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Sweden as a case of MMT

from Lars Syll

According to the Swedish government official website, “Historically, the Swedish economy suffered from low growth and high inflation,” which the nation overcame with “inventive and courageous reforms” that “succeeded in maintaining control over public spending.

“First, in 1996, a ceiling for public spending was introduced. This was accompanied by the addition of the ‘surplus goal’ … for the government budget.”

dumstrut​Swedish government spending reforms were the consequence of a financial crisis in the early 1990s that saw the economy collapse into three years of recession and the nationalization of two major banks …

From 1971 to the 1990s crisis, Sweden experienced a mash-up of Green New Deal extreme government spending and “Modern Monetary Theory” loose money and enormous deficits. Government spending rose to over 70 percent and deficits rose to over 10 percent of GDP, while inflation soared to double-digit rates.

Sweden has trod the ground U.S. progressives wish to cover, and the only gains came when the social democratic fantasy was unwound.

Douglas Carr / The Hill

Now, this is one of the lousiest pieces of history revisionism I’ve ever come across. 

In Sweden, as in so many other countries, neoliberal ‘norm politics’ invaded the economy in the 80s and 90s. The mantra was that it was high time for Sweden to follow in the footsteps of Thatcher and Reagan. Deregulate the economy — especially the financial markets — and make the central bank independent, so that one could concentrate economic policies on inflation-targeting rather than on low unemployment​, then Sweden​ would prosper. As it turned out, that was far from what happened. Letting finance markets loose and at the same time keep a pegged currency turned out to be fatal. If anything, the Swedish experience shows what happens when politicians — both Social Democrats and Right-Wing — start to listen to neoliberal economists and their market fundamentalist dreams.

In Sweden​ today we have a Finance Minister — a Social Democrat — that still keeps on talking​​ about how necessary it is to balance the budget. ​And that in a situation​ where the deficit is at its lowest in 40 years and still falling!

The Swedish government’s penny pinching is nothing but insane and has absolutely nothing at all in common with MMT or progressive ideas on how to manage a prosperous​ economy​​.

What the Swedish experience shows is that a government’s ability to conduct an ‘optimal’ public debt policy may be negatively affected if public debt becomes too small. To guarantee a well-functioning secondary market in bonds it is essential that the government has access to a functioning market. If turnover and liquidity in the secondary market become too small, increased volatility and uncertainty will, in the long run, lead to an increase in borrowing costs. Ultimately there’s even a risk that market makers would disappear, leaving bond market trading to be operated solely through brokered deals. As a kind of precautionary measure against this eventuality, it may be argued – especially in times of financial turmoil and crises — that it is necessary to increase government borrowing and debt to ensure – in a longer run – good borrowing preparedness and a sustained (government) bond market.

No matter how much confidence you have in the policies pursued by authorities nowadays, it cannot turn bad austerity policies into good job creating policies. Austerity measures and overzealous and simple-minded fixation on monetary measures and inflation ​are not what it takes to get our limping economies out of their present-day limbo.

We are not going to get out of the present economic doldrums as long as we continue to be obsessed with the insane idea that austerity is the universal medicine. When an economy is already hanging on the ropes, you can’t just cut government spendings. Cutting government expenditures reduces aggregate demand. Lower aggregate demand means lower tax revenues. Lower tax revenues mean​ increased deficits — and calls for even more austerity. And so on, and so on …

  1. Jan Milch
    April 11, 2019 at 11:41 pm

    The neo-liberal economic, system shift in Sweden began already, in the early 1980s, and had as basis 5 factors that should be known. The neoliberal policy has continued since then by both the Right and the Social Democratic governments. It started with:

    1) The Devaluation 1982 that created huge gains and surrender of the selective policies that Gösta Rhen and Rudolf Meidner et al had designed. The finance sector grew unabated at the expense of the real economy.

    2) The second factor in the policy pursued by the then Minister of Finance, Kjell Olof Feldt, was to abolish the credit regulations. The deregulation created just what it said they wanted to counteract, a complete speculation orgy, a casino economy.

    3) The currency regulation was abolished. Foreign investment was released, capital outflows were huge at the end of the 1980s instead of being invested in the Swedish real economy, real estate and other speculative businesses, being a more profitable one to invest in domestic production.

    4) The krona, linked to the ECU, became an early EURO, and it was a miserable mistake, it made Sweden dependent on the policy that was conducted in Germany and the Bundesbank.

    5) The tax reform the fifth of Feldt’s “reforms”, created huge holes in the Swedish state budget, a structural budget deficit was created. It was also based on false, unvalidated premises on so-called “dynamic effects” without empirical support more than what the supply economist Art Laffer designed. on a napkin during a restaurant visit !!! But these “Dynamic Effects” did not exist.

    What is very strange about these so-called “dynamic effects” (which later went on again, in some modified form when it comes to the so-called job tax deductions) is that as far as I can find it does not even hold on the basis of Neoclassical Theory of Margin Benefit!

    As far as I understand the argument, it is as follows: that there must be a “substitution effect” of lowered tax on the margin, after which we get paid for the work we do and that makes it more expensive for us to live, we will automatically work more !

    However, the numerous investigations that have been made do not show that they would have such a relationship. And for those of us who have read the old classics, it turns out instead that already old neoclassic Knut Wicksell, pointing out that the marginal benefit for income above a certain level, tenders move towards zero and therefore they should be estimated away, and even old, Max Weber, showed that if people’s incomes increase, it tends to work less if they have reached for them a satisfactory level. So the description you read about Sweden among economic writers in business magazines is usually totally misleading.

  2. April 12, 2019 at 1:25 am

    Budgetary balance and austerity are two completely different subjects. when a people decide to sell bonds to accomplish a project bigger than can be funded with normal tax receipts they are democratically deciding on deficit spending. Austerity is a completely unrelated subject.

    • Econoclast
      April 12, 2019 at 3:28 am

      Well, one of my late university economics professors, former Greek Premier Andreas Papandreou, and recently former Greek finance minister, Yanis Varoufakis, would disagree with you more effectively than can I. I would just say that in a narrow economic model they might be unrelated, but in the real world of neoliberal political economy they are highly related tactics of corporate power.

  3. Helen Sakho
    April 14, 2019 at 1:56 am

    Even thinking about old explanations such as the MMT is obsolete. What we have now are crumbling economies, erosion of real value of money everywhere, and deregulation to an extent that it will take decades to even get back to the point when Yanis Varoufakis (for example) was ousted overnight for the wrong reasons. The new Brexit party run by self-congratulatory fascists rule. Private banks will no doubt be bailed out (no longer any need to do it secretly either).

  4. Ken Zimmerman
    April 21, 2019 at 10:13 am

    There’s lots of information available about Sweden, apart from official government data. Looking at several of these this is what we find.

    Sweden is a competitive mixed economy featuring a generous universal welfare state financed through relatively high-income taxes that ensures that income is distributed across the entire society, a model sometimes called the Nordic model. In 2014 the percent of national wealth owned by the government was 24.1%. Sweden’s economic model in the post-World War II era is characterized by close cooperation between the government, labor unions, and corporations. Sweden experienced several crises in the 1980s and 1900s due to financial and real estate busts. Sweden implemented spending reforms in response to these crises.

    According to Econlife.com, Sweden is less equal than most of us imagine. More defined by birth than a meritocracy, the majority of Sweden’s upper class inherited its affluence. The numbers also demonstrate that Sweden has a relatively high number of millionaires and ultra-high net worth individuals…and a happy middle class. That said, still only 2% of the world’s millionaires are found in Sweden, the largest of the Nordic nations. However, above the millionaire level, Sweden ranks among the top 20 nations for ultra-high net worth individuals. Why has Sweden’s relatively high inequality created so few problems for Sweden? Credit Suisse speculates that the, “Strong social security programs, good public pensions, free higher education or generous student loans, unemployment and health insurance can greatly reduce the need for personal financial assets. Public housing programs can do the same for real assets. This is one explanation for the higher level of wealth inequality we see in Denmark, Norway and Sweden that seems to create little dissatisfaction. The top groups continue to accumulate for business and investment purposes, while the middle and lower classes have no pressing need for personal saving.”

    The Heritage Foundation is both negative and positive about Sweden. Sweden’s economic freedom score is 75.2, making its economy the 19th freest in the 2019 Index. Its overall score has decreased by 1.1 points, with declines in government integrity, judicial effectiveness, and property rights outweighing an improved score for government spending. Sweden is ranked 10th among 44 countries in the Europe region, and its overall score is above the regional and world averages. Sweden’s long tradition of politically stable minority governments promotes consensus-building. Enviable living standards result from an economy that performs optimally because of open-market policies that enhance flexibility, competitiveness, and large flows of trade and investment. A transparent and efficient regulatory regime encourages robust entrepreneurial activity. Wealth is created by a large and vibrant private sector. There are no minimum wage laws. Banking regulations are sensible, and lending practices have been prudent. The legal system provides strong protection for property rights, buttressing judicial effectiveness and government integrity. The overall tax burden equals 44.1 percent of total domestic income. Over the past three years, government spending has amounted to 49.4 percent of the country’s output (GDP), and budget surpluses have averaged 0.9% of GDP. Public debt is equivalent to 40.9 percent of GDP. The efficient regulatory framework strongly facilitates entrepreneurial activity, allowing business formation and operation to be dynamic and innovative. The nonsalary cost of employing a worker is high, and dismissing an employee is costly and burdensome. There are few price controls in Sweden, but the government provides significant subsidies to encourage renewable energy.

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