Coal Can’t Fill World’s Burning Appetite

With Supplies Short, Price Rise Surpasses Oil and U.S. Exporters Profit

Laborer takes nap after searching for usable coal at a cinder dump in Changzhi, Shanxi province.

(WP) – Long considered an abundant, reliable and relatively cheap source of energy, coal is suddenly in short supply and high demand worldwide.

An untimely confluence of bad weather, flawed energy policies, low stockpiles and voracious growth in Asia’s appetite has driven international spot prices of coal up by 50 percent or more in the past five months, surpassing the escalation in oil prices.

The signs of a coal crisis have been showing up from mine mouths to factory gates and living rooms: As many as 45 ships were stacked up in Australian ports waiting for coal deliveries slowed by torrential rains. China and Vietnam, which have thrived by sending goods abroad, abruptly banned coal exports, while India’s import demands are up. Factory hours have been shortened in parts of China, and blackouts have rippled across South Africa and Indonesia’s most populous island, Java.

Meanwhile mining companies are enjoying a windfall. Freight cars in Appalachia are brimming with coal for export, and old coal mines in Japan have been reopened or expanded. European and Japanese coal buyers, worried about future supplies, have begun locking in long-term contracts at high prices, and world steel and concrete prices have risen already, fueling inflation.

In the United States, the boom in coal exports and prices has helped lower the trade deficit, which declined last year for the first time since 2001. The value of coal exports, which account for 2.5 percent of all U.S. exports, grew by 19 percent last year, to $4.1 billion, the National Mining Association said. An even bigger increase is expected this year.

That means that, in a small way, higher revenues for U.S. coal exports indirectly helped the U.S. economy cover the cost of iPods from China, flat-screen TVs from Japan and machinery from Germany. The still-gaping trade deficit of the world’s largest industrial power at the dawn of the 21st century was slightly eased by a fuel from the era and pages of Charles Dickens.

Big swings in the prices of coal and other commodities are common. But while the price of coal has slipped slightly in recent weeks, many analysts and companies are wondering whether high prices are here to stay. As increasing numbers of the world’s poor join the middle classes, hooking up to electricity grids and buying up more manufactured goods, demand for coal grows. World consumption of coal has grown 30 percent in the past six years, twice as much as any other energy source. About two-thirds of the fuel supplies electricity plants, and just under a third heads to industrial users, mostly steel and concrete makers.

Meeting rising demand will prove difficult. To maintain its role as the world’s producer of last resort, the United States will need to make major investments in mines, railways and ports.

“We think the current world markets have legs,” said Thomas F. Hoffman, senior vice president of external affairs at Consol Energy, one of the biggest U.S. coal producers. Consol is trying to decide whether to expand output at its Appalachian mines and to add capacity in Baltimore’s harbor.

“We’re at a point where we’re running through the capacity,” said David Khani, a coal analyst at Friedman, Billings, Ramsey Group. He compares the coal market to the oil market. For coal, he added, “it is unprecedented.”

If high prices last, that would raise the cost of U.S. electricity, half of which is generated by coal-fired powered plants.

Expensive or not, coal is almost always dirtier to burn than are other fossil fuels. Although its use accounts for a quarter of world energy consumption, it generates 39 percent of energy-related carbon dioxide emissions. Climate change concerns could lead to legislation in many countries imposing higher costs on those who burn coal, forcing utilities and factories to become more efficient and curtail its use. Climatologists warn that without technology to capture and store carbon dioxide emissions, burning more coal would be disastrous.

China‘s Ravenous Appetite

China, the world’s largest consumer of coal, is burning through more than the United States, European Union and Japan combined. And its consumption is increasing by about 10 percent a year. In 2006, it installed power plants with more capacity than all of Britain.

China has vast coal resources, but its growing appetite has outstripped production. In January 2007, it imported more coal than it exported for the first time, according to government figures.

Logistics compound China’s coal woes. The biggest deposits lie inland and in the north while most of the fast-growing industries are in the south and along the coasts. Transporting all that coal strains the railways, half of which are devoted to coal transport.

When blizzards hit this winter, shipments were held up, reserves dwindled to half their normal levels, and the government suspended exports for two months. On Friday, it issued its first export license of 2008. Because of shortages, electricity was rationed in 17 provinces, most of them in the south.

Guangdong Taini Cement said it was not allowed to use electricity from 7 a.m. to noon or from 5 p.m. to midnight. “The electricity we were getting at that time was only 60 percent of what we usually get,” said Chen Jijing, director of the company’s manufacturing department.

Even before the storms, blackouts were common, as a result of China’s muddled energy policies.

China has done little to contain demand. Indeed, the government has limited electricity rate increases for years, encouraging greater use. Concerned about climbing inflation, Beijing on Jan. 10 turned once again to Communist-style measures, freezing electricity prices even as coal and oil prices soared.

“The current price policy encourages people and companies to consume electricity because electricity is so cheap. There’s no pressure for them to use energy resources efficiently,” said Ping Xinqiao, a professor of economics at Beijing University.

Strong coal demand has created incentives for small illegal coal mine operations that are extremely dangerous and highly polluting. The government has shut down 11,155 such mines since 2005, further crimping supplies.

In India, Policy vs. Demand

India also relies on outdated energy policies while trying to keep pace with booming demand. The economy is growing at 8 to 9 percent a year, and by 2012 India expects to add 76,000 megawatts of power, according to Upendra Kumar, a member of the mining committee at the Confederation of Indian Industries.

But 94 percent of India’s coal mining is in the hands of government-owned companies. The biggest, Coal India, produces four-fifths of the country’s coal. Because the government is worried about social unrest, the prices for coal and electricity are kept low.

“Today our coal prices are about 40 percent lower than international coal prices,” said K. Ranganath, Coal India’s director of marketing. And, he notes, the “lower the prices, the higher the demand.”

That discourages investment, too. Although India’s coal reserves are vast, they haven’t been fully developed. The government hopes to boost coal production by 50 percent by 2012 and quadruple it by 2030. Yet that would require massive investment. Experts note that India’s coal deposits are deep and difficult to mine. The dilapidated rail infrastructure is another obstacle; India’s coal has to travel an average of 435 miles to reach plant and industrial users, said D.P. Seth, additional secretary in India’s coal ministry.

As a result, India expects to import 51 million tons by 2012, nearly as much as U.S. exports last year. By 2022, imports could climb to 136 million tons, Kumar said.

Developing countries aren’t the only ones using more coal. Throughout the 1980s and 1990s, British coal consumption declined as new sources of oil and natural gas were discovered in the North Sea. However, the trend has reversed and coal consumption has climbed steadily over the past six years, including a 9 percent jump from 2005 to 2006. Coal has now surpassed gas once again as the leading fuel for electricity plants.

However, the British mines that George Orwell described 70 years ago as “like my own mental picture of hell” are much smaller than they once were. Mine production capacity declined during the ’80s and ’90s “dash for gas.” Now Britain imports coal from Russia, Australia, Colombia, South Africa and Indonesia.

At the Mercy of Nature

Sometimes it takes an act of nature to uncover human and policy flaws. The fragile balance of coal supplies in Asia has been exposed this winter to flash floods and torrential rains in Asia’s top coal-producing nation, Australia. The floods caused six big coal producers in Queensland to declare “force majeure,” a contractual option that allows them to miss coal deliveries because of events outside their control. The companies include Rio Tinto, BHP Billiton and Xstrata.

At two major coal ports in Australia, about 45 ships are stacked up, waiting for deliveries from the mines. Loading delays running between 20 and 28 days. The industry is expected to take months to recover. Workers are still draining water and mud that pooled in open pits and repairing machinery and roads.

Australia‘s problems have contributed to a surge in Asian spot prices, meaning prices for immediate delivery, for coking coal, used for iron and steel production. They are running at three times the current contract price of $98.

South Africa, which might ordinarily have come to Asia’s rescue, was wrestling with its own supply problems. The state-owned utility, Eskom, let coal reserves dwindle, and power plants simply ran out. Power outages crippled the country. Heavy rain also dampened coal piles, making it harder to burn the tiny reserves efficiently.

Rolling power outages forced the mining industry to shut down for several days. Amid this political debacle, Eskom vowed to replenish its coal stockpiles, a push that will eat into supplies available for export.

Australia‘s gridlock also coincides with deep cuts in coal exports by Vietnam, a key supplier to Japan and China. Vietnam will raise tariffs on coal exports to slash them by about a third this year. The goal is to keep coal at home for domestic needs. Last year, Vietnam exported 32.5 million tons of its total production of 41.2 million tons.

Vietnam‘s Industry Ministry has reportedly recommended to the country’s prime minister a total halt in coal exports after 2015.

Prices Squeezing Asia

The consequences of tight supplies are being felt throughout the region and are not limited to developing countries.

Rising coal prices are squeezing Japan and South Korea, which depend largely on imports for energy. Hardest hit, so far, are steel companies. It takes about 1.5 tons of coking coal to make a ton of steel. Steel makers, in turn, are raising prices for carmakers and other manufacturers, who at some point will pass some of the costs on to customers.

Japan‘s Nippon Steel and JFE Holdings, and South Korea’s Posco agreed last month to a 65 percent increase in coal prices, paying Brazilian mining giant Vale $78.90 a ton, up from $47.81. It was the industry’s first major deal of the year and could set a global benchmark for material to make steel; a day after the deal was announced, Japanese Industry Minister Akira Amari announced that he was worried about the country’s growth.

Japanese steel makers were also buying on the spot market last month, purchasing U.S. coking coal for the first time since 2005, according to Nihon Keizai Shimbun, a Japanese business paper. It reported that mills were paying about $350 a ton for U.S. coal, which is about three times the price of coal purchased from Australia last year.

Nippon Steel has said it plans to raise prices for steel sheet and plate by 10 to 20 percent, reflecting the higher costs of iron ore and coal. Shipbuilders have been passing higher steel costs on to their customers. And in the construction machinery industry, Shin Caterpillar Mitsubishi and Kobelco Construction Machinery raised prices across the board in January, citing higher materials costs.

Jackpot for Mining Firms

For coal mining companies, the coal crisis is a bonanza.

The price hike has revived long-neglected mines in Hokkaido, a region in northern Japan that has been producing coal for more than a century. As global coal prices have more than doubled, the Japanese mines have suddenly become competitive and they are attracting the attention of utilities and companies that use coal for power.

Hokkaido Electric Power Company this year doubled its coal order from the Hokkaido mines, from 500,000 to 1 million tons. The mines cannot produce enough coal to meet new requests.

In the United States, it is getting harder to license and borrow money to build new coal plants. But Peabody Energy’s chief executive Gregory H. Boyce says foreign demand will sustain mining output. “Coal is the sustainable fuel best able to close the gap of growing demand vs. scarce and expensive alternatives,” he said at a conference last month.

Khani, the FBR analyst, said that “coal use has expanded beyond steam and steel into coal-to-liquids in China and coal-to-chemicals,” which he said would link coal prices to oil as well as natural gas. Given recent oil price levels, that could mean higher prices for coal too.

That could slow U.S. and worldwide economic growth and contribute to a renewed bout of stagflation. Rising commodity prices are “producing real limits on the future of economic growth in the U.K. and overseas,” said Shaun Chamberlin, a specialist in energy and climate change at the Lean Economy Connection, an research institute in London. “In terms of industry, we’re running out of ways of generating energy. We’ve jumped around from one energy source to another, and now we’re running out.”

All this is especially bad news for those worried about climate change. Germany, for example, is caught between its pledge to eliminate nuclear power and its pledge to slash carbon emissions. Because nuclear energy accounts for a quarter of the country’s electricity needs, utilities have filed applications for permits to build two dozen coal-fired plants over the next few years.

“You reach a point where people say you have to stop burning coal,” said Per Nicolai Martens, director of the Institute of Mining Engineering at the Aachen Technical University in Germany. “But when you reach that point, you are forced to ask the question of what happens when you shut it off?”

In the developing world, where growth is paramount, there is no thought of shutting off coal, especially when, on average, a person in China emits about one-sixth and an Indian less than one-tenth as many greenhouse gases as an American “Coal will continue to be king in India. There is no way out,” said Kumar, of the Confederation of Indian Industries. “The other choice is asking the country to stay poor. . . . The question is, are we going to allow poverty or allow a little bit of pollution?”

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Housing Bust Fuels Blame Game

Democrats Seize On Opponents’ Role; Bipartisan Failures

(WSJ) – As the falling housing market shakes financial institutions and pummels Americans in an election year, the nation’s economic woes have surged to the top of voters’ minds. The timely question: To what extent are politicians and regulators at fault?

Democrats are quick to blame Republicans, who were in power during the housing bubble and subprime lending frenzy. For years, America’s leaders failed to restrain the markets, companies, investors and consumers from the missteps that led to the most pervasive financial crisis in decades.

But in hindsight, the failure stretches across government and across party lines. At bottom are two strong currents. From the Republican president to urban Democratic congressmen, homeownership was pushed as an overriding and unquestioned goal. And many significant attempts at regulation were obstructed by the prevailing belief that the economy did best when financial markets operated as freely as possible.

The Bush administration coupled cheer-leading for homeownership with pressure on government-sponsored mortgage lenders Fannie Mae and Freddie Mac to provide funding for riskier mortgages. Both Democrats and Republicans stood by as Fannie and Freddie invested heavily in securities backed by subprime loans. Democratic congressmen pushed a federal law to restrain lending practices later discredited, but Republicans with some Democratic allies blocked or countered with weaker versions.

And at the Federal Reserve, Chairman Alan Greenspan, revered by both parties for his economic management, resisted using the Fed’s authority to more aggressively regulate lender behavior.

The blame spreads beyond Washington, to state capitals. In California, home to most of the country’s subprime lenders, Democratic state lawmakers didn’t support laws that would have imposed tougher regulations on a prized local industry. Politicians of all stripes cheered on the lower interest rates that sparked the boom in housing and excesses in credit.

Now, as Washington scrambles to repair the damage, momentum appears to be swinging back toward a more significant role for government in the American economy. Congressional Democrats have proposed the federal government guarantee up to $400 billion in troubled mortgages if lenders first write down their value. The Bush White House, which opposes the use of public money to bail out borrowers and lenders, is signaling it is open to compromise.

It is impossible to know whether a different approach to housing and financial regulation would have produced a different outcome. As in the 1990s stock-market bubble, many victims began as willing participants seduced by ever-rising prices and easy credit.

One thing is clear. The nation gorged itself on home-buying, something once considered as American as apple pie. “Let’s be honest with ourselves,” Richard Syron, chief executive of Freddie Mac and a former Carter Treasury and Federal Reserve official, said in December. “We went crazy as a country with the goals…saying, ‘Everybody’s got to have a house.'”

Below, a look at what went wrong.

Pushing the Dream

As far back as the Civil War, owning a home has been associated with civic virtue and moral behavior. Democratic and Republican administrations alike sought to raise homeownership through subsidies, tax breaks and dedicated agencies.

When George W. Bush took office, that push became a pillar of his “ownership society” campaign. “We want everybody in America to own their own home,” Mr. Bush said at a housing conference sponsored by the White House in October 2002. Earlier that year, he issued a “challenge” to lenders and others in the industry: Create 5.5 million new minority homeowners by the end of the decade. In 2003, he signed the American Dream Downpayment Act, creating a program that would offer money to the poor so they could secure a first mortgage.

These challenges came just as the lending industry was finding that subprime loans could be very profitable, at least in the short term. The administration’s push also bolstered industry claims that such loans — made to people with weak credit records — were answering a vital social need.

Homeownership is “our mission,” Angelo Mozilo, chief executive of Countrywide Financial Corp., a giant mortgage lender, said in a February 2003 speech. Citing Mr. Bush’s drive, Mr. Mozilo said lenders needed to bring the rate of minority homeownership closer to that of whites. One answer, he said, was to stop requiring sizable down payments from people who couldn’t afford them.

Countrywide and other lenders soon were promoting mortgages that allowed subprime borrowers to buy homes with little or no money down. The percentage of subprime borrowers who didn’t fully document their income and assets grew from about 17% in early 2000 to 44% in 2006, according to data from First American CoreLogic, a research firm in San Francisco.

Subprime was initially aimed at people with weak credit. But by 2005 and 2006, lenders encouraged many types of better-off borrowers to take such loans, including people with large incomes who wanted to speculate on rental housing. Many subprime loans were made to refinance low-income people who already owned homes, often loading them up with more mortgage debt and creating the risk of foreclosure.

Government-sponsored companies that buy and guarantee mortgages also joined the subprime fray. In 2002, the Bush administration began criticizing the companies, Freddie Mac and Fannie Mae, saying they were “trailing” the rest of the mortgage market in terms of their financing of homes for low-income people and minorities.

To push Fannie and Freddie, the Department of Housing and Urban Development, or HUD, eventually required that a higher percentage of loans they fund go to low-income borrowers. The pair met HUD’s requirements partly by buying the AAA-rated portions of mortgage securities created by Wall Street firms and backed by subprime home loans. After the initial low-payment period, many of those loans proved unaffordable to borrowers and are now going into foreclosure.

The homeownership rate, which rose from 65% in early 1996 to a record 69% in 2004, has since fallen below 68% and is almost certain to fall further as foreclosures rise and credit tightens for first-time buyers. Moody’s Economy.com forecasts that three million home loans will go into default in the 30 months ending in mid-2009, with about two-thirds of them resulting in foreclosures.

HUD says minority homeownership has increased by about 3.1 million since mid-2002 — more than two million shy of President Bush’s goal. The Bush administration is “proud” of having pushed for more minority homeownership and never favored reckless lending, says Tony Fratto, a White House spokesman.

From the time subprime took off in the mid 1990s, legislators and regulators tried to balance two conflicting goals: increasing low-income families’ access to credit and minimizing the potential for abuses by lenders. As home prices soared, tighter curbs usually lost out to a laissez-faire attitude in tune with the ruling Republicans. The result: Congress blocked legislation and the Fed was slow to regulate.

Congress Adrift

In 1999, Democrats, inspired by a groundbreaking antipredatory lending law in North Carolina, sought a federal equivalent. Predatory loans are typically described as those that involve excessive fees and high interest rates. Generally, such abuses occur in the market for subprime loans, those for people with weak credit records or high debt in relation to their income. Republicans, who controlled Congress, blocked the antipredatory legislation, arguing it would interfere with legitimate lending.

“Don’t apologize when you make a loan above the prime rate to someone that has a marginal credit rating,” Texas Republican Phil Gramm, then chairman of the Senate Banking Committee, told a group of bankers in 2000. “In the name of predatory lending, we could end up denying people with moderate income and limited credit ratings the opportunity to borrow money.”

From 2000 on, Democrats continued to introduce bills aimed at safeguarding against alleged predatory lending. In 2005, Rep. Brad Miller of North Carolina and two other Democrats introduced one such bill. Alabama Republican Spencer Bachus, the Republican chairman of a House committee on mortgage lending, was interested in co-sponsoring the bill.

In spring 2006, Mr. Bachus abruptly toughened his stance, in effect killing negotiations, Mr. Miller says. Barney Frank, then a senior Democrat and a co-sponsor of the bill, says while Mr. Bachus was cooperative, the Republican house leadership didn’t want any such bill reaching the floor.

Mr. Bachus disputes that the Republican leadership interfered with his efforts, adding: “I was very concerned about the subprime situation.” He says Democrats were the ones who toughened their negotiating stance. Mr. Bachus notes that many of his provisions are contained in a bill that the House approved last year.

Fed’s Light Touch

Even without congressional intervention, regulators had other tools to address potential abuse. But Alan Greenspan, chairman of the Federal Reserve until 2006, wanted to be sparing in their use.

In 2000, he rejected an informal proposal by then-Fed governor Edward Gramlich that Federal Reserve staffers examine the lending practices not just of banks but of their mortgage affiliates. In 2002, he rejected calls from Democrats to use the Fed’s power under the Federal Trade Act to write rules on unfair and deceptive practices.

Mr. Greenspan, in an interview, said examining mortgage affiliates wouldn’t have prevented fraud, and would have given shady operators the additional cover of claiming to be Fed-regulated. Regarding the calls from Democrats, he said he and the other governors were following the advice of the Fed’s professional staff. More broadly, he said, Congress, not the Fed, was best suited to define “unfair and deceptive” practices and to create legislation to address such lending.

He says he erred in thinking that other investors and market participants would adequately monitor lending standards in the mortgage-backed securities market. “I turned out to be wrong, much to my surprise and chagrin,” he said.

Mr. Greenspan and other bank regulators did take some steps to tighten oversight. In 2001, they barred banks from making “loans to borrowers who do not demonstrate the capacity to repay the loan.” But that didn’t explicitly apply to state-regulated finance companies and mortgage brokers, the entities that originated the majority of subprime loans. Many observers say the Fed also fueled the housing bubble by keeping short-term interest rates low in 2003 and 2004.

The pendulum is now swinging back toward intervention. Mr. Frank last November pushed an aggressive antipredatory lending bill through the House with the cooperation of Republicans. Among other things, the law would hold firms that package mortgages into securities responsible if those mortgages were predatory — even if someone else, like a mortgage broker, originated them. The Senate has yet to take up the matter.

Rep. Scott Garrett, a New Jersey Republican who actively opposed many antipredatory-lending bills, says earlier action might not have mitigated the subprime crisis. He says innovation in the lending market would have found a way around even an all-encompassing bill. “Just a year ago we were talking about how great it was [that] the highest percentage of Americans ever were in their homes,” he says.

A State’s Blind Eye

The nation’s laissez-faire climate permeated California, where subprime lending soared as home prices outraced incomes. Here, regulatory shortcomings spanned party lines. Republican legislators generally opposed anti-predatory lending bills. And Democrats, who controlled the state legislature, didn’t want to threaten one of the state’s star industries. The state’s regulators, meanwhile, were poorly equipped to oversee the booming mortgage industry.

California banks are regulated federally, some jointly with the state’s Department of Financial Institutions. But the largest subprime originators were other kinds of institutions: mortgage brokers and finance companies which were overseen by the Department of Real Estate and Department of Corporations, respectively.

The Department of Corporations, which regulates more than 300,000 corporate entities in a wide variety of investment and financial businesses, has long been business friendly. Spokesman Mark Leyes says it has to strike a balance between regulating and facilitating business. “We’re the cop, but we’re the friendly cop,” he says.

Since 2003, the department had been run by a series of interim commissioners. Preston DuFauchard, an assistant general counsel for Bank of America, was appointed and confirmed commissioner in June 2006. That year, companies regulated by the department loaned $252 billion to Californian home buyers.

But the mortgage industry wasn’t the top priority. Mr. DuFauchard says his first tasks were to bring securities regulations in line with federal rules and to tackle concerns involving financial scams against senior citizens. Mortgages moved to the top of the list only in early 2007, after a high-profile California lender collapsed.

Armed with 27 examiners for 4,800 consumer-finance companies, including mortgage lenders, the department examined mortgage companies once every four years. The department checked whether these companies charged proper fees to borrowers and kept adequate capital reserves, but it generally wasn’t tasked with assessing whether the loans themselves were sound.

In August 2006, the department examined Irvine, Calif.-based New Century Financial Corp., one of the biggest subprime lenders, and found no violation of state laws. What the examiners missed, because it wasn’t technically their mandate to look, was the rapid corrosion of loan quality that would force New Century out of business seven months later.

That same month, the department notified Ownit Mortgage Solutions, Agoura Hills, Calif., another big subprime lender, that it was four months late filing its 2005 audit report and levied a $1,000 fine. In December 2006, unable to honor commitments to repurchase defaulting mortgages from investors, Ownit ceased all lending and filed for bankruptcy protection. Only nine months after that did the Department revoked its license.

“The Department of Corporations effectively fulfilled our obligations as state regulator of both” New Century and Ownit, says spokesman Mr. Leyes.

In January 2007, Democratic State Sen. Michael Machado pressed Mr. DuFauchard, the Department of Corporations commissioner, to adopt tougher federal guidelines for state lenders. Mr. DuFauchard began the process of approving the rules, but cautioned it could take months. Enforcing them “may be a bigger pill than the Department of Corporations can swallow with existing resources,” he told the state senate banking committee.

Last summer, after soaring defaults ended the most questionable practices, the department swung into action. Mr. DuFauchard said the federal guidelines would apply to state lenders effective January 2008. He also initiated talks that led to mortgage-servicing companies agreeing to extend some initial interest rates to protect some homeowners from defaulting.

The department has added seven examiners while the number of mortgage lenders it oversees has shrunk by more than 100. It also has broader scope to audit licensees. Under a new state law, subprime and nontraditional mortgage lenders must evaluate a borrower’s ability to repay the loan over its full life, not just during the period of introductory fixed interest rates. The state legislature had blocked such a provision back in 2001.

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The Welfare System in the United States – Part 5

The Swedish Model:  Welfare For Everyone

Sweden has developed a social welfare system that has eliminated poverty by providing extensive government benefits to everyone. But taxes are high, and some doubt that this so-called “Swedish Model” can continue without major changes.

The Swedish welfare state (also called the “Swedish Model”) is based on the idea that everyone has a right to health care, family services, old-age pensions and other social benefits regardless of income. Since everyone is entitled to these benefits, everyone must pay for them through their taxes.

Sweden began to build its welfare state early in the 20th century and greatly expanded it between 1945 and 1975. Up to the 1970s, the “Swedish Model” succeeded for several reasons. First, the Swedish economy grew steadily during this period. Second, Sweden did not participate in World War II and so, unlike other European nations, it did not have to make a painful recovery from the war. Third, its defense budget was small. Fourth, the country did not have to deal with any immigration problems. Sweden had a small population with a common cultural background. Swedes were proud that their little democratic society had seemingly found a “middle way” between socialism and capitalism.

Building the Welfare State

The welfare state has been the vision of the Swedish Social Democratic Party (SDP), which was founded in 1889. Formed by industrial workers, this political party rejected violent revolution (as in Russia) in favor of democratic social reform. The SDP aimed at building a system that would provide workers (and later all Swedes) with health insurance, old-age pensions, protection from unemployment, and other social benefits financed by taxes on workers and employers. The SDP called its vision for a welfare state the “people’s home.”

The SDP gained control of the government in the 1930s and remained in power for most of the following 60 years. In 1937, the Swedish parliament, called the Riksdag, created a national old-age pension program that remains as the backbone of the welfare state to this day.

The SDP did not want government to take over the ownership of businesses. Instead, SDP leaders realized that government could work with private enterprise, which would produce the economic growth necessary to make the “people’s home” possible. Even today, after six decades of welfare-state development, 90 percent of the businesses in Sweden remain in the hands of private owners. Starting in 1938, the Swedish government began to engage in negotiating national wage agreements between employers and labor unions, which currently represent over 80 percent of the workers.

Following World War II, the SDP government greatly expanded the welfare state. It provided a long list of benefits for all citizens and even immigrant workers. It introduced a national compulsory health insurance system, which was later expanded to include dental care and prescription drugs. It passed into law low-cost housing, child-support payments to parents, child-care subsidies, a mandatory four-week vacation for all workers, unemployment insurance, and additional old-age pension benefits. Most of these things were financed by sharp increases in employer social security taxes. But a booming economy with unemployment usually less than 1 percent made the new social welfare programs possible.

By the mid-1970s, the SDP’s had largely realized its vision of a “people’s home” welfare state. All Swedes, regardless of need, could call upon the government to provide them with the benefits listed below. Most are available at no charge to the individual or family. Some “subsidized” benefits require persons to pay a partial fee, usually according to one’s income.

Health and Sickness

1. subsidized doctor care mainly in county clinics

2. free public hospital treatment

3. subsidized dental care; free for children

4. subsidized prescription drugs; life-saving drugs free

5. free abortions and sterilizations

6. free maternity clinics for prenatal care

7. cash benefits to compensate for loss of most wages due to sickness; a separate benefit is available for workers injured on the job

Family Support

8. tax-free monthly payment to parents for each child; single parents receive an additional payment for each child

9. parents have a right to take a total of 12 months paid leave from work at near full wages to care for each child up to first year in school

10. subsidized child care at home or in a government day-care center

11. one year at a subsidized nursery school

12. unemployment insurance pays about 80 percent of previous income

Pensions

13. most retired persons receive three different kinds of old-age pensions paid for by taxes and employer contributions

14. full or partial disability pensions; disabled child pension goes to parents until age 16 and then directly to child

15. special payment to handicapped persons who are working or in school

16. surviving spouse and orphan pensions

A few additional kinds of aid are provided only to those who have low incomes. The most important of these are housing subsidies for poor families and elderly pensioners.

Because of the extensive number of benefits available to all age and income groups, poverty was virtually abolished in Sweden by the 1970s. But there are those who still need extra help during hard economic times or a family crisis. An example of the latter is the increasing number of single mothers who depend on temporary government cash aid. This “social assistance” (what we call “welfare”) usually involves small amounts of aid provided for less than a year.

Benefits and Burdens

The Swedish welfare state has all but eliminated poverty, especially among the elderly and families with children. The typical married retired couple receives pension and supplemental payments that almost equal their pre-retirement income. This is much more than what a Social Security pension provides in the United States. The infant mortality rate in Sweden is five deaths for every 1,000 live births contrasted to seven deaths in the United States. Also, both male and female Swedes live longer than Americans.

While there is little doubt that the Swedish people have benefited from the “Swedish Model,” they also have one of the heaviest tax burdens in the world. Today, an average Swedish working family pays about half its earned income in national and local taxes. Swedes also pay taxes on investment income. In addition, Sweden has a national 25 percent sales tax that is built into the price of consumer goods. Beyond this, employers must pay corporate taxes and make payments into government pension, unemployment, and other social welfare funds. The resulting tax burden is so heavy that Swedes have a special word for it, skattetrat, which means “tax tiredness.”

Government spending currently equals about 60 percent of Sweden’s gross domestic product (the value of all goods and services purchased in a year). U.S. government spending by contrast accounts for about 20 percent of the U.S. gross domestic product. The Swedish government’s fastest growing spending areas are health services and old-age pensions. Furthermore, public employment has rocketed to account for about one-third of all jobs in Sweden. (In the United States, the government supplies less than 5 percent of all jobs.)

Starting in the mid-1970s, the Swedish economy began to slow down. Among other things, Swedish exports had become too expensive due to the high wages and payments made by employers into the different government welfare-state programs. As economic growth slowed, Sweden found it increasingly difficult to pay for its system of social-welfare benefits.

Can the Welfare State Continue?

As inflation, unemployment, and the government budget deficit grew, many working people started to complain about the burden of paying for the expensive pension system. Others objected to the lack of choice in a society where the government runs almost all social services.

In 1991, a conservative government took control of the government and tried to rein in the welfare state. It cut some benefits as well as taxes. But these actions came during a world-wide recession, and unemployment in Sweden soared to an unprecedented 13 percent.

Fearing that the conservative government was going too far in cutting back the welfare state, Swedish voters returned the Social Democratic Party to power in 1994. Surprisingly, the SDP, the party that created the welfare state, announced a program of spending cuts and tax increases to reduce the government deficit. Late in 1997, however, with both the deficit and unemployment down, the SDP government reversed course and declared it was time to restore and even expand some social welfare benefits. But many doubt whether the “Swedish Model” of a welfare state that benefits everyone can continue at the level that most Swedes have come to expect.

Some Americans look to Sweden as a model for U.S. welfare programs. Others say that the “Swedish Model” would not work in the United States because the two countries are so different.

Part 5 of 5.

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