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.
{ 22 comments }
The treatment of flexible exchange rates is incredibly superficial. We can hate the state and still give the devil its due.
If you weaken the home currency you increase exports and perhaps employment. Is there anyone who denies this? That’s not mercantilism that’s just reality.
Wealth is the important thing – and you can’t buy wealth with monopoly money.
It “increases” exports because you’re giving more shit away for free.
Here’s a proper example: before inflation US$ 5 could buy 1 kg of swedish goods and after inflation, US$ 4 can buy 1 kg of swedish goods. This loss in value means you give 25% more goods (in weight) for the same amount of dollars. THIS IS GIVING SHIT AWAY FOR FREE.
But since the exporters get more krona for same amount of dollars (by giving away more goods to foreign importers) they get a transfer of wealth from the general population to themselves. Score, right?
“Here’s a proper example: before inflation US$ 5 could buy 1 kg of swedish goods and after inflation, US$ 4 can buy 1 kg of swedish goods. This loss in value means you give 25% more goods (in weight) for the same amount of dollars. THIS IS GIVING SHIT AWAY FOR FREE.”
Businesses give shit away for free all the time, its called promotional marketing.
Devaluing the currency may give away some exports on the cheap, but the increase in employment more than compensates for it.
Don’t get me wrong, I’m all for abolishing the government. But as long as its here to we have to push an agenda of unemployment and misery? Don’t “End the Fed”, end the IRS, end the FBI, end the federal court systems, and then the consumer can choose whether to use dollars.
You cannot quantify whether “the increase in employment” compensates for anything!
Note that a good percentage of business may only be sustainable in the first place if inputs from other currency zones can be obtained at reasonable prices. Maybe the “employment” consists in people doing economically unsound activites like providing goods of extremely marginal value to foreign customers. So ultimately destroying the currency, destroying the savings, defaulting on debts and enabling the next cycle of malinvestments in carefree Keynesian abandonment may not be the good deal you thing it is.
And why is “increase in employment” an end in itself? The “increase” may be entirely due to the fact that people are unable to make ends meet, not because you have suddenly unlocked export markets that may or may not be to your long-term advantage.
But that’s the deal with central management – one only thinks one knows what one does and one only thinks on can influence one variable while keeping the others constant. Same as a first-grader putting voltage to ground to set the displayed value to 0, really. Where does all the smoke come from?
Economic analysis is the interpretation of data. YOu can quantify how important the increase in employment is by looking at increases in inflation adjusted GDP. Not a perfect measure, but good information when properly interpreted. The evidence is overwhelming that many states have states have raised real GDP by monetary stimulus.
Again, an increase in the supply of currency is not destroying the currency” any more than an increase in apples is “destroying the apple crop”.
State planners may be evil, but they are hardly so stupid to believe that they can influence one variable and keep others constant. ABCT claims that the bust clears out malinvestment, they have no evidence to support this assertion. Quasi-monetarists can explain explain how cyclical unemployment is caused, how to remedy it and why we should benefit to remedy it.
Gentleman, for a new day! We shall be anarcho-capitalists who throw off the childish
sophistry of Austrian economics!
Damn it, I forgot to change that stupid name on this computer. Feel free to make fun of me
actually, I thought it was pretty cool…
but what do I know…
BioTube is right. Money means next to nothing, except as a facilitator. Wealth means everything. People (and by extension countries) do not trade money for goods/services. They trade other goods/services for the goods/services they want (i.e. they trade part of their wealth for those things they believe will increase their net wealth).
Weakening a currency might make your country’s goods/services more attractive to people in other countries, but all their goods/services will be that much more expensive in your country. Mercantilism is indeed based on the fallacious belief that a country’s wealth depends on sustaining a “positive” trade balance. Consider the following: is the answer to maximizing wealth for all countries as simple as having them all, simultaneously, maintain a “positive” trade balance?
Sounds like Lake Woebegon where all of the children are above average…
“Money means next to nothing, except as a facilitator.”
And apples mean next to nothing, except as a source of fiber.
Sometimes an economy needs more fiber so it grows more apples. Sometimes it needs more facilitating so it makes more money. Money and apples are a PART of of “wealth”.
Apples are. Money is not.
http://stefanmikarlsson.blogspot.com/2011/02/swedish-boom-isnt-due-to-monetary.html
“Weakening a currency might make your country’s goods/services more attractive to people in other countries, but all their goods/services will be that much more expensive in your country.”
This is true, but most statists view decreased unemployment as a worthy trade off for higher import prices.
There is no reason why an ancap society might not do the same thing and weaken its currency. Just as Chuck-E-Cheese and create more tokens to be used in its video games, an ancap society can create more currency to be used in its ancap community.
An ancap society would surely use non-inflationary commodity money, as market forces would surely “choose” it. There would be no company with a monopoly of production (as chuck e cheese has with its tokens) of whatever happens to become the currency. Any attempts at an inflationary currency would be dumped by the market very quickly.
You don’t know what a free society would choose.
There might not be any company with a monopoly on production, but one firm might be big enough so that its tokens could be traded as money. Kind of like a Walmart gift certificate, but denominated in “Walmart points”, etc.
“You don’t know what a free society would choose.”
Yes we do: Gold & Silver!
Don’t assume free people are as primitive as Austrian economists.
A free, MODERN society would not be so limited. David Friedman has suggested commodity basket money, that is a unit of currency might be redeemable in a little bit of cotton, little bit of oil, little bit of tin, etc. Therefore it would be more stable and less influenced by supply shocks.
And there are so many other choices. My belief is that an extremely large company with market dominance could circulate tokens that could be used in its stores and its tollways and to pay rent(assuming it was also a landlord).
Conventional wisdom is encouraging the Greeks to leave the Euro and devalue their currency, too. But like most bad economists, they see only the short term effects on exporters and not the full effects on everyone. It would have worked no better for the Swedes. Economists who claim it did have merely blinded themselves to the obvious:
Currency debasement is never in the national interest
“Savers are presently taking their money out of the Greek banks and the Greek economy and, together with the productive elements of society in Portugal and Spain, put their money into real assets overseas (such as property here in London), thus making a mockery of the notion that the adoption of soft national paper monies would be in the national interest. In fact, as the Financial Times reported yesterday, many Greek savers are currently rushing into the eternal form of money, gold, the sale of which is rising sharply in Greece. These people choose the hardest form of money for their savings. They fear bank runs and financial collapse but also exit from the euro and subsequent currency debasement as all of these are damaging to their wealth. They are certainly part of the nation but debasement is certainly not in their interest.”
“And there is a further problem. Even for the supposed beneficiaries of these policy recommendations – the local export industry, the borrowers, the government and the moochers and freeloaders who cling onto the state like a nasty skin rash– the benefits would be fleeting. They would only last a second or two, then the benefits of currency debasement would turn into disadvantages – and disadvantages for everybody. Savers and creditors, whether domestic or foreign, would demand higher yields for keeping their money in the country or putting new money into it. Gains in the exporting industries would not only be offset by losses in the importing industries but the overall wealth would diminish through higher inflation and reduced capital accumulation. No society has ever enhanced lasting prosperity through a weak currency.”
http://papermoneycollapse.com/2011/06/greece-should-return-to-a-gold-standard/
As far as people putting their money in gold, etc, your argument has a problem of scale.
People are doing the same thing in the USA. You know what we call them? Conspiratoid nuts! As long as they remain a small part of the national economy they are just a side show.
And the benefits are hardly fleeting. Increased employment leads to increased total savings and total investment, this is the life blood of future economic growth.
The weakness of a currency is a function of its supply and demand, a weak currency isn’t bad or good, just as a weak apple market isn’t bad or good, it just depends on the circumstances. Just as an increase in the supply of apples may be good for an economy, an increase in the supply of money may be good for an economy.
Why didn’t WaPo come to Oklahoma and ask us how we achieved the lowest unemployment in the nation? Our housing prices have declined about 1%. Texas has only slightly higher unemployment with about the same decline in housing prices. Of course, we’re not as socialist as Sweden. It appears WaPo merely wanted to promote socialism, not tell anyone the truth.
Lot’s of countries suffered very little from the recent depression, not just Sweden. All a country had to do to avoid it was not buy a bunch of mortgage backed securities from the US.
Investors and traders are betting the central bank will abandon a plan to raise rates twice more this year after last month forecasting a rate of about 2.5 percent by the end of 2011 and more than 3 percent at the end of 2012.
Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/08/24/bloomberg1376-LQFOH51A74E901-3VVVN1D9SEPSUUC0U7LHVHUOCT.DTL#ixzz1W5TDSkx0
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