Bernie's Right—America Should Be More Like Sweden
But not in the way he thinks
Bernie Sanders thinks the U.S. should look to Sweden and other Scandinavian countries to "learn what they have accomplished for their working people." The Vermont senator has said so repeatedly throughout his campaign for the Democratic presidential nomination, prompting GOP rival Marco Rubio to say, "I think Bernie Sanders is a good candidate for president—of Sweden."
As a native of Sweden, I must admit this makes me Feel the Bern a bit. Sanders is right: America would benefit hugely from modeling her economic and social policies after her Scandinavian sisters. But Sanders should be careful what he wishes for. When he asks for "trade policies that work for the working families of our nation and not just the CEOs of large, multi-national corporations," Social Democrats in Sweden would take this to mean trade liberalization—which would have the benefit of exposing monopolist fat cats to competition—not the protectionism that Sanders favors.
In fact, when President Barack Obama visited Sweden in 2013, the three big Swedish trade unions sent him a letter requesting a meeting. Their agenda: a discussion of "how to promote free trade." The chairman of the largest Social Democratic trade union scolded the American president for his insufficient commitment to the free flow of goods.
This reality will not endear my home country to American socialists, but it's better to be hated for the right reasons than to be loved for the wrong ones, as the saying goes. Being more like modern Sweden actually means deregulation, free trade, a national school voucher system, partially privatized pensions, no property tax, no inheritance tax, and much lower corporate taxes. Sorry to burst your bubble, Bernie.
Sanders isn't completely deluded, of course. Sweden and the other Scandinavian countries have experimented with very big government and semi-socialist ideas. There's just one problem: That experiment coincided almost perfectly with the region's only sustained period of economic decline over the last 100 years.
Sanders' image of Scandinavia is just like the rest of his policies: stuck in the 1970s. Until that decade, Sweden and Denmark had grown much faster than other European countries and had become richer than most other countries on the planet, in large part by limiting government and embracing markets. (Norway is a special case, because oil and gas make up 22 percent of GDP, just a few percentage points below Venezuela. So unless Sanders' policy proposal is to strike oil, the Norwegian example is not relevant.)
During its laissez faire period, between 1850 and 1950, Swedish income per capita increased eightfold as the population doubled. Infant mortality fell from 15 to 2 percent, and life expectancy increased by a whopping 28 years. And all this happened before the welfare state was even a glint in the taxman's eye.
As late as 1950, total taxes as a percent of GDP in Denmark and Sweden were not just lower than in other European countries but lower than in the U.S.: 20 and 19 percent, respectively, vs. 24 percent in America.
It was at this point, when we Scandinavians had satisfied our thirst, that we thought that we could turn our backs to the well. We began to regulate. We increased taxes and beefed up the public sector. It's easy to see how foreigners observing the implementation of these unorthodox policies might confuse cause and effect. But those who think the semi-socialism made us rich would also probably look at a snapshot of Bill Gates and conclude that you become the world's wealthiest man by giving your money away.
Instead, the Scandinavian countries became a real life version of the old joke about how to make a small fortune; you start with a large one. Sweden took democratic socialist policies further than its neighbors, and as a result its economy fell more steeply. Slowly but steadily the policies of Prime Ministers Tage Erlander and Olof Palme eroded productivity and the long-renowned Scandinavian work ethic. In 1970, Sweden was 25 percent richer than the OECD average. Twenty years later, the average had almost caught up with us. Once the fourth richest country on the planet, Sweden was now the fourteenth.
It was a disaster for entrepreneurship and employment. During this time, not a single job was created in the private sector (on net), despite a growing population. As of 2000, just one of the 50 biggest Swedish companies had been founded after 1970.
As the Social Democratic finance minister Bosse Ringholm admitted in 2002: "If Sweden would have had the same growth rates as the OECD average since 1970, our common resources would have been so much bigger that it would be the equivalent of 20,000 SEK ($2,400) more per household per month."
During this brief Bolivarian turn, many Swedish intellectuals feared that their country would become an Orwellian nightmare. The Social Democrats toyed with an incredibly unpopular plan to socialize private businesses, and Parliament implemented a general rule saying that any economic transaction that had the intention of lowering one's taxes was illegal even if the transaction itself was legal. IKEA founder Ingvar Kamprad and many other entrepreneurs, plus all of our famous sports stars, fled the country.
Sweden's most famous author, Vilhelm Moberg, wrote that the government was out of control, and that we were turning into a third way between democracy and dictatorship "where everybody is discontented and disappointed." Our most famous film director, Ingmar Bergman, was snatched by the police at the Royal Theatre on charges of tax crimes (later dropped). He had a nervous breakdown and left the country.
Our most famous author of children's books, Astrid Lindgren, had to pay more than 100 percent in marginal income tax, prompting her to write a bitter, satirical essay about the kind old witch Pomperipossa and vicious tax authorities: "She had thought that the rights of everybody would be respected in a democratic country. People should not be punished and persecuted because they happened—with or against their will—to make money in an honest way." But in the end, she finds a solution to her problems: "But suddenly it struck her—woman, you must be able to get welfare benefits! Oh, wonderful thought! And then Pomperipossa lived on welfare happily ever after. And she never wrote another book."
Kjell-Olof Feldt, the Social Democratic minister of finance from 1983 to 1990, admitted in a 1992 book that some of the government's program was "unsustainable," some of the policies "absurd," and the tax system "perverse." These policies also collapsed after a debt- and inflation-fuelled boom in the late 1980s.
Whatever these unsustainable and perverse policies did, they did not help the working people that Sanders claims to represent. Real wages in Sweden fell by around 5 percent between 1975 and 1995. Nominal wages increased, but runaway inflation devoured it.
But in the early 1990s Sweden began to abandon its brief detour into Bernienomics. It deregulated, privatized, reduced taxes, and opened the public sector to private providers. The two decades that followed saw real wages increase by almost 70 percent.
All industrialized countries liberalized at least somewhat during that period, but Scandinavia led the pack. Between 1975 and 2005, Sweden improved its score on the Fraser Institute's Economic Freedom of the World Index by 2.3 points on a 10-point scale. Denmark's score went up by 1.7. This can be compared to Germany's 0.9 and the United States' 0.5—Ronald Reagan notwithstanding. "Swedes lead Europe in reform," wrote the Financial Times.
In other words, there is no secret about Scandinavia's success, no mystery to be explained. These countries have performed just like any free market economist would have expected. They outgrew other industrialized countries when they had freer markets, and stagnated when they experimented with socialism. Now that they have started reforming their economies again, they are again performing better. "Sweden is the rock star of the recovery," The Washington Post proclaimed in 2011.
The legacy of Scandinavia's third way—its still-high public spending and high taxes, at least compared to the U.S.—has dwindled to fairly normal European levels. The governments provide the citizens with health care, child care, free colleges, and subsidized parental and medical leave. We Scandinavians have our quarrels with these systems and how they function, but at least they have not ruined our societies; indicators of living standards and health are impressive.
Why isn't the system more abused? Why are they not more of a drag on growth?
One reason is that we compensate for them with a more open economy than others. In the summary Fraser Institute rankings, Sweden and Denmark are more economically free than the United States when it comes to legal structure and property rights, sound money, free trade, business regulation, and credit market regulations. We don't have the multitude of occupational licensing laws that block competition in the United States.
Tax the Poor
We also pay for the welfare state in a fairly brutal way, but one that doesn't hurt production as much: by squeezing the poor and the middle class. Unlike the rich, poor and middle-class people don't flee or dodge when they're taxed aggressively.
The Social Democrats knew all along that they couldn't fund such a generous government by taking from the rich and the businesses—there are too few of them, and the economy depends on them too much. So Sweden and Denmark take in lots of revenue via highly regressive value-added taxes at a normal rate of 25 percent of sales—the only tax where the rich and poor pay exactly the same amount in kronor. On the other hand, the corporate tax is just 22 and 23.5 percent respectively, compared to the U.S. rate of 35 percent.
In fact, rich people in Sweden enjoy several economic advantages not offered to their lower-class counterparts. Sweden always admitted very generous tax deductions for capital costs. Labor regulations are tailored to benefit big companies. To attract highly educated specialists from abroad, Sweden now has a beneficial "expert tax" for them, which shields 25 percent of their wages from taxation for a three-year period. "Sure, it is unfair, but we have no better solution," the Social Democratic minister of finance said in 2000, when he implemented special tax exemptions for individuals and families who owned a large share of a listed company.
Unlike Sanders, Scandinavian socialists have concluded that you can have a big government or you can make the rich pay for it all, but you can't do both.
Sanders has a point when he notes that Scandinavian countries are fairly equal, decent societies with high living standards. Speaking from my own experience, they are also pretty good places to live.
But does the welfare state deserve credit for this state of affairs? When Nobel Prize–winning economist Milton Friedman was confronted with the claim that there was no poverty in Sweden in contrast to the United States, he famously replied "That's funny, because in America, among Swedes, we have no poverty either."
That's an exaggeration, but the data bear out his underlying point. As the Swedish researcher Nima Sanandaji has observed, the income of Scandinavians in the U.S. is about 20 percent higher than the average, and their poverty rate is about half the poverty rate of average Americans.
The 18,000 Scandinavians in Sanders' Vermont and the other 11 million ancestors of Scandinavians in other parts of the United States have also created fairly decent communities with high living standards, even under ruthless American dog-eat-dog capitalism.
Apparently, you can take Scandinavians out of Scandinavia, but not the Scandinavia out of Scandinavians. There is a cultural background that explains some of our success, going even further back than the laissez faire period in the late 19th and early 20th century, a culture of social trust, comparative lack of corruption, and a Lutheran work ethic. This may reflect a long history of internal stability, scant levels of feudalism, and a strong tradition of trading.
Two Scandinavian economists, Andreas Bergh and Christian Bjørnskov, have documented that a high degree of trust is an old legacy, and that descendants of those who emigrated from Scandinavia 100 years before the welfare state are also more trusting. Their conclusion is that trust in others and social cohesion creates the welfare state rather than the other way around, since it is more tempting to give power to politicians and money to strangers if you believe that they are decent people who would never cheat the system.
Scandinavians have always frowned on those who take money they are not entitled to. Sweden is, after all, the country where the leading candidate for prime minister in 1995 had to resign because it was revealed that she had used her official credit card to pay for some small private expenses, even though she always, every month, paid the credit card debt herself.
When asked, "Under what circumstances is one justified in accepting government benefits to which one is not entitled?" in 1991 and 1998, the Nordics led the world in saying "never." (Only Malta says it is more upstanding, and a brief canvass of Maltese of my acquaintance suggests that they are rather likely to have lied on the survey.) Oh, and the United States is 16th, lower on the list than even the Italians.
Commerce, Culture, and Continuity
But culture is not destiny. Scandinavian values were formed once upon a time with the help of economic incentives and institutional support. If that support goes, this culture could start to erode. If you have been brought up thinking that work is an essential virtue, you will work hard even when it doesn't pay much. But what happens in the next generation, the young and immigrants, who enter working age long after the incentives have been distorted?
The proportion of Swedes who say that it is never OK to accept benefits to which one is not entitled is still high, but has been reduced from 82 percent in the early 1980s to 55 percent now.
Some erosion of these attitudes could be seen in the early 2000s, when the number of Swedes on sick leave exploded. Even though we were objectively healthier than almost any other population, we were off sick more than anybody else. Often during large sporting events, coincidentally. During the Soccer World Cup in 2002, the number of men taking short-term sick leaves increased by 41 percent, whereas it did not change for women. God knows what would have happened had Sweden made it past the final eight.
In Sweden, we are experiencing these problems in the form of increased unemployment among immigrants. Now the employment gap between natives and foreign-born in Sweden is twice the European Union average, even though we express less racist and discriminatory attitudes than others. In response, Swedish politicians have recently decided to abandon liberal immigration policies and do whatever they can to scare people away.
It was easier to have a one-size-fits-all approach when we were all alike, from the same background, with the same faith and attitude and a similar education. We need a more flexible model now that we are becoming a little bit more like…well, the United States.
Gunnar and Alva Myrdal, the two leading Social Democratic thinkers of the 20th century, thought that the Scandinavian countries were uniquely suited for experimenting with high taxes and redistribution. They had homogenous populations with a strong work ethic, non-corrupt civil services, a high degree of trust in bureaucracies and politicians—and competitive free trade economies to foot the bill. If it did not work there, they suggested, it would be difficult to think it could work anywhere.
For now, the Swedish experiment in socialism continues along, in a much-altered form and buoyed by a healthy dose of economic liberalization. But attempting to transplant the Nordic 1970s model to the U.S. could have disastrous effects in a country with a less hospitable underlying culture. More government in the U.S. would not get you a big version of Sweden. It would get you a big version of the U.S. Postal Service.
If Bernie Sanders decided to run for the presidency of Sweden, as Marco Rubio suggested, Swedes would find it laughable. He is far too much of a leftist and a protectionist. And there's one other small problem: Sweden is a constitutional monarchy. We do not have a president.