The Swedish Illusion

"Do you hear that Mr Anderson? That is the sound of inevitability."
--Agent Smith (The Matrix)

During a class discussion yesterday, a student noted that she worked for a Swedish company, and that her visits to Sweden suggest to her that a high tax, redistribution of wealth model is effective. Everything is clean, she said, and healthcare is 'covered.' It works, she concluded.

It is tempting to draw such conclusions from anecdotal observations, but the picture is rarely that simple. A bigger picture assessment is necessary.

With a land mass about the size of California, Sweden's GDP officially clocks in at about $450 billion, which ranks it 22nd in the world. The eye popping stat right out of the gate is that the country's population is 9.2 million--just a bit larger than NYC. This puts nominal GDP/capita at $50,000 (estimates of real per capita income range from $30-35K). This suggests one of three things: a super productive people, econometric book cooking (e.g., GDP much lower than reported), or some 'special situations.'

Superproductive seems unlikely, as Swedes characteristically work fewer hrs than workers elsewhere. And issues w/ govt sponsored metrics are always an issue...

Let's look at some of the special situations. Non participants in the World Wars, historically high saving rates, and rich natural resource base that has has led to strong exports during the commodity price boom (exports account for more than 1/3 of total output). Wisely, Sweden did not drink the EU kool-aid, thus it maintains sovereign control of fiscal and monetary policy--certainly a comparative advantage over its neighbors drowning in Continental collectivism.

One hundred yrs ago Sweden was home to a near textbook free market structure. Over the last 50-70 yrs, however, the economic structure tilted toward the socialist end of the spectrum. The original socialist model collapsed in the wake of a banking crisis in the early 1990s. Since then, structural reforms such as privatizing former state owned companies and reducing government regulation has made the private sector more vibrant.

However, a large public component remains. Tax rates are high across the board, and total tax intake amounts to over 50% of GDP. Parenthetically, it is difficult to grasp how Heritage can assign Sweden a property rights rating of 90 when over half of all measured output is appropriated by the government. This large redistribution of wealth has resulted in a burgeoning welfare system that, while reformed somewhat since the early 1990s meltdown, remains central to the economic structure. Healthcare (10% of GDP), retirement, unemployment, large public sector workforce (1/3 of total), strong union/rigid workrules (80% of workforce unionized), et al.

One would 'think' this setup disastrous. Thus far, however, it has been workable--and perhaps offers the illusion of socialist utopia. Many on the Left indeed hold up Sweden as the benchmark for planning.

There are various plausible explanations as to why this model has yet to cave in. First off, this socialist system DID come apart in the early 1990s, and arguably it has been structural reform toward the free market end of the spectrum that has driven real productivity gains-essentially offsetting the drag of the welfare system. It also seems likely that real living standards are lower than the large per capita income would suggest. Data suggest that Swedes save about 10% of income. If that's true, then that means citizens have only about 40% of their income for private consumption (the other 60% is taxes and savings). 40% of 35,000 is about $14,000 in personal income available for consumption purposes. Pretty spartan, it seems to me.

As in all socialist systems, the marquee labels such as universal healthcare ignore the problems under the hood. There are few things easier to forecast that the outcomes of government sponsored healthcare for all. Costs go up from the bureaucracy and lack of competition. If government puts a lid on how much providers get reimbursed, then there will be shortages as supply leaves the system. Talent looks elsewhere. Quality goes down. Rationing (famously labelled 'deathpanels' during the domestic healthcare debate) is inevitable.

I did not do too much digging, but accounts of Swedish health care system dysfunctionality are certainly available to inquiring minds (ex here).

From where I sit, Sweden's mixed economy model is no triumph of central planning. Instead, a historic free market basis, less war-related loss, and recent market-oriented reforms are offsetting the dead weight of the social welfare system. If more market-oriented reforms are implemented, then Sweden may continue to prosper.

My sense is that things are likely to head in the other direction, however. The public sector becomes a black hole, draining productive resources from the economy. Savings rates fall and government will either borrow more (national debt right now is a relatively small 40% of GDP) or the Riksbank will print Krona to try to cover the standard of living shortfall. Chaos, just as we are observing elsewhere.

Currently, however, Sweden's special situations appear to have slowed its trip down the Road to Serfdom.

Expect the pace to quicken...