Sweden’s economic and social system, sometimes called the “Swedish Model,” is often depicted either as an ideal or an abnormality. But Sweden’s system has varied considerably. In fact, broadly speaking there have been three different Swedish “models” since the late nineteenth century.
The first model lasted from about 1870 until the 1960’s. During this “liberal” period, the government basically provided stable market-supporting legislation, education, health care, and infrastructure. As late as 1960, both total government spending (as a share of GDP) and the distribution of earnings were similar to those prevailing in the United States. During this century-long period, Sweden moved from being one of the poorest western countries to being the third richest country in terms of GDP per capita. In other words, Sweden became a rich country before its highly generous welfare-state arrangements were created.
A second era lasted from 1960 until 1985. The free-trade regime of the liberal period was retained during this period – indeed it was deepened by the various rounds of global trade liberalization – but the dominant thrust was the creation of a generous welfare state. By the late 1980’s, total public spending reached 60-65% of GDP, compared to about 30% in 1960. Moreover, marginal tax rates hit 65-75% for most full-time employees, compared to about 40% in 1960 (all taxes on households being included).
Economic incentives to work, save, and start businesses were also reduced through the compression of wage differentials and a big squeeze on company profits, both largely the result of strong and centralized labor unions. Moreover, new labor-market regulations were introduced, the most important being strict job-security legislation implemented in the early 1970’s. The regulation of financial markets that was imposed during WWII was retained. It is this economic and social system that is usually identified as the “Swedish model.”