Does it? What about country Z? Cuba, North Korea, Venezuela, how's it going there? Maybe it depends on each situation and a number of factors other than the economic model and how much socialism a country has. Let's talk about Sweden for a minute. Who BTW vehemently deny being socialist.
As early as 1950, Sweden had become the fourthârichest country in the world, and there was nothing mysterious about its progress. Sweden was also the fifthâfreest economy at that time, according to an analysis by Robert Lawson and Ryan Murphy at the OâNeil Center for Global Markets and Freedom at Southern Methodist Universityâs Cox School of Business. In 1950, taxes were just 21 percent of Swedenâs gross domestic product (GDP), lower than in the United States, and roughly 10 percentage points below the level in countries like Britain, France, and West Germany.
So, what happened next? They fucked it up. The Swedish Social Democrats thought that Sweden was uniquely suited to be a generous welfare state. It was a wealthy country with competitive businesses that could fund it all. They also had homogenous populations with a strong work ethic, noncorrupt civil services, and a high degree of trust. If it did not work there, it would be difficult to believe it could work anywhere. Slowly but steadily, the Social Democrats intervened in education and health care and created social security systems that provided pensions, unemployment, paternal leave, and sick leave benefits. Most benefits were proportional to the amount paid in so that the middle class would have an interest in supporting the system.
But soon, with coffers filled and riding on an international socialist wave, the Social Democrats accelerated their takeover of business and civil society. Between 1960 and 1980, public spending more than doubled, from 31 to 60 percent of GDP, and taxes skyrocketed. The government started regulating businesses and the labor market in detail. The Social Democrats even began experimenting with a system to socialize major companies, âthe wage earnersâ fund.â
Talent and capital stormed out of Sweden to escape taxes and red tape. Swedish businesses moved headquarters and investments to more hospitable places. IKEA left for the Netherlands and Tetra Pak for Switzerland. BjĂśrn Borg and other sports stars fled to Monaco. The famous novelist Vilhelm Moberg, who had settled in Switzerland, complained that the Swedish government was a âmonster without morality or sense of poetry.â The legendary filmmaker Ingmar Bergman left for Germany after having been falsely accused of tax evasion.
âThis is hell,â Prime Minister Olof Palme said behind closed doors, referring to the wage earnersâ fund that he couldnât even get himself to believe in. The Swedish economy, which had gotten used to outpacing all the other industrialized economies, now started lagging behind them significantly. In 1970, Sweden was 10 percent richer than the G7- group of wealthy countries on a per capita basis. In 1995, it was more than 10 percent poorer. During that period, not a single net job was created in Swedenâs private sector.
The bottom line is that socialist policies didnât even work in Sweden. Massive government intervention had undermined not only productivity and innovation but also the very foundations that made Sweden look like the best place to experiment with it. The celebrated work ethic remained intact for those who had grown up under a system of free markets and personal responsibility, but it was eroded in new generations who had only experienced high taxes when they worked and generous benefits when they didnât. The people were turning into âa population of cheats,â exclaimed a disappointed Gunnar Myrdal.
Man, does that sound familiar. The share of Swedes who said it is acceptable to lie to obtain public benefits increased from 5 percent in 1960 to 43 percent in 2000. After generous sick leave benefits were implemented, Swedes who were objectively healthier than any other population on the planet were suddenly âoff sickâ from work more than any other population â suspiciously often male workers during hunting season and big, international sport events.
For a while, a debtâ and inflationâfueled boom kept the economy crawling along. But when that ended in 1990, Sweden suffered a spectacular crash. Unemployment surged and the budget deficit soon reached 11 percent of GDP. For a few days in 1992, the Central Bank tried to defend the Swedish currency with an interest rate of 500 percent.
So, what did they do? Market reform. This was the conclusion of people across the political spectrum. A centerâright government under Prime Minister Carl Bildt from 1991 to 1994 implemented a radical reform agenda to get Sweden back to its classical model. And Social Democrats also embraced many of these reforms. They reduced the size of the government by a third and implemented a surplus target in public finances. They reduced taxes and abolished them on wealth, property, gifts, and inheritance. Stateâowned companies were privatized, and markets in financial services, electricity, media, telecom, and others were liberalized. Sweden also joined the European Union to get tariffâfree access to its most important markets. In Brussels, Sweden became a leading voice for fiscal restraint and deregulation.
Sweden implemented choice and competition in the public sector and created a school voucher system. And, to the disbelief of foreigners, Social Democrats and centerâright parties agreed to end the payâasâyouâgo system in social security and replace it with defined contributions and private accounts. Now pension payments are dependent on the development of the economy, not on politiciansâ promises. It was transformational. Between 1980 and 2000, Sweden improved by 2 points on the 10âpoint scale of the Economic Freedom of the World Index, compared to 0.5 for the Reaganite United States and 1.8 for Thatcherite Britain. Of course, Sweden started from a lower level, but it was still a fairly steep climb.
Since then, the Swedish economy has once again outpaced its neighbors. Even though the reforms were painful for many sectors and groups, they were a boon for the general public. Between 1970 and 1995, when the world thought of Sweden as a workerâs paradise, inflation ate almost all their wage increases. Since 1995, on the contrary, real wages have increased 65 percent.
Public spending and taxes are now down to normal West European levels. Social spending is 26 percent of GDP, compared to 29 percent in Belgium and 31 percent in France. But it is still much higher than in the United States. The Swedish government provides citizens health care, childcare, free colleges, and subsidized parental and medical leave. How? The tax system is not built to squeeze the rich â they are too few, and the 1970s showed that the economy is too dependent on them. Instead, Sweden squeezes the poor. They are loyal taxpayers, they canât afford tax attorneys, and they never move their assets to the Bahamas.
Ninetyâseven percent of Swedish tax revenue from incomes comes from proportional payroll taxes and flat regional taxes, set at around a third of everybodyâs income. Just 3 percent of the total income tax revenue comes from âtaxing the richâ specifically. The U.S. system is much more progressive. According to the latest Organisation for Economic Coâoperation and Development comparison, the top 10 percent in the United States pay 45 percent of the income taxes. In Sweden, they pay less than 27 percent. If Sanders and Sen. Elizabeth Warren (D MA) complain that the U.S. rich donât pay their âfair share,â they would really hate the Swedish model. In addition, more than a quarter of government income derives from taxes on consumption, in which the poor pay just as much as the rich for every item bought. This includes a 25 percent valueâadded tax on most goods.
So that is the real story of the Swedish model. Laissezâfaire economics turned a poor backwater into one of the richest countries on the planet. Then it experimented with socialism briefly in the 1970s and â80s. This made the country famous, but it almost destroyed it. And learning from this disaster, the left and the right have, in relative consensus, liberalized Swedenâs economy more than other countries, even though it is still far from its classical liberal past.
https://www.cato.org/policy-report/january/february-2020/swedens-lessons-america
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