The Welfare State in Transition: Reforming the Swedish Model.

• Author: Stanfield, James Ronald
• Position: Review

Edited by Richard B. Freeman, Robert Topel, and Birgitta Swedenborg. Chicago: University of Chicago Press, 1997. Pp. ix, 477. $74.00.

The essays in this volume are the result of a major research project on the serious problems facing the Swedish economy that have culminated in an important redirection of policy over the past decade. The essays examine the performance of the Swedish model prior to the 1990s crisis, the nature of the crisis, the relation of the Swedish model to the crisis, and the consequences of the crisis for Sweden's ongoing economic performance.

An examination of Sweden's historical success in reducing economic deprivation leads one to conclude that Sweden's compression of income, while notable, is misleading if it is compared solely to the more skewed pattern in the U.S. This is because, whether one compares high incomes to low incomes or low incomes to median incomes, the U.S. is far more an outlier than Sweden. Hence, the common American perception of "socialized Sweden" is misleading even in terms of income distribution. It is less the case that Sweden is egalitarian than that the U.S. is inegalitarian.

An analysis of Swedish public employment, taxes, and labor market policies concludes that substantial welfare losses result from the point of view of individual utility analysis. The study indicates that a large bias is created toward employment in household services in contrast to goods production (p. 80). The objection that access to labor market policies is rationed. The argument that Swedes apply a more collective valuation to such policies is acknowledged but is considered to affect the value of the benefits of these policies, whereas the deadweight welfare losses are indications of their cost (p. 104).

In the last decade or so, Sweden has enacted several pieces of tax-reform legislation and significantly restructured its labor market policies in response to the global pressure to reduce tax rates and improve factor supply incentives. The authors of Chapter 3 insist unabashedly that "there can be no doubt that the Swedish income tax is vastly better now than it was in 1980" (p. 149). This conclusion follows from the compaction and reduction of effective marginal tax rates. Removal of distortions in capital markets is a further advantage of these tax reforms. The tax reforms are likely less important than restructuring income protection programs insofar as labor supply incentives are concerned (p. 253). The move...