Sweden

In a move bold and radical by the standards of Washington political gridlock, President Obama yesterday called for comprehensive tax reform. In so doing, he has given Congressional Republicans the rope with which they may choose to hang themselves.

Everyone from Paul Krugman to Rush Limbaugh can agree that the U.S. tax code – weighing in at around 10,000 pages it is the third longest in the world, after India’s and Britain’s – is a mess, shot through with loopholes, incentives, and exemptions: $1 trillion worth each year, according to the President’s bipartisan deficit reduction commission, which released its preliminary findings a couple of weeks ago. The gist of the President’s remarks is that the tax code could be simplified by removing these loopholes, broadening the tax base, and lowering both corporate and personal income tax rates. [click to continue…]

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Benjamin Franklin said, “Of two things you can be certain: death and taxes.” What was true in the 18th century is somewhat less so in 21st century America, at least where taxes are concerned. On this day, April 15, when most Americans are either submitting their annual tax returns or struggling to request extensions of the deadline, it is appropriate to consider the current state of taxation. It is widely reported that 47 percent of Americans pay no federal income tax, a number that has increased dramatically under the Bush and Obama presidencies. Yes, the members of this 47 percent remain subject to withholding for Social Security (pension) and Medicare (post-retirement health care) contributions, but they are exempt from personal income taxes. This obviously increases the burden on those who do pay taxes, but a far more important consequence is the establishment of a more or less permanent class of people who feel free to demand ever-more generous services from government knowing that someone else will pick up the tab. As a people we have already grown used to fighting wars in which other people will serve and die in our place, and we now have a society in which the demand for services is increasingly disconnected from any notion of responsibility to pay for them. This can’t help but erode the notion of what it means to be a citizen. [click to continue…]

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In yesterday’s New York Times Janet Yellen, President of the Federal Reserve Bank of San Francisco, is quoted as predicting a slow drop in the U.S. unemployment rate, now 9.7 percent, to 9.25 percent by the end of this year and 8.0 percent by the end of 2011.  This is pretty anemic in view of her forecast of 3.5% GDP growth this year and 4.5% next year, a robust performance for a mature economy, though she attributes much of this growth to reduction in inventories rather than growth in sales. Ms. Yellen doesn’t foresee a return to peak economic performance and a corresponding drop in unemployment until 2013. The cause, she says, is clear: an increase in business efficiency and labor productivity, which she says, “is here to stay.” [click to continue…]

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In the eyes of many Americans, “Sweden” is shorthand for everything we don’t want America to become. It’s a tradition that goes back some way. In the 1965 movie I’ll Take Sweden, Bob Hope is an executive whose company sends him to Sweden, and he takes his teenage daughter, played by Tuesday Weld, largely to get her out of the clutches of her dead-end, guitar-playing boyfriend, played by Frankie Avalon, whom she wants to marry. Long story short, Tuesday falls in love with a suave Swede, only to find he has some strange ideas about premarital sex. Enter Frankie, who has traveled across the sea to try to win his girl back. He breaks his guitar over the degenerate Scandinavian’s head, and takes Tuesday back to America and married life in a trailer park, with Dad beaming proudly.

Opponents of President Obama’s proposed health care reform, massive deficit spending, takeover of the banking and automotive industries, and other “statist” excesses defend their position by saying those things are fine if you want America to become like Sweden, but we don’t, thank you.

John Stewart’s Daily Show ran a series a few months ago reporting on the horror that is modern day Sweden. The show’s ace investigative reporter went around interviewing people of all walks of life, from former members of ABBA to business executives, doctors, government officials, and factory workers, all of whom professed satisfaction with their lives and with the way Swedish society is organized. The reporter concluded that there had to be some kind of Invasion of the Body Snatchers thing going on, with most Swedes’ brains having been taken over by an alien life form that made them unaware how miserable they really are.

The only thing wrong with this picture is that it’s not really true. It is true that Sweden was an early adopter of the sexual revolution, the Swedes enjoy mixed saunas and sensible cars, and Sweden has colonized much of the world with Ikea, which for all its commercial success looks like something a state bureaucrat with fascist leanings might have invented.

Oh, and it is a welfare state. Sweden does provide benefits to the unemployed and it gives all its citizens free health care and education, and taxes them pretty highly in return. The combined income and social security tax for high earners is over 48% (including mandatory pension contributions), but that is not too far from the U.S. where earners in the top 5% can pay as much as 40%, depending on income taxes in their home state. And Sweden’s corporate tax rate is only 28%, compared to the 35% U.S. corporate tax rate and average effective combined Federal and state rate of 39.3%.

Sweden is far from being the statist, socialist nightmare that many Americans imagine. The government last week announced deep cuts in personal income taxes “to stimulate the economy,” together with planned reforms to improve the business climate and create incentives to start companies.

It may be their Lutheran heritage that has imparted to the Swedes some common sense and a work ethic. The maximum $1,650 after-tax monthly employment benefit is hardly lavish, and in most cases it expires after 300 days. The government offers retraining, employment subsidies and reduced employer social contributions to encourage companies to hire the unemployed, with additional enticements such as lower minimum wages and flexible contracts for hiring people under 25. Similar youth employment incentives proposed two years ago in France, drew hundreds of thousands of students into the streets in protest.

On health care, Sweden’s single-payer system came under intolerable stress in the 1980s, with rising costs and growing waiting lists for medical procedures. The government devolved substantial power to county councils, and gave them freedom to introduce market-based reforms, which most have done. Hospitals have been privatized and the market share of private medical practitioners is on the rise. Many kinks still need to be worked out, but Stockholm, which has been most aggressive in introducing market-oriented reforms, has shown impressive results.

Still and all, Sweden is socialist, isn’t it? And that has to be a bad thing, right?

In a word, no. Sweden is a leader in privatizing public pensions. Though mainly state-owned corporations historically accounted for about one fourth of the market capitalization of the Stockholm Stock Exchange, the government has privatized or plans to privatize most of its crown jewels, including the stock exchange itself, the Apoteket pharmaceutical distribution monopoly, the former alcohol manufacturing and distribution monopoly Vin & Sprit, and major state-owned telecoms, real estate, and financial firms. Industry itself has always been overwhelmingly in private hands, and Sweden has a lot of world-renowned companies for a country of only nine million people, including Volvo, SKF, Ericsson, Skanska, Electrolux, Sandvik, Atlas Copco, Ikea, and H&M.

In the 1990s Saab and Volvo sold their passenger car divisions to General Motors and Ford, respectively, while holding on to their lucrative truck, heavy equipment, and aerospace operations. This past spring, as GM teetered on the edge of bankruptcy, and the U.S. government started crafting its takeover of GM and Chrysler, the Swedish government firmly rejected the idea of a Saab bailout. “The Swedish state is not prepared to own car factories,” said Maud Olofsson, the Minister of Enterprise. The World Economic Forum ranks Sweden the fourth most competitive economy in the world, just behind Switzerland, the United States, and Singapore.

Sweden went through its own financial and banking crisis in the early 1990s when a real estate bubble collapsed, GDP dropped by 5%, total employment fell 10%, and the central bank briefly jacked up interest rates to 500% to prevent a run on the krona. The state took over a fourth of the country’s banking assets to save the banking system, at a cost of 4% of GDP. In 1994 the budget deficit stood at 15% of GDP. The government quickly restored the banks to private ownership, cut government spending, and introduced liberal economic reforms that enabled the economy to rebound quickly and to capitalize on the emerging IT and telecoms boom. From a 2008 budget surplus of 2.5% of GDP, this year’s expected budget deficit is 2.2% of GDP, and is forecast to widen to 3.4% in 2010 before returning to balance. Not bad for the worst global financial and economic crisis since the Great Depression, and an awful lot better than America’s projected deficit of 13.1% of GDP this year and 9.6% next year, not to mention the boom years of 2001 to 2008, when the Bush Administration ran average annual deficits of more than 4% of GDP.

Sweden is not perfect. The nanny state sticks its nose into too many corners of personal life. An eight-year-old boy in Lund had his birthday party invitations confiscated at school when he failed to invite two of his classmates. This violated rules on “inclusion.” Government has launched an investigation of parents who use the family computer to access porn sites, which their kids might then be able to access. In the 1970s Sweden, the home of former heavyweight champion Ingemar Johanssen, banned boxing as too violent for the pacific society it had become. TV advertising is banned from programs targeting under-12s, while movies with even a hint of violence get a rating that bans under-12s from watching, even if accompanied by their parents. Toy guns –even water pistols – were outlawed. Alcohol taxes are among the highest in the world, and you can see the unhealthy consequences on the overnight duty-free “booze cruises” from Stockholm to Helsinki, which end with bleary-eyed Swedes (and Finns), still drunk, stumbling onto the pier, their shoes encrusted with vomit. But e-commerce, home DVD players,  the end of internal border controls in the EU, and a general feeling that things had gone too far have started to win some battles with the nanny state. You can buy toy tanks and bazookas now, and in 2007 the ban on boxing was repealed.

As the U.S. government, first under George W. Bush and now under Barack Obama, becomes ever more statist, and as Americans accept eavesdropping on telephone conversations, bans on trans fats ,and proposals to tax soft drinks as something governments have every right to do, Sweden – never anywhere near as socialist as popular imagination would have it – has steadily moved in the opposite direction. Our paths will cross, if they haven’t already done so. One can only be grateful that when Americans realize the limits of state intervention in our personal and economic affairs we will have the Swedish model as a guide to start putting ourselves back on the right track.

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