The dynamic welfare state: how adaptation can save the Swedish economy.

The Swedish welfare system thrives in spite, or perhaps because of, its contradiction of contemporary economic thought. By ignoring the most basic principles of the deadweight loss of taxation and the inefficiency of transfer payments, the Swedish system has persisted in the face of international and European trends towards smaller government. At the same time, this Nordic state has adapted to international changes, allowing it to survive storms that have affected Europe's economic giants. For these reasons, the Swedish system has been a quandary for social scientists, economists, and political theorist alike. Today, Sweden faces a slew of new challenges; it needs to call upon its malleable nature to reform and adapt, as it has so successfully done in the past.

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A Meteoric Rise

Two centuries ago, Sweden lagged behind the rest of Europe; it was failing agriculturally due to its frigid climate and suffering industrially as well. Like much of the rest of Europe, Sweden adopted a parliament known as the Riksdag. It also created a socialist economic system, including a strong welfare program. In the twentieth century, largely because of its military neutrality in the two World Wars, Sweden quickly surpassed former giants like Great Britain and France. Because it profited from post-war reconstruction and did not suffer from any infrastructural losses as did the rest of war-torn Europe, Sweden managed to propel itself forward in the latter half of the 1900s.

But in 1993, the humming Swedish system was tested by troubles that had long been overlooked. The model welfare state could no longer handle the artificial employment rate created by the injection of government jobs into the system, massive government spending, and inflation that governmental policies had not addressed. Simply put, the government was growing too fast to be sustained by the private sector. By 1990, government spending matched 57 percent of the GDP, government jobs accounted for 33 percent of total employment, and annual inflation hit 10 percent. All of these factors led to a spike in unemployment between 1992 and 1993, constituting an implosion in the model welfare state.

Dealing with Disaster

Sweden has come far since the economic crisis of 1993. Due to stringent reforms made in response to the economic faults of the 1990s, government spending is still large, but has been limited. With the exception of 2001, the government has posted a surplus every year since 1993, allowing debt to decrease from 74 percent of GDP in 1993 to 47 percent of GDP in 2006, according to Statistics Sweden, the government authority for official statistics.

Over 90 percent of Sweden's industrial production is now privatized. These gains in private sector growth are a direct result of massive deregulation of industries in response to the early 1990s recession. Because Sweden responded quickly to the crisis and recognized the importance of the private sector, it maintained the benefits of competition. In addition, Sweden's central bank, the Sveriges Riksbank, now keeps a tight rein on inflation. Prices are growing at 2 percent a year, allowing the economy to have a rather stable platform compared to the rest of the world.

All of this reform has been effected without sacrificing many of the government-funded social benefits that Swedes enjoy. Everything from childcare to transportation is subsidized, and workers receive several months of sick leave and vacation each year. Even after becoming unemployed, Swedish workers receive welfare benefits that cover around 80 percent of the lost income if they had previously held a job for 12 full months. Those without jobs also receive subsidized training for new occupations so as to avoid structural unemployment. This social insurance, combined with a relatively low 5 percent unemployment rate, contributes to Sweden consistently being named in surveys as one of the happiest nations in Europe. For the country's economic safety net, many immigrants brave the heavy tax burden and flock to Sweden, allowing for a myriad of first generation immigrants to contribute to the workforce. This concentration of people and the general welfare of the populace explain Sweden's status as a center of creativity in Europe.

None of these benefits come without a cost, as Swedish workers bear a heavy tax load to support all of their social benefits. With sales tax of 25 percent and an income tax around 55 percent for most, Sweden is getting exactly what they're paying for: the model welfare state with a price tag to match. Yet at a time when Europe seems to be lashing out against the structural flaws of excessive government interference, the thoroughly socialist Swedish economy has avoided meltdown while other European nations have stagnated and, in some cases, outright failed.

Sweden and France: A Comparative Case Study

The key difference between the leaking private sectors plaguing other European nations with the welfare model in Sweden is the way in which the government injects value into the economy. Because of the structure of Swedish welfare, the private sector doesn't suffer. Swedish socialism is designed to protect the people, not just jobs themselves.

A counterexample is France, where people have rioted in response to the high unemployment rate and other social crises such as crime and discrimination. France's unemployment rate is high due to the government's stringent requirements on corporations to support their workers. This, in turn, feeds into youth anger and rebellion. Yet when one compares the weeks of compensation following the loss of a job and the five weeks vacation that the French government mandates with the even more extensive benefits the Swedes enjoy, it is puzzling why, of the two, France has been the first to buckle in terms of unemployment.

The reason for this apparent contradiction lies in the agent of action in Sweden's social calculus. While French corporations are required by law to provide benefits, the Swedish government shoulders these costs. In addition, unions in Sweden have a different perspective than do their French counterparts. Much like the system as a whole, the goal of unions is not just to protect jobs, but to protect people by winning benefits for those who go off the employment rolls. In France, a worker represents costs to the company during and even after their employment, but in Sweden, the government takes over for the welfare of laid-off workers.

Yet even with deep government involvement in the welfare of its citizens, Sweden, unlike France, has a large private sector. The government does not make extensive laws on corporate hiring, but it does require benefits and picks up the tab of unemployment, allowing companies more economic maneuverability without sacrificing welfare benefits. Thus, even though Swedish unemployment is speculated to be higher than represented in government reports, it is still less than the double digit figures endured in France. By avoiding the responsibilities of overly regulated industry while still capitalizing on the returns of high tax rates, Sweden's government manages to support both the private sector and its welfare ledgers.

A final contrast between the Nordic country and its southern counterparts is national unity. With a largely homogenous population, Sweden's view of community is unique. Unlike France, which is a nation historically marked by prejudice and racial conflict, Swedes are more willing to submit to the large tax rates that support the large government payroll and expenditures.

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Today, the government of France is caught in a tight niche of possible actions. On one hand, if it moves to increase employment through deregulation, worker unions will rise in anger at the loss of benefits. Moving to sustain benefits by increasing taxes will lead to much of the same from the general populace. Yet doing nothing will only serve to fuel criticisms of the current regime, link it with the past, and drag it down as an archaic good-for-naught political administration. Sweden's government has so far managed to avoid this fate, but it cannot do so forever.

Heading toward Trouble?

Government figures and case studies against other nations present a rosy picture of Sweden in the short term, but the Swedish economy will not be nearly as idyllic in the long run. Despite a decade of reform, many dormant problems remain and have started to manifest themselves in recent years. High tax rates and government programs continue to create distortions, and the issues of the past are beginning to resurface. Ironically, the same creative government involvement that has saved Sweden from the social unrest of other European welfare states is the factor that has the most potential to condemn it in the future.

Government injection is not sustainable in the long run. The private sector may be prospering now, but with the aging population, employment in the private sector will no longer be as high in the future. Because employee benefits are so generous, many abuse the system by faking illnesses and escaping work. Absenteeism is the largest unaccounted-for contributor to the discrepancy between government data and actual statistics. Also fueling the inaccuracy is the number of people either supported by or working for the government. Especially considering the massive bureaucracy that is the Swedish government, and the numerous people who are on the government payroll just for the sake of being employed, it is clear that the 5 percent unemployment rate is experiencing unnatural boosts from the government, not all of which are productive or beneficial.