,000 (not 12,000) problem families cost £9bn per year, although it was the correct cost of £75,000 per family that I had in mind when I made my comment about Eton (fees about £30,000 per year). The validity of the claim is assessed here: http://fullfact.org/factchecks/problem_families_costs_eric_pickles-27396 and while it may be exaggerated, it seems that the number is nevertheless quite spectacular.

    I would be fascinated to know what readers from outside the UK think of Britmouse’s view that it would be “abhorrent” to pay welfare in benefits in kind rather than cash.

  24. Gravatar of ssumner ssumner
    9. October 2012 at 12:52

    Mattias, So his essay is inaccurate?

  25. Gravatar of Mattias Mattias
    9. October 2012 at 22:09

    Scott

    I found a summary by Edward Palmer on OECD:shttp://www.oecd.org/finance/financialmarkets/2638200.pdf) which describes the Swedish pensions system well:

    “June, 1994, Sweden replaced its pay-as-you-go,defined benefit system with a pay-as-you-go (PAYG) notional defined contribution (NDC) system and
    an advance funded second pillar with privately managed individual accounts, supplemented with a guarantee at age 65 for persons with low lifetime earnings. The earnings-related NDC PAYG commitment emulates the principles of a market-based defined-contribution insurance scheme, although without advance funding – other than that which follows with changes in cohort size – and with a rate of return based on the performance of the economy rather than the financial market.”

  26. Gravatar of ssumner ssumner
    10. October 2012 at 11:27

    Thanks Mattias.

  27. Gravatar of Vince Vince
    10. October 2012 at 13:28

    Interesting that the essay mentions the Swedish housing bubble of the late 80′s early 90′s not at all. One would wonder why the Riksbank ended up inventing the ‘Swedish Solution’.

    Looking at FRED http://research.stlouisfed.org/fred2/series/SWERGDPR?cid=32278

    It’s hard to see the two decades of low growth starting in 1968 and ending in 1990 that the writer claims. You do see the effect of something about 1990, however.

  28. Gravatar of Mike Steinberg Mike Steinberg
    11. October 2012 at 18:07

    Swedish economist/blogger Tino Sanandaji has a number of posts on the subject and also links below his brother’s report to the British think-tank Institute of Economic Affairs: “The surprising ingredients of Swedish success – free markets and social cohesion”

    http://super-economy.blogspot.co.nz/2012/09/secret-sauce-of-scandinavian-sucess.html

  29. Gravatar of Lorenzo from Oz Lorenzo from Oz
    11. October 2012 at 18:52

    Vince: I believe it is relative growth that is being discussed.

  30. Gravatar of A lesson from Sweden | Porter Capital Management A lesson from Sweden | Porter Capital Management
    9. October 2013 at 19:58

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