Krugman on Sweden

[kayak3]

Doug Henwood wrote:
> 
> [Unfortunately this isn't on Fortune's website, nor is it on
> Krugman's. But that's what scanners are for!]
> 
> Fortune - October 25, 1999
> 
> Economics: The Vindication Of Scandinomics?
> WHO KNEW? THE SWEDISH MODEL IS WORKING
> 
> By Paul Krugman
> 
> Until recently, when people asked me what kind of a society I wanted
> to see, I had a stock answer: "Sweden in the summer of 1980." Why
> Sweden? Because I am a soggy liberal, and Sweden has traditionally
> been the exemplar of what used to be called the ,'middle way," a
> market economy with the rough edges smoothed by generous government
> programs. Why summer? Because Stockholm, arguably the world's most
> beautiful city on a sunny day in June, has precious little daylight
> in winter, And why 1980? Because by the early '90s the Swedish model
> was failing apart. The one time model society had contracted
> Eurosclerosis, with sagging growth and an unemployment rate of more
> than 8%. And the Swedish welfare state seemed to be going broke: In
> 1993 the budget deficit reached an absurd 12% of GDP.
> 
> The collapse of the Swedish model brought joy to conservatives. As a
> 1991 Cato Institute report gleefully declared, "Sweden seemed to
> present an intellectual challenge to those who argued that high tax
> rates and extensive state intervention would hamper economic
> growth.... Few would now consider the Swedish system worthy of
> emulation."
> 
> But have they looked at Sweden lately? On a recent visit to
> Stockholm, I was stunned as usual by the city's beauty but also
> startled by the unmistakable buzz of prosperity, First impressions
> are confirmed by the statistics: Since 1993 the economy has grown
> vigorously; most predictions are for growth of almost 4% this year.
> Unemployment has fallen steadily, with many predicting that it will
> drop below 5% next year-an achievement even more impressive given
> very high labor force participation rates (in Sweden, as in the U.S.,
> about three-fourths of working-age adults are employed, compared with
> less than two-thirds in Continental Europe). And the budget is in
> surplus.
> 
> How did the Swedes manage this turnaround? Did they Reaganize their
> economy, adopting an American-style regime of low taxes and
> winner-take-all markets? In a word, nej. Oh, Sweden has scaled back
> its welfare state a bit and eliminated some of the truly crazy
> disincentives in the tax system (supposedly there used to be cases in
> which marginal rates really were in excess of 100%). But last year
> Sweden collected an awesome 63% of GDP in taxes. The Swedish welfare
> state remains extremely generous, its safety net remarkably far above
> the ground. If you believe the people who think that America's
> comparatively trivial tax burden a mere 34% of GDP! - is an
> oppressive drag on the economy, you would expect to see the Swedish
> economy imploding instead of booming. (For another European
> turnaround story, see "The Luck of the Irish.")
> 
> The Swedes themselves are not entirely sure what they have done
> right. But a good guess is that the formula for Sweden's "New
> Economy" is similar to that of America's: a culture that is receptive
> to modem information technology combined with a monetary policy that
> has let the economy take advantage of higher growth potential.
> 
> Start with the technology. Nobody is sure why Scandinavians and
> digital technology go together like herring and boiled potatoes, but
> the affinity is undeniable. Americans think they own the Net; but by
> most measures Finland (not technically Scandinavian but close
> enough), the home of Linux and Nokia, is the world's most wired
> nation, and Norway and Sweden aren't far behind. Some say it's the
> combination of highly educated, highly Anglophonic populations and
> low telephone charges; others, that there isn't much else to do
> during those long, dark winters.
> 
> But higher productivity isn't enough: There also has to be enough
> demand to make use of the economy's higher potential. And that's
> where the Swedes had a great stroke of luck. Back in the dark days of
> 1992, Swedish officials believed that to restore prosperity they had
> to be part of Europe's drive toward a unified currency. Although
> Sweden was not a formal member of the European Monetary System, it
> behaved as though it was, pegging the krona to the German mark even
> in the face of soaring unemployment. After all, any devaluation would
> be a disaster, leading to spiraling inflation, right? Then, in the
> aftermath of Britain's devaluation in September 1992, speculators
> attacked, eventually forcing Sweden to accept a devaluation of its
> own - just what the economy needed.
> 
> Of course, Sweden's future is by no means guaranteed. Responding both
> to globalization and high tax rates, some Swedish companies have
> moved their headquarters abroad - Ericsson, for example, now has its
> head office in London. But the Swedish story should prove that nice
> societies sometimes finish first.

I was in Stockholm in August. It definetly was one of the most beautiful
cities on our tour and it certainly did appear to be properous. One
question. Our travel guide noted that in 1980 the Swedish workers
compensation was the 3rd highest in the world and that it had dropped to
about 13th by the mid-90's. Does anyone know if this has changed the
last few years?

Brad Hatch