Thursday, May 24, 2012

Did Anders Borg Pursue Austerity in Sweden in 2009 and 2010?

The right wing press is all aglow with paeans to the Swedish finance minister Anders Borg. See these articles:
Veronique de Rugy, “GDP Growth Rates: The Swedish Approach,” Mercatus Center, May 16, 2012.

Fraser Nelson, “Sweden’s Secret Recipe,” The Spectator, 14 April 2012.
The conservatives appear to be asserting that Sweden’s recovery from the 2008–2009 recession was the result of austerity, and the tax cuts Borg passed in 2007. Unfortunately, this nonsense falls apart when we look at the facts.

Anders Borg became finance minister on 6 October 2006. The government passed tax cuts in January 2007, long before financial crisis of 2008 and global recession. But what kind of tax cut did Borg oversee? Apparently, they involved tax cuts for lower income earners as well as upper income earners:
“What even Borg did not expect was that his tax cut for the low-paid would increase economic growth so much that it has almost entirely paid for itself. Borg had created something that Osborne’s critics say does not exist: a self-financing tax cut. ‘There was some criticism at the time that we were borrowing to finance tax cuts,’ he says. But Sweden could do it, because it was expecting to return to surplus soon.”
Fraser Nelson, “Sweden’s Secret Recipe,” The Spectator, 14 April 2012.
If Sweden was borrowing money to finance tax cuts, then there must have been a resulting deficit, but strangely there doesn’t appear to have been a deficit in 2007:
Swedish Government Budget Surplus/Deficit as % of GDP
2005 1.95%
2006 2.22%
2007 3.53%
2008 2.20%
2009 -1.18%
2010 -1.17%
So I do not know exactly what was going on here: whatever fiscal effect the tax cut had is unclear to me, but the crucial point is that this tax cut happened in 2007.

When the global recession struck in 2008, what did Sweden do? It adopted a Keynesian stimulus package, and expansionary fiscal policy in 2009 and 2010. In December 2008, the Swedish government announced an 8 billion kronor (757 million euros, $966 million) stimulus package, implemented in 2009.

The 2010 budget was also expansionary, and Anders Borg, the man himself, said so:
“Sweden’s centre-right government presented on Monday an expansive 2010 budget bill focused on job creation and economic stimulus to lift Sweden out of the crisis a year ahead of general elections. ‘We are trying to limit damage from the crisis by taking forceful action to promote jobs and enterprise and by providing support to everyone who has been severely hit by unemployment,’ Finance Minister Anders Borg said.”
Economic Stimulus to Lift Sweden out of the Crisis, The Swedish Wire, 21 September 2009.
The Swedish economy was lifted out of its recession around the middle of 2009, owing to the stimulus. The belief that tax cuts in 2007 (whose actual fiscal effects are unclear) caused a recovery in mid-2009 is ridiculous beyond words.

Another ridiculous and misleading trick of conservatives to say that Swedish government spending as a percentage of GDP fell from 52.9% in 2006 to 51.8% in 2011, and then imply that this was the reason for the recovery. Yet the actual figures show a large increase in government spending as a percentage of GDP during the recession and economic crisis:
Swedish Government Spending as % of GDP
2006 52.9%
2007 51.0%
2008 51.7%
2009 55.2%

2010 53.0%
Note the huge surge from 2008–2009 (partly, of course, a function of falling GDP from 2008–2009, but also a result of automatic stabilisers and stimulus spending).

Then the percentage falls once the recovery occurred and the stimulus did its work, causing private sector growth, and rising GDP and tax revenues.

All precisely predictable and consistent with Keynesian economics.

14 comments:

  1. Stop joking. From 2006 to 2009, both France and Sweden increased their government spending, but between 2009 and 2011, France didn't cut its spending, as opposed to Sweden. That's why Sweden is better positioned to weather the recession than France.
    Look at the chart.

    That is not consistent with keynesian theories.

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  2. "but between 2009 and 2011, France didn't cut its spending, as opposed to Sweden. That's why Sweden is better positioned to weather the recession than France."

    What recession are you talking about?

    (1) France's recession ended in 2009

    (2) Sweden's recession ended in 2009.

    (3) Sweden's government spending as a percentage of GDP fell once the recovery occurred and the stimulus did its work, causing private sector growth, and rising GDP and tax revenues. The same thing has happened in Australia (which did not even have a recession thanks to its quick stimulus).

    All precisely predictable and consistent with Keynesian economics.

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  3. Also, the whole premise that cuts and a booming economy are always inconsistent with Keynesian economics is so much rubbish.

    No Keynesian has ever said that contractionary fiscal policy is a problem, if (note the word "if") the private sector is booming – providing the necessary private investment and consumption spending (you might also have an export boom as another source of growth well).

    In fact, this is precisely the other side of Keynesian demand management.

    When governments around the world first started to adopt Keynesian economic principles during the Second World War, and they did so to control inflation and excessive aggregate demand, by contracting demand when wartime command economies had been implemented (a point also once made in a similar way by Ludwig Lachmann).

    http://socialdemocracy21stcentury.blogspot.com/2011/11/robert-skidelsky-on-keynes.html

    You've got to the point where your ignorance of basic Keynesian theory is so bad it is laughable.

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  4. You define recession as growth in GDP. GDP is defined as government and private spending. You are just running in circles.

    Secondly, Sweden had a very big expansionary monetary policy which has only made their housing bubble much bigger. That is not real growth.

    Thirdly, even though nutty Keynesians as yourself believe that this is being done for "unemployment". The fact is that, the fiscal stimulus has only been accompanied by higher unemployment. (You have to take into account tens of thousands of Swedes, fleeing to get a job that do not show up in the unemployment rate).

    I cant believe you are defending this crazy use of resources and spin doctor politicians destroying peoples lives. BTW I am from Scandinavia

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    Replies
    1. The statement that "the fiscal stimulus has only been accompanied by higher unemployment" is either sheer ignorance or a lie:

      http://www.tradingeconomics.com/sweden/unemployment-rate

      Unemployment as a result of the recession rose from about 6% to 9%. Then fell over 2010 and most of 2011 to 6.6%. It has risen to about 7.8% very recently from late 2011: but then Sweden had a negative quarter of growth in Q4 2011, so this not surprising:

      http://www.tradingeconomics.com/sweden/gdp-growth

      (2) "You have to take into account tens of thousands of Swedes, fleeing to get a job that do not show up in the unemployment rate)."

      Cite actual evidence that Sweden's emigration is high by international standards.

      Sweden has a positive migration rate (the difference between the number of persons entering and leaving a country during the year per 1,000 persons) of 1.65 migrant(s)/1,000 population, which means more people enter each year than leave.

      So your statement appears to have just rubbish.

      Delete
    2. Nice to see some actual Facts Lord Keynes. Your explanations make alot more sense than your critics. The swedish stimulus (966million dollars) looks quite small even for their GDP. what determines size of stimulus needed? Also I read on Delongs site, that expansionary policy lowered the value of the kroner which "switched alot of european demand into sweden". Can you explain what all that means.

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    3. "Also I read on Delongs site, that expansionary policy lowered the value of the kroner which "switched alot of european demand into sweden". Can you explain what all that means."

      It means that fiscal expansion supposedly caused depreciation of the Swedish kroner against other currencies making their exports cheaper and causing a surge export-led growth.

      The UK had a similar experience with QE.

      Delete
  5. I don't know the realities of what happened to Sweden in 2008 and since but the logic of a couple of your statements worry me.

    1. "Note the huge surge [in the % of govt spending] from 2008–2009 (partly, of course, a function of falling GDP from 2008–2009, but also a result of automatic stabilizers and stimulus spending)."

    The logic of what you're saying here is that the bigger the govt % the less the effects of a private sector recessions. Why do you get so freaked out when I point out that the logic of this argument is that 100% govt share of spending would guarantee stability according to your logic ?

    2. "The Swedish economy was lifted out of its recession around the middle of 2009, owing to the stimulus. The belief that tax cuts in 2007 (whose actual fiscal effects are unclear) caused a recovery in mid-2009 is ridiculous beyond words."

    How do you know this ? Logically it could be either (or something else) that caused the recovery - but you are adamant it was stimulus. This seems to be based on nothing other than pure bias on your part.

    I like your blog as it raises interesting issues - I just think you need to get a bit deeper into analysis and rely less on blind assertions.

    ReplyDelete
    Replies
    1. "The logic of what you're saying here is that the bigger the govt % the less the effects of a private sector recessions. Why do you get so freaked out when I point out that the logic of this argument is that 100% govt share of spending would guarantee stability according to your logic ?"

      An economy run by centrally planned production would indeed abolish business cycles, but it does not follow that would be a good thing.

      Keynesians do not advocate command economies, but mixed economies.

      Your stupid reasoning is akin to this: the less cars we use the less car accidents there are: so why don't we abolish all cars and abolish all car accidents!?

      "How do you know this ? Logically it could be either (or something else) that caused the recovery "

      No, it couldn't. The new fiscal effects of the tax cuts (whether they were contractionary or expansionary) occurred in 2007.

      Even if we assume they were expansionary, they could not have imparted new fiscal expansion in 2009.

      It was the stimulus that did that.

      Delete
    2. I know that Keynsian theory does not rely on a large state in its model - But I have noticed a tendency in your version of it to focus on the benefits of a large govt sector as a buffer against recessions (perhaps I misinterpreted this ?) - and I think this often comes close to saying "the bigger the govt the less the effects of the business cycle" which I think is both dangerous and not essential for the Keynsiam model.


      To go with the car analogy: If the number of car accidents start increasing then the Keynesian logic would be to reduce the speed limit or have more traffic cops until the rate returns to normal. If however the accident rate had gone up because there were more cars and what was needed was more roads then the "Keynesian" solution would just mask the problem. Under a free market the number of road accidents may be higher in the short term but eventually the right solution is found not just a short term hack that makes the numbers better but ignores the real issue.

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    3. "If the number of car accidents start increasing then the Keynesian logic would be to reduce the speed limit or have more traffic cops until the rate returns to normal. If however the accident rate had gone up because there were more cars and what was needed was more roads then the "Keynesian" solution would just mask the problem."

      The "Keynesian" solution if there were too many cars would be to introduce more roads and open up capacity for these cars to move.

      In the actual context, this means austerity ONLY once a full capacity economy is realized. This approach is purely Keynesian.

      Delete
  6. "Secondly, Sweden had a very big expansionary monetary policy which has only made their housing bubble much bigger. That is not real growth."

    Are you saying that expansionary monetary policy only leads to bubbles? You do realize that decisions on investment are quite independent on the wads of cash provided...

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  7. Jan said: Well both Prof.Lars E.O. Svensson, Sveriges Riksbank, Stockholm University,
    http://people.su.se/~leosven/papers/PhillipsAbs.htm
    In "The Possible Unemployment Cost of Average Inflation below a Credible Target"
    and Professor Lars Pålssson Syll,at Malmö University in http://larspsyll.wordpress.com/?s=Krugman+wrong+Sweden
    Is "that the Swedish Fed for no reason at all has made people unemployed. As a consequence of a faulty monetary policy the unemployment is considerably higher than it would have been if the Swedish Fed had done its job adequately."

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  8. "Are you saying that expansionary monetary policy only leads to bubbles? You do realize that decisions on investment are quite independent on the wads of cash provided..."

    Not really, you provide credit to households and it will push up the house market

    ReplyDelete