Does Socialism Work in Scandinavia? (Part 3)

Authored by: Matt Palumbo

In parts one and two, I answered the question of whether or not the Scandinavian countries are examples of successful socialism. Part 1 disputed that those countries (Sweden, Denmark, Norway) truly are socialist, and instead argued that they’re capitalist countries with high taxes and large governments. Part 2 analyzed the follies in various government freebies those nations have become known for, including “free” college and socialized medicine.

The question of whether or not Scandinavian countries are examples of socialism done right is a resounding “no,” and despite their large governments, there are some capitalist lessons to be learned from them. Sweden in particular is ideal for this analysis. In the case of some Swedish economic reforms, conservatives will find evidence that smaller government yields benefits, that school vouchers work, and even that Social Security can be partially privatized.

Smaller Government is Better – And Balanced Budget Amendments Work 

In part one I alluded to the fact that Sweden’s economic growth spurt came during a time they had low taxes and small government, and that the brakes began to halt once they created the welfare state they’re known for in the mid 1970s. While their government is still massive, Sweden did also implement reforms relatively recently in the mid 1990s, that have scaled back the size and scope of their government. And as it turns out, when it comes to government, smaller is better.

Consider the following.

From 1975-95, Sweden’s GDP growth was half that of all other OECD countries, and a full percentage point lower than the EU-15 countries. After 1996, Sweden has outperformed both groups of nations. Note: all charts are from the Swedish think tank “Reform Institute.”

A similar pattern can be seen when it comes to Sweden’s productivity growth relative to other nations (with the only exceptions being during the 2008-09 financial crisis, when Sweden’s manufacturing sector saw a severe downturn):

The culprit for the rise in GDP growth and productivity? Simple – a shrinking public sector. In the 1990s, more than one out of every five government employees lost their job. It’s no secret that government workers are (on average) less efficient than private sector workers due to different incentive structures in the public and private sector, and the reallocation of workers from public to private sector gave the economy a much needed jolt.

Swedish workers personally saw the benefits that a reduced government had on the economy. From 1976-95, Swedish incomes rose only 0.7%-0.8% per year. From 1996-2011, the rate of growth nearly quadrupled.

And speaking of the government’s finances, in 1994, Sweden’s national debt totaled 80% of GDP, which has since been cut in half. The catalyst? A 1997 fiscal rule requiring a budget surplus of 2 percent (which was since lowered to one percent).

The national debt in America currently stands at 105%. There is significant evidence that debt exceeding 90% of GDP begins to have noticeable negative effects on the economy. While that may not be noticeable to us currently in the Trump economy, it still remains a lingering problem that will not resolve itself.

School Vouchers Work 

In the 1950s, the late Milton Friedman created the concept of school vouchers. Explained briefly, rather than maintain the status quo in which a student attends a school based on his zip code, Friedman wanted every student to be given a “voucher” with a certain dollar value, which could be used to attend another school (or towards a private school). In theory, this would ensure that only the best schools survive (as students would leave under-performing schools, thus depriving them of funding).

Sweden put such a system in effect in 1992, and it’s yielded the expected positive effects. Prior to vouchers, fewer than 1% of Swedish students attended private schools. Since then, that figure has increased to 10-15% (depending on which study you look at), Just like in America, Swedish students at private schools outperform their public school counterparts.

A study commissioned and published by Sweden’s government controlled Institute for Evaluation of Labour Market and Education Policy concluded that the implementation of vouchers had a positive effect on test scores, grades, probability of attending college, among other factors. Most important was the mechanism by which student performance increased: that competition among schools for vouchers has increased the quality of schools across the board.

I’ll only note that it did take 10 years before those positive effects started becoming realized, so vouchers aren’t an “overnight” fix, but they do work.

(Partially) Privatizing Social Security Works 

Sweden was the first country to implement a universal government-funded retirement system, and among the first to partially privatize the system. Workers in Sweden pay 18.5 percent of their income towards the nation’s retirement program, with their employer footing roughly two-thirds of the bill. After reforming and partially privatizing their retirement system in 1998, workers can now invest 2.5 percentage points of the 18.5 percent into hundreds of private pension funds of their choosing.

The other 16 percentage points fund a restructured pay-as-you-go government program called an “income pension,” similar to our Social Security system. According to Sweden’s Pensions Agency in 2017, income pensions have earned an average investment rate of 3%, compared to 6.7% for private pensions. Obviously there are different risk profiles in the types of assets being invested in, but one can certainly tolerate plenty of volatility when the private system yields twice as much.

Someone investing $4,000 annually over a 45 year career at 3% will have $386,000, while the same person earning 6.7% would have $1.1 million.

Conclusion

While there’s no question that Sweden’s government is far larger than our own, and taxes their citizens to a confiscatory extent, things used to be worse. As they moved towards the direction of freedom, their economic fortunes finally began to sweeten. There’s no reason to think that such trends wouldn’t only continue further if Sweden were to continue to cut their government down to a more reasonable size.

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Does Socialism Work in Scandinavia? (Part 2)