The Swedish Model

Whenever I speak on the relationship between government growth and economic growth, someone throws Sweden up as a counter example. They point out that Sweden is a case where people have chosen a welfare state and yet have experienced rising standards of living, often greater than the U.S. In reality, the Swedish model has failed.

Between 1870 and 1970 Sweden progressed from an underdeveloped country to a country with one of the highest per capita incomes in the world. During that period, only Japan had a higher per capita growth rate.

Sweden also built the most comprehensive cradle-to-grave welfare system in the West. The Swedish system features a steeply progressive income tax and measures aimed at equalization of incomes and opportunity. A broad political consensus supported creation of the system.

Sweden seemed to present an intellectual challenge to those who argued that high tax rates and extensive state intervention would hamper economic growth. Sweden no longer presents such a challenge. Few would now consider the Swedish system worthy of emulation.

Since the late 1960s Sweden's industrial competitiveness has deteriorated sharply. For two decades Sweden has had one of the lowest economic growth rates of countries that are members of the Organization for Economic Cooperation and Development.


Why has Swedish GDP growth fallen? Because 75 percent of its economy—mostly services—is protected. This does not include trucks, software, and banking, which are world class.

In the early 1970s, Sweden enjoyed one of the highest standards of living in Europe. Since then, however, its economic performance has undergone a relative decline.
By 1990, Sweden had been overtaken by Germany, France, and Japan in GDP per capita; three years later, it had also fallen behind Italy and the United Kingdom

Following a severe contraction in the early 1990s, the Swedish economy accumulated a strong record of output growth coupled with a disappointing performance in the labor market.

As of 2005, hours worked per person 20-64 years of age are 10.5 percent below the 1990 peak and a mere one percent above the 1993 trough. Employment rates tell a similar story.

Sweden, like much of Europe is now moving away from the welfare state, attempting to lower taxes, especially on business, and offering fewer cradle to grave services.

There is no doubt that the greater the governemnt the smaller is the growth of the economy.