Economics

Say what?!? (followed by sound of record scratching)

I’m embarrassed to admit that I ventured over to the NY Times editorial section to see if there was any sign of intelligent life in the aftermath of Congress’ horrible decision to send Bush its misguided Emergency Economic Stabilization Act.

Editorialist Paul Krugman was doing his usual dance of dread and blame, which seems to be the preferred two-step of the Times’ editorial class. About 2/3rds of the way through his rant, I read this:

A solution to our economic woes will have to start with a much better-conceived rescue of the financial system — one that will almost surely involve the U.S. government taking partial, temporary ownership of that system, the way Sweden’s government did in the early 1990s.

Say what?!? Sweden? Where did that come from? The better question is why Krugman, a noted economist, didn’t see fit to stop whining for nebulous action and explain what Sweden — a country with very high taxes, a very stable working relationship between private companies and the public sector, and, from what I can tell, a pretty robust economy for a little mouse that won’t roar — accomplished in the 90s.

Thanks for nothing, Krugman. I’ll figure this one out myself. Off to Wikipedia, where I found a passage that is eye-opening enough to quote in its entirety (italics are mine):

Sweden has had a unique economic model in the post-World War II era, characterized by close cooperation between the government, labor unions and corporations. The Swedish economy has extensive and universal social benefits funded by high taxes, close to 50% of GDP. In the 1980s, a real estate and financial bubble formed, driven by a rapid increase in lending [Andrew: sound familiar?]. A restructuring of the tax system, in order to emphasize low inflation combined with an international economic slowdown in the early the 1990s, caused the bubble to burst. Between 1990 and 1993 GDP fell by 5% and unemployment skyrocketed, causing the worst economic crisis in Sweden since the 1930s. In 1992 there was a run on the currency, the central bank briefly jacking up interest to 500% in an unsuccessful effort to defend the currency’s fixed exchange rate. Total employment fell by almost 10% during the crisis.

The welfare system that had been growing rapidly since the 1970s couldn’t be sustained with a falling GDP, lower employment and larger welfare payments. In 1994 the government budget deficit exceeded 15% of GDP. The response of the government was to cut spending and institute a multitude of reforms to improve Sweden’s competitiveness. When the international economic outlook improved combined with a rapid growth in the IT sector, which Sweden was able to capitalize from, the country was able to emerge from the crisis.

However, the reforms enacted during the 1990s seem to have created a model in which extensive welfare benefits can be maintained in a global economy.

Is Treasury Secretary Henry Paulson even aware that somebody else has faced this problem in recent (really recent) times? Did anybody in Washington think to call Swedish officials — past and present — and ask, I don’t know, a couple or three questions? Would reaching out for that kind of advice have been any more rash or outrageous than turning a 3-page plan into a — get this — 451-page bill packed with pork?

On closer inspection (PDF), it appears that Swedish citizens fundamentally doubted the viability of their model during the crisis and that a deposed government, returning to power, picked up where it left off. First, they elected to preserve the universal welfare system the Swedes are so proud of, so few or no cuts were going to happen there. Second, they realized that the prudent thing to do was cut government spending, an instinct no mainstream Republican seems capable of contemplating anymore. How did they do that? By stressing efficiency and — incredibly important — closing loopholes and other opportunities for abuse the tax policies had generously favored.

Third, they intervened in markets with a plan based on measurable outcomes, with an end goal rooted in numbers related to unemployment rates, inflation, and GDP.

Now, I’m no fan of a 60% tax on GDP, which was Sweden’s at its highest. Their socialist state provides astonishing welfare, so the Swedes are getting precisely what they want — less disposable cash but lots of free stuff from Stockholm (and Swedes seem very satisfied with the free stuff — their ROI is dreamy). Compare 60% with the U.S.’s relatively low 27% tax on GDP and consider what Democrats are trying to do with universal healthcare. The forced increases in taxes based on values (as opposed to ideas) is at the heart of the problem (along with systemic regulatory abuses allowed by complex healthcare legislation that should be discarded in toto and reformed with the bravery of a Swede!).

But we were talking about the bailout plan.

I guess I’m a little disappointed that I have to have conversations with myself on my own blog to get any sense of perspective on the historical — and global — ramifications of what Congress has just done. There’s more to life than the Great Depression (a cliche comparison to the current problem). Wish Americans could pull their heads out of their asses long enough to learn such lessons.

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