Leaders of the Democratic Party have moved to the left of the political spectrum. Bernie Sanders, who describes himself as a democratic socialist, has mounted a successful campaign against Hillary Clinton. He and his supporters have identified Denmark and Sweden as examples of countries with larger government sectors that they would like the United States to emulate.
Specifically, Sanders has proposed instituting free tuition for college students, expanding Social Security benefits for retirees and making the government the single payer for health care. He has also criticized Wall Street and advocated breaking up big banks. In response, Clinton has moved to the left and tried to convince voters that she is as progressive as Sanders.
Sweden and Denmark do have large governments, and they are prosperous, but prosperity was achieved during growth as market economies prior to the expansion of large government. Sweden was a poor country prior to reform that initiated a century of economic growth from 1870 to 1970. By 1970 Sweden was the fourth-richest country in the world with a government size that was small relative to the U.S. or the rest of Europe. As government grew in the 1970s and 1980s, economic growth slowed, and in 1992-93 there was a severe banking crisis that resulted in major economic reform.
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Because of their large government sectors, Sweden and Denmark are often described as socialist countries. However, this is misleading because they also have flourishing private sectors. The Heritage Economic Freedom Index ranks Sweden, Denmark and the U.S. among the top 15 percent of 178 countries in total Economic Freedom in 2016. The index assigns Sweden and Denmark lower scores than the U.S. for large government spending and taxation, but it assigns them higher scores for all other components of Economic Freedom. They score higher than the U.S. in rule of law, regulatory efficiency and open markets. Sweden and Denmark have been able to provide a broad safety-net without intruding on an efficient market economy.
How have they achieved a larger government budget and greater economic freedom than the U.S.? They are different in size and homogeneity of the population. With a population of 320 million, the U.S. is more than 30 times the size of Sweden and Denmark. The Swedish economist, Lars Jonung, has described them as “consensus economies.”
Sweden and Denmark have learned from mistakes. Following the crisis of 1992-93, Sweden reformed its fiscal policy, and both countries made changes to reduce adverse effects on incentives. Sweden now requires a balanced budget over the business cycle. Deficits in certain years have been offset by surpluses in other years. Since reform, Sweden’s debt has fallen from 70 percent of GDP to 40 percent. Sweden’s fiscal reform mitigated the adverse effects of the Great Recession.
Reforms after crisis
When the Swedish welfare state was at its peak, the government financed and provided basic services, such as health care, education, daycare for children and eldercare. State agencies were monopolists that tended to follow the rule of “one size fits all.” Since the crisis, Sweden has retreated from state monopoly provision of many services. Education vouchers can be used at private schools, and patients can receive medical services from private suppliers. The government has reduced public pensions and introduced private retirement schemes. Denmark has also recently reduced subsidies to college students and unemployed workers and increased the age of eligibility for pensions.
What can Americans learn from the experience of Sweden and Denmark? First, prosperity was achieved by growth in their market economies prior to the expansion of big government. Today, in spite of large government budgets, both countries exhibit greater economic freedom in the regulation of their private sectors than the United States. As Danish Prime Minister Lars Lokke Rasmussen stated in a recent speech, “I would like to make one thing clear. Denmark is far from a Socialist Planned Economy. Denmark is a market economy.”
Their regulatory freedom may be welcome to many Americans, but it may depend on a small and homogeneous population that the U.S. lacks. Sweden’s bold reform of its fiscal policy has particular relevance to the U.S., given its problems of underfunded Social Security, Medicare and Medicaid. However, Sanders and his followers have expressed no interest in constraining spending and taxation policies with a balanced budget requirement.
Thomas Grennes is a professor of economics at N.C. State University. Andris Strazds is on the faculty of the Stockholm School of Economics in Riga, Latvia. They blog at EconoMonitor.com.