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How Keynes Saved Sweden?

June 24, 2011

Washington Post has an article today on “Five economic lessons from Sweden, the rock star of the recovery.” While it is certainly true that the economy of Sweden quite quickly bounced back after the short crisis, WaPo’s analysis is more of wishful thinking than statements of facts. Granted, the facts stated are true – but the offered interpretations of their effects are not.

The first lesson is not rocket science, but Keynesians might not fully agree with it: “Keep your fiscal house in order when times are good, so you will have more room to maneuver when things are bad.” Sweden’s economy has been in relatively good shape after the depression the country experience in the early 1990s, after which politicians started cleaning up their own mess. Since the mid-1990′s Sweden has had only balanced budgets and even reduced the national debt from just over 80% to under 40% of GDP. The welfare system has also, slowly and step by step so that people would not notice the change, been restructured through adding incentives for people to choose productive labor instead of welfare checks. Many welfare programs have also been changed from the previous never-ending subsidization of laziness to provide limited time only support while adjusting to changes in the market.

But already in the second lesson, “Fiscal stimulus can be more effective when it is automatic,” smells of Keynesian wishful thinking. The writer seems to say that Sweden managed to get quickly out of the crisis since the country’s government “always” stimulates the economy, while temporary stimulus attempts (as attempted by both Bush II and Obama) do not seem to work. Of course, an extensive welfare system is really a burden on the economy – it is hardly the case that constant stimulus spending makes an economy depression-proof. And when thinking about it, this “second lesson” really contradicts the first lesson: how come a country could quickly bounce back when it did not provide temporary stimulus and had recently and consistently cut down on and restructured the welfare systems while also cutting taxes specifically for those with [real] jobs? It is hardly the “stimulus spending” that helped Sweden out of the crisis.

The third lesson seems to be an attempt to stifle the growing support to audit (or abolish) the Federal Reserve. According to the Washington Post, a country needs to “Use monetary policy aggressively” in order to “solve” crises. The Swedish central bank, the Riksbank, supplied the market with negative interest rates and WaPo tells us this is what saved the country. Interestingly enough, they do not mention anything about what the Riksbank was doing before the crisis – during the boom. Perhaps the Swedish central bank did not work as hard as the Federal Reserve to create a bubble in the first place?

The fourth lesson is the common mercantilist crap we would expect from journalists completely ignorant of economics. Sweden was “saved” because the government was able to “Keep the value of your currency flexible” during the crisis, which improved profitability for exports when the krona fell. Well, the reason the krona does not have a fixed exchange rate is because this was part of why the recession in the early 1990s escalated into a depression; the krona was pegged to the euro, since the Swedish government was hoping to enter the EU and adopt the euro in 1995. This didn’t work out. With a fluctuating fiat currency the market sets its value depending on the public finances, which in a sense provides a check on government spending. The fact that the krona fell during the crisis, which means Swedes were made immediately poorer compared to peoples under the euro and dollar, simply reminded leading politicians that they should not gorge in deficit spending…

The fifth lesson is not so much a lesson as a desperate cry in the name of what Mises termed “statolatry”: WaPo states that “Bankers will always make blunders; just make sure they don’t doom the economy.” Obviously, one should interpret the sentence as to saying that bankers and other private interests will always make blunders, but benevolent government will not. It follows from lessons 2-4 that government saved Sweden (at least in the mainstream media way of thinking), and lesson 5 simply makes this “truth” more explicit.

Just like the other pro-state lessons, however, this is a very interesting statement simply because it is so strange in its utter stupidity. WaPo mentions how banks may have learned something from the much worse crisis in the early 1990s, during which the Swedish government nationalized banks and set interest rates to 500%, but that the real savior of the day (of course) is government. It is proclaimed that “bank bailouts might be necessary to save an economy” and that keeping failed banks afloat is necessary not for the economy to crash, but that government still needs to provide the banks (its children?) with a good spanking so that they do not take on too much risk next time around.

Obviously, this is what WaPo thinks government did in the early 1990s and that’s why only a little support was needed in the recent crisis. But Sweden’s attempt at “solving” the crisis in the 1990s pretty much provided a blueprint for the federal government in this recent crisis: bank bailouts and nationalization, the assuming of bad debts, new government regulation and a supervising authority… This is why e.g. Paul Krugman has used Sweden as an example of how to put an end to the crisis. (But, of course, WaPo concludes, without the Federal Reserve the Swedish banking system would have crashed anyway.)

Interestingly enough, many Keynesians suffer from memory loss. The pretty radical and sound changes to the Swedish welfare state 1992-2007 are always mysteriously unnoticed in their “analysis” of the crises. Carry on, people, nothing to see here.

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