Krugman on Sweden — as informative as junk mail before election day

24 Nov, 2013 at 11:10 | Posted in Economics, Politics & Society | 8 Comments


In a post up yesterday, Paul Krugman writes about “Mysterious Swedes” (emphasis added):

The Riksbank raised rates sharply even though inflation was below target and falling, and has only partially reversed the move even though the country is now flirting with Japanese-style deflation. Why? Because it fears a housing bubble.

This kind of fits the H.L. Mencken definition of Puritanism: “The haunting fear that someone, somewhere, may be happy.” … The underlying deficiency of demand will call for pedal-to-the-medal monetary policy as a norm. But bubbles will happen — and central bankers, always looking for reasons to snatch away punch bowls, will use them as excuses to tighten.

This is, however, rather too simplistic a view of the problems facing the Swedish economy today. And just poohpoohing — has Krugman already forgotten what happened in the US back in 00:s I recommend consulting another Nobel laureate, Robert Shiller, who could probably freshen up his memory — deeply felt concerns and fears of a housing bubble with conspiracy theories (“excuses”) is debating economic policies analogous to playing tennis with the nets down.

So let’s try to get the picture right.

Lars E. O. Svensson – former deputy governor of the Riksbank – has repeatedly during the last year lambasted the Swedish Riksbank for having pursued a policy during the last fifteen years that has increased unemployment in Sweden:

The conclusion from the analysis is thus that the actual monetary policy has led to substantially lower inflation than the target and substantially higher unemployment than a policy that would have kept the policy rate unchanged at 0.25 percent.

The Riksbank has more recently justified the tight policy by maintaining that a lower policy rate would have increased the household debt ratio (debt relative to disposable income) and would have increased any risks connected with the debt. But, as I have shown … this is not true. A lower policy rate would have led to a lower debt ratio, not a higher one. This is because a lower policy rate increases the denominator (nominal disposable income) faster than the numerator (nominal debt). Then the debt ratio falls …

In summary, the Riksbank has conducted a monetary policy that has led to far too low inflation, far too high unemployment, and a somewhat higher debt ratio compared to if the policy rate had been left at 0.25 percent from the summer of 2010 until now. This is not a good result.

By the way, the latest report The Swedish Economy by the National Institute of Economic Research includes a very interesting special study, ”The Riksbank has systematically overestimated inflation,” which may be important in this context. In an analysis of the Riksbank’s inflation forecasts, the NIER shows that Riksbank forecasts have systematically overestimated inflation. The NIER concludes that “[t]he Riksbank’s overestimation of inflation has contributed to overly tight monetary policy with higher unemployment and lower inflation than would have been the case if, on average, its inflation forecasts had been on the mark.”

Why the majority of the Executive Board so systematically has exaggerated inflation risks so systematically is a question that may be worth returning to.

The Swedish Riksbank has according to Lars E. O. Svensson been pursuing a policy during the last fifteen years that in reality has made inflation on average more than half a percentage units lower than the goal set by the Riksbank. The Phillips Curve he estimates shows that unemployment as a result of this overly “austere” inflation level has been almost 1% higher than if one had stuck to the set inflation goal of 2%.

What Svensson is saying, without so many words, 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.

So far, so good — I have no problem with Svensson’s argument about the inadequacy of the Swedish inflation targeting policies.

However, what makes the picture more complicated than Krugman — and Svensson — wants to admit, is that we do have a housing bubble in Sweden — it’s not just a figment of imagination the “bad guys” use to intimidate us with. [That said, I, of course, in no way want to imply that central bank  interest rate targeting (and/or accommodations) is the best way to counteract housing bubbles. Far from it.]

The increase in house loans – and house prices – in Sweden has for many years been among the steepest in the world.

Sweden’s house price boom started in mid-1990s, and looking at the development of real house prices since 1986, there are obvious reasons to be deeply worried:

Source: Statistics Sweden

The indebtedness of the Swedish household sector has also risen to alarmingly high levels, as indicated by the figure below (based on new data published earlier this year by Statistics Sweden, showing the development of household debts/disposable income 1990 – 2012):

Source: Statistics Sweden

As a result yours truly has been trying to argue with “very serious people” that it’s really high time to “take away the punch bowl.”

Sad to say, this is not the first time I see people like Krugman  having a warped view on what is really going on in Sweden.

In a recent post on Sweden and rising inequality, Paul Krugman writes:

[Y]ou have no business talking about international income distribution if you don’t know about the invaluable World Top Incomes Database. What does this database tell us about Sweden versus America?


Hey, it looks just the same — or, actually, not.

Yes, the top one percent has risen a bit in Sweden. But how anyone could look at this and see the story as similar boggles the mind.

Although it’s not that often that yours truly disagree with Krugman on empirical matters, here I definitely think he’s wrong. It is indeed possible to see the story as similar.

Look at the figure below,  which shows how the distribution of mean income and wealth (expressed in year 2009 prices) for the top 0.1% and the bottom 90% has changed in Sweden for the last 30 years:

Source: The World Top Incomes Database

I would say the development in Sweden is deeply problematic and going in the wrong direction. The main difference compared to UK and US is really that the increasing inequality in Sweden (going on continuously for 30 years now) took off from a lower starting point.

The rising inequality has probably to do with income and wealth increasingly being concentrated in the hands of a very small and privileged elite – in Sweden as well as in the UK and the US.

So, I’m sorry Paul, but Sweden is no longer the model country it once was, in the heydays of the 60s and 70s. It’s no longer the country of Olof Palme. Neoliberal ideologies, economists and politicians have crushed the Swedish dream that once was. It’s sad. But it’s a fact.


  1. 1) Man måste även ta hänsyn till hur mycket tillgångarna har växt om man pratar om skulder. Obegripligt att det ska vara så svårt att förstå.

    2) Sluta kalla allting för “nyliberalt”. Det visar bara att du, liksom 95% av alla andra som använder ordet, inte vet vad det betyder.

  2. I am very confused by your arguments here. You agree with Svensson that the tight monetary policy has, unnecessarily, generated higher unemployment, and that monetary policy should have been more lax. At the same time, your are concerned that indebtedness and house prices have sky rocketed, and suggests that is is very much the time to “take away the punch bowl”.

    So now I’m puzzled. Did the low rates lead to both higher unemployment AND a housing bubble? And if so, how exactly will higher rates now not lead to more unemployment. And further, wouldn’t lower rates in the past have led to an even more pronounced housing bubble?

    • No need for confusion really, Pontus.
      Yes, low interest rates have probably — as Svensson’s model calculations show — contributed to unnecessary high unemployment.
      Yes, low interest rates have probably contributed to adding fuel to the housing bubble.
      This leads to the kind of classic economic policies dilemma that we have to face square on and try to solve — not with half-truths where we put a blind eye to one part — taking account of both the effects on employment and eventual bubbles.
      Now, as I write, I’m not at all sure that the interest policy pursued by the majority in the Riksbank is the best, but at least it acknowledges — finally — that we have to take real bubbles into consideration when setting interest rates. The danger is there, and hand-waving conspiracy arguments don’t further the debate a single inch!

    • Still confused though:

      “What Svensson is saying, without so many words, is that the Swedish Fed for no reason at all has made people unemployed.”

      “For no reason at all”. That does not sound like a “policy dilemma” all to me.

      But now you’re saying that “low interest rates have probably contributed to adding fuel to the housing bubble”.

      So it sounds like there was a trade off between unemployment and housing prices. That doesn’t sound like “no reason at all”.

      Hence my confusion. Which still remains.

  3. The above housing bubble / unemployment dilemma nicely illustrates the problems involved in not abiding by the Tinbergen principle, which is (roughly speaking) that each policy implement should have just one policy objective. That is, one should not use one implement (interest rate adjustments) to target two objectives (bubbles and unemployment).

    If aggregate demand (i.e. unemployment) was controlled by fiscal policy, and bubbles were controlled by interest rate adjustments, it would be possible, at least in theory, to pitch unemployment at the lowest level that was consistent with acceptable inflation while controlling housing bubbles.

    Of course it’s possible that interest rate adjustments will not give complete control of bubbles: Mervyn King suggested they might not. Possibly a law that clamped down on high loan to value ratio mortgages might be a better implement. But at least trying to abide by the Tinbergen principle helps get rid of the dilemma that Lars refers to.

  4. “Hög tid för en alternativ och aktiv bostadspolitik
    Magnus Nilsson, utredare pa Arbetarrörelsens tankesmedja
    torsdag, 14 november, 2013
    I Sverige har vi sedan början av 40-talet haft någon form av förhandlade bostadshyror. Dagens system bygger på den så kallade bruksvärdesprincipen där Hyresgästföreningen och Fastighetsägarna förhandlar fram en rimlig hyra utifrån lägenhetens läge, standard och tillgång till gemensamma utrymmen, skriver Magnus Nilsson i Veckans analys.

    Borgerliga och liberala debattörer brukar ofta framhäva bruksvärdesprincipen som förklaringen till varför Sverige idag har en extrem bostadsbrist i framförallt sina storstäder, men vilket fog finns egentligen för denna kritik?

    I veckan kom en kontroversiell rapport från Boverket vars slutsats var att ett system med marknadshyror hade skapat ett tydligare incitament att utnyttja bostadsbeståndet mer effektivt. Kort summerat bygger denna tanke på att marknadshyror skulle innebära höjda hyror i centrala stadsområden så att de boende där tvingas fundera över huruvida de har råd att bo kvar genom att exempelvis hyra ut en del av sin lägenhet, eller om de istället väljer att flytta. På så sätt har, i teorin, de centrala bostaderna använts mer effektivt.

    Kritiker pekar ofta på att segregationen skulle bli enorm om innerstäderna snabbt töms på dess olika inkomstgrupper. Samtidigt vet vi att segregationen redan idag är ett problem (exempelvis har medelinkomsten på Södermalm i Stockholm ökat med 500 % de senaste 15 åren) trots bruksvärdesprincipen och även om denna problematik hade förvärrats ytterligare med marknadshyror så är systemet idag långt ifrån funktionellt.

    Märkligt är däremot att det ofta är samma borgerliga debattörer som argumenterar för marknadshyror som samtidigt ser avskaffandet av fastighetsskatten som en viktig frihetsreform. Argumentationen mot fastighetsskatten har varit att man inte ska ”tvinga bort folk från sina hem”. I detta sammanhang benämns det alltså inte som effektivisering av bostadsbeståndet utan ses snarare som en rättighet till ägandet av sitt hem. För dessa debattörer finnas det alltså inte några problem med att tvinga bort hyresgäster med hjälp av marknadshyror men det är oetiskt att använda samma argumentation för de som äger sitt boende.

    Detta är bara ett av flera exempel på hur liberala debattörer premierar ägandet av en bostad framför att hyra sin bostad. Den borgerliga regeringen har infört en lång rad reformer som snedvridit konkurrensen till bostadsrättens fördel. SABO, Fastighetsägarna och Hyresgästföreningen har i en gemensam rapport från 2010 redovisat hur ägandet av bostad premierats genom ränteavdrag, ROT-avdrag, slopad fastighetsskatt osv. Sanningen varför det inte byggs hyresbostäder ligger alltså inte i att marknadspriset är felaktigt eller att värdarna har för låga marginaler utan snarare i att förhandlade hyror kräver en aktiv bostadspolitik.

    Det är inte realistiskt att avskaffa alla statliga subventioner till byggandet av nya hyresrätter, kraftigt indirekt subventionera byggandet av bostadsrätter och sedan beklaga sig över att det inte byggs något. En ekonomi med förhandling kräver en aktiv bostadspolitik och det saknas idag. Det kan också vara värt att ifrågasätta huruvida marknadshyror överhuvudtaget hade skapat fler hyresrätter eller om byggbolagen hade utnyttjat situationen till att öka sina vinster.

    Med den extrema situation som finns i exempelvis Stockholm är det inte troligt att det snabbt går att bygga ikapp flera år av eftersatt byggande eftersom det finns olika bestämmelser och byggregler som avgör möjligheten att exploatera nya områden. Resultatet av marknadshyror i ett sådant läge hade enligt hyresgästföreningen och boverket inneburit hyreshöjningar i innerstaden på 60-70 %. Varför skulle byggbolagen och hyresvärdarna i ett sådant läge känna sig tvingade att bygga nytt? Vore det inte snarare rationellt att bibehålla en ständig bostadsbrist och därmed kunna kräva orimligt höga hyror och öka vinster markant?

    Det är hög tid att vi frågar oss vilka intressen det är som styr i diskussionen kring boendet. För de som äger sin lägenhet beskrivs boendet som en rättighet och skatter blir ett hot mot individen, men hos de som hyr sin lägenhet är istället argumentationen att de står i vägen för effektivt utnyttjande av stadsutrymmet. Argumentationen är obehaglig på flera sätt och det är hög tid att hitta en alternativ bostadspolitik från vänstern där ägendat inte sätts på en piedestal.”

  5. You are right. We have a Riksbank who has considered both inflation and the housing bubble. That could have been avoided if we had a goverment who enacted policies who stopped the housing bubble. Something like forcing everyone to have a pay back plan for paying off a loan and not take eternal loans would have helped stop the housing bubble.

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