For some Americans clamoring to see the government take more active steps to take care of society with social initiatives and financial support programs, the Nordic countries may appear to be an attractive model of a welfare society, where the state is the omniscient provider of all the necessities and amenities of life. Based on a strong economy, Sweden’s Social Democrats were the first to introduce a policy of comprehensive welfare in the 1970s. By the turn of the century, the consequences of this had become apparent. Sweden was sliding in prosperity ranking, growth was lackluster, and the country suffered from the highest taxes in the world.
Finland has been keen to follow the example of its bigger neighbor, and publicly financed welfare is no exception. Whereas in Sweden a conservative government has succeeded in turning the tide, Finland is still drifting towards the dead end of economic malaise and public insolvency. My country should learn from the Swedish experience and change course in key policy areas; other nations should also heed the warnings Swedish failure has provided.
The most insidious effect of the welfare society is the slow erosion of what I call "moral capital." It becomes manifest in the flight from individual and civic responsibility. Personal honesty is compromised in dealing with an all-pervasive administration. Mutual trust dissolves and entrepreneurship wanes. The very core of culture, the capability to play plus-sum games, is under threat. The free and responsible citizen turns into a passive government subject.
The well-nigh irresistible trend towards all-inclusive collective responsibility constitutes a serious challenge for affluent democracies. Economic disaster and the breakdown of society loom at the end of this road. The deeper we fall into the trap of socialism, the harder will be the climb back to a genuinely free and prosperous society.
A brief overview of the Swedish economy
In his publication The Swedish Model Reassessed, Nima Sanandaji outlines the development of the Swedish economy, beginning in the 1870s. Well into the following century, Sweden had one of the fastest growing economies in the world. The Social Democrats rose to power in 1935, but their political agenda remained moderate and growth-oriented for a long time.
A systematic increase in the tax rate began in the late 1960s; taxes were raised by approximately one percentage point per year. By 1985, the country had exceeded a tax rate of 50 percent of GDP, of which 30 percentage points were direct income tax. Sweden’s economic growth floundered, and employment increased only in the public sector.
In 2006, a conservative government stepped in. Taxes were cut to 43 percent of GDP by 2010, and the administration has become more entrepreneur-friendly. It is clear that Sweden’s old basic strengths still drive economic growth. Perhaps the most important factor is the Lutheran social morality, which, according to polling studies, declined steeply during the period between 1989 and 2004, but is now again on the rise.
Sanandaji focuses on comparing the living conditions in Sweden and the United States from a welfare perspective. The most interesting observation is the stability of the cultural foundations of the immigrant population of Swedish origin. In a sense, they have created a “Little Sweden” in their new home country. Within this population, unemployment and other social indicators are very close to the old home country. The only difference is an income level that is 53 percent higher on the other side of the Atlantic.
Cultural tradition as a success factor
Sweden’s success is dependent on a strong cultural tradition, or in other words, the moral capital of its citizens. It can endure high taxes—to a certain point— if the socioeconomic atmosphere is sufficiently motivating and discourages free riders. The tax rate in Sweden exceeded the critical level at the end of the past century, and progressive taxation could be crushing. This resulted in a reduced appetite for work and entrepreneurship.
An over-protective and restraining immigration policy has affected the cultural foundations of Sweden—for better and for worse. Immigrants from neighboring countries have adapted well, but many of those from farther away have dropped out of the economy. In the United States, immigrants have always been received with benevolent neglect. Non-interference has worked well, as everyone had to live up to the common work ethic.
What could other nations learn from the Swedish experience?
The first key message to take away is that entrepreneurial spirit and motivation to work must be cherished like a national treasure. The Swedes lost their moral standing in their embrace of the welfare state. In the beginning of the 1980s, over 80 percent of Swedes agreed with the statement “applying for public support fraudulently is never justified.” Two decades later, the number dropped to 55 percent; even sick leave had become an entitlement. The situation is now slowly improving.
Second, it is essential to keep public finances in good shape. Tax reductions should be preceded by expense cutting. Furthermore, sustainable welfare can only be based on an efficient and innovative economy. Productivity, competitiveness, and economic growth are easily trampled upon by politics. In such cases, the whole country enters a vicious downward spiral, typified by the near collapse of the Greek economy.
Third, renewing the general framework of the public economy should be done without prejudice. Only genuine competition ensures good service and exemplary operations. This can be achieved, for example, through the extensive use of vouchers for public services, but a prerequisite for outsourcing is that private service companies are allowed to compete on a level playing field.
Fourth, immigrants should be integrated into working life as quickly as possible. Instead of being patronized, they should be put to work. For many immigrants, the only competitive advantage is a strong determination to work, even for a low salary. This should be legalized. The alternative is permanent exclusion or a gray labor market and relentless exploitation.
Finally, the affluence and welfare of a country depends on the innovativeness and self-reliance of the citizens. Only free citizens can take responsibility for themselves and take part in building a genuine civil society. The state simply maintains the essential framework for the joint efforts of free individuals. Unfortunately, legislation and bureaucracy have an innate tendency to expand beyond any reasonable bounds.
The creative energy of citizens must not be restrained, entrepreneurship should not be hampered, and the self-reliance of independent citizens must not be suppressed by excessive care and control. Vital moral capital is built slowly, piece by piece, but it may erode much more quickly.
Gustav von Hertzen is chairman of Libera, a free market think-tank in Helsinki, Finland. This article first appeared in the leading Finnish language newspaper, Aamulehti.