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ChoomCzar · 10-01-2012, 09:11 AM

The Swedish Model: Government Austerity

By Randall Hoven

Sweden, like Norway, is often held up as a country which is "socialist and successful." For example, Sweden has high taxes yet also has had healthy economic growth recently. In this century so far, Sweden's total tax bite amounted to 52% of GDP, while the U.S.'s was 32%. Yet Sweden's real GDP grew 2.3% per year from 2001 to 2011, and ours grew only 1.6% per year. Prima facie evidence that high taxes don't kill an economy, right?
In July I deconstructed the Norwegian "Miracle," the other "socialist and successful" country. It's Sweden's turn now.
Sweden, like Norway, consists of a small, not very diverse, mostly white and Christian people. Its population is 9.1 million -- a bit less than North Carolina's. (There are 13 cities in the world with bigger populations.) Not only are native Swedes white, but so are most of Sweden's immigrants. The CIA World Factbook lists its immigrants as "Finns, Yugoslavs, Danes, Norwegians, Greeks, Turks." And 85% of that population is Lutheran; 85% live in cities -- 22% in the Stockholm area itself.
But unlike Norway, which is swimming in oil, Sweden is not richer than the U.S. On a GDP per capita basis (Purchasing Power Parity), the U.S. is 20% richer than Sweden. So Sweden has enjoyed somewhat faster growth than the U.S., at least over some cherry-picked periods of time, but it has not caught up to us in over three decades.
In 1980, Sweden was 81% as rich as us; 31 years later, 83%. That's not much movement on Sweden's part. In fact, even that 2% difference all came in the last year, 2011 (the last year of available data), not exactly a banner year for the U.S.
The real story of Sweden is the exact opposite of a "socialist success story." The real story is that big government stifles growth and that what works is austerity. The real story of Sweden comes in two parts: pre-1993 and post-1993, or the quasi-socialist years and the austerity years.
From 1980 through 1997, Sweden's government spent more than all other advanced economies as a fraction of GDP. It peaked at 68% of GDP in 1993, an all-time record for advanced economies.
And how did that "socialism" work for Sweden? Its economy grew only 1.4% per year from 1980 to 1993, when the U.S. was growing 3.0% per year. And over those last five years, 1988-1993, it stopped growing altogether -- 0% growth. It fell farther behind the U.S: from 81% as rich to 72% as rich. Its debt grew to 70% of GDP.
In short, government spending in Sweden had the effect that free-market types always predict: slow growth and high debt. Government spending does not stimulate; it stifles, and it sticks our kids with the bill.
Around 1993, Sweden's government changed its behavior: it started spending less. By 2011 it was spending "only" 49% of GDP. While that is still pretty high, that represents a cut of 19% of GDP, or about what the entire federal government of the U.S. spent each year in most of the Clinton and Bush years.
By 1998, Sweden was no longer Europe's biggest spender. By 2011, it had dropped to 9th place of 34 advanced economies. Sweden's government is still big, but not near the biggest, and it lost a lot of weight -- the equivalent of shedding the weight of the entire federal government of the U.S.
That is what I call "austerity": the government simply spending less. And how did that work out for Sweden? Since 1993, its economy grew 2.8% per year, or double its previous rate, while ours grew only 2.5% per year. Its debt was cut from a high of 73% of GDP to 37%.
Here is the Sweden Story in two charts.

I don't know how it could be any clearer: austerity, properly understood, works. And Keynesianism is voodoo economics.
I wrote in July that economic growth is highly correlated, negatively, to government spending. I said that economic growth will grind to a halt once government spends about 70% of GDP. At what point did Sweden turn itself around? At 68% of GDP. And in the five years before that, from 1988 to 1993, Sweden's real growth was absolutely flat -- 0%. Sweden validates my growth model.
Sweden's turnaround has not gone unnoticed. The Pew-Peterson Commission on Budget Reform cited Sweden as one of the success stories in cutting government debt.

In the 1990s, following a financial crisis and the worst recession in Sweden since the 1930s, Sweden faced a deficit of over 11 percent of GDP in 1993. Soon thereafter, the government enacted a large deficit reduction plan to restore confidence in its currency and enhance its budgetary flexibility. It reduced its subsidies for medical and dental care, indexed certain taxes, and increased contribution rates for the unemployment benefit system. Ultimately, Sweden reduced its debt by establishing a goal to make surpluses equal 2 percent of GDP. By 2004 Sweden was running budget surpluses, and in 2008 the country's debt was 38 percent of GDP.

Sweden's debt was cut from 73% of GDP in 1996 to 37% in 2011. Do you know what U.S. government debt did during those same years? It rose from 70% of GDP to over 100%! What's more, the U.S. government did all that in just the last four years.
It took Sweden 12 years to cut its debt by 35% of GDP. It took the U.S. just four years to increase its debt by 35% of GDP. We are taking Sweden's example and turning it on its head.
Look at Pew's summary of what Sweden did and compare it to what the U.S. is doing now.
Sweden "enacted a large deficit reduction plan." The U.S. has had deficits in excess of a trillion dollars each year that Obama has been president. President Obama's latest budget plans for a debt that skyrockets to infinity.
Sweden "reduced its subsidies for medical and dental care." The U.S. passed ObamaCare in 2010, calling for a whole new class of subsidies.
Sweden "indexed certain taxes and increased contribution rates for the unemployment benefit system" (although it reduced the fraction of GDP it took in as revenues -- see below). Obama makes up tax policy as he goes along, increasing rates on everything from tanning beds to medical devices, and cutting payroll taxes, the very taxes that fund Social Security and Medicare, which actuaries expect to go broke in the next decade or two.
And, of course, Sweden simply cut government spending. Government spending in the U.S. is at post-war record highs. The federal government in particular has been spending over 24% of GDP in every year of Obama's presidency, a significant increase over the 16 years that preceded Obama (which averaged 19.7% of GDP).
Sweden does have high taxes. Government revenues were 49% of GDP in 2011. (In the U.S., they were 32% of GDP, including federal, state, and local governments.) But Sweden gets that revenue from everyone, not just "the rich." The top 10% of income earners in Sweden made 26.6% of all income, and they paid 26.7% of all taxes, for a ratio of 1.00 -- perfectly flat. In the U.S., the ratio was 1.35, the most progressive of all advanced economies.
If we want to imitate Sweden's high revenues, we need to raise taxes most on the non-rich!
The real story of Sweden is that austerity works. When Sweden's government was the biggest spender, its economy totally stalled: zero growth for five years. What grew was its debt. And even with extremely high taxes, it ran huge deficits.
Then it changed its high-spending ways. It cut spending, drastically, and over an extended period of time -- going on 18 years now.
Keynesians tell us that cutting government spending will slow economic growth. The exact opposite happened with Sweden. Once it started cutting spending, its economy started growing: 4% in 1994 and 3.9% in 1995. In the 18 years since it started cutting, Sweden's economy grew at twice its previous rate, even faster than the U.S.'s.
And Sweden did not cut its debt and deficits by raising revenue levels. Sweden's government took 62% of its GDP at the high point (1987-91). By 2001, government revenue was under 54%, and in 2011, it was under 50%.
Sweden cut spending and taxes. And its tax system is as flat as a tax system can be.
Instead of imitating Sweden's example of austerity, Obama and the Democrats are championing the exact opposite in every measure. More spending, more taxes, more subsidies, a more progressive tax system, more Krugmanomics. There's a word for that: delusional.
Randall Hoven can be followed on Twitter or contacted via his web site, randallhoven.com.
Data sources: The source for most comparisons above, including the two charts, was the International Monetary Fund's World Economic Outlook Database (dated April 2012). The source for population characteristics was the CIA Factbook. The source for U.S. federal government revenue and spending was the White House's Office of Management and Budget.

ChoomCzar · 10-01-2012, 09:23 AM

The Norwegian 'Miracle'

By Randall Hoven

Liberals love Norway (for example, see this). First, it is a European country. Second, it is a liberal country; it gives out the Nobel Peace Prize. Third, it is considered a welfare state, maybe even a socialist one. In 2011 its tax revenues were 57% of its GDP, the highest of all advanced economies.
And fourth, and what liberals really love about it, it beats the U.S. in multiple economic categories. In fact, Norway is one of the richest countries around. Its GDP per capita was 10% more than the U.S.'s in 2011. Its net government debt was a negative 168% of GDP. That is, it is one of the few countries with no net debt at all, but instead a huge surplus.
(By the way, I find the following amusing. In 2011 Greece's net government debt was equivalent to about $430 billion. Norway's surplus was about $745B. If Norway would simply take about half of its surplus and hand it to Greece, Greece would be completely bailed out of debt! Yet the EU is badgering debt-ridden Germany, whose net debt is 56% of GDP, to do it. Norway had the good sense to stay out of the EU.)
But getting back to why liberals love Norway, it is because they can use it to bang conservatives over the head. It is a high-tax state, yet it is richer than us. And since about 1988, its economy has grown just as fast as the U.S.'s. Yet not only does it have no debt, but it has a surplus. "All your free-market arguments are belong to us!"
Let me bring that down to earth. First, Norway's population is about 4.7 million, or about the same South Carolina's, or a bit more than half of New York City's. That population is at least 98% white, and almost all of that is Norwegian. It is also about 90% Christian. About four out of five Norwegians live in cities, with almost one in five living in Oslo itself.
Norway might be liberal, but it is not diverse. (The U.S., for comparison, is 80% white and 70% Christian. So whites outnumber minorities 4-to-1 in the U.S. In Norway, the ratio is 50-to-1.)
But perhaps the two charts below might give us some insight into Norway's economic success.

Norway's Crude Oil Production

Source: U.S. Dept. of Energy.

Crude Oil Prices

Source: U.S. Dept. of Energy.

It just so happens that Norway's success over recent decades coincided rather nicely with two explosions: North Sea oil production and oil prices.
To call Norway the Saudi Arabia of Europe would be an insult. Saudi Arabia has been producing about 125 barrels of oil per year per person. Norway produced between 135 and 250 barrels per year per person from 2001 through 2011.
Even on an absolute scale, Norway is a huge exporter of oil. In fact, it is the 5th-biggest oil exporter in the world. Bigger than Iraq. Bigger than Kuwait. And Canada. And the U.S. And Venezuela. It is behind only Saudi Arabia, Russia, Iran, and the UAE. And remember, its total population is about the same as Saudi Arabia's second-largest city, Jeddah.
Multiply those recent production rates by the price of oil, and you get about $6,250 per person per year in 2001, and $13,500 in 2011. Oil has been very, very good to Norway.
And where does good little liberal Norway get that oil? From drilling in the ocean. Most of its oil was drilled in the North Sea. You know, offshore, like the U.S. used to do in the Gulf of Mexico, but won't do on either the Pacific or Atlantic coasts.
Here's another one: CO2 emissions from fossil fuels. From 1990 to 2009, the U.S.'s emissions went up 6.7%. Norway's went up 31.9%.
I think of Norway as the Bono of countries. It likes to preach to the rest of us how to be good citizens of the world. In the meantime, it makes money hand-over-fist by being one of the biggest of the Big Oil gorillas. It drills for it. It drills for it in the ocean. It sells it. It owns a major oil company. It increases its carbon footprint while the rest of Europe shrinks its own.
And here's another little secret about Norway. Relatively speaking, it's not all that socialist. In 2008, all government in Norway spent 39.8% of GDP. At the same time, the "free market" U.S. was spending 39.2%, almost exactly the same. (France was spending 53.3% then.)
In fact, Norway has been cutting the size of its government: from a high of 51.6% of GDP in 1992 to a low of 39.8% in 2008. That is a huge drop, roughly equivalent to the federal government of the U.S. cutting its spending in half.
One more little tidbit: Norway's tax system is regressive, not progressive. The top 10% make 28.9% of the income but pay only 27.4% of taxes! The U.S. has the most progressive tax structure of advanced economies, in which the top 10% make 33.5% of the income but pay 45.1% of the taxes.
Liberal Norway-lovers don't like to advertise these parts of Norway's policies: slimming down its government, regressive taxes (not even flat), being part of Big Oil.
So the simple-minded story is that Norway is some great socialist state yet its economy is humming along just nicely. Let me summarize its real keys to prosperity.

A tiny, non-diverse, predominantly white and Christian population.
Drilling in its ocean for oil to become one of the biggest oil exporters on the planet, and the biggest by far on a per capita basis, all during a time when oil prices quintupled.
Letting its carbon footprint grow at one of the fastest paces in Europe, a pace almost five times faster than the U.S.'s.
Shrinking its government spending, the equivalent to the U.S. federal government cutting its spending in half over 16 years. Shrinking its government spending to about the level of the U.S.'s, and smaller than most of Europe's.
A tax system that is flatter than flat; it is regressive -- the rich pay less than the non-rich.

And while the U.S. government is "investing" in high-speed rail, solar energy, wind energy, etc., look at this Statoil website to see where Norway put its money. (Norway owns 67% of Statoil's stock.)
I'm convinced. Let's imitate Norway.