How Socialist is Sweden?

A guest post from Johan Norberg

During our Capitalism versus Socialism debate, Scott Sehon argued that Scandinavia really is quite socialist. Since I’m not on expert on Scandinavia, I asked Johan Norberg, author of the short book The Mirage of Swedish Socialism, as well as the recent The Capitalist Manifesto, to weigh in. Norberg kindly agreed.

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With great interest I have followed Bryan Caplan’s and Scott Sehon’s capitalism versus socialism debate. I think they do an excellent job outlining their respective positions and their differences (it’s no secret that I am team Caplan). Since so much of the debate has revolved around the accomplishments of Nordic countries, perhaps it would be of interest to hear some thoughts from a Swede, who has just published a study on Sweden’s experience with big government, The Mirage of Swedish Socialism.

One of Sehon’s favorite pro-socialism arguments is that Scandinavian welfare states seem to be doing better on many indicators of well-being than the United States. This is a tricky argument, since it’s difficult to find causation when so many variables differ between Scandinavians and Americans.

When a Swedish economist once told Milton Friedman that there was no poverty in Sweden, Friedman famously replied: “That’s interesting, because among Scandinavians in America we also have no poverty.”

His point was that the millions of descendants of Scandinavian migrants in the US do better than most other Americans, and interestingly, also tend to do better than Scandinavians in Scandinavia. I am not sure if someone has looked into whether they are happier too, but going by my admittedly anecdotal evidence, it wouldn’t surprise me.

And it’s by no means certain that economic freedom is the most important difference between our countries. As Caplan points out, on the Fraser Institute’s 10-point scale, the US now registers an economic freedom rate of 8.14, compared to 8.10 for Denmark. (Sweden is at 7.81). At a minimum, this reveals that Scandinavian countries compensate for higher taxes and more public spending by having freer markets in several other areas.

Indeed, on other indicators than taxes and spending, Sweden is on average slightly more capitalist than the US. If Scott Sehon wants to imitate Sweden, he would have to liberalize several markets, reform social security and introduce private accounts, introduce school vouchers, get rid of most occupational licensing, introduce budget rules that demand a surplus over a business cycle, abolish inheritance and property taxes, and actually reduce corporate taxes a bit.

As the means of production have not been nationalized, Sweden is not a socialist country. With strong protections for property rights, and mostly private companies competing freely in an open economy coordinated by prices set by market forces, it bears little resemblance to Soviet Russia or Venezuela.

Public spending is a bit higher than America’s, but not dramatically so. According to the latest OECD data on general government spending, Sweden spends 49.1 percent of GDP compared to 44.9 percent in United States. Social spending is very similar, 23.7 and 22.7 percent of GDP respectively. If America is not an example of socialism, it is difficult to make the case that Sweden is.

A country like France is more of a big government outlier, with public spending of 59 percent of GDP and social spending of 31.6 percent. A country, incidentally, with lower self-reported well-being than both US and Sweden.

It is also important to understand how Scandinavian welfare states are funded, because it’s easy to get the impression that it’s all about taking from the rich and giving to the poor. And that will always sounds tempting. But that is the opposite of what we do. Sweden has lower corporate taxes than other OECD countries, and no taxes on property, wealth, gifts and inheritance. At the same time Sweden taxes the incomes of the poor heavier than other countries and implements a regressive value-added tax at a normal rate of 25 percent.

According to an OECD study, the richest decile in Sweden pays almost exactly the same share in household taxes as their share of market income, while in the US the top decile pays 1.35 times their share of market income. Counter-intuitively, Sweden has one of the least progressive tax systems of all rich countries.

This is the result of a painful lesson from the 1970s and 80s, the one era when Sweden really did experiment with socialist ideas. This was also the only time in modern economic history that Sweden lagged behind the rest of the world. When redistribution increased, growth repeatedly disappointed, debts ballooned and not a single net job was created in the private sector for more than two decades. Important entrepreneurs and major corporations like IKEA and Tetra Pak left Sweden. Yes, we became more equal, because of an exodus of rich people — and few new fortunes were created. It all ended in a terrible economic crash in the early 1990s, after which the left and the right agreed to liberalize the economy and stop punishing wealth creation.

Swedish social democrats learned that you can have a big government or make the rich pay for it all. You can’t have both. The rich and the entrepreneurial are too few and too important to the economy.

Today, the Swedish government is still relatively generous, but we pay for it ourselves, not the least low- and middle-income households. It’s mostly redistribution over the life cycle, not between groups. The major difference between us and the US is not that we get more, but that our government tells us how and when we should spend more of our income.

Since Sehon’s case for big government relies so heavily on the fact that Scandinavians report slightly higher subjective well-being than Americans, I would like to conclude by sharing a story from my latest book, The Capitalist Manifesto:

The Dutch sociologist Ruut Veenhoven, the man behind the famous “World Database of Happiness”, has told me that when he first began to study happiness, he was active in the Social Democratic party and believed that redistribution and social spending was a key to subjective wellbeing. This was a tempting assumption when you always find countries like Denmark, Finland and Sweden near the top of the happiness lists.

But as Veenhoven got more statistics, it became clear that other small, rich democracies such as Iceland, Switzerland and New Zealand, with lower social spending as a share of GDP than the US, were also consistently at the top of the rankings. Ireland, the Netherlands and Australia have about half the social spending that Belgium, Italy and France do, but are significantly happier. “Happiness is not greater in welfare states,” Veenhoven now states, “I was simply wrong.”

Another conclusion that surprised Veenhoven was that income inequality does not reduce a country’s well-being: “Income inequality is a by-product of capitalist societies and they have such a positive effect on well-being that it outbalances the negative effect of being relatively poor.” This, Veenhoven adds, is not a popular conclusion in all camps: “My colleagues are not amused. Inequality is big business here in the sociology department. Entire careers have been built on it.”