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Friday, March 1, 2013

The New Swedish Model

Among policy nerds back in the day, “Swedish model” meant the brand of social democracy practiced in Sweden in the second half of the twentieth century. (Somebody would usually crack wise about Anita Ekberg whenever the phrase was uttered.) But for a very long time, whenever the problems of socialism were discussed, it was common to hear people say as a kind of shut-up argument: “Ah, but socialism works in Sweden; what about the Swedish model?”
Swedish social democracy created an extensive welfare state—including comprehensive health care, generous unemployment benefits, and marginal tax rates commonly in excess of 70 percent. But that followed years of relatively free-market policies in the early twentieth century, which generated impressive economic growth. Government intervention in Sweden didn’t really get going until the 1960s.

The Economist on “Northern Lights”

Interventionists in the United States could learn something from what’s going on now in Sweden (although I fear they won’t). According to a recent spread in The Economist magazine
Sweden has reduced public spending as a proportion of GDP from 67 percent in 1993 to 49% today. It could soon have a smaller state than Britain. It has also cut the top marginal tax rate by 27 percentage points since 1983, to 57%, and scrapped a mare’s nest of taxes on property, gifts, wealth and inheritance. This year it is cutting the corporate-tax rate from 26.3% to 22%.
Compare these rates with the U.S. tax rates, under the 2013 tax law, of 39.6 percent on incomes above $400,000 (filing single) and 35 percent on corporations.
But in some sense the current dramatic policy changes in Sweden are just a continuation, after an interruption of several years, of a dis-interventionist trend that began in the 1990s. The “new” Swedish model is not really that new. Indeed, Sweden has climbed to 30th out of 144 countries in economic freedom according to, compared to the United States, which has fallen to 18th, just ahead of Germany (31st) and far outpacing France (47th) and China (107th).

So What About the United States?

The federal deficit numbers in the United States, however, look worse compared to Sweden’s. Again, according to The Economist,
Sweden has also donned the golden straitjacket of fiscal orthodoxy with its pledge to produce a fiscal surplus over the economic cycle. Its public debt fell from 70% of GDP in 1993 to 37% in 2010, and its budget moved from an 11% deficit to a surplus of 0.3% over the same period.
The current U.S. federal deficit—the annual excess of government spending over tax revenue—is around $1.1 trillion.
The accumulated debt of the United States federal government now exceeds $15 trillion, which is roughly equal to the current gross domestic product (GDP), the dollar value of all goods and services produced in the U.S. economy in 2012. That means that the federal debt as a percentage of GDP is now slightly more than 100 percent (compared to 37 percent in Sweden). 
The United States does compare favorably to Sweden in federal spending as a percentage of GDP. For the United States, that’s about 39 percent, versus around 50 percent for Sweden. Including state and local spending boosts this figure somewhat, to over 40 percent of GDP for the United States, but that’s still significantly below Sweden's figure. Sweden, though, with one-thirtieth the population of the United States, has a per capita GDP of $57,091 to the United States’s $48,112.

If Sweden Can Do It, Can the United States?

Some fear that a debt-to-GDP ratio above 100 percent places the United States past the fiscal “point of no return”—that is, past the point where in modern times governments have been able to significantly reduce the percentage of debt to GDP. How did things get so bad?
Milton Friedman brilliantly characterized the main alternative politico-economic systems as follows: 
1) Spending my own money on myself (capitalist model)
2) Spending my money on someone else (Christmas model)
3) Spending someone else’s money on myself (rent-seeking model)
4) Spending someone else’s money on someone else (socialism)
He went on to say that the problem with socialism is that eventually you run out of other people’s money.
But if Sweden, a country in which the welfare state has been so entrenched over so many decades, can make such dramatic, even radical, changes in its interventionist habits, why couldn’t the United States? A comparably dramatic reform here—perhaps “revolution” comes closer to describing what would be needed—is certainly possible, despite staggering institutional barriers, tenacious entrenched interests, and sheer economic ignorance. 
The biggest obstacle, as I see it, is not having the strength of will to sustain the relentless intellectual and political battle needed to overcome all those other obstacles. And in all honesty, I find it hard to be very optimistic about that.

The Greek Model

Well into my sixth decade of life, one of the things I think I’ve learned is that radical change and the will to see it through are indeed possible—beyond any so-called point of no return—but only when it’s clearly a matter of life and death. There has to be a sense of urgency, even desperation, to the extent that you become willing to do whatever it takes to survive. But of course desperation is tricky; desperate people can easily make matters worse. It’s perhaps during crises, moments of widespread desperation, that a well-developed philosophy of freedom can have its finest moment by guiding desperate people toward real solutions.
So does the United States have to follow, say, hapless Greece—with its bloated welfare state, strangling regulation and taxation, and monetary profligacy? Will our crony-capitalist system develops cracks wide enough for enough of us to see that embracing liberty and rejecting statism is our last, our best, and our only hope?
I’m afraid our economy will have to look much more like the Greeks’ before we’ll muster the will to follow the example of the Swedes.

  • Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.