The recovery-by-stimulus model has failed across the board

With Most Of Europe Still On Its Back, Sweden Tries Policies That Actually Work

By Matt Kibbe

The headlines from across the pond read “Europe Rejects Austerity” as the French and Greeks elected socialists and even some neo-national socialists to office. These new officials have promised tax rates as high as 75 percent on millionaires, and have vowed to continue government spending unabashed in the wake of staggering levels of debt and anemic economic growth and persistent double- digit unemployment. However, there is one finance minister in one European nation that is bucking the trend, and, instead of ridicule and failure, he’s been named Europe’s best finance minister by the Financial Times. He’s not from Britain or Germany and certainly isn’t Greek. He isn’t some old fat cat in a suit either. In fact he’s famous for rocking a pretty awesome ponytail and gold earring. His name is Anders Borg and he’s Swedish.

That’s right, the European nation famously stereotyped for having aggressive taxation to fund an omnipresent state has actually decided that in response to the Eurozone crisis and the continued effects of the global economic downturn, or “Great Recession”, that it’s time to ease up on taxes and reduce the size of government. While Sweden is not technically in the Eurozone, as it does not use the Euro as currency, it has been drawn into the financial mess of the Eurozone by sheer proximity. Unemployment in 2011 was north of 7.5 percent and GDP growth was anemic at .4 percent projected for 2012.

While the rest of Europe and the United States have gone on massive spending sprees fueled by government borrowing and tax hikes, Sweden took a different approach. In the Spring 2012 Economic and Budget Policy Guidelines, the Swedish Government and its Finance Minister, Anders Borg, have laid out a plan that is focused on lowering taxes. Their rationale? “When indviduals and families get to keep more their income, their independence and their opportunities to shape their own lives also increase.”

Borg also wants to lower the corporate tax rate as a way of meeting the government’s goal of “full employment”. The government has already cut property taxes and other luxury taxes on the rich to lure investors and entrepreneurs back to Sweden. The government has also slashed spending across the board, including on the welfare programs that used to be Sweden’s claim to fame. They’ve also installed caps on annual government expenditures: real and enforceable limits that the Swedes believe are pivotal to economic stability. They explain in their Policy Guidelines that “the expenditure ceiling is the Government’s most important tool for meeting the surplus.” Imagine that, a government that stays within its limits. So why didn’t Sweden hop on the stimulus bandwagon like the U.S. and much of Europe?

Anders Borg explains, “Look at Spain, Portugal or the UK, whose governments were arguing for large temporary stimulus… Well, we can see that very little of the stimulus went to the economy. But they are stuck with the debt.” We have now seen that attempts at austerity within the Eurozone have met a similar fate: none of it was serious. As spending increases have been squandered, spending cuts have been a charade, failing to target the big government programs at the core of the debt crisis. So Anders Borg and the Swedish Government have undertaken an economic and budget plan that slashes taxes and (actually) caps government spending. If you told Paul Krugman and the rest of the Keynesians back at the onset of the financial crisis that Sweden’s finance minister was planning such action, they would have surely laughed in your face and cynically predicted doom and gloom for the Scandinavian nation. However, in reality, a place Keynesians seem to be unfamiliar with, it’s become clear that what Sweden is doing is working. And it’s working better than even Minister Borg expected.

Despite slow projected growth for 2012, Sweden is expecting annual GDP growth of over 3 percent starting next year, projected out through 2016 by which time their unemployment is expected to slide down to just about 5 percent. During this time the Swedish gross debt is expected to drop from 37.7 percent/GDP to 22.5 percent/GDP as a result of government surpluses. For comparison, US gross debt to GDP is well over 100 percent and climbing. All this success must be on the backs of the working class right? Wrong. Wages are slated to rise in Sweden by nearly 4 percent annually through 2016.

The recovery-by-stimulus model has failed across the board, and as Mr. Borg has pointed out, we are still stuck with the damage it has done. With the refusal of the Obama administration, Congress, and their European counterparts to accept serious spending cuts, maybe it’s time to try something that’s actually working. Heck, I’ll even grow the pony tail.