Tuesday, 2 September 2003

Swede and Sour

STOCKHOLM — If Sweden left the European Union and joined the United States we would be the poorest state of America. Using fixed prices and purchasing power parity adjusted data, the median household income in Sweden in the late 1990s was the equivalent of $26,800 compared with a median of $39,400 for U.S. households – before taxes. And then we should remember that Sweden has the world’s highest taxes.

The Swedish Research Institute of Trade, who made the study, underlined that Afro-Americans, who have the lowest income in the United States, now have a higher standard of living than an ordinary Swedish household.

That story came as a chock to many about a month ago. But mostly to foreigners, not to Swedes. Since the 1970s, we are used to news about Sweden lagging behind the rest of the world in wealth and income. It was more of a shock to Americans and Europeans who used to think about Sweden as the perfect example, the exception that could combine the big welfare state with a productive economy. If this social model was a part of the US, it would be considered a social problem. How did this come about?

To understand this, we have to understand that Sweden was never an exception to the rule that wealth can only be created by free men and women, on a free market.

Swedish Development

In 1850, Sweden was a poor developing country where the people starved. This country couldn’t be saved by redistribution. Even if you had levelled out all property in the middle of the 19th century, it would still have given everybody a life in misery. Total equality would have given the average Swede a living standard equal to the median income in today’s Kazakhstan.

But in a few decades in the mid-1800s, a group of classical liberal politicians gave Sweden religious liberty, freedom of speech, freedom of movement and economic liberty, so that people could start their own businesses and buy and sell freely on the market. Free trade made it possible for Sweden to specialize in what we did best, such as the timber and iron industries, and exchange it for that which we produced less well, such as food and machinery.

The result was economic growth and industrialisation, which made it possible to increase well-being and invest in education and health care. Between 1860-1910 the manufacturing wage increased 170 per cent, much more than in the period after. Swedish life expectancy increased ten years and infant mortality declined rapidly. Sweden was not a welfare state, it was more of a minimal state. Until the first World War, the Swedish public sector did not spend more than 6 per cent of GDP!

The Social Democrats, who took power in 1932, continued with liberal rules for big business, whom they appreciated, and they continued with a free trade policy. Even though government intervention slowly grew, in 1950, the public sector was smaller than in most countries — about 25 % of GDP, roughly the same as in USA and Switzerland. The economy also benefited when we stayed out of two world wars. Swedish enterprise sold to both sides, the industry was not destroyed and young Swedes weren’t killed.

Between 1870-1970, Swedish growth was the biggest in the world, next to Japan’s. In 1970 Sweden was the fourth richest among the OECD-members, after USA, Luxembourg and Switzerland.

The Welfare State, The Welfare Weight

But then, the welfare state had begun to increase — as a way for the politicians to redistribute the wealth that individuals and markets had created. The economy continued to grow: considering the starting-point, the good industries and a well educated and hard working people, only a total planned economy could have destroyed that possibility. But thereafter, it was slower than in other countries. If you don’t get much return on investments, work and education, why would you invest, work hard or get a good education? The welfare state simply consumed the wealth that the markets had created, and made it harder to create more. In 1990, the year before a deep depression in Sweden, private enterprise had not created a single net job since 1950, but the public sector had increased by more than a million employees.

The Swedish public sector grew bigger, and more unproductive in the 1970s, and the labour market was regulated. From 1976 to 1982 public spending rose from 50 to 65 per cent. At the same time we had to devalue the currency five times, by a total of 45 per cent. The average growth rate was halved to 2 per cent in the 1970s, and declined further in the 1980s, and that was before the big crisis in the 1990s.

After more than 30 years of high taxation and an expanding welfare state, Sweden is not the 4th richest OECD-country any longer, but the 17th. This hurts the least well off most. Between 1980 and 1999, the gross income of Sweden’s poorest households increased by just over six percent while the poorest in the United States enjoyed a three times bigger increase.

Free markets and free trade were the basis for the Swedish miracle. Sweden was not an exception, and therefore it is no surprise that the shift away from free markets undermined the miracle.

In 1934 the two Swedish social democratic ideologues Gunnar and Alva Myrdal explained that there were extremely beneficial conditions for a welfare state in Sweden – considering our wealth, the homogenous population, the protestant work ethic and the good education. If the welfare state didn’t work here, it couldn’t work anywhere in the world, they thought. The rest of the world should seriously ponder the fact that the Myrdals were right in that prediction.

Johan Norberg

The author is a Swedish historian of ideas, a senior fellow with the classical liberal think tank Timbro, and author of the influential pro-globalisation book In Defence of Global Capitalism, www.globalcapitalism.st – winner of The Antony Fisher International Memorial Award 2002

This article appeared on www.techcentralstation.be on 10/06/2002