Does Sweden Have The Right Model?
By Holly A. Bell
While the economies of the U.S. and most of Europe have continued to struggle under Keynesian style stimulus, Sweden has taken the opposite approach enacting supply side tax and spending cuts. The result? Over the last two years (2010 to 2011) Sweden’s real GDP growth has averaged 5%. That’s more than twice that of the United States. Sweden’s Finance Minister Anders Borg is not quite what you’d expect when you think of a supply-sider. He is a youthful middle age, sports a ponytail and an earring and describes himself as a feminist. But his policies are almost good enough to make me forget about the high personal income tax rates in Sweden. Here’s how he did it:
- He implemented permanent tax cuts. This left the future certain as opposed to the U.S. where tax cuts are in danger of going away at any moment creating uncertainty and incentives to save rather than spend.
- He did not borrow money like the rest of Europe; he cut spending by paring down government and cutting welfare spending. As a result Sweden has abolished their deficit and encouraged private sector development.
- He cut property taxes for the rich to increase entrepreneurship and bring businesses back to Sweden. He also revisited wealth taxes and inheritance taxes that were causing business owners to leave the country.
There’s one more little known fact about Sweden that has helped them through this crisis. While the U.S. and the rest of Europe are struggling to figure out how to continue to pay for social programs like Social Security, Sweden privatized their social security system in 1999.
“He also revisited wealth taxes and inheritance taxes that were causing business owners to leave the country.” Monopolies, especially natural ones, tend to forget that they have non-local competition. Jurisdictions would be well served to remember they too compete with other jurisdictions. Once someone leaves for a competitor, your ability to get them back is practically zero.
I know we’re so very, very scared to cut taxes and make them permanent. It’s usually necessary (but not sufficient) for a reduction of budget to drive a reduction in institutional waste. I don’t know enough about macro-economics to conjecture where it’s best to cut in taxes, the middle, upper, or lower income brackets but, generally, a cut in taxes seems to be related to many good things. I don’t think I’ve ever heard someone say that once they cut taxes the economy spiraled out of control. I might be forgetting the history of Calvin Coolidge though.
I’m curious about whether or not span of control issues would influence different results were it implemented here in the United States. Would a simple copy/paste of Sweden’s policies work or would we need to manipulate them to fit our way of doing things here?
@ Peter: I agree, globalization means we have to think about competition and things like corporate income taxes (all taxes for that matter) on a global basis. This is one reason why we\’re seeing \”too big to fail\” in the U.S. Regulators allow mergers and acquisitions to happen that they wouldn\’t have approved before because they look at competition globally and not just intra-country. That\’s not necessarily a criticism, but an observation.
If I were to boil the macro-economy down to it\’s basic level in a highly globalized environment, I would say that the developed country that has the most highly trained workforce and the least oppressive (and stable) tax system wins. I\’m not sure if the Swedish model is necessarily a \”cut and paste\” solution for the U.S., but it\’s worth looking at. What we have been doing certainly isn\’t working very well.
I have to agree with HollyB88 on the difficulty with global unmanageable monsters.
Feeding these guys however is like feeding a tapeworm. They are already beyond control of the type of people who invade another nation before breakfast.
America has on many occasions, including recently in attempts to operate levies on the global banks, been the one holding out and preventing the rest of the world from gaining some control.
On the original question, Supply side can only work if demand exists. Businesses wont set up or expand if there are no customers, regardless of the tax breaks.
It can only work in certain limited circumstances.