Sweden vs US: Does Inequality Matter?

June 26th, 2011 at 5:36 pm

Neil Irwin has a nice piece in today’s WaPo comparing how Sweden did in the global recession compared with other advanced economies.  Answer: a lot better.

The piece cites better fiscal and monetary policy (the former, more prepared for a downturn; the latter, a more aggressive policy stance); a deeper, more reactive safety net; flexible currency; and a more risk-averse banking system.

I wonder if there’s something else going on here too: Sweden’s more equal income distribution.  Just a hypothesis, but it does seem that one of the things that’s weighed on American growth in recent decades is this phenomenon where more concentrated income growth translates into more narrowly based demand.

When most of the growth ends up in the top few percentiles of the income or wealth scale, Nordstrom’s does well at one end of the barbell economy and Walmart prospers at the other end.  But there’s a gap in consumption, investment, and demand in general in the broad middle.  And this dynamic could make it tougher for a recovery to take hold among the broad American middle class.

Questions like these about the relationship between growth and equity form an important and exciting new area of economic inquiry.  Check out, e.g., the Center for Equitable Growth led by inequality scholar Emmanuel Saez at UC Berkeley.


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11 comments in reply to "Sweden vs US: Does Inequality Matter?"

  1. Geoffrey Freedman says:

    I read the article about Sweden and its very interesting and informative.

    There is something called the Pareto Priciple (80-20 rule). This rule states that for many different events roughly 80% of the effects come from 20% of the causes. An Italian economist in the late 1800’s and early 1900’s, Pareto observed that 20% of the population in Italy owned 80% of the land. Much to his surprise, when he checked other countries beside Italy, he found much the same results. A business consultant named Joeseph Juran used this observation to develop this concept, applied it to other activities as well and named it after the Italian economist.

    Regressing tax rates seem to play a role at tipping wealth towords the upper percentiles for wealth holders.

    For example in 2001 the upper 20% had 81.3% of the wealth, and the lower 80% had 18.7% of the wealth. By 2010, after the bush tax cuts, the upper 20% had 85% of net wealth and the lower 80% had 15% of the wealth.

    This also happened in the 1920’s after tax rates at the top end were cut from 76% to 25%.

    Its hard for aggregate consumption to increase when most folks just don’t have money to spend.

    There also is a tendency for increased financial (borrowing and lending with increased margins)activities when this condition occurs.

    By the way Sweden’s wealth disribution is way more equitable than that – I think is about 59% for the top 20% and 41% for the next 80%.

  2. Erik (.se) says:

    Tucked away in the last section of the article is this:

    “Swedish banks didn’t make it through the 2008 crisis without major losses. To the contrary, they had lent heavily in the Baltic nations of Lithuania, Latvia and Estonia, which suffered an economic collapse.”

    Contrary to nations like Iceland or Ireland, the Latvian government decided it was just going to pay those debts to foreign banks, without the much needed restructuring demanded by other troubled countries.

    In 2009 Latvian GDP declined by >16%. Massive public sector cutbacks. The Swedish recovery is fueled by Latvian misery – nothing to be proud of and certainly nothing to be emulated elsewhere.

  3. Tyler says:

    Sweden definitely gets it. They understand that massive inequality is harmful to a nation.

    Most rich Americans also understand that they can only get richer if the middle class has enough money to buy stuff other than necessities.

  4. Dick C says:

    Does Inequality Matter? You’d think by now we should be able to answer that question with “D’oh.”

  5. NM says:

    Surely the reason (or at least a major one) that Sweden did better during this crisis is that it had already been through its own banking crisis in the early nineties. The government took over much of the banking sector after a massive housing bubble collapse (sounds familiar doesn’t it). Having been through that, it is little wonder that their collective memory helped them prevent a second such crisis, rather as the collective memory of 1929 shaped US finance for a long time afterwards.

  6. Tyler says:

    Thanks to the tax deal struck in late 2010, workers are enjoying bigger paychecks this year.

    Employees normally pay 6.2% on their first $106,800 of wages into Social Security, but they are now paying only 4.2%.

    That tax break is set to expire at the end of the year, and Democrats would like to extend it. Republicans have been cool to the idea so far. Gee, I wonder why that would be.

  7. Artie Gold says:

    Concentration of wealth also makes demand more brittle — which is one of the main problems we saw in the recent meltdown. Things get a little tough, that extra plane isn’t so important…

    We’ve pushed income up the line for decades…and now we are suffering for it.

  8. jonathan says:

    I’m not sure that inequality matters in this case but it obviously matters in the long run because countries with too much inequality fail. Look at the so-called Arab Spring; inequality translates directly to less opportunity which leads to social upheaval, even revolution. I translate that as: we can have many metrics for success but a simple one is “do you provide material success for your people?” That is roughly the definition used by conservatives in the Cold War comparing US standards of living to Soviet. Now the goal seems to be to reduce living standards in the US to compete with China, India, Malaysia and other countries. That’s failure.

    To me, the model in Sweden is a combination of factors that may or may not work in every situation. You noted many but add to that a general industrial policy. By that I don’t mean subsidizing an old steel industry but subsidizing companies that are competitive internationally while taking steps to keep jobs in Sweden. This stands in direct contrast to the US, particularly the last part. We subsidize old industries, make it hard for new ones to grow – look at China’s growth in alternative energy – while providing tax incentives for our companies to move jobs overseas. Heck, as you noted, that’s the incentive in the insane idea of allowing a largely tax-free repatriation of funds.

    Sweden’s approach is that they are the state while the US is riven by divisions over who is the state. The GOP approach is to treat each state as its own competitive unit, which means states spend much of their resources stealing business from each other even as the entire picture erodes. They focus on relative gains: which state is doing well versus other states. Their model is that state v. state competition is best. In recent years, they’ve taken that model to extremes; rather than have a US policy that respects individual state differences, just have no US policy at all.

    I don’t see logic in the GOP model. It’s based on a belief system. I say that because international trade and the movement of money and jobs depends on the word “national”. They are applying a 19thC model to the 21stC. It’s like John C. Calhoun were suddenly a GOP candidate for office and all the time from 1840 til now had disappeared. They are wholly concerned with the relation of states to the federal government and thus are missing all the action because that’s occurring at the national level. Their only approach to those ideas is to empower corporations to act in any way they want because their belief system doesn’t allow anything more. That is why this country is headed for worse.

  9. general c. san desist says:

    …glad to see what is new is old. Welfare economics was what a fringe group of students & a few T.A.’s at Berkeley adhered to in spite of the prevailing Samuelson texts used in the econ dept. back in the early 70’s. With the Samuelson criterion acting as a gelding factor on the utility-possibility curve as far as social or ethical choices are concerned, the frontier of all welfare possibilities would correspond to a position of Pareto optimum. I believe that was the argument back then to quiet the redistribution crowd.
    When it comes to tax policy, the Scitovsky criterion is the only valid proof to changing policy positions, in my opinion. Raise the taxes on the upper 25%, progressively, and see what happens in 5 years. Then ask if the reverse of said policy change would benefit from returning to the original position. Seems we have been in this experiment for 30 some years & enough data has gathered to shovel the Lafferians on top of that huge pile of failed republican social experiments.

    I fondly called it the What Do You Want From Life theory. Wreakonomics was just being applied in practice at the campus. Registration went from $25 a quarter to $225 in four years…they were in the beginning stages of taking the public out of the Public Institution. Parading as an American value, one should pay for what they get was the tome. Where is the welfare in maximizing leisure for the rich? Seems the maximum welfare for all would be the rule…and since that would be a utopian goal it is beyond the realm of choice, according to the radical right. Only when we take into account the welfare for the many & not the few do we fulfill our national creed of lend me your weak & weary.

    The way this is shaping up, we are only a few steps away from Peter King asking…have you now or ever been a member of the Democrat Party? This has become siege mentality…starve ’em & they will capitulate kinda stuff.

  10. AlanDownunder says:

    Following your link to the Center for Equitable Growth, I got to this: “CAPITALISM relies on inequality. Like differences in other prices, pay disparities steer resources — in this case, people — to where they would be most productively employed.”

    Funny how disparities steered resources to the negatively productive financial sector. And still do.

    Not that I disagree with the quote. It’s just that today’s plutocratic kleptocracy has transcended its capitalist origins.

  11. Michael says:

    So . . . we’re in a financial recession, right? Not an inequality recession. I mean, inequality fueled it by creating a rentier “vampire squid” class, but the problem, fundamentally, is bad policy.

    The path is:
    inequality -> vampire squid -> extended collapse

    The inequality is only relevant insofar as it extends the life of the vampire squid. I don’t care if Bill Gates is rich as Croesus, as long as he got it by producing. It’s the Masters of the Universe set that is the problem.