We all know about dates that historians consider turning points in history; 1914, 1789, etc.  I’d like to add 1978 to the list.  Maybe it’s just because I was a young adult in 1978.  Things seem very important when we are young.  (Do NOT ever talk to a baby-boomer about 60s pop music.)

It seems like almost everything that crosses my desk reminds me of 1978.  Three items in just the last week.  I’ll discuss those three, and a fourth from a bit further back.

Part 1.  This quotation from Joan Robinson did not seem insane in 1977

From the Economist:

Before the last Korean war in 1950, the North was home to most of the country’s heavy industry. As late as 1975, its income per head still exceeded the South’s, according to Eui-Gak Hwang of Korea University in Seoul. “Obviously, sooner or later the country must be reunited,” wrote Joan Robinson, a Cambridge economist, in 1977, “by absorbing the South into socialism.”

Within about 5 years a comment like that would have seemed far-fetched, and today it would seem completely loony.  I’m not saying I necessarily would have agreed with her in 1977, but North and South Korea were about equally developed at that time.  North Vietnam had just taking over the South.  No communist country had ever gone non-communist.  And even non-communist countries seemed to be getting more statist every day.

Part 2:  How’s this for an event study:

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That’s what happened after they deregulated America’s railroads.  (Transport deregulation began with the airlines—in 1978.)

I think the best way to approach this issue is to use Rorty’s maxim “truth is what your colleagues let you get away with.”  Truth is socially constructed.  So imagine a timeline with a bell-shaped distribution above it.  The distribution shows the point in time when each economist thinks China has surpassed the US.  At the left end in 2010 is me, a China booster who (shamelessly) wants to get credit for being first to notice that America’s more than 100 year reign as number one is over.  The mode occurs when the World Bank says that China has achieved what Italians call “Il Sorpasso.”  And at the far right of the distribution, well into the 22nd century is Lester Thurow.  The mode occurs around 2016.  Mark your calendars.

I should have stayed with that prediction, but forecasters always like to push the date forward if their predictions don’t seem to be coming true.

Arpit Gupta sent me an article by Arvind Subramanian that suggests China did pass the US at some point in 2010.  I find his argument quite plausible, although I certainly wouldn’t claim it is “True,” as there is no fact of the matter.  The US and China produce a vastly different set of goods.  China produces much more “stuff” and we produce much better “stuff” (on average.)  Who produces more RGDP?  That depends on how one defines RGDP, and I’ve never seen an even half-way plausible definition.  Have you?

What does this have to do with 1978?  A little village in Anhui province started the most momentous economic reforms in world history in December 1978, without official permission and at great personal risk.  That’s why the US is about to be overtaken for the first time in more than 100 years.

Part 4:  Let’s make a deal.

Jeremy Horpedahl sent me this Heritage Economic Freedom data, which shows that Denmark has finally surpassed the US in the race to be the most capitalistic economy on Earth.  If you look at the table, you will see just how impressive Denmark’s achievement really is.  They did this despite scoring relatively “low” on the fiscal freedom and size of government components of the survey.  Because the Heritage Foundation is a right wing think tank, they believe big government implies a lack of economic freedom, and thus is “bad.”  Think of the US as the Usain Bolt of capitalist nations.  The archetype, the quintessential free market economy.  Little Denmark approaches the starting line and is suddenly asked to strap a 5 pound weight onto each leg.  And they still beat Bolt in the 100 meter dash!  (Time for a drug test.)

OK, we know life is never like a fairy tale.  It’s boring, there’s always some “reasonable” explanation.  Denmark is more neoliberal than the US in most of the other dimensions of economic freedom; and as Statsguy pointed out a few months back, some of those seem suspiciously more like “good governance” than freedom.

Still it’s the Heritage Foundation’s survey, so I’d like to treat it as if it’s true; or more precisely as if the people at Heritage think it’s true.  Here’s one possible implication; why not have the US adopt Denmark’s economic model?  After all, Heritage says it would be an improvement, and I don’t think the Paul Krugman’s of the world would object.

Now progressives would argue that conservatives merely pretend to care about all sorts of issues, whereas in reality they only care about tax cuts for the rich.  The conservatives would never agree to the deal.  So here’s a compromise.  Have the US adopt Canada’s tax and government spending model (which Heritage says is much better than the US model), and in all other respects adopt Danish policies.  I still say the progressives would do that deal in a heartbeat.  I did some calculations and the US score would soar to 85.5, putting us into 3rd place, far ahead of Australia.  Since many people argue Hong Kong and Singapore are just “city-states” and hence not real countries, you could even argue that the US would become the most capitalist country on Earth.  I’d think the people at Heritage would be thrilled, after all this is their survey, their method.

Obama and Boehner; there’s a deal that will put you both in the history books.  A win-win.  Git er done!

Back on planet Earth, there are a few problems with my pleasant dream:

1.  Conservatives would never agree to Canadian-level defense spending.  Ditto for prisons.  But even allowing for an extra 3% on GDP on the military and 1% on prisons, we could probably move up quite sharply in the rankings.  (BTW, I favor much lower defense spending.)

2.  Denmark is much more decentralized.  The same sort of policies adopted in Denmark would work less well in the US, because we are much more centralized, and hence far less democratic (if you define democracy properly, where people can affect their government.)  Denmark has nothing like the LA school system or the McAllen, Texas, Medicare system.

3.  Denmark is much more civic-minded that the US.  That’s not to say we aren’t civic-minded, we are near the top.  But Denmark is simply off the charts.  Yet even they recently found it necessary to cut unemployment benefits from 4 years to 2, because too many Danes were taking advantage of the system.  (Something rotten . . . )  With our somewhat less honest culture, the Danish/Canadian economic model would work less well.

I don’t see any of these problems as deal-breakers, it’s just that things would be more messy that what I have sketched out.  Obviously what I propose won’t happen.  But it’s an interesting way of thinking about the problem, and illustrates how politics can be a positive sum game.

What does this have to do with 1978?  In 1978 a large black slab was placed on the moon.  It began emitting signals than made earthlings more favorably inclined toward free market reforms.  Those countries that were most under-performing (like China and Britain) and most idealistic (like Denmark) reformed the most.  Denmark went from being far more socialistic than the US in 1978, to slightly more capitalistic in 2011.  Indeed a study showed that the speed at which the 32 developed countries adopted market reforms is highly correlated with how civic-minded they are.  Only New Zealand reformed faster than Denmark among the developed economies.  Which developed country is least civic-minded?  Greece.  And which developed country is least capitalistic?  Greece.

1978:  Disco, big hair, and a mysterious transformation of the zeitgeist that will shape the 21st century.

PS.  Why December?  That’s when it started in China, and it’s roughly midway between the US airline deregulation and Thatcher’s election in Britain.  And of course it was the month chosen by Virginia Woolf.

Be careful what you wish for.  Tim Worstall sent me this interesting post about the Nordic countries:

The UK’s centre left just doesn’t seem capable of understanding what it is that makes what they claim to want work: imagine the horror there would be if I suggested that Group 4S took over the majority of fire and ambulance services in the UK? Yet that is what Denmark does (really: it’s actually Group 4S that runs them). We can hear the screams already as Gove tries to bring the Swedish school system with its funding following the pupil, essentially a market, to the UK. Can you imagine the piteous wails if someone suggested importing the Finnish schools system (often ranked as the world number 1)? With its division at 15 into academic sheep and vocational goats?

Compare and contrast the the Swedish health care system with the NHS: taxes are raised in county and spent in county (on average, 400,000 people, it’s as if a PCT raised and spent its own money), there are copayments to see the doctor…no, we couldn’t imagine the British centre left allowing such a system to exist, could we? Nor the localism of Denmark: the national income tax rate is 3.76%: the top national one 15%. The vast bulk of the money is raised by the communes which can be as small as 10,000 people. You and I would think that money so raised will be better spent when any and every taxpayer knows exactly who is spending it and where they have a snifter on a Friday night.

This reminded me of a post I did a while back, which discussed an interesting article in the New Yorker on health care in McAllen, Texas:

In 2006, Medicare spent fifteen thousand dollars per enrollee here, almost twice the national average. The income per capita is twelve thousand dollars. In other words, Medicare spends three thousand dollars more per person here than the average person earns.

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I was impressed. The place had virtually all the technology that you’d find at Harvard and Stanford and the Mayo Clinic, and, as I walked through that hospital on a dusty road in South Texas, this struck me as a remarkable thing. Rich towns get the new school buildings, fire trucks, and roads, not to mention the better teachers and police officers and civil engineers. Poor towns don’t. But that rule doesn’t hold for health care.

I had this to say about the New Yorker quotation:

Suppose McAllen was an independent country with universal health care.  How much would it cost the government to insure the entire population?  If independent, McAllen would be poor relative to the US, but it certainly wouldn’t be poor in any absolute sense.  My guess is that it would come in somewhere around Portugal or Slovenia.  And I would also guess that it would spend less insuring the entire population than we now spend insuring the relatively small share of the population covered by Medicare.

Many on the left say we should adopt the European health care system.  A good place to start would be federalism.  The EU is roughly the size of the US, but has 27 members, each with their own health care system.  If we are to copy Europe, the first thing to do is to delegate health care to the 50 states.  No more Medicare and Medicaid.  Any public health care should be fully funded at the state level, just as in Europe.  My guess is that the good citizens of Houston and Dallas are not going to be enthusiastic about spending $15,000 per enrollee in McAllen, when the prestigious Mayo Clinic spends $6688 per enrollee.  If those on the left aren’t enthused about this idea, then let’s not hear any more talk about copying Europe’s health care system.  (After completing this post I noticed that Robin Hanson had an even better idea.)

Liberals often tell me that Swedish vouchers wouldn’t work here, our population isn’t as homogeneous and civic-minded.  I’d think that’s a much better argument against the more socialist aspects of the Nordic system, like generous unemployment benefits.  Reading this stuff I can’t help but think back to posts by people like Paul Krugman, praising our Medicare system for its low administrative costs.  He’s right; they spend very little preventing the health care industry in places like Texas and Florida from systematically looting the taxpayers.  By all means, let’s let each county run and pay for its own health care system.  If not, then stop talking about how the Swedes are superior to us.

A few weeks back I complained that Obama was trying to force me to divorce my wife.  According to The Economist, the Swedish government doesn’t do that:

In Sweden 88% of women aged between 25 and 54 take part in the labour market. It helps that the country’s extensive day-care facilities for children are largely reserved for workers, and that couples file their tax returns separately so that households do not get hit by higher marginal tax rates on their second incomes.

A larger share of Sweden’s older people, too, remain in the labour force than anywhere else on the continent, not least because they accrue higher retirement benefits for each year they work after the age of 61. If other Europeans aged between 55 and 64 were as industrious as older Swedes, the continent could reduce the gap in hours with America by almost a quarter, according to the MGI.

The rest of Europe could also learn from Denmark’s efforts to beat unemployment and from the Netherlands’ success in getting youngsters into work. To echo an old joke, heaven is where women and older people work like the Swedes, the young work like the Dutch and the unemployed find jobs like the Danes. Hell is where workers get into unemployment like the Americans and out of it like the Italians.

And we are falling behind them in neoliberal reforms.  Again, from The Economist:

Sweden offers a more encouraging lesson. In the aftermath of its banking bust in the early 1990s it not only cleaned up its banks quickly but also embarked on a radical programme of microeconomic deregulation. The government reformed its tax and pension systems and freed up whole swaths of the economy, from aviation, telecommunications and electricity to banking and retailing. Thanks to these reforms, Swedish productivity growth, which had averaged 1.2% a year from 1980 to 1990, accelerated to a remarkable 2.2% a year from 1991 to 1998 and 2.5% from 1999 to 2005, according to the McKinsey Global Institute.

Sweden’s retailers put in a particularly impressive performance. In 1990, McKinsey found, they were 5% less productive than America’s, mainly because a thicket of regulations ensured that stores were much smaller and competition less intense. Local laws restricted access to land for large stores, existing retailers colluded on prices and incumbent chains pressed suppliers to boycott cheaper competitors. But in 1992 the laws were changed to weaken municipal land-use restrictions, and Swedish entry into the EU and the creation of a new competition authority raised competitive pressures. Large stores and vertically integrated chains rapidly gained market share. By 2005 Sweden’s retail productivity was 14% higher than America’s.

The restructuring of retail banking services was another success story. Consolidation driven by the financial crisis and by EU entry increased competition. New niche players introduced innovative products like telephone services like https://www.circles.life/au/plans and internet banking that later spread to larger banks. Many branches were closed, and by 2006 Sweden had one of the lowest branch densities in Europe. Between 1995 and 2002 banking productivity grew by 4.6% a year, much faster than in other European countries. Swedish banks’ productivity went from slightly behind to slightly ahead of American levels.

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Even in America there would be benefits. But, alas, the regulatory pendulum is moving in the opposite direction as the Obama administration pushes through new rules on industries from health care to finance. So far the damage may be limited. Many of Mr Obama’s regulatory changes, from tougher fuel-efficiency requirements to curbs on deep-water drilling, were meant to benefit consumers and the environment, not to curb competition and protect incumbents. Some of the White House’s ideas, such as the overhaul of broadband internet access, would in fact increase competition. The biggest risk lies in finance, where America’s new rules could easily hold back innovation.

I didn’t always agree with President Clinton, but at least he did deregulation, welfare reform, NAFTA and cut the capital gains tax.  I can’t recall a single thing that Obama has done that a classical liberal would approve of.  Even where his private views may be libertarian (free trade with Cuba, gays in the military, ending the abuses of the national security state, medical marijuana, a smaller military, etc) he seems to lack the courage of his convictions.  No wonder he generates so little enthusiasm.

Tea Partiers complain that Obama wants to make us like Sweden.  If only that were true.  I fear we are headed toward Brazilian-style “big government.”  Lots of spending and lots of poverty.

My favorite piece of furniture is an elegant rosewood desk that was custom made in Denmark.  Like most of my possessions, I bought it out of someone’s house.  This was back before Craigslist (I basically stopped buying stuff at age 45; thank God they don’t depend on me for sales tax revenue.)  Of course Scandinavian furniture is known for its “less is more” aesthetic, although I’d say Ikea overdoes the “less” part.  There’s a difference between timeless elegance and dorm room utilitarian.

I believe that there are some artistic theories that mix ethics and aesthetics.  I suppose simplicity is seen as being more honest.  Keat’s truth is beauty.  The Bauhaus aesthetic was linked to socialist ideals, whereas the Italian Baroque was associated with the Counter-Reformation.

I’m not a big fan of attempts to mix ethics and aesthetics, but when it comes to politics and economics, I definitely think less is more.  I was reminded of this when frequent commenter Malavel sent me a new Swedish regulation requiring at least 15% down-payments on all mortgages.  That’s it, no bells and whistles, just 15%.  Check out the simplicity of this press release.

Sweden also has an income tax that is much simpler than ours (yes, I know that’s faint praise), where many (most?) taxpayers simply receive a bill in the mail.  Their vouchers for education don’t require you to live in Milwaukee, or enter a lottery.  Everyone in the country is eligible, and their kids are free to go to any approved school; public, not-for-profit, or for-profit.

In America, the left told us that the banking fiasco was caused by “de-regulation,” which allowed banks to run amok making sub-prime loans.  The right insisted it was the government’s fault; Fannie Mae and Freddie Mac and FDIC creating moral hazard.  Both are partly right.  In response our legislators produced a 1000 page bill that failed to address any of the alleged causes of the crisis.  Not only are sub-prime loans not banned, but FHA is actually encouraging more sub-prime lending.  The GSEs got off scot-free, and FDIC has not been reformed at all.  It’s still insuring wildcat banks in the South, who take taxpayer-insured deposits and lend the money out to highly risky construction projects.

If only we could have an economic policy regime that reflected the simplicity and elegance of Scandinavian furniture.  When I saw the Fed’s alphabet soup of special vehicles created to address the financial crisis, I pretty much knew we were in trouble.  The Fed forgot that its duty was very simple—just provide enough money to keep the price level rising at 2%.

The left was ecstatic about the appointment of Elizabeth Warren.  I have nothing against her, although I was a bit puzzled to learn that the main lesson of this crisis was that we needed to do a better job of protecting the financial industry’s consumers.  (Scratches head.)  But let’s say I’m wrong, and she’s the superwoman her supporters believe her to be.  How does that really help us?  Before too long the Republicans will be back in power, and she’ll be out of a job.

If you are visiting a dysfunctional tropical country, it’s common to have people talk wistfully of the need for a “strong man” to be put in charge.  But with the possible exception of Singapore, that almost never works.  Unless you put into place a democratic, transparent and non-corrupt system of governance, there is a real danger of back-sliding as the strong man becomes corrupted by power, or is replaced by someone less honest.

It’s sad that we’ve reached the point where Congress writes a 1000 page bill that completely fails to address the problems that caused the worst economic disaster since the 1930s, and then we instead pin all our hopes on Elizabeth Warren.  The elation that greeted her appointment was the sort of thing you’d expect from a mob of supporters when a Putin or Chavez announces he’ll run again, as there is “no one else capable of doing the job.”

In art and architecture it is not always true that simplicity is best.  I’ll take Borromini’s Quattro Fontane over Le Corbusier’s Radiant City.  But in politics and economics the simplest and most transparent regulatory regime is generally best.  K.I.S.S.

PS.  Of course the Swedish program has problems just like any other system. But progressive skeptics might be surprised by the nature of those problems:

One of the first independent schools, Botkyrka Friskola, was started by an ex-communist in a low-income, immigrant suburb of Stockholm. With an emphasis on individual student responsibility, familial involvement, and efficient use of technology, it now has over 2000 students waiting for one of its 240 places and a continuous stream of educators interested in imitating its success (Svangren 1998).

Public Vouchers and Public Controls

Though public vouchers are invigorating the Swedish education system and broadening the educational choices available to families, they have come with some strings attached. The first of these is the government’s demand that independent schools select their pupils on a first-come, first-served basis. Special exceptions are granted only for siblings of current students, students with special needs, and those who live in the immediate vicinity of the school (Gustafsson 1998). Most independent schools are happy to accept students on this basis and would have done so even without this regulation.

The condition makes it difficult, however, for a school to establish a particular learning environment and does nothing to guarantee the equal access it was set up to ensure. Per Svangren, the principal of Botkyrka Friskola, hoped his school would become a challenging, multicultural environment for immigrant families poorly served by the local municipal school but, as its reputation grew, Swedish families in neighbourhoods with better schools began applying early. The school had to take the students who applied first, so it was forced to reject those whom its leaders believed would not only benefit most but also contribute most to the school’s unique environment. As a result, a fundamental aspect of the school’s mandate was compromised (Svangren 1998). Though they would be rare exceptions, (as experience in Denmark demonstrates) schools established for the academically gifted or those for a particular learning disability are impossible in this environment. It is a loss to Sweden that its politicians prohibit families from choosing a specialized education for their children and prohibit schools from making such educational alternatives available for them.

I have a friend who teaches development.  He tells me that he would often run into the following problem.  He’d carefully work through the logic of some argument, explaining how A implies B, and B implies C. The student would nod his head in agreement.  At the end he’d say; “So here’s the policy implication, right?”  And the student would shake his head and say; “No, you don’t understand, China is different.”  (BTW, it could have been any country.)

Both Paul Krugman and I have felt this frustration when looking at the actions of the Fed, ECB, and Bank of Japan.  It goes sort of like this:

You say inflation is currently below target.  “Yes”

You say inflation is expected to remain below target for years to come.  “Yes.”

You say output is below the natural rate.  “Yes”

You say output is expected to remain below the natural rate for years to come.  “Yes.”

Ergo monetary policy should be made more expansionary.  “No.  You don’t understand, this cycle is different.”

I’ve racked my brains for an answer.  So has Krugman.  Once I even delved into pop psychology, arguing that monetary policymakers needed to have a relentlessly logical attitude in applying theory to policy.  No common sense judgments about whether interest rates “seemed to low.”  I argued this was similar to the autistic cognitive profile–blocking out any extraneous factors.

Stefan Elfwing just sent me a Google translation of an article on Lars Svensson, which led me to recall all this frustration:

Lars EO Svensson wants the federal funds rate is 1.75 percent in three years, not 3.8 percent as the Riksbank’s majority wants.

He was also against the latest interest rate rise from 0.50 to 0.75 percent.

His colleague on the Executive Board, Karolina Ekholm, voted for the increase but also want a lower interest rate over the next few years because of the doubts that exist about the global economy.

For Lars EO Svensson is the “obvious” to select a rate and interest rate forecasts that are considerably lower than the Executive Board a majority of four members chosen because it gives better effectiveness.

Our forecasts for CPIF inflation below the target most of the period and resource utilization is low.  If the interest rate path is lower we get a better effectiveness.

That sounds very logical.  So why don’t his colleagues agree?

Lars EO Svensson has repeatedly asked his colleagues on the Executive to explain why they disagree with, he has asked them to point out errors in their reasoning.  The answers are lacking.

Unfortunately I don’t speak Swedish, and I think something got lost in translation.  But I gather the other members of the board have not been able to point out errors in Svensson’s logic.

He points out that although the Finance Committee stated that it would be desirable that the Riksbank is very clear about why various policy decisions taken or not taken.

I am surprised by the disagreement about some things that should be obvious, for example, that one should not raise rates when the forecast for inflation and resource utilization is too low.

That’s why transparency is so important.  It isn’t because a central bank doesn’t know what it should be doing; it’s needed to make sure the central bank in fact does do what it knows it should be doing.

Lars EO Svensson has been accused of being an academic theorist who hide behind their models and research reports. Especially when he, in the midst of financial crisis, would have zero interest, and led a discussion about having a negative interest rate.

I see no contradiction between theory and practice.  Monetary policy should not be controlled by the brain without the ghosts of the facts and analysis.

I guess Svensson’s fellow board members did not benefit from being educated by John Stuart Mills’ father:

I recollect also his indignation at my using the common expression that something was true in theory but required correction in practice; and how, after making me vainly strive to define the word theory, he explained its meaning, and shewed the fallacy of the vulgar form of speech which I had used; leaving me fully persuaded that in being unable to give a correct definition of Theory, and in speaking of it as something which might be at variance with practice, I had shewn unparalleled ignorance. In this he seems, and perhaps was, very unreasonable; but I think, only in being angry in my failure.

Svensson continues:

The last interest rate path should not uncritically be taken as a starting point.  Any interest rate decision should stand on its own and not lean on the previous.

In a post entitled “Losing Face” I showed that central bankers don’t like to admit that their previous policy decision was wrong.

Svensson continues:

Although my colleagues do not seem to want to listen to his argument, he has not tired of sitting on the Executive Board.

Not a minute have I regretted that I took the job.  It was a challenge I could not say no to.  I got the chance to turn 15 years of research in practice.

All six members have an individual responsibility to make independent decisions and justify them.

My job is to do what I do and continue to do so.

Lars Svensson is one of the few policymakers who will come out of this debacle with his reputation intact.  I’m surprised Krugman hasn’t mentioned him in his blog posts.  (They are colleagues at Princeton.)

PS:  Two Swedish posts in one day!  What other American blog provides such complete coverage of Nordic events?  My half Swedish–half Norwegian grandmother would have been proud.

The term ‘economic reform’ implicitly meant more government between 1875 and 1975, and has implicitly meant less government since.  That’s how we can tell whether or not we are still in the neoliberal era.

When the recent financial crisis first hit I was worried that it would push us toward statism, just as in the 1930s.  And indeed that seems to have occurred in the US.  By the spring of 2009, however, I noticed that the rest of the world seemed to be moving in the opposite direction.  Parties of the left kept losing in places like India (the communists), Argentina, and Germany.  At the time many commenters said I had things wrong, that I was misinterpreting complex local conditions.

Now I think we now have enough information to know I was right.  The financial crisis has turned out to be a huge problem for parties on the left.  Here’s a recent headline on the election in Sweden:

(Reuters) – The crash of Sweden’s long-ruling Social Democrats to their worst defeat since 1914 highlights the decline of socialist parties in much of Europe, drained by social change, economic crisis and the rise of new issues.

Obviously Sweden will continue to be far more social democratic that the US.  But the effect of the crisis has been for countries like Sweden, Denmark and Holland to trim back government.

Look at how envious the British are of Sweden:

For decades, conservatives have played an important role in Swedish politics: they are there to be defeated. They advocate lower taxes, and are duly accused of planning savage cuts. So the voters traditionally stick with the Social Democrats who have held power for seven of the last eight decades. Every other decade Swedish conservatives come on for some light entertainment, before being booted out after a term. Never in modern Swedish history has a conservative prime minister been spared this fate. Until now.

This week Fredrik Reinfeldt, a bald and deeply dull 45-year-old who communicates with David Cameron by text message, is celebrating the first re-election in history of his party, the Moderaterna. He is also celebrating the success of an extraordinary experiment. His response to the recession was to cut taxes, a move his critics said the country could not afford. The European Commission warned him it would end in tears. But instead, the lower taxes were a spur to growth and Sweden now has the fastest-growing economy in the Western world.

When elected four years ago, leading a four-party coalition, Reinfeldt had a striking slogan. ‘We are the new workers’ party,’ he said, meaning he would cut taxes for those in employment, but not for those on benefits. When faced with protests about how the poorest would be paying a higher marginal tax rate, he appealed to voters’ innate sense of fairness – and resentment at the high level of welfare dependency. At every stage, his ministers would explain the basics of low-tax economics. Cut tax on wages, and you increase the incentive to work. ‘This will increase employment,’ Reinfeldt said. ‘Permanently.’

Not that he was believed – at first, anyway. The party fell 20 points behind in the polls, and braced itself for the ritualistic electoral ejection. It carried on regardless, with tax cuts for cleaners and baby-sitters (most home helpers were paid ‘black’, as the Swedes say, because the tax was so high). Tax on low-paid jobs fell sharpest. Nursing assistants, for example, saw their tax bill drop by a fifth. The aim was to make work compete more aggressively with Sweden’s famously generous welfare state.

Taxes for the rich also came down. Reinfeldt abolished the notorious wealth tax, which took 1.5 per cent a year from any Swede worth over about Skr1.5 million (£125,000). Anders Borg, the finance minister, faced predictable protests about a Bush-style tax cut for the rich. He replied: ‘The big winners are, in the long term, all Swedes, because we must create conditions for companies to match global competition.’ So while the Tories were endorsing Gordon Brown’s plan to increase the tax on the rich, the Swedes were cutting the tax rate – in order to collect more from the well-paid.

When the recession came, Sweden was badly hurt, as one would expect from an export-orientated economy trading with a stricken continent. But the damage was limited because Sweden had properly regulated financial institutions (having been stung by a serious financial crisis in the 1990s. Banks which had embarked on misadventures in the Baltic cleaned up their own mess. The government entered the recession with a surplus. A Gordon Brown figure would have been impossible in Sweden because its laws prohibit politicians running up the national debt in boom years.

Like most of Europe, Sweden launched a stimulus, but Reinfeldt set aside two thirds of his for a tax cut. Corporation tax fell from 28 per cent to 26.3 per cent [the US rate is over 40%], taxes on jobs were cut further still while income tax thresholds were raised. Determined not to let a crisis go to waste, he declared the tax cuts permanent. So while Brown was planning to increase National Insurance, the Swedes were doing the reverse and explaining why. ‘If you tax work higher, you will get fewer people in work,’ said the education minister, Jan Björklund. ‘But if you tax work less you will get more in work.’ This was a battle of ideas, and it was a battle that Reinfeldt and his coalition allies were winning.

In April last year, his party pulled ahead in the polls for the first time since his election. As election day approached, it became clear just how effective his tax cuts had been. Unemployment never hit the forecast 10 per cent – it was 8 per cent in July and 7.4 per cent in August. Two think tanks have confirmed Reinfeldt’s assessment that his tax cuts have created some 100,000 jobs. The deficit was tumbling as the economy recovered. Extraordinarily, Sweden has now overtaken the United States and reached second place in the World Economic Forum’s yearly competitiveness rankings.

Ask about the recession in Sweden now and you are met with a blank stare. Consumer confidence is at a ten-year high. Its recession was steep, but shorter than its downturn after 9/11. In fact, this had come to worry Reinfeldt. ‘Our medicine may have been just too effective,’ one of his state secretaries told me over the summer. ‘Voters don’t think about the economy now. The recession is becoming a distant memory.’

It helped that the deeply unpopular Mona Sahlin was leading the Social Democrats. It also helped that her party was intellectually exhausted. The left has had to embrace ‘free schools’ (the model adopted by Michael Gove) because they are now so popular among parents. The Social Democrats spent much of the campaign trying to persuade voters to forget they ever opposed them. ‘Pupils should choose schools,’ ran one of its posters, ‘schools should not choose pupils.’

The Social Democrats’ main economic argument – that tax cuts mean vicious spending cuts – was exposed as false by the Reinfeldt recovery. Ms Sahlin did not dare to propose reversing what had been the sharpest tax cuts in Swedish history.

And finally, a little comic relief from The Economist:

But Maria Wetterstrand, the Greens’ co-leader, demurred, saying her party could not support a government that “kicks sick people off health insurance, does not have a climate policy and wants to build ten new nuclear power plants.”

PS:  Why did we go the other way from the rest of the world?  I’ve always thought our liberals were motivated by unfinished business.  We never really completed the welfare state, leaving millions without health insurance.  Matt Yglesias says that now that Obama has finished the job, the real need is efficient neoliberal reforms, not even bigger government than currently forecast.