Unemployment, Alcoholism, and the Swedish Black Market

FIELD NOTES FROM SWEDEN, Part I:

Unemployment, Alcoholism, and the Swedish Black Market

Imagine retiring at a young age as a “registered disabled” person. The reason? Alcoholism. The Swedish solution is for the state to pay you money to stay home and remain drunk. Treatment is optional. Interpretation of alcoholism is subjective and often left to the one claiming it as a disability. Doctors’ visits are often symbolic. People can and do remain on “disability” for their illness. It is common knowledge that alcohol consumption is very high among the Northern top of Europe (Russia, Sweden, Norway, Finland, Denmark, Iceland, the UK, and Ireland), which is sometimes called the “Liquor Belt.” The Russians, Swedes, and Finns are particularly known for their ability to consume large quantities of vodka. The Norwegians and Danes prefer more beer, as are the Brits and the Irish.

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Sweden’s alcohol disability program, on the surface, is intended to allow registered alcoholics enough government money to pay for all their basic necessities, including alcohol. The program has several aspects. First, the official number of alcoholics is clouded by the fact that people can be “retired early” for alcoholism, but registered as an early retiree instead of an alcoholic. This method works well for those above 50 years-old. For younger people, they are registered as “generally disabled.” Though Swedish employment laws make it difficult for employers to fire employees, it is much easier to place them on “disability” if their performance falls below expectations.

The state-sponsored alcoholic welfare program is rooted in the good intentions of the Swedish Riksdag (Sweden’s legislative body). Many members have enormous compassion for people with the “sickness” and believe that people should take their time in finding a cure for the disease. This is the reason for optional treatment and not very rigorous medical examinations. Allowing people to easily be placed on “disability” also lowers the unemployment level. This is perhaps a more important political benefit of being compassionate. Instead of having employers lay off people (and creating more strife with Sweden’s strong unions), these “disabled” people are placed outside of the workforce statistics.

Sweden’s alcohol policies have been unique. In the 19th century, the country experienced chronic levels of alcoholism, which resulted in a nationwide prohibition campaign. The legacy of prohibition still hangs over Sweden. In fact, disproportionate numbers of members of the Riksdag consumer very little or no alcohol, unlike their constituents. Sweden operated a modified national prohibition system from about 1910 until 1956.

During this time, some Lans (counties) were completely alcohol-free. Others required that all alcohol purchases be recorded by the state in official books to track and limit consumption in some areas. People were given quantitative restrictions on how much they could purchase on these records. When prohibition was finally lifted in the 1950’s, it was done primarily to increase tax revenue for the state. In fact, the major reason why prohibition never completely took hold in the country, unlike in the United States, was because of the need for tax revenue.

The Swedish government’s love-hate relationship with alcohol continues today. Hard liquor must be purchased from State stores (bars and nightclubs buy directly from State stores). The alcohol tax remains very high. Roughly 75% of the cost of spirits at the retail level is tax. Popular Swedish brands such as Absolut are owned by the Swedish government.

The “registered alcoholics” who use their welfare funds to purchase alcohol are, in effect, largely reimbursing the government with their purchases. The system feeds itself. Some Riksdag members with a teetotaler mentality still believe that the high tax discourages even more consumption. This is the classic perception of a “sin tax”.

Recent developments with Sweden’s neighbors have complicated its well-intentioned, somewhat hypocritical alcohol program. Both Denmark and Finland dramatically reduced their alcohol taxes in March 2004. The result is that a 500-ml bottle of Absolut, Sweden’s national brand of vodka, in Malmo, Sweden, costs 310kr ($40.80) at a State Store. If you drive across the bridge into Copenhagen, that same bottle can be purchased for 100kr ($13.16).

With Finland, the price differences are not quite as extreme but are still easily worth a two-hour boat ride to Aland (a group of islands in the Gulf of Bothnia between Sweden and Finland, near Stockholm). The Danish and the Finns are responding to pressure with their own alcohol smuggling problems. The tax rates in Germany, Denmark’s southern neighbor, are much lower, forcing Copenhagen to reduce its taxes. For Finland, alcohol taxes and prices in general are rock bottom in nearby Estonia and neighboring Russia. Sweden’s neighbors are responding from European Union pressure and global competition.

In March 2004, while visiting numerous offices within Sweden’s Riksdag, the debate of what to do with the alcohol crisis raged. Everyone in the building knows of people who have circumvented the alcohol tax system by making a quick trip to Denmark or Finland. Many of them have made those kinds of purchases themselves. Still, frustration brews. Sweden’s parliament building sits in a fitting geographic position. Situated on an island in the middle of Stockholm.

The Riksdag faces a freshwater lake to its west side and the Baltic Sea on its east. The situation is somewhat symbolic of where the parliament stands with responding to outside pressures. The alcohol crisis is one of many to come for a country that is imbued with a socialist ideology. Its agreements with the European Union have forced it to reform. The reluctance is intense.

Sweden’s governing Social Democratic Party is privately split over the alcohol tax crisis. Decisions to lay off State Liquor workers in Scandia (the far south of Sweden) have been made, but that is a temporary measure. As more Swedes make shopping trips outside of Sweden, less VAT[footnoteRef:1] is received by the government. The problem is compounded. [1: Value-added tax; a hidden sales tax.]

With less tax money, pressure will be applied to try to make it more difficult to receive an alcohol pension. However, requiring more medical treatment will also cost enormous amounts of money. In some cases, it is simply cheaper to keep someone continually on alcohol rather than pay for an expensive treatment session numerous times.

The Riksdag physical fitness expert, Yngve Borgstrom, stated that, “Many alcoholics go through programs many times without any long-term result.” Borgstrom, who is originally from Malmo, also added that sometimes when he visits family in southern Sweden it is nice to make a shopping trip to Denmark. Borgstrom, as a very disciplined retired Major in the Swedish army, does not condone purchasing large stocks of alcohol to bring back to Sweden, but he certainly understands the logic.

Black markets, or informal markets, exist whenever government restrictions prevent people from obtaining their needs. Most people think of contraband such as narcotics or weapons, but the clear majority of world’s black-market goods are non-illicit.[footnoteRef:2] Bringing alcohol into the country is not illegal according to the European Union’s laws. However, it is an act of substitution, where instead of buying within one high-tax zone people buy in another. [2: This is especially true for Sweden.]

At a local level, American counties would dare not increase its sales tax to 15%. In recent years, the malls have been clogged for the tax-free sales weeks. A 15% sales tax would make a county’s shopping malls vacant, and precipitate a flurry of sales in nearby counties. That is what is happening to Sweden on a large scale. Even registered alcoholics can buy in bulk and pay less than their neighborhood State Store.

When asking students at Sweden’s premier university in the ancient capital of Uppsala, their general response was that alcohol prices have no impact on deciding whether they drink or not. For some Uppsala students. Higher prices affect their ability to buy as much alcohol, but many of their friends will bring back large amounts of alcohol, stock it away, and consume it over the semester. Swedish students are known around the world for their love of travel. A southward excursion into Denmark or a jump across the Baltic Sea to Finland is as simple as Florida’s students making a weekend trip to the beach.

A small concession in recent years, according to the Social Democrat Member Per Erik Grantor of Lapland, was a beer tax reduction. A typical beer at a Seven-Eleven in Sweden runs 14SEK for 500 ml. Beer in Sweden falls into three categories: 2.5%, 5%, and above 7%. Since prices in Denmark and Finland, remain about 30% to 40% lower, some black-market activity for beer continues in Sweden.

Norwegians, who pay even higher taxes on beer, will often drive into Sweden and purchase truckloads of beer. Of course, the growing popularity of home brewing kits in Norway has reduced that. As a more isolated country than Sweden, the Norwegians are discovering it is more convenient to make their own, than smuggle some across their very porous eastern border with Sweden.

Nonetheless, in Sweden it remains entirely possible for someone under 30 to become a registered alcoholic for many years, if not life. That person can conveniently be seen as disabled and is no longer of concern for employers, labor economists, or the unions. In the short term, everyone is happy, especially the alcoholic, who effectively receives free booze money. Sweden will ultimately succumb to market pressures and reduce taxes. But what will happen to those who have been promised a secure life of registered “disability” if that umbilical cord is ever cut?

As a witness to the dramatic changes in Eastern Europe, where millions of people essentially one day woke up and realized that they had to write a resume to find work; Sweden’s economic atmosphere seems to smell of a lighter version of the Soviet collapse.

 

Questions to Consider:

1.) What makes Sweden’s welfare system different from the U.S. system?

2.) Describe the unique problem of Sweden’s alcohol tax. Do we have this

problem in the United States? Why or why not?

3.) What is the governing party of Sweden? What future political challenges

does the Swedish leadership face in this article?

4.) What is the VAT? How much is it in Sweden? How does this compare with

U.S. tax rates?

5.) What kind of alcohol policies does the Swedish government have? How are

these different from the United States? Are there similarities?

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FIELD NOTES FROM SWEDEN, Part II:

Europe’s Population Implosion Breeds Financial Hardship: The Swedish Case

In the 1960’s and 1970’s, economists and demographers were obsessed with overpopulation as a primary problem for the world. Paul Ehrlich’s “Population Bomb” did a terrific job into scaring millions into believing in impending global doom and destruction due to a lack of sustainable resources.

What these alarmists ignored was that at that time the fertility rates in Europe were already creating a long-term financial problem – one that ultimately may be the death knell for Europe’s classic cradle-to-grave social system. Current financial ills are based on a payment system that requires enormous amounts of revenue from the working segment of the population to sustain the non-working population. The cultural implications of using mainly African and Middle Eastern immigration as a solution are not so easy to digest. Cultural clashes have erupted in Madrid, London, Paris, and in major metropolitan areas throughout Europe.

Yet, European governments thirst for adequate funding. In Sweden’s case, its financial planning problems emerged when its experts assumed that that the economic conditions of the 1950’s would remain fixed for many decades. Political pressure, particularly from large unions within the long-ruling Social Democratic Party, favored politicians who ignored disturbing trends.

By placating their constituents’ short-term needs, politicians focused mainly on efforts to perpetuate their positions of power. Not until 1999-2000 did Sweden substantially change its national pension system. Political participation, though declining, is still far above American rates.[footnoteRef:3] In Europe, changes to programs carry unpleasant political consequences. In 2012, for example, French President Nicholas Sarkozy lost his re-election effort partly due to increasing the retirement age from 60 to 62 years. [3: For all demographic groups, Swedish political participation is proportionally much higher than in the United States.]

Polls often indicate that people are willing to accept program cuts so long as they do not directly impact the benefits they personally receive. Swedes receiving pensions complain about young people working “black jobs” (unreported jobs) which results in them contributing less money to the government.

Some young people complain that high taxes force them into finding alternate sources of income. Meanwhile, many unionists want more jobs in their industries but are unwilling to accept lower wages or fewer benefits. Also, corporate managers are upset at their high-income taxes, and are concerned that higher taxes discourage talented workers from seeking opportunities with their companies.

Sweden’s socialist system was based on the concept on the “Folkhemmet”, or the “The People’s Home.” All people living in the country were supposed to receive maximum economic security for their entire life; this would give them a lifestyle removed from the ups and down in an uncaring capitalist system. Unemployment would no longer cast a foreboding shadow over the masses. Everyone would receive education, healthcare, and affordable housing – the entire socialist system could function and was viewed as affordable so long as key contributing financial factors prevailed. The very basis of those contributing factors was a more youthful, working population base. But while the system was expanding in the 1960’s, other factors emerged that would present long-term problems.

The system worked when there were enough workers to continue to pull the cart. But with an aging population, the load grows heavier, with fewer able bodies to push it along. Like the United States, Sweden’s economy benefited tremendously from the Second World War. They made a fortune selling top-quality raw materials, at massively inflated prices, to a desperate German war machine regime to the south.

After an initial post-war boom, Sweden’s birth rates declined precipitously, and by the 1970’s it went to below zero population (below replacement level). In 2004, with Sweden’s fertility rate (number of births per woman) still below that of replacement level, the Riksdag (parliament) predicted that by 2020 Sweden will have more pensioners than workers in its population.

Imagine if in America more people received social security than paid into it. The financial crisis is obvious. Though Sweden did experience a sudden upward shift which lifted its fertility rate above replacement levels (starting in 2005-2006), it arrived too late and was not substantial (just slightly above replacement levels). The other alternative, immigration, has now flooded the country with flurries of people who are unfamiliar with Sweden’s culture, language, and climate.

Sweden’s current migration system, like most of Europe, does not adequately or efficiently make use of immigrants. In a country that historically has had little to no immigration, Swedish society struggles with accepting newcomers. Today, some portions of greater Stockholm consist of immigrant zones which resemble ghettos, something unimaginable in the 1980s. These represent the failures of an immigration system that has not integrated a significant portion of the population with the rest of the country.

The Economist has repeatedly admitted that immigration is largely a short-term solution. Though immigration adds people, often shortly after relocating the newcomers’ reproduction rates rapidly drop. To their credit, the Swedish government attempted numerous policies to encourage fertility. Since 1949, Stockholm has directly subsidized mothers by providing direct monthly child support. Child support paid by the state directly to women shows a small, long-term increase in fertility.

Sweden’s population crisis is not unique. It reflects a broader European problem. Some countries, particularly in the East, already experience net losses each year due to low fertility. A handful of countries, like Ireland, remain above replacement level – but not much, and certainly they cannot provide substantial replenishments to their European neighbors. Virtually, all Swedes are aware of the low birth rate problem. Many women cite common problems to bearing children – subtle employment discrimination against women with children and the lack of available housing in large cities.

 

Population Stages, Economic Conditions, Consequences

Stage 1 Preindustrial/Pre-transition/Traditional Both birth rates and death rates fluctuate at a high level giving a small population growth.
Stage 2 Transitional (Early)/Growth Birth rates are high but death rates decrease rapidly causing rapid population growth.
Stage 3 Industrial/Late transition/Low Growth Birth rates fall rapidly whilst death rates fall slightly causing a slowly increasing population.
Stage 4 Postindustrial/Post-transition/Zero or Negative Growth Both birth rates and death rates are low, fluctuating slightly, creating a steady population.

 

For government planners and businesses, a declining population means a shrinking market. Inward shifts of aggregate demandor total demand, for all products, includes real estate in many local markets,[footnoteRef:4] which will force gross sales down, and ultimately prices. This will be expressed as a generalized deflation with GDP recessionary gaps. Labor shortages in key areas will also hinder prosperity. [4: Because real estate is often locally-based, many countries with overall declining populations will still have increases in property values for a specific area.]

Since the EU allows the free movement of labor between its member states, Sweden directly competes with all other EU labor markets. This is causing a substantial brain drain; a chronic loss of a country’s best and brightest to other markets. Part of America’s historic success has been based on its ability to attract the world’s best and brightest. The United States is like the New York Yankees in baseball, except the top players pay us – we don’t pay for them.

In 2005, U.S. Federal Reserve Chairman Alan Greenspan expressed concerns to the Senate over America’s social security system. The United States fortunately had a modestly higher fertility rate than its European counterparts, and also attracted immigrants who typically contributed more to its economy. Consequently, European states face a problem of greater severity that will hit them faster and harder.

The United States continues to largely ignore its looming social security crisis. Ongoing denial has prevented us from taking meaningful pre-emptive measures that address our emerging demographic realities. Fortunately, Europe faces these adjustments before we will because their population is aging faster and sooner.

In the long run, while individuals may not financially benefit from having children, economic systems are dependent upon a stable population base. Social programs require working, healthy participants to fund them. The antiquated structure of American and European pension systems will continue to haunt policymakers, who too often examine their short-term gains or benefits without realizing the tremendous long-term costs.

Europe will soon buckle under enormous financial pressure, and the post-World War Two social system will be riddled with leaks. Privatization and dramatic losses will result. The question is whether Sweden’s government and those of other EU nations can make those crucial adjustments soon enough to avoid substantial long-term financial destruction. Election years often prevent or delay necessary fiscal reforms because the will of the masses may not reflect or comprehend pragmatic measures.

 

Questions to Consider:

1.) What is population implosion? What are some key problems with it?

2.) What is the ‘Folkhemmet’? How does population implosion threaten it?

3.) How does Sweden’s population implosion reflect future problems for the

United States? How can the United States make changes to avoid

Sweden’s crisis?

1.) What advantages did Sweden have in the past to allow it to build the

Folkhemmet?

2.) What other pressures exists beside population implosion for Sweden to

reform its economic policies?

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Field Notes from Sweden, Part III:

The High Cost of Employment and the Zero Employee Firms of Sweden

In the United States, the majority of new jobs, even in “jobless recovery” times, are generated by small and medium-sized businesses. The American dream of owning your business and expanding it is still alive and well. The U.S. economy is dependent on these small businesses to create private-sector jobs that contribute money to the government through taxes, rather than take money from the government as public-sector jobs do. During a recent visit to Sweden, one striking difference observed by those in the Riksdag (parliament) was the lack of jobs created by small businesses.

The clear majority of small businesses in Sweden have no employees, with the owner being the only one who works there. These owners and government officials know the main basic reason: the heavy cost of taking on the responsibility of employing another person. Aside from the typical payroll taxes, insurance requirements, and wage expenses, potential Swedish employers are faced with those (which are almost all higher than what their American counterparts experience) and several other key long-term liabilities.

These problems include an employment system that makes it very difficult, if not impossible, to terminate employees or. Often the labor unions (which over 80 percent of the Swedish workforce belongs to) will delay and ensure that employment is secured regardless of job performance. In addition, the employer must obtain the permission, in almost all cases, of the Swedish government to fire a worker. This permission is granted through paperwork which can take months, even a few years, to complete – and all the while the employee still, by law, remains employed and collects paychecks.

Swedish employers, if successful in terminating their employee after such delays, are then faced with paying the terminated employee’s salary for a good number of years (sometimes five or more). Recent large-scale layoffs such as the one that Ericsson orchestrated ignored these rules. The Swedish system has long favored large corporations and enterprises over small firms. These large firms have the influence to negotiate or obtain concessions. Everyone else is stuck with the full package of employer restraints. Swedish employees can arrive at work each morning with little or no concern of ever obtaining a pink slip.

As a workforce, Sweden’s population is dubbed the world’s “sickest.” This is measured by the annual number of sick days that Swedes claim. Every workday, depending upon how statistics are viewed, one out of four or five Swedes calls in sick. The employee that calls in ill is not required to prove that they are ill for the first week they are out. Regardless of whether they are ill or not, it is illegal for an employer to take any recourse for their employees’ “illness.” Sick days are expensive because the employer must pay for the full salary without any work being performed. They must also pay essentially double by hiring a temporary substitute worker (and paying the same costs due to employment fairness regulations) during this illness.

Sweden’s generous family leave policy is also a huge concern. Swedish parents can stay home at any time to be with their ill children (whether the children are ill or not). Many Swedish families will take a collective “sick day” and will spent that day together watching videos inside the house (particularly in winter), or will perhaps go on a vacation.

The sick pay cycle worsens for the Swedish government because often these “ill” Swedes will work a black job, or unreported job, while receiving sick pay. Fraudulent Swedes can essentially more than double their personal income, especially since “black” jobs completely evade Sweden’s high personal and payroll taxes. Young Swedes are particularly involved in such work.

While visiting Uppsala University, Sweden’s top college, I found few Swedish students who did not privately admit to have worked a “black” job. Riksdag members are well aware of this – all of whom I spoke with, knew people who engaged in black market work. Many of them alluded to paying for unreported work – particularly work done in their households such as plumbing, carpentry, and renovation.

It is so widespread that when called, these repairmen often will quote, “with tax” or without “tax.” The message is clear. Taxes discourage work and the reporting of work. People will not hire people to do work if the cost of employing them is beyond reasonable. Many Swedish people have quit trying to follow the system, and essentially rationalizing that they are entitled to personally benefit by not being honest with the taxman or their employer.

The result is that the demand for taxes increases as people take advantage of the system. The supply of tax revenue is also decreased as people find creative ways to avoid their tax liabilities. Employers became weary of making employees official. Employees also become weary of becoming official. Everyone can hide from each other in this bizarre hide-and-seek game of financial responsibility. Such is life in high taxed Sweden.

Business is hampered at official levels, but continues to thrive, and perhaps even sustains what would likely be a free falling economy through its unofficial activities. Much similar to the old Soviet phrase of, “we pretend to work and they pretend to pay us.” In Sweden, perhaps it should be said, “We pretend to hire workers, and they pretend to be sick.”

Questions to Consider:

1.) What are “black jobs” in Sweden? Does the U.S. have them?

2.) How did Swedish workers become so sick? How can this problem be

corrected?

3.) Why are employees so expensive in Sweden? What kinds of negative

impacts do these high costs have on the Swedish economy?

4.) What kind of economic system does Sweden have? What are some of

the positive components to it? Why would some people like it?

3.) How is the U.S. job market different from Sweden’s?