13 March 2013 –
Tom,
Good to hear from you, even if your message consisted of
only two words and descriptive punctuation. We have not been torrid in
our exchange of e-mails in the last several months. But, I have chosen to
blame you completely for the lack of contact. It is much easier to blame
you than to accept responsibility for my own actions and to rise up and do the
right thing. My rationalization allows
me to live in my fantasy bubble, quite like so many in our nation who vote and
act as if we can afford big government forever.
That is the biggest thing I took away from this article that
you forwarded to me. Sweden is a great example of how to don “the golden
straitjacket of fiscal orthodoxy”, retain a AAA credit rating, reduce the
government debt load, and be a place where schools thrive and people want to
try new things. How can the Swedes do
this? The author says, “It begins with
choice and competition.” Well, duh! But, these guiding principles can only be
implemented after the country realizes that “they have reached the limits of
big government,” and that they “can’t afford it.” Gone are the days in Sweden when the large
corporations in the country could “generate enough money to support the
state.” The easy-money fantasy bubble
broke about twenty years ago in Sweden, and the Swedes responded with demands
for transparent, more limited government.
We Americans don’t have that consensus yet.
After our fiscal profligacy beats us into submission and we
scream for help—any help—choice and competition will probably shine as primary
principles of economic soundness. You
know, competition, the thing that gets people up in the morning and out to
work, even if the knee hurts or the television calls our name? An especially important change the author
mentions as a factor in the Swedish government’s new-found fiscal integrity is the
implementation of a sound pension system that replaces a defined-benefit system
with a defined-contribution one, the latter making adjustments for longer life
expectancy (Think of the difference between a fixed government pension system
that constantly rises in payouts due to government largesse to get votes versus
a system of 401(k) pensions that must be managed to ensure payouts until one
dies). The author also mentioned a
universal system of school vouchers that encourages academic excellence and a
system of health care that seems to encourage private health providers’
participation rather than to stifle it. Things
are going well in Sweden, it seems.
I must disagree with the author’s contention that these examples
of Sweden’s changes in fiscal policy are “highly innovative solutions that
reject the tired orthodoxies of left and right.” Indeed, Sweden’s use of school vouchers to
fund both public and private schools is a current “tired orthodoxy” of the
right—one that President Obama and most teachers’ unions reject out of
hand. Also a “tired orthodoxy” of the right is the
use of private pension plans to replace Social Security and fixed
pensions. I remember President Nixon’s
administration recommending such a plan in the late 1960s and early 70s, with
sound examples of how it would provide old-age security and keep the Social
Security system sound. A Democratic
Congress wouldn’t even consider it. These
examples of how to turnaround a government’s fiscal problems are tried and
true, conservative, right-wing, policies.
The author should have called a Swedish meatball a Swedish meatball and
have been done with it.
Finally, the author fleetingly suggested that the cultural
homogeneity in Sweden makes it easier to implement fiscal changes. This is important for the Americans because
Sweden is so much different than the United States, except for parts of
Minnesota and eastern Nor’ Dakota, yah sir, you betcha! The author, without parsing out the divisive
and fiscally unsound effects that derive from the fact that “Sweden is finding
it particularly hard to integrate its large population of refugees.” Oh my.
Does the author really want to say, but is fearful of doing so, that
culturally diverse peoples increasingly living in a previously homogeneous
society will make it more difficult for politicians to implement sea changes in
government policies and actions? I hear
that loudly and clearly in his silence.
Sweden is a sovereign country long-based on a people who look, act,
speak, eat, and worship similarly. That
has been a strength. Now that
homogeneity may be diminishing, Sweden’s potentially decreasing ability to
adjust fiscally can have future ramifications on the country’s sovereignty and
underlying concept of itself.
Are there lessons here for the United States? Answering that question is worth a book. Quickly said:
We are not a nation based on a common ancestry, but on the common ideas
of our Founders. Stray from those ideas,
from the “tired orthodoxies” that so many today want to misstate or ignore, and
we do so at our peril. Group rights,
hyphenated-Americans, and carefully cultured ignorance of the responsibilities
that accompany and secure Americans’ unalienable rights and liberties paralyze,
divide, and bankrupt the nation. Ours is
a self-destructive course of action.
The following article
was written by Adrian Woolridge, Management Editor of the Economist magazine.
THIRTY YEARS AGO
Margaret Thatcher turned Britain into the world’s leading centre of “thinking
the unthinkable”. Today that distinction has passed to Sweden. The streets of
Stockholm are awash with the blood of sacred cows. The think-tanks are brimful
of new ideas. The erstwhile champion of the “third way” is now pursuing a far
more interesting brand of politics.
Sweden has reduced
public spending as a proportion of GDP from 67% in 1993 to 49% today. It could
soon have a smaller state than Britain. It has also cut the top marginal tax
rate by 27 percentage points since 1983, to 57%, and scrapped a mare’s nest of
taxes on property, gifts, wealth and inheritance. This year it is cutting the
corporate-tax rate from 26.3% to 22%.
Sweden has also donned
the golden straitjacket of fiscal orthodoxy with its pledge to produce a fiscal
surplus over the economic cycle. Its public debt fell from 70% of GDP in 1993
to 37% in 2010, and its budget moved from an 11% deficit to a surplus of 0.3%
over the same period. This allowed a country with a small, open economy to
recover quickly from the financial storm of 2007-08. Sweden has also put its
pension system on a sound foundation, replacing a defined-benefit system with a
defined-contribution one and making automatic adjustments for longer life
expectancy.
Most daringly, it has
introduced a universal system of school vouchers and invited private schools to
compete with public ones. Private companies also vie with each other to provide
state-funded health services and care for the elderly. Anders Aslund, a Swedish
economist who lives in America, hopes that Sweden is pioneering “a new
conservative model”; Brian Palmer, an American anthropologist who lives in
Sweden, worries that it is turning into “the United States of Swedeamerica”.
There can be no doubt
that Sweden’s quiet revolution has brought about a dramatic change in its
economic performance. The two decades from 1970 were a period of decline: the
country was demoted from being the world’s fourth-richest in 1970 to
14th-richest in 1993, when the average Swede was poorer than the average Briton
or Italian. The two decades from 1990 were a period of recovery: GDP growth
between 1993 and 2010 averaged 2.7% a year and productivity 2.1% a year,
compared with 1.9% and 1% respectively for the main 15 EU countries.
For most of the 20th
century Sweden prided itself on offering what Marquis Childs called, in his
1936 book of that title, a “Middle Way” between capitalism and socialism.
Global companies such as Volvo and Ericsson generated wealth while enlightened
bureaucrats built the Folkhemmet or “People’s Home”. As the decades rolled by,
the middle way veered left. The government kept growing: public spending as a
share of GDP nearly doubled from 1960 to 1980 and peaked at 67% in 1993. Taxes
kept rising. The Social Democrats (who ruled Sweden for 44 uninterrupted years
from 1932 to 1976 and for 21 out of the 24 years from 1982 to 2006) kept
squeezing business. “The era of neo-capitalism is drawing to an end,” said Olof
Palme, the party’s leader, in 1974. “It is some kind of socialism that is the
key to the future.”
The other Nordic
countries have been moving in the same direction, if more slowly. Denmark has
one of the most liberal labour markets in Europe. It also allows parents to
send children to private schools at public expense and make up the difference
in cost with their own money. Finland is harnessing the skills of venture
capitalists and angel investors to promote innovation and entrepreneurship.
Oil-rich Norway is a partial exception to this pattern, but even there the
government is preparing for its post-oil future.
This is not to say
that the Nordics are shredding their old model. They continue to pride
themselves on the generosity of their welfare states. About 30% of their labour
force works in the public sector, twice the average in the Organisation for
Economic Development and Co-operation, a rich-country think-tank. They continue
to believe in combining open economies with public investment in human capital.
But the new Nordic model begins with the individual rather than the state. It
begins with fiscal responsibility rather than pump-priming: all four Nordic
countries have AAA ratings and debt loads significantly below the euro-zone
average. It begins with choice and competition rather than paternalism and
planning. The economic-freedom index of the Fraser Institute, a Canadian
think-tank, shows Sweden and Finland catching up with the United States (see
chart). The leftward lurch has been reversed: rather than extending the state
into the market, the Nordics are extending the market into the state.
Why are the Nordic
countries doing this? The obvious answer is that they have reached the limits
of big government. “The welfare state we have is excellent in most ways,” says
Gunnar Viby Mogensen, a Danish historian. “We only have this little problem. We
can’t afford it.” The economic storms that shook all the Nordic countries in
the early 1990s provided a foretaste of what would happen if they failed to get
their affairs in order.
There are two less
obvious reasons. The old Nordic model depended on the ability of a cadre of big
companies to generate enough money to support the state, but these companies
are being slimmed by global competition. The old model also depended on
people’s willingness to accept direction from above, but Nordic populations are
becoming more demanding.
Small
is powerful
The Nordic countries
have a collective population of only 26m. Finland is the only one of them that
is a member of both the European Union and the euro area. Sweden is in the EU
but outside the euro and has a freely floating currency. Denmark, too, is in
the EU and outside the euro area but pegs its currency to the euro. Norway has
remained outside the EU.
But there are
compelling reasons for paying attention to these small countries on the edge of
Europe. The first is that they have reached the future first. They are
grappling with problems that other countries too will have to deal with in due
course, such as what to do when you reach the limits of big government and how
to organise society when almost all women work. And the Nordics are coming up
with highly innovative solutions that reject the tired orthodoxies of left and
right.
The second reason to
pay attention is that the new Nordic model is proving strikingly successful.
The Nordics dominate indices of competitiveness as well as of well-being. Their
high scores in both types of league table mark a big change since the 1980s
when welfare took precedence over competitiveness.
The Nordics do
particularly well in two areas where competitiveness and welfare can reinforce
each other most powerfully: innovation and social inclusion. BCG, as the Boston
Consulting Group calls itself, gives all of them high scores on its e-intensity
index, which measures the internet’s impact on business and society. Booz &
Company, another consultancy, points out that big companies often test-market
new products on Nordic consumers because of their willingness to try new
things. The Nordic countries led the world in introducing the mobile network in
the 1980s and the GSM standard in the 1990s. Today they are ahead in the
transition to both e-government and the cashless economy. Locals boast that
they pay their taxes by SMS. This correspondent gave up changing sterling into
local currencies because everything from taxi rides to cups of coffee can be
paid for by card.
The Nordics also have
a strong record of drawing on the talents of their entire populations, with the
possible exception of their immigrants. They have the world’s highest rates of
social mobility: in a comparison of social mobility in eight advanced countries
by Jo Blanden, Paul Gregg and Stephen Machin, of the London School of
Economics, they occupied the first four places. America and Britain came last.
The Nordics also have exceptionally high rates of female labour-force
participation: in Denmark not far off as many women go out to work (72%) as men
(79%).
Flies
in the ointment
This special report
will examine the way the Nordic governments are updating their version of
capitalism to deal with a more difficult world. It will note that in doing so
they have unleashed a huge amount of creativity and become world leaders in
reform. Nordic entrepreneurs are feeling their oats in a way not seen since the
early 20th century. Nordic writers and artists—and indeed Nordic chefs and game
designers—are enjoying a creative renaissance.
The report will also
add caveats. The growing diversity of Nordic societies is generating social
tensions, most horrifically in Norway, where Anders Breivik killed 77 people in
a racially motivated attack in 2011, but also on a more mundane level every
day. Sweden is finding it particularly hard to integrate its large population
of refugees.
The Nordic model is
still a work in progress. The three forces that have obliged the Nordic
countries to revamp it—limited resources, rampant globalisation and growing
diversity—are gathering momentum. The Nordics will have to continue to upgrade
their model, but they will also have to fight to retain what makes it
distinctive. Lant Pritchett and Michael Woolcock, of the World Bank, have
coined the term “getting to Denmark” to describe successful modernisation. This
report will suggest that the trick is not just to get to Denmark; it is to stay
there.
The final caveat is
about learning from the Nordic example, which other countries are rightly
trying to do. Britain, for example, is introducing Swedish-style “free
schools”. But transferring such lessons is fraught with problems. The Nordics’
success depends on their long tradition of good government, which emphasises
not only honesty and transparency but also consensus and compromise. Learning
from Denmark may be as difficult as staying there.
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