Utopia, you are standing in it!

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Sweden is a common example of a generous welfare state that is compatible with a prosperous society. One interpretation of the UN Development Index is you improve your national ranking by becoming more like Sweden.

Assar Lindbeck has shown time and again in the Journal of Economic Literature and elsewhere that Sweden became a rich country before its highly generous welfare-state arrangements were created

Sweden moved toward a welfare state in the 1960s, when government spending was about equal to that in the United States – less that 30% of GDP.

Sweden could afford this at the end of the era that Lindbeck labelled ‘the period of decentralization and small government’. Sweden was one of the fastest growing countries in the world between 1870 and 1960.

Swedes had the third-highest OECD per capita income, almost equal to the USA in the late 1960s, but higher levels of income inequality than the USA.

By the late 1980s, Swedish government spending had grown from 30% of gross domestic product to more than 60% of GDP. Swedish marginal income tax rates hit 65-75% for most full-time employees as compared to about 40% in 1960.

Swedish economists named the subsequent economic stagnation Swedosclerosis:

  • Economic growth slowed to a crawl in the 1970s and 1980s.
  • Sweden dropped from near the top spot in the OECD rankings to 18th by 1998 – a drop from 120% to 90% of the OECD average inside three decades.
  • 65% of the electorate receive (nearly) all their income from the public sector—either as employees of government agencies (excluding government corporations and public utilities) or by living off transfer payments.
  • No net private sector job creation since the 1950s, by some estimates!

In 1997, Lindbeck suggested that the Swedish Experiment was unravelling.


Sweden is a classic example of Director’s Law of Public Expenditure. Once a country becomes rich because of capitalism, politicians look for ways to redistribute more of this new found wealth.

Studies starting from Sam Peltzman (1980) showed that government grew in line with the growth in the size and homogeneity of the middle class that became organised and politically articulate enough to implement a version of Director’s law. Director’s law augmented by Gary Becker’s 1983 model of competition among pressure groups for political influence explain much of modern public policy.

Government spending grew in many countries in the mid-20th century because of demographic shifts, more efficient taxes, more efficient spending, shifts in the political power from those taxed to those subsidised, shifts in political power among taxed groups, and shifts in political power among subsidised groups.

The Swedish economic reforms from after 1990 economic crisis and depression are an example of a political system converging onto more efficient modes of income redistribution as the deadweight losses of taxes on working and investing and subsidies for not working both grew. Improvements in the efficiency of taxes or spending reduce political pressure to suppress the growth of the welfare state and thus increase or prevent cuts to both total tax revenue and spending.

After the rise of Swedosclerosis, the taxed, regulated and subsidised groups had an increased incentive to converge on new lower cost modes of redistribution. More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden of taxes on the taxed groups. Most subsidised groups benefited as well because their needs were met in ways that provoked less political opposition.

Reforms ensued led by parties on the Left and Right, with some members of existing political groupings benefiting from joining new political coalitions.

The Nordic median voter was alive to the power of incentives and to not killing the goose that laid the golden egg. The deadweight losses of taxes, transfers and regulation limit inefficient policies and the sustainability of redistribution.

For example, while tax rates are high in Sweden and the rest of Scandinavia, hours worked in Scandinavia are significantly higher than in Continental Europe.

Richard Rogerson found in Taxation and market work: is Scandinavia an outlier? that how the government spends tax revenues imply different rates of labour supply with regard to tax rate increases.

Rogerson considered that differences in the composition of government spending can potentially account for the high rate of labour supply in Sweden and elsewhere in Scandinavia. Specifically, examining the conditions on which how tax revenue is returned to Swedes as income transfers or other conditional payments is central to understanding the labour supply effects of taxes:

  • If higher taxes fund disability payments which may only be received when not in work, the effect on hours worked is greater relative to a lump-sum transfer with no conditions; and
  • If higher taxes subsidise day care for individuals who work, then the effect on hours of work will be less than under the lump-sum transfer with no conditions.

A much higher rate of government employment and greater expenditures on child and elderly care explain the high rates of Swedish labour supply.

Swedes are taxed heavily, but key parts of this tax revenue are then given back to them conditionally if they keep working. Policies that significantly cut the total wealth available for redistribution by Swedish governments were avoided relative to the germane counter-factual, which are other even costlier modes of income redistribution.

Advertisements

3 thoughts on “The rise of the Swedish welfare state, Swedosclerosis and Director’s Law

  1. IIRC the story on western Germany is the same – parisimonious welfare (even in the face of the influx of enormous refugee/diplaced person population) 1948 – 61; thereafter (after the CDU suffered a shock electoral setback) fairly rapid growth of welfare – under first CDU, then the CDU/SPD, then SPD. A decent amount of reform occurred in the early 00s under the guise of Harz IV – under an SPD government.

    Liked by 1 person

  2. Jim Rose says:

    Thanks, interesting common thread.

    Sam Peltzman’s 1980s the growth of government studied the mid-20th century surge in the welfare state in most industrialised countries. A good scare at the ballot box was the nudge in most places.

    Like

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

The Honest Broker

Making Sense of Science in Policy and Politics

The DALE YEAGER Blog

A Forensic Profiler Explains the World

Survey Anon's Gender Blog

discussing formal and, more often, informal studies of gender feelings

Jason Collins blog

Behavioural economics. Behavioural and data science. Economics. Evolutionary biology.

One Sock: Heather Roy's Blog

A blog for my thoughts and writings - past, present and future

Friends of Science Calgary

The Sun is the main driver of climate change. Not you. Not carbon dioxide.

Visualize This

data visualization goulash

James Kennedy

VCE Chemistry teacher in Melbourne, Australia

The History of Parliament

Blogging on parliament, politics and people, from the History of Parliament

longandvariable

A blog on macroeconomics and public policy by Tony Yates.

Gender Abolitionist

Examining Gender Identity ideology and its impact on Women's Sex based protections. Exploring how this has taken such firm root in Western societies (Cognitive & Regulatory Capture).

The Skeptical Doctor

Dedicated to the work of Theodore Dalrymple

Books & Boots

reflections on books and art

Legal History Miscellany

Posts on the History of Law, Crime, and Justice

English Legal History

Making English Legal History easy and enjoyable to digest.

Right From Yaad

A view from "the Right", as a source of ideas to create a new vision of freedom and what it promises for Jamaicans, to counter the tyranny of the status quo of Jamaica's reality since 1962.

TERF is a slur

Documenting the abuse, harassment and misogyny of transgender identity politics

No Punches Pulled

Laughter – the best medicine

The Dangerous Economist

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Sex, Drugs and Economics

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Economic Growth in History

Nuno Palma's economic and political history blog

The Logical Place

Tim Harding's writings on rationality, informal logic and skepticism

RGS History

The Newcastle RGS History blog

Nick Cohen: Writing from London

Journalism from London.

4thWaveNow

A community of parents & others questioning the medicalization of gender-atypical youth

Women Are Human

Independent source for the top stories in worldwide gender identity news

Trans Crime UK

Documenting crimes committed by transgender individuals in the UK

Flip Chart Fairy Tales

Business Bullshit, Corporate Crap and other stuff from the World of Work

The Long Run

the EHS blog

Sir John Cowperthwaite

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

The Undercover Historian

Beatrice Cherrier's blog

Vincent Geloso

Economics, History, Lots of Data and French Stuff

Climatism

Tracking Anthropogenic Climate Alarmism

MasterResource

A free-market energy blog

Science Matters

Reading between the lines, and underneath the hype.

Point of Order

Politics and the economy

Coase to Coase AM

Writing on Economics

FREEcology

Libertarian environmentalism

%d bloggers like this: