Lessons from Sweden

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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.