Sweden’s lessons on inequality

STOCKHOLM, Sweden — As recently as the early 1990s, the idea that Sweden could be a model of anything except socialism gone awry would have been laughable.

Sweden's debt-to-GDP was staggering when compared to other advanced industrial nations, topping 70 percent in 1992 and headed ever upward. Nearly 60 percent of all economic activity was generated by either government or government-owned enterprises. Meanwhile, the full employment mantra of its socialist model was coming apart at the seams as government simply could not borrow or print enough money to bridge the gap. The Swedish jobless rate shot from less than 2 percent in 1988 to more than 10 percent in 1993.

Even renowned global brands — Saab, Volvo and Electrolux — were failing. By 1993, Sweden’s banks were effectively bankrupt.

But Sweden today barely resembles its former self. As the Economist magazine wrote last year, “The streets of Stockholm are awash in the blood of sacred cows.”

A century of pursuing political neutrality and aggressive egalitarian socialism has more recently been leavened by economic reforms and market liberalizations, lighting a fire under the economy. After a modest dip during 2008, the economy has outperformed the US and even Germany since.

Most importantly, the growth has not led to the kind of spike in income inequality that accompanied growth spurts in many other western countries since the 1980s. Sweden’s reforms caused inequality of income to grow over the past 20 years. As measured by the Gini coefficient, the world’s standard measure of household equality, Sweden went from a .21 to a .25 – still the best in the developed world. For the US, the numbers are staggering. From a Gini rating of .31 in 1975, the current ranking (adjusted for taxes and benefits) is .38.

How did Sweden do it? The answer is a mix of carefully introduced competitive pressures on services previously run by government, from schools to health to pensions, and an intelligent and forceful response to a banking crisis in the early 1990s that had a lot in common with the one that followed the collapse of Lehman Brothers.

There was no "radical shock" akin to the market reforms applied to the states of the former Warsaw Pact in Europe after 1989. Rather, Sweden embarked on a gradual recalibration of government spending, a lowering of top tax rates — to "only" 57 percent at the top — without a kind of offloading of social responsibility that characterized earlier market reform efforts in Thatcher's Britain or Reagan's America. The result is a country and a Nordic region, given that its neighbors have followed suit, that no longer resembles the socialist "Third Way" economy of the late 1970s.

Not just Sweden, but also Denmark, Finland and Norway are thriving, and it turns out its quirky mix of social democracy, communitarianism and advanced capitalism has produced the most socially mobile, consistently robust and fiscally sound nations in the world. While some of its old state champions have been sold — Saab to a Dutch firm, Volvo to China — new powerhouses like IKEA and H&M have mixed corporate responsibility with an intense focus on cost controls — and high profits.

Sweden’s banks, flat on their back in 1993, are now rated by the European Union’s chief banking regulator as the strongest on the continent.

While there are many lessons from Sweden’s experience applicable in the West, there also is an apples and oranges problem.

For one thing, Sweden is a relatively small economy at $500 billion in GDP, compared to the $15.7 trillion in US annual output. It’s also a much more homogeneous society. A recent spike in immigration from the Middle East and Eastern Europe notwithstanding, most Swedes are, well, Swedish.

The large influx of immigrants into the US that began in the late 1980s certainly did much to prevent fiscal problems; by raising the US birth rate, for instance, immigrants have prevented the current debate about Social Security from being a question of collapse and merely one of finding a way to make it more sustainable; and a few founded world-beating companies, like Russian immigrant Sergey Brin at Google or Taiwan-born Jerry Yang of Yahoo, adding billions to US GDP.

But immigration on such a scale attracts people at both the top and bottom of the skills pool, meaning that some will go on to found S&P 500 firms or win Nobel Prizes, while many other lag in educational achievement and earnings. Taken together, this phenomenon naturally pushes up inequality rankings.

Sweden also has handled the age of globalized finance very differently and indeed, it might be argued, a lot more intelligently.

Back in 1992, Sweden suffered its own real estate bubble-fueled banking crisis. Facing the same kind of domino-effect collapse on a smaller scale, Swedish regulators demanded banks write down losses, provide major relief to underwater homeowners and issue warrants — in effect, voting rights on their boards of directors — the government. Once the bad debts were sold back onto the market, Swedish taxpayers rather than bank shareholders were the primary beneficiaries, and taxpayers made more when the government exited from its stake in the banks later in the 1990s.

Reflecting on the Swedish crisis in 2008, as the US and UK were trying to structure their own bailouts, Urban Backstrom, a senior Swedish finance ministry official at the time, warned that a guiding principle was that the “public will not support a plan if you leave the former shareholders with anything.” By and large, the American version, TARP, left shareholders, including bank executives, completely intact — to this day a source of serious criticism of former US Treasury Secretary Tim Geithner and his team.

While the Swedish government insisted that banks pay a proper tab for their drinking binge, it simultaneously opened up other markets which had been over regulated, selling state shares in major enterprises, introducing school vouchers and private, rather than state-run pension programs. The country also broke the state’s hold on its central bank (with the US Federal Reserve as a model).

“These decisive economic liberalizations, and not socialism, are what laid the foundations for Sweden's success over the last 15 years,” says Jonny Munkhammar, a member of parliament for Sweden’s center-right Moderate Party who wrote a book about the Swedish reforms.

Could the United States emulate even some of this? The question is complex and shot through with the competing ideological dogmas that each party bring to the table. Indeed, it might be said that there is something from both sides to loathe in the modern Swedish model. For the American Left, the idea that market liberalization is a significant part of the Swedish story shatters a simplistic devotion to redistributive policy. For the American Right, Sweden’s heavy handed devotion to regulation and a top tax rate of 57 percent for multimillionaires would be a hard pill to swallow.

Then again, national insolvency and an ever rising gap between rich and poor in America are two nasty pills in their own right. At least at the margins, the Swedes have something more than their legendary blonde hair going for them.