The Swedish Experiment
The insider economist's account of what the welfare state did to incentives.
Summary
Assar Lindbeck was Sweden's most prominent economist and chaired the commission that examined the country's economic problems after the crisis of the early 1990s. This work sets out his analysis of what went wrong with the Swedish model.
His argument is that Sweden's welfare state and labour market institutions worked well for a period and then overshot. He divides the postwar record into phases: a period through the 1960s in which Sweden combined a large public sector with strong growth and low unemployment, and a period from the 1970s in which expanding benefits, rising marginal tax rates, employment protection and public sector employment growth progressively weakened the incentives on which the earlier performance had depended.
His specific mechanisms include the effect of high marginal tax rates on labour supply and on the choice between market and household production; the effect of generous and long-duration benefits on job search and on the acceptability of unemployment; the ratchet in public sector employment; and what he calls hazardous dynamics, meaning that social norms about work and benefit use erode slowly, so that behavioural responses to policy appear with long lags and are then hard to reverse. The 1991 to 1993 crisis he treats as the culmination. Lindbeck writes from within Swedish social democratic economics rather than against it, and his prescription was reform of incentives rather than dismantling. Sweden adopted much of it.
Key takeaways 7
- Sweden combined a large public sector with strong growth through the 1960s and the model deteriorated as benefits and tax rates expanded after 1970.
- High marginal tax rates shift activity from the market to household production and to the informal economy.
- Generous long-duration benefits affect job search behaviour and the social acceptability of not working.
- Lindbeck's concept of hazardous dynamics holds that social norms erode slowly, so behavioural responses to policy appear with long lags.
- Norms that have eroded are difficult to restore, which makes the lagged response asymmetric.
- Public sector employment growth ratcheted upward because reversing it required decisions no government would make.
- Lindbeck argued for reforming incentives rather than dismantling the welfare state, and Sweden adopted much of that programme.
Who should read it
Policy analysts and investors assessing welfare state economics who want the internal critique that shaped Sweden's reforms.
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