Swedish Surprise
Lord Abbett
Milton Ezrati
October 25, 2010
As the United States approaches a very important midterm election, accusations of socialism and fascism have become more acerbic, and policy positions have hardened. In such an environment, it is often useful to look abroad for perspective, to open minds, and to remind all involved, including investors, of possibilities outside the firing lines of current debate. Though it seldom works when nations import foreign policies wholesale, what has happened in Sweden, however, offers just such a useful reminder and also the insight that new approaches often come from the least likely sources.
Most people, on both sides of the Atlantic, associate Sweden with socialism—the quintessential example of a centralized, Western European welfare state—a leader in that form of sociopolitical organization, in fact. And in general, there is good reason for the association. Since the Second World War, Sweden’s socialists have fairly consistently dominated the government and economic policymaking, creating a generous welfare system and relatively high taxes to support it. Occasionally, the conservatives have taken office, but until recently, they have had little success in their efforts to dismantle socialist structures. Consistently, the electorate has voted the socialists back in the next election. Until very recently, in fact, no conservative coalition has ever enjoyed reelection.
This history makes recent events that much more interesting. It just so happens that a conservative four-party coalition was in power in Sweden as the 2008–2009 global recession broke. In some respects, this Swedish government followed most other national governments in the emergency, the United States included. Stimulus spending increased. But unlike other governments, Sweden’s has refused to respond to resulting budget deficits with any consideration of tax increases, much less a turn to austerity, as many governments in Europe have begun to do, even as the recession’s effects on income and employment linger. Without judging these other approaches, Sweden took a very different tack. Instead of heavy government spending, as was done in the United States, Sweden’s government reserved two-thirds of its stimulus for across-the-board tax cuts. To increase the incentive to work, these cuts, applied only to work. There was no tax relief for those on government benefits.
The greatest tax relief occurred at the bottom of the wage scale. The relief raised the threshold for paying any tax on wages. Those just above that level saw their taxes cut by one-fifth. The cuts brought housekeepers and babysitters onto the tax rolls for the first time. Previously, high taxes had prompted many of them to work off the books. Taxes for the higher paid fell, too, but less dramatically. The government cut corporate tax rates, from 28% to 26.3%. At the highest end of the income scale, the government abolished Sweden’s wealth tax, which formerly took 1.5% a year off any wealth above the equivalent of about $190,000. The government argued that the tax discouraged investment and hence job creation.
The effort seems to have worked. Though export-oriented Sweden initially suffered in the 2008–2009 global downturn, the economy bounced back quickly, rising into the top ranks of growth among developed economies. Unemployment, which had been forecast to rise to 10% of the work force, never rose above 8%, and it fell to 7.4% this past August (the most recent period for which data are available). Sweden has, by the reckoning of two prominent economic think tanks in the country, created over 100,000 jobs, a big number in a country with a population of a little more than nine million people. Consumer confidence has reached 10-year highs, and according to recent polls, most Swedes no longer believe the economy is in recession.
Of course, the tax-cut policies were not the sole reason for Sweden’s relative economic success during this time. Its banking system was, after all, in much better shape than those in the United States and the rest of Europe. Sweden’s major banking crisis in the early 1990s had made that country’s banks wary during this recent bubble, leaving them relatively unscathed when that bubble burst. Even apart from banking differences, there is no suggestion by the Swedes or anyone else that such policies can transplant successfully to any other European country, much less to the United States, with its more diverse economy and much less centralized political structure. But the sudden turn of socialist Sweden points up the odd sources of insight in difficult economic times and why, as the United States approaches this critical midterm election, any who need to consider policy choices also need to maintain an open mind.
(c) Lord Abbett
