Sweden

[Sven R Larson <larson@xxxxxx>]

I get the feeling that there might be more interest in Sweden following
the postings about the EU demonstrations, and since the mere topic
"Sweden" makes my stomach turn upside down I'll make one and only one
contribution. After this one I don't want to have anything to do with
that topic anymore. So please excuse me for writing a long one here.

Sweden, as most of you know it, "is" a country with a big, well
functioning welfare state that stands as a role model to the rest of the
world. You think health care is free, schools are great, people are
friendly and crime is no big deal.

Well, that's the country I grew up in. But it wasn't the country I left
two years ago. Let me try to tell you what happened.

There are three events in three different years that constitute the
turn-around for Sweden:

1977 - the conservative finance minister decides to go for fiscal
austerity in the midst of a recession. Although the idea as such is not
new, it was the first move of its kind for decades. This could have been
an isolated event, but two other domestic events conspired in the same
direction.

1979 - the supposedly leading economics professors in Sweden gathered in
the summer and decided to institute "coherence in political advise".
This meant, in practice as well as by intention, that economists who
spoke in public about fiscal policy and other economic matters should
stay within close ranks of opinion.

1981 - the social democratic party tells its party congress that it will
revert to good ole Keynesianism (at least a mild version of it) if
winning the upcoming parliamentary elections. That was the most blatant
lie to a political congregation seen so far in Sweden, and you might say
it constituted an intellectual coup d'etat in the social democratic
party.

By the time the social democrats took office in late 1982 after winning
the elections solidly, they did nothing of what they had promised to do.
Instead they devaluated the currency (their economic policy analysis
group had said in their party congress report a year before that the
double-digit inflation then experienced was imported!) and cut fiscal
spending both on the national level and in local governments (in the
aforementioned report they had said that unemployment was a
lack-of-demand problem!). The results were a clear down-gearing of the
economy's growth, and only sluggishly falling unemployment. Actually,
the reason why it fell at all was that the export industries had their
hay-days.

The public sector had seen fragments of general cutback programs during
the six years 1976-1982 with various liberal and conservative
governments. Now that regime, first outlined in 1977, was de facto
transformed into an honor of public agencies. Every year the national,
regional and local bodies of the government sliced two or three percent
off their operations. In the beginning - actually for several years -
this didn't have any other effect than to streamline to the better, but
once the excess weight was shrunk away it wasn't as fun to be there
anymore. (I still remember when I was in high school and budget cutbacks
forced the school to give us teacher-free classes...) Once in a while
the finance minister, Mr Feldt of the social democrats, would go on
public television threatening to bring out the fiscal chain-saw if he
wasn't allowed to keep on slicing 2-3% each year. He also made tax hikes
an annual event - the only year in the 1980s when inflation in Sweden
was below 5% was 1986. The only year no taxes were raised in Sweden in
the 1980s was 1986.

Budget balancing gradually became a part of the daily thinking among
public sector managers and legislators. By the time a new recession
broke out in 1990 the balancing principle had been impregnated into the
minds and statutes of the public sector for 13 years, slowly and shakily
at first and then with the efficiency of a modern, indicatively planned
economy.

During the 1980s the standard of living in Sweden grew more slowly than
in the rest of the world. Sweden gradually drifted down from world
leadership into a mainstream crowd with the rest of the Nordic
countries. Things were, to be honest, still going OK, but as the early
1990s proved the economy was hanging in two fragile hooks: the export
industry and the financial sector. These two, in turn, were
interrelated. The export industry made enormous profits thanks to the
devaluations in '81 and '82, and since they made such huge profits it
wasn't really necessary to be world leading in investments. So much of
the profits ended up in the financial sector, where world-leading
speculation took place in the real estate market as well as on the stock
market. In January 1982 the Stockholm stock market index was at 192. In
July 1990 it peaked at 1314.7. (This world record is stunning; NB that
index 100 is at January 1980 and growth in the next decade, to 1/90, was
1238%.) When speculation collapsed it brought the entire private bank
system with it. Only a huge national bail-out by the conservative
government in 1991-1994 saved Sweden from a complete macroeconomic
melt-down.

Financial speculation was the only "trickle-down" channel that could
proliferate the wealth of the export sector to the rest of the economy.
There are several tangible indicators that Swedes, during the 1980s,
gradually grew poorer thanks to persistent fiscal austerity. One such
indicator is the relative fall in private car purchases: while car sales
were good an increasing share went to corporate leasing fleets; average
families geared down in size and quality. Another indicator is the
relative drop in home construction: between 1965 and 1975 Sweden (with a
population of 8 million at the time) build 100,000 new homes per annum.
During the 1980s the peak figure was 65,000. In other words: the housing
standard began a slow but steady fall. Two important reasons for this:
taxes and a purchasing power among households that to an increasing
extent failed to climb. A third indicator: the distribution of income
tipped to the disadvantage of average families. A fourth indicator: the
country was no longer able to support its excellent pay-as-you-go
pension system because average GDP growth during the 1980s (1.9% yearly)
fell below the required 2.3% p.a..

All of this does not sound very dramatic. But it is fundamentally the
work of intention - the intention behind fiscal austerity. Throughout
the 1980s taxes rose, spending was streamlined and a new generation of
managers and politicians (on all levels) made career on being good at
making tough cutback decisions. This institutional change is more
important in the long run than it is in the short run; but it is a
crucial part of any explanation of what happened next, after a decade of
tepid economic development.

In August 1990 a major financial corporation, Nyckeln ("The Key"), filed
for bankruptcy. That triggered a huge financial crisis that, as
mentioned, brought the whole private banking system with it. A financial
system in speculation works like a pyramid game - it only yields profit
so long as more people enter at the bottom than exit at the top - and
therefore when equity values and the estate market had been so severely
overspeculated that even the boldest, most insanely Ponzi-oriented
speculators realized that they wouldn't be able to cash their profits,
the collapse was imminent. This caused national panic, to say the least.
I still remember how news broadcasts reported on developments in the
financial sector as though it was a basketball tournament, with frequent
updates and excited voices. The government and the central bank all went
into panic, and the social democratic government of 1990 decided on a
drastic move: to file an application on behalf of the country for EU
membership.

This financial collapse lead to a total break-down of the construction
industry. In only two years the entire construction industry went from
shock-full employment to an unemployment rate of 65%. The national
unemployment figure went from almost zero to 15% in eighteen months.
Industry investments ceased. And the public sector went into its biggest
crisis ever, and there it has been ever since.

The public sector is important as a hub in this whole story. Remember
that the institutional turn-around during the '80s injected fiscal
austerity into the minds of every person with any sort of budget and
employment responsibilities in that sector. When the recession hit the
country, including the financial crisis, the minds of all leading
politicians and all "leading" economists (A Lindbeck et al) were already
set for budget balancing. By the time the recession emerged a tax reform
was already being implemented in the same theoretical spirit. It favored
labor market participation by reducing marginal taxes; it favored saving
over consumption; and it made it less attractive to borrow. The effects
of the implementation of this reform were immediate, as household
savings went from -2% to +10% in only two years (1989-1991). That
savings shock was paired with increasing efforts in the public sector to
cut spending, cut spending and cut spending.

One might say that the financial crisis was unfortunate. But anyone who
knows Keynesian theory also knows what triggers speculative processes. A
crucial effect of the events in 1979, when economists decided on
"coherence in advise", was that Keynesianism was passed on to the
departments of economic history. Keynesian theory soon became little
more than a passage in intro textbooks and the last academically active
economist in Sweden who openly confessed himself to Keynesianism, Sven
Grassman, was stripped of everything except his tenure. In this
intellectual environment it is obvious that a recession of the kind
Sweden experienced in 1990-1992 could only be met in one way: with more
austerity.

And austere they went. The conservative government 1991-1994 (succeeded
the 1982-1991 social democratic government) did their very best not to
engage in business cycle counter-balancing, but they were a relatively
weak government, thank God, so the major effect was a rapidly growing
budget deficit on the national level and fierce cutback efforts on the
local level. However, since the national deficit wasn't actively used,
but only stood in for failure to raise taxes and cut spending even more,
nothing good really came out of it (other than relatively). But the
social democrats rushed to help the government launch a really nice
little austerity package in the fall of 1992, to save the fixed exchange
rate as it was motivated.

During the early years of the '90s the budget balancing efforts had
taken on such grotesque proportions in Sweden that it was hard to
believe even as one witnessed it. I'll give you a very typical example.
A small town outside Gothenburg, led by conservatives, decided to cut
down welfare payments. This had been done in absolute or relative
(inflation adjustment) terms for years, so it was nothing dramatic as
such. but the problem was that by making this cutback they actually
lowered the payment standards below what national law prescribed. A
recipient discovered this and sued. She won and the court ordered the
town to raise its payment standards and compensate the woman in
question. The welfare board refused and was backed by their national
party friends in Stockholm (then in government) with promises that if
they were taken to court for their "courageous" budget balancing efforts
the fines they would receive would be paid by the party. This, of
course, would have been a major legal scandal and never happened, but
the mere intention is illustrative of a way of thinking that had emerged
as a result of a decade-and-a-half of fiscal austerity.

(Welfare standards have been cut every year since then, and are now so
low that you wouldn't believe me if I gave you the figures. But they are
all available to anyone who wants to research this.)

By the time the social democrats regained power in 1994 they had decided
to launch a major strike against the budget deficit. Their plan as
announced in the election was put at only a fraction of the actual
package they sent through parliament. With implementation starting in
1995 they cut spending and raised taxes over three years, totalling 9%
of GDP. Disabled children lost their assistants. Many towns began
charging elderly in their care so much it took practially their whole
pension (until social democrats realized they could lose the election in
'98 if they didn't put a ceiling these charges). Kids' school lunches
were kept at acceptable standards in some cities only thanks to term
fees. A visit to a doctor in the paid-by-taxes health treatment system
cost $20 or more (in a country where the public sector grabs
substantially more than half of GDP). Everywhere absurd effects of
budget cuts were seen and felt. The pension system was completely
overhauled, with a new pension tax that now claims 9% of a net-tax
salary (30-35% income taxes have been paid), but the future recipients
of these pensions know already now that they will be very poorly
rewarded for their contributions - regular income earners can lose as
much as 50% net tax.

Class sizes in public schools have gone from 20-28 in the 1970s and '80s
to 25-40 in the 1990s. AS such the change doesn't say much, but please
remember that an average public school teacher makes $1,500 per month,
pre-tax. Quality in public sector education has fallen dramatically,
which can be seen in that illiteracy has grown sharply and social
problems among kids has been a major cause of disturbance. When I went
to school in the '70s there were not only more teachers but also other
student-oriented staff in schools. These are now long gone and teachers
are working harder than ever. The same has happened in the health care
sector; on hospitals helpers practically do not exist anymore. Not that
they've been replaced by nurses - they've simply been "budget balanced"
away.

These are only fragmentary illustrations of what the situation is like.
Every day life, if you chose to live in Sweden, is much worse than this
forum allows me to account for. Let me give you some more scattered
facts off the top of my head:

1. If US welfare regimes were used in Sweden, one out of three families
with children at home would be eligible for at least some support.
2. In Stockholm last year 1,900 people had to seek emergency room care
at hospitals after having been beaten in the streets, a rise by 30% in
one year.
3. The unemployment rate in Sweden is still 16%, if you take into
account the eleven categories of employer of last resort and job
training programs. For comparison, in Denmark (which has chosen a
relatively OK Keynesian fiscal policy strategy) the same figure is
slightly below 7%.
4. Ericsson has announced it will fire 20,000 of its staff, most of them
in Sweden. At the same time all economic indicators point downward for
Sweden.
5. After two decades of relentless budget balaning efforts, the
government has had to open an emergency cash line to local cities who,
in increasing numbers, line up because they cannot cover their expenses.
6. Closing of entire hospitals to cut public spending are being
discussed and have in some instances been carried through.

The outlook for Sweden is as follows.

16% of the work force is, again, outside the regular labor market. It is
easier to impeach Bill Clinton out of the White House than it is to make
a Swedish politician think Keynesian. Within 18 months the public sector
- especially on the national level - will begin to experience real
budget balancing problems. New programs to balance the budget will be
launched, and unemployment will climb sharply. This will most probably
lead to a macroeconomic collapse for Sweden, a collapse the effects of
which we can only speculate about, since it hasn't been seen anywhere
else. Remember: the problems in Sweden are self inflicted. It is already
too late to try to change the course of its economy. Many local
government agencies will probably be unable to pay wages on time. Taxes
won't be collected as they should. Schools, perhaps even parts of the
health care system, will stop functioning because of cash distress and
lack of staff.

This scenario is about 2½ years ahead, but the timing depends on how
quickly the recession breaks out. The melt-down itself is inevitable. It
is simply impossible to exercise fiscal austerity in a country with 16%
unemployment at the outset of a recession, without major systemic
effects.

That's all from me on Sweden. I'm sure there are others on this list
who'd like to provide their own interpretations of the situation there.
I've had enough of it.


Best Keynesian wishes,


Sven

--
Sven R Larson
PhD; Assistant professor of economics
Department of Social Sciences, Bldg. 22.2
Roskilde University
Pb 260
DK-4000 Roskilde, Denmark
Phone: (+45) 4674 2910