WHEN LUTHER WEARS OFF (via Tom Morin):

Swedish Models (Johan Norberg, Summer 2006, National Interest)

Long the paragon of social democracy, the Swedish model is rotting from within. Ironically, the unique social and economic foundation that first allowed Sweden to construct its political edifice--and which makes it such a difficult model for other countries to emulate--has been critically weakened by the system it helped create. Far from a being a solution for the new sick men of Europe, Sweden must face serious and fundamental challenges at the heart of its social model.

TO SAY that other countries should emulate the Swedish social model is about as helpful as telling an average-looking person to look like a Swedish supermodel. There are special circumstances and a certain background that limit the ability to imitate. In the case of the supermodel, it is about genetics. In the context of economical and political models, it is about the historical and cultural background.

Gunnar and Alva Myrdal were the intellectual parents of the Swedish welfare state. In the 1930s they came to believe that Sweden was the ideal candidate for a cradle-to-grave welfare state. First of all, the Swedish population was small and homogeneous, with high levels of trust in one another and the government. Because Sweden never had a feudal period and the government always allowed some sort of popular representation, the land-owning farmers got used to seeing authorities and the government more as part of their own people and society than as external enemies. Second, the civil service was efficient and free from corruption. Third, a Protestant work-ethic--and strong social pressures from family, friends and neighbors to conform to that ethic--meant that people would work hard, even as taxes rose and social assistance expanded. Finally, that work would be very productive, given Sweden's well-educated population and strong export sector. If the welfare state couldn't work in Sweden, the Myrdals concluded, it wouldn't work anywhere.

Sweden's economic success story began in the late 19th century, after a fundamental political shift towards free markets and free trade. Swedish traders could export iron, steel and timber, and entrepreneurs created innovative industrial companies that became world leaders. Between 1860 and 1910, real wages for factory workers rose by about 25 percent per decade, and public spending in Sweden didn't surpass 10 percent of GDP.

The Social Democratic Party came to power in 1932 and has governed Sweden for 65 of the last 74 years. They realized early on that a party of class struggle wouldn't be able to hold on to power in Sweden. Instead, they became a party of the middle class by creating social security systems that gave the most pension, unemployment, paternal-leave and sick-leave benefits to those with high wages. (Most benefits were proportional to the amount paid in, so the wealthy middle class would have an interest in supporting the system.) It was a policy of socialization from the consumption side: The government would not take control of the means of production, but would instead tax workers, in the form of sales and income taxes, to provide welfare. It was markets and competition for big business, a welfare state for the people. Still, as late as 1950 the total tax burden was no more than 21 percent of GDP, lower than in the United States and Western Europe.

This meant that the Social Democrats were eager to please industry and not allow the social agenda to interfere with the economy's progress. Free trade was always the rule. Regulations that were introduced were adapted to benefit the biggest industries--for example, wages were equalized, but for the purpose of keeping wages low for the big companies, while small and less productive companies were forced out of business. The trade unions, for their part, were relatively positive to the creative destruction of capitalism, so they allowed old sectors like farming, shipping and textiles to pass away, as long as new jobs were created.

These policies, and the fact that Sweden stayed out of two world wars, meant that the economy yielded amazing results. Sweden was rich: In 1970 it had the fourth-highest per-capita income in the world, according to OECD statistics. But at this stage the Social Democrats began to radicalize, with coffers filled by big business and heads filled with ideas from an international leftist trend. Social assistance was expanded and the labor market became heavily regulated. Public spending almost doubled between 1960 and 1980, rising from 31 percent to 60 percent of GDP.

This was also the time when the model began to run into problems. From 1975 to 2000, while per-capita income grew by 72 percent in the United States and 64 percent in Western Europe, Sweden's grew by no more than 43 percent. By 2000, Sweden had fallen to 14th in the OECD's ranking of per-capita income. If Sweden were a state in the United States, it would now be the fifth poorest. As the Social Democratic Finance Minister Bosse Ringholm explained in 2002, "If Sweden would have had the same growth rates as the OECD average since 1970, our common resources would have been so much bigger that it would be the equivalent of 20,000 SEK [$2,500] more per household per month."

Too Much of a Good Thing

THE SOURCE of the problem was the fatal irony of the Swedish system: The model eroded the fundamental principles that had made the model viable in the first place.

The civil service is a powerful example of this phenomenon. The efficiency of the civil service meant that the government could expand, but this expansion began to undermine its efficiency. According to a European Central Bank study of 23 developed countries, Sweden now gets the least service per dollar spent by the government. Sweden still reports impressive results on living standards (just as it did before the introduction of the welfare state in the years following World War II), but not at all what you would expect from a country with the world's highest tax rates, currently at about 50 percent of GDP. If the public sector were as efficient as Ireland's or Britain's, for example, the expenditure could be reduced by a third for the same service. The Swedish Association of Local Authorities and Regions reports that Swedish doctors see four patients a day on average, down from nine in 1975. It is less than in any other OECD country, and less than half of the average. One reason is that a Swedish doctor spends between 50 and 80 percent of his time on administration.

On the economic side, the old Swedish system of encouraging investments in big industry worked well, as long as there was little need for innovation. Once that occurred, however, the system ran into trouble. The competitiveness of industry had to be propped up several times by depreciating the currency. Globalization and the new knowledge and service economy made it more important than ever to invest in human capital and individual creativity. High marginal tax rates on personal income, however, reduced individuals' incentives to take risks and to boost earning potential by investing in their education and skills, and made it extremely difficult to attract skilled workers from abroad.

Furthermore, the Swedish model was dependent on having a small number of large industrial companies. As these diminished in importance, or moved abroad, Sweden needed something to take their place. But the policies that benefited the biggest firms created a deficit of small- and medium-sized businesses. Those that did exist didn't grow, partly because of the risks and costs of highly burdensome employment rules that prevented the firing of workers. Indeed, the most important Swedish companies today are those that were born during the laissez faire period before the First World War; just one of the fifty biggest Swedish companies was founded after 1970. Meanwhile, services that could become new private growth sectors, like education and health care, were monopolized and financed by the government. As they grew in importance and size, a steadily growing part of the Swedish economy thus became protected from international market forces and investments that could have turned them into successful and productive enterprises.

In the early 1990s a deep recession forced Sweden to abandon a lot of the excesses from the 1970s and 1980s. Marginal tax rates were cut, the central bank was made independent, public pensions were cut and partially privatized, school vouchers were introduced, and private providers were welcomed in health care. Several markets were deregulated, like energy, the post office, transportation, television and, most importantly, telecom, which opened the way for the success of companies like Ericsson.

But Sweden retained the world's highest taxes, generous social security systems and a heavily regulated labor market, which split the economy: Sweden is very good at producing goods, but not at producing jobs. According to a recent study of 35 developed countries, only two had jobless growth: Sweden and Finland. Economic growth in Sweden in the last 25 years has had no correlation at all with labor-market participation. (In contrast, 1 percent of growth increases the number of jobs by 0.25 percent in Denmark, 0.5 percent in the United States and 0.6 percent in Spain.) Amazingly, not a single net job has been created in the private sector in Sweden since 1950.

During the recession in the early 1990s, Sweden had an unemployment rate of about 12 percent. The official rate has been halved since, but the difference has been offset by a dramatic increase in other forms of absenteeism. For example, there are 244,000 openly unemployed workers in a total population of 9 million. But this does not include 126,000 working in labor-market projects (the largely unsuccessful programs geared towards helping people acquire the skills to find employment) or the 89,000 job-seekers who are receiving some form of education. And there are another 111,000 in "latent unemployment", people who are not defined as part of the work force, but who can and would like to work. If all of these workers are included in the calculation, Sweden's true unemployment rate is still 12 percent. (Although other countries' unemployment figures, including those for the United States, also fail to reflect the real rate joblessness, Sweden's array of government-funded projects for work and education particularly distort the data. In addition, Sweden does not include in its figures students that are seeking employment, breaking with international norms.)

Moreover, the unemployment rate says nothing about another hidden labor problem: rampant absenteeism. Swedes are healthier than almost any other people in the world, but they are also out sick more often than any other people, according to available data. In 2004, sickness benefits absorbed 16 percent of the government budget, while health absenteeism has doubled since 1998. With a sickness benefit of up to 80 percent of a recipient's income (depending on his or her wage level), it is not surprising that there is an epidemic of absenteeism. Moreover, about 10 percent of the working-age population has retired with disability benefits. A researcher at the main trade union, LO, recently left his job when he was not allowed to publish his estimate that close to 20 percent of Swedes are unemployed, either openly or hidden in labor-market projects, long-term sick-leave and early retirement. [...]

SO IF THE Myrdals were right when they said that if the welfare state couldn't work in Sweden, it wouldn't work anywhere, what will it mean if Sweden's system fails? The answer seems obvious.