How Sweden Overcame Socialism

It’s a model for the U.S., but the lesson isn’t what Rep. Alexandria Ocasio-Cortez thinks it is.

By Jesús Fernández-Villaverde and Lee E. Ohanian. Mr. Fernández-Villaverde is a professor of economics at the University of Pennsylvania. Mr. Ohanian is a senior fellow at the Hoover Institution and professor of economics at UCLA. Excerpts:

"Sweden’s experiment with socialist policies was disastrous, and its economic success in recent decades is a result of market-based reforms.

Until the mid-20th century, Sweden pursued highly competitive market-based policies. By 1970 Sweden achieved the world’s fourth-highest per capita income. Then increasingly radical Social Democratic governments raised taxes, spending and regulation much more than any other Western European country. Economic performance sputtered. By the early 1990s, Sweden’s per capita income ranking had dropped to 14th. Economic growth from 1970 to the early 1990s was roughly 1 percentage point lower than in Europe and 2 points lower than in the U.S.

Before its socialist experiment, Sweden had a smaller government sector than the U.S. By the early 1990s, government spending and transfer payments ballooned to 70% of gross domestic product, and debt had increased to 80% of GDP. Between 1966 and 1974, Sweden lost some 400,000 private jobs—proportionate to 16.7 million in today’s U.S.

In 1991 a market-oriented government came to power and undertook far-reaching reforms. Policy makers have privatized parts of the health-care system, introduced for-profit schools along with school vouchers, and reduced welfare benefits. Since 1997, government ministries that propose new spending plans have been required to find offsetting cuts in their budgets. As a result, public debt has declined from 80% of GDP in the early 1990s to 41%.

To increase incentives to work, Sweden reduced unemployment benefits and introduced an earned-income tax credit in 2007. The electricity and transportation industries were deregulated in the 1990s, and even the Swedish postal system was opened up to competition in 1993. The corporate tax rate was cut from its 2009 level of 28% to 22% today, and is scheduled to decline to 20.4% in 2021."


"Since 1995, Swedish economic growth has exceeded that of its European Union peers by about 1 point a year."

"While Sweden still has a larger government than the U.S., its tax code is flatter."