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Stagnating Socialist Sweden

January 11, 2011

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Sweden is thriving. At least compared to other countries, Sweden has done pretty well during the financial crisis. Some people, like Paul Krugman, seem to think this is due to extensive bailouts and the nationalization of private corporations at the beginning of the 1990s that supposedly "saved" Sweden from market-imposed disaster. Whereas it is true that a bank was nationalized and billions of dollars were pumped into "saving" the overvalued Swedish krona back in 1992, this attempt failed at an enormous cost to Swedish taxpayers.

What followed a short period of complete chaos while the central bank pushed interest rates to 500 percent (yes, 500 percent) was a currency in free fall. Obviously, its superficially high value could not be "defended" against the market's much more correct valuation, despite government's very serious attempt to do so. Political panic ensued, soon followed by the realized necessity to get public finances under control.

Since that time, as I discuss in more detail in Back on the Road to Serfdom (ed. Tom Woods), the Swedish government — regardless of ruling party — has consistently had balanced budgets and paid off the national debt. In fact, since 1992 the national debt has gone from around 80 percent to less than 40 percent of GDP according to a recent report from the Swedish National Debt Office. And this includes antirecession measures taken throughout 2009.

This is hardly what Krugman and others mean when they advocate that the United States emulate the successful path taken by the Swedes. Rather, they stubbornly refuse to see anything but the evidently unsuccessful measures taken just before Sweden was forced onto the road to recovery.

Krugman is not alone, however, in believing the great myth of Sweden as some kind of successful socialist experiment. Swedes generally believe this myth, and many around the world believe it, too. People frequently seek me out only to tell me how wonderful my country is and tell me stories of how everything is supposedly "free." I always wonder what they are talking about and what gave them those crazy ideas that they seem to hold for truths. Krugman should know better, but doesn't.

But perhaps Sweden in this recent crisis is exactly the kind of "dream myth" that Keynesians have been looking for. After all, the Swedish wealth buildup during the 20th century looks very much like a Keynesian creation: a continuously fed artificial boom that was automatically fueled and saved many times by circumstances that happened to play out unbelievably well for the country in the far north.

Following a period of "extreme" free trade in the second half of the 19th century, the welfare state was created and greatly expanded. Not taking part in any of the world wars certainly helped, and propping up the welfare state was easy in the 1960s — there was plenty of wealth around to be expropriated and "invested" in great systems of social engineering.

The saga, however, ended in the 1970s — but not, it seems, the myth. The international oil crisis forced the Swedish government into pure Keynesianism and the currency, consequently, was devalued frequently and extensively over about a decade. The following "happy 1980s" offered no solution to the bankrupt nation state, which financially imploded in the early 1990s as the international markets sobered up after a real-estate boom. This is when the government was forced, in economic terms, to cut down on spending and impose limits on benefits offered through the multitude of welfare systems.

"They stubbornly refuse to see anything but the evidently unsuccessful measures taken just before Sweden was forced onto the road to recovery."

But there's another truth about the Swedish economy that was only recently uncovered. There is now proof that Sweden, even in terms of official statistics, isn't that great and actually experienced no real economic growth (at least in terms of real jobs, which should be of obvious interest to Keynesians) for more than half a century.

In an article (unfortunately available in Swedish onlyDownload PDF) published in the Swedish Economics Association's journal Ekonomisk Debatt in 2009, Ratio Institute economists Bjuggren and Johansson show the sad truth. Relying on public data from the government agency Statistics Sweden ("SCB" in Swedish, an acronym standing for the Central Bureau of Statistics) and using a new classification system to denote ownership, they found that there has been no job creation at all in the private sector from 1950 to 2005.

Yes, you read that correctly: there was no net increase in the number of jobs in the private sector in Sweden over a period of 55 years. In other words, starting five years after the end of the Second World War, the Swedish economy was at a complete standstill.

Believers of the Sweden myth might wish to attack the classification system used by Bjuggren and Johansson, but it is based on an international standard that simply provides a better view of the public and private sectors through identifying the holder of ownership rather than type of management or official status.

In other words, the classifications used by these economists show the effects of the corporate government by identifying what corporations are owned by government and therefore considered, as government-owned corporations, part of the public sector. The data takes the self-employed into account, as well as foreign ownership, both of which are categorized as "private" (whether owned by foreign governments or not).

While the private sector has provided zero net job creation, the public sector has seen monstrous growth during this period (see the graph provided in this article, with private sector jobs in blue, public sector in brown, and population in red). And the population has increased even more, which explains the higher unemployment rates as well as the great chunk of people of working age pushed into public universities to further "educate" themselves.

This, in turn, explains how the Swedish government was ultimately unable to continuously prop up the welfare state from the 1970s into the early 1990s. As there were no international wars to rely on for increased — however, temporary — exports, and there was no genuine international growth to piggyback on, the bluff was called and a return to reality called for.

Sweden's relatively successful survival through the recent financial crisis has nothing to do with propping up government, increasing welfare benefits, or nationalizing the private sector. It is a direct result of a purposeful and politically painful program over a period of more than 15 years to clean up the mess of almost a century of Krugmanite policies that were close to bankrupting the thousand-year-old nation.

Krugman may be right that the United States can learn from the Swedish example — but only from the period after the crisis of 1992.


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