This week Fredrik Reinfeldt is celebrating the first re-election in history of his party, the Moderaterna. He is also celebrating the success of an extraordinary experiment. His response to the recession was to cut taxes, a move his critics said the country could not afford. The European Commission warned him it would end in tears. But instead, the lower taxes were a spur to growth and Sweden now has the fastest-growing economy in the Western world.
When elected four years ago, leading a four-party coalition, Reinfeldt had a striking slogan. 'We are the new workers' party,' he said, meaning he would cut taxes for those in employment, but not for those on benefits. When faced with protests about how the poorest would be paying a higher marginal tax rate, he appealed to voters' innate sense of fairness - and resentment at the high level of welfare dependency. At every stage, his ministers would explain the basics of low-tax economics. Cut tax on wages, and you increase the incentive to work. 'This will increase employment,' Reinfeldt said. 'Permanently.'
Tax on low-paid jobs fell sharpest. Nursing assistants, for example, saw their tax bill drop by a fifth. The aim was to make work compete more aggressively with Sweden's famously generous welfare state.
Like most of Europe, [in response to the recession] Sweden launched a stimulus, but Reinfeldt set aside two thirds of his for a tax cut. Corporation tax fell from 28 per cent to 26.3 per cent, taxes on jobs were cut further still while income tax thresholds were raised. Determined not to let a crisis go to waste, he declared the tax cuts permanent.
HT: Don Luskin
Broken link.
ReplyDeleteFixed, thanks
ReplyDeleteInteresting perspective, but you have to keep in mind that Sweden still has one of the highest marginal income tax rates in the world at 57% for people making more than USD 75K/year and the sales tax/VAT is 25%.....and as a Swede living in the US for many years I would not label Moderaterna's politics as conservatives more like liberals.
ReplyDeleteAs a fraction of GDP, what does Sweden spend on national defense, VA and homeland security?
ReplyDeleteAnd, will they be invaded as a result?
I tend to agree with Magnus, Sweden had/has a lot of room on the Laffer Curve to benefit from lowering taxes. I hate to sound like Rahm Emanuel but unfortunately we missed a great opportunity with this last crisis to fundamentally remake the financial services industry and orient the US economy to more vibrant but stable policies.
ReplyDeleteNationalization - We should have followed Sweden not only on fiscal policy but with regard to how they handled their banking crisis in the early 1990’s. I know nationalization runs counter to everything we believe as free-market capitalists and the idea of the current administration (with effectively zero private sector experience) taking over the banking industry scares a lot of people, me included, but that is the point; to never have this situation happen again.
http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html
http://www.creditwritedowns.com/2009/03/lessons-from-swedish-bank-resolution-policy.html
http://www.nakedcapitalism.com/2009/03/amazingly-disingenuous-piece-by-alan.html
All we did was make TBTF banks bigger, reinforced the moral hazards that led to this mess and left $500 trillion in unregulated derivatives still waiting to explode.
I realize dealing with derivatives was not part of the Swedish solution to their banking crisis but I throw that in there because leaving these instruments alone is merely kicking the can down the road. They need to be traded only on exchanges, transparency must be a priority, and counter parties must be appropriately capitalized and reserved for.
Fatal Conceit - With regard to tax policy it is unfortunate but many either do not understand or are being outright disingenuous with regard to how supply-side fiscal policy works. Too many, in the Republican Party particularly, are of the belief that tax cuts always leads to more revenue or at least pays for themselves. This isn’t always the case and there are frequently trade-offs between revenue and economic activity. Sometimes lowering taxes will yield more revenue and sometimes it won’t but may lead to more economic activity/growth. In certain circumstances raising some taxes will yield more revenue without a significant drop in the underlying taxed activity. The problem is when the R’s keep making the statement that lowering taxes always yields more revenue they box themselves in and give up half the argument with regard to growth. We need to have an adult conversation about the type of fiscal policy we want to have, revenue maximizing or growth maximizing because there is a distinct difference.
http://www.cato-at-liberty.org/whats-the-ideal-point-on-the-laffer-curve/
Gold/Dollar - Lastly, let us not forget that it is precisely because we have a floating currency that the crisis emerged in the first place. Until we have a dollar backed by gold these asset bubbles will continue to develop and our standard of living will continue to erode. We need an anchor for the dollar if we have any hope of fixing this mess and preventing future crises from forming.
http://www.newworldeconomics.com/archives/2010/090510.html
These three things would go a long way to stabilizing our system and set us up for long term economic growth. All we need is the leadership in Washington with the courage to do what is necessary and proper. I am afraid that is our toughest challenge.
Well, if we could wipe out Abba, I would vote for invading Sweden.
ReplyDeleteInteresting commentary from Bill Gross, PIMCO--
ReplyDeleteForeign Stocks Offer Better Investment Than US: Gross
Published: Tuesday, 28 Sep 2010 | 2:45 PM ET Text Size By: CNBC.
The weak dollar will mean meager returns on US stocks and bonds for years, so US investors need to look at overseas markets for better yield, Pimco's Bill Gross told CNBC Tuesday.
"The developing world grows at a much faster rate, so investors should be looking outside the United States," he said. "Especially if the dollar is declining and reducing your standard of living and purchasing power."
Among those areas where he expects better growth—and returns: China, other Asian countries, Australia and Canada.
"Non-dollar currencies, in combination with higher growth, is really the receipe for investment success," he said.
Gross said he expects the Fed to begin another round of easing soon, which he called "a last gasp."
The Fed, he said, will begin "buying hundreds of billions of Treasurys with the hope that lower interest rates will stimulate the animal spirits, forcing investors to buy stocks" because bonds offer such low yields.
Gross said that if the Fed is successful in stimulating economic growth over the next few years, stocks will be the main beneficiary.
Go QE Go FED
GO Monetary Bulls!
Note to John: This may be the beginning of the secular property/equities market rally I have been pining for....
Benj,
ReplyDeleteRandall Forsyth has a column in today's Barrons online (see realclearmarkets.com tuesday morning for a link) outlining a QE idea that I find interesting. It would not likely be implemented prior to the elections but I would like your take on it. Scott's too. Pub, you'll hate it but hey. It may deserve to be hated. Me, I have to deal with what is.
Scott,
Another good idea. One of my best friends here in Florida is a retired Swede. In Swedish, Js are Ys. He calls me 'Yohn'. He has mentioned more than once how he thinks Sweden has better government than we do (while he laughs, not wishing to offend...he doesn't).
The U.S. for the past 10 years have consitently had lower tax rates, yet two recession, with the first one seeing very little employment growth -- the jury is still out on the second.
ReplyDeleteI suspect that Sweden plan was effective mainly because taxation was very high to start with, so workers saw a dramatic drop in their tax bill (as Magnus alluded to).
If what you say is correct, the payroll taxes should be reduced and tax on middle class income also, whereas taxes on wealth (big cheese) should be increased.
Not sure the Republicans will buy that, and I'm certain that the Dems don't have the balls to try it
Johnm-
ReplyDeleteYes, that is an idea first advocated by an excellent Univ. of Chicago School blogger named Scott Sumner. $100 billion a month of QE.
I hate to say it, but I am beginning to think everything that right-wing and left-wing economists say is full of baloney.
The left-wingers say we need big federal deficits. Baloney. The right-wingers say we need tight money. Baloney.
We need reasonably balanced budgets and some monetary bulls at the Fed.
Re: quantitative/qualitative easing. Let me just say for now that I am very uneasy with this. The Fed is playing with fire. I'm hopeful they won't feel the need to resort to QE2. I don't see how it can do anything but weaken the dollar and fan inflationary fires.
ReplyDeleteSuppose they were to put a ceiling on 10-yr yields. Every person with a brain would then have the incentive to take out the biggest fixed-rate mortgage they could find. Housing prices would reflate, but this is not a good way of stimulating an economy. We've already seen how that movie ends, and it's not good.
Scott-
ReplyDeleteJeez, I'll take a reflation of housing prices (and real estate in general). Bring it on.
Scott, there are blocks of unoccupied retail space in Beverly Hills along Olympic. In Los Angeles there is industrial space for lease or sale that has not wanted for tenants in generations, maybe ever.
Office buildings are half price in OC.
All that is misery for banks, unless real estate reflates. Property never reflated in Japan...and good luck to banks there. They are into their 17th-straight month of deflation.
Bernanke is a timid fellow. He will timidly go to QE. I think there is uch safety in the $100 billi9on a month of QE pan. You don;t just drop a monetary bomb and hope foir the best...You are bullish, but monitor and meter along the way.
Right now, we are dancing on the edge of deflation--you know that from your own posts, and the Boskin Commission, and a recent study in the American Economic Review. The CPI overstates inflation.
Lastly, if we get QE to work, it blows out of the water forever the idea that fiscal stimulus is the way to go.
Both parties want to use fiscal stimulus as patronage--a very slippery slope. I contend we simply have to get to a balanced budget, or perhaps even surpluses.