Anders Aslund has written an essay which he titled “A Swedish Lesson for Ed Balls”:
To Brits, Sweden with its tightly regulated social welfare state is often a byword for socialism. But in the last two decades the country has been transformed. today it offers a flexible and dynamic European model with ever falling public expenditure, lower taxes, economic growth and budget surpluses.
It can easily be generalized as “lessons for all”.
This is interesting because in his recent appearance on “This Week”, Krugman countered Mary Matlin´s assertion that “this is the worst recovery” saying this is what´s to be expected following a “financial crisis recession”. And cites Sweden in the early 1990s.
But let´s take a closer look and compare Sweden and the UK. The first chart shows that in the early 90s spending (NGDP) crashed in both countries. That may have something to do with the blow-up in the real estate market and banks in Sweden, but let´s leave that aside. They never regained the prior trend path of spending, but that´s because that spending path was associated with high inflation – of 8% on average during the 1980s in both countries.
Now take a look at the real output trend path and actual real output. Sweden took a long time reverting to the trend, reaching it in 2007, just before the international crisis erupted. But note that the UK never even tried to get back to the original trend path, remaining on a parallel lower path before shifting down following the crisis. Sweden, on the other hand appears set to regain the original trend level path.
As Aslund notes, Sweden after 1990 went through deep structural reforms, a difficult job after more than two decades of rampant socialist policies. Many of those were supply side reforms, allowing growth to rise so as to get back to the original trend path.
One indication is seen on the next chart. While since 1993 government expenditure has been on a downtrend in Sweden, more recently it has gone up significantly in the UK. Despite all the “austerity” talk in the UK, Sweden has been much more “austere”. During the crisis, mostly due to automatic stabilizers, government spending in Sweden went up by 3.2% of GDP. In Britain it went up by a whopping 7%. Since 2009 in Sweden it has dropped back to the initial level, but in Britain it is still more than 5% above. But that hasn´t helped British growth, which has remained well below Sweden´s.
The difference in their relative performance in the present cycle is due to what´s happened to spending growth in both countries. That´s illustrated in the next chart. Note that both countries remained close to the low inflation spending path to which they had ‘transferred’ after the early 90s adjustment, but while Sweden is well on the way back, Britain is still distancing itself from it!
Obviously, monetary policy in Sweden has been much better than in Britain. Lars Svensson, Bernanke´s Princeton colleague, is on the Board over there. Maybe he should be invited to cross the Atlantic!
Even “better” examples of relative success than Sweden are Australia – some will quickly say its because of commodity prices – and Poland, not known as a ‘commodity country’. In both, NGDP never faltered.
HT: David Levey