HIgh Taxes Kill Growth? Those Darned Swedes!

In the Business section of yesterday's Washington Post, Neil Irwin brings us "five lessons" from the Swedish economy, which grew at 5.5% during 2010, the highest rate in Europe and certainly higher than the US, with the Swedish unemployment rate now down to 7% and falling noticeably. Lesson #1 is to "Keep your fiscal house in order in good times, so you will have room to maneuver when things are bad." Just before the 2008 crisis Sweden was running a 3.6% fiscal surplus, with one of the highest average tax rates in the world, far in excess of what we had (and have) here in the US. They did run a stimulative fiscal policy during the recession, including a small tax cut, but had "the room" to do it, now recovering with little deficit problem and booming growth. We all know that it was the unprecedented policy during the last decade of fighting fresh wars while cutting taxes that made ended the surpluses in the US of the late 90s and put this out of reach. In any case, Sweden's taxes are far higher now than those in the US, now lower than since the 1950s, but they are booming away.

Other parts of the Swedish story may be less applicable to the US. So, #2 is to have the fiscal policy be more automatic. Probably a good idea and long in place in Sweden, but probably not up to the taste of the US political system. #3 is to use monetary policy more aggressively, with Sweden actually having made one target interest rate negative for a short period of time. On this one, Bernanke did do that at crucial moments, and may have to do more of it if the end of QE2 and ongoing events leave us too stagnant. #4 is "keep the value of your currency flexible." Well, the US dollar already floats, but this is easier for a smaller country not tied up in a large currency union to pull off. And #5 is "Bankers will always make blunders, just make sure they don't doom the economy." The Swedish bank crisis of the early 90s led them to avoid getting deep into the real estate bubble. The unwillingness to put Elizabeth Warren into the position she is suited for and the pushback from US bankers against Dodd-Frank is not encouraging on this one.