Sweden threatens the global economy
Doing Bastiat-style reductio ad absurdum arguments seems to get more difficult each day. A few week ago I tried to satirize the view that China was the Great Satan of international imbalances, pointing out that the combined current account surpluses of tiny Switzerland and Norway (population 13 million) is nearly half as large as China’s $289 billion CA surplus (population 1.35 billion.) Indeed a relatively small block of countries lying between Switzerland to the south and Norway to the north have a combined CA surplus of $397 billion, and a population of only 125 million.
So I was quite startled to see an article in the Swedish press with the following headline:
Sweden ‘threatens the global economy’: study
An American think tank has criticised Sweden for maintaining a constant current account surplus and urged the country to undertake measures to stimulate domestic demand.
“Sweden has not taken sufficient measures to reduce its current account surplus,” non-profit New America Foundation, a non-profit, non-partisan US-based think tank, wrote in a statement on Thursday.
“Its fiscal policy should be more expansionary; it should encourage currency appreciation; and it should open its domestic market to foreign goods.”
I’m worried to death that I have made some sort of terrible mistake. I know that I have a few Swedish readers; please tell me I haven’t accidentally cited a Swedish version of The Onion, so I can quickly erase this post.
Seriously, I actually respect the New American Foundation much more than the neo-mercantilists who obsess over China. At least they have the courage of their convictions, and at least they’ve bothered to look at the data. However I’m not quite sure about the charge that Sweden doesn’t have an open domestic market; doesn’t Sweden have relatively low trade barriers?
Tags: Sweden
12. November 2010 at 18:16
The key phrase is the following:
“it should encourage currency appreciation”
As someone who is slightly familiar with the situation this should be enough.
12. November 2010 at 18:52
Any reducio-able in macro-thinking will become the argument that the other side actually takes seriously.
.
Economists are very good (and usually willing to) at taking things to their logical conclusions, so any fallacies or odd assumptions used to form them will result in very bazaar results being accepted.
You can see this in Keynes’s arguments were he starts advocating hiring people to fill bottles and others to bury them and others to dig them up and others to empty and clean them. Once you accept the make-work fallacy, you end up with his very insane results. You really can’t parody them, when we try to, they turn out real. (Compare Heinlein’s fictional attempt in “The Roads Must Roll” with the very real Cash for Clunkers.)
12. November 2010 at 19:33
Oh btw, George Selgin, Larry White, and William D. Lastrapes have a new paper in which they credit you for help, Scott.
‘We thank David Boaz, Christopher Hanes, Jeff Hummel, Arnold Kling, Jerry O’Driscoll, Scott Sumner, Dick Timberlake, and Randy Wright for their helpful suggestions, while absolving them of all responsibility for our paper’s arguments and conclusions.’
http://www.cato.org/pubs/researchnotes/WorkingPaper-2.pdf
12. November 2010 at 19:45
Doc Merlin,
I’m very curious to see what Scott has to say in response to that paper. If I am right Scott will have much to say that disagrees with it.
Mark
12. November 2010 at 21:18
I’m also curious to hear Scott’s take on the Selgin, White, and Lastrapes paper, especially since I don’t expect much disagreement.
12. November 2010 at 22:16
Yeah, it’s all Sweden’s fault. I like the ring of that.
12. November 2010 at 23:48
Selgin is an uncommonly coherent and clear thinker/writer. In some ways his papers remind me of Coase’s, somewhat because of the style of argumentation.
Oh and yah, end the Fed.
13. November 2010 at 00:21
I’ve never heard of “the local”. It seems to be a site publishing news about Sweden with sources both in the Swedish press and foreign press. The article you quote doesn’t seem to have a Swedish paper as a source. But I wouldn’t be surprised if a Swedish paper pick up the story. Our journalist are no better than yours, I’m afraid.
13. November 2010 at 02:07
The Local is indeed a real source. Roughly speaking, Sweden’s English language newspaper.
As to Sweden being relatively open to imports. In terms of tarrifs, rules, etc, it’s exactly the same as any other EU country. Must be, for extra EU trade is a “sole competency” (this means the EU gets to make all the rules) of the EU. Nations don’t have anything to do with it any more.
13. November 2010 at 02:10
It’s not an onion site. They got the story from http://currentaccounts.newamerica.net/about/about-project .
13. November 2010 at 04:15
http://en.wikipedia.org/wiki/The_Local
“The Swedish version is edited by American David Landes”
Not an onion, but hardly representative of Swedish press either.
13. November 2010 at 04:29
The Local is a real paper.
13. November 2010 at 06:22
Examining the supply chain of Apple products in a globalised world shows up the absurdity of overly focusing on bilateral trade figures.
The breakdown of an ipod nano and the value is clearly not in the manufacturing.
http://www.geek.com/wp-content/uploads/2010/09/ipodnano_BOM.jpg
‘ Tracking down where the iPod’s 451 parts originate is pretty complicated, as is figuring just how much the parts cost compared to how much they sell for. Apparently, $155 of the $299 you pay for a 30GB iPod video goes to Apple: a tidy $80 profit and roughly $75 for retail and distribution. Japan contributes $26 to the final price, while Korea contributes only $1. There’s also another $110 in components that haven’t yet been accounted for.
There are a few points to take away from all this. The total cost of the 30GB iPod is estimated to be $150 and, although the trade statistics show $150 going to China from the US for each iPod you see in an Apple store, the real picture is much different thanks to the complex nature of the iPod’s supply chain. The value added by China is actually only on the order of $4, meaning that much of the $150 figure actually winds up in a variety of different places. ‘
http://arstechnica.com/apple/news/2007/06/ipod-manfacturing-is-valuable-to-many-countries.ars
So the US bilateral trade figures with China are not accurate.
‘ This value added calculation illustrates the futility of summarizing such a complex manufacturing process by using conventional trade statistics. Even though Chinese workers contribute only about 1 percent of the value of the iPod, the export of a finished iPod to the United States directly contributes about $150 to our bilateral trade deficit with the Chinese. ‘
http://people.ischool.berkeley.edu/~hal/people/hal/NYTimes/2007-06-28.html
China are probably an extreme example. However, some of the same factors will apply to places like Sweden. It probably lends credence to the EU view that the current account for the whole EU is what is relevant and not the individual CA of countries in a single market. However, there is still the possibly intractable problem of no single fiscal authority in the common currency area.
13. November 2010 at 08:02
Mark, I agree.
Doc Merlin, That’s a good point.
Mark and William, I will do a post when I have time. I have read the paper. It is very high quality (although in the end I don’t favor abolishing the Fed.)
Benjamin. I laughed out loud when I saw that headline.
Mattias, Tim, malavel, Henrik, Thanks for the info.
13. November 2010 at 08:07
Richard, I agree that bi-lateral imbalances are meaningless due to the value added problem. But in fairness to the other side, they usually focus on overall imbalances, which are not affected by the value added problem–as imported components offset the overstated value of exports.
13. November 2010 at 09:10
On Selgin et al. “”
For sure the authors are more enthusiastic about advocating “free banking” than you are, but I’m not sure the conclusion of this particular paper is that we should abolish the Fed. They write:
“Coming up with alternatives to the Fed today takes more imagination. Assuming that there is no political prospect of replacing the fiat dollar with a return to the gold standard or other commodity money system, for the dollar to retain its value some public institution must keep fiat base money sufficiently scarce. [..] [T]he Fed’s poor record calls for seriously contemplating a genuine change of regime. In particular it strengthens the case for pre-commitment to a policy rule that would constrain the discretionary powers that the Fed has used so ineffectively. Whether implementing such a new regime should be called “ending the Fed” is an unimportant question about labels.”
13. November 2010 at 14:53
The difference is that China’s surplus is the deliberate outcome of exchange rate pegging and capitlal controls. This has permitted Chinese businesses to have an advantages over U.S. businesses in goods in which the United States has an intrinsic comparative advantage and hollow out the U.S. industrial base. This requires the United States to use the threat of reatliatory tariffs to force China to discontinue the policy
Countries that have a surplus as a result of market responses to their monetary and fiscal policies are a different case. Here the United States can deal with the problem by following a more expansionary monetary policy, which will cause the dollar to deprectiate against such countriees’ currencies.
In any case, the United States needs to make it clear that it cannot and will not continue to be the world’s buyer of last resort, taking the goods that they cannot get their own people to buy off their hands.
13. November 2010 at 15:05
@Full Employment Hawk:
‘The difference is that China’s surplus is the deliberate outcome of exchange rate pegging and capitlal controls.’
1. I don’t agree. They have a much higher productivity per dollar, for many types of manufactured goods.
2. Even if it was true, we could mostly fix that by cutting our governmental deficits, then they would be forced to invest in our productive capital therefore increasing our competitiveness.
3. Even if it is true, its subsidizing US consumption, so I don’t see how its bad.
13. November 2010 at 15:06
@Full Employment Hawk:
‘The difference is that China’s surplus is the deliberate outcome of exchange rate pegging and capitlal controls.’
1. I don’t agree. They have a much higher productivity per dollar, for many types of manufactured goods.
2. Even if it was true, we could mostly fix that by cutting our governmental deficits, then they would be forced to invest in our productive capital therefore increasing our competitiveness.
3. Even if it is true, its subsidizing our consumption, so I don’t see how its bad.
13. November 2010 at 20:47
“1. I don’t agree. They have a much higher productivity per dollar, for many types of manufactured goods.”
If that were the basis of their advantage over U.S. firms, they would not have any need for rigging the exchange rate.
With market-determined exchange rates, China would still have an advantage over the United States in part of the products they have an advantage now, but not in others.
2 and 3 are inconsistent with each other. If they are subsidizing our consumption, reducing the defict would not result in their investing in productive capital, they would simply be subsidizing more consumption.
They are not subsidizing the consumption. They are letting us live beyond our means by letting us get deeper and deeper into debt to them.
14. November 2010 at 07:10
“You can see this in Keynes’s arguments were he starts advocating hiring people to fill bottles and others to bury them and others to dig them up and others to empty and clean them.”
The point of this is not that it is the BEST way to stimulate the economy, only that it is BETTER THAN DOING NOTHING. This is the reason for the argument, rather than advocating it as a serious policy. If the economy is depressed all those people will earn an income, most of which is spent, increasing NGDP. Obviously spending it on infrastructure, which will, in addition to increasing NGDP, increase potential output is far superior.
14. November 2010 at 07:12
What China is doing is a blatent case of interference with the workings of free markets. It seems to me that the laissez-faire advocates on this site should be outraged by such a practice.
14. November 2010 at 08:48
William, Thanks, I recall that passage, and I’m glad you confirmed my memory is correct so that I don’t have to reread the entire paper (which is quite long!)
Full employment hawk, You said;
“The difference is that China’s surplus is the deliberate outcome of exchange rate pegging and capital controls. This has permitted Chinese businesses to have an advantages over U.S. businesses in goods in which the United States has an intrinsic comparative advantage and hollow out the U.S. industrial base. This requires the United States to use the threat of reatliatory tariffs to force China to discontinue the policy”
The surplus is mostly caused by government policies that encourage saving, which is exactly what causes Norway’s massive surplus. And no, these policies have nothing to do with the “hollowing out” of US manufacturing. I don’t see German manufacturing being hollowed out. A trade war would be a disaster for the world.
I am outraged by all countries that deviate from laissez-faire, including Cuba. But I want to trade with Cuba, not ban trade with Cuba. The same is true for China. I believe trade is the best way of improving conditions in other countries, and all we can do is hope that they stop doing policies that hurt their own citizens, and hope the US stops doing policies that hurt our own citizens. Given how inept our economic policy is, the last thing we should be doing is telling other countries how to run their affairs–especially as their policies do not hurt us.
14. November 2010 at 14:00
There are many myths about Sweden. Sweden probably has for the last half century had larger CA surpluses as a percentage of its relative GDP compared to the current US bogeymen China and Germany. I even think larger than Switzerland.
Sweden and Switzerland are extremely export intense. If i remember it correctly Sweden’s economy was at its peak 75 % dependent on exports. Sweden also constantly up until our crisis 1992-93 devalued our currency and it is also why Sweden refuse to link their currency to the Euro. In the 60s 1 Swedish Krona, SEK, was worth Swiss Franc, CHF. Today the exchange rate is SEK 7 for CHF 1.
Another anomaly is whilst Sweden historically have had the worlds highest income and capital taxes we at the same time have had the lowest taxes on corporations. My tax law professor told me at our fist lecture on business taxation in the early 80s, when our taxes peaked, that if Sweden would have been in the an offshore location Sweden would have been blacklisted and hunted for its competitive corporate taxation. Most scholars don’t know that Sweden is the ultimate tax haven for multi-national corporations, the effective tax rate is 21 % but if you are a multi-national corporation you can use the normal tax rules that in effect makes your effective tax close to zero. For instance Volvo and all Swedish multi-nationsals paid no corporate tax during 1990-2000. One of the benefits of relocating the holding company to Sweden is nto only the extremely low taxes but also that Sweden has the most extensive tax treaty system i.e. your earnings will never be double taxed.
Myths are difficult to dispel.
1. Sweden is a high tax country, yes but only for individuals
2. Sweden is functional socialist, not since 1990, Sweden now is neo-liberal.
From Swedish research scientist blogg Andreas Bergh, the article is in English but I’ve translated his comments. Any miss-translations is on me.
———————————————
Andreas Berghs blogg post Anders Ã…slund on “The New Scandinavian Model”
An interesting article by Anders Ã…slund about Sweden. The now more common thesis is: That the welfare state has been reformed and adjusted so that the social systems is relatively well functioning.
It has according to Ã…slund to do with the attitude most Swedes hold towards the state:
[Former prime minister Carl] makes an interesting observation:
A small correction is warranted. Anders writes
. This however is not revenue but spending. These automatically rose to extreme levels because of among other things the huge unemployment 1993. It fell automatically during the recovery. No drastic cuts were needed to get to the lower levels.
You can also make a counter argument to the following:
I would rather describe this as that the Keynesian policies where institutionalized by the automatic stabilizers within the Social Security systems. The automatic stabilizers gives firm rules and a predictability that is superior to active, discretionary stabilization policies.
14. November 2010 at 20:30
“The surplus is mostly caused by government policies that encourage saving,”
Are you asserting that if the Remibi were not pegged and allowed to float it would not appreciate relative to the Dollar, so that therefore the advantage Chinese businesses have over U.S. firms would not decrease? I find that implausible.
“how to run their affairs-especially as their policies do not hurt us”
Undervaluing their currency agaist ours by deliberate intervention in the foreign exchange market is our affair. And, unless the Remibi would not appreciate against the dollar if they did not peg it, such a policy puts our firms at an unfair advantage and hurts us.
14. November 2010 at 20:36
“The automatic stabilizers gives firm rules and a predictability that is superior to active, discretionary stabilization policies.”
Normal recessions are best handled by monetary policy plus automatic stabilizers. Discretionary fiscal policy is a blunt, inflexible tool and only needed for serious economic crises, like the one we currently face.
14. November 2010 at 20:40
@Full Employment Hawk:
I am not convinced that it hurts us if the Chinese undervalue their currency. If anything it helps us as they are subsidizing our consumption.
14. November 2010 at 20:44
“But I want to trade with Cuba, not ban trade with Cuba. The same is true for China.”
Obviously we should trade with China. But we should change the rules so that they are not rigged against us. Since the undervaluing of the exchange rate is a market distortion, offsetting tariffs that eliminate the advantage China gets from undervaluing its currency is an offsetting distortion that actually increases efficiency. But it would not need to come to that. A credible threat of retaliatory tariffs would make China back down. They need exports to the Unites States a lot more than we need exports to China.
15. November 2010 at 06:33
Old Whig, Yes, I have many posts dispelling those myths about Sweden. I recall they also lack an estate tax.
Indeed most of the Nordic countries tax consumption much more than capital income.
Full Employment Hawk, The high saving policies, such as the governments massive accumulation of US assets, is what causes the yuan to be strong. It depends what you mean by “let it float”. If you also mean the government would stop buying up foreign assets, then it would obviously drop. But the same is true in Norway.
The CA surplus is domestic saving minus domestic investment. As long as China has policies in place that cause domestic saving to be much higher than domestic investment, they’ll run a surplus (whether they float or not), just as all the other high saving countries do with floating rates (Switzerland, Norway, Germany, Singapore, etc.)
Your last comment is flat out wrong. It is true that there are some market distortions in one country that can be offset by the actions of others. Say a 10% tariff in one offset by a 10% subsidy in the other. But undervalued exchange rates do not drive a wedge between import and export prices, and hence do not distort trade. Rather they distort saving. So a US trade barrier would not offset the Chinese action, and would not improve world welfare. It would simply add one distortion onto another.
15. November 2010 at 09:20
‘Your last comment is flat out wrong. It is true that there are some market distortions in one country that can be offset by the actions of others. Say a 10% tariff in one offset by a 10% subsidy in the other. But undervalued exchange rates do not drive a wedge between import and export prices, and hence do not distort trade. Rather they distort saving. So a US trade barrier would not offset the Chinese action, and would not improve world welfare. It would simply add one distortion onto another.’
Thanks Scott, thats the best way I have heard this argument made so far. The Krugmans of the world keep trying to use China’s policies as excuse for US protectionism, but doing so is a horrible idea.
16. November 2010 at 05:40
Thanks Doc Merlin.
16. November 2010 at 09:01
There are some horrible leftovers from the old socialist Sweden. The worst one might be that it’s almost impossible to fire an individual if he messes up at work. He has to severely ignore his responsibilities against the employer before he can be sacked. Otherwise, the employer has to pay a lot to get rid of him. A five year employee, for example, is entitled to a 24 months salary.
And since alcoholism is considered a disease in Sweden you can’t fire someone for being drunk at work.
17. November 2010 at 18:38
malavel, That’s interesting, but we have some of the same problems here with alcoholism. I don’t know if it was true, but I once read that Exxon had trouble firing an alcoholic. Maybe someone will tell me the story was an urban myth.
Do you know about Denmark? I read that it is relatively easy to fire workers in Denmark.
18. November 2010 at 10:43
Yes, Denmark outclasses Sweden in this area. I did a little bit of googling and found that OECD ranked Sweden no 6 and Denmark no 26 (higher number equals more regulations in this area). There are no general seigniority rules in Denmark. but unions might have negotiated such agreements. So it depends on what kind of job you have.
But Sweden had better rules for hiring short term employees.
19. November 2010 at 14:57
Thanks malavel