Sweden as a case of MMT

9 Apr, 2019 at 14:53 | Posted in Economics | 1 Comment

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 Comment

  1. You did forget to mention that the socialist government in Sweden in the late 80s tried to spend itself out of recession. The propensity to consume for Swedes at the time was supposedly 102%. There was no austerity in the late 80s before the housing bubble burst.

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