Welfare state reform without retrenchment

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  1. 1. Welfare state reform without retrenchment describing and explaining political change in Sweden 1980-2000
  2. 2. Background: Why care about Sweden? Frightening example or proof that socialism can work? When Sweden was lagging behind, there was critique from the editorial page of Wall Street Journal & Washington Post. PM Ingvar Carlsson responded in Washington Post 1990: The Swedish model doesnt need fixing Immediately after this Sweden plunged into the worst recession since the 1930s. Sept 1991, Cato Policy Analysis, From Capitalist Success to Welfare-State Sclerosis
  3. 3. Taxes and growth in Sweden Taxes/GDP 1970-2003 2,02,52,5Real GNI per capita 2,02,22,6Real GDP per capita EU15USASwe Avg annual growth, 1995-2004 0 10 20 30 40 50 60 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 r Procent SWE OECD EU15
  4. 4. The Swedes themselves are not entirely sure what they have done right. Paul Krugman
  5. 5. Is high taxes suddenly good for growth? No! Bergh and Karlson, (2009). Public Choice, forthcoming: Big government IS negatively correlated with growth, but countries can (and do) compensate with sound economic policies (e.g. low inflation, trade openness).
  6. 6. End of background.
  7. 7. The nature of political change in Sweden globalization Property rights, sound money, free trade, regulations Small government
  8. 8. Evidence from a new OECD reform data base (Bergh & Dackehag, work in progress)
  9. 9. This leads to two questions: Why so large reforms towards economic freedom in most areas except government size? Why no reforms towards smaller government? Crises and commissions Topping up and freedom of choice
  10. 10. Commissions fascilitate reform identifying losers, create Kaldor-Hicks compensations creating a common world view
  11. 11. Norm (?) that social democrats and the right wing parties should agree on important issues -> left and green party find an excuse to leave the commission Pension reform, EU-membership, central bank independence, tax reform, several privatizations and deregulations, new budget rules
  12. 12. Why no reforms towards smaller government? Even high and middle income earners are surprisingly happy with the welfare state... Why? Becausewhat they get from the welfare state is sufficiently similar to what they would buy anyway... ...and to some extent it can now be individually enhanced and configured, through topping up and freedom of choice
  13. 13. Welfare state support in Sweden: (stated preferences) Question: Do you prefer increased, unaltered or decreased amount of tax money spent on [various]? Average, normalized to a 100-point scale. Source: Svallfors 2004 and own calculations.
  14. 14. Vote share for the right wing party in Sweden 1982-2006 Revealed preferences:
  15. 15. Topping up level of protection Level desired by high income earners Level provided by the welfare state Topping up Market alternative Freedom of choice vs Choking: Public level exceeds desired
  16. 16. Yes, the public sector is big and inefficient, but with all the latest patches you can actually learn to live with it. ...and many market solutions are designed as complements, so switching seems terribly complicated anyway. Yes, its a bit like Microsoft windows. In other words: Topping up and freedom of choice lowers the disutility associated with being a net payer to the welfare state.
  17. 17. Finally, what if you really want to dismantle the welfare state? Do the opposite! Do not initiate public commissions. Increase social insurance benefits above the choking level Forbid topping up of welfare services Do not use vouchers Increase tax-progressivity A mandate for retrenchment and tax cuts should take 5 to 10 years