'Stockholm Syndrome': Why is the U.S. Afraid of Sweden?

"There is no way America is going to go for a paralyzed, uninnovative economy with stagnating productivity and low employment," said Phelps, a staunch defender of the U.S. free-market model.

Fellow Nobel laureate in economics Joseph Stieglitz argued in reply that the Nordic countries performed much better than the United States in all social indicators, even in social economic mobility, a virtue in which America has long prided itself.

But Phelps insisted that the Nordic model had "not delivered cutting-edge economies."

All this controversy made me wonder: How socialist is Sweden, really? Do Swedes really love the state and think as a collective?

It is true that Sweden, like its neighbors, has long favored a strong welfare state, based on the belief that everyone, including the weak and poor, has the right to state-financed health care, universal child support and a pension.

Why the Socialist Stereotype Doesn't Explain Sweden

But Sweden has many characteristics that don't fit into the socialist stereotype.

For example, Sweden is one of the world's most market-oriented countries, and has nationalized few companies. Production is run by the private sector, and the bank system is the second-most efficient in the world, according to a 2008 survey by the World Economic Forum. Sweden is also a fervent free-trade champion, which partly explains how companies like Volvo, IKEA and H&M have been able to grow into leading multinationals.

Another reason for dismissing the stuffy socialist caricature is that the market economy philosophy has dominated here in the past 15 years, allowing for a wave of deregulation. The public school system was deregulated, as well as the energy and telecommunications sectors. There were bold attempts to cut subsidies to the agricultural sector.

"We went as far as deregulating the post office, even if I think it was a failure; not even Margaret Thatcher managed that," said Leif Pagrotsky, a member of the Social Democratic Party and minister in the party's government between 1994 and 2006.

"Sweden hasn't had a strong culture of regulation since the reforms in the 1860s," he said.

The welfare state was slimmed down by the center-right alliance government, which came to power in 2006. The unemployment benefit system was scaled back and taxes were lowered for low- to middle-income workers. Even real-estate taxes, generally seen as one of the most reliable, were slashed.

So, if "socialist" is an inaccurate boilerplate tag for Sweden, how could it be better described?

Lars Tragardh, a U.S.-based Swedish historian, rebuts the cliche that the Swedes are an innately, collectively minded people. It is actually a less altruistic impulse that underpins their welfare ideology, he claims in his book "Are Swedes Human?" which explores the development of the modern Swedish state.

"The most important thing for a Swede is to be free and independent and not to be subjugated to family or other socially tightly knit communities," Tragardh said.

When the state pays for schools, child care and care of the sick and the elderly, the citizens are freed of such interdependent bonds. It has also proved to have positive effects for the economy, allowing half of the work force, the women, to enter the labor market.

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