But What About Sweden?

Liberals and Progressives like to hold up Sweden as a model of a welfare state that actually works. But a quick look at some facts should do much to dispel that myth.

First, it is important to understand Sweden’s history. A relatively poor country until the 19th century, says Richard Rahn, “[b]eginning in the 1870s, Sweden created the conditions for developing a high-growth, free-market economy with a slowly growing government sector. As a result, Sweden for many years had the world's fastest-growing economy, ultimately producing the third-highest per capita income, almost equaling that in the United States by the late 1960s. Sweden became a rich country before becoming a welfare state.”

Then, in the 1960s, Sweden implemented a variety of welfare state policies, increasing the tax and regulatory burden on individuals and businesses, and raising government spending to more than 60 percent of GDP. As a result, “[b]y 1993, the government budget deficit was 13 percent of GDP and total government debt was about 71 percent of GDP, which led to a rapid fall in the value of the currency and a rise in inflation.”

When the Swedes realized the negative impact of their socialist policies on the economy, they began implementing free market reforms. They lowered the top marginal tax rate, and deregulated public services such as taxis, air services, railroads, and electricity. Most notably, the Swedes instituted a voucher program in their schools and overhauled their pension system to include partial privatization and individual accounts. As a result, economic freedom in Sweden has increased since the 1980s, putting the country back on the road to recovery and growth.

Nevertheless, the Heritage Foundation’s 2010 Index of Economic Freedom still ranks Sweden only 21st in the world, 13 spots below the United States. Why? “Sweden’s scores in fiscal freedom and government spending are among the lowest in the world. Although the corporate tax rate has been reduced and the wealth tax has been abolished, the overall tax burden remains large. The top income tax rate of 57 percent is one of the world’s highest. Total government spending is more than half of GDP.” Consequently, Sweden loses out on economic development. As James Gwartney’s research shows, the higher the tax burden, the lower the economic growth rate; people have less incentive to raise their productivity levels if they are punished for it with higher taxes.

And despite what advocates of government-run healthcare would have you believe, Lund University economist and author of The Capitalist Welfare State, Andreas Bergh argues in this video interview that the higher life expectancy in Sweden is not because of their socialized medicine but because the Swedes eat healthy, have an active lifestyle, don’t smoke, and only consume alcohol in moderation. Moreover, as Johan Norberg, author of In Defense of Global Capitalism, makes clear, Swedish healthcare relies heavily on medical technology and drugs produced in the United States’ freer market. Ironically, Sweden also has the highest sick leave statistics in Europe, because its people still get 80 percent of their wages staying home—clearly an incentive that reduces productivity and job growth.

Sweden is not an example of a well-functioning welfare state. It is an example of a country trying to have the best of both socialism and capitalism. Of course, one cannot reconcile contradictions. As long as Sweden—and every other mixed system—believes it can, it will never unleash the economic and moral potential of a truly free society.

Watch Andreas Bergh’s interview with reason.tv below.