The economic story about Sweden’s social democracy the left never tells

While many on the left have a soft spot for Scandinavian economies, a Milken Review Institute piece by Swedish economist Andreas Bergh offers a corrective. I highlight the following since it seems to describe the Sweden — high taxes, big welfare state — as imagined by many progressives:

In the 1970s, several well-intended political reforms backfired. The desire to increase income equality through high marginal tax rates and generous welfare benefits weakened work incentives and created strong incentives for tax avoidance. Indeed, in the 1970s and 1980s, many wealthy Swedes – notably Bjorn Borg – left the country to avoid the taxman.

Meanwhile, the desire to tame the business cycle and minimize unemployment led to the subsidization of noncompetitive industries. The unions’ desire to drive wages ahead of productivity growth led to inflation, while efforts to restore Sweden’s competitiveness through repeated currency devaluations led to both a lower living standard and investment-sapping uncertainty.

Perhaps most important, the mix of subsidies and devaluations sent the signal that firms in trouble could turn to the government for help, rather than be forced to innovate in order to stay competitive. When that happens, economies inevitably pay a price.

After the crisis of the early 1990s, the Swedish economy recovered smartly. In many ways, Sweden learned from its mistakes and took measures to avoid large budget deficits and inflationary wage pressures. By the mid-1990s, these changes were institutionalized – and strikingly, often with support from Social Democrats as well as the right-wing parties. Prominent examples include a tax reform that lowered marginal rates substantially and a pension reform that balanced the risks between pensioners and taxpayers by automatically adjusting payments to demographic and economic conditions.