The New Swedish Model?

Swedish-flag-credit-Matti-Matilla

The advocates of “austerity now!” are talking about Sweden.

Last year Fraser Nelson wrote in The Spectator:

When Europe’s finance ministers meet for a group photo, it’s easy to spot the rebel — Anders Borg has a ponytail and earring. What actually marks him out, though, is how he responded to the crash. While most countries in Europe borrowed massively, Borg did not. Since becoming Sweden’s finance minister, his mission has been to pare back government. His ‘stimulus’ was a permanent tax cut. To critics, this was fiscal lunacy — the so-called ‘punk tax cutting’ agenda. Borg, on the other hand, thought lunacy meant repeating the economics of the 1970s and expecting a different result.

Three years on, it’s pretty clear who was right. ‘Look at Spain, Portugal or the UK, whose governments were arguing for large temporary stimulus,’ he says. ‘Well, we can see that very little of the stimulus went to the economy. But they are stuck with the debt.’ Tax-cutting Sweden, by contrast, had the fastest growth in Europe last year, when it also celebrated the abolition of its deficit. The recovery started just in time for the 2010 Swedish election, in which the Conservatives were re-elected for the first time in history.

So, how is the Swedish economy doing?

Well, the good thing about assessing the Swedish economy is that Sweden remains monetarily sovereign, meaning that its economy is not dependent upon the monetary policy of a foreign agency like the ECB. This means that it can be fairly assessed side-by-side with other Western monetary sovereigns like Britain, America and Japan.

The thing that austerians are so excited about is that Sweden currently has low debt and is running balanced budgets:

sweden-government-debt-to-gdp

But that hasn’t meant that unemployment has been low. In fact, right now it’s worse than American, British and Japanese unemployment:

sweden-unemployment-rate

And while Sweden’s low debt and balanced budgets may have resulted in low rates, its rates are not significantly lower than Britain and America, and are higher than Japan who carry the highest debt load of all:

sweden-government-bond-yield

But to be fair real GDP growth in Sweden since the crisis has been relatively decent — although notably still below its pre-2008 trend — beating the other three countries who all performed poorly:

fredgraph

I think that Sweden is benefiting less from its actions during the slump and more from its actions during the boom.

In my view, Sweden’s focus on bringing down deficits in the years from 2004 until the crisis in 2008 was very responsible and prudent. Sweden had no wasteful expansionary spending in the mid 2000s on things like occupying Iraq. It was not enacting expensive legislation like No Child Left Behind, Medicare D and unfunded tax cuts that bloated government budgets.

Coming into the crisis with a low debt-to-GDP ratio is very healthy because it gives the government additional fiscal space to cut taxes, and spend money on infrastructure, public goods and tax rebates to bring down the unemployment rate, which is the one aspect of the Swedish macroeconomy with significant room for improvement. An unemployment rate approaching 9% is undeniably unhealthy, and it is disappointing that the Swedish treasury with so much wiggle room is not doing more to assist the private sector in bringing down unemployment. And even though Sweden has had more growth than other Western countries, it has still not caught up with its pre-2008 growth trend.

Sweden’s unemployment woe illustrates that Sweden is not a paradigm of the supposed virtues of austerity in all seasons. Austerity in the slump just frees up resources while the economy is already suffering from a high degree of slack in resources — capital (high savings, low interest rates) and labour (high unemployment). Sweden illustrates this just as much as other Western nations.

The lesson we should take from Sweden is that a countercylical spending policy — less spending in the boom, more spending in the slump — is preferable.

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31 thoughts on “The New Swedish Model?

  1. Good points. A few comments:

    1. Unemployment rate: this is always difficult to measure across countries. However, according to employment-to-population ratio (which may be a better measure), Sweden tops the other countries you mentioned.
    Sweden: 60.3% (2011:
    http://research.stlouisfed.org/fred2/series/SWEEPRNA )
    UK: 58% (2011: http://research.stlouisfed.org/fred2/series/GBREPRNA )
    Japan: 56.2% (2011:
    http://research.stlouisfed.org/fred2/series/JPNEPRNA )
    USA: 58.5% (2013: http://data.bls.gov/timeseries/LNS12300000 )

    Hard to say which measure is better–unemployment or employment to pop ratio. However, I will say looking at the latter with regards to the US seems to give a more accurate picture of a stagnant job market (as opposed to the unemployment ratio, which has steadily fallen as workers have dropped out of the labor market: http://data.bls.gov/timeseries/LNS14000000 )

    2. “it is disappointing that the Swedish treasury with so much wiggle room is not doing more to assist the private sector in bringing down unemployment”

    Borg seems to be planning to do just that next year.

    “Swedish Finance Minister Anders Borg said the first priority after elections in 2014 will be to lower taxes for low and middle-income earners while backing away from cutting the top marginal rate. The government will also work to lower corporate and ownership taxes.”

    http://www.bloomberg.com/news/2013-03-14/borg-sees-tax-cuts-as-top-priority-as-sweden-faces-lean-years.html

    Sweden also cut corporate taxes from 26.3% to 22% in January 2013: http://tmagazine.ey.com/insights/swedens-drive-tax-competitiveness/

    • 3. Finally, if austerity (i.e. balanced budgets or deficit reduction) is to be implemented, don’t you think it’s better to do it the Swedish supply-side way with a mixture of tax cuts and gradually reduced spending, rather than the
      Southern European way of focusing only on tax increases with little in the way of spending cuts?

      http://www.aei-ideas.org/2012/05/europes-failed-experiment-in-tax-hike-austerity/

      Surely everyone agrees that tax hikes in today’s circumstances make no sense. I even agree that Keynesian stimulus is needed to help the PIIGS and France. But I’d rather see stimulus by way of cutting T, not increasing G. Wouldn’t you, too?

      • Finally, if austerity (i.e. balanced budgets or deficit reduction) is to be implemented, don’t you think it’s better to do it the Swedish supply-side way with a mixture of tax cuts and gradually reduced spending, rather than the
        Southern European way of focusing only on tax increases with little in the way of spending cuts?

        I’m more focused on the timing of austerity (yes in the boom, no in the bust) than its makeup, but during the boom I think the Swedish way is fine.

        • May I ask: very briefly and in general terms, what do you suggest be done re: fiscal policy in the PIIGS and France?

        • If the ECB is not willing to supply sufficient liquidity to keep states liquid I think that they should leave the Euro, become monetary sovereigns again, spend their way out of depression and then once the private sector is growing enact strong deficit reduction measures so that the next time a severe recession hits they are in a similar position to Sweden today.

          If leaving the Euro is off the table, I think that the Euro system should federalise budgets and create a redistribution mechanism like the US Federal government so that booming states transfer to bust states and so there is a kind of fiscal safety net. Try selling that to German taxpayers, though…

        • Ideally, I also favor leaving the Euro, to enable a badly needed nominal wage cut. But that idea, and the others you suggest, all seem to extremely unlikely to happen anytime soon.

          Looking at the choices:
          1. Monetary easing by the ECB.
          This seems impossible for now. Germany won’t allow it.

          http://uneasymoney.com/2013/04/26/mrs-merkel-lives-in-a-world-of-her-own/

          2. Leaving the Euro, increase (govt?) spending
          I’m sympathetic to this idea. But, (1) realistically, how likely is it that Europe will give up on the Euro? Too much has been invested politically. (2) How does this solve their debt problems? The PIIGS’s debts are denominated in euros, not drachmas, lira, etc. (3) Is a Eurozone breakup even possible? JP Koning makes some good points: “Germany can’t leave it easily, because it is owed some E500b by the ECB via the Target2 settlement system. The PIIGS can’t leave because a bank run will immediately result. And if they dodge the run, they surely won’t be able to dodge euroization: citizens will spontaneously disengorge any newly-created liras/drachmas/etc in favour of the already-circulating and vastly superior Euro.”

          http://jpkoning.blogspot.kr/2012/01/euro-isnt-glove-its-chinese-finger-trap.html

          3. Federalised budgets, fiscal transfers
          Again, this just isn’t going to happen b/c of Germany. Also, this seems to go against your ideals of decentralization. How is rewarding poor economic performance in one country with transfers from a successful one a positive development?

        • Given that all of these options seem infeasible, what else is left?

          The inescapable immediate outcome is that Brussels is tacitly going to allow Spain and the others more flexibility to run deficits at 3% or more for the next few years. http://www.ft.com/intl/cms/s/0/fd104cc4-ae8a-11e2-bdfd-00144feabdc0.html#axzz2RXXbl3dM

          Assuming that the PIIGS are going to run larger deficits anyway, isn’t it better to endorse a tax cut rather than increased govt spending? In particular, corporate taxes (as in Sweden) and payroll taxes should be cut. Corporate cuts to spur investment, and payroll cuts to help the poor (payroll taxes are regressive) and to increase spending. Furthermore, employer contributions for payroll taxes are extremely high compared to the US; payroll tax cuts would also make it cheaper for firms to increase new hires. http://johnhcochrane.blogspot.kr/2012/09/europes-payroll-taxes.html

  2. Do you suppose that Swedish unemployment might be high because wage rates are inflexible downward, and that they are inflexible because of the large welfare state, minimum wage laws, third and fourth generation welfare bums and recreational drug users, labor alienation, nihilism, Western civilization, etc.? Are there macro statistical data that show whether or not wage rates are flexible or is it standard procedure to just conclude that labor markets won’t clear without monetary or fiscal manipulations, when closer examination might show that what we have here is a coordination problem.

    • I doubt that wage inflexibility is a uniquely Swedish problem. Keynes pointed out that “wages are sticky downwards” and he never suggested (I think rightly) that that problem was particularly bad in one or just a few countries. E.g. in the UK wages have been rising at about 2% a year in recent years despite productivity actually FALLING.

  3. It is’nt clear to me how Sweden avoided a deficit. Lower taxes (or higher spending) would, on their own, make a deficit more likely.

  4. Sweden may not provide the perfect model, but it’s far, far better than what has been tried elsewhere in much of Europe. The outcomes are at least as good as in those countries which have tried the ‘growth through increased government spending’ (debt) route, and they don’t have a massive debt to pay off! What’s not to like?

  5. Sweden most likely has high unemployment because it is connected to the rest of Europe [in depression].

    What must happen in the future is that countries must design their economies for their own populations, first and foremost, and for export, secondarily, if and only if, international trade is once again balanced [by gold, preferably].

    • One of Keynes’ main criticisms of the international gold standard was that it didn’t balance trade. He proposed creating a new fiat currency controlled by an international board of trade called the Bancor to artificially balance flows in a gold-based system.

        • Not least because when the world was on an international gold standard in the 1920s and 1930s, there were massive trade imbalances.

        • If a country wishes to run a trade imbalance, this is no problem as long as they have sufficient gold to make up the difference.

          The problem lies in the fact that countries generally do such to meet the needs of the Elite [e.g., oil], not for the betterment of the country. This is how it has ALWAYS been and how it will ALWAYS be.

          All institutions are designed by the few for their own benefit. There is no clearer example of this than international trade.

          Debt is simply living beyond your means, something that is NEVER necessary. This is how the intellectual elite use thinking to enslave regular people who want little more than to take care of their families and live modestly.

          The problem is debt, and understanding money is understand debt and how it insidiously transforms honest people into greedy something for nothing devotees.

  6. I suggest the whole concept “fiscal space” and “wriggle room” are invalid. The argument behind them is that if a country already has a high debt/GDP ratio it won’t be able to run a big deficit because deficits accumulate as more debt, and given a high debt/GDP ratio, no one wants to lend to such a government.

    The whapping great flaw in that argument is that (as pointed out by Keynes, Milton Friedman and others), deficits do not need to accumulate as debt: they can accumulate as monetary base. That is, instead of borrowing, a country can simply print.

    Of course printing is more stimulatory or inflationary per dollar than borrowing. Though if QE is any guide, there isn’t a HUGE DIFFERENCE between them. That is QE consists of the central bank printing money and buying up debt, and the effect of QE has been unimpressive.

    But assuming printing is X% more stimulatory than borrowing, then all a country has to do when aiming for a given amount of stimulus and done via printing, is to print X% less than it would have borrowed, had it gone for the borrow option.

    • I suggest the whole concept “fiscal space” and “wriggle room” are invalid. The argument behind them is that if a country already has a high debt/GDP ratio it won’t be able to run a big deficit because deficits accumulate as more debt, and given a high debt/GDP ratio, no one wants to lend to such a government.

      If you recall my criticism of MMT, I noted that the problems with MMT were mostly in the realm of human psychology. At the zero bound, I technically agree with MMT in that governments can basically borrow and spend until unemployment falls below interest rates, but that psychological factors due to fear of public debt often prevent this.

      The “wiggle-room” and “fiscal space” I am referring to are psychological. If you’re at the zero-bound (something Sweden are not actually at, but let’s talk about countries where they are), if you have 30% of public debt to GDP it is an easier sell to legislators and the public to increase that.

  7. The “austerity now” brigade must be desperate if they can only cite one small country, Sweden, to back their ideas. Moreover, even if Sweden has managed economic expansion with a balanced budget, that in no way disproves the basic Keynsian idea that given private sector lack of spending, government will have to expand its net spending.

    That is, given private sector caution in many countries, it does not follow that the private sector in EVERY COUNTRY is equally cautious.

    Moreover, looks from the above article that there is good explanation as to why the private sector in Sweden should be relatively exuberant: it has just had a significant tax burden removed from its shoulders.

    • Moreover, even if Sweden has managed economic expansion with a balanced budget, that in no way disproves the basic Keynsian idea that given private sector lack of spending, government will have to expand its net spending.

      I put this article together to suggest that Sweden has done well precisely because they followed Keynes’ advice in the boom.

      • Australia’s Left and Right Governments BOTH spent big during the boom, causing wage inflation in building and construction (Schools were over built) as Government projects competed with Mining companies for labour. Now we have a Government budget deficit and no capacity to spend. As I repeat, Politicians and their Parties are corrupt, selfish and not out for the best interest of the nation. They may listen to Economists, and cherry pick policy, but as a result of their short shortsightedness (Caused by evil career lust) they screw everything up.

    • Do you think that Austerity is driving people to further study, in fields that may be in demand IF business is given the incentive (Lower taxes and less regulation) to invest. That way business has a pool of skilled labour that is KEEN to learn and work. We have had 50 years of socialism and it is a painful adjustment, but the clearing of the labour market is essential to get productivity and the skill set for the 21st century.

  8. Every law, policy and “visible hand” that spews from Government’s group think is corrupt, ill-conceived and selfish. Unintended consequences are a natural result of evil pervading politics.

    Face it. Humanists, Communists, Socialists all have an agenda to shape society and the economy. I am sick of Economists quoting other Economists who lived in a different time and social response to economic policy.

    Instead of understanding the social context of the country they are working in, they look at historical precedents. Economics is a social science. How do the new generation respond to information? What about the older generation?

    If we go back to lower regulation (More choice for consumers and more competition among supplier), lower taxes (less waste in the useless regulating public sector), the internet savvy consumer will quickly work out what is the best product or service. There is no need for regulation anymore, as poor business practice will spread like wild fire over the internet.

  9. Sorry Aziz, but i can’t accept incompetence when there is a self-interest benefit to those making the decisions. It reminds me of a particular scene in “The Last Boy Scout” (www.youtube.com/watch?v=Wf8-FRnUHSA). I don’t buy coincidence when it involves “accidental” benefit.

    To be sceptical, keynesian economics is an excuse politicians use to spend to get reelected. To be cynical, keynesian economics is an invention to justify statism or even marxist economic policies. Personally I see merit in using spending or otherwise to fine-tune an economy, but from experience it’s an excuse to spend ad infinitum beyond any recessionary period, which eventually results in austerity, which again is code for not spending beyond your capacity to ever pay it back.

    • Agreed, see my comment above in regard to Australia’s situation. Both parties blew the revenue of the mining boom to get re-elected.. Criminals.

  10. For thousands of years, people have known that debt leads to misery. It is no different now.

    Spending future income would be like attempting to pull time forward. If you could, think about how that might work out.

  11. Pingback: Enlaces | Artir contra el mundo

  12. Pingback: Effects on Sweden: The New Swedish Model azizonomics | Euro Economy

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