There is this myth going around among America’s “big tent libertarians” (predominantly concentrated to the Tenderfoot Coast between Baltimore and Tysons Corner) that we here in America need to look to Sweden in order to figure out how to do things right. The latest example is an article by Matt Kibbe in the Forbes Magazine, where Kibbe, the president and CEO of Freedom Works, raises the highest-taxed nation on Earth to the skies.
I, for one, thought Freedom Works wanted more economic freedom in America, not less, but since I am not paying Kibbe’s salary I will concentrate on dispersing the mythologically rosy clouds upon which he serves his vision of adopting Swedish policies in America.
The headlines from across the pond read “Europe Rejects Austerity” as the French and Greeks elected socialists and even some neo-national socialists to office. These new officials have promised tax rates as high as 75 percent on millionaires, and have vowed to continue government spending unabashed in the wake of staggering levels of debt and anemic economic growth and persistent double- digit unemployment. However, there is one finance minister in one European nation that is bucking the trend, and, instead of ridicule and failure, he’s been named Europe’s best finance minister by the Financial Times. … His name is Anders Borg and he’s Swedish. That’s right, the European nation famously stereotyped for having aggressive taxation to fund an omnipresent state has actually decided that in response to the Eurozone crisis and the continued effects of the global economic downturn, or “Great Recession”, that it’s time to ease up on taxes and reduce the size of government.
After this bombastic set-up, Kibbe has a lot to deliver on. But already here we can see that he has not bothered to read Remaking America: Welcome to the Dark Side of the Welfare State, a book about the disaster waiting for us if we here in America were to copy the Swedish welfare state.
While Sweden is not technically in the Eurozone, as it does not use the Euro as currency, it has been drawn into the financial mess of the Eurozone by sheer proximity. Unemployment in 2011 was north of 7.5 percent and GDP growth was anemic at .4 percent projected for 2012.
If Kibbe checked his facts, he’d see that the only sector that has been growing in Sweden for the past 20-odd years is the export industry. Private consumption growth rates were at one third to one half of American levels for the last three decades of the 20th century. Since then the parity has been smaller, but only because America’s private consumption has grown more slowly.
Gross exports is the largest category of Sweden’s GDP. What does that mean? That households are living a very poor life while an isolated corporate sector is making good money. There is virtually no tricke-down from the export-oriented manufacturing industries to the rest of the economy.
In the Spring 2012 Economic and Budget Policy Guidelines, the Swedish Government and its Finance Minister, Anders Borg, have laid out a plan that is focused on lowering taxes. Their rationale? “When indviduals and families get to keep more their income, their independence and their opportunities to shape their own lives also increase.”
These “tax cuts” consist almost entirely of an Earned Income Tax Credit, which has increased the already steep marginal effects in the Swedish income tax system. That system, which starts at a 30-percent local income tax rate and tops out north of 60 percent, is now even more discouraging toward hard work, career-advancement and the pursuit of higher education. The more you make, the more government will take on the margin. All the Swedish version of the EITC does is encourage people to take low-paying jobs – and stay there.
Borg also wants to lower the corporate tax rate as a way of meeting the government’s goal of “full employment”. The government has already cut property taxes and other luxury taxes on the rich to lure investors and entrepreneurs back to Sweden.
The corporate income tax is about six percent of total tax revenues. Largely insignificant, in other words. Property taxes barely even register on the government revenue radar screen. Government revenues depend predominantly on personal income taxes and consumption-based taxes, such as but not limited to the value added tax. Besides, the property tax reform was initiated long ago and really has nothing to do with some kind of overall strategy by the current administration.
The government has also slashed spending across the board, including on the welfare programs that used to be Sweden’s claim to fame.
Every Swedish government over the past 20 years has executed spending cuts. Between 1995 and 2005 the socialized health care system laid off 21 percent of its staff. Between 2000 and 2006 the general income security system cut spending by tightening eligibility requirements to such a degree that they were running 15-percent surpluses year in and year out.
Did this benefit the economy? Of course not. Taking people’s money in the form of taxes and then refusing to spend it is not a policy for smaller government. Standard of living has remained virtually flat since the big crisis in the early ’90s, and the total tax burden on Swedish families and businesses is still the highest in the world.
They’ve also installed caps on annual government expenditures: real and enforceable limits that the Swedes believe are pivotal to economic stability. They explain in their Policy Guidelines that “the expenditure ceiling is the Government’s most important tool for meeting the surplus.”
Kibbe is wrong. These spending cuts were put in place in the late ’80s and reinforced by reforms to the national government’s budget appropriations process in the mid-’90s. Has this changed the role that government plays in the Swedish economy? Only for the worse: government now takes in on average 102 krona in taxes for every 100 krona it spends. Does Freedom Works really endorse that kind of government budgeting??
Imagine that, a government that stays within its limits.
And taxes are still the highest in the world. Freedom Works has to make up its mind: does it want a balanced budget or less government?
Then Matt Kibbe spins the no-austerity-here wheel one more turn, repeating the fiscal mythology that Veronique de Rugy marketed earlier this year (and I responded to here):
We have now seen that attempts at austerity within the Eurozone have met a similar fate: none of it was serious. As spending increases have been squandered, spending cuts have been a charade, failing to target the big government programs at the core of the debt crisis.
[What] Sweden is doing is working. And it’s working better than even Minister Borg expected. Despite slow projected growth for 2012, Sweden is expecting annual GDP growth of over 3 percent starting next year, projected out through 2016 by which time their unemployment is expected to slide down to just about 5 percent.
Pure accounting trickery. Sweden has enormous general income security programs where people can participate for a variety of reasons. With the exception of unemployment benefits, when government stashes away a person in one of these programs that person vanishes from the unemployment rolls. Sweden also has Europe’s highest youth unemployment rate.
Kibbe’s praise of Sweden’s superficial fiscal achievements…
During this time the Swedish gross debt is expected to drop from 37.7 percent/GDP to 22.5 percent/GDP as a result of government surpluses.I don’t think Kibbe could even imagine that this is what is going on in Sweden. But from now on I hope he studies up on the practices of the world’s largest, most authoritarian welfare state before he raises its superficial fiscal achievements to the skies.
…is overshadowed by his ignorance of the actual workings of the world’s largest, most authoritarian welfare state. One example of how the Swedish government balances its budget is from the general income security system, run by a government agency funded by very high payroll taxes. This agency forces sick people back to work by simply refusing to recognize their doctor’s notes on their medical condition. I report in detail on this practice in my aforementioned book Remaking America.
Long story short: the fiscal responsibility that Matt Kibbe sees and praises is actually achieved on the backs of cancer patients who are forced back to work because the government can no longer afford to pay their benefits.
Hopefully, Freedom Works is not in the business of generally handing out accolades to the world’s largest welfare states. But regardless of why Freedom Works is suddenly so interested in the big Swedish government, the real story here is that any attempt at keeping the welfare state will always fail in the end. In Sweden’s case the “salvage operation” has come in the form of massive austerity programs – in the ’90s government executed net spending cuts equivalent to nine percent of GDP – while still maintaining the world’s highest taxes.
There is only one sustainable solution: end the welfare state.