Debunking Utopia

by Nima Sanandaji

  Democratic socialism … can stop job growth [while] market reforms and tax reductions can spur job creation.

  The stagnation of job growth that followed the rise of the Swedish welfare state slowly but surely changed the political landscape in Sweden. Particularly since the beginning of the 1990s, the policy debate has been focused on tackling exclusion from the job market. The reason is that around one million Swedes of working age have become trapped in visible and hidden unemployment. This might not seem like much to an international audience, but keep in mind that Sweden has a population of fewer than ten million. Although market reforms and tax reductions have had some success in promoting job growth, the labor market exclusion persists. The situation is quite similar in the other Nordic nations.

  PUBLIC-SECTOR AND PRIVATE-SECTOR JOBS GROWTH IN SWEDEN (THOUSANDS)18

  To truly understand how social democratic policies affect the labor market, we can look at two different economic crises. One crisis occurred during the period when Sweden had low taxes and free markets. The other struck when the nation instead had high taxes and a large public sector. The first crisis was the Great Depression. As a trade-dependent nation, Sweden was not only hurt by the global economic depression, but also by the trade barriers other nations put up in a misguided effort to protect their economies from the downturn. From 1930 to 1933 the number of job opportunities available in Sweden decreased by 170,000 – one-sixteenth of all jobs in the economy were lost. The crisis could have been severe, especially since it occurred at the same time that many young Swedes were entering the labor force. But the Great Depression was short-lived in Sweden. Job creation soon outpaced job destruction in the dynamic economy. As shown on the following graph, more Swedes were working in 1935 than before the crisis.19

  EMPLOYMENT IN SWEDEN (THOUSANDS) BEFORE AND AFTER THE GREAT DEPRESSION

  Source: Olle Krantz (1997)

  The strong recovery was made possible by new, innovative businesses. During the crisis years, Nohab Flight engines (today known as Volvo Aero), was born. Shortly after the crisis, Securitas and SAAB were founded. A new method for creating paper pulp was invented, leading to the creation of Sunds Defibrator (today Metso Paper, a leading developer of paper industry equipment).20 To this date, Sweden continues to rely heavily on businesses started during or shortly after the Great Depression. Opportunities were created across the Nordics during the crises. The ability to turn around the crises illustrates the benefits of combining the Nordic culture of success with free-market policies. As Norwegian economist Ola Honningdal Grytten puts it, “During the years of depression, entrepreneurs had to come up with new innovations in order to survive. New technology was utilized in the manufacturing industry. Production became more efficient and was better matched with the actual demand. Nordic manufacturing industry was by this able to operate at larger markets. In addition, cost efficient production gave competitive advantage to Nordic companies. Thus, exports increased.” Grytten explains that the four Nordic nations indeed faced a significant decrease in economic production and a corresponding increase in unemployment during the Great Depression. “However, the crisis was milder and shorter than in most other Western economies at the time.”21

  So, let’s compare the Great Depression with another downturn. The beginning of the 1990s saw a banking crisis hit the Swedish economy. In a time when unemployment was falling in many other countries, it rose rapidly in Sweden. Even when the country returned to economic growth, employment only slowly recovered. In fact, as shown in following graph, it took until 2008 before it had reached the pre-1990 level – ironically, the same year that a major global crisis hit the world.22 A study from McKinsey has analyzed the paradox of why such a sluggish job development could occur in a time when the country was experiencing strong growth. The study concludes that labor market regulation and high taxes – staples of social democratic policies – explain the stagnation: “Labor market barriers are the main reason for the private service sector’s failure to create new jobs. High taxes on employment raise the cost of labor for all employers and make low value-added services – undertaken, for instance, by restaurants, retailers, cleaning firms, and builders – very expensive.”23

  EMPLOYMENT IN SWEDEN (THOUSANDS) BEFORE AND AFTER THE 1990S CRISIS

  Source: Statistics Sweden (2009).

  Finland also went through an economic crisis during the beginning of the 1990s. According to researchers Seppo Honkapohja and Erkki Koskela, the crisis can be understood as “a story of bad luck and bad policies.” The bad luck was due to the collapse of the Soviet Union, an important trade partner for Finland. The bad policies included a tax system that was unfriendly to entrepreneurs and stringent financial regulations. In response to the crisis, taxes rose. Together with high levels of debt among Finnish firms and exchange rate depreciation, this slowed down the recovery. The authors concluded, “In the absence of bad policies, Finland would have experienced a recession, not a depression.”24 Summing up the experience from the respective crises faced by Finland and Sweden during the 1990s, Klas Fregert and Jaakko Pehkonen wrote that institutional factors, such as growth-inhibiting taxes, explain why the recovery from the crises was sluggish for both nations. During the following years, reforms were introduced in both countries, which helped recovery. These included reduced generosity in unemployment benefits, tax reforms, and less union dominance over the labor market. The reforms resulted in a substantial decrease in unemployment.25

  Nordic countries have grown rich during periods with free-market policies and low taxes, and they have stagnated under socialist policies

  It is still a common belief in countries such as the United States that Nordic countries somehow defy normal economic laws by prospering and creating jobs despite high taxes and large welfare states. But is there really any support for this theory? As we have seen, Nordic countries have grown rich during periods with free-market policies and low taxes, and they have stagnated under socialist policies. Job growth follows the same logic. Perhaps proponents of Nordic-style democratic socialism would argue that, yes, the Nordic countries do have higher unemployment rates than the United States. But surely the difference isn’t that large. They would be right, according to official records. But let’s keep in mind that Nordic welfare states are hiding much of the true unemployment.

  The previously quoted report from McKinsey discusses the prevalence of hidden unemployment. There we can read that the official unemployment in Sweden was somewhat above 5 percent in 2004. This figure was, however, quite misleading. Much of the true unemployment was hidden by the government through various public labor market programs and by excluding unemployed people from the labor force statistics. When including those in hidden unemployment, McKinsey found that the total unemployment figure was around 17 percent.26 The previous year another, similar report had been written, by analyst Jan Edling. Edling estimated that since the beginning of the 1990s, approximately one-fifth of the Swedish population of working age has been supported by unemployment benefits, sick leave benefits, or early retirement benefits. Now, what is interesting is that Edling was no critique of social democracy. Rather, he was working as an analyst for the Swedish Trade Union Confederation LO. The confederation is the heart of the Swedish labor movement and has very close ties to the Swedish Social Democratic party, which at the time controlled the government. LO refused to publish the report, believing it to be critical of the government in particular and the social democratic welfare model in general. Edling quit his job in protest and made the material publicly available.27

  Other studies have since supported Edling’s findings about high levels of hidden unemployment.28 Perhaps the most interesting one is that which was coauthored by Swedish economist Lars Ljungqvist together with Thomas Sargent. Thomas Sargent is one of the most well-cited economists in the world, and was in 2011 awarded with the Nobel Prize in Economics. The two economists calculated the real underlying rate of unemployment in Sweden. By using historic data they were ab
le to sort out how much of sick leave, early retirement, and other forms of labor market exclusion was due to normal factors, such as people being too ill to work, and how much the welfare system was hiding the true employment level.29 In 2014 economist Susanne Spector published a study in which she had updated Sargent and Ljuhgqvist’s measure with new data. There we could see that the true unemployment level in Sweden has varied between 14 and 18 percent since the mid-1990s.30

  It is not a right-wing conspiracy idea that the Swedish welfare state hides unemployment.

  Although estimates do differ somewhat, the various economists who have looked at the unemployment level in the Swedish welfare agree on one thing: the true level is much higher than official figures. It is not a right-wing conspiracy idea that the Swedish welfare state hides unemployment, but rather, a fact shown by the analysis performed within the labor movement itself and by one of the leading economists in the world. The picture is quite similar in other parts of the Nordics. As will be discussed in the next part of this book, not least the Norwegian welfare state – which has remained generous thanks to massive oil wealth while other Nordic states have scaled back their welfare state in recent years – is trapping many families in hidden unemployment.

  Once we take a closer look, the myth of Nordic countries being able to defy economic logic is easy to bust. These countries had a phenomenal economic growth when they had small governments and free markets. As they moved toward socialism, entrepreneurship, growing prosperity and new jobs all came to a halt. A shift back to free markets brought back growth. Still today we can observe that the large welfare states are creating, and hiding, unemployment. Of course, this isn’t necessarily a case for Nordic-style welfare states being a generally bad idea. One could always argue that there is an inherent value in combining high taxes with generous welfare programs. Slower growth and higher labor market exclusion might be seen by some as a price worth paying for having a large welfare state. Most admirers of Nordic-style democratic socialism, however, do not follow this line of argument. Instead, they cling to the false notion that Nordic countries are bumblebees that prove that socialism doesn’t have negative effects on the economy. This is simply not the case. The laws of the economic universe exist in Denmark, Sweden, Finland, and Norway. And they work much as they do in America.

  7

  WHY ARE SO FEW NORDIC WOMEN AT THE TOP?

  WE LIVE IN AN AGE of women’s progress. Or to be more precise, we live in an age when a number of long-term trends are paving the way for women to climb the career ladder around the world. One such trend is that norms are changing. It is still common to find gender-biased attitudes wherein individuals are seen as less competent, reliable, or valuable simply because they are women. However, over time, such attitudes have become less widespread. Recent surveys, for example, have found that the majority of Americans believe that women are every bit as capable of being corporate and political leaders as men.1

  While women’s progress is very much a global phenomenon, there can’t be any doubt that one region of the world is leading in gender equality – the Nordics. The Global Gender Gap report concludes that “the Nordic nations continue to act as role models in terms of their ability to achieve gender parity.”2 Saadia Zahidi, senior director and head of gender parity and human capital at the World Economic Forum, has this to say about gender equality in the region: “While patterns vary across the Nordic countries, on the whole, these economies have made it possible for parents to combine work and family, resulting in more women in the workplace, more shared participation in childcare, more equitable distribution of labor at home, better work-life balance for both women and men and, in some cases, a boost to waning fertility rates.”3

  International praise of Nordic gender equality is easy to find. Katrin Bennhold at the New York Times, for example, argues that Sweden’s feminist model is beneficial both to men and women in tearing down traditional gender roles: “In this land of Viking lore, men are at the heart of the gender-equality debate. The ponytailed center-right finance minister calls himself a feminist, ads for cleaning products rarely feature women as homemakers, and preschools vet books for gender stereotypes in animal characters. For nearly four decades, governments of all political hues have legislated to give women equal rights at work – and men equal rights at home.” Like many other international proponents of Nordic gender equality, Bennhold admires the “social engineering” that has made it possible for “a new definition of masculinity” to emerge. She also wrote enthusiastically about “laws reserving at least two months of the generously paid, thirteen-month parental leave exclusively for fathers” and other features of Nordic welfare states, which are said to have “set off profound social change.”4

  Those who follow international news sources are routinely given the impression that Nordic gender egalitarianism simply results from the social democratic welfare state policies introduced in this part of the world. Through social engineering, the social democrats have shaped their citizens into gender-equal beings. The British left-of-center newspaper the Guardian, for example, informs its readers: “Official figures from Eurostat show that 77% of women in Sweden had a job in 2014 – the highest level in the European Union. Children are guaranteed a place in childcare from the age of 12 months for a very modest sum, making it possible for women to return to work.”5 On the Guardian’s web page, this news item directly links to an opinion column by Gabrielle Jackson. The article is entitled “Force men to take paternity leave. It will make the world a better place.” It, of course, argues that the Swedish model with a welfare state providing generous paternity leave is a fantastic solution.6

  So, Nordic-style social democracy is the best way of promoting women’s careers? There is indeed a case to be made for this argument. Several aspects of Nordic welfare states – such as public provision of child care, generous parental leave, and liberal sick leave – are aimed at making the combination of work and family easier for parents, and particularly so for mothers. However, the reality is more complex than what admirers of social democracy might believe. To begin with, it is certainly true that the Nordic countries, and Sweden in particular, are role models in gender equality. But this success did not materialize with the welfare state. Rather, Nordic gender equality stretches back many centuries before the foundation of modern welfare systems.

  Much as portrayed in TV series such as HBO’s Vikings, ancient Norse societies were already quite gender equal.

  Much as portrayed in TV series such as HBO’s Vikings, ancient Norse societies were already quite gender equal. Women had considerably more influence than in other contemporary cultures. As an illustration, Scandinavian folklore is primarily focused on men who venture on longboats to trade, explore, and pillage. Yet the folklore also includes shieldmaidens, women chosen to fight as warriors. John Skylitzes, a Greek historian of the late eleventh century, documented that women were indeed participating in Norse armies. This came as something of a shock to the enemies of the Vikings.7 The fact that women were allowed to carry arms, and train as warriors, suggests that gender-segmentation of early Norse societies was considerably more lax – or at least more flexible – than in other parts of contemporary Europe.

  Evidence also indicates that women in early Nordic societies could inherit land and property, keep control over their dowry in marriage, and control a third of the property they shared with their spouses. In addition, they could – under some circumstances, at least – “participate in the public sphere on the same level as men.” Medieval law, which likely reflects earlier traditions, supports this notion. Medieval inheritance laws in Norway followed family relations through both male and female lines. Additionally, women could opt for a divorce.8 These rights might not seem impressive today, but were rather unusual in a historic context. In many contemporary European and Asian societies, the view was that women simply belonged to their fathers or husbands, having little rights to property, divorce, or inclusion in the public sphere.


  Nordic gender egalitarianism continued after the Viking age, particularly in Sweden. In much of the world, women were excluded from participating, at least fully, in the rise of early capitalism during the eighteenth and nineteenth centuries. In essence, free markets and property rights were institutions for men, not women. Although Sweden and the other Nordic countries were far from completely egalitarian, they challenged contemporary gender norms by opening up early capitalism for women’s participation. In 1798 married women in Sweden were given legal majority and juridical responsibility within the affairs of their businesses. At the time, this was a highly unusual practice. As a comparison, the state of Maine was groundbreaking in allowing women to own and manage property in 1821, but only under the condition that their spouses were incapacitated. Massachusetts and Tennessee introduced the same legislation in 1835, with other states gradually following suit. Swedish author Anders Johnson, who has written numerous books about the development of business freedom, explains that women in Sweden during the first half of the nineteenth century had more opportunities to run businesses than in other parts of Europe.9