The Mirage of Swedish Socialism: The Economic History of a Welfare State (Parts 1 and 2)

Much of what the outside world thinks it knows about the Swedish model is wrong. When American politicians like Senator Bernie Sanders and Representative Alexandra Ocasio-Cortez are asked to name an example of a successful socialist economy, they often point to Sweden.

But Sweden only began to experiment with socialist ideas after it was already one of the world’s most successful societies. Its success was based on a free market model developed after an episode of radical liberalization between 1840 and 1870 and the rapid growth it unleashed. As early as 1950 Sweden was the fourth richest economy in the world, and it was also one of the freest, with public spending below 20 percent of GDP. Government was smaller than in other Western European countries and taxes were slightly lower than in the United States.

Only in the 1970s and 1980s did Sweden expand government dramatically with more spending, taxation, and regulation. It is reasonable to say that during this time Sweden was moving towards socialism. But that was an aberration in Sweden’s history, an aberration that was not associated with success. On the contrary, this was the one period in modern economic history when Sweden lagged behind other industrialized countries.

Incentives for work and entrepreneurship were weakened, and welfare dependency increased. The private sector stopped creating jobs, real wages stagnated, and many of Sweden’s most important businesses, like IKEA and Tetra Pak, fled the country. Sweden ran large budget deficits every year and got stuck in a dangerous spiral of inflation, devaluations, and debts. It ended with a deep financial crisis in the early 1990s that included a brief period when the central bank interest rate rose to 500 percent.

At that time, Sweden’s political parties decided, often in consensus, to return elements of the older capitalist model. They deregulated the economy, reduced taxes, shrank government, and introduced a set of fiscal rules that has reduced public debt substantially. The pension system was reformed and many government-owned businesses were privatized. Sweden abolished taxes on wealth, gifts, and inheritances.

At the same time, Sweden became a pioneer in privatizing welfare services, making it possible for private providers to compete with public ones on similar terms and funding, and giving citizens the freedom to choose between different providers of elder care, health care, preschool, and education, including for-profit businesses. Around a fifth of all tax-funded welfare services are now provided by the private sector.

Sweden’s level of social spending makes it a fairly average western European economy with a more open economy. Its welfare state is still larger than in the United States and other Anglo-Saxon countries, but it mostly distributes resources over an individual’s life cycle rather than between groups. Sweden learned in the 1970s that a universal welfare state cannot rely on tax revenue from small groups of high-income households but has to take more in income tax from low- and middle-income groups; it also relies on revenues from a proportional value-added tax. Paradoxically, its tax structure means that Sweden’s tax system is now one of the least progressive in the OECD.

With the exception of the size of government, the Swedish economy is now more free-market-oriented than the US economy according to Economic Freedom of the World data. After the new reform period in the 1990s and early 2000s, Sweden once again started outperforming other industrialized countries economically, creating new companies and increasing real wages.