Saturday, June 16, 2012

Why Follow Sweden's Pro-Market Trends

When you hear the country of Sweden mentioned, it's not only things such as IKEA, the Nobel Prize, the group ABBA, or Swedish meatballs. It's one of the Nordic countries, so therefore, it must be one of those "hard Left-leaning, socialist, welfare states with high levels of taxation," a reputation that was developed in the 1970s when Sweden embraced spending larger amounts of government expenditures to provide social goods and benefits to its citizenry.  

When analyzing nations, we have to realize that nations are run by human beings, who are more than prone to imperfection. As such, a degree of leniency has to be granted for that reason. On the other hand, we have standards, so when nations make bad policy decisions (e.g., United States, Israel), we should criticize them fairly and objectively. Sweden doesn't get a free pass on policy criticism. For instance, I can criticize the fact Sweden's government expenditures as a percent of GDP are the highest amongst OECD countries, its top marginal tax rate is at a distressing OECD-high of 56% (OECD, Table I.7), and how nearly half of its GDP is derived from tax revenue (Tax Statistical Yearbook of Sweden, p. 8; OECD, Table A), which is high compared to other developed nations (but to make a counter-point, it is lower than in previous years). Even though I could continue with this line of criticism, what caught my eye was that a "socialist welfare state" could merit a ranking of #21 in the economic freedom ranking from the unabashedly conservative think-tank Heritage Foundation. It turns out that Sweden has been heading in a pro-market direction since its recession in the early 1990s.

According to OECD data, Sweden's corporate tax rate is 26.3% (Table II.1). Although this rate is slightly above the mean of 23.6% and the median of 24.5%, one has to keep in mind that just before its economy collapsed in the early 1990s, Sweden's corporate tax rate in the late 1980s was at 52%! Seeing a drop in the corporate tax rate is progress. It's not just the corporate tax that has seen improvement. In 2007, Sweden repealed its wealth tax, a tax that most countries have abolished. It's nice not to implement a tax that harms economic growth and yields low returns. Sweden also got rid of the inheritance and gift taxes at the end of 2004 (Tax Statistical Yearbook of Sweden, p. 15), which is a great stride towards progress.

Sweden's Financial Minister Andrew Borg was named the best financial minister by the Financial Times for his "fiscal prudence." Why? Sweden has shown enough financial restraint where it ran a surplus last year, amidst a recession. Minus the temporary spike of government spending in 2009, Sweden has managed to decrease its government expenditures as a percent of GDP (Eurostat) and its debt as a percentage of GDP (OECD), but managed to pull off higher GDP growth without having to resort to comparable tax hikes.

The education system in Sweden has also been liberalized. Back in 1992, Sweden implemented a school voucher program. I have some reservations about school choice, but on the whole, anything to loosen the government's monopolistic grasp on education is certainly better than the status quo. As former Swedish Minister of Education Per Unckel stated, "Education is so important that you cannot leave it to just one producer because we know from all monopolies that the monopoly system does not fulfill all wishes." How have the vouchers been doing since 1992? As a recent study from London's Institute for Economic Affairs shows, the private schools are outperforming the public school. The better-performing schools excel, and the inferior schools are crowded out of the education system. The joys of profit motive! One also has to appreciate that Sweden had privatized its Social Security in 1998, or at least reformed it where it was semi-privatized. It's not perfect, but at least it's better than the compulsive, "one size fits all" Social Security program we have here in the United States.

The "Nordic system" is ultimately a poor choice. Why else would Sweden's overall policy direction for the past 20 years be an abandonment of it? Sweden was successful before the "Swedish model" became famous, some of it having to do with cultural and demographical factors (e.g., entrepreneurial spirit) but a lot of it having to do with a respect for capitalism. The embrace of the welfare state eroded Sweden's success. Fortunately, Sweden has slowly, but surely been abandoning it for better conditions. This is hardly to say that Sweden would be considered a libertarian haven. Far from it! Sweden still has room for improvement, particularly on the overall size of its government. However, countries such as Greece or even the United States can take lessons from Sweden, and learn to use more market-oriented policies to mitigate the current economic situation.

No comments:

Post a Comment