Paul Krugman is at it again. In his latest column, “Sweden turns Japanese“, he argues that Sweden is, well, turning japanese, economically speaking – meaning we in Sweden are about to experience a lost decade of low-to-no growth. His case is based on our stubbornly high unemployment, plus our inflation rate which for the past two months (an eternity in Krugman’s world) has been below zero. Further, Krugman argues that the Swedish central bank (the Riksbank) is to blame for this as they have refused to mindlessly print money like there is no tomorrow (unlike the Federal Reserve).
I decided to have a closer look at all the relevant data – not just the inflation & unemployment rate like Krugman – to find out whether Krugman was right: Have the UK & US, which chose the Keynesian route, really done better than Sweden? As this article will show, the answer is No.
Krugman is right that Sweden initially recovered much faster than anyone else. In the 4th quarter of 2010, the Swedish economy grew by 7.7 %!!! on an annual basis. That’s faster than China is growing right now.
More amazingly, we were growing at that rate despite having reduced our government debt during the financial crisis – government debt was lower at the end of 2010 than it was in 2006! It really shines through throughout the text that Paul Krugman is gloating at Sweden’s current predicament, with our stubbornly high unemployment and our below-zero inflation rate – but he completely ignores that according to his own theory, we should never have had high growth – or any growth – to begin with. No Keynesian have ever given a credible explanation for how that happened – Sweden went the opposite path of the US, and yet our results were so much better.
Here are the main problems with Krugman’s argument:
1) Sweden experienced healthy growth in Q4 2013. Yes, GDP growth for the year in total was dismal, but in the final quarter of last year Sweden’s economy grew at a healthy speed of 3.1 %. Was that a blip or the beginning of a sustained recovery? We simply don’t know yet.
More interestingly, Sweden’s high growth in Q4 happened even though inflation averaged 0.03 %! during those three months. Hence, Sweden’s low inflation need not be a roadblock for growth – whatever Paul Krugman and his fellow Keynesians think.
Sweden experienced a real GDP growth of over 3 % in the last quarter. To my knowledge, real GDP growth never reached those levels in Japan during their lost decade.
2) GDP growth peaked after the Swedish central bank began to hike interest rates. The Swedish Riksbank began to raise interest rates in July 2010, and yet growth continued to climb: The growth rate was 3.8 % in Q1 2010, rising to 6 % in Q2. In Q3, growth kept climbing despite the interest rate hike that occurred one month into the quarter to 7.6 %, and in Q4 growth peaked at 7.7 %.
Overall, Sweden had less fiscal AND monetary stimulus than the US during 2008-2010 – so how could we recover so much faster than the United States? We didn’t even do any of those massive bailouts the Keynesians kept telling us were needed to keep the economy from collapsing! There simply is no Keynesian explanation for this, something Krugman conveniently ignores.
3) If you don’t raise interest rates when growth is at 7.7 %, when do you do it? Krugman, like all Keynesians, insist that they do not support inflationary policies all the time – they believe in them as a temporary measure to be used during recessions. Everybody, including Keynesians like Krugman, agrees that too much monetary or fiscal stimulus can overheat an economy and create bubbles (in housing or elsewhere).
When your economy is growing at 7.7 %, doesn’t it make sense to raise interest rates? In particular if the level of household debt has continued to increase, even though you just went through the worst financial crisis since the Great Depression? Swedish debt levels increased more in 2008-2010 than in 2006-2008, despite the global “credit crunch”. How long would Krugman have waited until he raised interest rates? Is he suggesting that the Federal Reserve should keep interest rates at zero until the US gets higher growth than China? He doesn’t tell.
4) In the UK, which kept interest rates low (and continues to do so), more and more signs points towards a new housing bubble. Apparently, the 2008 crash didn’t teach anyone anything about the dangers of property speculation.
Real GDP growth is virtually flatlining in the UK – unlike in Sweden, GDP growth in the UK is being eaten up by inflation (and also immigration).
Finally, in Sweden, salaries are rising in real terms – and blue collar workers are enjoying the biggest increases. In the UK, gross wages have fallen by £2000 (approx $3000) since 2010. By contrast in Sweden, between 2010 and 2012 (I don’t have any data for 2013 unfortunately), the average salary for a blue-collar worker rose by approx £1100 ($1650) – yes, that’s in real terms.
White collar workers have seen a smaller yet under the circumstances respectable increase of £550 ($825). Again, these are all real term increases, adjusted for inflation. Even in 2012, when GDP grew by a measly 0.9 %, salaries went up 2.6 % (more than they did in 2011 when GDP growth was higher – a funny paradox that tells you something about what an unreliable indicator GDP can be).
In Sweden, salaries for blue collar workers have increased every single year during the financial crisis (white collar workers did not see an increase in 2008). In the UK and US, they have hardly began to rise – seven years after the subprime crisis began.
In fact, the increasing salaries may explain why – as Krugman correctly notes – Swedish unemployment is stubbornly high (8.1 %, seasonally adjusted).
Are you starting to notice a pattern here? Countries like the US and UK that went down the stimulus/quantitative easing path see nominal GDP growth, but flatlining salaries & real GDP growth. Signs of a housing bubble are re-emerging in both countries. Sweden chose another path, and while things are far from perfect, I would quite frankly rather be us than you.
So, is there nothing to worry about?
Does this mean that everything is good with the Swedish economy? Nothing but clear skies? Not at all.
The real problem facing Sweden’s economy – and indeed the other Nordic countries’ economies as well – is a dangerously high level of household debt. You could say that while southern Europe has a sovereign debt problem, northern Europe has a private debt problem. Interestingly,Krugman himself have admitted as much – and yet he thinks that lowering central bank interest rates is a good idea for Sweden. How could lower interest rates possibly help against overborrowing? Aren’t lower interest rates known for increasing borrowing? How does Krugman make sense of this?
The truth is of course that he doesn’t. Honestly, his article looks to me like a hit job from a resentful man. He hates the fact that Sweden’s economy didn’t collapse during the financial crisis, despite us doing the opposite of what he recommended – and so now, at the slightest hint that our economy is in less-than-perfect shape, he gleefully points at us and shouts “I told you so!”.
Truth is, it will be years before we can sum up the 2008 financial crisis and state with certainty which policies worked and which didn’t. Krugman unfortunately is impatient and wants to declare victory, even before he has any substantial data to back him up (which I doubt he ever will) – he is, as the saying goes, counting his chickens before they’re hatched.
And if he has to cherrypick data and make outright dangerous recommendations – like cutting interest rates when debt is already running too high – then he’ll do so, because apparently once you win a Nobel Prize, you don’t have to bother with boring things like “dignity”.
I’ll stop here. Thank you for reading.
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