Keynesian Lessons From Sweden

Neil Irwin did an interesting piece last week looking at lessons from Sweden about the economic recovery. What’s fascinating about it is how incredibly boring it is in most respects. The ‘lessons’ basically all just amount to bog standard orthodox Keynesianism. Sweden’s right-wing government (which of course is wildly socialistic by American standards) went in to the recession with the budget in good shape, rather than the Bush approach of tax cut-induced structural deficits and expensive wars. Then when the recession hit, Sweden has massive automatic fiscal stabilizers, and tacked on some discretionary stimulus in the form of tax cuts and infrastructure projects.

On top of that, the Swedish central bank employed highly expansionary monetary policy. It used an explicit inflation target to keep expectations anchored (the Fed let inflation expectations plummet), it dropped short-term nominal rates to zero (the Fed did the same), it did massive QE (equivalent to 25% of GDP, the Fed did 15%), and it started paying a negative interest rate on excess bank reserves (the Fed started paying a small positive rate). When the value of the krona fell, Swedish politicians didn’t run around freaking out about debasing the currency, they recognized that such a currency dip can be useful in promoting a recovery. The upshot of doing a lot of expansionary policy has been a rapid economic expansion.


Note that there’s no miracle here. It’s not like Sweden has shot forward into some bold new era of unknown prosperity. They were plugging along before the crisis, the crisis caused output and employment to plummet, but then what all the expansionary policy did was allow for a period of rapid growth so that Sweden can catch back up to the trend. Then with that out of the way, it’s time to return to normal politics where different figures have different ideas about the best long-term strategy.