Sweden’s Quiet Revolution
Without much fanfare, the Scandinavian country has been moving away from socialism.


Bolstered by prudent economic stewardship and a relatively conservative financial sector, Sweden entered the global recession on a sound footing. While it endured a nasty spike in unemployment, its export-driven recovery has been so vigorous that the central bank is now concerned about inflation risks. In the second quarter of 2010, Sweden posted a 4.6 percent annual growth rate, prompting the Wall Street Journal to hail it as “the biggest success story in post-recession Europe.” It currently has the lowest deficit-to-GDP ratio in the entire European Union. Before the election, Swedish finance minister Anders Borg announced plans to privatize another $14 billion worth of state assets. “If we get a surplus in place,” Reinfeldt told a Reuters interviewer, “we will deliver on tax cuts for 6.1 million workers and pensioners.” (The total Swedish population is roughly 9.4 million.)

To be sure, Sweden won’t look like Hong Kong or Singapore anytime soon. It still has a lavish welfare state, and its aggregate tax burden is still quite heavy. The top marginal income-tax rate is 57 percent in Sweden, compared with 35 percent (for now) in America. On the other hand, a 2008 OECD study found that household taxes are substantially more progressive in the U.S. than they are in Sweden, even after we control for America’s higher level of income inequality. Sweden has a much lower average statutory corporate-tax rate than the U.S., and also a much lower effective corporate-tax rate on new capital investments (according to University of Calgary economists Duanjie Chen and Jack Mintz). Its tax structure is made even more regressive by a 25 percent value-added tax on consumption of most goods and services.

Which brings us to a common misconception about the Swedish system — that it takes from the rich and gives to the poor. Actually, says Lund University economist Andreas Bergh, “the majority of the taxes you pay are given back to you during your life cycle.” Thus, “if you pay more when you work, you will also get more when you retire.” Even upper-class Swedes enjoy bountiful government largesse.

Another popular myth would have us believe that Sweden’s wealth was somehow created or facilitated by social democracy. In reality, “Sweden’s prosperity is the result of well-functioning capitalist institutions,” says Bergh, author of the new Swedish-language book The Capitalist Welfare State. As Cato Institute scholar Johan Norberg explained in a 2006 National Interest essay, the relative “success” of the country’s social-democratic model “was built on the legacy of an earlier model: the period of economic growth and development preceding the adoption of the socialist system.”

During the first half of the 20th century, Sweden benefited enormously from its non-participation in the two world wars, which devastated Europe’s major industrial powers. Blessed with abundant natural resources, it was a staunch defender of property rights and a robust advocate of free trade. Cultural homogeneity, a strong legal framework, and a lack of corruption promoted famously high levels of trust and social cohesion. Sweden had a welfare state, but it also had an open, free-market economy. “As late as 1950,” Norberg observed, “the total tax burden was no more than 21 percent of GDP, lower than in the United States and Western Europe.”

In other words, Sweden became a fantastically rich country before it started greatly boosting taxes, spending, and regulation during the 1970s. Cleveland Fed economist Emre Ergungor has noted that “the marginal income tax rate on full-time workers earning the average hourly wage increased from 35 percent in the second half of the 1960s to 65 percent in 1976.” Soaring taxes funded a dramatic expansion of government: The public sector accounted for 20 percent of total Swedish employment in 1965 and 38 percent in 1985.