Thursday, May 31, 2007


I recently went through Carl Bildt's post on The Legacy of Olof Palme.

As an economist, I'm rather interested in how the economic policy of Palme administration was conducted.

As I posted earlier, Sweden is a laissez-faire case study depicting the path of a Nordic tiger that sustained the second highest GDP growth in the world during 1890 and 1950, after Japan. Aggregate tax burden after the WW2 grew significantly; from 21 percent of the GDP in 1950 to 53,2 percent of the GDP in 1990 (Larson, 2006).

The figure below shows how marginal taxation of individual income had grown in Sweden. As we can see, the taxation grew explosively approaching 90 percent in 1980s. Consequently, gross capital formation had remained below 20 percent of the GDP from 1970 onwards. As Riksbank introduced a panel of measures to curb excessively high inflation, public spending grew and capital formation gained temporarily inevitably after a transitory period of recession and low output performance which is unavoidable in the course of reversing an excessively strong inflation. In the period of economic policy conducted under confiscatory taxation, high taxes and excessive regulations encourage capital flight from Sweden. Out of 10 largest corporations, none was created since 1970.

How did Swedish recovery emerge? After the removal of capital market regulations, foreign exchange controls and Sweden's entry in the EU, the economic policy streamlined tax cuts in the range of 10 to 20 percent, deregulation of certain product markets (electricity, telecommunications, railways and road transport), broader privatization of state enterprises and also the introduction of tax-financing in human services such as childcare, education (where voucher system was imposed) and old-age care. Economic reforms recently boost the removal of wealth tax, decades old symbol of uninterrupted left-wing rule.

It is actually quite difficult to find the evidence on Palme's economic policy. I found one yesterday as I came across the book entitled "Blood on the Snow: The Killing of Olof Palme" which reveals the insights behind the assassination of Olof Palme. In a great book, Jan Bondeson describes the performance of economic policy in the following way:

"...they depicted him as personifying a system of rigid socialism and ineffective bureaucracy, a system that rewarded indolence and parasitism while punishing industry and enterprise. Taxation was a key issue, since middle-class Swede paid seventy percent of his/her income in tax. Small businesses were literally taxed out of existence. When the celebrated children's book author Astrid Lindgren questioned whether it was really right that she should pay more than one hundred percent tax on her foreign earnings, Palme's minister of finance retorted that she should concentrate on writing books and leave matters of state to those who understood them better. Not long after, the minister was himself accused of tax evasion. Sweden had a monopoly on radio and television, and the two state television channels were widely considered the dullest in the world outside Eastern bloc. More children were taken into care in Sweden than anywhere else, by an army of assiduous social workers. In the state schools (there were almost no private incentives) the curriculum was experimental in the extreme, to the detriment of general education. And was it really right that young people should earn more on social security than when employed as an apprentice? "

Source: Jan Bondeson: The Blood on the Snow: The Killing of Olof Palme (link)

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