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Lessons from Sweden

Friday, 30 August 2013 04:21

C Fred Bergsten suggests that Obama could get some lessons from Sweden when he visits there next week. His piece emphasizes the market orientation of Sweden's government. While the country has definitely rolled back some of its social welfare state over the last quarter century, readers could be misled by some of the items in Bergsten's column.

For example, Bergsten tells readers:

"Swedish social security became a true insurance system, rather than a pay-as-you-go one with huge unfunded liabilities as in the United States."

The defined benefit portion of Sweden's reformed Social Security system is supported by a tax that is roughly 30 percent higher than the U.S. tax. (Okay, I was doing a Peter Peterson imitation.The tax rate is roughly one-third higher, but by saying "30 percent" I can get many readers to think I mean 30 percentage points.) Anyhow, even post-reform Sweden's Social Security system is substantially more generous than the U.S. system.

It is also important to note that nearly 90 percent of Swedish workers are covered by a union contract. Unions continue to be a major force in Swedish politics which all political parties recognize.

The piece also reports that Sweden's per capita income had fallen from one of the highest in the world in 1970 to 17th by the late 1980s. While it portrays this as a fall attributable to its over-reaching welfare state, the story is a bit more complicated.

According to the OECD, average annual hours worked fell by more than 10 percent from the late 1960s to the early 1980s. This suggests that Swedes were taking much of the benefit of productivity growth in leisure rather than income. There is no economic reason to object to workers making this choice even though it lowers per capita income.

The other factor to consider is that Sweden has a substantial grey market economy, with people doing work off the books to avoid taxes and regulations. (For example, people might paint houses and do car repairs without reporting their income.) Some conservatives economists have estimated the size of this economy as being as large one-third of Sweden's official GDP. While such an estimate is almost certainly exaggerated, there is no doubt that the country has a larger grey market than some countries with lower tax rates.

This grey market does not get counted in GDP. Any effort to fully measure economic activity in Sweden would include these services. If the grey market is anywhere near as large as conservatives claim, then Sweden's per capita income would still rank near the top in the world.

Comments (8)Add Comment
Conservative Anthropologist Discovers New Breed of Taker Animals
written by Last Mover, August 30, 2013 7:07

It won't be long now, some anthropologist paid handsomely under the table by conservatives will surely discover a new species of animals living somewhere in isolation.

They will be declared socialists because they live in groups and cooperate to survive. They will be compared to America and shown to have failed for replacing free markets with tyrannical territorial rights marked by domineering alpha males and females urinating to stand their phony ground as takers and fend off true maker intruders attempting to trade goods and services.

The rest of the time they lay around greeting and licking each other in celebration after raiding other groups just like themselves to steal food.

After extensive deliberation anthropologists decided to name the new species Homo Economus Predatorsaurus after the invasive species that came to dominate America.
written by medgeek, August 30, 2013 9:24
(Okay, I was doing a Peter Peterson imitation. The tax rate is roughly one-third higher, but by saying "30 percent" I can get many readers to think I mean 30 percentage points.)

One-third higher = 33 1/3% higher. Not sure what point you're trying to make.
Peterson types often refer to a percent increase in tax rates
written by Dean, August 30, 2013 9:45

the Peterson crew is a professional scare lobby. They will often say that making up the projected SS shortfall beginning in the 2030s will require a 30 something (would have to check) PERCENT increase in the payroll tax. Undoubtedly many people hearing this think 30 PERCENTAGE POINTS. The latter is very scary. The former is not trivial, but if I thought the worst think we had to worry about for our children and grandchildren was that the payroll tax might increase by 3.6 percentage points in 20 years, I would be feeling pretty good about the world. That's about 1/8th of projected wage growth over this period.
The Peterson scare lobby is a paper tiger
written by John Wright, August 30, 2013 10:03
If the Peterson scare lobby was actually effective, one would expect newly Peterson frightened Americans would plan for the future by saving much more to cover their Peterson predicted shortfall in Social Security.

But this hasn't happened, so perhaps Peterson's influence is largely a "serious people" hope/myth.

And he helps provide fodder for financial columnists when they are desperate for material.
grey markets here and there
written by pete, August 30, 2013 10:55
Look we have 11M uncounted many of whom work, long hours. This will likely grow with the 30 hour work weeks which are apparently growing. The additional 10-20 hours will be off the books, no doubt. Funny that you bring up the value of leisure. When I mention this, that someone on unemployment gets 40 hours of leisure plus a check, hence the hurdle to employment is large, I am laughed at. Unemployed are not supposed to be consuming leisure for some reason. Swedes do, but not in the U.S.
OK...got it.
written by medgeek, August 30, 2013 11:06
So, Peterson is implying that the increase needs to be 30% of total wages, not 30% of the current payroll tax? That's fear mongering indeed.
written by watermelonpunch, August 30, 2013 11:34
@ John Wright:
The people it's scaring the most (and probably intended to scare the most), don't have enough money to save any more than they have been.
That's why it's so scary.

And believe me, people are buying that misunderstanding.
If you make $15 per hour, 6.2% Social Security tax is .93 cents out of that. If you increase that by 1/3rd to 8.02%, that now comes to $1.31 per hour.
But if you add 30% to 6.2%, that's 36.2 percent!
If they're already paying 30% of their pay in deductions for taxes & benefits, that's going to bring it up to about 60% of their pay.
Most people making around $15/hr or less can't afford to live on $400 less per month.

And that's exactly what some people are really believing is going to happen because of the misunderstanding caused by the way these things are expressed.
Sweden & underground economy
written by kares, August 30, 2013 2:33
More than likely you are aware that Sweden has a large pool of unemployed workers, many if not most of them are immigrants with little knowledge of the Swedish language and customs. This comment applies more to the middle aged and older persons; but even the younger ones who may have been born in Sweden have become alienated from the majority culture because of high levels of unemployment. These people are ghettoised in small and now somewhat larger areas in the suburbs, and live on the fringes of cities. Unfortunately, Sweden has become much more intolerant society in the last 35 years or so, with the assassination of Olaf Palme, the Social Democratic Party Prime Minister. Sweden's high income tax rates have been cut drastically by the currently governing right-wing parties which rose in popularity to both due to the high tax rates in Sweden and in reaction to these parties "nationalist" or racist propaganda.

During 1970s and even early 1980s, Swedish factories would continue to employ workers and produce extra inventory for sales after global recessions had set in and thus keep workers employed. The state used to chip into the cost of labor costs. But this surplus inventory began to become a big economic burden with rapid technological change and Japanese in-time inventory methods. Large numbers of Volvo and Saab cars and trucks remained unsold even during the economic upswings, which led to criticisms of the social-welfare state's economic thinking and to the rise of the dormant right-wing parties. This also created large pools of unemployed workers who in turn became racist -- the blame-game as in the U.S. South.

Unsurprisingly, Reagan's model of cutting taxes has become the new mantra now even in Europe and the current prime minister has promised to cut taxes even more to furnish the "necessary" boost to the Swedish economy to counter-act the downward economic spiral emanating from the Euro-land.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.