Sweden is often regarded as a country whose policies should be emulated by those in other nations wishing to expand the size of their governments. The reason is that Sweden combines a large public sector with many attractive features, such as low crime rates, high life expectancy, and a high degree of social cohesion.
However, the success of Swedish society is not due to the welfare state, as is often assumed. Rather, it is the result of cultural and demographic factors, as well as a favourable business environment throughout most of Sweden’s modern history.
The evidence for this hypothesis comes from three sources. Firstly, Sweden showed higher rates of growth and had a model society well before the start of the Social Democratic era in 1936.
Secondly, descendants of Swedes who migrated to the United States in the nineteenth century are today also characterised by favourable social outcomes, such as a low poverty rate and high employment, despite the relative absence of welfarism in the US. This indicates that cultural factors such as the Lutheran work ethic have played, and continue to play, an important role in the success of Swedish society.
Thirdly, starting in the 1990s, Sweden has significantly scaled back the size and scope of government, which was followed by a recovery in the growth rate. The period characterised by the most extensive welfare state policies, around 1970–1995, is associated with low growth rates. It is true that Sweden maintains a high standard of living, despite high taxes, but at the same time, it is wrong to assume that this proves high taxes do not affect the economy.
Affluent Sweden could have been even more prosperous with lower tax rates. The combination of high taxes, generous government benefits and a rigid labour market has led to dependency on government handouts among a large sub-section of the population, and has limited the ability of Swedish society to integrate immigrants into the labour market.
Sweden compensates for its tax policy by employing market-friendly reforms in other areas, such as trade openness, personal retirement accounts and school choice. Societies can prosper for many different reasons. Undeniably, the success of Swedish society hinges on the free market policies to which the nation is again returning.
This blog post is excerpted from The Swedish Model Reassessed – Affluence Despite the Welfare State, which was released on 11th October.