In 1989, as Mayor of Burlington, Vermont, Bernie Sanders praised the Cuban revolution in a public statement. “For better or for worse, the Cuban revolution is a very profound and very deep revolution. Much deeper than I had understood,” Sanders wrote. “More interesting than their providing their people with free health care, free education, free housing … is that they are in fact creating a very different value system than the one we are familiar with.”
After a trip to the Soviet Union in 1988, Sanders also praised many aspects of the Russian socialist system. But today he stresses that when he talks about “socialism,” he isn’t referring to a system like in the Soviet Union.
Democrats like Bernie Sanders tend to hold up Scandinavian countries as their dream examples of “socialism.” Either socialists like Sanders don’t know enough about Scandinavian countries’ economies or they hope that huge swathes of the American public know too little about them. That’s why it’s so informative to take a look at economic developments in Scandinavia. For a long time, Sweden was regarded as a model of “democratic socialism” and the perfect example of a counter-model to American capitalism.
Spoiler alert: Modern Sweden is not a socialist country. According to the Heritage Foundation’s 2019 Index of Economic Freedom ranking, Sweden is among the 20 most market-oriented economies in the world. With an “Economic Freedom Score” of 75.2, Sweden has a similar level of economic freedom to the United States (76.8) and ranks ahead of South Korea and Germany.
The image of Sweden and other Scandinavian countries as strongholds of socialism harks back to the 1970s and 1980s. During the period of socialist welfare-state expansion from 1970 to 1991, Sweden dropped far behind many of its European competitors. Sweden’s economic growth rate was lower than in a number of other countries, including Italy, France, Germany, the UK and the Netherlands. From fourth place in the Organisation for Economic Co-operation and Development’s (OECD) per-capita GDP ranking in 1970, socialist-era Sweden had dropped to 16th place by 1995.
In the decade from 1965 to 1975, the number of civil servants swelled from 700,000 to 1.2 million, a rise that was accompanied by increasing government intervention in economic affairs and the creation of a number of new regulatory authorities. Between 1970 and 1984, the public sector absorbed the entire growth of the Swedish workforce, with the largest number of new jobs created in the social services sector.
In order to understand the full extent of Sweden’s disastrous flirtation with socialism, it is well worth taking a closer look at the development of two key groups: In 1960, for every 100 “market-financed” Swedes (i.e. those who derived their income predominantly from private enterprise), there were 38 who were “tax-financed” (i.e. dependent on the public sector for their income, whether as civil servants or as welfare recipients). Thirty years later, that number had risen to 151. During the same period, the total number of employed or self-employed in the market-financed sector fell from just under 3 million to just under 2.6 million, while the total number of tax-financed Swedes grew from 1.1 million to 3.9 million. These figures reflect Sweden’s move away from a capitalist free-market economy to a socialist model during that period.
Politicians, such as Bernie Sanders and Elizabeth Warren, who call for drastic tax increases on the rich, would be well advised to take a closer look at how such policies played out in Sweden. The socialist agenda damaged the Swedish economy and resulted in prominent entrepreneurs leaving the country in frustration. Ikea founder Ingvar Kamprad was one of them. The marginal income tax rate of 85% was supplemented by a wealth tax on his personal assets, which forced him to borrow money from his own company in order to pay his taxes.
To pay back his debts to Ikea, Kamprad planned to sell one of the small companies he owned to Ikea at a profit. At the time this was a common practice among Swedish entrepreneurs as they attempted to reduce their wealth tax burden. As Kamprad was preparing the sale, the government made changes to tax legislation. And they did so retroactively. He was stuck with the costs and furious at his country’s unfair treatment of entrepreneurs. In 1974, he moved to Denmark and later to Switzerland, where he spent the next few decades—for a time as the wealthiest man in Europe. Kamprad didn’t return to Sweden to live and pay taxes until 2013—a textbook example of how countries cut their own throats by imposing excessive taxes on the rich.
Many excesses of the welfare state were equally absurd, including the generous sick pay. As well as statutory payments, most employees in Sweden received additional sickness benefit under company agreements and their collective agreements, which meant that those who took sick leave ended up with a larger paycheck than a healthy person who came to work every day. Unsurprisingly, Sweden held the OECD record for the highest rate of non-working adults in the labor force for several decades. Equally unsurprisingly, spikes in the rate of absence due to sickness frequently coincided with major sporting events. Even during the 2002 soccer World Cup—by which time reforms had already reversed the very worst excesses—the number of sick days increased by 41% among male workers.
From the 1990s, however, a counter-movement emerged in Sweden to push back against the clearly catastrophic effects of “democratic socialism.” There was a major tax reform in Sweden in 1990/91:
– corporate taxes were slashed almost in half;
– the tax on share dividends was abolished;
– capital gains from shares were taxed at a greatly reduced rate, which was later eliminated completely; and
– the top marginal income tax rate was cut by a third.
While income tax rates have come down considerably from their peak in the 1970s and 1980, they are still higher than in many other countries. However, what many don’t realize is that other taxes have been completely abolished in Sweden, including:
– wealth taxes; and
– inheritance and gift taxes.
In stark contrast, socialists of Bernie Sanders and Elizabeth Warren’s ilk want to drastically increase wealth and inheritance taxes in the United States.
The Swedish population willingly accepted that stripping back the welfare system would result in a more drastic decline in equality than almost anywhere else in the world. The Gini coefficient, a widely used measure of income distribution, grew by around 30% between the mid-1980s and the late 2000s. Only New Zealand recorded a similar growth in inequality during the same period. As a result, Sweden lost its ranking as the world’s most egalitarian country. But this did not seem to bother the Swedes all that much. After all, despite the significant decline in equality compared with Sweden’s socialist phase, prosperity increased for the vast majority.