By Nima Sanandaji and Robert Gidehag
Sweden is often held up by American pundits and experts as a kind of Utopia, a country to be emulated. As is often the case when dealing with Utopias however, the complexities of history, culture and policy frequently are shoved aside.
Rather than being guinea pigs in a progressive experiment in social engineering, Swedes are a unique people with a long history. Therefore, we should question the lazy assumption that good Swedish outcomes (long life expectancies, social equality) are due to particular Scandinavian policies (the welfare state).
After all, even before the high-tax welfare state, Sweden was characterized by an even distribution of income, low poverty and long life spans, the same phenomena that today are said to be the result of high-tax welfare policies. In 1950, before the high-tax welfare state, Swedes lived 2.6 years longer than Americans. Today the difference is 2.7 years.
A more reasonable view of why Sweden performs well on many social metrics has its basis in history and sociology: Swedes have for hundreds of years benefited from sound low-level institutions, such as a strong work ethic and high levels of trust and cooperation.
These cultural phenomena do not disappear when Swedes cross the Atlantic to the supposedly inferior “cowboy” country. On the contrary, they appear to bloom fully. The 4.4 million Americans with Swedish origins are considerably richer than the average American. If Americans with Swedish ancestry would form their own country their per capita GDP would be $56,900, more than $10,000 above the earnings of the average American.
The old Sweden, in contrast, has not done as well in economic terms. In 1960 taxation stood at 30 percent of GDP, roughly where the US is today. As taxes rose, economic growth decreased, with Sweden dropping from being the 4th richest country in 1970 to being the 12th richest in 2008. Swedish GDP per capita is now $36,600, far below the $45,500 of the US, and even further behind the $56,900 of Swedes in America.
A Scandinavian economist once stated to Milton Friedman: "In Scandinavia we have no poverty." Milton Friedman replied, "That's interesting, because in America among Scandinavians, we have no poverty either." Indeed, the poverty rate for Americans with Swedish ancestry is only 6.7%, half the U.S average. Economists Geranda Notten and Chris de Neubourg have calculated the poverty rate in Sweden using the American poverty threshold, finding it to be an identical 6.7%.
Ironically, this points us towards the conclusion that what makes Sweden uniquely successful is not the welfare state, as is commonly assumed. Rather than being the cause of Sweden’s social strengths, the high-tax welfare state might have been enabled by the hard-won Swedish stock of social capital. It was well before the welfare state, when hard work paid off, that a culture with strong protestant working ethics developed.
As taxes in Sweden have grown rapidly towards taking up half of the economy, that social capital is being eroded. In the 1990s, supposedly hyper-healthy Sweden established itself as being sickest country in the rich world, in terms of sick-leave. In addition, half a million working-age people (compared to a total labor force of four million) were placed in health-related “early retirement”.
Labor union economist Jan Edling calculated that a fifth of working-age Swedes were supported by some form of public unemployment support, including sickness related leave in 2004, when the economy was growing strongly.
The high-tax state has also created an increasingly threatened middle class. In a recent study, the Swedish Taxpayers association noted that wealth formation among the middle classes is weak. There is little correlation between earnings and wealth amongst Swedes.
Instead of building capital, Swedes go into debt: 27 percent of Swedish households in fact have more debts than wealth, compared to between 16 and 19 percent in the US. With middle class wealth formation being held back by high taxes, Sweden has ironically developed a more unequal wealth distribution than the US. The Gini coefficient for ownership is almost 0.9 in Sweden, compared to slightly above 0.8 in the US.
In short, there is much to admire in Sweden. But when it comes to economic policy and copying Swedish institutions, Americans are probably better off being inspired by Swedes in America, rather than Swedes in Sweden.
Nima Sanandaji, is President of the Swedish think-tank Captus and Robert Gidehag is president of the Swedish Taxpayer´s association. They were assisted by Tino Sanandaji and Arvid Malm, chief economists at Captus respectively the Swedish Taxpayers Association.