Sweden's Experiment with Economic Democracy
Introduction to the Swedish Economy – Barry Clark
THE THIRD WAY
Maslow’s Hierarchy of Needs Abraham Maslow – (1908 – 1970)
Higher needs generally won’t be pursued until lower needs are met.
Current Statistics
Sweden’s small, open, and competitive economy has been thriving and Sweden has achieved an enviable standard of living with its combination of free-market capitalism and extensive welfare benefits. Sweden remains outside the euro zone largely out of concern that joining the European Economic and Monetary Union would diminish the country’s sovereignty over its welfare system.
Timber, hydropower, and iron ore constitute the resource base of a manufacturing economy that relies heavily on foreign trade. Exports, including engines and other machines, motor vehicles, and telecommunications equipment, account for more than 44% of GDP. Sweden enjoys a current account surplus of about 5% of GDP, which is one of the highest margins in Europe.
GDP IN COMPARISON – 2017
household consumption: 44.1% - 68% 39.1%
government consumption: 26% 17.3% 14.5%
investment in fixed capital: 24.9% 17.2% 42.7%
investment in inventories: 0.8% 0.1% 1.7%
exports of goods and service s: 45.3% 12.1% 20.4%
imports of goods and services: -41.1% -15% -18.4%
SWEDEN UNITED STATES CHINA
Basic Domestic Macroeconomic Relationships
Y
C
S I
T G
INDUSTRIAL PRODUCTION GROWTH RATE - 2017
SWEDEN – 4.1%
UNITED STATES - 2.3%
CHINA - 6.1%
TAXES AND OTHER REVENUE RECEIVED BY THE GOVERNMENT – AS A % OF GDP
SWEDEN – 50.6%
UNITED STATES – 17.0%
CHINA - 21.3%
Total taxes and other revenues received by the national
personal and corporate income taxes
value added taxes
excise taxes
tariffs
Other revenues include social contributions - such as payments for social security and hospital insurance - grants, and net revenues from public enterprises.
EDUCATION EXPENDITURES - 2017
SWEDEN - 7.7% OF GDP
UNITED STATES - 5% OF GDP
CHINA - NA
HOUSEHOLD SAVINGS
https://data.oecd.org/hha/household-savings.htm#indicator-chart
BRIEF ECONOMIC HISTORY ORGANIZED CAPITALISM: 1870 - 1932
19th century
No feudal past
Communal cooperation in agricultural villages
Industrialization – 1870-1930’s
Export demand for Swedish iron ore & timber Demand for Swedish industrial labor
Privatization of agricultural lands Supply of labor - migration of farm labor to cities
HOWEVER
Supply of labor > Demand for labor
Industrial wages DROPPED below poverty levels
Mass emigration (25% of population) to United States
Creation of Swedish cooperative societies to address widespread Swedish poverty
1899 = Consumer Cooperative Union – national organization that operated retail stores and offered insurance policies – farmers’ coops and food coops
Cooperative (Co-op)
A business that is owned and democratically governed by its members, the people who use its products or services, or are employed by the business.
PURPOSE: not to accumulate profit for investors, but to meet the goals and aspirations of its members.
Any surplus generated by a co-op is reinvested in the business or returned to the members based on their use of its services.
Membership in the co-op is obtained through the purchase of a member share in the business, which does not change in value (in contrast to publicly traded corporations) and entitles the member to one vote in matters that come before the members.
World War I Boom / Bust Cycle and Even More Deterioration of Swedish Economy
1899 – Swedish Social Democratic Party (SAP) founded
promotes socialism
Won first parliamentary election
From its founding in 1889, the SAP has been committed to the creation of an egalitarian society. It has led Sweden’s government for most of the period since 1932.
The party suffered a split in 1917, when some members left and eventually formed the Left (Communist) Party.
From 1932 to 1976 (except for a brief period in 1936), the SAP held power continuously, sometimes in coalition with various groups on the left. By the time it left office in 1976, it had transformed Swedish society.
Implementing Ithe policy of folkhemmet (“people’s home”), the idea that society should provide a place of safety for the people, the SAP created one of the world’s most comprehensive systems of welfare.
Measures included allowances for children and for housing, health insurance, pensions, and a reform and expansion of the educational system.
This was largely the work of two SAP leaders—Per Albin Hansson, who served four terms as prime minister between 1932 and 1946, and Tage Erlander, who served as prime minister from 1946 to 1969.
Olof Palme, head of the SAP from 1969 to 1986 and twice prime minister (1969–76, 1982–86), worked to preserve the policies of his predecessors until he was assassinated in 1986, a crime that shocked the country
Rehn-Meidner Model
Sweden’s postwar welfare state had been built around a model designed economists Rudolf Meidner (1916-1996) and Gösta Rehn (1914-2005).
The model stressed
Keynesian fiscal policies,
centralized collective bargaining between unions and employers,
low inflation,
push for wage equalization through a “solidarity in wages” policy.
BACKGROUND TO REHN-MEIDNER MODEL
Primary argument:
The US/European KEYNESIAN strategy for fighting inflation in an economy approaching full employment is ineffective
WHY?
Profit margins are high when economy is a full employment and high AD
Soaring profits are a threat to price stability because HIGH EXPECTED PROFITS CREATES EXPECTATIONS OF CONTINUED GROWTHWAGES RISE (WAGE DRIFT) in manufacturing bubble economy
Incomes policy cannot prevent wage drift
Conflicts would develop between trade unions representing manufacturing workers vs. those in more competitive sectors
Secondary argument: An economy that is dependent on export earnings must maintain low and stable prices and wages.
How?
Wage solidarism and active labor management policies managed and implemented by the government
19
Solution to profit-wage-inflation cycle
Wage Solidarity: Active Labor Management Policies
Occupational retraining
Training to avoid being laid off
Relief work
Youth terams
Recruitment support
Cradle-to-grave welfare state programs
Universal health insurance system (1955)
Universal Public pension system (1959)
5 weeks paid holidays (1989)
3 month maternity leave (1945) expanded to 18-month general parental leave at 90% pay (1991)
90% of salary for unlimited sick leave
How to pay for the welfare programs:
Sweden has highest % GDP devoted to government spending, including transfer payments of any market economy
The rising trend of government transfers paid for by increased taxes or financed by cutbacks in other areas of government spending, notably infrastructure investment
| Country | Spending 2014 (includes defense, infrastructure, social programs) | Transfers 2014 |
| Sweden | 51.5 | 27.1 |
| Denmark | 55.0 | 29.0 |
| Norway | 45.8 | 22.4 |
| France | 57.3 | 31.9 |
| Italy | 51.0 | 29.0 |
| Germany | 44.1 | 24.8 |
| Canada | 41.9 | 16.8 |
| Finland | 58.1 | 30.2 |
| United Kingdom | 43.8 | 21.9 |
| United States | 38.0 | 18.8 |
| Japan | 42.1 | 23.1 |
In order to raise a lot of income tax revenue, income tax rates in Scandinavian countries are rather high except for in Norway. Denmark’s top marginal effective income tax rate is 60.4 percent. Sweden’s is 56.4 percent. Norway’s top marginal tax rate is 39 percent.
Taxes in comparison
Scandinavian income taxes raise a lot of revenue because they are actually rather flat. In other words, they tax most people at these high rates, not just high-income taxpayers.
The top marginal tax rate of 56.9 percent in Sweden applies to all income over 1.5 times the average income in Sweden
From the American perspective, this means that all income over $75,000 (1.5 times the average income of about $50,000 in the United States) would be taxed at 60 percent.
Compare this to The United States. The top marginal tax rate of 46.8 percent (state average and federal combined rates) kicks in at 8.5 times the average U.S. income (around $400,000). Comparatively, few taxpayers in the United States face the top marginal rate.
High Value-Added Taxes
In addition to the high payroll and income taxes, all Scandinavian countries collect a significant amount of revenue from Value-added taxes (VATs). Value-added taxes are equivalent to sales taxes, but levied on businesses throughout the production process.
Denmark collects about 9.6 percent of GDP through the VAT, Norway collects about 7.8 percent, and Sweden collections about 9 percent of GDP. All three countries have VAT rates of 25 percent. The United States does not have a national sales tax or VAT. Instead, states levy sales taxes. The average rate across the country is about 7 percent.
The much lower rate only collects about 2 percent of U.S. GDP in revenue.
Corporate Taxes
Distribution of household net wealth
Swedish Wage Earner Funds (part of the Rehn-Meidner plan)
to counteract the concentration of ownership which, from a general equality perspective, must be regarded as unacceptable;
to increase wage earners’ influence in economic life through ownership of capital;
and to facilitate the continuation of the solidaristic wage policy by a mechanism to deal with excess profits (which could also be seen as an element in lessening the concentration of capital).
Purpose of Wage Earner Funds
Workers as a united whole would collective own the investment funds
It would give all Swedish working people a share in the stock holdings of the country and a right to vote their shares of stock in determining the boards of directors of Swedish firms
It would allow representation of Swedish working people on corporate boards
It would make economic democracy possible
Financing the Wage Earner Funds
Tax of 20% on pre-tax profits exceeding one million SEK (about $150,000) or 6% of a firm's total payroll costs, whichever was higher, after appropriate allowance was made for inflation and other appropriations.
Paid by all Swedish and foreign companies
Tax of 0.2% on total payroll costs of all corporations, private and public.
Each of the WEFs got one-fifth of the revenues generated from these two sources, although an inflation- adjusted ceiling (set at 400 million SEK [about $60 million] for 1984) was imposed on each fund.
34