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Tuesday, November 06, 2007

In Love with a Fantasy

If you spend some time perusing political and economic blogs you might read posts or comments by people who are enamoured with the Swedish economic/social model. Unfortunately their perceptions are detached from reality:

If Sweden left the European Union and joined the United States we would be the poorest state of America. Using fixed prices and purchasing power parity adjusted data, the median household income in Sweden in the late 1990s was the equivalent of $26,800 compared with a median of $39,400 for U.S. households - before taxes. And then we should remember that Sweden has the world´s highest taxes.

The Swedish Research Institute of Trade, who made the study, underlined that Afro-Americans, who have the lowest income in the United States, now have a higher standard of living than an ordinary Swedish household.

That story came as a shock to many about a month ago. But mostly to foreigners, not to Swedes. Since the 1970s, we are used to news about Sweden lagging behind the rest of the world in wealth and income. It was more of a shock to Americans and Europeans who used to think about Sweden as the perfect example, the exception that could combine the big welfare state with a productive economy. If this social model was a part of the US, it would be considered a social problem. How did this come about?

To understand this, we have to understand that Sweden was never an exception to the rule that wealth can only be created by free men and women, on a free market.

After more than 30 years of high taxation and an expanding welfare state, Sweden is not the 4th richest OECD-country any longer, but the 17th [Update 2005: 15th]. This hurts the least well off most. Between 1980 and 1999, the gross income of Sweden´s poorest households increased by just over six percent while the poorest in the United States enjoyed a three times bigger increase.

Free markets and free trade were the basis for the Swedish miracle. Sweden was not an exception, and therefore it is no surprise that the shift away from free markets undermined the miracle.

In 1934 the two Swedish social democratic ideologues Gunnar and Alva Myrdal explained that there were extremely beneficial conditions for a welfare state in Sweden - considering our wealth, the homogenous population, the protestant work ethic and the good education. If the welfare state didn´t work here, it couldn´t work anywhere in the world, they thought. The rest of the world should seriously ponder the fact that the Myrdals were right in that prediction.

see also(drawing upon above article and others):

If Sweden Left The EU and Joined the US, It Would Be the Poorest U.S. State, Below Even Mississippi

EU vs. USA Smackdown: EU Still Below Mississippi


Bret said...

One of the lessons is how long it takes before a non-optimal societal model shows up in the data. It seems to take a generation or two. That's because once invested, those already working have little choice but to continue. However, those thinking of going to college contemplate working hard and being heavily taxed or goofin' off and being taken care off and rationally choose not to invest in the future in terms of education and career. I think a lot of Europe is waking up to the fact that the socialist model has failed them.

On the other hand, these numbers won't convince anybody of much. Comparing life in Sweden to the U.S. is very difficult and the naysayers will say that subjectively life is much better in Sweden due to the socialist model and that these numbers are cherry picked to make Sweden wrongfully look bad.

That's the beauty of economics. You can pretty much believe whatever you like, but in most cases you can't be proved wrong.

Martina said...

Good words.