Freeman

ARTICLE

Sweden's Welfare State: A Paradise Lost

DECEMBER 01, 1980 by ERIC BRODIN

Eric Brodin, a native of Sweden, is a naturalized U. S. citizen, now Professor of the Lundy Chair of Philosophy of Business at Campbell University in North Carolina. This article is from a lecture st the 4th Annual Institute on Free Enterprise and Public Policy st Grove City College in Pennsylvania, June 17,1960.

The Swedish welfare state was initiated in 1932 and has long been heralded the model of the middle way. Seldom has there been so unique an opportunity to judge whether a vast socio-economic experiment, developed uninterruptedly for five decades under optimum conditions, will work or not.

Whether it is correct to call Sweden a socialist country depends on the definition we use. If socialism means government ownership of the means of production, then Sweden is not socialist. Perhaps not more than a fourth of the means of production is in government hands, although that now includes all wharfs, most communications, transport, forests and mines. I prefer to call Sweden a Social Welfare State. The creators of the Swedish Welfare State in the 1930s were Marxists of sorts, but they allowed a pragmatic attitude of gradualism to modify the radical ideological demands of state ownership. But if socialism means control over the results of production, there is no doubt that Sweden is a socialist nation; and the prime means of government control over the results of production is through taxes—now the highest in the world for the 8.3 million Swedish people.

Noted among the founders of the Swedish Welfare State are Gunnar and Alva Myrdal. In a book on Swedish Population Policy written in 1932 they stated: “The Scandinavian countries, and particularly Sweden, by historical accident, are given the most advantageous set of prerequisites for a bold experiment in Social Democracy [social welfare state]. If it cannot successfully be developed in Scandinavia, given by historical chance quite exceptionally advantageous conditions, it would probably not work out anywhere else.” These conditions include an unbroken peace for 150 years, a nation completely un scarred by two world wars, and with an industry intact which could be transformed from arms manufacturing to manufacturing the goods desperately needed by Sweden’s war- torn neighbors. It is a tightly knit, highly industrialized, remarkably homogeneous country rich in raw materials, including hydroelectric power, huge forests and rich sources of iron ore in the north.

From the 1930s through the 1960s Sweden developed a new social welfare state, sometimes called the Mixed Economy, containing both elements of private ownership and government control. That involved retention of the basic manufacturing in private hands, but accompanied by a taxation policy which was to bring about a redistribution and equalization of income. This was to be accomplished through a vast social welfare machine to insure every Swede against practically every exigency. The private and municipal insurance programs were the first to be integrated into a central compulsory system even before the Second World War. In the 1950s came the integration of nearly all pension plans into a compulsory government administered system.

Taxes

To finance the elaborate womb to tomb or cradle to grave welfare system requires a lot of money. And the Swedish government has only the revenue collected through taxes and “social fees.” Today no less than 64 per cent of the Gross National Product goes to the public sector to finance the system. From 50 to 60 per cent of the salary of a typical industrial worker is taken in taxes. But in addition to this basic income tax, there is an additional 22.5 per cent in value-added tax (VAT)—a form of sales or excise tax on all goods and services, including foodstuffs.

The Swedish Confederation of Employers has given us a concrete example of how the subsidy-taxation distribution system works. Let us say that a man with four children and a wife not working, earns $4,600; add to this the social subsidies to which he is entitled, and he has an after tax actual income of $14,000. But let us say that another man with the same sized family earned initially $23,000; after taxes, and with little likelihood of subsi dies, his income also would be $14,000. Presumably the higher earner is also the harder worker, but what is the incentive in keeping that up? Of course this has a tremendous effect on productivity. It is no longer worthwhile to work. The difference, for example, in working full time and working half time is a mere $2,000 for the year, and a lot of people are choosing more leisure instead. Professional people such as doctors, dentists and lawyers seldom work more than five months a year.

The situation for the private entrepreneur is especially difficult. What is not generally recognized is that the employers’ compulsory contribution toward employee benefits is nothing but another form of payroll tax. This averages 40 per cent on top of the salary which, of course, means that the “government bite” of the total wage is even higher than the 50 to 60 per cent indicated. Many small entrepreneurs, operating on a tight profit margin, cannot afford this additional burden, and face the options of going out of business, dismissing employees, or cutting back to a one-man operation.

Underground Economy

It is said that the only expanding sector of the Swedish economy today is that of the underground economy—the secret sector. The burden of reporting and paying a 22.5 per cent sales tax has made it almost common practice in Sweden to ask if a transaction is to be “with or without receipt.” It has been estimated that as much as a third of the work by painters, carpenters, mechanics and the like is performed in the secret sector—untaxed. There does not appear to be any way in which government representatives can determine and prosecute this growing practice. Despite tremendous manpower resources (at least one third of all in Sweden are working for some form of government) they do not have enough people to prevent the secret sector from expanding.

Sweden is becoming a barter trade society. And this barter trade takes many forms. As a genealogist I searched the ancestry of my dentist, while he fixed my teeth. A plumber friend of mine could decorate his home with oil paintings in a deal with an artist acquaintance. And so on.

The malaise in the Swedish economy is in no small part due to the taxation policy which rewards indolence and encourages illegality. Even Gunnar Myrdal calls for new tax legislation: “Swedish honesty has been a source of pride for me and my generation. Today, however, I have an uneasy feeling that, due to bad tax laws, we are more and more becoming a nation of cheats.”

The Absent Worker

There are many other ways in which the employed demonstrate their unwillingness to continue sharing the tax burdens of financing the elaborate welfare state system. With an illness insurance system paying 90 per cent of wage compensation, absenteeism is spreading like some contagious disease through the Swedish employment sector. On any given day 10 per cent of Sweden’s labor force is absent. On Mondays and Fridays absenteeism may reach 20 per cent. At times the Volvo car manufacturing plant or the Kockum Wharf in Malmö have recorded the absence of 25 per cent of the working force, and this has also occurred in some hospitals. How can an economy stand such loss of productivity? How can an export-dependent economy compete in international markets against new industrial nations such as those of Asia whose workers perform efficiently?

With each liberalization of the illness insurance system in Sweden, the increased “absence due to illness” has jumped—by as much as four million working days in a year. The employers’ association desperately urges legislation which would restore the three- day waiting period before the insurance program takes effect. This would remove the temptation for leaves of short duration which often require no doctor’s statement.

Absences are not due to illness alone. There are at least 12 different reasons for “excused absences” with pay from the Swedish places of employment. In a recent experiment, I tried to phone ten persons at their places of work and found only two of them available and in their offices. When I asked why they were absent, I was given an indication of the range of “excused absences.” One man was taking advantage of the law which encourages the man to leave his place of employment to take care of a child (freeing the mother, presumably to enable her to go to her employment). Another one was said to be home caring for a sick child. Another one was taking a course in the Swedish language. Still another one was taking a union-ad-ministered course in how to be “a worker’s representative” on a company board. Still another was absent in order to take care of a document at a government agency. And so on. These are not cases of absence without pay. Either the employer has to pay in full or the employee gets compensated from one agency or the other of government.

The Public Sector

To provide the funds for such an elaborate system requires an immense bureaucracy, and the one-third of Sweden’s work force which some call the non-productive sector must be paid. Today 64 per cent of the total GNP goes to support the public sector’s increasing demands. And they will keep on growing because there is a cumulative effect to these demands. The share of the

GNP going into the public sector increased by 20 per cent between 1950 and 1980. When the first non-socialist government since 1932 came into power in 1976, some of the ground-swell support from the right thought that some alterations would be made in the social welfare system. No such thing has happened. And the cost-indexing of various forms of subsidies will cause the problem to grow as the inflation continues.

The idea of the welfare state gains support from many quarters. The state-owned radio and television monopoly, for example, is required by law to devote 40 per cent of its programming to “informative” programs and these often take the form of propaganda for and about various social welfare measures. Advertisements in newspapers and on vehi cles proclaim: “Did you know that you don’t have to be married to get a housing allowance? . . . . If you’re 18 years old you may still qualify.” The result is an increased degree of utilization, and a peculiar interpretation which defines Sweden’s high living standard by the increase in the number of persons living “on the dole.”

The Budget Deficits

Sweden’s national budget reveals the increasing burdens of the public sector on the national exchequer. And the budget also reveals, through its deficits, the inability of Sweden to finance these increases. The deficits grew from 649 million crowns in 1960 to 50.2 billion crowns in 1980. Much of the budget today consists of transfer payments, currently about 40 per cent. These consist of revenue-sharing to local governments, transfer payments to families, and subsidies to ailing industries, the last of which amounted to 7 per cent of the budget in 1978. In view of the failure by Swedish industry to compete for the reasons mentioned above, many enterprises are failing, especially in shipping and in the textile and shoe industries.

Inasmuch as the labor unions are still very strong (and Sweden has more of its labor force unionized than any other country) there are always pressures for the government to bail out ailing industries in order to maintain employment. This is done by various forms of subsidies, all of which are also subject to some misuse. The government has thus be come increasingly involved in producing items which cannot be sold, and for which there is no market either at home or abroad.

The Real Face of Unemployment

It is necessary to turn to the unemployment situation to understand the current Swedish economic problems. Full employment has always been high among the goals of Swedish planners. But the government has been forced to take extensive measures of intervention in the labor market. For years government spokesmen have maintained the fiction that Swedish unemployment is among the world’s lowest. Such statistics can only be maintained if the real extent of unemployment or under-employment is hidden.

Dr. Sven Rydenfelt has exposed the myth of full employment in a number of articles in Sweden and abroad. He points out that there is an official figure of 2 per cent un employment, or 94,000 of a work force of 4.1 million (half Sweden’s population). However, WPA types of “make work” employed 3 per cent in education or public work schemes. Investigations reveal that 25 per cent of the college students in Sweden are there simply because they cannot get work, or a further 2 per cent. Then there is an additional 90,000 who have asked for “early retirement” because they want to provide work to someone else, another 2 per cent. Finally, there is the 2 per cent employed in industries which are not economically viable, but which continue to hire workers only because of government subsidies. Dr. Rydenfelt concludes: “If these items are added we find a total of 11 per cent unemployed, a share which better reflects the realities of the Swedish labor market than the official reports.” While the work force in private manufacturing was reduced by 100,000 in the five-year period 1975-1980, it is significant that employment in the public sector rose by 250,000 during that same period.

Conclusions: A Welfare Society in Trouble

The Swedish Welfare State faces deep problems today. Many Swedes were jolted into some awareness of the depth of the crises during the General Strike in May 1980. Curt Nicolin, chairman of the board of the Swedish Employers’ Association, said in 1979: “It is high time we comprehend that we are under severe threat . . . we, like sleepwalkers, have moved straight into an economic crisis so serious that we must count upon social unrest and the loss of freedom for most of us.” Certainly the strike and lockout, and the further extension of the conflict by the Longshoremen’s Union, are part of this social unrest. But there are many other indications, which are apparent for those who study the moral effects of the present crises in Sweden’s welfare state.

In the economic sense, it is important to realize the limitations in the nature of the welfare state itself. Feeding upon itself, it is slated for extinction. The German Marxist Jürgen Habermas defined the dilemma in these words: “The division of labor between the state and the private sector that forms the basis for the Swedish model, requires that a continually increasing share of the national product be transferred to the public sector. Technical and economic changes must be accompanied by enormous public investments in order to insure the stability of the society. There is a point where a dislocation in the social structure caused by the free play of the market forces, becomes so great that the people are no longer willing to pay the price of the necessary remedies. The demand for security remains, but the desire of each person to contribute to the cost of this security diminishes. The welfare society then faces a crisis of confidence.”

Those who seek to find the causes of the Swedish welfare-state malaise too often treat the symptoms not the cause. In some cases they prescribe medicines, like ineffectual nos trums, that long ago proved wrong. While they seek in international economic developments the bête noire behind the failure of the “Swedish Model” they are unable to question the Swedish welfare state itself, or any other welfare state. It is, of course, no longer just an “economicproblem.” The interdependence of economic and moral crises are well documented, not the least in the case of Sweden. At a time like this, it is worthwhile to recall the wisdom of a man who still speaks with a voice of authority to a living generation, Wilhelm Roepke:

“The desire for security, while in itself natural and legitimate, can become an obsession which ultimately must be paid for by the loss of freedom and human dignity—whether people realize it or not. In the end, it is clear that whoever is prepared to pay this price is left neither with freedom and dignity nor with security, for there can be no security without freedom and protection from arbitrary power. To this exorbitant price must be added another . . . namely, the steady diminution of the value of money. Surely, every single one of us must then realize that security is one of those things which recede further and further away the more unrestrainedly and violently we desire it.” (A Humane Economy, p. 172)

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December 1980

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