For the United States to resemble Sweden economically, it would
- Reduce its corporate tax
- Abolish Fannie Mae and Freddie Mac
- Abolish occupational licensing
- Abolish minimum wage laws
- Eliminate taxes on property, gifts, and inheritance
- Reform Social Security from defined benefits to defined contributions and introduce private accounts.
- Adopt a school voucher system where private schools get the same per‐pupil funding as public schools.
Before the 1950s Sweden had free enterprise social and economic policies. It prospered under them. After the 1950s the majority Swedish Social Democratic Workers’ Party (“Social Democrats”) intervened in education and health care and created social programs that provided pensions, unemployment benefits, paternal leave, and sick leave benefits.
Between 1960 and 1980, public spending more than doubled and taxes skyrocketed. The government started regulating the business and labor market in detail.
Talent and capital stormed out of Sweden to escape taxes and red tape. Swedish businesses moved headquarters and investments to more hospitable places. For example, IKEA left for the Netherlands and Tetra Pak for Switzerland.
Björn Borg and other sports stars fled to Monaco. The legendary filmmaker Ingmar Bergman left for Germany after having been falsely accused of tax evasion.
The previously celebrated Swedish work ethic was eroded in new generations who had only experienced high taxes when they worked and generous benefits when they didn’t.
The share of Swedes who said it is acceptable to lie to obtain public benefits increased from 5 percent in 1960 to 43 percent in 2000. After generous sick leave benefits were implemented, Swedes who were objectively healthier than any other population on the planet were suddenly “off sick” from work more than any other population.
In 1990, Sweden suffered a spectacular crash. Unemployment surged and the budget deficit soon reached 11 percent of GDP. The value of the Swedish currency plummeted.
Voicing a conclusion of people across the political spectrum, the Social Democratic Minister of Finance Kjell‐Olof Feldt stated “That whole thing with democratic socialism was absolutely impossible. It just didn’t work.”
From 1991 to 1994 a center‐right government implemented radical reforms. The government reduced its size by a third. It implemented a surplus target in public finances. Taxes were reduced. Taxes were abolished on wealth, property, gifts, and inheritance.
State‐owned companies were privatized. Markets in financial services, electricity, media, telecom, and others were liberalized. Sweden joined the European Union to get tariff‐free access to its most important markets.
Sweden created a school voucher system where private schools get the same per‐pupil funding as public schools
Social Democrats and center‐right parties agreed to end the pay‐as‐you‐go system in social security, like that of the United States, and replace it with defined contributions and private accounts.
The Swedish government still provides citizens health care, childcare, free colleges, and subsidized parental and medical leave.
The Social Democrats returned to power in 1996. However, they had already embraced many of these reforms.
Between 1970 and 1995, when the world thought of Sweden as a worker’s paradise, inflation ate almost all the workers’ wage increases. Since 1995, on the contrary, real wages have increased 65 percent.
The tax system is not built to squeeze the rich — they are too few, and the 1970s showed that the economy was too dependent on them.
Ninety‐seven percent of Swedish tax revenue from incomes comes from proportional payroll taxes and flat regional taxes, set at around a third of everybody’s income. Just 3 percent of the total income tax revenue comes from “taxing the rich.” The top 10 percent in the United States pay 45 percent of the income taxes. In Sweden, they pay less than 27 percent.
More than a quarter of government income derives from taxes on consumption, in which everybody pays just as much as the rich for every item bought.
So that is the real story of the Swedish model. Free enterprise economics prior to the 1950s turned a poor backwater into one of the richest countries on the planet. Then it experimented with socialism briefly in the 1970s and ‘80s. This made the country famous, but it almost destroyed it. Learning from this disaster, the left and the right have cooperated to liberalize Sweden’s economy more than other countries, even though it is still far from its classical liberal past.
Note: Johan Norberg is a Swedish author, lecturer and documentary filmmaker. This is an abridged version of “Sweden’s Lessons for America,” originally published in Cato Policy Report January/February 2020. For the complete essay go here