A recent book by Andreas Cervenka compellingly looks at the huge economic gaps that have emerged in Sweden over the past few decades.
Sweden has an international reputation of being one of the most equal countries in the world. For instance, when someone like Bernie Sanders campaigns for democratic socialism in the US, he sometimes mentions Sweden (and the other Nordic countries) as a role model for the US to aspire to. Yet this image of Swedish equality has become increasingly dated over the past few decades, during which the country has seen a number of economic decisions and reforms that all have stacked the economy massively in favour of the rich, which in turn has created major economic gaps and concomitant social dissatisfaction.
In his recent book Girig-Sverige: Så blev folkhemmet ett paradis for the superrika (Greed-Sweden: How the Welfare-State Became a Paradise for the Super-Rich), the economic journalist Andreas Cervenka provides a fascinating account of what only can be described as a remarkably awful kind of economic politics (i.e., monetary policy and fiscal policy) that has been orchestrated by the central bank and both sides of the political spectrum for several decades by now. A few hard numbers are useful for setting the stage: Sweden is now the country in the world with most dollar billionaires per capita. In 1996, there were 28. In 2019, there were 206. And in 2021, there were 542. At that time, they owned a total of 3 514 billion SEK (30 times more than in 1996 and more than twice as much as in 2019) – which is a total of 68% of Sweden’s GDP. This means that the country has seen a 1 700% increase of dollar billionaires between 1996 and 2021 – including a 3 000% increase of their accumulated wealth. At the same time, the increase in economic standards for Swedish households between 2016 and 2019 was the lowest since the economic crisis of the 1990s, and the number of households with low incomes is now the highest ever at 15%. This means that Sweden has gone from being one of the most equal countries in the world to the twelfth most unequal.
These are only some of the numbers that Cervenka brings up in his analysis, although we will look at some more shortly. But, to begin with, it is necessary to take a closer look at what it is that has caused this unfortunate development, since it is of course not by any means a necessary development, but rather the result of various economic decisions at the highest levels.
The Benefits of Owning
As Cervenka shows, the explanation is to be found in the fact that, over the past decades, there has been a massive wealth transfer from those who work to those who own – which, accordingly, has turned owning things (e.g., real estates and stocks) into an extremely lucrative phenomenon. Furthermore, he identifies two major causes behind this development. Firstly, the policy rate set by the central bank has been very low in Sweden for a long time – more specifically, at zero and even negative for a few years. As is well known, a low policy rate means that the value of assets like real estates and stocks increase – for example, because it makes it cheaper to borrow money from the bank, which incentivises people to take higher loans when buying real estates and thus boosting the housing market. This is indeed exactly what has happened in the Swedish housing market, which has increased massively in value for several decades by now (also due to the fact that Sweden has an interest deduction for most types of loans, including when buying real estates, which means that the Swedish state covers a third of the total cost for example when you borrow money to buy a home). Thus, tenant-owned flats have increased in value by about 800% between 1996 and 2021, whereas houses have increased by about 435%. This means that those who have owned their own home during this period have become a lot richer, whereas those who instead have rented (e.g., because they could not afford to buy) have lost out on huge amounts of money in terms of increased value.
Again, this is because of the very low policy rate maintained by the central bank – based on their stated objective to keep the inflation at 2% per year, as that is considered best for a stable economy. But there are numerous problems with this, as Cervenka argues, such as that the way that the inflation goal was determined, and the way that it is calculated, is far from an exact science and rather builds on various assumptions and conflicting ways of approaching it. Then there is also the problem that the central bank only takes one kind of inflation into account when setting the policy rate level: what is known as consumer price inflation, which is measured by the so-called ‘consumer price index’ and refers to the prices of the consumer items we buy when we go to the store (e.g., food, clothes, electronic equipment, etc.). However, it turns out that the value of real estates (and also stocks) in fact are not included in the consumer price index, as they rather fall into the category of another, less known form of inflation: so-called asset inflation. This, somewhat oddly, means that the central bank does not take asset inflation into account when setting the policy rate level, which is the reason for why the value of assets has exploded far beyond the items measured by the consumer price index (Cervenka uses the example of a Big Mac, which would cost about 240 SEK if it had followed the trajectory of asset inflation).
As Cervenka puts it: the policy rate is like the economic joystick of capitalism, which means that something unfortunate has happened when the central bank only has taken one kind of inflation into account when setting the policy rate and ignored the other one. It has allowed the value of assets to increase uncontrollably, as the central bank’s reasoning for keeping the policy rate at zero, or even at negative, only has been with regards to consumer price inflation. So, while the former has developed in more a controlled way, asset inflation clearly has not. Or, to put it differently, the inflation measured by the consumer price index has increased by 33% since 1996, which is to contrast with the hundreds of percent increase in the housing market during the same time – also due to the fact that the production of money simultaneously has increased massively in Sweden (from 750 billion SEK in 1996, to 4 800 billion SEK by the end of 2021, which is an increase of 540% – indeed, a very basic way of thinking inflation), because of the many loans provided by Swedish banks (which is how the electronic money that mostly is utilised in Sweden is produced). The result is the major economic gap that has been created between those who own lots of stocks and/or their own home, and those who do not, which lucidly illustrates the well-known fact that huge inflation tends to lead to massive societal changes.
Secondly, Sweden has also turned into somewhat of a tax haven over the past few decades – with both left and right governments having removed many of the taxes that could have evened the playing field significantly. This includes the inheritance tax (2005), the gift tax (2005), the wealth tax (2007), the real estate tax (2008) – as well as a low corporation tax (20,6%) – which has led to some very odd phenomena. For instance, when the real estate tax was removed in 2008, it was replaced with a real estate fee of at most 8 524 SEK – which means that you pay roughly the same amount regardless of whether you own a small house in a less exclusive neighbourhood, or if you own a huge luxury home of several hundreds of square metres in one of the most exclusive areas in the country. Hence, rather than progressive taxation (i.e., when you pay more in taxes if you make more money or own more assets), what we have here is the opposite – regressive taxation – since the fee indeed is lower percentagewise the more valuable your house is (and it is of course ridiculously low for those who own very valuable real estates). On top of that, so-called ISK accounts were introduced in Sweden in 2012, which allows everyone who invests in stocks to pay a significantly lower tax than the standard 30% of the profit. Instead, ISK is taxed according to a yearly low percentage (0.375% in 2022) of the total amount invested – which similarly has benefited the rich significantly and cost the welfare state several billions that could have gone to improving various public services.
Although, ironically, Sweden remains a high taxation country when it comes to the taxation of work – which is among the highest in the world. For instance, people who work in what generally are considered the four most socially important (welfare) professions – healthcare, education, the police and the military – not only do not have particularly good salaries, but are also taxed a lot more percentagewise than the very wealthy people who own a lot of assets and run their own companies. Indeed, those who start a tech-company and become successful (Silicon Valley-style) can end up making astronomical amounts of money within a pretty short time – and end up paying lower taxes as well. And what makes this even more peculiar is that Sweden’s welfare services are primarily financed by the taxation of salaries (1 300 billion), whereas financing by the taxation of capital is astonishingly low (only 100 billion – and this is after the massive value increases in both the housing and stock market over the past decades). This once again clearly goes against the idea, or foundation of the Western welfare societies, of progressive taxation.
Why Not Do Something About It?
There is no question that the trajectory outlined above is an awful one that has created a huge wealth transfer to one group of people at the cost of another one. Indeed, it is not the outcome of an economic politics constructed for the benefit of all. Yet the fact that this did not happen overnight, but on the contrary has been going on for several decades – under both right- and left-leaning governments – obviously begs the questions of why it has come to this and why no one has done anything about it? I think that the simple, and sad, response is that this kind of development has been seen as desirable. As Cervenka puts it: given how long this has been going on, under different kinds of governments, it simply feels logical to conclude that it has strong political support. And certainly, some of the leading politicians who have orchestrated this economic path have also benefited significantly from its outcomes (to the point where they now are among the 0.5% richest people in Sweden) – such as by moving into the business world after they finished their political careers and cashing in massively thanks to the political reforms they previously drove through. Then there is the central bank as well – that ‘independent’ entity of economic high priests which is not democratically elected, but which clearly, at the very minimum, needs to be a lot more critically scrutinised given how massively and negatively its monetary policy has impacted the economy.
The other thing is that it is always more difficult to roll back things that you already have implemented (Cervenka uses the example of taking half of the candy back that you just gave to a little kid) – particularly in this case, when doing so (for instance, by reintroducing or increasing taxes) would potentially hit large groups of people, and not just the super-rich, which is not necessarily a desirable recipe for winning a political election. The ISK account, for example, is not just used by a small elite of very wealthy people, but on the contrary is something that over 3.5 million Swedes make use of today (and, indeed, when there were talks of slightly increasing the taxation of ISK accounts a few years ago, the response was fierce – to the point where one newspaper referred to it as a gangster move). But here it is also worth noticing that even though many Swedes use ISK accounts, the distribution of their assets is very uneven – with 10% (or, roughly 3% of the Swedish population) owning 75% of all the money currently invested there. According to Cervenka, the latter equals roughly 160 billion SEK in lost tax money due to the generous taxation system for ISK. Yet if one for instance implemented some kind of progressive ISK taxation that only hit the richest 10%, the state would receive roughly 120 billion in additional tax money. Clearly not too bad, although not something that seems to be on the current political agenda.
Risks and Tensions
Another question that emerges is obviously: what does an economic trajectory like this do to a country over time? One response is to be found in the title of the book, since Cervenka argues that it forces people to become greedy insofar as you simply do not make enough money from an ordinary job to, for instance, be able to afford to buy a house. Hence, it has led to a speculation culture as it incentivises people to borrow a lot of money, or quickly start investing in the stock market or in risky assets like cryptocurrency (and the interest in this increased massively during the pandemic), since you otherwise will not have access to what really should be basic things in life, like owning your own home. It also means that there is a risk that many young and intelligent people will go to work in areas like tech and trading, because this is where the big money that is needed is to be made. In other words, it seems very reasonable to suggest that this kind of economic politics leads to a society that is – or must be – very fixated on money.
Another thing is that it risks nurturing a distrust against politicians and the elite in general. Why would, for example, someone want to work for a political party such as the Social Democrats at grass-roots level – such as by handing out flyers or meeting with people in order to try and win their votes – if people at the top of the party use the confidence that they have been given by their voters to drive through a politics that so clearly only benefits some (including themselves)? On that note, there is also research that indicates that economic inequality such as this can lead to increased violence, social unrest, as well as fuelling the growth of far-right parties who thrive on anti-establishment rhetoric and tend to see immigrants as those who mainly are to blame for all the problems in society (obviously a well-known phenomenon today, and one can certainly see this in Sweden as well, with the far-right Sweden Democrats having grown massively in parallel with the unfolding of the economic trajectory pinpointed by Cervenka). Yet the flaw with politics such as this is that it directs anger towards minorities rather than the super-rich – who should be the real political target, as the huge wealth they have accumulated is what actually takes away from the collective resources of a welfare society.
Then there are also basic economic risks baked into this model. For one thing, there is research that points to that major economic inequality leads to lower overall growth, since (contra the idea of trickle-down-economics) the rich tend to save most of the money that they make, rather than reinvesting it in the larger economy. Then there is also the risk of a financial crisis – which indeed often have been preceded by periods of major economic inequality – due to how much in debt many Swedes are, and of how much the economies of the major Swedish banks are dependent on real estates loans. Indeed, Sweden is one of the most mortgaged countries in the world (between 1996 and 2021, the total debt of the Swedish population increased from 680 billion SEK to 4 500 billion SEK) – in large part because people have been able to borrow a lot of money at low costs to keep up with the real estate rally (and, in turn, kept boosting it even further). In other words, these are people who are wealthy on paper, but who also have major debts that have been somewhat forgotten due to the low policy rate. Hence, their loans have not cost them much until now (i.e., post-pandemic and due to the war in Ukraine), when standard inflation rises and the assumptions that the policy rate always will be low, and that assets simply will continue to increase in value, are proven wrong. The uncomfortable truth is rather that we are sitting on a massive housing bubble that is particularly sensitive to an increased policy rate and falling real estate prices, which is exactly what we are seeing in the current worsening economic situation. One could have hoped that the major economic decision makers had learned from previous financial crises and not created an economic system with this much risk baked into it. Yet that has not been the case and the big question now is obviously if the Swedish economy will be able to withstand the most likely tougher road that is lying ahead of us. One should certainly hope so – and if we do, it is also of vital importance that we then make sure to remake the economic system thoroughly. Indeed, given the many obvious ways for levelling the economic playing field more long-term – such as by reintroducing various taxes, taxing progressively, taxing work more fairly, raising the policy rate, removing the interest deduction, also including asset inflation when calculating the inflation, and so on – there is much that we can do to get us away from the unfair, reckless and risky road that we are currently heading down.
Featured Image: (Riksbanken)