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Swedish Models
TO BE A Swede is once again to be admired. Sweden is "the most successful society the world has ever known", declares the left-wing British newspaper the Guardian; "Swedes lead Europe in reform", claims the free-market-oriented Financial Times; only the Nordic model "combines both equity and efficiency", explains a recent report initiated by the European Commission.

In a contentious European debate marked by hostility, riots and unrest, Sweden looks like a safe bet--neutral, uncontroversial and with no natural opponents. Sweden is a Rorschach test: The Left sees a generous welfare state, and the Right sees an open economy that pushes for deregulation in the European Union. The only thing British reformists and French protectionists could agree on at the EU summit in Brussels in March was that Europe should learn from the Scandinavian model's combination of generous social provisions and a high-growth economy. Sweden is seen as the proverbial "third way", combining the openness and wealth creation of capitalism with the redistribution and safety nets of socialism. It is the best of both worlds.

But things in Sweden are not as good as the advocates would like to believe. Long the paragon of social democracy, the Swedish model is rotting from within. Ironically, the unique social and economic foundation that first allowed Sweden to construct its political edifice--and which makes it such a difficult model for other countries to emulate--has been critically weakened by the system it helped create. Far from a being a solution for the new sick men of Europe, Sweden must face serious and fundamental challenges at the heart of its social model. ...

...THE SOURCE of the problem was the fatal irony of the Swedish system: The model eroded the fundamental principles that had made the model viable in the first place.

The civil service is a powerful example of this phenomenon. The efficiency of the civil service meant that the government could expand, but this expansion began to undermine its efficiency. According to a European Central Bank study of 23 developed countries, Sweden now gets the least service per dollar spent by the government. Sweden still reports impressive results on living standards (just as it did before the introduction of the welfare state in the years following World War II), but not at all what you would expect from a country with the world's highest tax rates, currently at about 50 percent of GDP. If the public sector were as efficient as Ireland's or Britain's, for example, the expenditure could be reduced by a third for the same service. The Swedish Association of Local Authorities and Regions reports that Swedish doctors see four patients a day on average, down from nine in 1975. It is less than in any other OECD country, and less than half of the average. One reason is that a Swedish doctor spends between 50 and 80 percent of his time on administration....

...SO IF THE Myrdals were right when they said that if the welfare state couldn't work in Sweden, it wouldn't work anywhere, what will it mean if Sweden's system fails? The answer seems obvious.

The Swedish model has survived for decades, but the truth is that its success was built on the legacy of an earlier model: the period of economic growth and development preceding the adoption of the socialist system. It is difficult to see how other countries--especially the troubled systems of Western Europe so keen to adopt the Swedish approach, but which lack the unique components for a welfare state first noted by Gunnar and Alva Myrdal--could cope with a similar welfare state. Bigger and more diverse countries with a weaker faith in government and more suspicion towards other groups would likely see an even stronger tendency to exploit the system, work less and abuse social assistance. The United States and much of Western Europe face immigration challenges at least as daunting as Sweden.

The economy has rebounded since the recession of the 1990s and the reforms that followed--in contrast to the stagnant continental economies--mostly because of a small number of successful global companies. But the problem is that a growing part of the population is left out and old attitudes about work and entrepreneurship are fading. Since 1995 the number of entrepreneurs in the European Union has increased by 9 percent; in Sweden it has declined by 9 percent. Almost a quarter of the population of working age does not have a job to go to in the morning, and polls show a dramatic lack of trust in the welfare system and its rules.

The system of high taxes and generous welfare benefits worked for so long because the tradition of self-reliance was so strong. But mentalities have a tendency of changing when incentives change. The growth of taxes and benefits punished hard work and encouraged absenteeism. Immigrants and younger generations of Swedes have faced distorted incentives and have not developed the work ethic that was nurtured before the effects of the welfare state began to erode them. When others cheat the system and get away with it, suddenly you are considered a fool if you get up early every morning and work late. According to polls, about half of all Swedes now think it is acceptable to call in sick for reasons other than sickness. Almost half think that they can do it when someone in the family is not feeling well, and almost as many think that they can do it if there is too much to do at work. Our ancestors worked even when they were sick. Today, we are "off sick" even when we feel fine.

The real worry is that Sweden and other welfare states have reached a point where it is impossible to convince majorities to change the system, despite the dismal results. Obviously, if you are dependent on the government, you are hesitant to reduce its size and cost. A middle class with small economic margins is dependent on social security. This was Bismarck's plan when he introduced a system that would make those dependent on it "far more content and far easier to handle."

Sooner or later, politicians begin to identify a new, influential bloc of voters--those who live at others' expense. A former Social Democratic minister of industry recently explained what his party meetings in northern Sweden looked like: "A quarter of the participants were on sick-leave, a quarter was on disability benefits, a quarter was unemployed."

This creates a damaging cycle. With high taxes, markets and voluntary communities are crowded out, which means that every new problem has to find a government solution. If change seems too far off, a large part of the electorate becomes more interested in defending good terms for unemployment and sick-leave than in creating opportunities for growth and jobs. And that goes even if you have a job. If regulations make it difficult to find a new job, you worry more about losing the one you have and will see suggestions of labor market deregulation as a threat. OECD interviews show that well-protected workers in Sweden, France and Germany are much more afraid of losing their jobs than workers in the less regulated United States, Canada and Denmark.

In that case, sclerosis creates a public demand for policies that create even more stagnation. This might help explain the lack of reform in Europe, despite all the political ambitions. The more problems there are, the more dangerous radical reforms seem to the electorate: If things are this bad now, the logic goes, think how bad they'll be without state protection. For example, it seems like the Swedish voters are now willing to oust the Social Democratic government in September. But that is only after the center-right opposition abandoned the more radical suggestions--such as labor-market reform and reduction in social security benefits--that it used to champion....