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.