Saturday, August 13, 2005

Why Sweden Works


The other day I was speaking to a friend of my dad's, who currently works at the World Bank, about an economic theory which takes credit for the prosperity in Northern European nations, namely in Sweden and Finland.

Sweden has the highest income tax rate in the world (51%) and Finland is not far behind. In fact, Finland appears to be so determined to redistribute the wealth that even speeding tickets are based on income. An incident in which an executive of Nokia was charged $98,000 for speeding on his Harley Davidson illustrates the fact (he later appealed and got it brought down to $5000).

However, these Scandanavians are far from anti-business socialists. Sweden has the lowest corporate tax rate in Europe (28%) and both countries pride themselves in the lack of regulation imposed on entrepreneurs.

"In some places, it takes thirty steps in six months to start a business, in others, it takes two steps in a day", said David, who has toyed with the idea of writing a book about the topic.

The Bad Hair Blog disagrees with me. The blogger, Fausta, earlier showed a graph that displayed recent job growth, and also indicated that Bush's tax cuts came right before the real rise in job creation began. However, Fausta ignores the fact that there have been two tax cuts during the Bush administration, one of which came right before the recession got worse.

Although it's plausible to assume that tax cuts cause some job growth, it's disingenious to give all the credit to tax cuts when the same congress that's giving them out is also spending oodles of money on pork-barrel public works projects.

13 Comments:

At 8:37 AM, Blogger Fausta said...

I agree 100% with your position on pork-barrel politics. The USA's economy's growth is greatly (and adversely) affected by it, and so are the economies of other nations because of the deleterious effect of, for instance, American farm subsidies and import tarrifs.

I didn't address at all in my post these items, since the post was mostly quoting a WSJ article. However, that doesn't mean the Swedes and the Finns are in great shape. If you look at GDP per capita (2003 figues from http://www.economist.com),
USA $37,831, Sweden $27,430, Finland $27,740, Ireland $33,120

Unemployment
USA 5.99%, Sweden 4.88%, Finland 9%
Ireland 4.7%

Ireland has an open approach to entrepeneurship, but has one of the lowest tax rates in Europe. And that's what's made Ireland the fastest growing economy in Europe.

 
At 10:39 AM, Blogger Enlighten said...

New Jersey’s Council of Economic Advisors, in their most recent report, noted the New Jersey economy had a breakout year in 2004. The Council attributed the state’s economic improvement to federal tax cuts and strong employment gains.

However, some may consider the Council to be a partisan group, as the NJ Council of Economic Advisors is comprised of a Chairman appointed by the Governor and legislative appointees.

The Council’s attributing the state’s economic revival to federal tax cuts must come as somewhat of a shock, considering the governor’s seat and both houses of the legislature are controlled by Democrats.

To add to what Fausta said above:

Sweden’s per capita GDP is less than or equal to the GDP of the poorest states in the United States.

Sweden has not created any net new private sector jobs since 1950

None of top 50 companies on the Stockholm stock exchange has been started since 1970.

Is that what you and your Father’s friend at the World Bank thinks is a model of economic prosperity? That economic theory which takes credit for the prosperity, or rmore accurately, the lack of prosperty in Europe, is known as socialism – a proven loser the world over.

 
At 7:01 PM, Blogger Steven said...

Has the current president created net new private sector jobs?

 
At 8:43 PM, Blogger Jack said...

Did any of you check out the poverty rate in Sweden? How many people go to bed hungry?

Of course the GDP is going to be lower. It's a much smaller country that attracts less foreign business because there are far fewer consumers. That will change now that the EU is getting started. Technically, Nokia has been a company for over 50 years, but it didn't become a multi-billion dollar corporation until the 1990's when mobile telecommunications took off.

Sweden has the lowest corporate tax rate in europe, that is not socialism.

 
At 2:50 AM, Blogger Chris Woods said...

Paul Krugman had a good column the other day talking about economy growth. Basically, compared to the last decade, its so-so at best. So, it seems that the Bush Administration praises mediocrity (new administration slogan: Bush White House--praising mediocrity!). The truth is, in the last 5 years, the biggest sector where jobs has been created (over three million) has been in the housing market. Combine that with military-contractors and other necessary expenditures in war and the little bit from the tax-cuts, you get a neutral job less ratio for his combined terms right now. However, that probably won't last with the housing bubble about to burst (albeit slowly though). Once the housing boom ends, particularly on the coasts where its the biggest, expect plenty of job cuts and unemployment to go up. See, mediocrity just isn't worth praising sometimes.

 
At 5:41 AM, Blogger Xpatriated Texan said...

"None of top 50 companies on the Stockholm stock exchange has been started since 1970."

So all fifty of their biggest companies are at least 35 years old. How is this bad? Sounds like a good solid foundation to grow on. Let's examine that a bit.

Oh, there's IKEA - which has been around and going strong since the 1930's. Yeah, let's pick on Sweden for having that company around.

Then there's VOLVO - which was started in the late 1920's. Another horrible stock to invest in, I suppose.

Ericsson - which was started in 1876. Man, I bet they have a deuce of a time getting investors with only a hundred and thirty years experience...

Electrolux - the largest maker of kitchen appliances in the world - started in 1919.

SAAB - started in 1937.

Hey, I think I'm going to buy into a Swedish index fund. All of these old fogies seem like wonderful stocks to own to me.

But let's not forget AstraZeneca - named as one of the 100 best companies for working moms to work for.

Sorry, enlighten, but you'll have to explain why it's bad to have such well-run companies on your exchange if you are going to discredit Sweden through them.

GDP per capita, although widely used to compare productivity of the economy, gives you absolutely no understanding of what it is like for people who work there. I mean, honestly, when was the last time your paycheck reflected GDP?

If you want an indication of how people live, then look for average (or mean) income as well as median income. The difference between the two (usually expressed as a Gini coefficient) will tell you how skewed the income is towards the wealthy - or how much the poor are left behind.

In America, the "average" worker makes about $40,000. The average worker in Sweden makes the equivalent of about $39,000. The distance from mean to median in America is about ten percent of the income earning population. In Sweden is is about six percent. That means that there is a much bigger difference in incomes in America than in Sweden. This is reflected in the Gini scores of 0.46 for the US and 0.39 for Sweden. A person on the 80th percentile in the US makes 23 times more than the person at the 20th percentile. In Sweden, only 19 times more.

The average tax rate for Americans is about 16%, with 1.5 earners per household and a household of 2.7 people.

The average tax rate for Swedes is about 25%, with 1.5 earners per household and a household of 2.2 people.

Sound like a raw deal for the Swedes? Yeah, except for that extra 10% they get universal health care, guaranteed day-care for any child from 2 to 6 years of age (after which they start public schools), guaranteed childcare, paternity, and maternity leave (including a guarantee of 12 months vacation time for each child between birth and 8 years of age), old age pensions, disability insurance, and both housing and food contributions. No means testing (as far as I can find) exists for any social benefits.

Sweden also has a longer life expectany than the US, as well as a lower birth-rate and a lower infant mortality rate - which can largely be attributed to that extra 10% tax for universal medical care.

All of the above information is available at the Chicago Federal Reserve Bank and the World Factbook.

As far as creating net jobs - they haven't needed to. Since 1950 their population has been roughly constant. For most of that time, their unemployment hovered around 2% - so low that it caused runaway inflation in the 90s. Since then, they have brought it under control and unemployment has remained between 3 and 5 percent.

So, Enlighten, you'll have to do better than just regurgitating right-wing echo-chamber factoids with no historical backing.

And, just to make things REALLY clear about the Sweden/US comparison - the "average" worker in the US works 1835 hours per year. In Sweden, it's only 1625. That means, if they worked the same hours we do from Jan. 1, they would be done with their year the week before Thanksgiving. We, on the other hand, would have to work until Dec. 31 to pay our usurously low taxes.

Of course, if you don't like snow, Sweden may not be the place for you - which explains why I'm here.

XT

 
At 11:28 AM, Blogger Enlighten said...

You might get an argument from more than a few Swedes on your assessment XPat. Try reading this report and let us know your thoughts.- http://www.timbro.com/euvsusa/pdf/EU_vs_USA_English.pdf Yes, the report was prepared in Sweeden.

Or perhaps you might want to read: "Fiscal Illusion and Fiscal Obfuscation: An Empirical Study of Tax Perception in Sweden" by the Stockholm School of Economics (http://www.skattebetalarna.se). In that paper, it states that for someone with an annual salary of $40,000 per year, the visible taxes are 32%, while the actual tax is 63%

The U.S. has a large number of companies more than 100 yers-old too, what's your point? Our point, the Swedish economy is highly dependent on a limited number of very large international companies. New companies are not being formed in Sweeden, not a sign of health or dynamism in an economy.

You might also be interested to know, the Wallenberg family controls corporations with a combined market value of over $100 billion, representing more than 40% of the market capitalization of the Stockholm Stock Exchange. Power to the people - right?

In terms of population growth - forecasts published by Statistics Sweden "predict by 2015, the number of people aged 65 or older is expected to be 25% larger than today, while the total population in other age categories will be largely unchanged."

"Due to this shift in the age structure of the population, eventually fewer people in the labor force will have to support more people who are not working. Meanwhile demand for medical care and related social services will rise as older people become more numerous."

Have any of you folks ever lived in Sweden or have families or friends that have lived there? The Swedes we know don’t see their country’s economy and future prospects in the rosy hues as those on the U.S. left.

 
At 2:00 PM, Blogger Jack said...

Enlighten has a point. Many Swedes do indeed wish they had lower taxes. However, their numbers and sentiments aren't strong enough to cause a regime change that would shift power from the current economic policies to a more American approach.

Many attribute the "share the wealth" mentality in Scandanavia to its homogenous population. The countries with the strongest right wings are ones where there is poverty as a result of immigration (france, germany, austria). People in Sweden don't feel threatened by the relatively small numbers of immigrants that come to join the workforce..or to enjoy social programs.

- Jersey Perspective

 
At 3:15 PM, Blogger Xpatriated Texan said...

Thanks for the links, Enlighten, I'll definitely take a look.

My point about the hundred year old companies? Simply that it isn't a bad thing at all. Apparently, you now agree, or maybe don't - it depends on which sentence of yours I read. I would say that it is neither good nor bad to have a few major companies dominating the economy - what matters is if they meet the needs of the economy. From all evidence, the ones in Sweden actually do, whereas our century old companies are rotting from the inside out.

There are, in fact, a lot of new companies being formed in Sweden - they just tend to be privately held and not traded on the stock market. That includes the Wallenburg Investment group.

The Wallenburg family, who controls so much, also pays an incredible amount of taxes. I don't have, and never have had, a problem with people being rich. I have a problem with people being rich and then acting like they don't owe anything to anyone.

I'm sorry I don't have a link for you, but if you can find anything written by Huw Dixon ("Economists, the Welfare State, and Growth: The Case of Sweden" is a good place to start), you'll find a very thorough critique of the picture of Sweden painted by most economists. His finding - the vast majority of economic analysis are ideologically based with little empiricle support.

As for the future, the structural problem of an aging population is certainly no worse in Sweden than in the US or any other Western country.

I don't have any relatives in Sweden, but I do have several friends from there. In general, I'd say they are fairly well satisfied with the direction in which their country is traveling. They readily accept that they will get paid less in their country than if they stay here, but they are also very willing to accept the social services they get in response for that.

My point? You can't do a direct comparison with Sweden and not provide a background that covers the differences. Doing so is, at best, ignorant, and, at worst, simply dishonest. When you compare Sweden to a "poor American state" remember that Swedes actually get health care, child care, and food and housing allowances. I know a number of people in Alabama, New Mexico, and Louisianna, and I can promise you they don't have ANY of that available.

XT

 
At 5:16 PM, Blogger dkreiss said...

Enlighten, your first link was to a public policy paper written by TIMBRO, which is a libertarian Swedish Think Tank (yes, they have them there) similar to the CATO Institute. Consider the source.

I spent two and a half months in Sweden in late 2004 on a research fellowing studying innovation. Couple of quick, non-partisan perspectives that I hope are balanced.

Swedes may not like the high taxes, but they certainly treasure their public services like health care (even though they are deeply inefficient, and actually not very competitive medically.)

There is also a lot of validity to XT's comments that Swedes get "universal health care, guaranteed day-care for any child from 2 to 6 years of age (after which they start public schools), guaranteed childcare, paternity, and maternity leave (including a guarantee of 12 months vacation time for each child between birth and 8 years of age), old age pensions, disability insurance, and both housing and food contributions."

As expat mentioned, "None of top 50 companies on the Stockholm stock exchange has been started since 1970." That actually is bad (and most Swedes will say this.) Take a good look at Ikea, and tell me whether it is really a Swedish company. The same goes for Amersham Biosciences, which was bought by GE Health Care, Volvo Cars by
Ford, Saab Automobile by GM, etc.

Most Swedes in the business world that I met say that it is extremely hard to become an entrepreneur. Coincidentally, Sweden has one of the lowest ratings in the Global Entrepreneurship Monitor.

The way that I always thought about Sweden, and yes, it is through a lense of a generally free-trade Democrat, is that there are certainly parts of the model worth emulating here in the States (health care, social services, etc.) but there are also large drawbacks (high tax individual rates, lack of entrepreneurship, uncompetitiveness in many global markets.)

 
At 1:49 AM, Blogger Jan Sandred said...

Sweden and large corporations

From the very beginning Sweden was an entrepreneurial country. Many products common today are Swedish patents and innovations, like the freezer, the zipper, the centigrade thermometer, the propeller, the monkey wrench, the pacemaker, the dynamite, the safety match, the ball bearing.

We still invent stuff, but since the beginning of the 1960s large engineering corporations have totally dominated the trade and industry (well, except for the basic industry forest and mining).

A few families and banks have been controlling the largest listed firms in Sweden. This is due to a Social Democratic political ruling, almost without a break, since the 1930s.

The political and economic powers have been united by strong common interests. The Social Democrats get support for their social and economic policies from the private sector, if the largest firms remain under Swedish control to prevent the capital to migrate. And the economic policy was tailored to suit the large dominating companies. Sweden has for example the lowest corporate taxes in Europe – 28 percent, compared to 38 percent in Germany, 40 percent in the United States and 42 percent in Japan – plus a special tax relief for foreign key personnel. This is a traditional policy of appeasement to keep the large Swedish companies – Ericsson, AstraZeneca, ABB, Volvo, Saab, etc – within the country.

In Sweden public limited companies also separate stock owner votes from capital. On ideological grounds the Social Democrats focused on the largest listed firms, in particular their investments and R&D spending. They supported financing via tax-subsidized retained earnings and loans from a strongly relation-based banking system. The economic policy for egalitarian reasons disfavoured equity markets as a supplier of capital.

Thus Swedish firms have only to a limited extent been dependent on the stock market, ownership did not disperse and addition of new firms has been very poor. There has been a very limited formation of private fortunes tied to new, fast-growing firms fuelled by equity market financing.

The drawback

This agreement between the political and corporate powers worked well until the 1970s, but the economy stagnated and did not respond to recessions and the globalisation. The policies were too focused on the very largest firms, and systematically ignored the need to create new ones.

The result is an unusually large proportion of very old and very large firms in Sweden, with well-defined owners in control. 31 of the 50 largest listed firms in 2000 were founded before 1914. Only 8 was founded between 1945 and 1970, and no large company has risen after that.

Jan Sandred
Fm Business Reporter, San Francisco Chronicle
http://innovationjournalism.blogspot.com/

 
At 12:08 PM, Blogger wfoley said...

There was a burst of entrepreneurial activity in Sweden during the dot-com boom. But most of it crumbled. Here's a story about one entrepreneur, which tells a bit of the Swedish story:
http://www.businessweek.com/magazine/content/01_12/b3724602.htm

 
At 4:21 PM, Blogger Moz said...

Sure enough, Sweden and Finland has its advantages. I wouldn't say that a good climate for entrepreneurs is one of them, though.

As Jan Sandred points out, Sweden has a very unproportional number of large companies in comparison with the mid-sized ones. There are a number of other taxes, apart from the corporate tax, that puts us in the #1 spot in OECD's tax/GDP ranking.

All these other taxes are, added together, one of the most important reasons to why Swedish companies have such a hard time to grow. There are numerous investigations performed by the main Swedish employer organization (Svenskt Näringsliv) that shows how mid-sized companies pay a significant tax premium per employee compared to the large corporations. Ericsson, Volvo, IKEA et cetera can use different kinds of corporate tax tricks designed to benefit large corporations.

We can only hope that change is coming. Even the social democrats (in office right now) have realized this, but their proposals so far is little more than a small, temporary tax relief. For a stable, small or mid-sized company, things would not change.

We will, most likely, see the conservatives seizing power next fall. Let's hope that they can make some significant improvements.

/Per Mosseby - Swedish entrepreneur

 

Post a Comment

<< Home

Free Counter
Web Site Counters Who Links Here Listed on BlogShares