Wednesday, May 23, 2012

No they can't! Why big government in Sweden has failed

What can U.S. learn from Sweden in the past and its contemporary move towards Neoliberalism? The dominating picture of Sweden as a successful far left socialist society does have very little to do with reality. The absolute truth is that the Swedish Socialist Democratic party has failed to deliver on its utopian egalitarian promises. Though the Swedes are dissatisfied with the outcome of most socialist reforms many still believe in economic equality.

After years of expensive socialist experimentation and a constant growth of government the people finally voted 1991 for a change in direction. The conservative party Moderaterna formed a coalition government based on the principle that the time of collectivism was out and that the society should be greater than the state. Unfortunately the right-wing government inherited an economy in severe decline. Sweden was in a deep recession between 1991 and 1993. From the 1970's to the beginning of the 1990's the Swedish GDP growth had fallen behind the other industrialized countries and the purchasing power adjusted GDP per capita fell relative to other industrialized countries in recent decades, from a fourth place in the 1970s to a 14th place in the 1980's. In lack of a coordinated political coalition program, and some racist statements by the conservative party, the Swedish Social Democratic Workers' Party managed to form a minority government after the 1994 election.

Experienced by the damage the right ring parties formed the "Alliance for Sweden" that led to success for the Conservatives (Moderaterna) in the 2006 election and change of government. Unfortunately after 70 years with mostly socialist governing the Swedish mindset has been characterized by a strong egalitarian belief. During the 2006 campaign the new right ring alliance presented a less socialistic alternative (compared to the traditional socialist party program), and changed the language toward a more socialistic terminology. The Conservatives' (Moderaterna) slogan was striking: "We are the new workers’ party." The formula has obviously worked since the Alliance for Sweden won the election in 2006 and was reelected in 2010. Since 2006 Sweden is making tax cuts and has a libertarian finance minister, Anders Borg, who was named the most effective finance minister in Europe by the Financial Times.

Sweden is not known for tax cuts and schools established on private initiatives. While big government Obama has been driving down the U.S. economic freedom ranking over the past three years, by sharp contrast Sweden’s highly efficient regulatory system, have raised its country's economy (in the 2012 Index of Economic Freedom). President Obama need to sit down with Sweden's finance minister Borg for a lesson on how to achieve a real economic recovery.

Borg’s mission has been to reduce the Swedish government. His “stimulus” was a permanent tax cut. To the critics this was fiscal lunacy — the so-called “punk tax cutting” agenda. Borg, on the other hand, thought lunacy meant repeating the socialist economics of the 1970s and expecting a different result! Three years on, it’s pretty clear who was right, according to Borg. “Look at Spain, Portugal or the United Kingdom, whose governments were arguing for large temporary stimulus.” “Well, we can see that very little of the stimulus went to the economy. But they [the PIIGS countries] are stuck with the debt.” Tax-cutting Sweden, by contrast, had the fastest growth in Europe year 2011, when it also celebrated the abolition of its deficit. Borg continued to cut taxes and welfare-spendings to pay for it; he even cut property taxes for the rich to lure entrepreneurs back to Sweden. The last bit was the most unpopular among the left, but for Borg, economic recovery starts with entrepreneurs.

Borg mean that, if cutting taxes for the rich encouraged risk-taking, then it had to be done. "In most cases, the company would not have been created without the owner," he says. "There would be no Ikea without [Ingvar] Kamprad. We would not have Tetra-Pak without [Ruben] Rausing. They are probably the foremost entrepreneurs [Sweden] have had in the last few decades, and both moved out of Sweden."  Borg believes that a high wealth tax and an inheritance tax, makes people to emigrate because it becomes too costly to own a company in such an environment. Ownership is a production factor. Entrepreneurs are a production factor. And his godson tells that, "these people are rich and you can obviously argue that we want to encourage social cohesion. But it is also problematic if you drive out entrepreneurs from your country, because they are the source of job creation."

Sweden is the unlikely champion of (Ronald Reagan) supply-side economics, with ideas now-days too radical for most Americans. There is a cross-party support in Sweden for profit-seeking state schools, which Obama won’t attempt. Borg’s tax-cutting policy was accompanied by a 268-page book explaining the dynamic link between lower taxes and more jobs. Such a document would be unthinkable from big government Obama.

In 1991, the right-wing government passed a law in Sweden that allowed new schools to be established on private initiatives. Today parents, teachers, charities and private businesses, can start their own school in competition with existing government operated schools. Not only did the reform create new, higher-performing schools, it also spurred improvements in old institutions forced to compete for pupils. 

The Swedish school system is also one of the world's most liberated. Only Chile's school system is on a similar level. What's completely unique is that the Swedish government doesn't care who owns the school. In twenty years Sweden went from one of the world's most regulated school systems on this planet to the world's most free.

If Sweden has learned its lessons from big government politics, Americans should also be able to learn from the Swedes that high taxes and a bad school system will slow down any economic recovery. Americans must put a harder pressure on all politicians to limit the power and size of its government, if the Untied States of America should be able to survive.