Tuesday, January 25, 2011

The Nordic Welfare State

Boyes writes of the differences in approach toward economic welfare and policy in Sweden v the United States.

Last week on the 17th I blogged on what appears to be, at least at the level of rhetoric, an awareness on the part of some leaders of the escalating cost of the welfare state here in the United States. President Obama's State of the Union last night repeated some of this rhetoric and there were a number of proposals that, while made under previous administrations of both parties (simplifying the tax code, ending earmarks, reducing military and discretionary spending) that make sense. It remains to be seen whether this change in rhetoric translates into any meaningful change in fiscal behavior. I have my doubts and, as Bob Higgs recently reiterated, this administration, like those before it of both parties, continues to foster regime uncertainty. This regime uncertainty has accelerated in the US and, while I am not the most informed observer of Sweden, it would seem that regime uncertainty in that country has declined at the time that US entrepreneurs and actors face in ever changing rhetoric and unknown future government policy and action.

There has been a clear change in fiscal behavior in Sweden.

Last semester, through a bit of luck, I had a young Swedish hedge fund manager speak to my introductory classes. He graduated with undergraduate and graduate degrees in economics from the University of Stockholm and outlined for my class the formal and informal institutions in Sweden, which he contrasted with those in the United States.

The Nordic countries, and Sweden in particular, have reacted to economic events over the past decade an a much different manner than the United States.

In contrast to the exploding deficits and debt in the US, Sweden has instituted a number of measures to move toward a projected budget surplus in 2011.

"The Swedish economy appears to be stronger than in our previous forecast (in June), in particular in 2010. The recovery in Sweden has been stronger than in the euro area and the United States," said the National Debt Office, which is the government's financial manager.

Sweden is now expected to post a budget deficit of just five billion kronor ($726 million) this year, down from the previous forecast of a 14-billion-kronor deficit, the debt office said in a statement.

"The budget is thus almost balanced. This strong development continues in 2011 and 2012 when the forecast indicates a central government budget surplus of 18 billion kronor and 78 billion kronor respectively," it said.


Click here http://www.thelocal.se/30252/20101116/ for the full analysis.

The divergence in approach between the Nordic countries and much of western Europe and the United States is reflected in current and projected economic macro indicators of growth, employment and associated measures of economic welfare.

Click here http://www.imf.org/external/pubs/ft/weo/2010/02/weodata/weorept.aspx?sy=2005&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&c=144%2C111&s=NGDP_R%2CNGDPRPC%2CPCPI%2CLUR%2CGGR_NGDP%2CGGX_NGDP%2CGGSB_NPGDP%2CGGXWDN_NGDP%2CBCA_NGDPD&grp=0&a=&pr1.x=40&pr1.y=6 to view an IMF comparison of reported data between the US and Sweden. For example:


Uemployment

-2005 -2006 -2007 -2008 -2009 -2010 -2011 -2012 Country

7.633 7.042 6.117 6.167 8.300 8.200 8.200 7.700 Sweden

5.083 4.608 4.608 5.817 9.275 9.730 9.589 8.846 USA

The United States leadership has been paralyzed by the approaching fiscal crisis, instead devoting attention to intervention in the market, increased regulation and a general hostility to the business community. This regime uncertainty certainly began in the adminstrations of the 1990s in both parties and accelerated during the Warfare and Welfare expansion of George Bush Jr - think the "conflicts" in Afganistan (our longest lived "war") and Iraq as well as the massive increase in government intervention in the health care market through the Medicare drug fiasco.

This regime uncertainty, unsurprisingly, has continued under the current administration.

On the other hand, it appears that there is considerably less regime uncertainty in Sweden - both the people and leadership seem to reflect a commonality and contentment with government action which as indicated by the macro statistics in the link above (which are reflected in the unemployment figures I pulled out of the report).

More importantly, the fiscal positions of the two countries are moving in opposite directions:

Central government budget close to balance in 2010

The Swedish central government payments resulted in a deficit of less than SEK 1 billion in 2010[1]. The budget is therefore practically in balance. It is a big improvement compared with 2009. This is due to the strong recovery in the Swedish economy, which led to higher tax income, while expenditure growth was moderate.


http://thomsonreuters.acnnewswire.com/article.asp?art_id=41046&lang=1

Note that Sweden's per cent of debt to GDP is in the dark grey = 11-30% while the US is in the light pink (appropriate) 51-70% and growing.

Click on the image below to view the entire world.

national-debt


So, while Sweden does in fact have a much larger state presence on the fiscal side, why has that country been relatively more successful in managing fiscal accounts? This seems to call into question the notion that economies that are more mixed and less statist respond to economic conditions in a more efficient manner and generate stronger economic performance and resulting welfare measures.

The Swedish speaker last semester suggested a number of key differences between our two countries - Sweden is much smaller and more homoegeous. Further there are a set of informal institutions - beliefs, norms and ethics that privilege egalitarianism and equality.

Taking the first, the smaller geographic area and population of Sweden may allow for a more efficient government - that is there are diseconomies to scale to provision of public goods. I am speculating here based upon my reading of Alesina's The Size of Nations.

A smaller society and state can, perhaps, react more quickly that then large and heterogeous United States. Perhaps this issue of size allows for more rent seeking in the United States which seems tohinder changes in fiscal policies - Sweden, on the other hand, has been much more reactive to the threat of budget deficits and high levels of debt.

The informal institutional framework of the two countries is much different - the norms and beliefs in Sweden seem to be in congruence with an active welfare state that provides a broad safety net. Such a consensus of opinion does not exist in the US, on virtually anything.


That said:

The World Bank ranks Sweden 18th in “ease of doing business” and 43rd in “ease of starting a business” in 2010. Starting a business in Sweden takes 15 days and costs 0.57% of GNI per capita.

The World Bank ranks US 5thin “ease of doing business” and 9th in “ease of starting a business” in 2010. Starting a business in the US takes 6 days and costs 1.4% of GNI per capita.

So, while the US had a clear advantage in ease of starting a business, in an unexpected stat, the US is almost 3 times as expensive in the cost of doing business.

Finally, perhaps due to size and philosophy, Sweden, for whatever this means, has a higher GNI per capital GNI Per Capita (US$) 48,930.00 to GNI Per Capita (US$) 47,240.00 in the US.

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