What went wrong in Sweden?

Nils-Eric Sandberg is an editorial writer at Daaens Nyheter (the major daily newspaper in Sweden), a position he has held for many years. He writes commentaries on a broad spectrum of financial and economic issues. He has contributed to more than twenty books on taxation, economics, housing policy and on philosophical issues.

What went wrong in Sweden?

What went wrong in Sweden? Nils-Eric Sandberg Translation Roger Tanner

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Contents

I. What went wrong in Sweden?

II. We were late starters ... III. From 1970: "the Middle Way" goes downhill IV. What did socialism mean?

l. The prerogative of politics

2. The legacy of Marx 3. 4. 5. 6.

7. 8. 9.

10. 11.

The Swedish super-Keynesians Myrdal's planned economy Meidner's wage-earner funds Income socialisation Collectivism The sanctity of equality A coun try that doesn't save Punitive tax on shares A constitutional concentration of power

V. Unemployment made permanent VI. Incentives for growth weakened Tables

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I. What went wrong in Sweden?

Once upon a time there were two small countries which were very similar. Both had been spared the devastations of two world wars. Both of them were small and had been independent for many centuries. Both had the same industrial structure, distinguishing them from all the others. Both had companies with a good reputation for the unfailingly high quality of their products. The one big difference between the two countries concerned the generosity of nature. One of them had large reserves of metalliferous ores, timber and hydropower. The other had nothing, except for a little grazing land, enough for a few cows; otherwise the population had to get by on hard work and ingenuity. A comparison between Sweden and Switzerland clearly reveals that something went wrong with the Swedish economy after 1970. Both countries were magnificently poised after the Second World War. They had remained neutral, in the sense of keeping clear of military involvement and busily trading with the belligerents. In 1945, with Europe in ruins, Sweden and Switzerland, with their industrial structures intact, were ready to exploit the seller's market created by the renovation of Europe with money from Marshall aid. Sweden had a clear advantage because of its natural assets. The two countries had much the same structure of industry: a

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relatively large number of very big and highly internationalised companies. The difference was that Swedish industry concentrated more heavily on exactly the capital goods which European renovation called for. Never before had Sweden'~ economy got off to such a flying start as in 1945. After the war, a Swiss franc cost SEK 0.9. Today Gune 1997) it costs SEK 5.65. In 1970 Sweden came third on the OEeD ranking list for GDP per capita. Switzerland came second, and still does so, while Sweden has fallen to 17th place. Switzerland has had a current account surplus almost every year. Sweden, almost without exception since 1965, has been showing a deficit. ABB economists have compared the kilo price of exports from the two coun tries over the past 25 years. This is a way of measuring value added: scrap iron costs SEK 0.5 per kg, aircraft SEK 10,000 per kg. Over the past 25 years, Swiss export prices have risen in such a way that 90 per cent of all exports exceed the previous average. The price structure of Swedish exports has remained virtually unaltered, with only two important exceptions: Ericsson's mobile phones and Astra's pharmaceuticals. Switzerland has had the lowest interest rate in Western Europe. Sweden has had one of the highest, especially since we abolished interest rate controls in 1985. Taxes and public spending have risen faster in Sweden since the mid-sixties than anywhere else. Taxes now equal 55 per cent of GOP, public spending upwards of65 per cent. The corresponding figures for Switzerland are 33 and 37 per cent respectively. Sweden took part in the currency exchange system of the EU countries from 1973 until 1977. We have devalued several times, and since 1976 the Swedish crown has fallen in relation to nearly

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all other currencies. Switzerland has had a floating exchange rate and its currency has shown a rising trend in relation "to the rest of the world. Swiss inflation between 1963 and 1995 was 40 per cent of Sweden 's. But Switzerland is not more favourably lotted than Sweden. On the contrary. Sweden has had a more homogeneous population and, above all, large natural assets and a long coastline (freight is cheaper by sea than by land). If strong political leadership and a large public sector confer any advantage, Sweden is extremely well off and Switzerland at a disadvantage, for ever since 1521 (when Gustav Vasa assumed power) Sweden has had an extremely powerful central government and, with the passing of time, has acquired a larger public sector than any other country. Switzerland, on the other hand, has had a very weak central governmen t and a small public sector. The referendum system has afforded protection for minorities and local opinions. The parallels between Sweden and Switzerland tell us that something serious has happened to the Swedish economy (and Swedish politics) since the end of the sixties. This essay sets out to describe what happened and why.

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II. We were late starters . ..

The American journalist Marquis Childs described Sweden as "The Middle Way" - a sllccessful compromise between Soviet central management and American capitalism - in his well-known book of that title, published in 1936. This description, however, does not fit Sweden, either at the beginning of its industrialisation or since 1970. Industrialism came later to Sweden. Starting in the mid-19th century, a number of laws were passed concerning joint stock companies, universal freedom of enterprise and a free credit market. Industrialisation then followed. A number of enterprises were founded on Swedish inventions or innovations. This was the golden age of the en trepreneurs. Between 1892 and 1911, individual persons built up 11 enterprises which later grew into big international corporations: Sandvik, Nobel, Atlas Copco, SCA, Ericsson, Alfa Laval, Munksjo, Facit, Bahco, SKF, AGA, ASEA, Electrolux, STAB,SAAB. Since the end of the last war, only four big companies have been f(Hlnded in Sweden: lKEA, Tetra-Pak, Gambro and Hennes & Mauritz. Two of the three companies which were based on innovations have left Sweden. The innovation-based enterprises grew rapidly and soon expanded internationally. This, of course, was due to the Swedish 10

market being so small, especially in terms of average household incomes compared with the rest of the world. Companies had to export so as to derive full advantage from the economies of scale. Ericsson, founded in 1876, was exporting 90 per cent of its output in 1900. The same factor forced companies to establish, first, sales networks and, later, manufacturing subsidiaries in other countries. The big Swedish corporations soon became multinational, more than 50 years before the cultural debaters discovered this concept and (vainly) attempted to understand it. The explanation is paradoxical but logical: because Sweden was so small, companies had to establish themselves internationally if they wanted to grow and survive in a situation of mounting international competition. But the question is: what caused us to have such a spate of start-ups during the decades before and after the turn of the century? Sweden had no comparative advantages in the form of a highly sophisticated credit market or an advanced education system. On the contrary, we got off to a later start than other countries. We could import technology to some extent (though imports of this kind, in the event, were quite small). But this fails to account for the foundation or expansion of businesses. Part of the reason is to be found in the taxation system. Up un til the First World War, the tax ratio was about 8 per cent. Taxes were raised after the outbreak of war, but in the 1920s they were still only 12 or 13 per cent of incomes up to MSEK 4 or 5, in presentday prices. This meant that a successful entrepreneur was able to keep the greater part of what he owned. In other words, economic incentives for starting up businesses, working and investing were very powerful.

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Another explanation: this was the beginning of industrialisation. New technology was created from scratch and spread relatively slowly. Thus a person who had an idea and made a commercial go of it could have a temporary monopoly and make a lot of money. During the hundred years between 1870 and 1970, Sweden had a higher growth rate than the other industrialised nations. Why? Four factors can be identified. a)

Industrialisation came late to Sweden and so we were able to import technology and, above all, capital from the outside world. These capital imports financed investments (railways, for example), not consumption.

b)

A wave of inventions and innovations was connected with the newly discovered power source, electricity. Exploitation of natural assets, such as hydropower also generated new technology, one such example being ASEA's technology for high voltage D.C. transmission.

c)

A very liberal economy permitted a rapid exodus of labour from low-productive agriculture to more productive occupations in industry and services, in spite oflong distances and a sparse population forcing us to make relatively large investments in housing and infrastructure.

d)

The smallness of the home market made exports and foreign start-ups essential for expansion. Sweden's industrial culture quickly developed a systematic way of thinking and capacity for managing large, flexible organisations as a comparative competitive asset. To take one example, Sweden is

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one, and the smallest, of the four countries capable of developing their own fighter aircraft, the other three being the USA, France and (perhaps) Russia. In addition, Swedish industry mainly delivered capital goods for the reconstruction of Western Europe in the fifties and sixties. The export sector was further boosted by Sweden, in August 1949, following Britain's example and devaluing by 30 per cent against the dollar. The average devaluation against all export currencies was about 15 per cent. From the beginning of the 19505, world trade in industrial commodities rose by upwards of 8 per cent annually.

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III. From 1970: 'The Middle Way" goes downhill

Sweden in the 1950s had an average growth rate of 3.4 per cent. This rose to 4.6 per cent in the 1960s. In the 1970s it fell to 2 per cent, and in the eighties it declined a little further. Why? Arguably, the completion of Western Europe's post-war renovation detracted from Sweden's favoured position in the seller's market. Sweden was hit by the two oil crises of 1974 and 1980, but no more than other countries; it has a relatively large percentage of cheap hydropower. Sweden until 1970 was for the most part marching in step with the rest of the world. We were part of the Bretton Woods system. Starting. however, in 1973, after Bretton Woods had been finally dissolved, Sweden experienced recurrent cost crises. We devalued five times in six years, between 1976 and 1982, reducing the value of the krona by something like 45 per cent. But costs continued to rise more steeply in Sweden than in the world at large. Sweden finally abolished its exchange controls in 1989. Interest rates now came to be internationally determined and interest shocks followed immediately - quite naturally, because everyone at home and abroad had learned that a crisis of costs in Sweden immediately led to a devaluation. In spite of a desperate defensive action, with an overnight interest rate of 500 per cent, the Riks14

bank (Sweden's Central Bank) was unable to sustain the krona exchange rate in 1992. When the exchange rate was left to float, it sank initially by 30 per cent. The whole of Western Europe was affected by a real interest rate shock at the beginning of the 1990s. Inflation declined but interest rates climbed, due partly to the rise in German interest rates following reunification. Even for a wealthy country like West Germany, the effort to make the former DDR socialist dictatorship inhabitable was a tremendous strain. But interest rates rose more in Sweden than in other countries, with the result that the ensuing property and money market crash was worse here than abroad. Bankruptcies quintupled. Open unemployment rose steeply, from about two to more than eight per cent. The State borrowed money to finance unemployment benefits. This resulted in a PSBR (budgetary deficit) equalling more than 10 per cent ofGDP. The national debt doubled in four years.

The home-made crises Wage costs in Sweden rose steeply at the beginning of the 1970s. Industrial wages rose by 59 per cent between 1973 and 1976. During the same period the Riksdag (parliament) increased wage bill taxes by 109 per cent. The then Prime Minister, Olof Palme, declared that in wage bill taxes the Riksdag had found "a new source oftaxation revenue". And the Riksdag needed more money to finance new reforms. Labour costs rose by more than 80 per cent in three years. Firms could not recoup this by raising their prices, because export prices were determined by the world market and Swedish companies were not price leaders. So corporate profits vanished. 15

On the dissolution of the Bretton Woods system in 1973, Sweden became an associated member of the Snake, the exchange rate system of the EU countries at that time. This meant Sweden having to maintain a fixed exchange rate against the D-mark. In other words, labour costs, corrected for changes in productivity, were not to rise more steeply in Sweden than in West Germany. It is questionable whether Sweden's politicians, or its company managements, or the unions, grasped the implications of this restriction. Between 1976 and 1981 Sweden devalued four times, by a total of 30 per cent. But this was not enough. Its export industry was still losing market shares. Sweden has very generous social security schemes and benefits, all financed out of public revenue. When companies, unable to cover their taxation costs, closed down facilities and axed employees, public spending rose, regardless of taxation revenue. Between 1976 and 1981, public spending rose from 50 to 65 per cent of GOP. Not even a country involved in a world war has experienced such a growth of public spending. In the mid-1970s the Swedish Government began borrowing abroad. This was nothing new. Sweden borrowed large sums of money internationally at the end of the 19th century, mainly in order to finance the construction of railways. Since the mid-1970s, the Swedish Government has borrowed about MSEK 600,000 abroad. If, as in the 19th century, we had borrowed for investment purposes, our investments would have increased substantially, and growth would have done the same. But, simultaneously with the State increasing its international borrowing, the investment ratio - that is, investments as a percent-

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age of GDP - declined. Between 1975 and 1996, the investment ratio fell from 21 to barely 14 per cent. This combination of capital imports and a falling investment ratio suggests that something was fundamentally wrong with the Swedish economy. The growth-generating relations had been put out of action. In three years, the State injected MSEK 600,000 of borrowed money into the economy. Unemployment rose and investments declined. More than one-fIfth of the employable population was excluded from the labour market - as openly unemployed, as participants in various employment training programmes, through early retirement "for labour market reasons", and as asylum-seekers. So true unemployment, thus defIned, exceeds more than 20 per cent. What mechanisms underlay this weakening of the production base of the welfare state?

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N. What did socialism mean?

1. The prerogative of politics In 1932 Sweden acquired a Social Democratic government. Ever since then, with the possible exception of the years between 1991 and 1994, Social Democracy has governed politics and imprinted its values on the country. This has to a great extent determined the development of political thinking in Sweden. a)

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The Social Democratic Party has lived in symbiosis with the trade union movement. Both organisations have principally the same members and they co-operate, for their mutual benefit, both in the Riksdag and outside it. The unions support the governing party financially and serve as its electioneering machine during the election campaigns. In return, the party has used legislation to make the unions the most favoured interest in every context. At the unions' requests, the governing party has introduced legislation strengthening the position of the unions in relation to employers. Sweden's hidebound labour laws are a case in point. The unions' almost unlimited right of direct action is inscribed in the constitution as part and parcel of human rights. And so on. This symbiosis has made the LO-SAP constellation (LO

being the Swedish Trade Union Confederation and SAP the Social Democratic Party) the dominant force in Swedish politics. An entrepreneur coming into conflict with the unions may find himself up against the Govemmen~ as well. b)

Social Democracy has had almost a monopoly of legislative power. And, unlike other parties, the Social Democrats have had a definite vision of what society ought to look like, for all citizens. Whereas liberalism wants an open society on the lines of Popper and Hayek, socialism wants an ultimate objective of development, a once-and-for-all definitive, finished society. Through far-reaching interventions, Social Democracy has shaped institutions in the home sector very much according to its intentions. Everyone has found themselves living in a Social Democratic society, whether they like it or not.

c)

Social Democracy reacted with monopoly during the decades when growth was rapidly accelerating and living standards with it. It is hard to make a case for the party's policy having been behind this. The reason why Swedish industry expanded so successfully in the thirties was its rigorous rationalisation during the twenties, which enabled it to meet the decade of the general depression with the most efficient production apparatus in Europe. To this was added a slight devaluation and Sweden's departure in 1931, ahead of most other countries, from the gold standard.

Sweden's economy in the fifties and sixties was free-wheeling, propelled by Western European purchases of capital goods and by 19

the internal productivity gains resulting from a movement of labour from agriculture to industry. But Social Democracy systematically claimed credit for the growth of employment and incomes. And growing prosperity came to be associated with the ruling party. All this is one of the main explanations for the dominance of Social Democracy and for the homogeneity of political culture. The party acquired for itself a "prerogative of problem formulation". And, more important still, a monopoly of formulating the solutions to the problems. From election debates to academic textbooks, the salient idea was new interventions by the political sector as the solution to nearly all society's main problems. In time, some of this mentality also came to be accepted by the party's opponents. Public sector expansion was lamely resisted. Some "opposition" parties began systematically outbidding Social Democracy in their demands for the assumption of new tasks by "society", meaning national and local government. When Social Democracy launched its radical idea of equality, the opposition criticised the economic consequences of abolishing all economic incentives but showed no sign of criticising the idea itself on grounds of principle. Social Democracy shaped political thinking in Sweden and created a political prerogative for all problem-solving.

2. The legacy of Marx Social Democracy is Marxist by origin. Although the revolution itself was soon written off by the party, the socialisation of the means of production long remained one of its principal ideas, at

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least ideologically. The revised programme adopted by the party at its 1920 Congress speaks of "abolishing private-capitalist ownership of the means of production and placing them under society's control and possession and (by) replacing the present, unplanned production of goods with a socialist production planned according to society's true needs and augmented for greater prosperity. " But the party soon dropped its demand for rapid socialisation. There were two reasons for this, both of them pragmatical. A number of debaters within the party pointed out that socialisation was difficult to accomplish. The party had no ready-made plan to indicate how the State, or the unions, or new "production councils", were to run businesses and plan production. Nils Karleby, one of the dominant figures in the party's internal debate, pleaded for a successive transfer of the various functions of ownership to "society". Formal socialisation was risky and unnecessary; the capitalists could be disarmed through legislation and at least parts of their property successively taken through taxation. The pragmaticalline prevailed. The party relinquished its demand for total nationalisation - purely for pragmatical reasons. There was no immediate and obvious connection between state ownership and higher incomes. Ideologically, though, the socialisation concept lived on. But the practical objectives were decisive. The party's main objective, in the short term, was to boost production so as to raise working-class incomes. During the early decades of industrialisation, the distribution of incomes had been extremely uneven. People moving from agriculture to industry, it is true, improved their earnings, but a large part of the wealth generated by the new 21

industrial society remained in the hands of the industrial proprietors. This was growth-sustaining, because the riches were re-invested. But if incomes had been more equally distributed, consumption would have grown at the expense of investments and the present-day generation would have had to make do with a lower standard of living. This aspect is never discussed by post facto critics of the unequal distribution of incomes during the decades round about the turn of the century.

3. The Swedish super-Keynesians Sweden's emerging com paratively unscathed from the depression of the thirties has been described as a great success for the new Social Democratic policy, i.e. rapid implementation of Keynesian ideas. This is a post facto construction. Sweden abandoned the gold standard in September 1931, ahead of most other countries. Its currency depreciated as a result. The official discount rate (the interest rate charged by the Riksbank) was lowered in 1933 from 8 to 2.5 per cent. In the spring of 1933, by sheer chance, the Swedish krona was pegged to an extremely low sterling exchange rate. This added up to a heavy depreciation of the krona, resulting in a growth of orders, profits and employment for export industry. This was the main reason for Sweden emerging from the depression faster than other countries. Economic policy in terms of taxes and public spending made little difference. On the contrary, public spending as a percentage of GDP fell slightly in the mid-1930s. But the party's basic ambition to socialise the economy, or at 22

least control it, was still there, and this is why Sweden, more than any other country, assimilated Keynes' recipe for controlling fluctuations of the economy. During the 1930s, all economists were pondering ways in which the State could dispel unemployment and get the economy moving again. Much of this pondering was unnecessary. In A Monetary History of the United States, Milton Friedman and Anna Schwarz have shown that between 1930 and 1933 the Fed cut money supply by one-third; this was a principal cause of the depression. The second main cause was widespread protectionism. In 1930 Congress passed the Smoot-Hawley Act, sanctioning trade barriers on 25,000 commodities. Protectionism spread rapidly. As a result, the value of world trade fell to one-third between 1930 and 1933, and many countries lost the greater part of their export industries. The depression, then, resulted mainly from political decisions and not from a lack of labour market policies. Sweden, though, opted for an extreme Keynesian policy. This was partly because a succession of Swedish economists, the Stockholm School, had mainly recommended something of the public incentives included in Keynes' recipe. Another reason, the most important one, was that Keynes provided Social Democracy with a new argument for the economic control which remained the party's principal concern. Then came the outbreak of war, and Sweden placed its economy on a wartime footing with strong central control. Mter the war, cyclical fluctuations returned and with them the economic argument for the Keynesian policy of control. What everybody had forgotten, deliberately or otherwise, was that Keynes' stabilisation recipe had been written for an essentially 23

isolated economy. When the state stimulated demand, the effects must not escape into the outside world, and so Keynes combined his recipe with import and export controls. In a small, open economy like Sweden's in which foreign trade bulked large, the Keynesian policy worked badly. For if an economy of this kind screens ofl its foreign trade so that the State can control economic fluctuations, it will lose more by the loss of trade than it gains by a more stable home market. Consider the following example. LKAB, the State-owned mining company, exports over 90 per cent of its iron ore. Suppose there is a drop in international demand for iron ore. This will mean a trade deficit. Suppose the Swedish Government raises general demand in the economy by paying bigger child allowances. But instead of increasing their consumption of iron ore, perhaps Swedish families will buy more Japanese TV sets, in which case the trade deficit will grow still larger.

4. Myrdal's planned economy A new example of the fundamental socialisation and regulatory ambitions of Social Democracy appeared in 1944. A common theory had it that the war would be followed by a depression, resembling that which had followed the First World War. A commission within the Social Democratic Party drew up a post-war programme with the aim of averting the depression. The methods employed were State control of the economy: socialisation of insurance, socialisation of other branches of the economy if efficiency so demanded, State planning of investments, con24

tinuation of price controls, exchange controls and control of foreign trade. But the interesting thing was that these regulations were not only meant to eliminate an acute depression: they were to be permanent. Most of the proposals had little connection with the difficulties which an anticipated post-war depression could give rise to. The Social Democratic post-war programme becomes intelligible only when viewed in a socialistic perspective. True, the party had abandoned the notion of general socialisation, but the aim of socialising key sectors and governing the entire economy through controls was still there. The 1948 election debate centred mainly round the planned economy. The Social Democrats came close to losing the election, whereupon they dropped the programme. And from 1950 onwards, Swedish industry was favoured by international demand, and so the pragmatical argument for State control was also eliminated.

5. Meidner's wage-eamer funds In 1975 an LO commission, headed by LO's chief economic adviser Rudolf Meidner, proposed the socialisation of industry by the trade union movement. Briefly, the scheme was as follows. All companies operating at a profit were to transfer annually to union funds newly issued shares equalling 20 per cent of their profits. If the proposal was carried, union funds would soon acquire a controlling interest in most profit-making Swedish enterprises. Sweden had acquired a unique economic system: private property

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would be confiscated by funds combining the functions of trade unions, employers/company managers and owners. The result would be an extreme combination of power and ownership, in that, before long, all profit-making concerns in the coun try would be owned by one single organisation. The fund proposal played a prominent part in the 1976 election debate, which led to the Social Democrats losing power. On its return to power in 1982, the party introduced wage-earner funds, but in a completely different form and with no direct socialising function. But the Meidner scheme is interesting, and serious, as a reflection of the prevailing mood in the trade union movement and the ruling party. LO's chief economic adviser was able to propose, in all seriousness, that the unions, assisted by the State, should confiscate every business enterprise in the country. A proposal of this kind would be inconceivable without a general body of opinion which condemned private ownership and completely misunderstood the fundamental rules of the market economy. If the Social Democrats had had a stronger electoral following say 55 per cent - Meidner's proposal could have been carried. Firms would have been owned by funds controlled top-down by the unions. Some idea of what would then have happened in Sweden can be gained by glimpsing at the performance of the socialist economies. Probably a number of profit-making firms with strong owners would have left the country, as did the Rausing family.

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6. Income socialisation Social Democracy in Sweden has relinquished its demands for a socialisation of enterprise - perhaps for the simple reason that big corporations have become increasingly internationalised; how could the State in Sweden nationalise Swedish subsidiaries abroad? On the other hand, the Social Democrats have socialised incomes. Taxation in Sweden has risen steeply since 1970. The 1971 tax reform reduced taxes for the lower income bands but made taxation more progressive: that is, the scale of taxation became steeper. Marginal taxes increased. Even in low income brackets, most pay rises disappeared in tax. An average industrial worker in Sweden pays 28 per cent tax on direct income. The corresponding OECD average is 16 per cent. For salaried employees with twice the gross earnings, taxation rates are 39 and 24 per cent respectively. To this are added indirect taxes. Since the beginning of the 1970s, the State has mainly increased what are called "employers' contributions", though they are more correctly termed wage taxes - that is, taxes on the wage bill. In addition, the State has increased consumption taxes, especially the tax on energy, and, on top of this, general VAT. Specific taxes and VAT are never shown in Swedish prices, and so the consumer does not know how much of the price is tax. One of several reasons why most taxpayers in Sweden accept the high pressure of taxation is that they never see any statement of taxes. What they see on their wage slips and tax cards is direct income tax, but this accounts for less than 40 per cent of total taxation. In a representative democracy, M.Ps. and Cabinet Ministers are 27

the citizens' agents, not their rulers. The citizens are the principals. But, by omitting to give a clear account of the total taxation levy, the representatives disinform their principals. In a limited company this would be inconceivable. Roughly speaking, taxes pre-empt something like 60 per cent of total income for low-wage groups and over 65 per cent for the better-paid. Officially speaking, "employers' contributions" on gross earnings finance parts of social security, such as pensions, unemployment benefit and health insurance. But the connection between contribution and benefit received is a weak one.

7. Collectivism Since the years round about 1970, Sweden has become increasingly committed to collective arrangements even for problems in private life. "Social insurance" as it is termed, guaranteeing income in the event of unemployment and illness and during old age, has mainly been organised in the form of State-controlled collective systems, with little connection between paid-up taxes/ contributions and insurance benefits.

a) State pensions When it started, in 1913, Sweden's pension system was entirely State-run. An expanded system, ATP, introduced in 1960 was also made entirely governmental, and was organised on a purely distributive basis. Pension contributions financed the pensions of

28

tomorrow, like an immense chain letter. A certain proportion was consolidated in a State fund, to offset the reduction of private savings by the guarantees of the pension system. In this way the pension system became part of the collectivisation of saving. The pension system has now been reformed,just a little. 11 per cent of the wages held back for pensions are paid into an individual pension saving scheme, i.e. a level premium method. But this is an extremely small proportion, added to which, these private pension moneys have been invested in a State account and entered on the credit side of the national budget. Organisations associated with the governing party are strongly opposed to all thought of individual pension saving.

b) Municipal child care The State and the municipalities in Sweden have developed a system of public child care since the beginning of the 1960s, the aim being for both parents to be able to go out to work, regardless of the number and ages of their children. Municipalities are obliged by law to look after children if the parents are gainfully employed. Municipal child care is extremely expensive. The direct charges paid by parents cover 10 or 20 per cent of true cost. The State and municipality collect the shortfall from taxpayers. Mter much hesitation, the non-socialist government in power between 1991 and 1994 introduced a small caring allowance for parents, the underlying idea being for parents to be able to decide for themselves how their children were to be looked after. This allowance was criticised by the Social Democrats, mainly on the grounds that it could lead to differences in child care between 29

individual families. On their return to power in 1994, the Social Democrats abolished the allowance. The underlying philosophy of municipal child care is for practically all children to be looked after by the municipality, not by their parents. Thus public support for child care takes the form of heavily subsidised municipal day nurseries, as opposed to direct grants to parents. Both parents should go out to work and contribute, as taxpayers, to the public sector. So large is the proportion of income paid in tax, that parents in normal income brackets cannot afford to stay at home with their children or to employ a nanny. By implication, politicians are telling parents that child care, from society's point of view, is so important that it cannot be entrusted to the parents but must be managed by the politicians. The majority - not perhaps of the general public, but of M.Ps. are firmly opposed to any thought of parents, with a grant in their hand, being able to choose their own child care. The argument goes that municipal day nurseries give the children social training and, in a word, bring them up to be good citizens. Coming as it does from adult politicians who have not themselves attended municipal day nurseries, it is liable to cut both ways!

c) State social insurance People in all countries need to be insured against unforeseeable misfortunes, especially illness and unemployment. In addition, everyone needs to save up for their pension; old age, unlike illness and unemployment, is of course predictable. In Sweden, these insurances have been organised collectively. Pensions are paid mostly out of contributions to the State. Governmen ts have systematically impaired the conditions for private pen-

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sion saving: anyone putting money into a private pension policy above a certain low benefit has to pay income tax on the money twice over. Medical care is financed mainly through a municipal tax. Health insurance, which covers loss of earnings, is entirely Stateoperated. Basically it is organised as an insurance, but the Riksdag has lowered the benefit rates and a large part of the "contribution" finances other things instead of benefit payments, and is therefore pure taxation. Unemployment insurance is geared to the trade union movement. During the 1930s there was a strong body of opinion in favour of a universal unemployment insurance, but the Social Democratic government decided that unemployment insurance was to be administered by the trade union movement and linked with union membership. The idea was for this link to force everybody to join a union. The people thus unionised were to be collectively affiliated to the Social Democratic party, and their membership contributions would pour into the party coffers. Unemployment insurance in Sweden is still based on this principle. There now exists the option, exercised by few, of retaining one's unemployment insurance even after leaving the union. But: unemployment insurance membership contributions are extremely low. Between 95 and 98 per cent of unemployment insurance benefit payments are funded through the national budget. What in Sweden is termed "unemployment insurance" is 98 per cent a tax-funded system of handouts. Why? Read on!

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8. The sanctity of equality At the end of the 1960s, LO launched a campaign for equality. Pay differentials were to be eliminated. The campaign received massive media support. One explanation is that it came at a time when the Marxist-inspired youth revolt was sweeping the industrialised nations. Equality soon became a prime concern of politics and especially of the media. All events, all problems were described and discussed in terms of equality. Politics and debate reinforced one another in a process of interaction. The equality aspect became the overriding viewpoint in all articles, all television programmes. In many cases it was a cloak for ignorance, with the simple demand for "more equality" supplanting the analysis of complicated relationships. The equality concept in Sweden has not only become a reaction to llI~ustified income differences or "injustices" but has developed into a general intolerance towards differences. "Serious" journalism is to a great extent concerned with tracking down differences between groups and criticising them as manifestations of "inequality". This applies regardless of whether differences in housing standards, for example, reflect different preferences: younger people want cheap housing so that they can study or travel, while households with children give priority to spacious accommodation. The Swedish Government now contemplates introducing legislation for shorter working hours. The main argument, according to the minister responsible, is that everyone must work equal hours. The equality concept has become an insistence on uniformity, completely overriding previous allowances for variations of individual preference.

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LO secured an equalisation of wages, before and after tax. The pay structure was compressed by a combination of central pay settlements and "low-pay improvements". Nearly all union organisations pursued the same pay policy. Every agreement channelled the greater part of pay improvements into the lowest wage brackets. The aim at first was equal pay for equal work, but it soon came to be equal pay for all, whatever work they were doing. Pay differentials declined between low-skilled and highly skilled. The skilled premium - that is the additional pay conferred by an extra year's training or education - has been halved since the mid-1960s. To this was added the aggregate effect of progressive taxes and inflation. Progressivity was intensified from 1971 onwards - the taxation scale acquired a steeper gradient. The inflation rate rose at the same time. And wages followed inflation. The problem was that the taxation scales were not adjusted for inflation, so that if an income was increased in step with inflation, tax rose in proportion to income. Income remained unaltered, in fixed money terms. But tax, in fixed money terms, increased. Sweden, according to the OEeD, has the hardest income equalisation of any OEeD country. Even on very low incomes Sweden has tax wages of at least 50 per cent. At the same time, transfers from social security systems, and social allowances, are very generous. This implies a severe pruning of the incentives for work and investment.

9. A country that doesn't save The investment ratio - that is, investments as a percentage ofGDP - rose steadily in Sweden from the turn of the century. It has been

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declining from the mid-1960s, from 24 to (at present) some 14 per cent. A large part of the investments are concerned with replacing worn-out capital. New investments - contributing to the capital stock and, accordingly, to production - fell from 16 per cent of GOP in 1970 to 2 per cent in 1996. This means that the base of Sweden's welfare is shrinking . . For a long time now, household saving in Sweden has been below the average for other countries. Between 1970 and 1990 it was 3 or 4 per cent of available income. This low saving ratio is a problem to industry and to housing construction, because enterprise and building require a certain amount of equity. The less households save, the more difficult it becomes for private persons to start up businesses. With a low level of saving, relatively few households are able to buy homes of their own. Low saving is a logical consequence of the State having eliminated both incentives and capacity for saving. Pensions and social insurances are State-operated, which means the State guaranteeing pension, sickness benefit, unemployment benefit etc. No one needs to put anything by for a rainy day. High marginal taxes confiscate the money which households could save. Savings, after all, are taken from the income which remains after necessary expenses have been paid - that is, from the income at the top. And that income has been hit by Swedish marginal tax, which used to be between 70 and 80 per cent and is now something like 60 per cent. Homes require saving. Since the end of the war, the State has supported housing construction with generous loans. Persons buying their own homes did not need to save much. This was because their debts were automatically written off by inflation.

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This made it easy to borrow money. And households neither needed nor were able to save. But inflation has now vanished. Debts are not being automatically written off. Banks are demanding personal savings. And because households in Sweden have no savings worth mentioning, housing production is declining. The trend for the first quarter of 1997 is the lowest figure at any time in the 20th century. Successive Social Democratic governments have tried systematically to reduce private saving and to increase collective saving instead. The 1960 pension reform represented a substantial collectivisation of savings. Tax increases since 1970 have almost completely obliterated the margin for private saving. Conditions for personal pension saving have been impaired. Sweden is probably the only industrial country whose government systematically tries to prevent citizens from saving up for their old age.

10. Punitive tax on shares Sweden has always taxed share saving more heavily than other forms of saving and income. Until 1991 share dividends came in for double taxation: first within the company and then from the shareholder. The total tax on distributed profits was between 85 and 92 per cent. This double taxation was abolished by the nonsocialist government in 1993, but reintroduced by the Social Democratic government in 1994. Shareholdings are taxed far more heavily than capital assets of other kinds. The only explanation for productive saving being singled out for this punitive taxation is that Social Democracy in Sweden has never quite accepted private ownership. Two of the dominant

35

Social Democratic ideologists, Nils Karleby and Vilhelm Lundstedt, have both rejected the arguments for ownership. Both have pleaded for what they term functional socialisation. They divide up ownership into a number of functions, i.e. various property rights, and go on to recommend that these functions be socialised by the State. As a result, the original owner is deprived of all possibility of using the property and its yield. His ownership is reduced to financial liability for tax and losses. Functional socialisation has been applied mainly to private rental housing. It could not be fully applied to big corporations, because these were able to move abroad. The confiscatory taxation of distributed corporative profits, to the tune of 90 per cent, locked up profits in businesses, for the shareholders had nothing to gain from the distribution of profits. Accordingly, profits remained within the companies, which meant that investments were concentrated on firms with historically good profits. But historical profitability does not automatically lead to profitability in the future. In a rational economy, profits should be collected in the market and then re-invested in those sectors, firms and projects showing the highest anticipated profitability. But Swedish taxation makes this impossible. The profits remained ill the old firms, whatever their future. The confiscatory taxation of share dividends has helped to conserve the structure of Swedish industry. Knowledge-intensive industry - pharmaceuticals and electronics - is in good condition but, by international standards, makes up a small proportion of industry as a whole. This is very much due to taxation having made it impossible to transfer profits from old industries to new ones. Hostility to ownership in general and shareholding in particular

guided taxation and, accordingly, shaped the structure of industry. The campaign against shareholding, prompted by distributive policy, became the overriding consideration.

11. A constitutional concen tration of power Sweden since 1970 has had a unicameral Riksdag. All questions are decided by a straight majority: 51 per cent prevails over 49. Constitutional safeguards for the minority are extremely weak. Rights of ownership are protected, in a formal sense, but so vaguely that a parliamentary majority can do anything it likes with private property. A government with a 51 per cent parliamentary majority can do almost anything whatsoever. The Swedish parliamentary system is almost completely devoid of checks and balances. The 51 per cent majority decides everything. Sweden does not have a constitutional court. It does have an extreme concentration of power within the Government. Other countries have lobbying organisations which try to influence parliament. All students have been taught that no such lobbyists exist in Sweden. This is because, in Sweden, the lobbyists have moved into parliament itself. The interest organisations have formed alliances, above all with Social Democracy, and in this way returned representatives to parliament. For a long time it was customary for the chairman of the Standing Committee on agriculture to be a farmer and for the Chairman of the Building Workers' Union to chair the Standing Committee for housing questions. The Swedish trade union movement has been the main finan-

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cier of the ruling party in Sweden, the Social Democrats. Formerly, all union members were collectively affiliated to the party (and membership contributions poured in). Now the unions are members. But a great deal of the party's income is provided by the unIons. They pay up and expect benefits in return. These include legislation entitling them to harass small firms, to create wage formation monopolies with their pay settlements, to veto the chartering of labour by a company and so on and so forth. The Swedish constitution affords relatively little protection for rights of ownership. Chap. 2, Section 14 of the Constitution Act formulates that protection as follows: "Every citizen's property is secured insofar as no one can be forced to surrender his property to the community or to any individual through expropriation or other such disposition or to acquiesce in the community limiting the use ofland or a building except where this is required in order to provide for urgent public interests. A person forced by expropriation or some other such procedure to surrender his property shall be assured of compensation for the loss ..... Compensation shall be determined according to grounds indicated by law." There are two serious weaknesses here, from the viewpoint of the individual. The constitution does not explain what is meant by the "gent public interests"justifying interference with the individual's property. The compensation rule does not say that the individual is to be

3H

compensated for the full value. On the contrary, the lravaux preparaloires set out a number of reasons why the law is not to guarantee compensation for the market value of the property. The expression "private ownership" does not occur in the constitutional text. Furthermore, the constitution does not set an upper limit for the levying of taxation. There is nothing to prevent a parliamentary majority from immediately raising taxation to 100 per cent of income or more. (Even today, a number of wealthy persons in Sweden are paying more than their total income in tax.) In this way, taxation can emasculate rights of ownership. Protection of ownership is a basic prerequisite of private investment. Without dependable protection of this kind, nobody can dare to invest.

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V. Unemployment made permanent

One million people, over 20 per cent of the employable population, are without work or at least excluded from the labour force. This is an enormous burden on the working population. Why? Three factors explain Sweden's inability to reduce unemployment: I. High minimum wages. The unions have a monopoly of wage formation. And for decades the unions have been raising low wages and restraining high ones. As a result, minimum wages have escalated. (The Riksdag has increased labour costs even more by raising "employers' contributions".) The unions and Riksdag are keeping labour costs at such a level that many people, young persons especially. have no chance of getting jobs. The net value of their work input is far below the gross cost to the employer. In addition, a VAT rate of 25 per cent on all services has expanded the tax wedge, i.e. the difference between what the client pays and the worker receives. 2. The tax on low incomes is so high that people in these wage brackets cannot make ends meet if their pay is reduced. 3. Basic rates of pay are too high. People unable to find work or

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unwilling to work for low pay, can subsist on public handouts, which leaves them with little incentive for seeking work.

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VI. Incentives for growth weakened

The basic problems of the Swedish economy are that incentives for growth have been weakened and the economy itself has lost flexibility. Despite massive injections of State-borrowed capital, unemployment remains at a total of some 20 per cent. In 1921-22, Sweden experienced a shock. The wartime bonanza suddenly ended. Production, employment and wages fell by 15 or 20 per cent. The bottom fell out of the economy. But from 1923 onwards, everything took an upward turn. For the remainder of the 1920s, growth was between 5 and 10 per cent annually. New firms were started, replacing the ones which had gone bust. One explanation is that the tax ratio was about 10 per cent; the maximum rate of income tax was 17 per cent. Start-ups, in other words, were a paying proposition. The interesting question: suppose the tax ratio in 1922 had been 55 per cent and the tax wedge something like 70 per cent; how many new firms would have been started then? The internationalisation of competition and technology is making heavier demands for adjustment and change. Sweden is a small, open economy heavily dependent on foreign trade. And so, in order to cope with competition, it has to have very good adjustment mechanisms. The problem is that taxation and general

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protective legislation have created strong, in-built barriers to change. If everything goes wrong, we will have only ourselves to blame.

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Tables

Return on education, per cent per annum Australia

1976

21.2

France

1976

20.0

Germany

1978

10.5

U.K.

1978

23.0

Japan Sweden

1976

8.8

1974

6.9

Source: OECD Economic Surveys, Paris 1995.

Net saving and net invesbnents in the economy as percentages of GDP Year

Net Saving

Net investment

1970

15.3

16.1

1975

13.6

14.1

191'0

5.9

9.0

191'5

5.2

6.5

1990

5.3

8.2

1995

4.9

2.9

Source: SCB, KI

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The investment ratio, i.e. gross investments as a percentage of GDP 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995

18.5 20.7 22.5 24.5 22.3 20.8 20.0 19.3 21.5 13.6

Public foreign debt, gross. BNSEK 1977 1980 1985 1990 1992

10.43 43.33 139 116 351

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Marginal tax 1921-1996. Single wage-earners. Income in 1996 prices: SEK

1921

1931

1941

1951

1961

1971

1981

1991

1996

150.000

13.7

14.7

28.5

37.0

40.8

49.5

52.6

34.3

38.0

250.000

16.1

15.1

36.8

42.5

49.9

60.6

74.6

51.2

58.8

400.000

17.6

17.9

40.2

46.1

53.3

60.5

80.0

51.2

56.7

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