US should learn from how big government damaged Swedish society

The Swedish author Nima Sanandaji has produced a new report in defense of the free markets. He shows that an over-bearing welfare state, along with high taxes, has damaged the economy in Sweden as well as undermining its social capital. It suggests that it is only through focusing on increasing economic freedom and introducing more choice in public services that the Alliance for Sweden has rebuilt the country's economy.  This report contradicts everything that Democrats believe about Sweden.

Here is a summary:

Sweden did not become wealthy through social democracy, big government and a large welfare state. It developed economically by adopting free-market policies in the late 19th century and early 20th century. It also benefited from positive cultural norms, including a strong work ethic and high levels of trust.

As late as 1950, Swedish tax revenues were still only around 21 per cent of GDP. The policy shift towards a big state and higher taxes occurred mainly during the next thirty years, as taxes increased by almost one per cent of GDP annually.

The rapid growth of the state in the late 1960s and 1970s led to a large decline in Sweden’s relative economic performance. In 1975, Sweden was the 4th richest industrialized country in terms of GDP per head. By 1993, it had fallen to 14th.

Big government had a devastating impact on entrepreneurship. After 1970, the establishment of new firms dropped significantly. Among the 100 firms with the highest revenues in Sweden in 2004, only two were entrepreneurial Swedish firms founded after 1970, compared with 21 founded before 1913.

High levels of equality and favorable social outcomes were evident before the creation of an extensive welfare state. Moreover, generous welfare policies have created numerous social problems, including high levels of dependency among certain groups.

Descendants of Swedes who migrated to the USA in the 19th century are characterized by favorable social outcomes, such as a low poverty rate and high employment, despite the less extensive welfare state in the USA. The average income of Americans with Swedish ancestry is over 50 per cent higher than Swedes in their native country.

Third World immigrants have been particularly badly affected by a combination of high welfare benefits and restrictive labour market regulations. In 2004, when the Swedish economy was performing strongly, the employment rate among immigrants from non- Western nations in Sweden was only 48 per cent.

Since the economic crisis of the early 1990s, Swedish governments have rolled back the state and introduced market reforms in sectors such as education, health and pensions. Economic freedom has increased in Sweden while it has declined in the UK and USA. Sweden’s relative economic performance has improved accordingly.

Download the report here

The Swedish healthcare model has a grim outlook

The Swedish welfare state is forcing its citizens to pay 44.4 percent in tax revenues on the gross national product to pay for its from cradle to grave entitlements. Compared to the U.S. tax burden of only 24.8 percent its a staggering number. The tax pressure on the Swedish middle class exceeds 60 percent and this is not enough to cover the shapely raising costs for the socialized healthcare system.

The Swedish socialized healthcare model is a proof of that the ObamaCare system is an utopian idea. The Health care bill in Sweden is growing steadily every year. A sharp increase by 13 percent more in tax, or significantly increased fees will be necessary to meet the needs, according to the Swedish economists Stefan Ackerby. To increase the tax pressure up-to 74 percent on the middle class would be impossible. But the political class making the decisions shy away from taking a stand. 

Each year the Swedes pay more money on health care. Between 1993 and 2008 health care spending increased by 70 percent (from 149 billion to 256 billion Krona in real terms). This represents an increase from $2,700  to $4,230 per Swede. Anders Klevmarken, emeritus professor of econometrics, and Björn Lindgren, professor emeritus of health economics, has analyzed the demographic change and concludes that health care costs could increase by another 270 percent by 2040 – that is almost a tripling of spending. Such an increase would mean that every Swedish need to shell out an additional $8,500 per year, or $710 per month. This impossible to pay for the Swedish middle class. In debate variations of private funding are proposed, since its almost impossible to increase the tax burden. It may be through higher fees when you go to the doctor, or the cost ceiling will be raised.

Already now Swedish patents has to pay all kinds of non-deductible fees up to $1,000 altogether. And the social health insurance does not cover the fees per day when hospitalized. The worst effect of the socialized health care system is the rationing causing patients to wait in line for month, if they can survive, to receive the treatment they are imagining that have paid for to get instantly. For the citizens that are better off its common to buy a private insurance for medical treatment in time, which is the smart way to go ahead in the queue. Since 2007, the market for private health insurance increased sharply by 58 percent. Medical insurance is paid to 80 percent by employers and as a benefit for employees. From an employer's perspective, private health insurance makes it possible for the employee to quickly return to work, thus reducing production loss. For the employee, a private health insurance contribute to a faster recovery and increased security for the economy and health.

After half a century of big socialist government and lack of personal accountability Sweden is in fact gradually forced to move away from the direction the USA is moving towards. The Americans are moving towards less economic freedom and a destroyed foundation for economic growth. The citizens of U.S. are risking the same development as the Swedes faced between 1960 and 1990, when income taxes for the average Swede doubled from approximately 30 to 60 percent. Is ObamaCare something the American middle class is willing and prepared to pay for?

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.

The downfall of the welfare state

Who does not want to get a free lunch? Most people likes the idea. Every society is building its strength on a moral ground. The modern Welfare State has been created on the myth that someone else is paying for the good gifts that the political class offers the masses. The guiding principles of the Welfare State were first explained by Ferdinand Lassalle (1825-1864), both a friend and rival of Marx. Lassalle ridiculed the socialist economic doctrines and in his eyes the state was God and Santa Claus at the same time. The state had inexhaustible funds at its disposal, which could freely be used to make all citizens prosperous and happy. The state should nationalize big business, underwrite projects for the realization of which private capital was not available, redistribute national income, and provide for everyone security from the cradle to the grave. The socialist's and the progressive's proposition is that the "rich" can be endlessly plundered on their wealth, the next generation is able to pay for the previous generations benefits, and other countries can be endlessly soaked to pay for the "free" entitlements. But when the political class believe they unpunished can plunder others on their wealth they are fatally mistaken.

In reality the money supply from other nations is about to evaporate and the rich wealth is not an inexhaustible resource. There is not enough money to take away from the rich to raise the standard of living anywhere in the world. Even if all taxable income of those earning more than $250,000 were confiscated, the additional income to any government would not cover all the good gifts promised by the political class. The Greeks who has been rescued twice by their Euro Zone partners have not changed their attitude. And Europe has not got it yet, that this approach is leading to a long and painful road to the downfall of the welfare state?

Germans and Frenchmen are though worrying that the PIIGS (Portugal, Ireland, Italy, Greece and Spain) are in such trouble that entire Euro Zone structure could come to a dismantling. When ordinary Germans learned that Greeks retired well before they themselves, they began to ask why they should continue to work so that others could rest on the beach, drink, and joke about the others who pay for them.

The European socialist economics doctrine (Keynesians) is about to crash like a house of cards. We are now facing the downfall of the welfare state and not the collapse of capitalism. Only nations based on a solid economic capital base founded on savings provides survivability. A society based on borrowing for consumption will consume itself and decline. When finally the costs of government exceed the gross domestic product the state can only survive by depleting their community wealth. This will result in the decline of the quality of civic life.

The nanny welfare state in front of others, Sweden, has been in terminal decline since the 1980s. The socialist “cradle-to-grave” welfare state did not work and there is little opposition to the slow dismantling of the benefits by the leading political party's. The working class does not anymore sympathies with the left for the solution of their problems.

Only one country in Europe, Switzerland, has managed to keep its welfare system under control. When the checks and balance is made by the people its less likely that unfunded and costly welfare reforms will survive a referendum (popular vote) by the people. This has been proven by several empirical results, like by Pommerehne (1978, 1990) and Matsusaka (1995). Government expenditure is lower in a representative direct democracy (republic) than in a pure representative democracy. The existence of citizens initiative leads to a particularly large reduction in the state and local public spending. Public services are produced more efficiently in representative direct democracies than in pure representative democracies. Swiss municipalities with private suppliers had the lowest cost. Those costs are at between 20 - 30 precent higher in representative than direct democracies. Most notable is that the willingness to finance the public sector is higher with referenda than in pure representative democracies. Most important public debt is lower when the citizens can vote on the issuance of public debt in referendums. Swiss cantons with direct democracy had a significantly (5 - 15 percent) better economic performance than purely representative systems. According to the European Commission’s 2009 European Innovation Scoreboard, Switzerland is by far Europe’s most innovative economy.

Switzerland has the highest European rating in the Index of Economic Freedom 2010. The nominal per capita GDP is one of the highest in the world and higher than those of the larger Western and Central European economies and Japan. Switzerland has the highest average wealth per adult at $372,692, defined by the value of financial and non-financial (such as real estate) assets. In 2005 the median household income in Switzerland was an estimated 95,000 CHF, the equivalent of roughly $100,000 (as of December 2010) in nominal terms. The Swiss model with popular vote as checks and balance has lead to lower welfare expenditure and less tax revenue per capita. Even though the Swiss welfare state has not yet broken down, and no severe cutbacks has been made in public welfare expenditures.

A comparison between Sweden and Switzerland clearly shows that the Swiss model from 1970 produced a greater wealth than the Swedish Income socialized model. Sweden must make a growth rate of eight percent per year for five years to catch up with Switzerland. How can it be that Switzerland with fewer natural resources managed better than Sweden? A Swedes average wighted yearly salary is €56.053 and a Swiss €82.725. The Swede pay income tax with 28.89–59.09 per cent and an additional 31.42 per cent in payroll tax, while the Swiss pay federal income tax with 0–13.2 per cent. The total rate does not usually exceed 40% and in most cases, the maximum tax rate is much lower than this. For example, in the Canton of Schwyz, the top rate, inclusive of federal, cantonal/communal tax is approximately 22 per cent. The cop orate taxes are that low the cantonal tax system has come under attack from the European Commission, which is attempting to make Switzerland change aspects of its corporate tax regime designed to attract holding companies to the jurisdiction. The European Commission does not like competition from Switzerland and that cantonal governments has the freedom to set their own tax rates to attract new companies and wealthy expats. Obwalden and Appenzell-Ausserrhoden, both charge 12.7 per cent.

Switzerland has a very weak central government and small public sector (government). The referendum institute provides a good protection for minorities and local opinions. Sweden in contrary has since 1521 (when King Gustav Vasa ceased power) had an extremely strong central government and over time a larger public sector (government) than any other country in the entire world. This has hardly given Sweden an advantage in building a wealthy society with wealthy citizen's.

When the socialist leader Olof Palme was appointed in 1969 as prime minister, he needed more money to fund a flood of new entitlement reforms. He explained that the parliament in payroll taxes has found "a new tax source." Labour costs increased at a record pace in the early seventies. Wages increased 59 percent between 1973 and 1976. During the same period the socialist majority in parliament increased payroll taxes by 109 percent! Labor costs exploded by more than 80 percent in three years. The companies had no way to compensate for raising prices, because export prices were determined by world markets, and the Swedish companies were barely the price leader. The result was that corporate profits was wiped out and job's evaporated.

When the Swedish Social Democrat Party launched their radical ideas of equality, social justice and redistribution of wealth the opposition criticized and warned for the economic consequences of the abolition of any economic incentives. But the opposition never took up the criticism of the idea. During the first decades of industrialization a large part of the proceeds from the new Swedish industrial society remained with the owners. This kept up growth, as riches were reinvested. Those who subsequently criticized the unequal distribution of income during the decades around the turn of the century never discuss this aspect. The idea of ​​equality has become not only a reaction against unwarranted disparities in income, or "injustice," but it has evolved into a general intolerance of difference at all. Much of the so-called serious Swedish journalism is to detect differences between groups and criticize them as manifestations of "inequality."

Sweden did increasingly during the 1970s and 1980s focus on socialist entitlement arrangements. It is known as social insurance and guarantees income from unemployment and sickness and old age have largely been organized as state-controlled collective system, with a very weak link between taxes paid (fees) and insurance outcomes.

Sweden has since 1970, a single legislative chamber. All questions are decided by a simple majority: 51 percent win over 49 percent. The protection of minorities in the constitution is extremely weak. Property rights are protected, but so vaguely that a majority parliament vote may freely dispose of private property.

Switzerland has a uniquely decentralized democratic system that provides a long-term stability and political reliability that makes entreprenours dare to invest. In Switzerland a decision is not made like in Sweden at a congress and becoming law a few weeks later. Each member of the Swiss Government are elected separately by the Parliament. The parliament can not by censure compel a government member or the force the government to resign. The government, on the other hand, can not dissolve parliament and call for elections.

Above all, the Swiss referendum, provide "checks and balances" that prevent minorities from pushing through decisions that are against the popular opinion. The people can speak in the post of parliamentary decision by the decision-making referendums. At the federal level referendums are mandatory for constitutional amendments. Federal laws and decisions in general and international agreements are not in force until further notice and are subject to optional referendum. Unlike Sweden, Switzerland has implemented very few damaging and costly reforms since the early 1970s. This veto right by popular vote helps to make the country more stable and predictable compared to Sweden.

If Europe and North America shall avoid a slow and painful downfall its time to improve the political system and introduce checks and balance by the people. The only people who do not like more power to the people is the politician class. Anyhow, the demand for direct democracy is growing, not only at the level of the national level, but also at the transnational European level. Lively debates are going on in many countries about an European-wide referendum on the new Reform Treaty, and in these debates popular participation is frequently contested by the politician class with the same arguments the defenders of purely representative democracy always have used. If any of those arguments were true, the stable direct democracy which has been alive in Switzerland for more than 100 years could not exist, because a referendum democracy should be self-destructive; and come to a rapid and catastrophic end on the reefs of cognitive incapacity.

US Senator Mike Gravel and the National Initiative want empower the citizens to check and balance representatives, at a national level. This will give the people a "Plan B" whenever representatives don't represent the people. The Founding Fathers would agree! George Washington said "The basis of our political systems is the right of the people to make and to alter their constitutions of government." America's leading Constitutional expert agrees. Akil Reed Amar says in Popular Sovereignty and Constitutional Amendment "We the People of the United States have a legal right to alter our government – to amend our Constitution – via a majoritarian and populist mechanism akin to a national referendum, even though that mechanism is not explicitly specified in Article V."

I would like to see a lot of people raising this issue and debating it frequently. There is still time to save a great country from a destruction by a runaway congress.

Ben Hedenberg