When I first started working on fiscal policy in the 1980s, I never thought I would consider Sweden any sort of role model.
It was the quintessential cradle-to-grave welfare state, much loved on the left as an example for America to follow.
But Sweden suffered a severe economic shock in the early 1990s and policy makers were forced to rethink big government.
I’m particularly impressed that Swedish leaders imposed some genuine fiscal restraint.
From a libertarian perspective, that’s obviously not very impressive, particularly since the public sector was consuming about two-thirds of economic output at the start of the period.
But by the standards of European politicians, 1.9 percent annual growth was relatively frugal.
And since Mitchell’s Golden Rule merely requires that government grow slower than the private sector, Sweden did make progress.
Real progress. It turns out that a little bit of spending discipline can pay big dividends if it can be sustained for a few years.
This second chart shows that the overall burden of the public sector (left axis) fell dramatically, dropping from more than 67 percent of GDP to 52 percent of economic output.
By the way, the biggest amount of progress occurred between 1994 and 1998, when spending grew by just 0.27 percent per year. That’s almost as good as what Germany achieved over a four-year period last decade.