Welfare state reform without retrenchment

describing and explaining political change in Sweden 1980-2000

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 doesn’t 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”

Taxes and growth in Sweden

Taxes/GDP 1970-2003

2,02,52,5Real GNI per capita

2,02,22,6Real GDP per capita

EU15USASweAvg annual growth, 1995-2004

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“The Swedes themselves are not entirely sure what they have done right.”

Paul Krugman

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).

End of background.

The nature of political change in Swedenglobalization

Property rights, sound money, free trade, regulations

Small government

Evidence from a new OECD reform data base (Bergh & Dackehag, work in progress)

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

Commissions fascilitate reform• identifying losers, create Kaldor-Hicks compensations

• creating a common world view

• 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

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

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.

Vote share for the right wing party in Sweden 1982-2006

Revealed preferences:

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

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.

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