April 25, 2012

Amid all the grim economic news from Europe, it’s worth noting that there are also some success stories. Well, of course, you say: Germany. Okay. But there’s another conspicuous candidate, and it might seem surprising: Sweden. To many Americans, Sweden is a bloated, inefficient welfare state. But the reality and the stereotype don’t match.

Look at the record.

Sweden’s job growth (as a percentage) rivals Germany’s since 2006; present unemployment at 7.5 percent is low among advanced economies; inflation averages about 2 percent; economic growth in the past five years slightly exceeds Germany’s; and government debt as a share of the economy is lower than Germany’s, according to a detailed presentation this week from Anders Borg, Sweden’s finance minister, at the Peterson Institute for International Economics in Washington.

What’s intriguing is that Sweden suffered its own economic crisis in 1992 — and its response will please and discomfort American liberals and conservatives alike.

Conservatives can take heart that many post-crisis policies came right from their playbook. Sweden’s income tax base was broadened and tax rates were sharply reduced. (In 1996, the average marginal rate — the rate on the last bit of income — was 46 percent; in 2010, it was 33 percent.) Spending was cut on old-age pensions, child allowances, unemployment benefits and housing subsidies. Union power over wages was reduced. Many markets (banking, air travel, telecommunications, electricity production) were deregulated. Low inflation and balanced budgets became broadly embraced popular goals.

On the other hand, liberals will also be reassured. Although Sweden trimmed social benefits, it hardly abandoned the welfare state. Overall government spending is still about 50 percent of the economy (gross domestic product), much higher than in the United States ,where the usual ratio is about 35 percent. To reduce income tax rates, the government raised other taxes. Gasoline and cigarette taxes were increased; so were taxes on dividends and capital gains, hitting the rich. Altogether, deficit reduction totaled a huge 12 percent of GDP from 1991 to 1998. Slightly more than a third of that came from higher taxes.

The lesson, Borg argued, is that it’s possible to embrace conservative economics and liberal social policy at the same time. The aims were clear: to reward work by cutting income tax rates; to push people back into the labor market by reducing some government benefits; and to promote productivity by increasing competition. Productivity and “real” (after-inflation) wage gains improved markedly. Still, Sweden has less economic inequality than most advanced countries.

Can the Swedish model be applied elsewhere? It requires, Borg said, a broad political consensus about what needs to be done. Although spending cuts are “preferable to tax hikes,” deficit reduction should rely on both. He also argued that Sweden has been much more successful than the United States in controlling health spending. As recently as 1980, health spending in both countries — as a share of GDP — was roughly equal. Now Sweden’s spending is about half the U.S. level. Among other things, he said, Sweden has relied on higher patient co-payments to discourage people from overusing health services.

Unfortunately, in one crucial respect, the Swedish experience can’t be duplicated. In the early 1990s, the rest of the world economy was relatively healthy. Sweden could offset the depressing effects of its domestic policies by exporting more — and that’s what happened, aided by a huge devaluation of its currency, the krona. The devaluation made its exports more price-competitive.

“They let it [the krona] go down by about 25 percent, and that produced an export boom,” says economist Desmond Lachman, a former top economist at the International Monetary Fund who has studied the Swedish crisis. “It allowed them to do massive [budget] adjustment without putting the economy into a deep recession.”

Austerity is more bearable when only one or a few countries embrace it and when devaluation can stimulate exports. In Europe, neither of these conditions now holds. Many countries — not just Greece, Ireland, Portugal, Spain and Italy — have adopted austerity policies. And all major debtor countries use the euro, making it impossible for any one to resort to a unilateral devaluation. Sweden’s good fortune is that it had its crisis two decades ago.