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
Historinhas 
I’d be very interested to see how the growth rates of GDP compare to the growth rates of public spending. It looks like there’d have to be real spending reductions in Sweden to achieve that decline in spending per GDP… I wonder also whether the declining spending per GDP is a cause or just an effect of higher growth rates which brought RGDP briefly back to trend (or close to it). My guess is that a lot of that high spending at the peak was the bailout of the banks, which also would coincide with automatic stabilizers kicking in.
Nice post, Marcus.
I had been vainly hoping that Svensson could replace Mervyn King next year. But there has been no leak from HM Treasury, who like to leak such news as soon as possible, and applications have closed. So I’m sad 😦
I wonder whether the British left will still continue to idolise the Scandinavian countries as the socialist utopia across the sea, as they get richer and we stagnate.
JJ, Over the past 11 years Sweden grew on average 0.6 pp more than Britain. In 2010 and 2011, while Sweden grew 5.8% and 4%, respectively, Britain only managed 1.8% and 0.8%.
From Anders essay, it´s clear that the decline in G was policy induced.
BM, A renewed dose of MT is needed!. Check out Mervyn King´s speech on Twenty years of Inflation targeting from yesterday.
Informative, and nice graphs as always. The early 90s crisis is poorly understood, especially by the media, all this talk about ‘bad banks’ when really it is mostly an boring old NGDP recession. I always thought the Australia case actually supported the supremacy of monetary policy, given how commodities crashed in 08/09, but Australia never looked back.
JP, thanks. It was, in the case of both Sweden and Britain, an NGDP recession to bring down inflation. Both countries, in the space of a few short weeks after they were forced out of the ERM in November 1992, and saw their currencies depreciate strongly, adopted IT. That´s the value of IT. Almost every country adopted it at a moment when inflation was high or risked becoming high. The US is an exception, having formalized IT at the worst moment possible, when inflation was low and risked becoming too low! Now it´s a constraint on monetary policy..
Correct; especially as the (proportional) crash in Australian exports was comparable to that in US exports.