The Free Market Social Democrats

A great piece from Anders Åslund, senior fellow at the Peterson Institute for International Economics and author of this very good book on Russia's transition from communism, explaining how the much-praised Scandinavian welfare state became more market friendly as it became evident that the social democratic model of the 1970s "was impossible to finance." And despite the free-spending governments in Copenhagen, Oslo, and Stockholm, it is important to remember, Åslund says, that “the Scandinavian economies were always free-trade oriented, dominated by efficient, competitive private companies that were forced to finance the social democratic excesses through exorbitant taxes.”

The crisis brought down the long-lasting social democratic governments and ushered in principled free marketers, with Swedish Prime Minister Carl Bildt (1991–94) as a leading ideologue. The combination of severe financial crisis and new free-market governments cleared the way for systemic change. Because of its abundance of oil, wealthy Norway could persist with the old statist model while Sweden and Finland caught up with the pioneer Denmark. These crises laid the groundwork for recent economic successes.

Although social democrats intermittently returned to government in Sweden and Finland, they had accepted the new market-oriented paradigm. During the next 15 years, Sweden went through an extraordinary financial cleansing, cutting public expenditures from 71 percent of GDP in 1993 to 52 percent in 2008—that is, by almost one-fifth of GDP. Public revenues fell also with lower taxes, but only from 60 percent of GDP to 54 percent of GDP. As a result, Sweden’s budget deficit of 11 percent of GDP was transformed into a budget surplus of 2.5 percent of GDP. Meanwhile, its public debt declined from 78 percent of GDP to 47 percent of GDP. Finland’s public finances went through a similar tightening.

Sweden, for instance, isn’t exactly a Friedmanite utopia, but Åslund makes a point that’s always worth underscoring: “[The center-right government of Fredrik Reinfeldt] cut taxes four times and abolished wealth taxes—the preceding social democratic government had actually eliminated inheritance and gift taxes, but even so achieving a budget surplus and reducing the public debt. Seldom has a government carried out so many small deregulatory reforms on a broad front.” And they were reelected, marking the the first time Sweden’s Social Democratic Party has lost two consecutive elections.

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  • ||

    During the next 15 years, Sweden went through an extraordinary financial cleansing, cutting public expenditures from 71 percent of GDP in 1993 to 52 percent in 2008—that is, by almost one-fifth of GDP. Public revenues fell also with lower taxes, but only from 60 percent of GDP to 54 percent of GDP.

    And people who say "That's still way more than the USA" tend to ignore that we spend way more at the state level than many European countries do at their federal units. Total spending from all government was about 44% of GDP in 2009.

  • Max||

    Sweden is still a welfare state with healthcare for all, generous unemployment benefits, free child care, tuition-free universities and a curious lack of right-wing fanatics of the Reason variety.

  • Old Mexican||

    Re: Max,

    Max, H&R's pet yorkie.

    Here, Max! Here, boy! Go fetch! Good boy!

  • ||

    Stop giving him a bone, OM.

  • Old Mexican||

    Re: Max,

    "Meanwhile, its public debt declined from 78 percent of GDP to 47 percent of GDP. Finland’s public finances went through a similar tightening."

    The Scandinavians must be tightening their belt just for the hell of it, in your mind...

  • Min||

    (Swedes don't work for stuff. Everyone there agrees.)

  • Mr. FIFY||

    Did Max post something? I wasn't paying attention.

  • Atanarjuat||

    I skimmed the article and it doesn't seem to go into greater depth about the specifics of deregulation, but it does say the governments spent less on welfare stuff and quit attempting Keynesian interventions. I, an extreme lay person, would be interested to see if high taxes, which I guess they have in Scandinavia, proved less onerous to a growth than market-interfering regulations.

  • Tony||

    Wouldn't it be nice if "growth" weren't the most important thing? What about something like "sustainability"?

  • Cytotoxic||

    Fine. Sustainable growth: brought to you by free-market capitalism, and nothing else.

  • Tony||

    Since when?

  • ||

    Don't you know Tony? They only take the ribs of a pig and throw everything else away. Why bother using the whole thing?

  • jester||

    You mean of course that wouldn't it be nice if government would focus on the sustainability of its budget instead of its growth. Correct?

  • Tony||

    And economies were driven by the same. How long are we supposed to grow for on a finite planet?

  • jester||

    Yes, the planet we occupy will be gone someday and I am guessing what we do today will do little or nothing to change that someday.

    But growth in the economic sense leads to features such as lower infant mortality, lower birth rates, more voluntary leisure time (yes, that is growth), better and more efficient technologies, etc.

    Growth is not some metaphorical vegetative vine that engulfs the world. Growth is accumulation of wealth and it can be stored in ways that defy what we all would have thought just a few years ago.

  • Tony||

    lower infant mortality, lower birth rates, more voluntary leisure time (yes, that is growth), better and more efficient technologies, etc.

    Technological advancement and shared prosperity lead to those things directly. The market delivers some of these thing and so does government (NASA and the progressive income tax being examples of the latter). Growth is an important aspect of economic activity but it shouldn't be the only purpose of it and assumed to be eternal.

  • jester||

    The market delivers all of those things. The government, after siphoning off rent for its myriad rent-seekers, delivers a shell of what private industry does.

  • ||

    A population that can adapt its environment to suit its needs is not bounded by that environment.

  • Tony||

    So when are we gonna get around to engineering the atmosphere we're completely fouling up?

  • jester||

    The 'we' part is the problem. 'We' are all individual acting agents. So if 'we' aren't the ones fouling things up, then 'we' aren't the ones responsible for the engineering.

    You haven't listened to a climate debate obviously because that's the clarion of a lot of very small nations.

    And its something that resounds with the Reason readership.

  • Xeones||

    Tony! I never knew you were some kind of atmospheric engineer/inventor! What else are you keeping hidden in that closet of horrors you call a mind?

  • Sam Grove||

    Did you swallow everything your teachers shoved down your throat?

    Completely fouling up? You should try examining the facts. The air is much cleaner than it was even 40 years ago. The atmosphere recovered from the Kuwait oil well fires, and regularly accommodates large volcanic eruptions.

    If you want to worry about fouling, look to the oceans.

  • Ted S.||

    Government's Ponzi-scheme pension systems are inherently unsustainable.

  • Atanarjuat||

    Are you shitting me? Economic growth is what keeps people from dying of cholera like they are in Haiti--able to afford sewage treatment facilities. Surely sustainability (I assume you're referring to environmentalism) is of lesser importance, a luxury we can indulge in when we're wealthy enough to not have to worry about our drinking water. Speaking of sustainability, which country has healthier forests, Haiti or D.R.?

  • ||

    "Nal khomerex, khesterex"

    The structure that does not grow, dies.

    Stagnation is death, Tony.

  • Atanarjuat||

    I.E., because taxes are essentially skimmed off the top and create less uncertaintanty than constantly updated regulations.

  • crazyfish||

    If I understand the Nordic model is moderate income taxes plus high consumption taxes, in exchange very little corporate and labor taxes?

  • Mr. Chartreuse||

    Also, they spend around 660 billion less on defense than we do. That helps.

  • ||

    More properly, it could be said that we supply, at no cost to them, much of their defense, as we supply, again with no cost to them, a large chunk of their medical overhead.

  • Max||

    I'll bet not many Swedes would trade their welfare state for shit hole the U.S is rapidly becoming. The incarceration rate alone is enough to make a civilized person puke.

  • Mr. Chartreuse||

    So you'll be joining us in the denunciation of the drug war?

  • ||

    Don't ask Ingemar Kamprad that question.

  • Mr. FIFY||

    Max doesn't understand that part of the reason we're becoming "a shithole" is due to the current leadership of his party.

  • sr7||

    On the left side of the spectrum we can squeeze our Democrat Party in between Raul Castro and Kim Jong Il. Good to know.

  • ||

    So, we should increase spending even more? That's what I'm taking away from this.

  • ||

    If I had to choose between (a) higher taxes and a shrunken regulatory/nanny state and (b) a swollen regulatory nanny state and lower taxes, I'd go with (a), because I'd have more freedom in how I live my life, and the growth from a shrunken regulatory state would mean I could afford the taxes.

    One of my major disappointments with the Tea Partiy movement is their complete and total silence on the regulatory/nanny state.

  • blubi||

    I resent both but taxes more, I guess it depends on your priorities. Say the state taxes you 25% during a working life of 40yrs (I´ll exclude taxes during retirement). That´s 10 years of your life working for the state, philosophically akin to sending you 10 yrs to a gulag, although obviously more pleasant and because people taxes are typically deducted from your paycheck, you tend to take it for granted. I´d gladly trade not being able to legally smoke pot, drink under 21, etc for 10 yrs of forced labour.

  • Voxpo||

    Meanwhile, clueless residue like this is about par for the left in the U.S. Really, if you can't get the My First Political Debate* level stuff, do you have any business attempting to influence others? Or mentioning myopia?

    * Day 1, Lesson 1: Opposing forced X is not the same as opposing X. Advocating legal Y is not the same as advocating Y. Now, who wants a graham cracker and juice?

  • pussy munster||

    Everyone thinks that anyone with a brain must agree with them--liberals, conservatives, libertarian--you name it.

    They are all equally convinced that anyone who disagrees with them is a worthless excuse for a human being.

    Any participation on my part won't change the political system in any way or how others choose to participate.

    Why should I care about politics at all?

  • Xeones||

    Thank you for posting, i guess.

  • rhea||

    I don't see how you can stimuli US economy already in a fragile recovery mode and cut investment spending by US government without rising the deficit? I think Mr. Obama with Timothy Geithner did the right thing with the tools they got in their at that time and one of them is not to lower income tax for higher revenues 250 K and more.
    Making sure that business and consumers has credit facility to invest and produce and for consumers to buy those products is certainly the way to go. So the lowest prime rate
    for US Central bank is vital to stimulate the economy until inflation is out of control.
    Cutting US government investment spending will jeopardize the already fragile economy and worsen US economy.

    http://www.pathtoasia.com/jobs/

  • Xeones||

    Your grammar skills and your economic acumen were made for each other.

  • Xeones||

    Why has no one mentioned that two thirds of the roads in Sweden are owned by private associations? They're practically Somalia over there.

  • blubi||

    Re. "the choice is more pragmatic than ideological": yes, but only to a point. Even if greater liberalization is beneficial (even to the "working class"), since that would lead to greater income inequality politicians will exploit it via class warfare so there is an ideological limit.

    Also to note that Sweden as a small country had more reason to adjust as it is more vulnerable to economic reality (capital fleeing elsewhere). Big nations like the US & EU seem to think they can survive by bullying other nations into raising their tax rates or changing their tax haven status.

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